FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965 – CIRCULAR NO. 3-P, DATED 11-10-1965

1. Amendments at a glance

4

FINANCE ACT, 1965 AND
FINANCE (NO. 2) ACT, 1965

Amendments at a glance
 SECTION/SCHEDULE
 PARTICULARS
FINANCE ACT
2 and 1st Sch.
Rate structure for assessment year 1965-66 35-58; 62
2(5)
Export incentives 63-65
68
Voluntary Disclosure Scheme and its mechanics 121
FINANCE (NO. 2) ACT
24
Voluntary Disclosure Scheme and its mechanics 122-129
INCOME-TAX ACT
2(14), 193, (proviso)
Exemption from tax of capital gains from transfer of gold bonds and exemption of interest thereon from deduction of tax at source 97
2(18)
Definition of “company in which the public are substantially interested” 107
2(22)(ia)
Distribution on reduction of share capital or liquidation of a company, attributable to capitalised profits of the company from which it issued bonus shares to its equity shareholders after 31-3-1964 68
8
Assessment of interim dividends 113
2(43)
Definition of “tax” 8
10(4A)
Exemption of non-residents from tax on interest from non-resident account in a bank in India 98
10(6)(vii)(a)(ii)
Extension of period of exemption from tax of foreign technicians on the perquisite represented by payment, by their employers, of tax on their salary 92-93
10(10A)
Exemption from tax of pensioners on the commuted value of pension 100-102
10(13)
Exemption from tax of amounts received from a superannuation fund by way of refund of contributions, etc. 99
10(15)(ii)
Exemption from tax of the bonus payable in respect of deposits in Cumulative Time Deposit Accounts in Post Office Savings Banks 95
10(23A)
Exemption of Bar Councils, etc., from tax on income from enrolment fees, etc. 103
10(26A)
Exemption from tax of persons resident in Ladakh district on income arising in Ladakh or outside India 104
10(28)
Exemption of tax credit certificates 77
33(1), (2), (6)
Development rebate 69-72
33A
Development allowance for assessees growing and manufacturing tea in India 73-75
36(1)(ix)
Deduction in respect of expenditure incurred by a company for promoting family planning 108
40(c)(iii)
Disallowance in assessment of companies of expenditure on providing perquisites to their employees in excess of 20 per cent of the salary 109
43(6)(b), proviso
Initial depreciation allowance under the 1922 Act not to be deducted in computing the written down value under the 1961 Act 110
47(v)
Exemption of subsidiary company from tax on capital gains from transfer of a capital asset to a holding company 111
49, Expln.
Cost of acquisition of a capital asset which becomes the property of the assessee under a gift or will, etc. 112
54A
Relief of tax on certain capital gains in the case of an individual who is not a citizen of India and of a foreign company 67
69B
Assessment of income represented by investments, etc., not fully disclosed 114
80A/87
Replacement of provisions for rebate of tax on payments in respect of LIP, provident fund contributions, etc., by a provision for deduction of a specified percentage of the qualifying amount of such payments in the computation of total income 28-34
80B
Deduction in respect of expenditure on medical treatment, etc., of handicapped dependants 105
80C
Relief in respect of payments made by partners of registered firms, engaged in certain professions, for securing retirement annuities 94
84(1), (2)
Extension of “tax holiday” concession to undertaking going into production at any time during the 5-year period from 1-4-1966 to 31-3-1971 76
85A, 99(1)(iv)
Income which qualified for rebate of super tax but did not qualify for rebate of income-tax or qualified for only a partial rebate 17-20
86(i)/(ii), 86A, 88(1)(a), 95 to103, 235(b)
Items which previously qualified only for a rebate of income-tax but not of super tax 12-16
88(3), (6)
Rebate of income-tax on donations for renovation/repair of temples, etc. 106
88(5A)
Rebate of tax on donations to charitable fund/institution – Charitable purpose not to include a purpose which is wholly or mainly religious in nature 115-116
104, 109,
Additional income-tax on the undistributed profits of companies liable to distribute not less than the statutory percentage of their distributable profits 55-58
112, 112A, 114(a)/(b)/(c), 193, (prov.)
Tax concession in respect of interest on National Savings Certificates (First Issue) 96
113, 192(2)
Change in the basis of charging tax on the income of non-residents, other than companies 25-27
114(b)(3rd prov.), 115
Rate of tax on capital gains represented by the fair market value of bonus shares66
131(1)
Power of IAC regarding discovery, production of evidence, etc. 117
178(3)
Recovery of tax from companies in liquidation 118
213 to 217,
Increase in the rate of interest, chargeable from assessees
220(2),243, 244
and also payable to assessees by Government from 4 per cent to 6 per cent per annum 119
226(5)
Recovery of arrears of tax by distraint and sale of movable property 120
280M(2), 280N,
Annuity deposit 59-61
280W(2)(c)
Chap. XXIIB (280Y)
Tax credit certificates 77
280Z
Tax credit certificate to certain equity shareholders 78-80
280ZA
Tax credit certificate to public companies shifting their industrial undertaking from an urban area to any other area 81-84
280ZB
Tax credit certificate to industrial companies liable to income-tax and/or surtax in excess of such tax payable in the base year 85-86
280ZC
Tax credit certificate in relation to exports 65; 87-88
280ZD
Tax credit certificate in relation to increased production of goods 89-91
SURTAX ACT
Prov. to 3rd Sch., Para 1
Rates of surtax on Indian/foreign company which satisfies certain conditions 130
3rd Sch. Para 2
List of articles relating to priority industries 131
24A
Central Government’s power to enter an agreement with Government of foreign country for avoidance of double taxation 132
Unit Trust of India Act
32
Tax relief on dividends in respect of Units 21-23
Preference Shares (Regulation of Dividends) Act, 1980
4A
Insertion of section 4A in consequence of integration of super tax and income-tax 24

2. Amendments to rationalise tax structure

FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
General
6. Amongst the various amendments to the Income-tax Act, those which are designed primarily, to simplify and rationalise the tax structure, and the corresponding provisions in the Finance Act, 1965 which lay down a new simplified rate structure of income-tax, may be broadly classified under the following heads:
1. Integration of super tax with income-tax by removal of the charge of super tax with effect from 1-4-1965, and simultaneous merger of the element of super tax with income-tax in the rate schedule of income-tax laid down in the Finance Act, 1965;
2. Change in the basis of charging tax on non-residents, other than companies, by removing, with effect from 1-4-1965, the special provisions in section 113 under which they were chargeable to tax on their total income liable to tax in India at the prescribed maximum rate or, alternatively, at their option at the average rate of tax applicable to their total world income;
3. Replacement of the provision for granting tax rebate, calculated at the average rate of tax applicable to an assessee’s total income, on the qualifying amount of payments made by him in respect of life insurance premiums, contributions to provident funds, deposits in a 10-year or 15-year account under the Post Office Savings Bank (Cumulative Time Deposit) Rules, 1959, etc., by a provision for an outright deduction in the computation of his total income of an amount equal to 60 per cent of the first Rs 5,000 of the qualifying payments and 50 per cent of the balance thereof; and
4. Laying down of a new rate structure of income-tax (including the element of super tax merged with it); introduction of a provision for granting tax relief to individuals and Hindu undivided families, resident in India, on account of personal allowance as a deduction from the tax in replacement of a varying amount of initial exempt slab in the rate schedule; modification of the basis of levy of surcharge on income-tax; and drafting of the rate schedules of income-tax on a new pattern with a view to enabling a quick calculation of tax.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
7. The provisions in the Finance Act, 1965, regarding matters falling under each of the heads mentioned above and other connected matters are briefly explained hereinbelow:
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
Integration of super tax with income-tax
8. Super tax discontinued – The charge of super tax, which was an additional duty of income-tax, has been removed with effect from 1-4-1965. In this behalf sections 95 to 103, relating to the charge of super tax and exemption relief or rebate in respect of super tax, have been omitted from the Act, and all other sections of the Act, containing references to super tax, have been suitably amended. The term “tax” in section 2(43 ) has been redefined to mean income-tax in relation to the assessment year 1965-66 and any subsequent assessment year and income-tax and super tax in relation to the assessment year 1964-65 and earlier years. The super tax which was payable under section 104 by certain companies, in which the public are not substantially interested, in respect of their undistributed profits, has been named as income-tax. Any super tax included in the advance tax paid in respect of, or the tax deducted from, income assessable for the assessment year 1965-66 will be credited to assessees against the income-tax determined to be payable by them for the assessment year 1965-66.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
9. Simultaneously with the removal of the charge of super tax for the assessment year 1965-66 and subsequent years, the element of super tax has been merged in the rates of income-tax prescribed by the Finance Act, 1965, for the assessment year 1965-66.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
10. As the provisions in the Income-tax Act relating to exemptions, rebates and reliefs in respect of super tax have been omitted from the Act, with effect from 1-4-1965, assessees will be entitled to obtain, for the assessment year 1965-66 and subsequent years, the exemptions, reliefs and rebates provided in the Income-tax Act in respect of income-tax only. In view of the position that the rates of income-tax prescribed for the assessment year 1965-66 include the element of super tax also, the amount of rebate of income-tax will automatically be equivalent to the amount of rebate which the assessee would have obtained if he were entitled to a rebate of both income-tax and super tax.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
11. However, there are certain items of income and payments in respect of which the Income-tax Act, as it stood before its amendment by the Finance Act, 1965, provided (a ) only for a rebate of income-tax but not of super tax, or (b) only a rebate of super tax but not of income-tax. The position in respect of each of these items under the provisions of the Income-tax Act, as amended by the Finance Act, 1965, is as follows :
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
12. Items which previously qualified only for a rebate of income-tax but not of super tax – Income of a partner of a registered firm carrying on business from his share in the profits of the firm – The share of the partner of a registered firm in the profits of the firm is computed without allowing a deduction therefrom for the income-tax paid by the registered firm on its total income. However, the partners are entitled under section 86(iv ) to a rebate of income-tax in their individual assessments, on a proportionate amount of the income-tax paid by the registered firm. Under section 102 which has been omitted by Finance Act, 1965, with effect from 1-4-1965, they were entitled to a rebate of super tax, only on such part of the income-tax paid by the registered firm as was attributable to its income from sources other than a business carried on by it. In other words, while the partners of a registered firm were entitled, under the Income-tax Act before it was amended by the Finance Act, 1965, to a rebate of both income-tax and super tax on a proportionate part of the income-tax paid by the firm in relation to its income other than business, they were entitled to a rebate of income-tax only but not of super tax in respect of the income-tax paid by the firm in relation to its business income.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
13. The effect of the omission of section 102 is that for the assessment year 1965-66 and subsequent years, partners of registered firms will obtain a full rebate of tax, i.e. , income-tax as consolidated with the element of super tax, on the amount of income-tax paid by the firm on its total income, including income derived from a business carried on by the firm. The partners of a registered firm deriving income from business will, thus, be on par with partners of registered firms deriving income from any other source in the matter of their entitlement to rebate of tax on the amount of income-tax paid by the registered firm. This will also simplify the calculation of tax on the income of partners of registered firms.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
14. Interest on securities of the Central Government issued or declared to be income-tax free, and interest on securities of a State Government issued income-tax free, the income-tax whereon is payable by the State Government – Prior to the amendment of the Income-tax Act by the Finance Act, 1965, assessees were entitled, under clauses (i ) and (ii) of section 86 to a rebate of income-tax on their income by way of interest from the above mentioned securities. No rebate of super tax was admissible in respect of such income. Due to the merger of the element of super tax with income-tax with effect from 1-4-1965, the grant of full rebate of income-tax on such income would, however, have resulted in the grant of rebate in excess of what they were entitled to previously. Consequently, clauses (i) and ( ii) of section 86 have been omitted and a new section 86A has been introduced with effect from 1-4-1965, providing that the rebate of income-tax on the above-mentioned income, calculated at the average rate of income-tax applicable to the assessee’s total income, will not exceed 25 per cent of the income on which rebate is granted – 25 per cent being the maximum rate of income-tax before the merger of the element of super tax into it. Section 181 has also been amended to the effect that the income-tax payable by the State Governments in respect of interest on the securities issued by them free of income-tax will not exceed 25 per cent and that the rate at which such income-tax will be payable by them will be notified by the Central Government in the Official Gazette, from time to time.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
15. Tax rebate in the case of companies in respect of donations qualifying for the rebate under section 88 – Prior to the amendment of the Income-tax Act by the Finance Act, 1965, companies were entitled to a rebate of income-tax but not of super tax, on the amount of donations qualifying for the rebate under section 88. In view of the merger of the element of super tax into income-tax, clause (a) of section 88(1) has been substituted by a new clause with effect from 1-4-1965, under which companies will be entitled to a rebate of income-tax on such donations at the average rate of income-tax applicable to their total income, but not exceeding 25 per cent of the amount of the qualifying donations.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
16. Tax relief to shareholders in respect of dividends from a company attributable to profits on which agricultural income-tax has been paid by the company – Consequent to the integration of super tax with income-tax, section 235 has been amended with effect from 1-4-1965, to provide that the rebate of income-tax admissible to a company shareholder under that section in respect of dividends referred to above will be equivalent to either, (a) the amount of agricultural income-tax and super tax attributable to the dividend, or (b) the amount of income-tax calculated thereon at the rate of 25 per cent, whichever is lower. In the case of shareholders other than companies, the rebate will be lower one of either (a) the amount of the agricultural income-tax and super tax attributable to the dividend, or (b) the amount calculated on the dividend at the average rate of income-tax applicable to the total income of the shareholder, but not exceeding 25 per cent of the dividend.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
17. Income which qualified for rebate of super tax but did not qualify for rebate of income-tax or qualified for only a partial rebate of income-tax – Under clause (iv) of sub-section (1) of section 99, which has been omitted by the Finance Act, 1965 with effect from 1-4-1965 certain inter-corporate dividends, i.e., dividends received by any company from an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India, qualified for a rebate of super tax.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
18. Further the Finance Act, 1964 provided, in the case of a foreign company which has not made the prescribed arrangements for the declaration and payment of dividends within India, for the grant of a rebate of income-tax at the rate of 10 per cent on the dividends received by it from an Indian company in which the public were not substantially interested and which was wholly or mainly engaged in the business of generation or distribution of electricity or of manufacture or production of any one or more of the articles relating to priority industries listed in Part IV of the First Schedule to the Finance Act, 1964.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
19. In view of the merger of super tax with income-tax, the Finance Act, 1965 has introduced a new section 85A with effect from 1-4-1965, providing, in substance, that income-tax will be chargeable on the inter-corporate dividends referred to above at the rate of 20 per cent (15 per cent in the types of cases referred to in paragraph 18). This will be achieved by granting a rebate, to the company receiving the dividends, of that part of the income-tax calculated on the dividends at the average rate of income-tax applicable to the company’s total income which exceeds the amount of income-tax calculated on the dividends at the above-mentioned rate of 25 per cent or 15 per cent as the case may be.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
20. In all cases, other than those referred to in paragraphs 14 to 19, where the pre-existing provisions of the Income-tax Act provided for an exemption, rebate or relief in respect of both income-tax and super tax, assessees will be entitled, for the assessment year 1965-66 and subsequent years, to a rebate of the income-tax on the income qualifying for the exemption, rebate or relief in full, without any restriction, subject, of course, to the provisions of section 80A, dealing with a deduction of a specified percentage of the qualifying amount of payments by way of life insurance premia, etc., vide paragraphs 28 to 34.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
21. Tax relief on dividends in respect of units of the Unit Trust of India – In consequence of the integration of super tax with income-tax, the Finance Act, 1965 has made certain amendments to section 32 of the Unit Trust of India Act, 1963. Under the pre-existing provisions of section 32 of that Act, dividends from the Unit Trust of India to the extent of Rs. 1,000 (hereinafter referred to as “the qualifying dividend”) were not to be included in the total income of an individual unit holder for the purposes of income-tax. However, for the purposes of super tax, the qualifying dividend was to be included in the total income of an individual unit holder, except where he would not have been liable to super tax but for inclusion of the qualifying dividend in his total income. In other words, if the individual unit holder’s income other than the qualifying dividend was Rs. 20,000 or less, the qualifying dividend was required to be excluded from his total income, both, for income-tax and super tax, but if his income other than the qualifying dividend exceeded Rs. 20,000 the qualifying dividend was to be excluded from his total income for the purpose of income-tax, but was to be included in his total income for the purposes of super tax.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
22. Under the relevant provisions of section 32 of the Unit Trust of India Act as amended by the Finance Act, 1965, with effect from 1-4-1965 the tax treatment of the qualifying dividends in the case of an individual for the assessment year 1965-66 and subsequent years will be as follows. Where the unit holder’s income other than the qualifying dividend does not exceed Rs. 20,000, the qualifying dividend will not be included in his total income, as before. However, where the unit holder’s income other than the qualifying dividend exceeds Rs. 20,000, the qualifying dividend will be included in his total income. In such a case, i.e., where the qualifying dividend is included in the total income of an individual holding units of the Unit Trust of India, the unit holder will be entitled to a rebate of income-tax calculated on the amount of the qualifying dividend at the rate of 25 per cent thereof.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
23. Other amendments to the Unit Trustof India Act, in relation to income-tax, in consequence of the integration of super tax with income-tax – Under the pre-existing provisions of section 32(2) of the Unit Trust of India Act, individuals, whether resident in India or not, were entitled to receive dividends in respect of units of the Unit Trust of India, without any deduction of income-tax therefrom at source. However, in the case of individuals not resident in India, the Unit Trust of India was required to deduct super tax at the prescribed rate from the dividends paid to them. Because of the integration of super tax with income-tax, a new clause (c) has been inserted by the Finance Act, 1965 in section 32(2) of the Unit Trust of India Act, providing that in the case of non-resident individuals, income-tax at the rate of 15 per cent will be deducted at source from the dividends paid to them by the Unit Trust of India.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
24. Amendments to the Preference Shares (Regulation of Dividends) Act, 1960, in consequence of integration of super tax with income-tax – As a result of the integration of super tax with income-tax, the rate of income-tax prescribed in the Finance Act, 1965 in the case of companies is 80 per cent subject, of course, to various rebates of income-tax on different kinds of income, corresponding to the rebates allowed to companies previously in respect of super tax. Some companies have issued certain preference shares subject to the condition that the stipulated dividend thereon would be paid after deducting income-tax therefrom at the rate of income-tax applicable to companies. [Such deduction is for the company’s benefit and is, thus, distinct from the deduction of income-tax from dividends at the time of payment, under section 194]. In order to obviate the possibility of such deduction being made by companies at the above-mentioned rate of income-tax of 80 per cent instead of at 25 per cent which was applicable prior to 1-4-1965, the Finance Act, 1965 has inserted a new section 4A in the Preference Shares (Regulation of Dividends) Act with effect from 1-4-1965, providing that such deduction shall, in no case exceed 25 per cent of the stipulated dividends in respect of preference shares.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
Change in the basis of charging tax on the income of non-residents, other than companies
25. Deletion of section 113 – Under section 113 assessees other than companies who were not resident in India as well as assessees who were resident but not ordinarily resident in India, were chargeable to tax on their total income liable to tax in India at the prescribed maximum rates or, alternatively, at their option, at the average rate of tax applicable to their total world income. The Finance Act, 1965 has omitted the said section with effect from 1-4-1965. The effect of this deletion is that for the assessment year 1965-66 and subsequent assessment years, non-resident assessees other than companies and also assessees who are resident but not ordinarily resident in India will be charged to income-tax on their total income at the rates of income-tax applicable under the Annual Finance Act to resident assessees other than companies.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
26. In respect of income under the head “Salaries” assessable for the assessment year 1965-66, section 2(2) of the Finance Act, 1965 provides that tax will be chargeable on such income with reference to the rates applicable under the operation of the Finance Act, 1964. However, it is to be kept in view that this provision does not have the effect of continuing the operation of section 113 for the purpose of charging tax on income under the head “Salaries” assessable for the assessment year 1965-66. Such income will be assessable with reference to the rates of income-tax and super tax prescribed by the Finance Act, 1964, but the provisions of section 113 will not be applicable to the assessment.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
27. Deduction of tax at source in the case of “non-residents” from income under the head “Salaries” – Under section 192(2) tax was required to be deducted from income under the head “Salaries” payable to a non-resident at the rates prescribed for this purpose in the annual Finance Act, viz., income-tax and surcharge thereon at the maximum rates and super tax at 19 per cent or at the average rate of super tax applicable to the income, whichever is higher. The Finance Act, 1965 has omitted sub-section (2) from section 192 with effect from 1-4-1965. The effect of this deletion is that in the case of a non-resident, income under the head “Salaries” payable during the financial year 1965-66 and subsequent years will be liable to deduction of income-tax at source under section 192(1) in the same manner as in the case of assessees who are resident in India.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
Replacement of provisions for rebate of tax on payments in respect of life insurance premiums, provident fund contributions, etc., by a provision for deduction of a specified percentage of the qualifying amount of such payments in the computation of total income – Introduction of section 80A replacing section 87
28. The Finance Act, 1965 has introduced a new section 80A (in a new Chapter titled: “Deductions to be made in computing total income”), which replaces the provisions in section 87 for the grant of rebate of tax to assessees, calculated at the average rate of tax applicable to their total income, on the qualifying amount of payments made by them out of their income chargeable to tax towards life insurance premiums, payments in respect of contracts for deferred annuities on life, contributions to provident funds to which the Provident Funds Act, 1925 applies and to recognised provident funds and approved superannuation funds and deposits in a 10-year or 15-year account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, etc.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
29. The provisions of new section 80A have effect for the assessment year 1965-66 and subsequent years in the case of assessees whose total income liable to tax for the assessment year 1965-66 does not include income under the head “Salaries” from which tax is deducted or deductible at source under section 192. In the case of assessees whose total income assessable for the assessment year 1965-66 includes income under the head “Salaries” from which tax was deducted at source or which was liable to such deduction under section 192, new section 80A will have effect for the assessment year 1966-67, and subsequent years. In their case, section 87 will continue to have effect for the assessment year 1965-66 but cease to have effect thereafter.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
30. The provisions of new section 80A differ from the provisions of section 87 in two important respects. One of these is the replacement of the provision in section 87 of allowing to an assessee a tax rebate calculated on the amount of the payments qualifying for the rebate at the average rate of tax applicable to his total income, by a provision for an outright deduction in the computation of the total income of the assessee of an amount equal to 60 per cent of the first Rs. 5,000 of the qualifying payments and 50 per cent of the balance. For instance, if the amount of the qualifying payments made by an individual during the relevant previous year towards life insurance premiums and contributions to a recognised provident fund is Rs. 10,000, the assessee will be entitled to a deduction in the computation of his total income of a sum of Rs. 5,500 (Rs. 3,000, being 60 per cent of the first Rs. 5,000 of the qualifying payments plus Rs. 2,500 being 50 per cent of the balance of Rs. 5,000). The other important difference between the provisions of new section 80A and section 87 is that under section 80A, the overall monetary limit of the payments towards life insurance premiums, contributions to provident funds, approved superannuation funds, deposits in a 10-year or 15-year account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959, etc., in respect of which a deduction is allowable to the assessee at the percentages mentioned above, is higher than the monetary limit of payments qualifying for tax rebate under section 87.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
31. The comparative position under sections 87 and 80A in respect of the limit over particular types of payments and overall limit on payments qualifying for relief under the respective sections is as follows:
Individuals
Under section 87
Under section 80A
1. Particular limit in respect of contributions to a recognised provident fund
One-fifth of salary of the employee or Rs. 8,000, whichever is less.
Same as under section 87.
2. Overall limit in respect of all the payments qualifying for relief:
(a) in the case of an author, playwright, artist, musician or actor, who has effected an insurance of his or her life or on the life of his or her spouse prior to 1-3-1964 and has paid any premium in respect of such policy during the previous year.
The special limit prescribed in rule 21 of the Income-tax Rules, 1962.
Same as under section 87.
(b ) in the case of any individual not falling under the preceding item (i)
25 per cent of the total income or Rs. 10,000 whichever is less.
25 per cent of the total income or Rs. 12,500, whichever is less.

