Circular No. 772-Income Tax Dated 23/12/1998

62

Finance (No. 2) Act, 1998

SECTION/SCHEDULE	PARTICULARS
	Finance Act
2/1st Schedule	Rate Structure 4
	Income-tax Act
Whole of Income-	Redesignation of Income-tax Authorities under the
tax Act, 2(7A),(9A),	Income-tax Act 5
(19A), (19C), (28C)
and (28D), 116(cca);
10(5A), 10(6)(i)(aa),	Removal of certain exemptions 6
10(6)(i)(via), (viia),
(ix) and (x); 10(18A)
10(15)(iv),	Extension of exemption under sec­tion 10(15)(iv) to indus-
Explanation (aa)	trial undertakings manufacturing computer software, etc. 7
10(22), 10(22A),	Provisions relating to exempting the income of education-
10(23C)(iiiab) to	al institutions, Universities, Hospitals and other medical
(iiiae), 10(23C)(iv)	institutions 8
and (via)
10(23F)	Liberalisation of exemption of income of a venture capital fund or a venture capital company 9
10(23G)	Rationalisation of clause (23G) of section 10 10
10(26)	Income-tax exemption for members of Scheduled Tribes residing in Ladakh region of Jammu and Kashmir 11
16(i)	Amendment to the provisions of section 16 for modifying standard deduction for salaried taxpayers 12
17(2), proviso (v)	Amendment of the provisions relating to perquisite value of medical benefits 13
24(1)(i), 24(2),	Deductions from income from house property 14
Proviso
2(11), 32(1), 35A(1),	Depreciation to be allowed on intangible assets 15
35AB(1)
32(1), 41(2), 50A	Depreciation for power sector 16
33ABA	Site Restoration fund 17
35(2AB)	Omission of provision for weighted deduction 18
35D	Amortisation of preliminary expenses 19
37(1), Explanation	Disallowance of illegal expenses 20
42(2)	Tax treatment of assignment expenses 21
43(1)	Certain receipts not to be included for computing the actual cost of an asset 22
43B	Certain expenses to be allowed only on payment 23
44AA(2)	Enhancement of limit for maintenance of accounts by certain persons carrying on business or profession 24
47(xi)	Extension of period for corporatisation of stock bro­ker s card 25
47(xv)	Exemption of Capital Gains Tax on Stock Lending 26
32, 47(xiii)/(xiv),	Exemption from levy of capital gains tax and allowance of
47A, 72A	carry forward of losses and unabsorbed depreciation in certain cases of business re-organisation 27
54H	Extension of time for investing amount of capital gains under sections 54EA & 54EB in cases of compul­sory acquisition under any law 28
69C	Amendment of section 69C 29
71B	Carry forward and set-off of loss from house property 30
80DD, 80DDA	Rationalisation of benefits available to parents and guard­ians of handicapped dependent 31
80G	100% deduction to donations made to National Sports Fund and the National Culture Fund 32
80GG	Reintroduction of the provisions of section 80GG 33
80HHBA	New Provisions for deduction for World Bank aided housing projects in India 34
80HHD, 80-IA	Amendment in section 80HHD and section 80-IA to prevent double deduction of same profit 35
80HHE	Modification in the provisions relating to export of software under section 80HHE 36
80-IA	Tax holiday in respect of undertaking set up in indus­trially backward States and industrially backward districts extended up to 31-3-2000 37
	Tax holiday in respect of undertaking engaged in power 38
	Tax holiday in respect of companies engaged in scientific and industrial research and development activities 39
	Tax holiday to radio-paging, domestic satellite service, network of trunking and electronic data inter-change services 40
	Tax holiday to Oil Refining Industries 41
	Tax holiday to undertakings engaged in developing and build­ing housing projects 42
	Inland Port and Waterways regarded as infrastructure facili­ty 43
80JJA	Deduction in respect of profits and gains from business of collecting and processing of bio-degradable waste 44
80JJAA	New section 80JJAA for granting benefits to companies creating employment opportunities 45
80P(2)(c)	Increase in the limits of deductions allowed in respect of income of co-operative societies 46
115AD(1)(a)	Tax on income of Foreign Institutional Investors from securities or capital gains arising from their transfer 47
139(1)	Addition of two more economic indicators for obligatory filing of returns 48
139A	Rationalisation of provision relating to application for allotment of Permanent Account Number 49
	Compulsory quoting of PAN 50
143(3)	Providing for issue of refund in assessment under sub-section (3) of section 143 51
145A	Method of accounting in certain cases 52
158BA(2), Explana-	Clarificatory amendments in procedure for block assessment 53
tion, 158BB(1),
Explanation (b),
158BE, Explanation 2
192(2B)	Adjustment of loss from house property for the purpose of determining the tax deductible from salary 54
245N(a) and (b),	Extending the scope of Author­ity for advance ruling to
245R(2), 245RR	resident applicants 55
246A	Abolition of the appellate level at Deputy Commissioner (Appeals) 56
249	Providing for appeal fee for filing appeals before Commis­sioner (Appeals) 57
252	Changes in the eligibility criteria for appointment as Judicial Member and Accountant Member in Appellate Tribunal 58
253, 254(2)	Enhancement of fee payable for filing appeal before Appellate Tribunal 59
255(3)	Increasing the monetary limit of appeals to be decided by single member bench of Appellate Tribunal 60
256(1), 257,	Direct appeal to High Courts 61
260(1A), 260A,
260B, 261
264(6) and (7)	Providing Limitation of time for revising orders by Commissioner of Income-tax under section 264 62
271F	Provision of penalty for non-filing of returns of income 63
272A	Prescribing maximum penalty for defaults committed with reference of sections 197A and 203 64
285B	Increase in the limit for submission of statements by pro­ducers of cinematograph films 65
First Schedule	Provisions relating to insurance business 66
119, 154, 177, 189,	Consequential amendments 67
248, 250, 251,
267, 271, 271A,
275, 287, 295
	Wealth-tax Act
Whole of wealth-	Redesignation of Wealth-Tax Authorities under the
Act, 2(ca) 24	Wealth-tax Act 5
2(ea), 5(1)(i)/(vi)	Incentives allowed under the Wealth-tax Act 68
23A, 24,	Abolition of the appellate level at Deputy Commissioner (Appeals) 56
	Providing for appeal fee for filing appeals before Commis-sioner (Appeals) 57
	Enhancement of fee payable for filing appeal before Appellate Tribunal 59
27A, 28, 29	Direct appeal to High Courts 61
25(3A)/(4)	Providing limitation of time for revising orders by Commissioner of
	Wealth-tax under the Wealth-tax Act 62
	Gift-tax Act
3(3)	Gifts made after a certain date not liable to tax 69
	Interest-tax Act
3(3)	Redesignation of Interest-tax Authorities under the Inter­est-tax Act 5
15(2)	Providing for appeal fee for filing appeals before Commissioner (Appeals) 57
16(6)	Enhancement of fee payable for filing appeal before Appellate Tribunal 59
20(6) and (7)	Providing limitation of time for revising orders by Commissioner of Interest-tax under the Interest-tax Act 62
	Expenditure-tax Act
3(1)	Increasing the limit of room charges for attracting the charge of Expenditure-tax 70
6	Redesignation of Expenditure-tax Authorities under the Expenditure-tax Act 5
21(6) and (7)	Providing limitation of time for revising orders by Commissioner of Expenditure-tax under the Expenditure-tax Act 62
22(2)	Providing for appeal fee for filing appeal before Commissioner (Appeals) 57
23(6)	Enhancement of fee payable for fling appeal before Appellate Tribunal 59

2. Rate structure

Finance (No. 2) Act, 1998

Income-tax

Rates of income-tax in respect of income liable to tax for the assessment year 1998-99

4.1 In respect of incomes of all categories of taxpayers (corpo­rate as well as non-corporate) liable to tax for the assessment year 1998-99, the rates of income-tax have been specified in Part I of the First Schedule to the Act and are the same as those laid down in Part III of the First Schedule to the Finance Act, 1997.

Finance (No. 2) Act, 1998

Rates for deduction of income-tax at source during the financial year 1998-99 from income other than “Salaries”

4.2 The rates for deduction of income-tax at source during the financial year 1998-99 from income other than “Salaries”, have been specified in Part II of the First Schedule to the Act. These rates apply to income by way of interest on securities, interest other than “interest on securities” , insurance commission, winnings from lotteries or crossword puzzles, winnings from horse races and income of non-residents (including non-resident Indi­ans).

Finance (No. 2) Act, 1998

Rates for deduction of income-tax at source from “Salaries”, computation of “advance tax” and charging of income-tax in spe­cial cases during the financial year 1998-99

4.3 The rates of deduction of income-tax at source from “Sal­aries” during the financial year 1998-99 and also the computation of “advance tax” payable during that year in the case of various categories of taxpayers, have been specified in Part III of the First Schedule to the Act. These rates are also applicable for charging income-tax during the financial year 1998-99 on current incomes in cases where accelerated assessments have to be made, e.g., provisional assessment of shipping profits arising in India to non-residents, assessment of persons leaving India for good during that financial year or assessment of persons who are likely to transfer property to avoid tax, etc. The salient fea­tures of the rates specified in the said Part III are indicated in the following paragraphs.

4.3-1 Individuals, Hindu undivided families, etc. – Paragraph A of Part III of the First Schedule specifies the rates of income-tax in the case of individuals, Hindu undivided families, associ­ation of persons, etc. The exemption limit has been raised to Rs. 50,000. There is no other change in the rate structure. The Table below gives the income slabs and the rates of income-tax (a) as specified in Paragraph A of Part I of the First Schedule to the Act; i.e., the existing slabs and rates, and (b) as specified in Paragraph A of Part III of the First Schedule to the Act, i.e., the new slabs and rates.

Table

	Existing		New
Income Slab	Rates specified in Paragraph A of Part I of the First Schedule to the Act	Income Slab	Rates specified in Paragraph A of Part III of the First Schedule to the Act
Upto Rs. 40,000	Nil	Upto Rs. 50,000	Nil
Rs. 40,001 – Rs. 60,000	10%	Rs. 50,001 – Rs. 60,000	10%
Rs. 60,001 – Rs. 1,50,000	20%	Rs. 60,001 – Rs. 1,50,000	20%
Above Rs. 1,50,000	30%	Above Rs. 1,50,000	30%

4.3-2 Effect of changes in the exemption limit – The impact of increase in the exemption limit in the case of individuals, HUFs, etc., at different income levels would be as under :

Total income (Rs.)	Existing tax liability (Rs.)	New tax liability (Rs.)	Relief (Rs.)	Percentage relief
41,000	100	Nil	100	100
42,000	200	Nil	200	100
43,000	300	Nil	300	100
44,000	400	Nil	400	100
45,000	500	Nil	500	100
50,000	1,000	Nil	1,000	100
55,000	1,500	500	1,000	66.7
60,000	2,000	1,000	1,000	50
75,000	5,000	4,000	1,000	20
1,00,000	10,000	9,000	1,000	10
1,20,000	14,000	13,000	1,000	7.1
1,50,000	20,000	19,000	1,000	5
1,75,000	27,500	26,500	1,000	3.6
2,00,000	35,000	34,000	1,000	2.9
2,50,000	50,000	49,000	1,000	2
3,00,000	65,000	64,000	1,000	1.5

4.3-3 Co-operative societies – In the case of co-operative socie­ties, the rates of income-tax have been specified in Paragraph B of Part III of the First Schedule to the Act. These rates are the same as those specified in the corresponding Paragraph of Part I of the First Schedule to the Act.

