Circular No. 145-Income Tax dated 9/9/1974

AMENDMENTS  TO  INCOME-TAX  ACT

 EXEMPTION FROM INCOME-TAX OF CERTAIN CATEGORIES OF INCOME

DIRECT TAXES (AMENDMENT)

ACT, 1974

Liberalisation of the provisions relating to tax exemption of remuneration of foreign technicians

5. Under section 10(6 )(viia), foreign technicians having specialised knowledge and experience in constructional or manufacturing operations or in mining or in the generation of electricity or any other form of power, or in agriculture, animal husbandry, dairy farming, deep sea fishing or ship building enjoy special concession in certain cases. One of the important conditions for availing of the tax concession is that the foreign technician should not have been a resident of India in any of the four financial years immediately preceding the financial year in which he arrives in India. The Amending Act has modified the provisions in section 10(6)( viia) with a view to empowering the Central Government to waive the condition regarding non-residence in India in the immediately preceding four years in cases where it considers it necessary or expedient to do so in the public interest. The new provision will be applicable only in the case of foreign technicians who are engaged for designing, erection or commissioning of machinery and plant or for supervising activities connected therewith. It should be noted that section 10(6)( viia) applies only in the case of technicians entering service after 31-3-1971 and, accordingly, the Central Government will be empowered to waive the condition regarding non-residence in the immediately preceding four financial years only in the case of technicians entering service after that date.

This amendment has come into force with retrospective effect from 1-4-1973 and is, accordingly, applicable in relation to the assessment year 1973-74 and subsequent years.

[Section 2(a) of the Amending Act]

 DIRECT TAXES (AMENDMENT)

ACT, 1974

Exemption from income-tax of interest payable by financial institutions and banking companies on loans raised in foreign countries in certain cases

6. Under section 10(15 )(iv), interest payable on foreign loans, especially those raised by industrial undertakings, enjoy exemption from income-tax over a large area. The Amending Act has enlarged the area of this tax concession with a view to exempting from income-tax interest payable to foreign parties in the following circumstances :

1. Where interest is payable by the Industrial Finance Corporation of India, the Industrial Development Bank of India and Industrial Credit and Investment Corporation of India, on loans, raised by them in foreign countries, such interest will be exempt to the extent of the rate approved by the Central Government.

2. Where interest is payable on loans raised in any foreign country by any other financial institution or by a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act) and the loan has been raised for the purpose of making advances to industrial undertakings in India for purchase of raw materials and capital plant and machinery or for the import of essential supplies, such interest will be exempt to the extent of the rate approved by the Central Government. Tax exemption in such cases will be available only if the relevant loan agreement is approved by the Central Government.

These amendments have come into force with retrospective effect from 1-4-1973 and are, accordingly, applicable in relation to the assessment year 1973-74 and subsequent years.

[Section 2(b) of the Amending Act]

 DIRECT TAXES (AMENDMENT)

ACT, 1974

Exemption from income-tax of certain awards for literary, scientific and artistic work or attainment or for proficiency in sports and games

7. Under section 10(3 ), as it stood prior to its amendment by the Finance Act, 1972, receipts of casual and non-recurring nature were exempt from income-tax, except where such receipts constituted capital gains or arose from business or the exercise of a profession, vocation or occupation or were by way of addition to the remuneration of an employee. This exemption was, however, limited to Rs. 1,000 only with effect from the assessment year 1973-74 under certain provisions made in the Finance Act, 1972. With a view to encouraging creative activities in the field of literature, science and art, as also for promoting sports and games, the Amending Act has inserted a new clause (17A) in section 10 in order to secure that awards for literary, scientific and artistic work, as also for proficiency in sports and games, instituted by the Central Government or a State Government are exempted from income-tax. Likewise, exemption will also be available in respect of similar awards which are approved by the Central Government for the purposes of the new clause (17A) of section 10. A specific provision has been made in order to empower the Central Government to grant its approval with retrospective effect in order to provide for cases where the application by the organisation instituting the award for approval by the Central Government is delayed or the approval is otherwise delayed.