Hindu Undivided Families
Limit over the amount of life insurance premiums (in respect of an insurance policy on the life of a male member of the family or the wife of a male member of the family) qualifying for relief
25 per cent of the total income or Rs. 20,000 whichever is less
25 per cent of the total income or Rs. 25,000, whichever is less

FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
32. In regard to other matters, such as the various types of payments qualifying for relief and the provision that no relief will be allowed in respect of life insurance premiums which are in excess of 10 per cent of the capital sum assured, the provisions of section 80A are identical to the provisions of section 87.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
33. It has been specifically provided in section 80A that the overall limit over the qualifying payments of 25 per cent of the total income (vide paragraph 30) will be applied with reference to the total income as computed without making any deduction admissible under the provisions of Chapter VI-A of the Act (which, besides section 80A itself, includes the provision in section 80B for a deduction, in the case of an individual or Hindu undivided family, in respect of expenditure on the medical treatment, etc., of handicapped persons, and the provisions in section 80C for a deduction, in the case of a partner of a registered firm rendering certain professional services, in respect of payments made by the partners for securing retirement annuities), and also without making any deduction for annuity deposit under the provisions of Chapter XXII-A. The amount of the annuity deposit is to be calculated on the total income as computed after allowing the deductions admissible under the Act, including the deductions admissible under Chapter VI-A. To take an example, where the business income of an Indian citizen resident in India, assessable for the assessment year 1965-66, is Rs. 1,00,000, the amount of life insurance premiums paid by him is Rs. 14,000 and the amount of expenditure incurred by him on the medical treatment of handicapped dependent in a hospital is Rs. 5,000, the total income of the individual will be computed as follows:
Rs.
Rs.
Income from business
1,00,000
Deduct:
– Amount deductible under section 80A in respect of life insurance premiums. [The maximum qualifying amount of the premium with reference to which deduction is admissible under section 80A is Rs. 12,500. In respect of the first Rs. 5,000 of the qualifying amount, the amount deductible at 60 per cent thereof, is Rs. 3,000, and in respect of the balance of such payment of Rs. 7,500, the amount deductible at 50 per cent thereof is Rs. 3,750]




6,750
– Amount deductible under section 80B in respect of expenditure on medical treatment of handicapped dependant, limited to
2,400
– Annuity deposit [This will be calculated at 12½ per cent of Rs. 90,850, being the total income computed by deducting from Rs. 1 lakh the aggregate of Rs. 6,750 and Rs. 2,400 referred to in items (a) and (b ) above. The amount at 12½ per cent is Rs. 11,356.25, which has been rounded off, under section 280Q of the Income-tax Act, to Rs. 11,360]


11,360


20,510
Total income
79,490

FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
34. The tax rebate under section 87 and also the deduction under section 80A in respect of the qualifying amount of payments for life insurance premiums, etc., is subject to the condition that such payments should have been made by the assessee “out of his income chargeable to tax”. However, this provision does not imply that the assessee should be required to link or identify the payments, specifically, with the funds representing his income chargeable to tax by way of showing that the payments have been debited to a particular account in his books in which the receipts from various sources of his income liable to tax have been accounted for, or that the payments have been made from a bank account in which he was crediting such receipts. The above-mentioned provision is only meant to ensure that the benefit of section 87 or section 80A is not availed of in cases where it is clear that the payments cannot be attributed, directly or indirectly, to the assessee’s income chargeable to tax, such as where an employee has withdrawn money from his provident fund account for the purpose of paying life insurance premiums or where the premiums in respect of the life insurance policy of the assessee have been paid ex gratia by his parents, or other benefactors out of their funds, and not by the assessee himself. In all other types of cases, where the payments are directly or indirectly attributable to the assessee’s income chargeable to tax, he will be entitled to the benefits of the provisions of section 87 or, as the case may be, section 80A.

3. New rate structure of income-tax

New rate structure of income-tax

FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
For the assessment year 1965-66
35. Assessees other than companies – Consequent on the removal of the levy of super tax with effect from 1-4-1965, the rates of income-tax prescribed in the Finance Act, 1965, include the element of super tax also at the levels of income where super tax was chargeable under the Finance Act, 1964. The rate schedules of income-tax are self-servicing tax tables enabling a quick computation of the tax. For example, the amount of income-tax, in the case of an individual, on a total income exceeding Rs. 20,000 but not exceeding Rs. 25,000 has been stated as”Rs. 2,500 plus 30 per cent of the amount by which the total income exceeds Rs. 20,000″. If an individual’s total income consisting of earned income is, say, Rs. 24,000, the tax payable by him will be Rs. 3,700, i.e., Rs. 2,500 (being the above-mentioned amount of tax on income up to Rs. 20,000) plus Rs. 1,200 (30 per cent of Rs. 4,000), subject to a deduction therefrom for tax relief on account of the personal allowance admissible to him as explained in paragraphs 38 to 40.
FINANCE ACT, 1965 AND FINANCE (NO. 2) ACT, 1965
36. Individuals, Hindu undivided families, unregistered firms, associations of persons (other than co-operative societies), bodies of individuals and artificial juridical persons – A single rate schedule of income-tax has been laid down for the above-mentioned classes of assessees. The income slabs in this rate schedule rise progressively by amounts of Rs. 5,000 from the first slab of Rs. 5,000 up to the sixth slab of income between Rs. 25,001 and Rs. 30,000 and by Rs. 20,000 in each of the next two slabs of income up to Rs. 70,000. Income exceeding Rs. 70,000 falls in the top slab. The rates of income-tax for the assessment year 1965-66 in respect of the first and the top slabs as well as several intermediary slabs of income are lower than the corresponding rates of tax for the assessment year 1964-65. The rate schedule of income-tax is applicable to all classes of assessees referred to above, whether resident, or resident but not ordinarily resident in India, or not resident in India.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
37. Exemption in respect of small incomes – The provisions in the Finance Act, 1965, in respect of exemption from tax of small incomes (i.e., total income not exceeding Rs. 6,000 in the case of a Hindu undivided family satisfying certain conditions, and Rs. 3,000 in any other case) are the same as in the Finance Act, 1964, except that under the Finance Act, 1965, such exemption is not available to assessees who are not resident in India. Marginal relief is available in the cases of resident assessees whose total income exceeds the above-mentioned limits of Rs. 3,000 or Rs. 6,000, as the case may be, by a small amount. In such cases, the amount of income-tax payable (after deducting in the case of resident individuals and Hindu undivided families, the amount of tax relief admissible to them on account of personal allowance) is to be limited to 40 per cent of the amount by which the total income exceeds the above-mentioned limit of Rs. 3,000 or Rs. 6,000, as the case may be. Such marginal relief will, in effect be admissible in the following cases:
1. Resident Hindu undivided families in whose case the limit of the total income not chargeable to income-tax is Rs. 6,000:
Limit of total income qualifying for marginal relief
Rs.
– Hindu undivided family having no minor coparcener
6,583
– Hindu undivided family having one minor coparcener wholly or mainly supported from the income of the family
6,516
– Hindu undivided family having more than one minor coparcener wholly or mainly supported from the income of the family
6,450