4.3-4 Firms – In the case of firms, the rate of income-tax has been specified in Paragraph C of Part III of the First Schedule to the Act. This rate is 35% which is the same as that specified in the corresponding paragraph of Part I of the First Schedule to the Act.

4.3-5 Local authorities – In the case of local authorities, the rate of income-tax has been specified in Paragraph D of Part III of the First Schedule to the Act. This rate is 30% which is the same as that specified in the corresponding Paragraph of Part I of the First Schedule to the Act.

4.3-6 Companies – In the case of companies, the rates of income-tax have been specified in Paragraph E of Part III of the First Schedule of the Act. These rates are the same as those specified in the corresponding paragraph of Part I of the First Schedule to the Act. There is no change in the existing rates of 35% for domestic companies and 48% for foreign companies

[Section 2 and First Schedule]

Finance (No. 2) Act, 1998

Redesignation of Income-tax Authorities under the Income-tax Act

5.1 The Fifth Central Pay Commission had recommended a change in the designation of Assistant Commissioner of Income-tax (Senior Scale). Consequently, it was decided to redesignate Assistant Commissioner of Income-tax (Senior Scale) and Assistant Director of Income-tax (Senior Scale) as Deputy Commissioner of Income-tax and Deputy Director of Income-tax respectively. This necessitated redesignating the existing Deputy Commissioner of Income-tax and Deputy Director Income-tax as Joint Commissioner of Income-tax and Joint Director of Income-tax respectively. The above changes in designation made it necessary to amend the various sections of the Income-tax Act so that the statutory powers continue to be exercised by the substituted authorities as a result of redesig­nation.

5.2 The following substitution of income-tax authorities has been globally made in the Income-tax Act :

Table

From To

Assistant Commissioner Assistant Commissioner or Deputy Commis­sioner

Assistant Director Assistant Director or Deputy Director

Deputy Commissioner Joint Commissioner

Deputy Director Joint Director

5.3 Clause (7A ) of section 2 of the Income-tax Act containing the definition of Assessing Officer has been amended to include the redesignated authorities as above.5.4 Clause (9A ) of section 2 of the Income-tax Act has been amended to include Deputy Commissioner in the definition of Assistant Commissioner.

5.5 Clauses (19A ) and (19C) of section 2 of the Income-tax Act have been amended to exclude the authorities of Additional Com­missioner of Income-tax and Additional Director of Income-tax from the definitions of Deputy Commissioner and Deputy Director.

5.6 Two new clauses, namely (28C) and (28D ) have been inserted in section 2 of the Income-tax Act to define Joint Commissioner and Joint Director.

5.7 Section 116 of the Income-tax Act has been amended by insert­ing clause (cca) to add a new class of income-tax authorities, namely, Joint Director of Income-tax or Joint Commissioner of Income-tax.

5.8 Identical amendments have also been made in the Wealth-tax Act, Interest-tax Act, Gift-tax Act and the Expenditure-tax Act.

5.9 These amendments have taken effect from the 1st day of Octo­ber, 1998.

[Sections 3, 4, 39, 66, 67, 76, 77 & 82]

Finance (No. 2) Act, 1998

Removal of certain exemptions

6.1 The remuneration received by foreign nationals who come to India in connection with shooting of a cinematograph film is exempt from income-tax under the provisions of clause (5A) of section 10. This provision was inserted with effect from 1-4-1982 and has since outlived its utility. The Act, therefore, omits the same.

6.2 Several perquisites of foreigners employed in India were exempt from income-tax under clause (6) of section 10. These include perquisites specified in the following sub-clauses :—

6.2-1 Sub-clause (i )(aa) provides for exemption in respect of passage fare of children, paid by the employer of a foreign national, proceeding to India during vacation.

6.2-2 Sub-clause (via ) provides exemption in respect of remunera­tion to employees or consultants of a foreign philanthropic body.

6.2-3 Sub-clause (viia ) provides exemption in respect of tax perquisites of foreign technicians.

6.2-4 Sub-clause (ix ) provides exemption in respect of tax per­quisites of foreign teachers or professors.

6.2-5 Sub-clause (x ) provides exemption in respect of amount received by a non-resident for conducting research during 24 months commencing from his arrival in India.

6.2-6 The Act omits these sub-clauses as a rationalisation meas­ure.

6.3 The ex gratia payments made by the Central Government conse­quent upon the abolition of privy purses are exempt under clause (18A) of section 10. This clause was inserted in 1972. As this exemption has outlived its utility, the Act omits clause (18A ) of section 10.

6.4 These amendments will take effect from 1st April, 1999 and will, accordingly, apply in relation to assessment year 1999-2000 and subsequent years.

[Section 5]

Finance (No. 2) Act, 1998

Extension of exemption under section 10(15)(iv) to industrial undertakings manufacturing computer software, etc.

7.1 Existing sub-clause ( iv) of clause (15) of section 10 of the Income-tax Act provides for exemption from income-tax in respect of interest payable by, inter alia, an “industrial undertaking” in India on any moneys borrowed or debt incurred by it in a foreign country subject to certain conditions. An “industrial undertaking” for this purpose has been defined to mean any under­taking which is engaged in specified activities.

7.2 The Act amends the definition of industrial undertaking to so as to include within its ambit the manufacture of computer software or recording of programme on any disc, tape, perforated media or other information device.

7.3 The amendment will take effect from 1st April, 1990 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 5]

Finance (No. 2) Act, 1998

Provisions relating to exempting the income of educational institutions, Universities, Hospitals and other medical institu­tions.

8.1 Under the provisions of clauses (22) and ( 22A) of section 10 of the Income-tax Act, before amendment, educational and medical institutions enjoyed a blanket exemption from income-tax if they existed solely for educational purposes and not for the purposes of profit. In the absence of any monitoring mechanism for check­ing the genuineness of their activities, these provisions have been misused.

8.2 The Act omits the aforesaid clause (22) and ( 22A) from the statute. The exemption would, however, continue in respect of any university or other educational institution, hospital or other medical institution which is wholly or substantially financed by Government, under the new sub-clause (iiiab) and (iiiac) inserted in section 10(23C) of the Income-tax Act by the Finance (No. 2) Act, 1998.

8.3 Further, under sub-clauses (iiiad) and (iiiae ) in section 10(23C), the income of other educational and medical institutions would also be exempt if their annual receipts are below a limit to be prescribed. The limit has since been prescribed at Rs. one crore vide Notification No. SO 897(E) dated 12th October, 1998.

8.4 The income of the remaining educational and medical institu­tions would be exempt if they are approved by the prescribed authority on application made by them under sub-clauses (vi ) and (via) of section 10(23C). This approval would be subject to their adherence of conditions similar to those specified for sub-clauses (iv) and (v) of section 10(23C) regarding maintenance of accounts, expenditure and accumulation of funds and investments of funds in specified assets. The accumulated income is required to be invested in the modes specified in section 11(5). These institutions are given time up to 30-03-2001 to transfer their investments to specified securities. The Rules and Forms in this regard have since been notified vide Notification No. S.O. 897(E) dated 12th October, 1998. By this notification the Central Board of Direct Taxes have been designated as the prescribed authority for the purpose of approval under sub-clauses (vi ) and (via) of section 10(23C).

8.5 These amendments will take effect from 1st April, 1999 and will, accordingly, apply in relation to assessment year 1999-2000 and subsequent years.

[Section 5]

Finance (No. 2) Act, 1998

Liberalisation of exemption of income of a venture capital fund or a venture capital company.

9.1 Section 10(23F ) exempted income by way of dividends or long term capital gains of a venture capital fund or a venture capital company from investments made by way of equity shares in a ven­ture capital undertaking. This clause provided for a minimum lock-in period of three years before such equity shares could be transferred. This condition of a minimum lock-in period has been withdrawn by the Act.

9.2 The Act has also expanded the ambit of a venture capital undertaking to include domestic companies whose shares are not listed in a recognised stock exchange in India and which are engaged in the business of developing, maintaining and operating any infrastructure facility. For the purpose of this clause “infrastructure facility” has been defined to mean road, highway, bridge, airport, port, rail system, water supply project, irriga­tion project, sanitation and sewerage system or any other public facility of a similar nature as may be notified by the Borad in this behalf in the Official Gazette and which fulfils the condi­tions specified in sub-section (4A) of section 80-IA.

9.3 This amendment will take effect from 1st April, 1999 and will, accordingly, apply in relation to assessment year 1999-2000 and subsequent years.

[Section 5]

Finance (No. 2) Act, 1998

Rationalisation of clause (23G) of section 10

10.1 In recognition of the vital role played by the infrastruc­ture in the development of economy, Finance (No. 2) Act, 1996 with effect from 1-4-1997, inserted section 10(23G ) of the Income-tax Act to provide tax exemption to any ‘infrastructure capital fund’ or ‘infrastructure capital company’ in respect of income by way of dividends, interest and long term capital gains derived from investment in the form of shares or long term finance in an enterprise carrying on the business of developing maintaining and operating an infrastructure facility. This provision came in to effect from the assessment year 1997-98.

10.2 Since no safeguards had been provided to ensure that the tax free funds raised by companies were invested in infrastructure development, it was not possible to ascertain, whether the pur­pose for which the section was introduced, viz., the development of infrastructure facility, was being achieved or not. To serve this purpose, the provisions of section 10(23G) have been amend­ed by Finance (No. 2) Act, 1998 to provide, inter alia, that the exemption under this clause shall be available only in respect of the investments in an enterprise,—

( i) which is wholly engaged in the business of developing, main­taining and operating an infrastructure facility; and

( ii) which has been approved by the Central Government on an application made by it accordance with the rules made in this behalf and which satisfies the specific conditions.

10.3 The amended provisions would apply only in respect of in­vestment made on or after 1-6-1998. Doubts had been expressed in different quarters about the continuance of exemption available under section 10(23G) in respect of investments made prior to 1-6-1998 for assessment year 1999-2000 and onwards. The Central Board of Direct Taxes have clarified by way of a press release that the exemption available under the provisions of section 10(23G), prior to its amendment by the Act, will continue to govern the investments made prior to 1-6-1998. The Rules and Forms in this regard have since been notified vide Notification No. S.O. 897(E) dated 12th October, 1998.

10.4 The definition of “infrastructure facility” in this clause has also been amended so as to include a project for housing which fulfils the conditions specified in sub-section (4F) of section 80-IA.

10.5 The amendment will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

Finance (No. 2) Act, 1998

Income-tax exemption for members of scheduled tribes residing in Ladakh region of Jammu and Kashmir

11.1 The income of residents of Ladakh was exempt from income-tax till the assessment year 1988-89 only under section 10(26A). There has been a demand for renewal of the exemption.

11.2 The Act extends the exemption available to members of the Sche-duled Tribes residing in the North-eastern States under clause (26) of section 10 to the members of the scheduled tribes resid­ing in Ladakh region of Jammu and Kashmir.

11.3 The amendment will take effect from 1st April, 1999 and will, accordingly, apply in relation to assessment year 1999-2000 and subsequent years.