This amendment has come into force with retrospective effect from 1-4-1973 and is, accordingly, applicable in relation to the assessment year 1973-74 and subsequent years.

[Section 10(c) (Part) of the Amending Act]

 DIRECT TAXES (AMENDMENT)

ACT, 1974

Exemption from income-tax of certain rewards

8. The Amending Act has inserted a new clause (17B) in section 10 providing for exemption from income-tax of rewards given by the Central Government or a State Government for such purposes as may be approved by the Central Government in the public interest.

This amendment has come into force with effect from 1-4-1973 and is, accordingly, applicable in relation to the assessment year 1973-74 and subsequent years.

[Section 10(c) (Part) of the Amending Act]

 TAX CONCESSIONS FOR ENCOURAGING INDUSTRIES IN SELECTED SECTORS/BACKWARD AREAS AS ALSO FOR PROMOTION OF
RESEARCH AND DEVELOPMENT AND EXPORT

DIRECT TAXES (AMENDMENT)

ACT, 1974

Initial depreciation allowance in respect of machinery or plant installed in selected industries

9. In May 1971, the Central Government had issued a notification providing for the withdrawal of development rebate in respect of ships acquired or machinery or plant installed after 31-5-1974. In view of the need for continued encouragement of industries in certain selected sectors, the Amending Act has inserted a new clause (vi) in sub-section (1) of section 32 providing for initial depreciation allowance in respect of machinery or plant installed in certain selected industries after 31-5-1974. The initial depreciation allowance will be available in respect of the following categories of machinery and plant :

1. New ships and aircraft acquired by a taxpayer engaged in the business of operation of ships or aircraft. It should be noted that new ships and aircraft will qualify for initial depreciation allowance only in the hands of taxpayers carrying on the business of operating ships or aircraft and will not be available in respect of ships or aircraft acquired by other taxpayers.

2. New machinery or plant (other than office appliances or road transport vehicles) installed for the purposes of business of generation or distribution of electricity or any other form of power.

3. New machinery or plant (other than office appliances or road transport vehicles) installed for the purposes of business of construction, manufacture or production of any one or more of the articles or things specified in new Ninth Schedule, namely :

   1.  Iron and steel (metal).

   2.  Non-ferrous metals.

   3.  Ferro-alloys and special steels.

   4.  Steel castings and forgings and malleable iron and steel castings.

   5.  Thermal and hydro power generation equipment.

   6.  Transformers and switch gears.

   7.  Electric motors.

   8.  Industrial and agricultural machinery.

   9.  Earth-moving machinery.

  10.  Machine tools.

  11.  Fertilisers, namely, ammonium sulphate, ammonium sulphate nitrate (double salt), ammonium nitrate, calcium ammonium nitrate (nitrolime stone), ammonium chloride, super phosphate, urea and complex fertilsers of synthetic origin containing both nitrogen and phosphorus, such as ammonium phosphates, ammonium sulphate phosphate and ammonium nitro phosphate.

  12.  Soda ash.

  13.  Caustic soda.

  14.  Commercial vehicles.

  15.  Ships.

  16.  Aircraft.

  17.  Tyres and tubes.

  18.  Paper, pulp and newsprint.

  19.  Sugar.

  20.  Vegetable oils.

  21.  Textiles (including those dyed, printed or otherwise processed) made wholly or mainly of cotton, including cotton yarn, hosiery and rope.

  22.  Textiles (including those dyed, printed or otherwise processed) made wholly or mainly of jute, including jute twine and rope.

  23.  Cement and refractories.

4. New machinery or plant (other than office appliances or road transport vehicles) installed in a small-scale industrial undertaking for the purposes of business of manufacture or production of any other article or thing. In other words, new machinery or plant installed in small-scale industrial undertakings will qualify for initial depreciation allowance irrespective of whether or not the new machinery or plant is used for the manufacture or production of articles or things specified in the new Ninth Schedule. An industrial undertaking will be regarded as a small-scale industrial undertaking, if the aggregate value of machinery and plant installed therein, as on the last day of the relevant previous year, does not exceed Rs. 7.5 lakhs. For this purpose, the value of the machinery or plant owned by the taxpayer shall be the actual cost thereof to the taxpayer and the value of machinery or plant hired by the taxpayer shall be the actual cost to the owner thereof.