2. Resident individuals, unregistered firms, associations of persons, bodies of individuals and artificial juridical persons:
Rs.
-Unmarried individual [The provision for marginal relief is, in practice, inapplicable to resident married individuals because of their entitlement to a higher amount of tax relief on account of personal allowances. The position is the same in the case of resident Hindu undivided families other than those covered by item (1) above.]
3,142
-Unregistered firms, associations of persons, bodies of individuals and artificial juridical persons
3,428

FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
38. Tax relief on account of personal allowances in the case of an individual of Hindu undivided family resident in India – Unlike the rate schedules of income-tax in the Finance Act, 1964, and the Finance Acts of earlier years, the rate schedule of income-tax in the Finance Act, 1965 does not prescribe a ‘nil’ rate on an initial slab of income. Instead, the Finance Act, 1965 has made a new provision for granting tax relief to individuals and Hindu undivided families resident in India on account of personal and family allowance. The amount of this tax relief – which has been calculated on certain amounts of personal and family allowances at the rate of income-tax applicable to the initial slab of taxable income – is shown in the following table :
Amount of tax relief

Rs.
– Unmarried individual
100 (5 per cent of Rs. 2,000)
– Married individual with no dependent child; or a joint Hindu family with no minor coparcener
175 (5 per cent of Rs. 3,500)
– Married individual with one dependent child; or a joint Hindu family with one minor coparcener supported by the family
195 (5 per cent of Rs. 3,900)
– Married individual with two or more dependent children; or a joint Hindu family with two or more minor coparceners supported by the family
215 (5 per cent of Rs. 4,300)

FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
39. The amount of income-tax calculated in accordance with the rate schedule of income-tax in Paragraph A of Part I of the First Schedule to the Finance Act, 1965, before levy of surcharge, is to be reduced by the amount of the tax relief specified in the above table. Where the amount of the income-tax calculated in accordance with the rate schedule is equal to or less than the amount of tax relief specified in the above table, the tax payable by the assessee will be nil.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
40. The above-mentioned tax relief is admissible to all individuals and Hindu undivided families resident in India, irrespective of the quantum of their total income. Non-resident individuals or Hindu undivided families are not entitled to this tax relief.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
41. Surcharge on income-tax – A surcharge on income-tax, for purposes of the Union, is leviable in the case of every individual, Hindu undivided family, unregistered firm, association of persons, etc., where the earned or unearned income included in the total income exceeds certain limits. Income other than earned income has been termed as “unearned income”. The definition of earned income has been enlarged to include annuities payable in respect of annuity deposits under Chapter XXII-A.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
42. Surcharge in respect of unearned income – No surcharge is leviable in respect of unearned income where the amount of such income (excluding, in the case of an individual or Hindu undivided family, whether resident in India or not, any income from investment in Government securities and in units of the Unit Trust of India), does not exceed Rs.15,000. Where such income exceeds Rs. 15,000, a surcharge is leviable on the amount of income-tax attributable to the amount of such income in excess of Rs. 15,000 at the following rates :
 Rate of surcharge
1.         Where the amount of such unearned income exceeds Rs. 15,000 but does not exceed Rs. 50,000
20 per cent of the amount of income-tax calculated on such unearned income in the slab between Rs. 15,001 and Rs. 50,000.
2. Where the amount of such unearned income exceeds Rs. 50,000
Rs. 2,900, being the amount of surcharge calculated in accordance with the preceding item(1) plus 25 per cent of the amount of income-tax calculated on such unearned income in the slab over Rs.50,000.

For the purpose of computing the surcharge, the income-tax is to be calculated on the amount of unearned income referred to above as if such income was the total income of the assessee and thereafter, the amount of such income-tax is to be reduced, in the case referred to in item (l) of the above table, by the tax on a total income of Rs. 15,000. Surcharge at 20 per cent is leviable on the amount of the income-tax as reduced. In the case referred to in item (2) of the above table, i.e., where the unearned income exceeds Rs. 50,000, income-tax will be calculated on the unearned income referred to above as if it were the total income, and thereafter reduced by the amount of income-tax calculated on a total income of Rs. 50,000. Surcharge will be calculated at the rate of 25 per cent on the amount of the income-tax so reduced. The amount thus arrived at will be increased by Rs. 2,900, that being the amount of surcharge calculated, in accordance with item (l) of the above table, on unearned income of Rs. 50,000.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
43. It will be observed that the basis laid down in the Finance Act, 1965, for levy of surcharge in respect of unearned income differs from that in the Finance Act, 1964, in the following two respects, apart from difference in the rates of surcharge:
1. Under the Finance Act, 1964, no surcharge was leviable in respect of unearned income which did not exceed Rs. 10,000, but where it exceeded Rs. 10,000, surcharge was leviable on the tax attributable to the entire amount of such income, subject to marginal relief. Under the Finance Act, 1965, surcharge is not leviable in any case on the tax attributable to the first Rs. 15,000 of the unearned income. Further, as the rates of surcharge under the Finance Act, 1965 have been prescribed on the slab system, calculations of marginal relief have been obviated.
2. Under the Finance Act, 1964, the amount of income-tax attributable to the unearned income (on which surcharge was levied) was calculated by placing the unearned income in the uppermost strata of the assessee’s total income. The result of this was that an assessee having a large amount of earned income, besides an amount of unearned income exceeding Rs. 10,000, would be liable to surcharge in respect of this earned income in a higher amount than an assessee having the same amount of unearned income but a smaller amount of earned income. Under the Finance Act, 1965, the income-tax attributable to the unearned income is to be calculated as if such income were the total income of the assessee. The assessee’s liability to surcharge in respect of such income would, thus, depend on the quantum of his unearned income in excess of the basic exemption of Rs. 15,000 and would not vary with reference to the quantum of his earned income.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
44. Surcharge in respect of earned income and other income treated on par with earned income – No surcharge is leviable in respect of the first Rs. 1 lakh of earned income. In the case of an individual or Hindu undivided family, income by way of interest on Government securities and dividends in respect of units of the Unit Trust of India is treated on par with earned income; accordingly, in such a case, no surcharge is leviable in respect of the first Rs. 1 lakh of earned income taken together with the said interest on securities and dividends. Where the earned income (in the case of an individual or Hindu undivided family, the earned income taken together with interest on Government securities and dividends in respect of units of the Unit Trust of India) exceeds Rs. 1 lakh, surcharge is leviable on the income-tax attributable to such income in excess of Rs. 1 lakh, at the following rates :
1. In the slab between
Rs. 1,00,001 – Rs. 2,00,000
5 per cent of the income-tax.
2. In the slab between
Rs. 2,00,001 – Rs. 3,00,000
10 per cent of the income-tax.
3. In the slab over
Rs. 3,00,000
15 per cent of the income-tax.

The basic exemption and also the procedure of levy of this surcharge under the Finance Act, 1965, are the same as laid down in the Finance Act, 1964, but the rates of surcharge are different being 5 per cent lower in respect of such income in the slab between Rs. 1,00,001 and Rs. 2,00,000 and 5 per cent higher for the slab above Rs. 3,00,000 than under the Finance Act, 1964, while being equal to the rate under that Act (viz., 10 per cent) for the intermediary slab of such income between Rs. 2,00,001 and Rs. 3,00,000.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
45. Under the rate schedule of income-tax and surcharge in the Finance Act, 1965, the incidence of tax at all levels of personal income is lower than under the Finance Act, 1964. It may be mentioned that under the Finance Act, 1965 the highest marginal rate of tax in respect of earned income, which is attracted when such income exceeds Rs. 3 lakhs, is 74.75 per cent as against 82.5 per cent on such income above Rs. 1 lakh under the Finance Act, 1964, and that on unearned income, exceeding Rs. 75,000, it is 81.25 per cent as against 88.125 per cent on such income exceeding Rs. 75,000, under the Finance Act, 1964.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
46. Co-operative societies – Under the Finance Act, 1964 and the Finance Acts of earlier years, co-operative societies were liable to income-tax and surcharge under the rate schedule applicable to individuals, unregistered firms, associations of persons, etc., and to super tax and surcharge thereon in accordance with the concessional rates laid down in a separate rate schedule.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
47. The Finance Act, 1965 lays down a separate rate schedule of income- tax for co-operative societies which is identical with the rate schedule for individuals, Hindu undivided families, etc., up to a total income of Rs. 20,000 and also includes the element of super tax leviable previously on income exceeding Rs. 25,000. Under this rate schedule, a single surcharge is leviable on a co-operative society at the rate of 6¼ per cent of the amount of income-tax calculated on its total income in excess of Rs. 25,000. Co-operative societies whose total income does not exceed Rs. 3,000 will not be liable to any tax. Where the total income of a co-operative society exceeds Rs. 3,000 by a small amount, it is entitled to marginal relief by way of limiting of its tax liability to 40 per cent of such excess. Such marginal relief will be available on total incomes up to Rs. 3,428.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
48. Registered firms – The rates of income-tax in the case of such firms under the Finance Act, 1965 are the same as under the Finance Act, 1964. The general rates of surcharge leviable on such firms is also the same as before, viz., 20 per cent of the income-tax payable by them, but this surcharge will be reduced by one-half in the case of a registered firm whose income from a profession, included in its total income, amounts to or exceeds 51 per cent of the total income.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
49. Local authorities – In the case of local authorities, the rate of income-tax (inclusive of the element of super tax) is 45 per cent. The rate of surcharge is 10 per cent of the amount of income-tax.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
50. Life Insurance Corporation of India – The rate of income-tax on the whole of the profits and gains of the Corporation from life insurance business is 47.5 per cent which is equal to the rates at which income-tax and super tax was chargeable on such profits and gains under the Finance Act, 1964, and earlier years.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
51. Rates of income-tax on companies for the assessment year 1965-66 in respect of income other than capital gains – Consequent on the integration of super tax with income-tax, the rate of income-tax in the case of companies in respect of income other than capital gains, has been prescribed at 80 per cent. This is, however, subject to allowance of rebates of income-tax at rates which vary according to the category of income and also the class of company. These rebates correspond to the rebates of super tax admissible to companies under the Finance Act, 1964. The effective rates of income-tax (i.e., the rates arrived at after allowing the above-mentioned rebates) in the case of companies for the assessment year 1965-66 in respect of income other than capital gains – exclusive of income-tax chargeable on certain companies with reference to the equity dividends declared or distributed or bonus shares or bonus issued by them — are shown in Appendix I. It will be observed that these rates are the same as for the assessment year 1964-65 except in the case of an Indian company and also a foreign company which has made the prescribed arrangements for the declaration and payment of its dividends within India, where in either case, (a) the company is one in which the public are not substantially interested, and (b) which is wholly or mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining. In the case of such companies, the effective rate of tax on the first Rs. 10 lakhs of their income is 50 per cent (45 per cent on the profits attributable to generation or distribution of electricity or the construction, manufacture or production of any of the articles relating to priority industries listed in Part III of the First Schedule to the Finance Act, 1965), and 60 per cent on the balance, if any, of their income (54 per cent on the profits attributable to priority industries as stated above). It may be mentioned that under the Finance Act, 1964, such a company was eligible for being charged at the lower rate of tax at 50 per cent only if its total income did not exceed Rs. 5 lakhs, and the lower rate of tax was applicable only to the first Rs. 2 lakhs of its total income.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
52. Articles relating to priority industries – Under the Finance Act, 1964, companies deriving profits from a business of generation or distribution of electricity or of the manufacture or production of any of the articles listed in Part IV of the First Schedule were entitled to a special rebate of super tax on such profits, at specified rates, equivalent to 10 per cent of the income-tax and super tax otherwise payable thereon. An equivalent amount of rebate of income-tax is admissible under the Finance Act, 1965, in respect of profits derived by a company from a business of generation or distribution of electricity, or of the construction, manufacture or production of any one or more of the articles or things specified in the list in Part III of the First Schedule. This is an enlarged version of the list of articles enumerated in Part IV of the First Schedule to the Finance Act, 1964. Some of the new items included in this list are ships, limestone, flame and drip proof motors, motor trucks and buses, malleable iron and steel castings, calcium, ammonium nitrate, soda ash, pesticides, automobile ancillaries, seamless tubes, gears, ball, roller and tapered bearings and cotton seed oil. The entry relating to “Machine tools and precision tools, dies and jigs” has been enlarged to read “Machine tools and precision tools (including attachments and accessories, cutting tools and small tools), dies and jigs”.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
53. Income-tax on certain companies with reference to their dividends on equity shares and bonus shares – Indian companies and foreign companies which have made the prescribed arrangements for the declaration and payment of their dividends within India – excluding such companies as are required, under section 104 to make a compulsory distribution of their distributable profits up to the statutory percentage – are liable for the assessment year 1965-66 to an extra amount of income-tax at the rate of 7.5 per cent of the amount of the dividends declared or distributed by them in the previous year. It may be mentioned that this tax is also payable by companies in which the public are not substantially interested, but which are not liable to distribute their distributable profits up to the statutory percentage, viz. (a) companies referred to in section 104(2)(iii), i.e., companies whose share capital, to the extent of 75 per cent thereof or more, is held throughout the previous year by an institution or fund which is established in India for a charitable purpose and whose income from dividends is exempt from tax under section 11; (b) companies referred to in section 104(4), i.e., an Indian company whose business consists wholly or mainly in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, or the value of whose capital assets, consisting of machinery or plant (other than office appliances or road transport vehicles), as per its balance sheet on the last date of the relevant previous year, amounts to or exceeds Rs. 50 lakhs; and (c) a company which has been exempted from the operation of section 104 by a notification issued by the Central Government under sub-section (3) of that section. In the case of any company, which has declared its maiden dividend during the previous year for the assessment year 1965-66 or any one of the four immediately preceding previous years, the above-mentioned income-tax at 7.5 per cent will be charged only with reference to the amount of equity dividends declared or distributed by it during the previous year for the assessment year 1965-66 in excess of 10 per cent of the paid-up equity capital of the company. The provisions in the matter are, in substance, the same as in the Finance Act, 1964.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
54. A company, other than a foreign company which has not made the prescribed arrangements for the declaration and payment of its dividends within India, is also liable, for the assessment year 1965-66, to an extra amount of income-tax calculated at 12½ per cent of the amount of the face value of any bonus shares or the amount of any bonus issued by it to its shareholders during the previous year with a view to increasing its paid-up capital, except where such bonus shares or bonus have been issued, after 31-3-1964, wholly out of its share premium account. The provisions in the matter are on the lines of the corresponding provisions in the Finance Act, 1964. It may, however, be mentioned that the Finance Act, 1965 defines the term “share premium account” (in Explanation 3 to Paragraph F of Part I of the First Schedule to that Act) to mean “an account forming a separate and identifiable part of the reserves of a company to which has been transferred a sum equal to the aggregate amount of value of the premiums on shares issued by the company”. For the purpose of the Finance Act, 1964, the term “share premium account” will have the same meaning as under the Companies Act, 1956.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
55. Rate of additional income-tax on the undistributed profits of companies liable, under section 104, to distribute not less than the statutory percentage of their distributable profits – Before the amendment of section 104 by the Finance Act, 1965, companies in which the public were not substantially interested and which failed to distribute their distributable profits in accordance with the provisions of section 104 were chargeable to an additional amount of super tax on the whole of their undistributed profits at the following rates, viz. (a) 50 per cent in the case of an investment company, and (b) 37 per cent in the case of any other company. The Finance Act, 1965 has amended these provisions with effect from 1-4-1965. One of these amendments, as stated in paragraph 8, consists of terming this liability to additional “super tax” as a liability to additional “income-tax”, in view of the removal of the charge of super tax with effect from 1-4-1965. Further, amongst companies other than investment companies, a distinction has been made between a “trading company” and a non-trading company, in regard to the rates at which the above-mentioned additional income-tax is chargeable on their undistributed profits. A “trading company” has been defined in the new clause (iia ) inserted in section 109 by the Finance Act, 1965, with effect from 1-4-1965, to mean “a company whose business consists wholly or mainly in dealing in any goods or merchandise, manufactured, produced or processed by a person other than that company whose income attributable to such business included in its total income is not less than 51 per cent of such total income”. Companies other than trading companies would consist of all other companies which are engaged in the manufacture or processing of goods, constructional activities or providing various services such as running of a transport service, carrying on general insurance business, running an engineering workshop, etc. In the case of a trading company, the rate of additional income-tax on undistributed profits has been retained at 37 per cent, which is equivalent to the erstwhile additional super tax on companies, other than investment companies. However, in the case of non-trading companies, the rate of the additional income-tax on undistributed profits has been reduced from the erstwhile rate of additional super tax of 37 per cent by 12 per cent to 25 per cent.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
56. A further distinction has been made between a trading company and a non-trading company in regard to the statutory percentage of the compulsory distribution of profits under section 104. Under section 109, the general statutory percentage of compulsory distribution of profits in the case of companies, other than investment companies, in relation to profits, other than those derived from the manufacturing or processing of goods, mining or the generation or distribution of electricity or any other form of power, is 60 per cent. However, section 109 provided for raising this statutory percentage of 60 to 90 if the company’s accumulated profits and reserves (in respect of which no order was made under section 23A of the 1922 Act, or section 104 of the 1961 Act) exceeded either the aggregate of its paid-up capital (exclusive of capital created out of profits in respect of which no order has been made under section 104) and any loan capital which is the property of its shareholders or the value of its fixed assets as shown in its books whichever is greater.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
57. The Finance Act, 1965 has amended the above-mentioned provision in section 109, the effect of which is that in the case of a non-trading company, the higher statutory percentage of 90 will be attracted only if its accumulated profits and reserves exceed twice the amount of either the aggregate amount of its paid-up capital and loan capital referred to above or the value of its fixed assets, whichever is greater.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
58. The reduction of the rate of additional income-tax on the undistributed profits of non-trading companies and the modification in regard to the statutory percentage of distribution in their case, as explained above, is intended to enable such companies to retain an adequate amount of their profits in their business for the purpose of expansion and development.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
Annuity deposit rates for the assessment year 1965-66
59. Under Chapter XXIIA introduced by the Finance Act, 1964, a resident assessee (other than an individual who is not a citizen of India, a registered firm, a co-operative society, a company or a corporation set up under a special law enacted by the Parliament or a State Legislature) whose total income for an assessment year subsequent to the assessment year 1963-64 exceeds Rs. 15,000 is required to make annuity deposits for that year, calculated on his adjusted total income for that year at the rates prescribed by the annual Finance Act. Advance annuity deposits are also required to be made by such an assessee during every financial year in respect of his total income assessable for the assessment year next following that assessment year. The amount of annuity deposit which an assessee is liable to make in accordance with the above-mentioned provisions is allowable as a deduction in the computation of his total income. The annuity due in respect of such deposits during each one of the 10 years for which such annuity is payable, is chargeable to tax as the assessee’s income of the relevant year.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
60. The rates of annuity deposits for the assessment year 1965-66 as well as of advance annuity deposits required to be made during the financial year 1965-66 are the same as prescribed by the Finance Act, 1964.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
61. The Finance Act, 1965 has not made any substantive change in the provisions in the Income-tax Act relating to annuity deposits. However, the Finance (No. 2) Act, 1965 has amended sections 280M, 280N and 280W with a view to enabling the cash refund of annuity deposits made by persons who were not liable to make such deposits or of any excess deposits in any other case, having regard to such factors as may be specified in the annuity deposit scheme framed by the Central Government. The annuity deposit scheme will be amended in order to make provisions in this behalf.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
Rates for deduction of income-tax at source during the financial year 1965-66
62. The rates for deduction of income-tax at source during the financial year 1965-66 from income, other than income chargeable under the head “Salaries”, have been shown in the table in Appendix II. It will be observed that those rates are the same as the rates prescribed by the Finance Act, 1964 except that the rates for deduction of tax at source from income payable to non-residents, other than companies, have been reduced, in view of the change in the basis of charging tax on the income of such assessees (vide paragraph 25). In respect of income by way of interest on income-tax free securities of the Government, the rate for deduction of tax at source in the case of such assessees is 15 per cent (income-tax 12.5 per cent and surcharge 2.5 per cent) and in respect of any other income (exclusive of income under the head “Salaries”), it is 30 per cent (income-tax 25 per cent and surcharge 5 per cent) or the income-tax and surcharge on income-tax on such income, at the rates prescribed in the rate schedule for income-tax, if such income had been the total income, whichever is higher.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
Export incentives
63. The tax concessions, provided by the Finance Act, 1964, for assessees (other than foreign companies which have not made the prescribed arrangements for the declaration and payment of dividends within India) have been continued by the Finance Act, 1965 for the assessment year 1965-66. These concessions are as follows:
            ( a)       in the case of an assessee exporting any goods or merchandise outside India, a rebate of 10 per cent of the tax payable by him on the profits from such export included in his total income; and
            ( b)       in the case of an assessee manufacturing or producing the articles specified in the First Schedule to the Industries (Development and Regulation) Act, 1951, exclusive of certain items such as fuels, fertilizers, sugar, jute, textiles, vanaspati, vegetable oils, cement, etc., which are the same as specified in the Finance Act, 1964, a rebate of tax calculated on 2 per cent of the amount of sale proceeds of such articles exported by him outside India, or sold by him to any other person and exported by such other person, directly.
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
64. Rules for the computation of the profits and gains derived from the export of goods or merchandise out of India, qualifying for the rebate of 10 per cent of the tax chargeable thereon were published in the issue of the Gazette of India, Extraordinary, dated 8-7-1965 under Board’s Notification No. SO 2214, dated 7-7-196
FINANCE ACT, 1965 AND  FINANCE (NO. 2) ACT, 1965
65. The Finance Act, 1965 has also introduced a new section 280ZC (in a new Chapter XXIIB, titled “Tax credit certificate”) under which a person who exports any goods or merchandise out of India after 28-2-1965, and receives the sale proceeds thereof in India in accordance with the Foreign Exchange Regulation Act, 1947, and the rules made thereunder, will be entitled to tax credit certificate for an amount, not exceeding 15 per cent of the amount of such sale proceeds, in accordance with the provisions of the scheme framed by the Central Government in this behalf. The provisions of this section, as amended by the Finance (No. 2) Act, 1965, have been dealt with in paragraph 87.