[Section 5]

Finance (No. 2) Act, 1998

Amendment to the provisions of section 16 for modifying standard deduction for salaried tax payers

12.1 Under the existing provisions of section 16 of the Income-tax Act, standard deduction of a sum equal to 331/3% of the salary or Rs. 20,000, whichever is less, is allowed to an individual having income from salary.

12.2 With a view to minimising the hardship that would have been caused to employees and also pensioners who are receiving salary or pension in the lower income slab, section 16 has been amended to raise the limit of standard deduction for assessees having salary income up to Rs.1,00,000 from Rs. 20,000 to Rs. 25,000.

12.3 The terms of employment of highly paid salaried employees are so arranged that these provide them benefit and facilities, whereby incidental expenses are not born by them. The amendment, therefore seeks to withdraw the benefit of standard deduction for the assessee having salary income of more than Rs. 5,00,000. The existing provisions of standard deduction shall continue to apply in respect of salary income between Rs. 1 lac to Rs. 5 lacs.

12.4 These amendments will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 6]

Finance (No. 2) Act, 1998

Amendment of the provisions relating to perquisite value of medical benefits.

13.1 Under the existing provisions, any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his fami­ly, other than the treatment referred to in clauses (i ) and (ii) of the proviso to clause (2) of section 17 of the Income-tax Act, to the extent of ten thousand rupees, is not included in the ‘perquisite’ of the employees.

13.2 In order to meet the rising cost of medical treatment and to mitigate the hardship faced by salaried taxpayers in such cases, the limit of ten thousand rupees has been enhanced to fifteen thousand rupees by an amendment in the provision contained in section 17(2)(v) of the Act.

13.3 The amendment will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 7]

Finance (No. 2) Act, 1998

Deductions from income from house property

14.1 While computing the income from house property, a deduction equal to one-fifth of the annual value of the property was being allowed in respect of repairs and collection of rent from the property under section 24(1)(i) of the Income-tax Act. With a view to promote investments in the housing sector, the Act has enhanced the percentage of this deduction to one-fourth of the annual value.

14.2 In order to provide an incentive for self-occupied housing, the allowance for interest paid on capital borrowed for construc­tion, repairs, renewals, etc., of house property has been increased from fifteen thousand rupees per annum to rupees thirty thousand.

14.3 These amendments will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 8]

Finance (No. 2) Act, 1998

Depreciation to be allowed on intangible assets

15.1 Under the existing provisions of section 32 of the Income-tax Act, depreciation is allowable only on tangible assets, being building, machinery, plant or furniture. The Act amends this section to widen its scope by providing that depreciation will also be allowable in respect of intangible assets, being know-how, patents, copyrights, trade mark, licences or franchises or any other business or commercial rights of similar nature, ac­quired on or after the 1st day of April, 1998. The Act also amends the definition of the term ‘block of assets’ so as to include these intangible assets within the meaning of block of assets. The rate of depreciation in respect of these intangible assets has since been prescribed at 25% vide Notification S.O. No. 781(E), dated 4-9-1998.

15.2 As a consequence of this amendment, the deductions allowable under section 35A of the Income-tax Act in respect of any expend­iture of a capital nature incurred on the acquisition of patent rights or copyrights and under section 35AB in respect of expend­iture on know-how have been withdrawn with effect from the as­sessment year 1999-2000.

15.3 These amendments will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Sections 9, 4, 12 & 13]

Finance (No. 2) Act, 1998

Depreciation for power sector

16.1 Section 32 of the Income-tax Act was amended by the In­come-tax (Amendment) Act, 1998 to provide for allowance of depre­ciation, in the case of assets of an undertaking engaged in generation or generation and distribution of power on straight line method depreciation on these assets is to be allowed on individual assets and not on the block of assets. The Act brings about consequential amendments in sections 32 and 41 of the Income-tax Act to provide for the manner of computation of depreciation and also the amount chargeable to income-tax when such an asset is sold, discarded, demolished or destroyed in the previous year.

16.2 Clause (iii ) in section 32(1) of the Income-tax Act has been inserted to provide that in the case of any asset in respect of which depreciation is claimed and allowed under section 32(1) and which is sold, discarded, demolished or destroyed in the previous year (other than the previous year to which it is first brought to use), the depreciation allowance will be the amount by which the moneys payable in respect of such asset together with the amount of scrap value, if any, falls short of the written down value thereof. It has also been provided that in such a case depreciation will be allowed only if the deficiency is actually written off in the books of assessee. Sub-section (2) in section 41 of the Income-tax Act has been inserted to provide that where the moneys payable in respect of such assets together with the amount of sharp value, if any, exceeds the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business of the previous year in which the moneys payable became due.

16.3 The Act has also inserted section 50A in the Income-tax Act to provide for the working of the cost of acquisition for the purposes of computation of capital gains in respect of such assets. It has been provided that where the capital asset is an asset in respect of which a deduction on account of depreciation under clause (i) of sub-section (1) of section 32 has been ob­tained by the assessee in any previous year, the provisions of sections 48 and 49 shall apply subject to the modification that the written down value, as defined in clause (6) of section 43, of the asset, as adjusted, shall be taken as the cost of acqui­sition of the asset.

16.4 These amendments will take effect retrospectively from 1st day of April, 1998 and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.

[Section 9, 16 & 23]

Finance (No. 2) Act, 1998

Site Restoration Fund

17.1 A new section 33ABA has been inserted in the Income-tax Act to provide for tax incentives to the petroleum and natural gas sector. This section provides for a deduction in computing the taxable profits in the case of an assessee carrying on business of pros­pecting for, or extraction or production of, petroleum or natural gas both in India and in relation to which the Central Government has entered into an agreement with such assessee for such busi­ness. The assessee will be allowed deduction in respect of the amounts deposited during the previous year in the special account with the State Bank of India in accordance with and for the purpose specified in the scheme approved by the Ministry of Petroleum and Natural Gas and in the Site Restoration Account opened by the assessee in accordance with and for the purposes specified in the scheme framed by the said ministry. The maximum amount of deduction will be restricted to 20% of the profits of such business, computed under the head ‘Profits and gains of business or profession’ before making any deduction under this section. It is provided that any amount credited in the special account or Site Restoration Account by way of interest shall be deemed to be a deposit.

17.2 The deduction shall not be admissible unless the accounts of such business of the assessee for the relevant previous year are audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and the assessee furnishes along with his return of income the report of such audit. In cases where the accounts of the assessee are required to be audited under any other law, e.g., under the Companies Act, it would be sufficient if the accounts are audited under that law and the audit report as per that law is furnished with the return along with a further report in the prescribed form.

17.3 It is provided that where a deduction is allowed under this section to a firm, association of persons or body of individuals, no deduction shall be allowed to any partner of the firm or the member of the association or body in respect of the same deposit. It is also provided that where a deduction is allowed in respect of any amount deposited in the special account or in the Site Restoration Account in one previous year, no deduction shall be allowed in respect of the same amount in any other previous year.

17.4 The amount standing to the credit of such special account or Site Restoration Account can be withdrawn only for the purposes specified in the respective schemes. If the amount released by the State Bank of India or the amount withdrawn from the Site Restoration Account during a previous year is not utilised in the same previous year for the purpose for which it is released, the amount not so utilised shall be deemed to be profits and gains of the business and , accordingly, chargeable to income-tax as the income of that previous year.

17.5 In case any amount standing to the credit of the assessee in the special account to in the Site Restoration Account is uti­lised by the assessee for the purposes of any expenditure in connection with such business in advance with the relevant schemes, such expenditure will not be allowed as deduction in computing the income chargeable under the head ‘profits and gains of busi­ness or profession’.

17.6 The section also provides that where any amount standing to the credit of the assessee in the above accounts is withdrawn on closure of the account during any previous year by the assessee, the amount so withdrawn from the account, as reduced by the amount, if any, payable to the Central Government by way of profit or production share, as provided in the agreement referred to in section 42, shall be deemed to be the profits and gains of business or profession of that previous year and shall be taxed accordingly. Further, where any amount is withdrawn in a previous year on closure of the account, in which the business carried on by the assessee is no longer in existence, the provisions shall still apply as if the business is in existence in that previous year.

17.7 There is an overriding condition that the deduction under this section cannot be allowed in relation to the amounts uti­lised for the purchase of any machinery or plant to be installed in an office premises or residential accommodation including guest house, any office appliances other than computers, any machinery or plant the whole of the actual cost of which is allowed as deduction whether by way of depreciation or otherwise in any one previous year or any new machinery or plant to be installed in an industrial undertaking for the purposes of busi­ness of construction, manufacture or production of low priority items specified in the Eleventh Schedule.

17.8 The deduction allowed under this section shall be withdrawn if the asset acquired in accordance with the relevant scheme is sold or otherwise transferred before the expiry of 8 years from the end of the previous year in which it was acquired. For this purpose, such part of the cost of such asset as is relatable to the deduction already allowed shall be deemed to be the profits and gains of the business or profession of the previous year in which the asset is sold or otherwise transferred and shall, accordingly, be taxed as income of that previous year. The deduc­tion allowed earlier will, however, be not withdrawn in the cases where the asset is so sold or otherwise transferred to Govern­ment, a local authority, statutory corporation or a Government company or where the sale or transfer of assets is made in con­nection with the succession of the firm by a company fulfilling certain conditions.

17.9 These provisions are aimed to cater to the need of proper abandonment of oil wells after their economic life.

17.10 These amendments will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 10]

Finance (No. 2) Act, 1998

Omission of provision for weighted deduction

18.1 Sub-section (2AB) to section 35 was introduced by the Fi­nance Act, 1997. This sub-section allows weighted deduction of a sum equal to one and one-fourth times of the expenditure incurred on scientific research on in-house research and development facility as approved by the prescribed authority on fulfilment of certain conditions. Due to difficulties experienced by the pre­scribed authority in monitoring and auditing such expenses, the Act omits the said sub-section and, accordingly, it has been provided that no deduction shall be allowed in respect of the expenditure which is incurred after the 31st day of March, 2000.

[Section 11]

Finance (No. 2) Act, 1998

Amortisation of preliminary expenses

19.1 Under the existing provisions of section 35D, deduction for certain preliminary expenses is allowed at an amount equal to 1/10th of such expenditure for each of the 10 successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of industrial undertaking is completed or new industri­al unit commences production or operation. Further, the aggregate amount of such expenditure is also restricted to two and a half per cent of the cost of the project or where the assessee is an Indian company, at the option of the company, of the capital employed in the business of the company.

19.2 As an incentive for development of capital market, the Act amends section 35D so as to enhance the allowable deduction to an amount equal to 1/5th of such expenditure for each of the five successive previous years. The aggregate limit of the expenditure is also enhanced to 5% of the cost of the project or where the assessee is an Indian company, of the capital employed in the business of the company.

19.3 These amendments will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 14]

Finance (No. 2) Act, 1998

Disallowance of illegal expenses

20.1 Section 37 of the Income-tax Act is amended to provide that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purposes of business or profession and no deduction or allowance shall be made in respect of such ex­penditure. This amendment will result in disallowance of the claims made by certain assessees in respect of payments on ac­count of protection money, extortion, hafta, bribes etc. as business expenditure. It is well decided that unlawful expendi­ture is not an allowable deduction in computation of income.

20.2 This amendment will take effect retrospectively from 1st April, 1962 and will, accordingly, apply in relation to the as­sessment year 1962-63 and subsequent years.