DIRECT TAXES (AMENDMENT)

ACT, 1974

10. Initial depreciation allowance in respect of the aforesaid ships aircraft, machinery or plant will be allowed at the rate of 20 per cent of their actual cost. The initial depreciation allowance will not be deductible in computing the written down value of the asset in subsequent years. This will, however, be taken into account in the year in which the asset is sold or demolished or destroyed or in the year in which normal depreciation tends to exceed 80 per cent of the cost. In other words initial depreciation allowance will be taken into account in calculating the balancing charge or determining the profits under section 41(2) and, accordingly, the aggregate of the initial depreciation and normal depreciation (including multiple shift allowance) over the years will not exceed the actual cost of the qualifying ship, aircraft, machinery or plant.

DIRECT TAXES (AMENDMENT)

ACT, 1974

11. For the purpose of the initial depreciation allowance, second-hand ships or aircraft which were not previously owned by any person resident in India will be regarded as new ships or new aircraft. Similarly, machinery or plant which before its installation by the taxpayer was earlier used outside India by any other person, will be regarded as new machinery or plant if the following conditions are fulfilled:

1. Such machinery or plant was not, at any time, prior to installation by the taxpayer, used in India for any purpose.

2. Such machinery or plant is imported into India from any country outside India. It should be noted that in order to qualify for initial depreciation allowance, it is not necessary that the machinery or plant should have been imported by the taxpayer himself and, accordingly, reconditioned machinery or plant purchased by a taxpayer from a dealer in machinery or plant who has imported the same into India will qualify for initial depreciation allowance provided other conditions laid down in this behalf are fulfilled.

3. No deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of the 1922 Act or the 1961 Act in computing the total income of any person for any period prior to the date of installation of the machinery or plant by the taxpayer.

DIRECT TAXES (AMENDMENT)

ACT, 1974

12. Office appliances and road transport vehicles, as also machinery or plant installed in office premises or any residential accommodation will not qualify for initial depreciation allowance.

DIRECT TAXES (AMENDMENT)

ACT, 1974

13. Initial depreciation allowance will ordinarily be allowed in the year in which the ship or aircraft is acquired or the machinery or plant is installed. Where, however, the ship, aircraft, machinery or plant is first put to use in the year immediately following the year in which it is acquired or installed, the initial depreciation allowance will be admissible for such immediately following year.

DIRECT TAXES (AMENDMENT)

ACT, 1974

14. Under the Income-tax Act, unabsorbed depreciation allowance can be carried forward indefinitely while unabsorbed development rebate can be carried forward only for a period of eight years. Further, where a taxpayer is entitled to set off of both depreciation and development rebate, the current depreciation as also unabsorbed depreciation of earlier years is deducted first and the unabsorbed development rebate carried forward from earlier years can be set off only against the balance of the income remaining after such deduction. In view of this position, enterprises having large unabsorbed development rebate may not like to avail of initial depreciation allowance until such development rebate is set off against profits for the assessment year 1975-76 or subsequent years. As the provision for the grant of initial depreciation allowance is intended to help the industrial undertakings and not to work to their disadvantage by depriving them of their right to development rebate the Amending Act provides that a taxpayer may, at his option, declare and choose not to avail of the proposed benefit of initial depreciation allowance. The assessee may exercise his option before the expiry of the time allowed under section 139(1) or section 139(2) (whether fixed originally or on extension) for furnishing the return of income for the assessment year in which he first becomes entitled to deduction in respect of initial depreciation allowance. Once the taxpayer exercises this option, no deduction in respect of initial depreciation allowance would be allowed till he revokes the option exercised by him. The taxpayer will be required to give the notice of revocation in writing to the Income-tax Officer before the expiry of the time allowed under section 139(1) or section 139(2) (whether fixed originally or on extension) for furnishing the return of income for the assessment year for which such revocation is to operate. After the revocation of the declaration the provision of section 32(1)(vi) will apply to the taxpayer for all subsequent years.