4. Amendments to Income-tax Act

AMENDMENTS  TO  INCOME-TAX  ACT

NEW PROVISIONS RELATING TO TAX ON CAPITAL GAINS

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Rate of tax on capital gains represented by the fair market value of bonus shares

66. Under the provisions of section 114, assessees other than companies are chargeable to tax on the capital gains represented by the fair market value of the bonus shares as on the 31st day from the date of their allotment, in the same manner as in respect of long-term capital gains other than those relating to buildings or lands or rights in buildings or lands. The first Rs. 5,000 of such gains (taken together with all other long-term capital gains) is free from tax. The amount in excess of Rs. 5,000 is chargeable to tax at one-half of the average rate of tax applicable to the assessee’s total income [as reduced by all long-term capital gains, capital gains represented by the fair market value of bonus shares and also any income by way of compensation chargeable to tax under section 28(ii)], subject to a minimum tax of 15 per cent of the excess referred to above. In the case of companies, the rate of tax on capital gains represented by the fair market value of bonus shares (as on the 31st day from the date of allotment), is 12½ per cent, vide section 115. The Finance Act, 1965 has amended sections 114 and 115, with effect from 1-4-1965, to provide that the amount of tax calculated on such capital gains in accordance with the provisions mentioned above will be reduced by the amount of 12½ per cent of the face value of the bonus shares. These provisions are illustrated below :

EXAMPLE 1
Individual
Rs.
1.
Face value of bonus shares
12,000
2.
Fair market value of the bonus shares as on the 31st day from the date of their allotment
16,000
3.
Deduction  for  the  initial  amount of capital gains exempt from tax
5,000
4.
Chargeable capital gains [Rs. 16,000 minus Rs. 5,000]
11,000
5.
Tax on the chargeable capital gains at the minimum rate of tax, viz., 15%. [It is assumed that the one-half of the average rate of tax applicable to the assessee’s income other than capital gains is 10%, hence the minimum rate of 15% applies]
1,650
6.
Deduction for 12½% of the face value of the bonus shares
1,500
7.
Net amount of tax payable in respect of capital gains [item (5) minus item (6)]
150
EXAMPLE 2
Company
1.
Face value of bonus shares
1,00,000
2.
Fair market value of the bonus shares on the 31st day from the date of their allotment
1,20,000
3.
Chargeable capital gains
1,20,000
4.
Tax on the chargeable capital gains at 12½% thereof
15,000
5.
Deduction for 12½% of the face value of the bonus shares
12,500
6.
Net amount of tax payable [item (4) minus item (5)]
2,500

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Relief of tax on certain capital gains in the case of an individual who is not a citizen of India and of a foreign company

67. The Finance Act, 1965 has inserted a new section 54A with effect from 1-4-1965. Under this  section, an assessee, being an individual who is not a citizen of India, or a foreign company, who derives capital gains from the transfer of any shares in an Indian company and reinvests, within two years of the date of the transfer, the full amount of the consideration received from the transfer in an investment approved by the Central Government in this behalf, is entitled to a refund of the full amount of the tax on such capital gains. Where only a part of the consideration is so reinvested, refund will be granted for such part of the tax as is proportionate to the amount of the capital gains utilised in making the investment. Capital gains will be taken to have been utilised in making the reinvestment to the extent that the amount of the consideration, which is received on the transfer of the shares and is reinvested, exceeds the “cost of acquisition” of the shares with reference to which the amount of capital gains on the transfer thereof is computed. For example, if shares costing Rs. 4 lakhs are transferred for Rs. 6 lakhs, resulting in capital gains of Rs. 2 lakhs, and the sum reinvested is Rs. 5 lakhs (which brings about an investment of one-half of the amount of capital gains), the assessee will be entitled to a refund of one-half of the amount of tax charged on the capital gains.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Distribution on reduction of share capital or liquidation of a company, attributable to capitalised profits of the  company from which it issued bonus shares to its equity shareholders after 31-3-1964

68. The fair market  value of bonus shares (issued by a company after 31-3-1964, otherwise  than from  its share premium account) as on the 31st day of their allotment, is  chargeable to tax as capital gains in the hands of the shareholders under section 45(2). The Finance Act, 1965 has introduced a new sub-clause (ia) in section 2(22), with effect from 1-4-1965, excluding from the scope of the term “dividend” that part of any distribution received by a shareholder on the reduction of share capital or liquidation of a company, which is attributable to its capitalised profits from which bonus shares were issued by it to its  equity shareholders after 31-3-1964. Such distribution, received on the liquidation of a company, will, however, be taken into account in computing the capital gains, if any, in the hands of the shareholders under the terms of section 46(2).

 PROVISIONS  RELATING  TO  DEVELOPMENTAL  INCENTIVES

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Development rebate

69. The rates of development rebate in respect of new machinery or plant installed after 31-3-1965, have been regarded on the principle of selective support for industries which are of special importance for the industrial development of India and whose growth will also be helpful in promoting import substitution. The quantum of development rebate in respect of machinery or plant installed by an assessee after 31-3-1965, for the purposes of a business of construction, manufacture or production of  certain articles or things relating to such priority industries has been fixed at a rate which is higher than that provided  in respect of any other machinery or plant. The above-mentioned articles or things relating to priority industries have been  enumerated in the new Fifth Schedule, to the Income-tax Act by the Finance Act, 1965, and amended by the Finance (No. 2) Act, 1965, to include “coal and lignite” therein, with effect from 1-4-1965. The articles and things enumerated in the Fifth Schedule [as amended by the Finance (No. 2) Act, 1965] are the same as the articles and things relating to priority industries listed in Part III of the First Schedule to the Finance Act, 1965 (the profits derived from the manufacture or production of which qualify for a special rebate of income-tax in the case of a company), except that “tea” is not included in the  list in the Fifth Schedule.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

70. The revised rates of development rebates in respect of new machinery or plant installed in a business after 31-3-1965 – provided in section 33, as amended by the Finance Act, 1965 and, subsequently, by the Finance  (No. 2) Act, 1965 with effect from 1-4-1965-are as follows:

Description
Rate of development rebate (% of the actual cost to the assessee of new machinery or plant)
1. Machinery or plant used for the construction, manufacture, or production of any one or more of the articles or things specified in the Fifth Schedule to the Income-tax Act—
(a) installed during the period from 1-4-1965 to 31-3-1970
35%
(b) installed after 31-3-1970. [Prior to the amendment of section 33 of the Income-tax Act by the Finance (No. 2) Act, 1965, new coal mining machinery installed up to 31-3-1966 was eligible, under clause (iii) of sub-section (l) of that section, for development rebate at 35 per cent and after 31-3-1966 at 20 per cent. However,  the Finance (No. 2) Act, 1965 has amended the above-mentioned provision and included “coal and lignite” in the Fifth Schedule with effect from 1-4-1965 and so, new coal mining machinery will continue to be eligible for development rebate at the rate of 35 per cent up to 31-3-1970 and 25 per cent after that date]


2. Any other new machinery or plant, not covered by the preceding item (l) —
(a) installed up to 31-3-1970
(b) installed after 31-3-1970
25%

 

 

 

 

 

 


 

20%
15%

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

71. The rate of development rebate in respect of new ships remains the same as before, viz., 40 per cent of the cost thereof.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

72. The Finance Act, 1965 has also added a new sub-section (6) to section 33 with effect from 1-4-1965, providing that no development rebate shall be allowed in respect of any machinery or plant installed after 31-3-1965, in any office premises or any residential accommodation, including any accommodation in the nature of a guest house. The effect of this provision is that development rebate will not be admissible in respect of machinery or plant such as air-conditioners, frigidaires, room heaters, electric fans, etc., installed after 31-3-1965 in any office premises or any residential accommodation including a guest house.