[Section 15]

Finance (No. 2) Act, 1998

Tax treatment of assignment expenses

21.1 A situation unique to the petroleum and natural gas industry is the assignment or farm-out of participating interest held by an assessee in a production sharing contract to the third party. Section 42 of the Income-tax Act is amended so as to provide for the treatment of the unallowed expenditure in a case where the business of the assessee consisting of the prospecting for or extraction or production of petroleum and natural gas is trans­ferred wholly or partly or any interest in such business is transferred in accordance with the agreement referred to in sub-section (1) of section 42.

21.2 It is provided that if the proceeds of such transfer (so far as they consist of capital sums) are less than the expenditure incurred remaining unallowed, a deduction equal to the expenditure remaining unallowed as reduced by the proceeds of transfer, shall be allowed in respect of the previous year in which such business or interest, as the case may be, is trans­ferred. If the proceeds of transfer are in excess of the amount of expenditure remaining unallowed, so much of the excess as does not exceed the difference between the expenditure incurred in connection with the business or to obtain interest therein and the amount of such expenditure remaining unallowed, shall be chargeable to income-tax as profits and gains of the business in the previous year in which the business or interest therein, whether wholly or partly, had been transferred. In case the proceeds of transfer are not less than the amount of expenditure incurred remaining unallowed, no deduction for such expenditure shall be allowed in respect of the previous year in which the business or interest in such business is transferred or in re­spect of any subsequent year or years.

21.3 Assuming that the transfer of business takes place during the previous year relevant to the assessment year 1999-2000, the following examples illustrate how the amended provisions will be applied :

	Proceeds less than the expenditure remaining unallowed	Proceeds exceeding the expenditure remaining unallowed		Proceeds equal to the expenditure remaining unallowed
		Situation A	Situation B
(a)Expenditure incurred	10,000	10,000	10,000	10,000
(b) Expenditure remaining unallowed	6,000	6,000	6,000	6,000
(c) Proceeds of transfer	5,000	7,000	15,000	6,000
(d) Amount allowable as deduction in A.Y. 1999-2000 (b-c)	1,000	NIL	NIL	NIL
(e) Amount allowable as deduction in subsequent years	NIL	NIL	NIL	NIL
(f) Excess of proceeds of transfer over expenditure remaining unallowed (c-b)	NIL	1,000	9,000	NIL
(g) Difference between the expenditure incurred and the expenditure remaining unallowed (a-b)	4,000	4,000	4,000	4,000
(h) Amount chargeable to income-tax as profits and gains in the assessment year 1999-2000 [lower of (f) & (g)]	NIL	1,000	4,000	NIL

21.4 In a scheme of amalgamation whereby the amalgamating company sells or otherwise transfers the business to the amalgamated company (being an Indian company), the amended provisions shall not apply in the case of the amalgamating company and shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the latter had not transferred the business or interest in the business.

21.5 These amendments will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 17]

Finance (No. 2) Act, 1998

Certain receipts not to be included for computing the actual cost of an asset

22.1 In order to rationalise the definition of the term “actual cost”, section 43 is amended by inserting Explanations 9 and 10 to sub-section (1) in this section. Explanation 9 provides that where an asset is or has been acquired on or after the 1st day of March, 1994 by an assessee, the actual cost of such asset shall be reduced by the amount of duty of excise or the additional duty leviable under section 3 of the Customs Tariff Act, 1975 in respect of which a claim of credit has been made and allowed under the Central Excise Rules, 1944.

22.2 Explanation 10 provides that where a portion of the cost of an asset acquired by the assessee has been met directly or indi­rectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsi­dy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee. Cost incurred/payable by the assessee alone could be the basis for any tax allowance. This Explanation further provides that where such subsidy or grant or reimbursement is of such nature that it cannot be directly re­latable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same propor­tion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee.

22.3 The amendment made through Explanation 9 will take effect retrospectively from 1st April, 1994 and will, accordingly, apply in relation to the assessment year 1994-95 and subsequent years. The amendment made through Explanation 10 will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 18]

Finance (No. 2) Act, 1998

Certain expenses to be allowed only on payment

23.1 Under the existing provisions, the sums referred to in clauses (a) to (e) of section 43B are allowable as deduction in the previous year in which the sum is actually paid. The first proviso to section 43B provides that the provisions of this section shall not apply to any sum referred to in clauses (a), (c) or (d ) if the sum is actually paid on or before the date on which the return of income is due to be furnished under sub-section (1) of section 139 for the previous year in which the liability to pay such sum was incurred. Thus, while the deduction in respect of any sum payable as interest on any loan or borrow­ing from any public financial institution or a State Financial Corporation or a State Industrial Corporation, referred to in clause (d), is allowable during the previous year even though the sum is actually paid in the subsequent year within the specified due date, the deduction in respect of any sum payable as interest on any term loan from a scheduled bank, referred to in clause (e), is allowable only if the sum is actually paid within the previous year.

23.2 In order to remove undue hardship to the assessees and to bring parity among the conditions for allowance of deduction in respect of both the above types of interest, the Act amends the first proviso to section 43B so as to provide that any sum pay­able by the assessees as interest on any term loan from a sched­uled bank referred to in clause (e ) shall be allowed as deduction during the previous year if such sum is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139.

23.3 These amendments will take effect retrospectively from 1st April, 1997 and will, accordingly, apply in relation to the assessment year 1997-1998 and subsequent years.

[Section 19]

Finance (No. 2) Act, 1998

Enhancement of limit for maintenance of accounts by certain persons carrying on business or profession

24.1 Under the existing provisions of section 44AA, every person carrying on business or profession, not being a profession re­ferred to in sub-section (1) thereof, is required to keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income, if his income from business or profession exceeds forty thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business of profession, exceed or exceeds five hundred thousand rupees in any one of the three years immediately preceding the previous year. In a case where the business or profession is newly set up in any previous year, then he is required to keep and maintain such books of account etc., if his income from busi­ness or profession is likely to exceed forty thousand rupees or his total sales, turnover or gross receipts, as the case may be, in a business or profession are or is likely to exceed five hundred thousand rupees during such previous year.

24.2 The Act enhances the above limits of forty thousand rupees to one lakh twenty thousand rupees and of five hundred thousand rupees to ten lakhs rupees. Accordingly, under the amended provi­sions, the assessees carrying on business or profession are re­quired to keep and maintain the books of account and other docu­ments if his income from business or profession exceeds one lakh twenty thousand rupees or his total sales, turnover or gross receipts, as the case may be, in the business or profession exceed or exceeds ten lakhs rupees during the relevant previous year.

24.3 These amendments will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 20]

Finance (No. 2) Act, 1998

Extension of period for corporatisation of stock broker’s card

25.1 Under the existing provisions of the Income-tax Act, corpo­ratisation of membership card of recognised stock exchanges is exempt from capital gains if transfer is effected on or before 31-12-1997.

25.2 In order to encourage more brokers to corporatise, increase their liquidity and consequently their volume of trading, the Act has amended clause (xi) of section 47 of the Income-tax Act to exempt such corporatisation of membership card of recognised stock exchanges from charge of capital gains tax if the same is made upto 31-12-1998.

25.3 This amendment will take effect retrospectively from 1st April, 1998 and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.

[Section 21]

Finance (No. 2) Act, 1998

Exemption of Capital Gains Tax on Stock Lending

26.1 Under the existing provisions, when share certificates are returned bearing distinctive numbers different from those appear­ing on shares which were earlier lent, the strict legal position of such exchange in terms of being a transfer under clause (47 ) of section 2 of the Income-tax Act attracting capital gains tax was far from clear. Since such transactions are not intended to be brought within the definition of transfer, the CBDT clari­fied in Circular No. 751 dated 10-2-1997 that such exchange would not result in transfer. To make the legal position free from doubt, the Act has amended section 47 of the Income-tax Act by inserting clause (xv) to provide that any transfer in a scheme for lending of any securities under an agreement or arrangement, subject to the guidelines issued by the Securities and Exchange Board of India in this regard, which the assessee has entered into with the borrower of such securities, shall not be regarded as transfer.

26.2 This amendment will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 21]

Finance (No. 2) Act, 1998

Exemption from levy of capital gains tax and allowance of carry forward of losses and unabsorbed depreciation in certain cases of business re-organisation

27.1 Business reorganisations have definite tax implications under the existing provision of the Income-tax Act. Transfer of assets attracts levy of capital gains tax. Similarly, carry forward of losses and that of unabsorbed depreciation are not available to successor business entities. However, in cases of amalgamation, capital gains tax is not levied and losses and unabsorbed depreciation are allowed to be carried forward under certain conditions. The Expert Group, in the draft Income-tax Bill, has recognised the need to encour­age business reorganisation when they are in consonance with the whole objective of economic development and not merely devices to secure tax advantage.

27.2 The Act, following the recommendation of the Expert Group, has amended the relevant sections of the Income-tax Act to allow tax benefits in cases of business reorganisation where a firm or a proprietary concern is succeeded by a company in the business carried on by it.

27.3 Section 47 of the Income-tax Act has been amended to provide that the transfer of any capital asset or intangible asset from the firm to the company shall not be regarded as transfer to attract levy of capital gains, subject to certain conditions. The conditions are that all assets and liabilities of the firm become the assets and liabilities of the company. The partners of the firm should become the shareholders of company in the same pro­portion in which they hold share in the firm. No consideration other than allotment of shares should arise to partners and the aggregate share holding of the partners in the company should be at least 50% for a period of 5 years from the date of succession. Similar conditions have also been stipulated in the case of a sole proprietary concern being succeeded by a company.

27.4 Section 47A of the Income-tax Act has been amended to pro­vide that if the conditions stipulated above are not complied with, the benefit availed of by the firm or by the sole proprie­tor shall be deemed to be the profits and gains chargeable to tax of the successor company in the previous year when the infringe­ment of conditions stipulated occurs.

27.5 Section 72A of Income-tax Act has been amended by inserting sub-section (4) to provide for carry forward of accumulated loss and the unabsorbed depreciation in the hands of successor companies fulfilling the above mentioned conditions for the unexpired period available to the predecessor firm or the pro­prietory concern. However in the event of non-compliance of any of the conditions laid down in the hands of the successor company in any previous year, such loss and depreciation allowed to be set off shall be deemed to be the income of successor company chargeable to tax in that year.

27.6 Also Fourth proviso to sub-section (1) of section 32 has been amended to provide that the aggregate depreciation allowable to predecessor and successor entities shall not exceed in any previous year the deduction calculated at the prescribed rates as if the re-organisation had not taken place.

27.7 These amendments will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Sections 21, 22, 27 & 9]

Finance (No. 2) Act, 1998

Extension of time for investing amount of capital gains under section 54EA & 54EB of Income-tax Act in cases of compulsory acquisition under any law.

28.1 Section 54H of Income-tax Act caters to the situation where the transfer of the long-term asset is by way of compulsory acquisition under any law and the amount of compensation awarded for such acquisition is not received by the assessee on the date of transfer. In such cases the period available to the assessee for investing the long-term capital gains for the purpose of exemp­tion is reckoned from the date of receipt of compensation and not from the date of transfer. The Act has inserted references to sections 54EA and 54EB in section 54H of Income-tax Act whereby extension of time shall be available for investing amount of capital gains under sections 54EA and 54EB in cases of compulsory acquisition.