 DIRECT TAXES (AMENDMENT)

ACT, 1974

15. Section 16 of the Finance Act, 1974 has made an independent provision so as to continue the development rebate for a specified period in the following cases:

  (a)  in the case of ships acquired after 31-5-1974 but before 1-6-1975, if the taxpayer furnishes evidence to the satisfaction of the Income-tax Officer that he had entered into a contract for the purchase of such ships with the builder or owner thereof before 1-12-1973;

  (b)  in the case of machinery or plant (other than a coal-fired boiler, furnace, kiln, oven or the like, or machinery or plant for converting any boiler, furnace, kiln, oven or the like from oil firing to coal firing) installed by the taxpayer after 31-5-1974 but before 1-6-1975, if the taxpayer furnishes evidence to the satisfaction of the Income-tax Officer that (i ) he had purchased such machinery or plant before 1-12-1973, or (ii) had entered into a contract for the purchase of such machinery or plant with the manufacturer or owner of, or a dealer in, such machinery or plant before that date, or (iii) had, where such machinery or plant has been manufactured in an undertaking owned by him, taken steps for the manufacture of such machinery or plant before that date;

  (c)  in the case of machinery or plant, being a coal-fired boiler, furnace, kiln, oven or the like, or any machinery or plant for converting any boiler, furnace, kiln, oven or the like from oil firing to coal firing installed by the taxpayer after 31-5-1974 but before 1-6-1977.

Since it is not the intention to allow initial depreciation allowance in respect of ships, aircraft, machinery or plant, which qualify for development rebate, the Amending Act has specifically provided that initial depreciation will not be allowed in respect of ships, aircraft, machinery and plant in respect of which development rebate is admissible, even though such ships or aircraft may be acquired or such machinery or plant installed after 31-5-1974.

 DIRECT TAXES (AMENDMENT)

ACT, 1974

16. The Amending Act has also made a consequential change in section 34 in order to secure that no initial depreciation allowance will be allowed in cases where any ship, aircraft, machinery or plant is sold in the previous year in which it was acquired or installed, or in the year in which it is first put to use. Opportunity has also been taken to make a similar amendment in relation to initial depreciation allowance admissible under section 32(1)(v) in respect of new hotel buildings erected by approved hotels.

DIRECT TAXES (AMENDMENT)

ACT, 1974

17. These amendments will take effect from 1-4-1975 and will, accordingly, apply in relation to the assessment year 1975-76 and subsequent assessment years.

[Sections 3, 4 and 16 of the Amending Act]

 DIRECT TAXES (AMENDMENT)

ACT, 1974

Tax concessions for promoting research and development

18. With a view to encouraging development of indigenous technology and self-reliance in industry, the Amending Act has extended that area of tax concessions for scientific research in the following directions:

1. Under section 35(1)( i), revenue expenditure laid out or expended on scientific research related to taxpayer’s business is allowed as deduction in the year in which such expenditure is incurred. The Amending Act has added an Explanation to this section so as to provide that revenue expenditure incurred by a taxpayer on payment of salary to research personnel and on material inputs during the period of three years immediately preceding the commencement of the business will be regarded as having been laid out or expended in the previous year in which the business is commenced. Such expenditure incurred in the pre-investment period will, therefore, be allowed as deduction in computing the taxpayer’s income of the year in which the business is commenced. The deduction will be available only in respect of expenditure incurred after 31-5-1973 on scientific research related to the taxpayer’s business. In order to prevent misuse of the concession, it is being provided that the deduction will be limited to the amount certified by the prescribed authority to have been actually spent on the qualifying items. For the purpose of the new provision, “salary” will have the meaning assigned to it in Explanation 2(a) below sub-section (5)  of section 40A. In other words, it will include wages; any annuity or pension; any gratuity; any fees, commissions, profits in lieu of or in addition to any salary or wages; any advance of salary and annual accretion to the balance at the credit of the employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under rule 6 of Part A of the Fourth Schedule. To put it a little differently, it will have the same meaning as in section 17, subject to the modification that perquisites as defined in Explanation 2(b) below sub-section (5) of section 40A, as also sums comprised in transferred balances referred to in sub-rule (2) of rule 11 of Part A of the Fourth Schedule will not be included in “salary”. It may be mentioned that expenditure incurred on the provision of “perquisites” as defined in Explanation 2(b) below sub-section (5) of section 40A during the pre-investment period will not be allowed as a deduction in computing the employer’s income. In other words, the expenditure incurred by the employer during the pre-investment period on providing (i) residential accommodation to research personnel, free of cost or on concessional basis; (ii) any benefit or amenity granted free of cost or at concessional rate; (iii) any payment by the employer of any sum in respect of any obligation which, but for such payment would have been payable by the employee; and (iv ) any payment of any sum, whether directly or through a fund, other than a recognized provident fund or an approved superannuation fund, to effect an assurance on the life of employee or to effect a contract for an annuity will not be allowed as deduction in  computing the employer’s income.