JUDICIAL ANALYSIS

EXPLAINED IN – Para 72 was Explained in Associated Cement Co. Ltd. v. CIT [1994] 210 ITR 69 (Bom.), with the following of observations :

“… Our attention was also drawn to Circular No. 3-P, dated October 11, 1965, of the Central Board of Direct Taxes explaining the provisions of the Finance Act, 1965, wherein it has been stated that the effect of the newly added sub-section (6) to section 33 of the Act is that development rebate will not be admissible in respect of machinery such as air-conditioners, frigidaires, room heaters, electric fans, etc., in any office premises or any residential accommodation including a guest house. The submission of learned counsel for the assessee is that the items specified in the Memorandum explaining the provisions of the Finance Bill, 1965, and the Board’s aforesaid Circular dated October 11, 1965, clearly go to show that section 33(6) of the Act is applicable only to “machinery and plant” such as air-conditioners, room heaters, electric fans or the like and not to all “plant and machinery”. We have carefully considered the above submission. We find it difficult to accept the same because sub-section (6) of section 33 has used the same expression “any machinery or plant” which has been used in the other sub-sections of the said section. It is a well-settled rule of interpretation that any word or expression used in dif­ferent sub-sections of the same section cannot be interpreted differently and assigned different meanings in different sub-sections in the absence of any provisions in the statute to the contrary. The various items mentioned in the aforesaid Memorandum explaining the provisions in the Finance Bill, 1965, and the Board’s Circular dated October 11, 1965, are only illustrative and not exhaustive which is evident from the use of the word “etc.”. In any event, the Memorandum explaining the provisions of the Finance Bill or the circular of the Board cannot be used to curtail or modify the clear meaning of an expression used in the statute. We are, therefore, of the opinion that the expression “machinery or plant” cannot be restricted only to some of the specious thereof mentioned in the Memorandum explaining the provisions of the Finance Bill and the Board’s Circular dated October 11, 1965.” (pp.76-77)

EXPLAINED IN –  Para 72 was Referred to and applied in CIT v. Thana Elec­tricity Supply Ltd. [1994] 206 ITR 727 (Bom.), with the following observations.

“… The Board, by its circular No. 3-P (LXXVI-57) of 1965, dated October 11, 1965, while explaining the above provision made it clear that the effect of this provision was that development rebate will not be admissible in respect of machinery or plant  such as air-conditioners, frigidaires, room heaters, electric fans, etc., installed in any office premises or residential accom­modation including guest houses. This circular of the Board makes it clear that the plant and machinery referred to in section 33(6) of the Act would mean only the plant and machinery of the types set out in its circular which are of use to the occupants of the office, residence or guest house. Electric meters, defi­nitely, do not fall in this category. The meter is in fact neces­sary only for the purpose of measuring the consumption of elec­tricity. It has no independent use of its own. In fact, it is not for the use in the office, residence, etc. It is a necessary adjunct to the supply line of electricity and the last point wherefrom starts the private line of the consumer. Though the meter is “plant and machinery” in the technical sense, in the context of section 33(6) of the Act, it cannot be said to be plant or machinery installed in the office premises or residen­tial accommodation, etc. Plant and machinery referred to in section 33(6) of the Act will only mean those plant or machinery which are intended for use in the office or the residence. The meter does not meet this description. It will, therefore, not fall within the section 33(6) of the Act…. “(p. 747).

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Development allowance for assessees growing and manufacturing tea in India

73. The Finance Act, 1965 has made a provision in this behalf in a new section 33A with effect from 1-4-1965. Under this section, an assessee carrying on the business of growing and manufacturing tea in India is entitled to a deduction, in the computation of his profits of a “development allowance” with reference to the actual cost of planting tea bushes at the following rates, viz.:

(a) in a case where tea bushes have been planted after 31-3-1965 on land which had been previously abandoned or which is newly brought under plantation, 40 per cent of the cost of such planting; and

(b) in a case where tea bushes are planted at any time during the period from 1-4-1965 to 31-3-1970, on land which is already under plantation, in replacement of bushes which have become permanently useless, 20 per cent of the actual cost of such planting.

The allowance is to be granted in respect of the fourth “previous year” reckoned from the “previous year” in which the land is prepared for planting, or replanting, as the case may be.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

74. The “actual cost” of planting comprises the cost of preparing the land, the cost of seeds, cuttings and nurseries, the cost of planting and replanting and the cost of upkeep thereof, for the previous year in which the land has been prepared for planting, and the three succeeding previous years. However, where such cost exceeds Rs. 10,000 per hectare [Rs. 12,500 per hectare in respect of land situate in a hilly area  declared as such by the Board by a general or special order under section 33A(8)], the excess amount is to be ignored for the purpose of grant of the development allowance.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

75. Other conditions under which development allowance is admissible are similar to those under which deduction for development rebate is granted. Broadly, these conditions are (a ) that the development allowance will be granted only if an  amount equal to 75 per cent thereof is credited to a reserve account, by debit to the profit and loss account, for being used for the purposes of the business over a period of 8 years, otherwise than for distribution as dividends or profits, (b) that the development allowance granted for a year will be withdrawn if the land  is sold or otherwise transferred during the above-mentioned period of 8 years, except if the transfer is made to the Government, a local authority, a Government company or a corporation established under a Central or State enactment, or is made in connection with an amalgamation or succession referred to in sub-sections (5) and (6) of section 33A, and (c) that the unabsorbed amount of development allowance in respect of an assessment year will be carried forward for being set off against the profits of subsequent years but not beyond 8 assessment years from the end of the relevant assessment year. Development allowance will be allowed as a deduction against the total income as computed after allowing all other deductions admissible under the Income-tax Act, including the deduction for development rebate.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Extension of the “tax holiday” concession under section 84 to undertakings going into production at any time during the 5-year period from 1-4-1966 to 31-3-1971

76. Under section 84, before its amendment by the Finance (No. 2) Act, 1965, the exemption from tax of the profits of an industrial undertaking newly set up in India to the extent of 6 per cent of the capital employed in the undertaking for a period of five assessment years (seven years in the case of an industrial undertaking owned by a co-operative society) was available to such undertakings going into production during the 18-year period from 1-4-1948 to 31-3-1966. The Finance (No. 2) Act, 1965 has amended section 84 to secure that the benefit of the above-mentioned tax concession will be available to industrial undertakings going into production at any time during a further period of five years up to 31-3-1971.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Tax credit certificates – Insertion of new Chapter XXIIB

77. The Finance Act, 1965 has introduced a new Chapter XXIIB with effect from 1-4-1965, containing provisions for the grant of  tax credit certificates for various purposes, viz ., providing an incentive to individuals and Hindu undivided families for investing in newly-floated equity shares of certain companies; facilitating the shifting of industrial undertakings of public companies from urban  areas to new areas with a view to relieving congestion in urban areas and enabling the expansion of industry in new areas providing resources for purposes relevant to the expansion of industry to companies engaged in important industries and earning profits higher than in a “base year”; stimulating export; and encouraging the production of certain goods liable to  Central excise duty. The amount of each one of these tax credit certificates, whether adjusted against the tax liability of the recipient or paid to him, is wholly exempt from tax in all cases, as under the new clause (28) added to section 10 by the Finance Act, 1965, and amended by the Finance (No. 2) Act, 1965, such amount will not be included in the total income of any person. The main provisions in regard to the above-mentioned tax credit certificates are stated below in paragraphs 78 to 91.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Tax credit certificate to certain equity shareholders

78. Under the new section 280Z any individual, or Hindu undivided family (whether resident or not resident in India) subscribing to and paying for an “eligible issue” of ordinary shares of a company is entitled to a tax credit certificate of an amount calculated on the amount of investment at the specified rates, viz., 5 per cent of the investment up to Rs. 15,000, 3 per cent of the next Rs. 10,000 and 2 per cent of the balance of the investment up to Rs. 10,000 making in all a maximum amount of Rs. 1,250 for a total investment of Rs. 35,000. The tax credit certificate will be granted for the financial year in which the equity shares are subscribed and paid for and also in respect of each one of the three succeeding financial years, the amount of the certificate for each of the three successive financial years being calculated in proportion to the amount of investment in the shares which continue to be held by the individual or Hindu undivided family, as the case may be. Tax credit certificates of an amount calculated as stated above will also be granted in respect of ordinary shares (forming part of an “eligible issue”) acquired by an individual or Hindu undivided family from an underwriter of the issue, in respect of the financial year in which the capital was so acquired and each one, if any, of the following financial years not falling beyond the third financial year from the end of the financial year in which the shares were subscribed and paid for by the underwriter.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

79. The amount of the tax credit certificate is required to be adjusted against the existing income-tax liability, if any, of the recipient and any such liability arising against him during a period of twelve months from the date of production of the certificate before the Income-tax Officer; the balance, if any, is payable to him thereafter as a refund due under Chapter XIX.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

80. The scope of “eligible issue” of ordinary shares and the procedure for issue of tax credit certificates and other ancillary matters will be laid down in a Scheme to be notified by the Central Government in this behalf.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Tax credit certificate to public companies shifting their industrial undertaking from an urban area to any other area

81. Section 280ZA, inserted by the Finance Act, 1965, with effect from 1-4-1965, provides for the grant of a tax credit certificate to a public company which owns an industrial undertaking in an urban area and shifts such undertaking, with the prior approval of the Board, to any other area. The entitlement to the tax credit certificate arises where such a company transfers its capital assets, consisting of buildings or lands or rights in buildings or lands situate in the urban area, in the course of or in consequence of shifting its undertaking to another area, and derives capital gains from the transfer of such capital assets. The certificate is to be granted for an amount bearing such proportion to the amount of income-tax on the capital gains as the amount of expenditure incurred by the company on acquiring lands and constructing buildings (including lands and buildings used for the residence of its employees, or as a hospital, creche, school, canteen, library, recreational centre, etc., for its employees) in the new area, together with expenditure on shifting of its machinery and plant and establishment to that area, during a period of three years from the date of the Board’s approval to the shifting or any further period allowed by the Board bears to the amount of the capital gains. The amount of the tax credit certificate will, however, be limited to the amount of the income-tax payable by it on the capital gains referred to above. For example, if the amount of the capital gains referred to above is Rs. 5 lakhs, the amount of income-tax payable by the company thereon at 40 per cent, is Rs. 2 lakhs, and the amount of qualifying expenditure incurred by the company is Rs. 4½ lakhs, viz., 90 per cent of the amount of the capital gains, it will be entitled to a tax credit certificate of Rs. 1,80,000 (90 per cent of the amount of income-tax, on capital gains. In this example, if the amount of qualifying expenditure incurred by the company were Rs. 5 lakhs, i.e., 100 per cent of its capital gains or Rs. 6 lakhs, i.e., 120 per cent of its capital gains, it will be entitled, in either case, to a tax credit certificate for an amount equal to the tax on the capital gains, viz., of Rs. 2 lakhs.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

82. If the capital asset, consisting of lands or buildings acquired or constructed in the new area, or any right therein, is transferred by the company during five years from the date of its acquisition or completion of its construction, as the case may be, to any person other than the Government, a local authority, a corporation established under a Central, State or Provincial enactment  or a Government company, the company will be liable to pay tax equal to one-half of the amount of the tax credit certificate granted to it. Such amount will be deemed to be tax due from the company on 30th day from the date of such transfer under a demand notice  issued under section 156 and all the provisions of the Act shall apply accordingly.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

83. The amount of the tax credit certificate is required to be adjusted against any existing income-tax liability of the company and any such liability arising against it during a period of twelve months from the date of production of the certificate before the Income-tax Officer, and the balance, if any, – which is deemed to be a refund due under Chapter XIX – is payable to the company thereafter.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

84. Detailed provisions as to the procedure to be followed in issuing, adjusting and paying the amount of such certificates will be laid down in a Scheme to be notified by the Central Government, in this behalf.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Tax credit certificate to industrial companies liable to income-tax and/or surtax in excess of such tax payable in the “base year”

85. Under the new section 280ZB, introduced by the Finance Act, 1965, any company, which is engaged in the manufacture or production of any of the articles listed in the First Schedule to the Industries (Development and Regulation) Act, 1951, and is liable to income-tax and surtax, if any, for any one or more of the five assessment years from the assessment years 1966-67 to 1970-71 in excess of its liability to such taxes for the “base year” is entitled to a tax credit certificate for an amount equal to 20 per cent of the excess tax liability (subject to a limit of 10 per cent of its aggregate liability to income-tax and surtax for the relevant years) for each one of such assessment years. The “base year” is the assessment year 1965-66, but in the case of a company which is not liable to any tax for that year, the base year is taken to be any succeeding year falling within the next following four assessment years for which the company first becomes liable to tax on its income. Where only a part of the profits and gains of a company are derived from manufacture  or production of the specified articles, the amount of the tax credit certificate is to be calculated with reference to the income-tax and surtax attributable to such profits.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

86. The amount of tax credit certificate is required to be adjusted against any existing income-tax liability of the company or any such liability arising against it during a period of 12 months from the date on which the certificate is produced before the Income-tax Officer, and the balance, if any, which is deemed to be a refund due under Chapter XIX, is payable to it thereafter. Such adjustment or refund against the amount of the tax credit certificate will be made or granted only to the extent of the amount spent by the company, on its own, for the repayment of loans from approved financial institutions, or redemption of its debentures or for the creation of a capital asset in India. The period during which a company should utilise its moneys for the purposes mentioned above, and the procedure for the issue and adjustment of the amount of the tax credit certificate, will be specified in a scheme1 to be framed by the Central Government for the purpose.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Tax credit certificate in relation to exports

87. The provisions relating to such tax credit certificates are contained in a new section 280ZC introduced by the Finance Act, 1965, and amended by the Finance (No. 2) Act, 1965, with effect from 1-4-1965. Under these provisions, any person who exports outside India after 28-2-1965, any goods  or merchandise specified in a scheme, for tax credit certificates for exports notified by the Central Government,  is entitled to a tax credit certificate of an amount calculated at the rate or rates specified in the scheme, not exceeding 15 per cent of the sale proceeds of the goods or merchandise. The tax credit certificate is to be granted if the exporter receives the sale proceeds of the goods or merchandise in India in accordance with the Foreign Exchange Regulation Act, 1947, and the rules framed thereunder. The amount of the tax credit certificate is required to be adjusted against any existing income-tax liability of the recipient of the certificate on the date on which he produces the certificate before the Income-tax Officer and the balance, if any, which is deemed to be a refund due to him under Chapter XIX, is payable to him forthwith.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

88. The Central Government has notified a scheme named “Tax Credit Certificate (Exports) Scheme, 1965” in the Gazette of India, Extraordinary, dated 18-8-1965, relating to the above-mentioned tax credit certificates. This scheme, inter alia, specifies the commodities for the export of which such tax credit certificates will be granted, the rates at which the amount of the certificate is to be calculated in each case, and the procedure to be followed in issuing the certificate and making adjustments and payments of the amount thereof. Certificates under this scheme will be issued by Deputy Directors and Assistant Directors of Tax Credit (Exports) stationed at important ports and functioning under the Director of Tax Credit (Exports), Ministry of Finance, Department of Revenue, New Delhi.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Tax credit certificate in relation to increased production of goods

89. Under the new section 280ZD, introduced by the Finance Act, 1965, with effect from 1-4-1965, any person, who manufactures or produces any goods during any one or more of the five financial years (April 1 to March 31) from 1965-66 to 1969-70 and clears such goods for the purpose of Central excise duty in a quantity exceeding the quantity of the goods so cleared by him during the “base year”, is entitled to a tax credit certificate for an amount being not more than 25 per cent of the Central excise duty payable by him on the excess quantity of goods cleared during each of the relevant financial years. The “base year” in relation to an undertaking existing in the financial year 1964-65 is that very financial year, and in relation to any other undertaking, it is the financial year in which such undertaking begins to manufacture or produce goods.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

90. The goods in respect of which the tax credit certificate is to be granted and the rate at which the amount of the certificate is to be calculated are to be specified in a scheme to be notified by the Central Government for the purpose.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