28.2 This amendment will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 24]

Finance (No. 2) Act, 1998

Amendment of section 69C

29.1 Under the existing provisions, where an expenditure incurred by the taxpayer in respect of which he either offers no explana­tion regarding the source of such expenditure or where explana­tion offered is found unsatisfactory, the expenditure is treated as ‘income’ under section 69C. There is no corresponding provi­sion for disallowance of such expenditure.

29.2 This used to enable the tax payer charged to tax under section 69C to claim the expenditure as deduction under section 37 defeating the very objective of the section.

29.3 The Act has amended section 69C of the Income-tax Act accord­ing to which unexplained expenditure deemed as income cannot be allowed as deduction under any head of income.

29.4 This amendment will take effect from 1st day of April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 25]

Finance (No. 2) Act, 1998

Carry-forward and set-off of loss from house property

30.1 Under the existing provisions of the Income-tax Act, loss from house property is not allowed to be carried forward and set off against income arising in subsequent years. The Act inserts a new section 71B so as to provide that where the net result of computation under the head “Income from house property” is a loss to the assessee and such loss cannot be or is not wholly set off against income from any other head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or where he has no income under any other head, the whole loss shall be allowed to be carried forward and set off in the subsequent assessment years against the income from house property upto a maximum of 8 assessment years.

30.2 This amendment will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 26]

Finance (No. 2) Act, 1998

Rationalisation of benefits available to parents and guard­ians of handicapped dependent

31.1 Under the existing provisions of section 80DD of the Income-tax Act, an assessee who is resident in India being an individual or a Hindu undivided family was allowed a deduction of Rs. 15,000 for expenditure incurred in respect of handicapped dependants subject to certain conditions.

31.2 Section 80DDA allows a separate deduction, from the gross total income, of an amount not exceeding Rs. 20,000, deposited in a year in any scheme of LIC, UTI, etc., specifically framed for providing recurring or lump sum payment for the maintenance and upkeep of a handicapped dependent.

31.3 It has been felt that the parents or guardian of handicapped dependents may not have to incur expenditure or medical treatment of a handicapped dependent every year. However, the parent or the guardian would always feel the need to provide for the future maintenance of the disabled dependent. The existing provisions to do not take such situations into account. In order to allow a choice to the parent or the guardian to spend either on the medical treatment of or for the future needs of the handicapped dependent, as the case may be, the amendment seeks to provide a new section 80DD. With the new provision, the parent or the guardian could claim a deduction upto Rs. 40,000 for the medical treatment and for future needs of the handicapped dependent in the manner most suited to his needs. The existing sections 80DD and 80DDA get consequentially merged with increase in overall limit of deduction from Rs. 35,000 to Rs. 40,000.

31.4 This amendment will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 28]

Finance (No. 2) Act, 1998

100% deduction to donations made to National Sports Fund and the National Culture Fund

32.1 Under the existing provisions of section 80G of the Income-tax Act, a deduction of fifty per cent of the donation is allowed in the computation of income of the donor. However, in respect of donations to certain funds, hundred per cent deduction is al­lowed.

32.2 For raising the standard of sports and games to Internation­al levels, easy access to world class facilities, sports equip­ment and scientific backup to sports persons is required. To facilitate availability of adequate funds for such objects for the promotion of sports and games in the country, an amendment to section 80G has been made to provide a 100% deduction for donations made to National Sports Fund to be set up by the Central Government.

32.3 The Central Government has also set up a National Culture Fund for the promotion of art and culture in the country with a view to mobilising funds for protecting, preserving and promoting the cultural heritage in the country. A similar deduction of 100% for donations made to the National Culture Fund shall now be allowed under the amended provisions of section 80G.

32.4 These amendments will take effect from 1st April, 1999 and will, accordingly, apply in relation to assessment year 1999-2000 and subsequent years.

[Section 29]

Finance (No. 2) Act, 1998

Reintroduction of the provisions of section 80GG

33.1 Section 80GG of the Income-tax Act provided for a deduction to all assessees [except the salaried persons who received house rent allowance covered under section 10(13A)] in respect of expenditure incurred towards payment of rent for residential accommodation, subject to certain limits. This relief was with­drawn by the Finance Act, 1997 by omitting the said section with effect from 01-04-1998.

33.2 The Act seeks to continue the above deduction and has, accordingly, reintroduced section 80GG of the Income-tax Act with effect from 01-04-1998. Subject to certain conditions, the deduction is now allowable to an assessee who incurs any expendi­ture in excess of 10% of his total income towards payment of rent in respect of any furnished or unfurnished accommodation occupied by him for the purpose of his own residence. The amount of allow­able deduction will be as under:

( i) the excess of actual rent paid over 10% of the total income;

( ii) Rs. 2000 per month;

( iii) 25% of the total income;

whichever is less.

33.3 The benefit of above deduction will not be available to an assessee in a case where he, his spouse or minor child or the HUF of which he is a member, owns any residential accommodation at a place where the assessee ordinarily resides, performs the duties of his office or employment or carries on his business or profes­sion. The deduction will also be denied to an assessee who owns any residential accommodation at any other place and the conces­sion in respect of self-occupied property is claimed by him in respect of such accommodation.

33.4 This amendment will take effect retrospectively from 1st April, 1998 and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.

[Section 30]

Finance (No. 2) Act, 1998

New provisions for deduction for World Bank aided housing projects in India

34.1 A new section 80 HHBA has been inserted in the Income-tax Act with a view to providing that an Indian company or a non-corporate assessee resident in India shall be entitled to a deduction of 50% of the profits and gains derived from the busi­ness of execution of housing projects aided by the World Bank and undertaken by the assessee in pursuance of a contract floated on the basis of a global tender. To claim this deduction the asses­see shall have to transfer 50% of profits and gains from the business of housing project, to a Housing Project Reserve Ac­count. This amount shall have to be utilised during a period of five years for the purposes of business other than for distribu­tion by way of dividends or profits. If the money is utilised for any non-business purpose then the income of the year in which the deductions allowed would be re-computed after withdrawing the deduction so allowed.

34.2 The amendment will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 31]

Finance (No. 2) Act, 1998

Amendment in section 80HHD and section 80-IA to prevent double deduction of same profit

35.1 Under the provisions of Chapter-VIA of the Income-tax Act, various deductions from the profits and gains are allowed to specified assessees, subject of fulfilling certain requirements specified under the relevant sections. The total deductions under Chapter VIA of the Income-tax Act are restricted to the gross total income in respect of the assessee as a whole.

35.2 However, it was notice that certain assessees claimed more than 100% deduction on such profits and gains of the same under­taking, when they were entitled to deductions under more than one section of Chapter VIA. With a view to providing suitable statu­tory safeguard in the Income-tax Act to prevent taxpayer from taking undue advantage of existing provisions of the Act by claiming repeated deductions in respect of the same amount of eligible income, even in cases where it exceeds such eligible profits of an undertaking or a hotel, in built restrictions in section 80HHD and 80-IA have been provided by amending the sec­tions, so that such unintended benefits are not passed on to the assessees.

35.3 These amendments will take effect from 1-4-1999 and will, accord-ingly, apply in relation to assessment year 1999-2000 and subsequent years.

[Sections 32 & 34]

Finance (No. 2) Act, 1998

Modification in the provisions relating to export of software under section 80HHE

36.1 Under the existing provisions of section 80HHE, 100% deduc­tion is allowed on profits derived from export of computer soft­ware provided the sale consideration is received in or brought into India inconvertible foreign exchange. Software exports have grown exponentially in recent years. With a view to increasing India’s market share in the international arena, the Explanation ( b) below this section has been extended to include ‘any custo­mised electronic data’ within the meaning of “computer software”. The benefits of deduction have also been extended to supporting software developers. With this in view, proviso to sub-section (1); and sub-sections (1A), (3A) and (4A) have been inserted by the Act so that the benefit of export can also be passed on to software developers by software exporting companies.

36.2 The said proviso provides that where an exporting company issues and certificate in the prescribed form that in respect of an amount of export turnover, deduction under sub-section (1) of section 80HHE is to be allowed to a supporting software develop­er, the amount of deduction available to the assessee shall be reduced by such amount which bears to the total profits of the assessee issuing the certificate, the same proportion as the amount of export turnover specified in the said certificate bears to the total export turnover of the exporting company.

36.3 The new sub-section (3A) provides that where the business carried on by the supporting software developer consists exclu­sively of developing and selling of software to one or more ex­porting companies, the whole of profits derived from such export shall be deemed as profit derived from software export to the exporting company. However, where a business carried on by the supporting software developer does not consist exclusively of developing and selling of software to one or more exporting company, the profit derived by the supporting manufacturer from sale of software to the exporting company, shall be the amount which bear to the total profits of the business of the supporting software developer, the same proportion as the turnover in re­spect of sale to the exporting company bears to the total turn­over of the business carried on by the supporting software de­veloper.

36.4 New sub-section (4A) provides that the deduction to the supporting software developer shall not be allowed unless it furnishes in the prescribed form along with return of its income—

(a) the report of an accountant certifying that the deduc­tion has been correctly claimed on the basis of profits derived by the supporting software developer in respect of software sold to the exporting company. For this purpose, the accountant shall be one as is defined in the Explanation below sub-section (2) of section 288; and

( b) a certificate from the exporting company that in respect of the export turnover mentioned in the certificate, the exporting company has not claimed any deduction under this sec­tion. The certificate issued by the exporting company shall be certified by the auditor auditing the accounts of the exporting company under the provisions of this Act or under any other law.

36.5 These amendments will take effect from the 1st April, 1999, and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 33]

Finance (No. 2) Act, 1998

Tax holiday in respect of undertaking set up in industrially backward States and industrially backward districts extended up to 31-3-2000

37.1 Under the existing provisions of section 80-IA of the Income-tax Act, deduction is allowed in computing the taxable income in respect of profits derived from a new industrial undertaking, or a ship or the business of a hotel.

37.2 For encouraging industrialisation in industrially backward States, the Finance Act, 1993 had provided for a five-year tax holiday for industrial undertakings set up in industrially back­ward States specified in the Eighth Schedule, which start manufac­ture or production during the period beginning of the 1st day of April, 1993 and ending on 31st day of March, 1998. After the first five years, deduction of 30% of the profits of such under­taking in the case of companies (25% in the case of other asses­sees) was allowed for the subsequent five years. The undertakings which started manufacture or production after 31st March, 1998 in backward States ceased to be entitled to the two-tier benefit. Similarly, a five-year tax holiday is available to undertakings set up in notified backward districts, which begin manufacture or production after 1-10-1994 but on or before 31-3-1999.

37.3 The Act has extended the tax holiday to undertakings set up in industrially backward States as specified in the Eighth Sched­ule which start manufacture or production even after 31-3-1998 upto 31-3-2000. It has also similarly extended the tax-holiday to undertakings set up in industrially backward districts up to 31-3-2000.

37.4 These amendments will take effect retrospectively from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.

[Section 34]

Finance (No. 2) Act, 1998

Tax holiday in respect of undertakings engaged in power

38.1 Under the provisions of section 80-IA of the Income-tax Act, a five- year tax holiday and a deduction of 25% (30% in the case of companies) of profits in the subsequent five years is allowed, inter alia, to an undertaking engaged in the business of genera­tion, or generation and distribution of power. The undertaking under the existing provisions should start generating power on or before 31-3-2000.