2. A new sub-section (2A) has been inserted in section 35 under which a weighted deduction equal  to one and one-third times the actual expenditure incurred by a taxpayer after 31-5-1973 on sponsored research in approved laboratories will be allowed. It is not necessary that the sponsored research should  be related to the taxpayer’s business but the weighted deduction will be allowed only if the scientific research is undertaken by a scientific research association or a university or a college or other institutions referred to in section 35(1)(ii) under a programme approved by the prescribed authority having regard to the social, economic and industrial  needs of the country. Where a deduction is allowed under  the new sub-section (2A) of section 35, no deduction in respect of the same expenditure will be allowed under section 35(1)(ii).

DIRECT TAXES (AMENDMENT)

ACT, 1974

19. In order to ensure that the tax concession granted under the amendment to section 35(1)(i) is not restricted in view of the overall limits placed on the deductible amount of expenditure on salaries under section 40A(5), a consequential amendment has also been made in that section. Under this amendment, expenditure incurred on payment of any salary to a research worker engaged in scientific research during any one or more of the three years immediately preceding the commencement of the business, which is deemed under the new provision in section 35(1)(i ) to have been laid out or expended in the previous year in which the business is commenced, will not be disallowed in the hands of the employer, to the extent it does not exceed Rs. 5,000 for each month or part thereof comprised in the period of employment in India during the previous year in which the business is commenced and in the period of his employment in India during which he was engaged in scientific research during the three years immediately preceding that year.

DIRECT TAXES (AMENDMENT)

ACT, 1974

20. These amendments have come into force with effect from 1-4-1974 and will, accordingly, apply in relation to the assessment year 1974-75 and subsequent assessment years.

[Sections 5 and 7 of the Amending Act]

 DIRECT TAXES (AMENDMENT)

ACT, 1974

Tax concessions for promoting exports

21. Under section 35B, domestic companies and non-corporate taxpayers resident in India are entitled to a weighted deduction equal to one and one-third times the amount of expenditure incurred by them on development of export markets. The weighted deduction is allowed only in respect of expenditure under specific heads, e.g., advertisement and publicity outside India; collection of information regarding markets outside India; distribution, supply or provision of goods, services or facilities outside India; maintenance of foreign branches and agencies; preparation and submission of tenders, etc. In order to encourage development of export markets, the Amending Act has made a provision in section 35B(1)(a) so as to increase the amount of deduction to one and one-half times the amount of actual expenditure incurred after 28-2-1973 by companies in which the public are substantially interested. It should be noted that the enhanced weighted deduction will be applicable only in the case of domestic companies in which the public are substantially interested and will not be available in the case of other categories of taxpayers.

 DIRECT TAXES (AMENDMENT)

ACT, 1974

22. This amendment has come into force with effect from 1-4-1973 and is, accordingly, applicable in relation to the assessment year 1973-74 and subsequent assessment years.