91. The amount of the tax credit certificate is required to be adjusted against the income-tax liability of the recipient of the certificate or paid to him in the same manner and subject to the same conditions, as the amount of tax credit certificates to industrial companies liable to income-tax and surtax in excess of such tax payable in the “base year”, vide paragraph 86.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Extension of the period of exemption from tax of foreign technicians on the perquisite represented by the payment, by their employers, of tax on their salary

92. Under section 10(6 )(vii)( a)(ii), as it stood before its amendment by the Finance Act, 1965, a foreign technician (other than a technician having a special knowledge and experience in industrial and business management techniques) whose contract of service had been approved by the Central Government within one year of the commencement of his service was entitled to an exemption from tax on his salary income for the first 36 months of his employment in India. If he continued  in employment in India  after that period, and the tax on his salary income was paid by his employer, the technician was further entitled to an exemption from tax on the perquisite represented by such payment, for a period of 24 months. Thus, the total period for which such a foreign technician was exempt from tax on his salary income in India was 5 years. However, Indian concerns employing such technicians in industries involving complicated and sophisticated modern techniques, sometimes, need their services for a longer period. The above-mentioned provision has, therefore, been amended by the Finance Act, 1965, with effect from 1-4-1965, by  way of extending the period of the second mentioned exemption from tax, in respect of the perquisite represented by the payment by the employer of tax on the salary of a foreign technician, from 2 years to 5 years, subject to the condition that the approval of the Central Government to the continuation of his employment in India beyond the initial 36 months has been obtained before 1st October of the relevant assessment year. The total period of exemption of such a foreign technician from tax in respect of his salary income has thus been extended from 5 years to 8 years.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

93. Under the above-mentioned provision, as it stood before the amendment, a foreign technician was not required to obtain the approval of the Central Government for continuing in employment in India beyond the initial period of exemption for 36 months, for the purpose of his exemption from tax on the above-mentioned perquisite. Under the amended provision, such approval is necessary and has to be obtained before  1st October of the relevant assessment year. The amended provision is effective for the assessment year 1965-66 and subsequent years. In respect of any assessment for the assessment year 1964-65 or any earlier year, the provisions of section 10(6)( vii)(a)( ii), as they stood prior to the amendment, will continue to apply and no exemption will be admissible for those assessment years in respect of the perquisite referred to above for a period beyond the first 5 years (60 months) of the technician’s employment in India. For example, if a foreign technician (whose contract of service for the first 36 months of his employment has been approved by the Central Government) joined service in India on 1-4-1958 and continues in employment in India for 8 years uptill 31-3-1966 and obtained the approval of the Central Government on 30-9-1965, to the continuation of his employment beyond the first 3-year period of his  service for a further period of 5 years from 1-4-1961 uptill 31-3-1966, he will be entitled to exemption from tax, under the pre-existing provisions of section 10(6)( vii)(a)( ii): (a) on his salary income in India for the 3 assessment years from 1959-60 to 1961-62; and (b) on the perquisite, represented by the payment by his employer of tax on his salary income, for the next two assessment years 1962-63 and 1963-64, but will not be entitled to such exemption for the assessment year 1964-65. Thereafter, he will be entitled to exemption from tax on the above-mentioned perquisite, under the amended provisions of section 10(6)( vii)(a)( ii) for the assessment years 1965-66 and 1966-67. For the purpose of the assessment year 1966-67, it will not be necessary for the technician to obtain a fresh approval of the Central Government to the continuation of his employment, if the approval obtained by him for the purpose of the assessment year 1965-66 also covers the full period of his employment during the previous year for the assessment year 1966-67.

 NEW TAX CONCESSIONS RELATING TO SAVINGS

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Relief in respect of payments made by partners of registered firms, engaged in certain professions, for securing retirement annuities

94. The Finance Act, 1965 has made a provision in this behalf in section 80C, forming part of the new Chapter VIA, with effect from 1-4-1965. Under this section, an Indian citizen who is resident in India and is a partner of a registered firm rendering professional service as a chartered accountant, solicitor, lawyer, architect, or such other professional service as the Central Government may notify, is entitled, subject to certain conditions, to a deduction in the computation of his total income, in respect of the amount paid by him during the previous year out of his income chargeable to tax as premiums under an approved contract or as contributions to an approved fund for the purpose of securing for him a life annuity in old age. The deduction is not admissible to any assessee whose unearned income included in his total income exceeds Rs. 10,000, or who is entitled to any pension or is participating in any pension or superannuation scheme. The limit within which the deduction is admissible is 10 per cent of the assessee’s total income or Rs. 5,000, whichever is less. No deduction is permissible in excess of the assessee’s income under the head “Profits and gains of business or profession” included in his total income. The above-mentioned limit of 10 per cent of the total income is to be applied to the total income as computed before making any deduction under Chapter VIA and also before making any deduction for annuity deposits under Chapter XXIIA. (The amount of annuity deposit is to be calculated on the total income as computed after allowing the deductions under the Income-tax Act, except under Chapter XXIIA). The deduction under section 80C is admissible only if the annuity contract in respect of which premiums are paid or the fund to which contributions are made is, for the time being, approved by the Commissioner of Income-tax. The conditions under which an  annuity contract or a fund can be approved by the Commissioner have been specified in sub-sections (2), (3) and (4) of section 80C. The Central Board of Direct Taxes is also authorised to make provisions in the matter in the Income-tax Rules. Pending the notification of such rules, approval to annuity contracts and funds will be granted by the Commissioner in accordance with the provisions of section 80C.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Exemption from tax of the bonus payable in respect of deposits in cumulative time deposit accounts in post office savings banks

95. Under an amendment made to  the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959, notified on 25-3-1965, cumulative time deposit accounts opened after 31-3-1965 and accounts maturing after 1-4-1965 (having not less than a term of 5 years or 10 years to run after the date, for maturity) will be entitled to a bonus at specified rates. The amount of such bonus will not be included in the total income of any person under terms of an amendment made by the Finance (No. 2) Act, 1965 to sub-clause (ii) of section 10(15). The amendment has retrospective effect.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Tax concession in respect of interest on National Savings Certificates (First Issue)

96. The Central Government has instituted a new series of savings certificates namely, the National Savings Certificates (First Issue) under a notification, dated 25-3-1965, issued by the Ministry of Finance, Department of Economic Affairs. In regard to interest received by an assessee on the encashment of such certificates, the Finance (No. 2) Act, 1965 has made the following provisions by inserting a new section 112A and by amending sections 112, 114 and 193 of that Act:

1. Any income by way of interest on such certificates, included in the total income, will be charged to tax at the average rate of tax applicable to the assessee’s other ordinary taxable income, i.e., total income as reduced by such interest income and also any extraordinary income by way of capital gains and compensation received for termination or modification of the terms of a managing agency, etc.

2. The tax on such interest income will be calculated as if the whole of it were earned income.

3. The tax on the assessee’s income, other than such interest income, will be calculated as if the latter income did not form part of his total income.

4. No tax will be deducted at source from the amount paid on encashment of National Savings Certificates (First Issue).

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

New series of Gold Bonds – Exemption from tax of capital gains arising from transfer of the Bonds and exemption of interest on the Bonds received by an individual resident in India, from deduction of tax at source

97. A new series of gold bonds, namely “7 per cent Gold Bonds, 1980”, has been instituted by the Central Government under a notification, dated 27-2-1965, issued by the Ministry of Finance, Department of Economic Affairs. The earlier series of gold bonds are named as “6½ per cent Gold Bonds, 1977”. Persons holding 6½ per cent Gold Bonds, 1977 are entitled to certain tax concessions under the Act, these being (i) the exemption from tax of the capital gains arising to a person on the transfer of the Bonds which has been secured by excluding such gold bonds from the definition of the term “capital asset” contained in section 2(14 ); and (ii) the exemption of the interest on such Bonds, received by an individual resident in India, from deduction of tax at source under section 193, subject to the condition that the individual makes a declaration that the nominal value of the Bonds held by him or on his behalf during the period to which the interest relates did not exceed Rs. 10,000. The Finance (No. 2) Act, 1965 has amended sections 2(14) and 193 to secure that the above-mentioned tax concessions are made available also to persons holding the new “7 per cent Gold Bonds, 1980”.

 MISCELLANEOUS TAX RELIEFS AND CONCESSIONS

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Exemption of non-residents from tax on interest accruing to them in a non-resident account in a bank in India

98. The Finance Act, 1965 has introduced a new sub-clause (4A) in section 10, providing an outright exemption from tax to non-residents on any income from interest on moneys standing to their credit in a “non-resident account” in any bank in India in accordance with the Foreign Exchange Regulation Act, 1947 and any rules made thereunder. This exemption, which is effective for the assessment year 1965-66 and subsequent years, is available in respect of the entire amount of interest accruing to a non-resident in respect of any moneys standing to his credit in a “non-resident account” maintained in a bank in India in accordance with the provisions of the Foreign Exchange Regulation Act, 1947 and the rules made thereunder.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Exemption from tax of sums received from a superannuation fund by way of refund of an employee’s contributions to it prior to 1-4-1962 and of payment of interest on such contributions at the time of the employee’s resignation or discharge from service

99. The Finance Act, 1965 has made a retrospective amendment to section 10(13). The effect of this amendment is that  an employee who, at the time of his resignation, discharge or dismissal from employment, receives a payment from an approved superannuation fund by way of refund of any contributions made by him to the fund prior to the date of commencement of the Act, viz., 1-4-1962, and payment of the interest on such contributions will not be liable to tax on such payments. It may be mentioned that such payments were not liable to tax under the 1922 Act.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Exemption from tax of pensioners on the commuted value of pension

100. Under the new clause ( 10A), inserted by the Finance (No. 2) Act, 1965, with retrospective effect, the payment received by a person in commutation of his pension under the Civil Pensions (Commutation) Rules of the Central Government or under any similar scheme applicable to members of the Defence Services or to employees of a State Government, a local authority or a corporation established  by a Central, State or Provincial Act will not be included in his total income. This exemption from tax is also available in respect of payments in commutation of pension received under any other scheme of any other employer, but in such cases, where the payment is received on or after 19-8-1965 [being the date on which the Finance (No. 2) Bill, 1965 was introduced in the Lok Sabha] the amount to be excluded  from the total income will be subject to certain limits. These limits are: (i) in a case where the employee receives any gratuity, the commuted value of one-third of the pension which he is normally entitled to receive; and (ii) in any other case, the commuted value of one-half of such pension. In such cases, the commuted value of pension will be taken to be the amount determined having regard to the age of the recipient, the state of his health, the rate of interest and officially recognised tables of mortality. Where the payment of commuted value of the pension is received, in such a case, before 19-8-1965, the above-mentioned limits do not apply and the whole of the payment will be excluded from the total income of the person concerned.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

101. Further, section 23 of the Finance (No. 2) Act, 1965 provides, retrospectively, that notwithstanding anything contained in the provisions of the 1922 Act any sum due to or received by any person in commutation of pension shall not be included in his total income, under the provisions of the latter Act.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

102. Thus, any payment received by any person in commutation of his pension prior to 19-8-1965 will not be includible in his total income under the 1922 Act, or 1961 Act, irrespective of the amount of such payment. Any such payment received by a person on or after 19-8-1965 will also not be included in his total income, subject, however, to the limits referred to in paragraph 100 in the case of persons in private employment.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Exemption of Bar Councils and certain other professional associations from tax on income from enrolment fees and subscriptions received from their members

103. The Finance (No. 2) Act, 1965 has made a provision in this matter in the new clause (23A) inserted in section 10, with retrospective effect. Under this clause, an association or institution having as its sole object the control, supervision, regulation or encouragement of the profession of law, medicine, accountancy, engineering or architecture, or any other profession which may be notified by the Central Government, will not be liable to tax on its income other than interest on securities, income from house property and any income received for rendering specific service, income from dividends and interest from its investments, subject to the conditions that the association or institution (a) applies its income or accumulates it for application solely to the objects for which it is established, and (b) is for the time being approved by the Central Government.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Exemption from tax of persons resident in Ladakh district on income arising in Ladakh or outside India uptill the assessment year 1969-70

104. Under a new clause ( 26A), inserted in section 10 by the Finance (No. 2) Act, 1965, with retrospective effect, persons other than employees of the Government, who are resident in the district of Ladakh, will not be liable to tax on any income assessable for any assessment year up to and inclusive of the assessment year 1969-70, which accrues or arises to them in Ladakh or outside India. A person shall be deemed to be resident in Ladakh district if he satisfies the tests for residence laid down in sub-sections (1), (2), (3) and (4) of section 6 in relation to his residence in Ladakh. For this purpose, reference in the above-mentioned sub-sections to “India” shall be construed to be reference to the district of Ladakh and reference to “Indian company” shall be construed as a reference to a company formed and registered under any law for the time being in force in the State of Jammu and Kashmir.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Deduction in the case of an individual or Hindu undivided family resident in India in respect of expenditure on medical treatment, etc., of handicapped dependants

105. Individuals and Hindu undivided families resident in India and incurring any expenditure on the medical treatment (including nursing) of a handicapped dependant out of their income chargeable to tax are entitled, under the new section 80B, introduced by the Finance Act, 1965, to a specified deduction  in respect of such expenditure in the computation of their total income for the assessment year 1965-66 and subsequent years. The term “handicapped dependant” means, in the case of an individual, any one of his relatives as defined in clause (i ) of new section 80D (such as mother, father, husband, wife, son, daughter, brother, sister, nephew or niece and the spouse of the son, daughter, etc.) and in the case of a Hindu undivided family, any member of the family, where such relative or member is (a) exclusively dependent on the individual or the family for his support or maintenance, and (b) is suffering from a physical or mental disability which is certified by a medical practitioner to have the effect of reducing considerably such person’s capacity for normal work or engaging in a gainful employment. The deduction to be allowed is for a specified amount, even though the expenditure actually incurred by the assessee for the medical treatment of the handicapped dependant is less than that amount or exceeds it. The specified amount of the deduction is (a) Rs. 2,400 in a case where the handicapped dependant has been admitted for not less than 182 days during the previous year in a hospital, nursing home, medical institution or any other institution notified by the Central Government to be an institution for the care of handicapped persons and fees or charges are payable to such hospital, nursing home or institution, and (b) Rs. 600 in any other case. In each case, the amount of the deduction is required to be reduced by the income, if any, of the handicapped dependant during the relevant previous year. The term “income” in relation to a “handicapped dependant” has been defined in clause (ii) of new section 80D to mean the aggregate income of such person from all sources. The deduction will be allowed from the earned income of the assessee and for the balance, if any, from his unearned income.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Rebate of income-tax on donations for the renovation or repair of temples, mosques, gurdwaras, churches and other places of public worship of renown