38.2 The country continues to require large investments in power. As the gestation period for such projects is long, to remove uncertainty from the minds of potential investors, the Act has extended the benefit to undertakings, which commence generation or generation and distribution of power on or before 31-3-2003.

38.3 The amendment will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 34]

Finance (No. 2) Act, 1998

Tax holiday in respect of companies engaged in scientific and industrial research and development activities.

39.1 In order to promote research and development activities, a five-year holiday was provided under section 80-IA with effect from the assessment year 1997-98 to approved companies engaged in scientific and industrial research and development activities. The incentive was made available to any company that had as its main objective, activities in the areas of scientific and indus­trial research and development and which had been accorded ap­proval by the prescribed authority. The prescribed authority for this purpose is the Secretary, Department of Scientific and Industrial Research. The tax holiday available to any company, which is accorded approval by the prescribed authority at any time before 31st March, 1998 has been extended by one year, i.e., up to 31st March, 1999.

39.2 This amendment will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 34]

Finance (No. 2) Act, 1998

Tax holiday to radio-paging, domestic satellite service, network of trunking and electronic data inter-change services.

40.1 Under the existing provisions of 80-IA, a five-year tax holiday in respect of profits and gains of an assessee engaged in telecommunication services is allowed with a further deduction of 25% (30% in the case of companies) of profits from such busi­ness in the next 5 years.

40.2 The country needs to augment its telecommunication serv­ices. For this purpose, the Act has extended the benefit of deduction available to telecommunication services to radio-paging and domestic satellite services. In the case of domestic satel­lite service, this deduction will be allowable only to those Indian companies which own and operate the satellite for provid­ing telecommunication services. Under the amended provisions, a network of trunking and electronic data inter-change services shall also be entitled to the benefit.

40.3 This amendment will take effect from 1-4-1999 and will, accordingly, apply in relation to the assessment years 1999-2000 and subsequent years.

[Section 34]

Finance (No. 2) Act, 1998

Tax holiday to Oil Refining Industries

41.1 Under the existing provisions of section 80-IA, undertakings engaged in the commercial production of mineral oil are entitled to a 7-year tax holiday benefit. With a view to encouraging oil refining within the country in view of the increased demand, it has been decided to extend the benefit of such tax holiday to undertakings engaged in refining of mineral oil. This benefit would be available to such undertakings which commence production on or after 1-10-1998.

41.2 This amendment will take effect from 1-4-1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 34]

Finance (No. 2) Act, 1998

Tax holiday to undertakings engaged in developing and building housing projects

42.1 With a view to promoting investments in housing, a new sub-section (4F) has been inserted in section 80-IA of the Income-tax Act. Under this provision, an undertaking engaged in developing and building housing projects is eligible to claim deduction under section 80-IA, subject to the following:—

( a) The project should be approved by a local authority;

( b) The size of the plot of land is a minimum of 1 acre and the residential unit has a built-up area not exceeding 1000 sq. ft.

( c) The undertaking commences development and construction of the housing project after 30th September, 1998 and completes the same before March 31, 2001.

42.2 Subject to the above conditions being satisfied, 100% of profits from such business shall be deductible.

42.3 This amendment will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 34]

Finance (No. 2) Act, 1998

Inland Port and Waterways regarded as infrastructure facility

43.1 Under the existing provisions of section 80-IA, roads, highways, bridge, airport, port and rail system are regarded as infrastructure facilities and the undertakings engaged in develop­ing, maintaining or operating such infrastructure facility are entitled to a tax holiday for 5 years and a deduction of 30% of profits for the next 5 years. These companies have the choice of availing such benefits in any 10 consecutive years out of initial 12 years from the year in which they commence production.

43.2 The Government has identified national waterways, the fourth mode of transport, for improving the transport infrastructure in the country. Inland waterways and inland ports play a vital role in improving a country’s infrastructure. With the objective of improving the transport infrastructure, the Act has included inland waterways and inland ports in the definition of ‘infra­structure facility’ as given in section 80-IA. The undertakings engaged in the development of such infrastructure would be entitled to two-tier fiscal benefits as outlined above.

43.3 The amendment will take effect from 1-4-1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 34]

Finance (No. 2) Act, 1998

80JJA Deduction in respect of profits and gains from busi­ness of collecting and processing of bio-degradable waste

44.1 Increasing population and urbanization pose challenges for planners. Waste management has been one area of serious concern, which so far has been primarily the responsibility of local bodies. Waste is now being thought not as a useless resource but a re-cyclable and reusable one given the proper framework. The waste can be utilized for generating energy and useful resources by way of composting, vermi-compost and anaerobic digestion. The potential for power generation is also tremendous.

44.2 Accordingly, a new section 80JJA has been inserted with a view to providing that where the gross total income of an assessee includes any profits and gains derived from the business of collecting and processing or treating of bio-degradable waste for generating power, producing bio-gas, making pellets or bri­quettes for fuel or organic manure, a deduction of an amount equal to the whole of such income or five lacs rupees, whichever is less, shall be allowed in computing the total income of such assessee.

44.3 The amendment will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 35]

Finance (No. 2) Act, 1998

New section 80JJAA for granting benefits to companies creat­ing employment opportunities.

45.1 Despite increase in employment of new workmen, economic growth and the employment growth rate has not been high enough to absorb addition to the work force. In order to encourage employers to create more employment opportunities, it was considered necessary to provide fiscal incentives in the Income-tax Act.

45.2 With this objective, a new section 80JJAA has been inserted in the Income-tax Act. The deduction under this section can be availed of by an Indian company. Under the provisions of the new section, an amount of 30% of additional wages paid to the new workmen is to be allowed as a deduction for a period of three years beginning with the year in which the new workman is employed, provided other conditions as laid down in the provision are met. The conditions are :—

( i) The new workman should be employed on regular basis. In other words, he should not be a casual workman, and he should not be employed under contract labour. The term ‘workman’ shall have the same meaning as in the Industrial Disputes Act.

( ii) Such a workman shall be in employment for at least three hundred days during the year.

( iii) In case of an existing undertaking, the increase in the number of regular workman should be at least 10% of the existing number of workmen and further that the number of workmen hitherto in employment was at least one hundred.

( iv) In case of a new undertaking, the number of such workmen must be at least one hundred. The benefit of the aforesaid deduc­tion shall be available only in respect of wages paid to workmen over and above that number both in case of new as well as exist­ing undertakings.

( v) The assessee should furnish along with the return of income the report of the accountant, as defined in the Explana­tion below sub-section (2) of section 288, giving such particu­lars as may be prescribed.

45.3 This amendment will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 36]

Finance (No. 2) Act, 1998

Increase in the limits of deductions allowed in respect of income of cooperative societies.

46.1 Under the Income-tax Act, co-operative societies enjoy certain tax concessions in respect of their income. The whole of the amounts of profits and gains of co-operative societies engaged in the business of banking or providing credit facilities to its members, marketing of agriculture produce of its members, supply of agricultural implements, seeds etc., to the members, processing without the aid of power of the agricultural produce of its members, cottage industries, fishing and allied activities and the primary co-operative societies engaged in the supply of milk, oil seeds, fruits or vegetables, etc., are exempt from the income-tax. Co-operative societies engaged in the activities other than those specified above are liable to tax on their business income in excess of Rs. 40,000, in the case of consumers’ cooperative societies and Rs. 20,000 in the case of other co-operative socie­ties.

46.2 The limit of Rs. 20,000 in respect of cooperative societies was introduced by the Finance Act, 1969, whereas a separate limit of Rs. 40,000 for consumers’ cooperative societies was inserted by the Finance Act, 1979. Over the years, there has been no increase in the exemption limit fixed for such cooperatives. With a view to encouraging and promoting growth of the cooperative sector, the exemption limit of cooperative societies has been raised from Rs. 20,000 to Rs. 50,000 and in the case of consum­ers’ cooperative societies from Rs. 40,000 to Rs. 1,00,000, by amending section 80P of the Income-tax Act.

46.3 These amendments will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 37]

Finance (No. 2) Act, 1998

Tax on income of Foreign Institutional Investors from securi­ties or capital gains arising from their transfer

47.1 The method of computation of the income of foreign institu­tional investors from securities or capital gains arising from the transfer of such securities is given in section 115AD. The Act amends clause (a) of sub-section (1) so as to extend the tax concessions available on income of Foreign Institutional Investors on their investment in listed securities to unlisted securities also.

47.2 This amendment will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 38]

Finance (No. 2) Act, 1998

Addition of two more economic indicators for obligatory filing of returns

48.1 Under the existing provisions, it is obligatory for a person not furnishing return under sub-section (1) of section 139 but residing in a specified area and fulfilling any two of the four following conditions to file return of income :

( i) occupation of an immovable property exceeding a speci­fied floor area by way of ownership, tenancy or otherwise,

( ii) ownership/lease of a motor vehicle,

( iii) subscription of a telephone,

( iv) foreign travel.

48.2 The Act has amended sub-section (1) of section 139 to add two more economic criteria, namely :—

( v) Holding of a credit card not being an add-on card.

( vi) Membership of a club where entrance fee charged is Rs. 25,000 or more.

The amendment also provides that the obligation to file a return will now arise on fulfilling any one of the above six indicators.

48.3 Further it is also provided that Central Government may exclude any class or classes of persons from the ambit of the first proviso to section 139(1) by notification in the Official Gazette.

48.4 A new explanation, namely, ‘Explanation 4’ has also been inserted clarifying that travel to any foreign country shall not include travel to the neighbouring countries and places of pil­grimages as may be notified by Board in the Official Gazette.

48.5 These amendments have taken effect from 1st August, 1998 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

48.6 In exercise of powers conferred by amended sub-section (1) of section 139 of the Income-tax Act, a number of notifications have been issued. Vide Notification No. SO 710(E) dated 20-8-1998, it has been specified that the proviso to section 139(1) shall not apply to a non-resident. A person who has attained 65 years of age, and is not engaged in any business or profession during the previous year shall not be required to file return for fulfilling the conditions relating to occupation of an immovable property of specified floor area or subscription of a telephone.

48.7 Vide Notification No. SO 711(E) dated 20-8-1998, it has been specified that travel to any foreign country shall not include travel to Saudi Arabia on Haj pilgrimage and travel to China on pilgrimage to Kailash Mansarover.

48.8 Vide Notification No. SO 712(E) dated 20-8-1998, it has been specified that travel to any foreign country shall not include travel to SAARC countries, namely, Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka.

[Section 40]

Finance (No. 2) Act, 1998

Rationalisation of provision relating to application for allotment of Permanent Account Number

49.1 According to the existing provisions, every person who is carrying on any business or profession and whose total sales, turnover, or gross receipts are likely to exceed Rs. 50,000 in any previous year is required to apply for the allotment of Permanent Account Number. This provision was inserted by the Taxation Law (Amendment) Act, 1975 w.e.f. 1-4-1976 and has ceased to be a realistic eligibility criteria for applying for PAN.

49.2 The Act has amended clause (ii) of sub-section (1) of sec­tion 139A to enhance the limit of Rs. 50,000 to Rs. 5,00,000.