[Section 6 of the Amending Act]

 DIRECT TAXES (AMENDMENT)

ACT, 1974

Tax concessions for industrial undertakings and hotels set up in specified backward areas

23. The Amending Act has inserted a new section 80HH under which all categories of taxpayers will be entitled to a deduction equal to 20 per cent of the profits derived by them from new industrial undertakings (other than those engaged in mining) and approved hotels set up after 31-12-1970 in backward areas specified in the Eighth Schedule. In the case of industrial undertakings which begin to manufacture or produce articles after 31-3-1973, the deduction will be allowed in respect of each of the ten assessment years beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles. In the case of an industrial undertaking which began to manufacture or produce articles before 1-4-1973 but after 31-12-1970, the period for which the concession is available will, however, be reduced by the number of assessment years expiring before 1-4-1974. Thus in a case where an industrial undertaking started manufacture or production of articles during the previous year relevant to the assessment year 1971-72, the deduction will be available for seven years commencing from the assessment  year 1974-75. Likewise, in the case of approved hotels which start functioning after 31-3-1973, deduction will be available for ten assessment years commencing from the assessment year relevant to the previous year in which the hotel starts functioning while in respect of hotels set up prior to 1-4-1973 but after 31-12-1970, the period for which the concession is available will be reduced by the number of assessment years expiring before 1-4-1974.

 DIRECT TAXES (AMENDMENT)

ACT, 1974

24. In order to qualify for the new tax concession, the industrial undertaking must fulfil the following conditions, namely :

1. The industrial undertaking should not have been formed by the splitting up or reconstruction of a business already in existence in any backward area specified in the Eighth Schedule. It may be noted that the new concession will be available in the case of industrial undertakings which are formed by splitting up or reconstruction of a business already in existence in a non-backward area and, accordingly, industrial undertakings shifting from non-backward areas to backward areas will qualify for the tax concession. Where an industrial undertaking is formed as a result of re-establishment, reconstruction or revival by the taxpayer of the business of any such industrial undertaking as is referred to in section 33B in the circumstances and within the period specified in that section, the same will qualify for the new tax concession, even though the earlier business was situated in any specified backward area.

2. The industrial undertaking should not have been formed by the transfer to a new business of machinery or plant previously used for any purpose in any backward area specified in the Eighth Schedule. In a case where any machinery or plant or any part thereof previously used in any backward area is transferred to a new business in that area or in any other backward area and the total value of the machinery or plant or part so transferred does not exceed 20 per cent of the total value of the machinery or plant used in the business, this condition shall be deemed to have been fulfilled. In this connection, it may be noted that, unlike the provision in section 80J, it is not necessary under the new section 80HH that the industrial undertaking should have been set up in a new building.

3. It employs 10 or more workers in a manufacturing process carried on with the aid of power or employs 20 or more workers in a manufacturing process carried on without the aid of power.

DIRECT TAXES (AMENDMENT)

ACT, 1974

25. The new tax concession  will be available in the case of the business of a hotel where the following conditions are fulfilled:

1. The business of the hotel is not formed by the splitting of or the reconstruction of a business already in existence anywhere.

2. The hotel is, for the time being, approved for the purposes of section 80HH(3)by the Central Government.

In this connection, it may be noted that, unlike the provision in section 80J, it is not necessary that the business of the hotel should be owned or carried on by a company and, accordingly, it will be open to the Central Government to approve any hotel, including a hotel run as a proprietary concern or partnership business, for the purposes of the new section.

DIRECT TAXES (AMENDMENT)

ACT, 1974

26. The new tax concession will be available in the case of all categories of taxpayers both corporate and non-corporate. However, in the case of taxpayers, other than companies and co-operative societies which are statutorily required to get their accounts audited, the concession will not be available unless the accounts of the industrial undertaking or the business of the hotel are audited by a chartered accountant or other qualified accountant and the taxpayer furnishes along with his return of income the report of such audit in the form to be prescribed in the Income-tax Rules.

DIRECT TAXES (AMENDMENT)

ACT, 1974

27. With a view to preventing abuse of the new tax concession by manipulation of profits between associated concerns or different units of the same concern, the Income-tax Officer has been empowered to determine the reasonable profits that could be attributed to the qualifying undertaking or the business of a hotel in the backward area in cases where, owing to close connection between the taxpayer and any other person or for any other reason, the course of the business is so arranged that the industrial undertaking set up in the backward areas derives more than the ordinary profits which might be expected to arise in that business. Likewise, where a taxpayer has several units, some in the backward areas and some outside, the profits of the units in the backward areas will be computed after taking the cost of the goods transferred to or from the units on the basis of the fair market value of such goods.