106. The provisions of sub-sections (3) and (6) of section 88 have been amended by the Finance Act, 1965. Under these provisions, as they stood before the amendment, donations made for the repair or renovation of any temple, mosque, gurdwara, church or other place notified by the Central Government to be a place of historic, archaeological or artistic importance qualified for a rebate of tax, subject to the same limits as were applicable to donations to an institution or fund established in India for a charitable purpose, viz., 10 per cent of the total income subject to a monetary limit of Rs. 2 lakhs. One of the amendments to section 88(6), which is retrospective in operation, clarifies that the requirement of notification by the Government applies to temples, mosques, gurdwaras, and churches also, in the same manner as to “any other place” referred to in that provision. Another amendment to section 88(6), which takes effect from 1-4-1965, consists of extending its provisions for rebate of tax on donations for the repair or renovation of temples, mosques, etc., notified by the Central Government to be of historic, archaeological or artistic importance, to such places which are notified by the Central Government to be places of public worship of renown, throughout any State or States. The amendment to section 88(3) which is effective for the assessment year 1965-66 and subsequent years, consists of increasing the monetary limit of donations to temples, mosques, gurdwaras, churches, etc., qualifying for rebate of tax under section 88(6) from Rs. 2 lakhs to Rs. 5 lakhs.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Liberalisation of the definition of “company in which the public are substantially interested”

107. Section 2 (18) which defines a company in which the public are substantially interested has been amended by the Finance Act, 1965, with effect from 1-4-1965. Under the pre-existing provisions of the above-mentioned section, a company in which shares to the extent of 51 per cent or more of its equity capital were held by another company in which the public are substantially interested (hereinafter referred to as a public company) or by a wholly-owned subsidiary of such a company did not qualify as a company in which the public are substantially interested. Under the amended provisions, shares in a company held by another public company or by a wholly-owned subsidiary of a public company will be treated on the same footing as shares held by the Government, or a corporation established under a Central, State or Provincial Act or the public for the purpose of entitlement of the first-mentioned company to be regarded as one in which the public are substantially interested. To take an example, if equity shares in a company to the extent of 51 per cent of its equity capital are held by a public company, or are held by various shareholders, such as a public company, a company which is a wholly-owned subsidiary of a public company and a corporation established under a Central Act, the first-mentioned company will be treated as one in which the public are substantially interested, if it satisfies the other conditions laid down in section 2(18). The amended provisions are effective for the assessment year 1965-66 and subsequent years.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Deduction in respect of expenditure incurred by a company for promoting family planning amongst its employees

108. Under the new clause ( ix), introduced in section 36(1) by the Finance Act, 1965, any expenditure bona fide incurred by a company for the purpose of promoting family planning amongst its employees will be allowed as a deduction in computing its income under the head “Profits and gains of business or profession” for the assessment year 1965-66 and subsequent years. However, where any such expenditure is of a capital nature, e.g., expenditure for constructing a building for a family planning clinic or purchasing equipment for it, it will be allowed as a deduction over a period of five years commencing from the previous year in which it was incurred, in equal sums. The allowance will be subject, as far as may be, to the same conditions as apply to the allowance of capital expenditure on scientific research. Thus, no depreciation allowance will be admissible in respect of capital assets used for promoting family planning for a previous year for which a deduction has been allowed under the above-mentioned section 36(1)(ix) in respect of the expenditure represented by such assets. The unabsorbed amount of the expenditure deductible under section 36(1)(ix) for a particular assessment year will be carried forward to subsequent years and set off in the same manner as unabsorbed depreciation allowance.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Liberalisation of the provision in section 40(c)(iii) for disallowance in the assessment of companies of expenditure incurred on providing perquisites to their employees in excess of 20 per cent of the salary of each employee

109. Section 40(c )(iii) has been amended by the Finance Act, 1965, with effect from 1-4-1965. The effect of one of these amendments is that (a) any payment made by a company towards tax on the salary of a foreign technician in its employment [in a case where such technician is exempt from tax under section 10(6)( vii) on the perquisite represented by such payment], and (b) any expenditure incurred by the company for promoting family planning amongst its employees, will not be taken into account in computing the expenditure incurred by it on providing any benefit, amenity, or perquisite to the employees concerned. The effect of another amendment is that the provisions of section 40(c)( iii) will not apply in respect of expenditure incurred by a company on providing any benefit, amenity or perquisite to an employee whose income chargeable under the head “Salaries” does not exceed Rs. 7,500 per annum. Consequently, no disallowance will be made in the assessment of a company in respect of the expenditure incurred by it on providing perquisites to such an employee in excess of 20 per cent of his salary income.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Initial depreciation allowance under the 1922 Act not to be deducted in computing the written down value under the 1961 Act

110. The Finance (No. 2) Act, 1965 has added a proviso to sub-clause (b) of section 43(6) to the effect that the initial depreciation allowance allowed to an assessee under sub-clauses (a ), (b) and (c ) of clause (vi)  of section 10(2) of the 1922 Act, will not be deducted in computing the written down value in respect of buildings, machinery or plant for the purpose of calculating the normal depreciation allowance thereon under the 1961 Act. This amendment, which has retrospective effect, restores the position in the matter, as it existed under the provisions of the 1922 Act.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Exemption of subsidiary company from tax on capital gains from transfer of a capital asset to an Indian company holding the whole of the share capital of the subsidiary

111. The Finance Act, 1965 has added a new clause (v) to section 47, with effect from 1-4-1965, providing in substance, that no capital gains or losses will be computed in respect of the transfer of a capital asset by a subsidiary company to its holding company, where such holding company is an Indian company and owns the whole of the share capital of the subsidiary.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Cost of acquisition of a capital asset which becomes the property of the assessee under a gift or will, etc.

112. Under section 49, the cost of acquisition of capital asset which becomes the property of the assessee under a gift or will, or by succession, inheritance or devolution, etc., is deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred by the previous owner or the assessee, as the case may be. However, it is possible that the previous owner of the capital asset may have acquired the asset under a gift or will or by any other mode of acquisition referred to in section 49.  In such a case, it could be urged that under section 49, the cost of acquisition of the asset to the assessee was nil. The Finance Act, 1965 has, therefore, amended this section with effect from 1-4-1965, by way of adding an Explanation to it to the effect that the expression “previous owner of the property” in relation to a capital asset owned by an assessee means the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in section 49.

 MISCELLANEOUS PROVISIONS RELATING TO ASSESSMENT,
RECOVERY OF TAX, ETC.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Assessment of interim dividends

113. The Finance Act, 1965 has made a new provision in section 8, with effect from 1-4-1965, laying down that any interim dividend shall be deemed to be the income of the previous year in which the amount of such dividend is unconditionally made available by the company to the member entitled to it.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Assessment of income represented by investments, etc., not fully disclosed in books of account

114. The Finance Act, 1965 has made a provision in this matter in a new section 69B, with effect from 1-4-1965. The effect of this section is that where the Income-tax Officer finds that the amount expended by an assessee in making an investment or acquiring any bullion, jewellery or other valuable articles exceeds the amount recorded in this behalf in his books of account, and the assessee offers no explanation about such excess or the explanation offered by him is, in the opinion of the Income-tax Officer, not satisfactory, the excess amount may be deemed to be the income of the assessee for the financial year in which the investment is made or the assessee is found to be the owner of the said bullion, jewellery or other valuable article.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Rebate of tax on donations to an institution or fund established in India for a charitable purpose – “Charitable purpose” not to include a purpose which is wholly or mainly religious in nature

115. Section 88 provides for the grant of a rebate of tax to an assessee, inter alia, on the qualifying amount of donations made by him to Government or to any local authority after 31-3-1960, for any charitable purpose or to any institution or fund which is established in India for a charitable purpose and satisfies the conditions laid down in sub-section (5) of that section. It has been held by the Bombay High Court, recently, in a case involving the interpretation of section 5(1)(v ) of the Gift-tax Act, that the scope of the expression “charitable purpose” is wide enough to cover a religious purpose also. As this interpretation is not in accordance with the intention underlying the relevant provisions in section 88, the Finance (No. 2) Act, 1965 has inserted a new sub-section (5A) in that section providing that the expression “charitable purpose” does not include any purpose the whole or substantially the whole of which is of a religious nature. Under the terms of new sub-section (5B) of section 88, the above-mentioned provision will have effect only in relation to donations made after 31-3-1964.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

116. It is possible that a purpose which is predominantly charitable in nature may, incidentally, have a religious motive or background, such as feeding of the poor on certain religious occasions. Such a purpose will continue to be treated as a “charitable purpose” under the terms of sub-section (5A) of section 88. That provision does not also affect in any manner, the provisions in sub-section (6) of section 88 relating to grant of rebate of tax on donations made by an assessee for the repair or renovation of any temple, mosque, gurdwara, church or other place notified by the Central Government to be of historic, archaeological or artistic importance or to be a place of public worship of renown throughout any State or States. It does not also affect the provisions contained in section 2( 15) or sections 11,12 and 13.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Extension of power under section 131 regarding discovery, production of evidence, etc., to the Inspecting Assistant Commissioner of Income-tax

117. A provision in this behalf has been made in section 131 by the Finance Act, 1965, with effect from 1-4-1965.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Recovery of tax from companies in liquidation

118. Section 178, which casts certain obligations on the liquidator of a company for ensuring recovery of the tax payable by the company, has been amended by Finance Act, 1965, with effect from 1-4-1965, to make its provisions more effective. Under the amended provisions, a liquidator will be personally liable for the tax payable by the company if he parts with its assets without providing for its tax liability. He will also be liable to prosecution, if he fails to comply with or contravenes the obligation cast upon him by section 178. A provision has also been made in section 178 permitting reasonable costs or expenses of winding up to be met out of assets of the company, with the prior approval of the Commissioner of Income-tax.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Increase in the rate of interest chargeable from assessees and also payable to assessees by Government under the Act from 4 per cent to 6 per cent per annum

119. The rate at which simple interest is chargeable from assessees under the provisions contained in sections 213, 215, 216 and 217 relating to advance tax, and section 220(2) relating to demands in arrears, has been increased by the Finance Act, 1965 from 4 per cent to 6 per cent per annum, with effect from 1-4-1965. Likewise, the rate at which simple interest is payable by the Central Government under section 214 in respect of excess payments of advance tax and under sections 243 and 244 in respect of delayed refunds has been increased from 4 per cent to 6 per cent per annum, with effect from 1-4-1965. It is to be kept in view that interest at the increased rate of 6 per cent per annum is chargeable or payable only in respect of a period falling after 31-3-1965. In respect of any period prior to April 1965, simple interest will be calculated at the rate of 4 per cent per annum. To take an example, if in a case, the demand of tax under section 156 in respect of the assessment year 1964-65 fell in arrears on 1-12-1964 and was paid by the assessee only on 1-7-1965, simple interest under section 220(2) will be payable by the assessee on the arrear demand at the rate of 4 per cent per annum in respect of the period from 1-12-1964 to 31-3-1965 and at the rate of 6 per cent per annum for the period from 1-4-1965 to 30-6-1965.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Recovery of arrears of tax by distraint and sale of movable property

120. Section 226(5) relating to recovery of arrears of tax by distraint and sale of movable property has been amended by the Finance Act, 1965, with effect from 1-4-1965. The amendment enables the Commissioner of Income-tax to issue a general or special order authorizing the Income-tax Officer to effect recovery of arrears of tax by distraint or sale of movable property, in the manner laid down in the Third Schedule to the Act.

 SPECIAL PROVISIONS FOR CHARGING TAX ON UNACCOUNTED
INCOME VOLUNTARILY DECLARED BY A PERSON

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Voluntary Disclosure Scheme and its mechanics

121. Section 68 of the Finance Act, 1965 provided for charging tax on the income declared by a person in accordance with the provisions of that section, during the period from 1-3-1965 to 31-3-1965, at an ad hoc  rate of 60 per cent (57 per cent where such income was declared and tax thereon was paid by 31-3-1965). The provisions of the above-mentioned section have been explained in a Press Note, dated 4-3-1965.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

122. Section 24 of the Finance (No. 2) Act, 1965 provides a new scheme for voluntary declaration of income liable to tax for any assessment year prior to the assessment year 1965-66, which has not been declared in a return filed by 19-8-1965, or which has otherwise escaped assessment. This scheme applies to declarations made during the period from 19-8-1965 uptill 31-3-1966.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

123. Under the provisions of the above-mentioned section 24, the amount of the declared income will be reduced by the income, if any, which has been detected or is deemed to have been detected by the Income-tax Officer on the basis of the materials available before the date of the declaration. Income will be deemed to have been detected if on the basis of the materials available before the date of the declaration, it can be shown to exist or its existence is considered so probable that a prudent man ought, under the circumstances of the particular case, to act on the supposition that it exists. The reduction referred to above will be made under an order to be made by the Commissioner of Income-tax, after giving the declarant an opportunity of being heard, within 30 days of the date of the declaration. The order is appealable to the Central Board of Direct Taxes. The income excluded from the amount of the disclosed income will be charged to tax under the provisions of the Income-tax Act and not under the provisions of section 24 of the Finance (No. 2) Act, 1965. However, any particulars furnished or statements made by a person in the declaration under that section will not be admissible as evidence against that person for the purpose of the assessment of such income or for the purposes of any proceeding for imposition of penalty or prosecution under the 1922 Act or the 1961 Act, the Excess Profits Tax Act, the Business Profits Tax Act, the Super Profits Tax Act, the Companies (Profits) Surtax Act or the Wealth-tax Act.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

124. The declared income, as reduced by the income detected or deemed to have been detected before the date of the declaration, will be charged to tax treating it as a single block of income, at the rates prescribed by the Finance Act, 1965. In the case of persons other than companies, such income will be charged to income-tax at the graduated rates of income-tax prescribed in that Act in respect of personal incomes. For the purpose of surcharge, such income will be treated as earned income. However, the deduction on account of tax relief for personal allowances in the case of resident individuals and Hindu undivided families under the Finance Act, 1965, will not be admissible. In the case of Indian companies or foreign companies which have made the prescribed arrangements for the declaration and payment of dividends within India, tax will be charged at the rate of 50 per cent (60 per cent in the case of a company in which the public are not substantially interested). In the case of a foreign company which has not made the prescribed arrangements for the declaration and payment of dividends within India, the rate of tax will be 65 per cent. If a person makes more than one declaration under section 24 of the Finance (No. 2) Act, 1965, the income on which tax is payable under the provisions of that section will be aggregated and tax will be charged thereon at the above-mentioned rates.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

125. The tax is required to be paid within 35 days of the issue of the notice of demand under section 156. However, facility will be allowed for payment of the tax in reasonable instalments over a period not exceeding 4 years from the date of the declaration, if not less than 10 per cent of the amount of tax demanded is paid within the time allowed in the notice of demand and security to the satisfaction of the Commissioner of Income-tax is furnished for the payment of the balance.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

126. The income on which tax is payable under the above-mentioned provisions will not be included in the total income of the declarant for the purpose of any assessment to income-tax, excess profits tax, business profits tax, super profits tax, or surtax under the relevant Acts. Consequently, the declarant will also be immune from the imposition of any penalty or prosecution under those Acts. Companies in which the public are not substantially interested will also not be liable to pay additional super tax or income-tax under the 1922 Act or the 1961 Act, for failure to make a distribution out of such income up to the statutory percentage.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

127. The tax paid on the income declared under the scheme will not be refunded in any circumstances. The declarant will also not be entitled to claim any relief or set off in respect of the income on which tax is payable under the scheme in any appeal, reference, revision or other proceedings relating to any assessment made in his case under the 1922 Act or the 1961 Act, the Excess Profits Tax Act, the Business Profits Tax Act, the Super Profits Tax Act or the Companies (Profits) Surtax Act.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

128. The declaration under the scheme is required to be made to the Commissioner of Income-tax concerned. Full information has to be furnished in the declaration, inter alia, as to the previous year or years in which the income was earned and the amounts relating to each such year (to the extent such information is available), and the form in which the income declared is held, i.e., whether in cash or as bank deposits, or in the form of bullion, shares, debts due from other persons, commodities or any other assets; and the location of such assets. The object of requiring these particulars is to safeguard the declarant against the possibility of being assessed subsequently to income-tax, excess profits tax, business profits tax, super profits tax or surtax in respect of the income on which tax is paid by him under the scheme. The declarant is entitled to obtain a certificate from the Commissioner, stating the particulars of the income on which tax has been paid by him and the amount of the tax paid. The certificate can be obtained only after the full amount of tax including any interest payable thereon has been paid.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

129. It may be mentioned that the provisions of section 24 of the Finance (No. 2) Act, 1965, do not affect, in any manner, the provisions of section 271(4A), which continue to be in force. Under that section, the penalty leviable for non-submission of return or for concealment of income may be waived or reduced by the Commissioner of Income-tax, and immunity from prosecution granted, where the assessee makes a voluntary disclosure of his concealed income before it is detected by the Income-tax Officer, and co-operates in the subsequent inquiry and makes satisfactory arrangements for payment of the tax on such income. A person who desires to make a disclosure of unaccounted income may do so either under the scheme contained in section 24 of the Finance (No. 2) Act, 1965, or under section 271(4A), whichever he may choose.