49.3 This amendment will take effect from 1st August, 1998 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 41]

Finance (No. 2) Act, 1998

Compulsory quoting of PAN

50.1 The existing provisions of section 139A of the Income-tax Act provide for compulsory quoting of Permanent Account Number (PAN) in all documents pertaining to transactions as may be prescribed by Board and entered into by the concerned persons. This section has been amended to provide that a person shall quote his Permanent Account Number or his General Index Register (GIR) Number till such time PAN is allotted. The amendment also provides that Board may notify a class or classes of persons to whom the provision regarding compulsory quoting of PAN shall not apply and further delegates power to Board to prescribe the form and manner of declaration which shall be furnished by a person not having either General Index Register Number or Permanent Account Number and the time and manner in which transactions subject to compulsory quoting of PAN/GIR No. shall be intimated to the prescribed authority.

50.2 These amendments have taken effect from 1st day of August, 1998.

50.3 Board has since amended Income-tax Rules, 1962 vide SO 889(E) dated 9-10-1998 specifying following transactions where it will be necessary to quote PAN or GIR from the 1st day of November, 1998 :

( a) sale or purchase of any immovable property valued at five lakh rupees or more;

( b) sale or purchase of a motor vehicle or vehicle, as defined in clause (28) of section 2 of the Motor Vehicle Act, 1988 (59 of 1988), which requires registration by a registering authority under Chapter IV of that Act. Two wheeled vehicles have been kept outside the ambit of the definition of motor vehicle vide Notification S.O. 939(E) dated 29-10-1998.

( c) a time deposit, exceeding fifty thousand rupees, with a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act);

( d) a deposit, exceeding fifty thousand rupees, in any account with Post Office Saving Bank;

( e) a contract of a value exceeding ten lakh rupees for sale or purchase of securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);

( f) opening an account with a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act);

( g) making an application for installation of a telephone connection (including a cellular telephone connection);

( h) payment to hotels and restaurants against their bills for an amount exceeding twenty-five thousand rupees at any one time.

50.4 The rules further provide that if a person has not been allotted PAN, he may quote his GIR No. till such time PAN is allotted to him. If he does not have either PAN or GIR No. and is making transactions in cash or otherwise than by way of crossed bank cheque or crossed bank draft, he is required to fill decla­ration in Form No. 60 giving his name and address and particulars of the transaction along with proof of his residential address. Persons having income from agriculture and not having any other income chargeable to tax are required to file similar declara­tions in Form No. 61. Non-residents visiting the country can produce copies of their passports.

[Section 41]

Finance (No. 2) Act, 1998

Providing for issue of refund in assessment under sub-section (3) of section 143

51.1 Under the existing provisions, the Assessing Officer deter­mines the sum payable by the assessee on the basis of assessment in accordance with the provisions of sub-section (3) of section 143 of the Income-tax Act. There is no provision to issue refund under this sub-section.

51.2 The Act has amended sub-section (3) of section 143 of the Income-tax Act to provide for determination of sum payable by the assessee as well as the refund of any amount due to him by the Assessing Officer while making an order of assessment.

51.3 The amendment has taken effect from 1st October, 1998.

[Section 42]

Finance (No. 2) Act, 1998

Method of accounting in certain cases

52.1 The issue relating to whether the value of the closing stock of the inputs, work-in-progress and finished goods must neces­sarily include the element for which MODVAT credit is available, has been the matter of considerable litigation over the years.

52.2 Consistent with the other provisions of the Act, with a view to put an end to this point of litigation and in order to ensure that the value of opening and closing stock reflect the correct value, a new section 145A is inserted. This section provides that the valuation of purchase, sale and inventory shall be made in accordance with the method of accounting regularly employed by the assessee and such valuation shall be further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called), actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.

52.3 This amendment will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 43]

Finance (No. 2) Act, 1998

Clarificatory amendments in procedure for block assessment

53.1 To set at rest the controversy as to whether block assess­ment subsumes the regular assessments or is independent of the latter, the Act has inserted an Explanation after sub-section (2) of section 158BA of the Income-tax Act clarifying that assess­ments completed under Chapter XIVB shall be in addition to regu­lar assessments in respect of each previous year included in the block period. Further, undisclosed income relating to the block period shall not include the income assessed in regular assess­ment. Similarly income in regular assessment shall not include the income of the block period assessed in block assessment.

53.2 To settle the controversy regarding meaning of the word ‘execution’ while calculating the period of limitation in section 158BE of the Income-tax Act, the Act has inserted a new clarifi­catory Explanation. An authorisation is deemed to have been executed in the case of search on the conclusion of search as recorded in the last panchanama drawn in relation to any person in whose case the warrant of authorisation has been issued. In regard to requisition under section 132A of the Income-tax Act, the authorisation would be deemed to have been executed on actual receipt of books of account or other documents or assets by the authorised officer.

53.3 The above amendments will take effect retrospectively from 1st July, 1995 and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years.

53.4 The Act has amended section 158BB of the Income-tax Act to clarify that the deduction of salary, interest, commission, bonus or remuneration, by whatever name called, in Explanation (b) in sub-section (1) of section 158BB is in relation to any partner not being a working partner. This amendment is effective from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Sections 44, 45 & 46]

Finance (No. 2) Act, 1998

Adjustment of loss from house property for the purpose of determining the tax deductible from salary

54.1 Under the existing provisions of sub-section (2B) of section 192, the person responsible for making payment of salary can take into account income from other heads (not being a loss) and taxes deducted thereon for the purpose of calculating and deducting tax at source from salary income. This results in small refunds in a large number of salary cases mostly because the drawing and disbursing officer cannot allow adjustment of loss from house property against salary income. It is such refunds that become subject matter of a large number of grievances of tax payers.

54.2 Since it is not desirable to collect taxes which are certain to be refunded, the Act amends sub-section (2B) of section 192 so as to allow adjustments of loss from house property against the income from salary for the purpose of determining the tax deduct­ible from salary. The person responsible for deducting tax at source can now make necessary adjustment and deduct appropriate amount of tax. It is hoped that this measure would go a long way to remove the hardship to a large number of salaried taxpayers.

54.3 This amendment will take effect from 1st August, 1998 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 47]

Finance (No. 2) Act, 1998

Extending the scope of Authority for advance ruling to resi­dent applicants

55.1 Under the existing provisions, the scope of Authority for Advance Ruling is restricted to a determination of a question of law or fact in relation to a transaction which has been undertaken or is proposed to be undertaken by a non-resident applicant.

55.2 The act has amended clause (a) in section 245N whereby advance ruling will also mean a decision by the Authority in relation to an assessment pending before the Income-tax Authority or the Tribunal in respect of a resident applicant and such decision will include the decision on question of law or fact arising out of the assessment order for which application has been made. However, the resident applicant has to fall within the class or category of persons as notified by Central Government in this regard. The Act has also inserted a new section 245RR in the Income-tax Act which bars the Income-tax Authority or the Appel­late Tribunal from deciding any issue in respect of which an application has been made by the resident applicant to the au­thority.

55.3 The amendment has taken effect from the 1st day of October, 1998.

[Section 48]

Finance (No. 2) Act, 1998

Abolition of the appellate level at Deputy Commissioner (Appeals)

56.1 Under the existing provisions of Income-tax Act, Deputy Commissioner (Appeals) are hearing appeals in very small cases. The Commissioner (Appeals) are also doing the identical functions. In the same case, appeal in one year may be pending before Deputy Commissioner (Appeals) and in the other year before the Commissioner (Appeals) depending upon the quantum of addi­tion. Presently, only a few posts of Deputy Commissioner (Ap­peals) are functioning in the country.

56.2 A new section i.e., section 246A has been inserted to pro­vide for filing of appeals before the Commissioner (Appeals) against all order where appeals earlier lay either with Deputy Commissioner (Appeals) or Commissioner (Appeals). It also pro­vides that every appeal which is pending before the Deputy Com­missioner (Appeals) would stand transferred to the Commissioner (Appeals) on the appointed date. Vide Notification SO 811(E) dated 14-9-1998, 1st day of October, 1998 has been notified as the appointed date for the purpose of the above section.

56.3 Similar amendments have also been made in the Wealth-tax Act and Gift-tax Act.

56.4 This amendment takes effect from the 1st day of October, 1998.

[Sections 49, 69 & 76]

Finance (No. 2) Act, 1998

Providing for appeal fee for filing appeals before Commis­sioner (Appeals)

57.1 Under the existing provisions of the Income-tax Act, no fees is required to file appeals before Commissioner (Appeals). Consequently, a large number of unnecessary appeals are filed on decided issues and also on issues having petty tax effect. These avoidable appeals take substantial time of the appellate authori­ties and slow down the disposal of appeals. In view of the above, the Act has amended section 249 of the Income-tax Act to provide for a scale of fee as under for filing appeals before Commission­er (Appeals) based on total income.

Assessed total income	Fee for filing the appeal before CIT (Appeals)
Rs. 1 lakh or less	Rs. 250
More than Rs. 1 lakh but not more than Rs. 2 lakhs	Rs. 500
More than Rs. 2 lakhs	Rs. 1,000

57.2 A fee of Rs. 250 has been provided for filing an appeal before the Commissioner (Appeals) under the other direct tax enactments.

57.3 These amendments have taken effect from the 1st day of October, 1998.

[Sections 50, 69, 76, 78 & 84]

Finance (No. 2) Act, 1998

Changes in the eligibility criteria for appointment as Judi­cial Member and Accountant Member in Appellate Tribunal

58.1 Under the existing provisions, a member of the Central Legal Service holding a Grade-I post for 3 years is eligible to become a Judicial Member. Similarly, a member of Indian Income-tax Service Group-A holding the post of Commissioner for 3 years is eligible to become an Accountant Member.

58.2 In view of the above provisions, the members of these two services join Appellate Tribunal at a very late age. On the other hands a Chartered Accountant, an advocate or a person holding judicial office can become a member of Appellate Tribunal at a younger age as they are required to put in only 10 years of serv­ice.

58.3 To redress this imbalance, the Act has amended section 252 of the Income-tax Act so as to make a Grade-II Officer of Indian Legal Service and an Additional Commissioner of Income-tax with 3 years’ experience in either case eligible to appointed as Judicial Member and Accountant Member respectively.

[Section 51]

Finance (No. 2) Act, 1998

Enhancement of fee payable for filing appeal before appellate Tribunal

59.1 Under the existing provisions, the appeal fee payable to Tribunal was Rs. 250 for appeals involving assessed total income upto Rs. 1,00,000 and Rs. 1,500 when the assessed total income exceeded Rs. 1,00,000. The above small scale of fee did not prohibit filing of a large number of unnecessary appeals on decided issues and on issues having petty tax effect, thus slow­ing down the disposal of appeals. In view of the above, the Act has enhanced the scale of fee payable to Appellate Tribunal as under by amending sections 253 and 254 of the Income-tax Act :—

Particulars	Fee for filing the appeal before ITAT
Assessed total income – Rs. 1 lakh or less	Rs. 500
Assessed total income is more than Rs. 1 lakh but not more than Rs. 2 lakhs	Rs. 1,500
Assessed total income is more than Rs. 2 lakhs	1% of the assessed income subject to a maximum of Rs. 10,000.
Miscellaneous applications under section 254(2)	Rs. 50
Stay petitions	Rs. 500

59.2 The fee for filing an appeal before the Appellate Tribunal under other direct tax enactments, namely Wealth-tax Act, Gift-tax Act, Interest-tax Act and Expenditure-tax Act, has been enhanced from Rs. 200 to Rs. 1000.