DIRECT TAXES (AMENDMENT)

ACT, 1974

28. Industries in backward areas already enjoy certain concessions inasmuch as Central subsidy is allowed to small and medium industries and financial institutions provide concessional finance to industries set up in these areas. The backward areas for the purposes of the new tax concession are the same as qualify for the grant of concessional finance by financial institutions, subject to the modification that the areas notified as the proposed site for the city of New Bombay have been excluded from the list. The list of backward areas has been specified in the Eighth  Schedule and consists of the following areas:

DIRECT TAXES (AMENDMENT)

ACT, 1974

29. Various districts specified in the list of backward areas are liable to be reorganised or to undergo a change in nomenclature. Since such reorganisation or change in nomenclature by the State Governments could have the effect of enlarging or limiting the scope of the new tax concession to industries in these areas, an Explanation has been included in the Eighth Schedule to provide that reference to any district listed therein should be construed as a reference to the areas comprised in that district on 3-9-1973, i.e., the date on which the Direct Taxes (Amendment) Bill, 1973 was introduced in the Lok Sabha.

DIRECT TAXES (AMENDMENT)

ACT, 1974

30. The Amending Act has made a specific provision as to the treatment to be accorded in cases where a taxpayer is entitled to a tax concession under the new section 80HH, and any one or more of the provisions in sections 80H, 80J, 80P and 80QQ. These provisions are briefly as under:

1. Where a taxpayer is entitled to a deduction both under sections 80H and 80HH in relation to the profits and gains of an industrial undertaking, the deduction under section 80HH shall be allowed with reference to the amount of the profits and gains of the undertaking as reduced by the deduction under section 80H.

2. Where a taxpayer is entitled to a deduction both under sections 80HH and 80J in relation to the profits and gains of an industrial undertaking or the business of a hotel, the deduction under section 80HH will be allowed first and the provision of section 80J shall apply to the balance of the income after allowing such deduction.

3. Consequential changes have also been made in sections 80J, 80P and 80QQ in order to provide that the deduction under each of the aforesaid sections will be allowed with reference to the income of the industrial undertaking after allowing, inter alia, the deduction under section 80HH.

DIRECT TAXES (AMENDMENT)

ACT, 1974

31. The aforesaid amendments have come into force with effect from 1-4-1974 and are, accordingly, applicable in relation to the assessment year 1974-75 and subsequent years.

[Sections 8, 9, 10, 11 and 12 of the Amending Act]

 OTHER AMENDMENTS

DIRECT TAXES (AMENDMENT)

ACT, 1974

Amendment of provision relating to penalty for delay or default in furnishing return of income

32. The Amending Act has modified the provision in section 271(1)(i) with a view to countering the ruling of the Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192. In the above-mentioned case, the Supreme Court held that the quantum of penalty for delay or default in furnishing the return of income should be determined with reference to the tax payable on the basis of the notice of demand issued as a result of assessment order. In other words, in computing the quantum of penalty, not only the tax deducted at source and the advance  tax paid during the financial year immediately preceding the assessment year should be deducted from the gross demand, but a deduction should also be made on account of the tax paid on self-assessment or otherwise after furnishing of the return. The Amending Act has specifically provided that the penalty exigible for delay or default in furnishing the return of income shall be calculated with reference to the quantum of assessed tax, that is to say, tax payable on the total income as reduced by the sum, if any, deducted at source under Chapter XVIIB or paid in advance under Chapter XVIIC.

This amendment has come into force retrospectively from 1-4-1962 and is, accordingly, applicable in respect of all past proceedings under the Income-tax Act.

 DIRECT TAXES (AMENDMENT)

ACT, 1974

33. With a view to giving sanctity to the decisions of the Supreme Court, the Amending Act has specifically excluded, from the operation of the amendment,  cases in which the Court has given a ruling adverse to the Revenue before 3-9-1973, that is, the date of the introduction of the Direct Taxes (Amendment) Bill, 1973 in the Lok Sabha. This special dispensation will, however, apply only in relation to the order of penalty for the particular assessment year in respect of which the ruling was given.

[Sections 13 and 22 of the Amending Act]

 DIRECT TAXES (AMENDMENT)

ACT, 1974

Power of the Board to give retrospective effect to subordinate legislation beneficial to taxpayers

34. Under section 295, the Central Board of Direct Taxes is empowered, subject to the control of the Central Government, to make rules for carrying out the purposes of that Act by notification in the Gazette of India.  Under the existing provision, the Board is not empowered to give retrospective effect to any rules except in cases where a specific provision in the law provides expressly or by necessary intendment that the Board may make subordinate legislation with retrospective effect.

The Amending Act has modified the provision under section 295 to expressly confer power on the Board to give retrospective effect to rules in cases where the interests of taxpayers are not prejudicially affected due to such retrospective framing of the rules.

[Section 14 of the Amending Act]

3. Amendments to Wealth-tax Act

Direct Taxes (Amendment) Act, 1974

Power of the Board to give retrospective effect to subordinate legislation beneficial to taxpayers

35. The Amending Act has amended section 46 (relating to the Boardýÿs power to make rules for carrying out the purposes of the Wealth-tax Act) with a view to expressly conferring powers on the Board to give retrospective effect to rules which do not prejudicially affect the interest of taxpayers. This amendment is on the lines of the amendment to section 295 of the Income-tax Act under section 14 of the Amending Act.

[Section 17 of the Amending Act]

Direct Taxes (Amendment) Act, 1974

Independent provision modifying the effect of section 18(1)(i) as it stood during certain period

36. Under section 18(1)(i), penalty for delay or default in furnishing returns of net wealth is currently calculated with reference to the quantum of net wealth and not wealth-tax payable by the taxpayer. The Supreme Courtýÿs ruling in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 does not, therefore, affect the existing provision in the Wealth-tax Act. A difficulty is, however, likely to arise in the interpretation of corresponding provision which was on the statute book during the period 1-4-1965 to 31-3-1969. The Amending Act has accordingly made an independent provision with a view to providing that the expression ýÿthe taxýÿ occurring in the aforesaid provision during the period referred to above shall mean the wealth-tax chargeable under the provisions of that Act. The effect of this provision will be that the quantum of penalty for delay or default in furnishing returns of net wealth for any assessment year governed by the provisions of section 18(1)(i), as these stood during the period 1-4-1965 to 31-3-1969, will be determined with reference to the gross amount of wealth-tax determined on assessment without making any deduction on account of the wealth-tax paid on provisional assessment or self-assessment.

[Section 23 of the Amending Act]

Direct Taxes (Amendment) Act, 1974

Provisions relating to imposition of penalty for delay or default in furnishing returns of gift-tax

37. The ruling of the Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 will, mutatis mutandis, apply in relation to gift-tax as it applies in relation to income-tax. The Amending Act has accordingly amended section 17(1)(i) with effect from 1-4-1963 in order to secure that the penalty for delay or default in furnishing returns of gifts will be calculated with reference to the assessed tax, that is to say, the gift-tax chargeable under the provisions of the Gift-tax Act as reduced by the amount, if any, for which credit is allowed under section 18.

An independent provision has also been made in order to achieve the same objective in relation to the period covered by the corresponding provision in section 17(1)(i) as it existed prior to 1-4-1963..

The effect of these amendments will be that the quantum of penalty leviable for delay or default in furnishing returns of gifts during any period will be determined with reference to the gross amount of gift-tax payable on assessments as reduced only by the amount for which credit is allowed under section 18 on account of advance payment of gift-tax.

[Sections 18 and 24 of the Amending Act]

Direct Taxes (Amendment) Act, 1974

Powers of the Board to give retrospective effect to subordinate legislation beneficial to taxpayers

38. The Amending Act has amended section 46 (relating to the Boardýÿs power to make rules for carrying out the purposes of the Gift-tax Act) with a view to expressly conferring powers on the Board to give retrospective effect to rules which do not prejudicially affect the interest of taxpayers. This amendment is on the lines of the amendment to section 295 of the Income-tax Act under section 14 of the Amending Act.

[Section 19 of the Amending Act]