59.3 These amendments have taken effect from the 1st day of Octo­ber, 1998.

[Sections 52, 53, 70, 76, 79 & 85]

Finance (No. 2) Act, 1998

Increasing the monetary limit of appeals to be decided by single member bench of Appellate Tribunal

60.1 Under the existing provisions a member of the Appellate Tribunal may be empowered sitting singly to dispose of any case where total income does not exceed Rs. 1 lakh.

60.2 With a view to helping quicker disposal of appeals before the Appellate Tribunal, the Act has enhanced the above limit to Rs. 5 lakhs by amending section 255 of the Income-tax Act.

60.3 The amendment has taken effect from the 1st day of October, 1998.

[Section 54]

Finance (No. 2) Act, 1998

Direct appeal to High Courts

61.1 According to the existing provisions, appeals arising out of the order of the Appellate Tribunal lie to the High Court where a substantial question of law is involved therein. The assessee or the Commissioner can request the Appellate Tribunal for reference of question of law to the High Court. If the Appellate Tribunal decides against such reference, High Court can be moved to direct the Appellate Tribunal to make such reference and state the case. This process consumes a lot of time before the decision on merits of the case is finalised. The limited scope of section 256(2) does not allow rendering of a final decision on the issue even where the relevant facts are available to give such a decision. Hon’ble Kerala High Court in the case of CIT v. Wandoor Jupitar Chits (P.) Ltd. 213 ITR 75 has pointed out such provisions as being archaic and have opined that authorities should take a fresh look on this matter. Similarly, after the High Court or Supreme Court have decided on the question of law, a copy of the judgment is sent to the Registrar of the Appellate Tribunal for passing such order as in necessary to dispose of the case. The above provision again contributes to the delay.

61.2 The Act has, therefore, inserted a new sub-heading, “CC-Appeals to High Court” and sections 260A, 260B in Chapter XX and has also amended sections 256, 257, 260 and 261 to provide that an appeal shall lie against the orders of the Tribunal directly to the High Court if the High Court is satisfied that the case involves a substantial question of law. The memorandum of appeal shall precisely state the substantial question of law involving the appeal and where the appeal is made by the assessee, such appeal shall be accompanied by a fee of Rs. 10,000 (Rs. 5,000 in the case of Wealth-tax). Where the High Court is satisfied that a substantial question of law is involved in any case, it may itself formulate that question. The appeals shall be heard on the question so formulated. However, nothing would take away or abridge the power of the Court to hear for reasons to be recorded the appeal on any other substantial questions of law if it is satisfied that the case involves such questions. The High Court may also determine any issue necessary for disposal of appeal which has not been determined by the Appellate Tribunal.

61.3 Similar amendments for direct appeal to High Court have also been made in Wealth-tax Act and Gift-tax Act.

61.4 These amendments have taken effect from the 1st day of October, 1998.

[Sections 55, 56, 57, 58, 59, 72, 73, 74 & 76]

Finance (No. 2) Act, 1998

Providing limitation of time for revising orders by Commis­sioner of Income-tax under section 264 of the Income-tax Act

62.1 Under the existing provisions, the Commissioner of Income-tax is empowered to revise an order passed by the subordinate authority where no appeal has been filed. The order passed by the Commissioner of Income-tax cannot be prejudicial to the interest of assessee. There is limitation of one year for filing the application but there is no time limit for the Commissioner of Income-tax to dispose of the application. The absence of such a provision has contributed to the delay in the disposal of such application.

62.2 The Act has made it obligatory on the Commissioner to pass an order under section 264 within a period of one year from the end of the financial year in which the application is made for revision. However, in computing the period of limitation, the time taken in giving an opportunity to the assessee to be reheard and any period during which any proviceedings under this section is stayed by an order or injunction of any court shall be exclud­ed. Further, the above time shall also not apply in cases of revisionary orders to be passed in consequence of or to give effect to any finding or direction in an order of the Appellate Tribunal, High Court or the Supreme Court.

62.3 Corresponding amendments have also been made in other direct tax enactments namely, Wealth-tax Act, Gift-tax Act, Interest-tax Act and the Expenditure-tax Act.

62.4 These amendments have taken effect from the 1st day of October, 1998.

[Sections 60, 71, 76, 80 & 83]

Finance (No. 2) Act, 1998

Provision of penalty for non-filing of returns of income

63.1 Under the existing provisions, no penalty is provided for failure to file return of income under sub-section (1) of section 139 [section 271F provides for penalty of Rs. 500 only in case of failure to file return under proviso to sub-section (1) of section 139]. The interest chargeable under section 234A of the Income-tax Act for not furnishing the return or furnishing the same after the due date is calculated on the basis of tax pay­able. If no taxes are payable, no interest can be charged. It is seen that a large number of persons having salary income which are subject to deduction of tax at source do not file their returns. Since the Act has amended section 192(2B) of the Income-tax Act to provide that loss from house property shall be allowed to be adjusted against salary income at the source itself, filing of returns has become absolutely necessary to find out that the claim of set off of loss is being correctly made. The penal provisions are also necessary to ensure that all such persons having taxable income file their returns of income.

63.2 Therefore, section 271F has been amended to provide for a penalty of Rs. 1,000 for not filing of return under sub-section (1) of section 139 before the end of the relevant assessment year.

63.3 This amendment will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 61]

Finance (No. 2) Act, 1998

Prescribing maximum penalty for defaults committed with reference to sections 197A and 203 of Income-tax Act

64.1 Under the existing provisions, penalty under sub-section (2) of section 272A of the Income-tax Act is impossible for failure to deliver in due time a copy of the declaration under section 197A or for failure by the person deducting tax to furnish a certificate of deduction, to the person to whom such payment is made or credit is given within the prescribed period. These de­faults are continuous in nature and attract penalty at the rate of Rs. 100-200 per day without any maximum limit.

64.2 The Act has amended section 272A of Income-tax Act to pro­vide that the maximum limit of penalty imposable in such cases shall not exceed the amount of tax deductible or collectible, as the case may be.

64.3 This amendment will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 62]

Finance (No. 2) Act, 1998

Increase in the limit for submission of statements by produc­ers of cinematograph films

65.1 Under the existing provisions of section 285B, producers of cinema-tographic films are obliged to furnish within 30 days from the date of completion of the film or within 30 days from the end of the financial year, whichever is earlier, statement containing particulars of all payments of over Rs. 5,000 in aggregate made by him or due from him to each person engaged by him. The Act en­hances the monetary limit from Rs. 5,000 to Rs. 25,000.

65.2 This amendment will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Section 63]

Finance (No. 2) Act, 1998

Provisions relating to insurance business

66.1 The profits and gains of any insurance business other than life insurance are computed in accordance with the provisions of section 44 of the Income-tax Act and the rules contained in the First Schedule. As per rule 5 of the First Schedule, the profits and gains of such insurance business are taken to be the balance of profits disclosed by the annual accounts under the Insurance Act, 1938 and are subject to the adjustments of expenditure or allowance which are not admissible under sections 30 to 43B.

66.2 The Act amends rule 5 of the First Schedule so as to explic­itly provide for the disallowance of provision for any tax, dividend, reserve or any other provision, as may be prescribed, debited to such profit and loss account, putting an end to the litigation in this regard.

66.3 This amendment will take effect retrospectively from 1st April 1989 and will, accordingly, apply in relation to the as­sessment year 1989-1990 and subsequent years.

[Section 64]

Finance (No. 2) Act, 1998

Consequential amendments

67.1 In view of abolition of appellate level at Deputy Commis­sioner (Appeal), the Act has made consequential amendments in sections 119, 154, 177, 189, 248, 250, 251, 267, 271, 271A, 275, 287 and 295 to omit references to Deputy Commissioner (Appeals).

67.2 These amendments have taken effect from the 1st day of October, 1998.

[Section 65]

3. Amendments to Income-tax Act

From	To
Assistant Commissioner	Assistant Commissioner or Deputy Commis­sioner
Assistant Director	Assistant Director or Deputy Director
Deputy Commissioner	Joint Commissioner
Deputy Director	Joint Director

	Proceeds less than the expenditure remaining unallowed	Proceeds exceeding the expenditure remaining unallowed		Proceeds equal to the expenditure remaining unallowed
		Situation A	Situation B
(a)Expenditure incurred	10,000	10,000	10,000	10,000
(b) Expenditure remaining unallowed	6,000	6,000	6,000	6,000
(c) Proceeds of transfer	5,000	7,000	15,000	6,000
(d) Amount allowable as deduction in A.Y. 1999-2000 (b-c)	1,000	NIL	NIL	NIL
(e) Amount allowable as deduction in subsequent years	NIL	NIL	NIL	NIL
(f) Excess of proceeds of transfer over expenditure remaining unallowed (c-b)	NIL	1,000	9,000	NIL
(g) Difference between the expenditure incurred and the expenditure remaining unallowed (a-b)	4,000	4,000	4,000	4,000
(h) Amount chargeable to income-tax as profits and gains in the assessment year 1999-2000 [lower of (f) & (g)]	NIL	1,000	4,000	NIL

Assessed total income	Fee for filing the appeal before CIT (Appeals)
Rs. 1 lakh or less	Rs. 250
More than Rs. 1 lakh but not more than Rs. 2 lakhs	Rs. 500
More than Rs. 2 lakhs	Rs. 1,000

Particulars	Fee for filing the appeal before ITAT
Assessed total income – Rs. 1 lakh or less	Rs. 500
Assessed total income is more than Rs. 1 lakh but not more than Rs. 2 lakhs	Rs. 1,500
Assessed total income is more than Rs. 2 lakhs	1% of the assessed income subject to a maximum of Rs. 10,000.
Miscellaneous applications under section 254(2)	Rs. 50
Stay petitions	Rs. 500

4. Amendments to Wealth-tax Act

FINANCE (NO. 2) ACT, 1998

WEALTH-TAX

Incentives allowed under the Wealth-tax Act

68.1 The existing provisions of section 2(ea) of the Wealth-tax Act, exempt from wealth-tax a house meant exclusively for residential purposes and which is allotted by a company to an employee or an officer or director who is in whole time employ­ment, having a gross annual salary of less than Rs. 2 lakhs. In view of inflation and general rises in the salaries, section 2(ea ) is amended so as to enhance the limit of gross annual salary to Rs. 5 lakhs.

68.2 The Act also amends the said section so as to provide for exemptions from wealth-tax in respect of any residential property that has been let out for a minimum period of 300 days in the previous year and also any property in the nature of commercial establishment or complexes.

68.3 Explanation (b) of section 2(ea) excludes from the meaning of urban land, any land held by the assessee as stock-in-trade for a period of five years from the date of its acquisition by him. The Act amends the Explanation so as to make land held by the assessee as a stock-in-trade for a period of ten years from the date of its acquisition by him, not includible in the defini­tion of urban land, and, hence not chargeable to wealth-tax.

68.4 Under the existing clause (vi) of section 5, one house or part of a house belonging to an individual or a Hindu undivided family is exempt from wealth-tax. The Act amends this clause so as to extend this exemption also in respect of a plot of land comprising an area of 500 sq. meters or less.

68.5 These amendments will take effect from 1st April, 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.

[Sections 67 & 68]

5. Amendments to Gift-tax Act

6. Amendments to Expenditure-tax Act