JUDICIAL ANALYSIS

FINANCE ACT, 1965

  1. Ahmed Ibrahim Sahigra Dhoraji v. CWT [1981] 129 ITR 314 (SC)

The declaration contemplated under section 68 is a declaration in respect of income of earlier years, which had been concealed and on which tax was payable during the relevant assessment years in the ordinary course. It could not be said that the amount declared under section 68 of Finance Act, 1965 was not income which was not taxable under the Indian Income-tax Act, 1922, or the Income-tax Act, 1961, as the case may be. The true position is that the amount declared has the liability to pay income-tax embedded in on the valuation date but only the ascertainmebnt of that liability is postponed to a future date. Thus, no new charge is created under section 68.

2. Bhawanidas Binani v. CWT [1980] 121 ITR 442 (Bom.) Tax paid under section 68 of the Finance Act, 1965 is a ‘debt owed’ for the purposes of section 2(m) of the 1957 Act, and, therefore, it is deductible.

3. Aminchand Payarilal v. ITO [1973] 87 ITR 305 (Cal.) The concession provided under section 68 of the Finance Act, 1965 does not extend to an exemption from tax in the ordinary course under the provisions of the Income-tax Act for the period covered by the disclosure petition. Regular assessments must be made but in making these assessments the ITO should exclude any amount included in such disclose petition on which taxes have been paid. The ITO is not precluded from requiring the assessee to produce evidence in support of other hundi loans not included in the disclosure made by the assessee under section 68 of the Finance Act, 1965. It would be wrong to assume that the disclosure would cover all siources of undisclosed income

4. R.G. Govan & Co. (P.) Ltd. v. CIT [1967] 65 ITR 158 (Punj.) A plain reading of clauses ( i) to (iii) of section 68 shows that a person making a disclosure is entitled to take benefit under any of the three clauses. An assessee is entitled to make a disclosure at any time before 1-6-1965, but after 28-2-1965, as is provided in the proviso to sub-section (2) of section 68. Having done so, he may wait till 31-5-1965, to pay any amount, not less than 50 per cent of the tax due and furnish adequate security for payment of the balance by the said date as provided in clause (iii) of sub-section (1) of section 68. The requirement as to specification of period of sub-section (2) does not apply to an assessee choosing to take the benefit of clause (iii) of section 68(1). Period is required to be specified by clause (ii) with respect to the entire tax due on the disclosed amaount in the declaration while under clause (iii) he may give an undertaking to pay the ‘balance’ at any time before 31-5-1965. In such an event, the assessee cannot obviously specify the period in the declaration. Thus no period need by specified in case an assessee decides to pay in accordance with clause (iii) of section 68(1).

FINANCE (NO.2) ACT, 1965

1. Jamnaprasad Kanhaiyalal v. CIT [1981] 130 ITR 244 (SC)-Section 24 of the Finance (No.2) Act, 1965, could not be construed as conferring any benefit, concession or immunity to any person other than the person making the declaration and the non obstante clause contained in the said section did not preclude the department from proceeding against the person to whom the disclosed income actually belonged. The protection enjoyed by the declarant under the said section extended only to the amounts declared, being not liable to be added in any assessment of the declarant.

2. ITO v. Rattan Lal [1984] 145 ITR 183 (SC)/Radhe Shyam Tibrewal v. CIT [1984] 145 ITR 186 (SC). The immunity enjoyable by the declarants under section 24 of the Finance (No. 2) Act, 1965 under the Voluntary Disclosure Scheme should be confined to the declarants and cannot be extended to the assessment of a third party.

3. CIT v. Salig Ram Prem Nath [1984] 18 Taxman 77 (Punj. & Har.)- In the relevant accounting year, the ITO noticed certian cash credits in the books of the assessee-firm, out of which part of the deposits were supported by affidavits of the depositors to the effect that they had made voluntary disclosure of the respective amounts under section 24 of the Finance (No. 2) Act, 1965. The remaining deposits were in the names of minor sons and daughters of the partners of the assessee-firm and declarations under the Voluntary Disclosure Scheme for these amounts had been made on their behalf by thier guardians. The ITO included the entire amount of the deposits in the income of the assessee.

The Court held that as far as the persons who had themselves declared their respective incomes under section 24 of the Finance (No. 2) Act, 1965 were concerned, as the persons had themselves made the necessary declarations and paid the tax on this  income and their affidavits showed that at the relevant time they had the relevant amounts of money which they invested with the assessee, to the extend of these deposits, it had to be held that the assessee had discharged the burden and these sums could not be included as the assessee’s income. In respect of the deposits in the names of minor sons and daughters of the partners of the assessee-firm where declarations under the Voluntary Disclosure Scheme had been made by their guardians, the issue stood concluded against the assessee by the judgment of the Supreme Court in Jamnaprasad Kanhaiyalal v. CIT [1981] 130 ITR 244, in which it was held that the declaration was required to be made in respect of the amount which represented the income of the declarant, and section 24(3) could not be invoked in assessment proceedings relating to any person other than the person making the declaration so as to rule out the applicability of section 68 of the Income-tax Act. Therefore, the department could include the said deposits, i.e., deposits in the name of minor sons and daughters of partners, in the assessee’s income.

4. Pioneer Trading Syndicate v. CIT [1979] 120 ITR 5 (All) (F.B.)- Disclosure may not earn any immunity from investigation. The certificate granted by the Commissioner as to the particulars of the voluntarily disclosed income cannot be treated as final so as not to be questionable before any court of law or before any authority. The fact that a certain person has made a declaration voluntarily disclosing certain amounts as his income will be relevant and admissible as a piece of evidentiary value. Certainly it will not be conclusive. While considering the explanation of the assessee, the revenue will in law be entitled to be satisfied, inter alia, that the declarant had the capacity to earn the amounts disclosed by him.

JUDICIAL ANALYSIS

The decision of the Allahabad High Court in Badri Pd. & Sons v. CIT [1975] 98 ITR 657 (All.) slightly modified by observing that the fact of declaration and the payment of tax on it are admissible materials, but the revenue can ask for satisfaction of the fact that the declarant had really earned that amount before accepting the explanation.

Note : This case has been approved in Jamnaprasad Kanhaiyalal v. CIT [1981] 130 ITR 244 (SC).

1. Mst. Zulekha Begum (Khatoon) v. CIT [1981] 129 ITR 560 (Cal.) Where in respect of certain cash and loan deposits appearing in the assessee’s books, the Tribunal, inter alia, found (i) that the alleged creditors and depositors were the relations of the assessee; (ii) that the summons issued to them at the addresses furnished by the assessee had come back unserved; (iii) that the assessee did not take any steps to produce them before the ITO; and (iv)  that the declaration made by the said persons under section 24 of the Finance (No. 2) Act, 1965 protected only the declarants and that such protection did not extend to third parties in whose books of  account the amounts were shown, and accordingly, sustained the addition of aforesaid amounts, it was held that none of the primary facts nor the conclusions or inferences derived therefrom having been challenged by the assessee, it was not open to the High Court to arrive at a different conclusion from what had been reached by the Tribunal.

2. Sunita Sabharwal v. CIT [1973] 92 ITR 377 (Delhi)- The declaration making a voluntary disclosure of an income under section 24 of the Finance (No. 2) Act, 1965 is in the nature of a return of income provided for under section 139 of the Income-tax Act. As such, in the case of a minor, the declaration can be signed only by some person competent to act on his or her behalf. In the presence of the father, the mother cannot file the declaration and sign it on behalf of the minor as the father is the only person who is competent in law to do so. The mother comes only after the father, i.e., if the father is no more in existence or capable to act.

Thus, where declarations of voluntary disclosure of income under section 24 were submitted on behalf of the minors through persons other than the natural guardian, it was held   that the ITO was right in returning the same with the objection  that the same were invalid as they did not bear the signature of the natural guardian of the minors.

3. Union of India v. Tulsidas Bhimji [1977] 109 ITR 557 (Cal.)- For determining the income-tax payable on declaration of income contemplated under section 24 of the Finance (No.2) Act, 1965 which is accepted unless there is a proceeding under sub-section (4), there is not scope for any hearing of appeal. Consequently, the Commissioner cannot issue any direction for such hearing, in the absence of such a proceedings.

In this case, B, who was a partner in two firms, died leaving his widow and sons as his heirs and legal representative. A voluntary disclosure made by the widow was accepted by the Commissioner. The widow paid a portion of the tax due and notices of demand for the balance were issued on the other legal representatives. When one of the legal representatives objected to the issue of notice, the Commissioner set aside the order and directed the ITO to assess the amount payable by the appellant after given him opportunity of hearing.

The Court held that the direction given by the Commissioner was without any legal basis, since there was no proceeding under section 24(4)

5. Amendments to Surtax Act

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Rates of surtax

130. The Finance Act, 1965 has made several amendments to the Companies (Profits) Surtax Act, 1964, all of which are effective for the assessment year 1965-66 and subsequent assessment years. Several of these amendments are consequential to the integration of super tax with income-tax. These amendments do not affect the substance of the relevant provisions. Besides these, two important amendments have been made to the Third Schedule to the above-mentioned Act. One of these amendments consists of the addition of a new proviso to Paragraph 1 of the Third Schedule which prescribes the rates of surtax. This proviso applies in the case of an Indian company or a foreign company which has made the prescribed arrangements for the declaration and payment of dividends within India and which, in either case, satisfies the following conditions, namely (a) that it is a company in which the public are substantially interested or a wholly-owned subsidiary of such a company, and (b) that its paid-up share capital (subscribed and paid for in cash), as on the last date of the previous year, is not less than 25 per cent of the amount of its capital as computed under the Second Schedule to the Companies (Profits) Surtax Act, 1964. In the case of such a company, the aggregate liability to income-tax (as reduced by the amount of any income-tax charged on it with reference to the face value of the bonus shares or the bonus issued by it to its shareholders during the previous year) and surtax for the assessment year 1965-66 and any subsequent year, will be limited to 70 per cent of its total income, by deducting any excess from the amount of surtax payable by it.

FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

List of articles relating to priority industries

131. The other amendment relates to Paragraph 2 of the Third Schedule to the above-mentioned Act, which enumerates the list of articles relating to priority industries, the profits derived from the manufacture or production of which qualify for a rebate of 20 per cent of the surtax attributable thereto. This list has been enlarged by the addition of certain new articles and industries which are identical to those added to the similar list in Part III of the First Schedule to the Finance Act, 1965. The articles and things newly added to the list in the said Paragraph 2 are : flame and drip-proof motors, agricultural implements, motor trucks and buses, malleable iron and steel castings, calcium ammonium nitrate, soda ash, pesticides, ships, automobile ancillaries, seamless tubes, gears, ball, roller and tapered bearings, and cotton seed oil. The entry relating to machine tools and precision tools has also been enlarged to include their attachments and accessories, cutting tools and small tools.

 FINANCE ACT, 1965 AND

FINANCE (NO. 2) ACT, 1965

Agreement with foreign Government

132. The Finance (No. 2) Act, 1965 has made another amendment to the Companies (Profits) Surtax Act, 1964 by way of inserting a new section 24A in the Act. This section authorises the Central Government to enter an agreement with the Government of any foreign country for (a ) the granting of relief in respect of chargeable profits on which have been paid both surtax under the Companies (Profits) Surtax Act and tax of a similar character or income-tax on such profits in that country, or (b) for the avoidance of double taxation of chargeable profits under the said Act and under any law relating to the taxation of income or profits in force in that country.

APPENDIX I

EFFECTIVE RATES OF INCOME-TAX IN THE CASE OF COMPANIES FOR THE ASSESSMENT YEAR 1965-66 ON INCOME OTHER THAN CAPITAL GAINS

[See paragraph 51 of the Circular]

Class of company
General rate
Special rate of income-tax, where applicable, in respect of
(i) Profits and gains from generation or distribution of electricity or construction or production of articles or things specified in Part III of the First Schedule to the Finance Act, 1965
(ii) Dividends from Indian company or a foreign company declaring and paying its dividends within India which is
(iii) Royalties received from an Indian concern under a post 31-3-1961 agreement and fees for technical services received from an Indian concern under a post 29-2-1964 agreement approved in both cases, by the Central Government
a company in which the public are substantially interested
a closely held Indian company wholly or mainly engaged in generation or distribution of electricity or in manufacturing, constructing or producing, the articles or things specified in the Third Schedule to the Companies (Profits) Surtax Act, 1964
1
2
3
4
5
6
I. Indian company or a company which declares and pays its dividends in India:

(a) Company in which the public are substantially interested or a wholly-owned subsidiary or such a company:
(1) Where the total income does not exceed Rs. 25,000
42.5%
25%
25%
(2) Where the total income exceeds Rs. 25,000
50%
45%
25%
25%
(b) Company in which the public are not substantially interested:
(1) Company wholly or mainly engaged in generation or distribution of electricity or any other form of power or in constructing ships or in the manufacture or processing of goods or in mining:
(i) on the first Rs. 10 lakhs of the profits
50%
45%
25%
25%
(ii) on profits exceeding Rs. 10 lakhs
60%
54%
25%
25%
(2) any other company
60%
54%
25%
25%
II. Foreign company which declares and pays dividends India
65%
25%
15%
50%

Note : The term “closely – held Indian Company” in Col. 5 above means an Indian Company in which public are not substantially interested.

APPENDIX II

RATES FOR DEDUCTION OF TAX AT SOURCE DURING THE FINANCIAL YEAR 1965-66

[See paragraph 62 of the Circular]

In respect of
Rates for deduction of tax
1. Dividends payable to —
(a) person, other than a company, who is –
(i) resident in India
20%
(ii) not resident in India
30%
[or the tax calculated on the total amount payable, in accordance with the rates in the rate schedule in Paragraph A of Part I of the First Schedule to the Finance Act, 1965, whichever is greater]
(b) a company which is-
(i) an Indian company, or a foreign company declaring and paying its dividends within India
20%
(ii) a foreign company declaring and paying its dividends outside India
25%
[15 percent where the dividend is payable by an Indian company in which the public are not substantially interested and which is wholly or mainly engaged in certain priority industries]
2. Interest on securities payable to-
(a) a person, other than a company who is-
(i) resident in India
20%
(ii) not resident in India
30%
[or the tax calculated on the total amount payable, in accordance with the rates in the rate schedule in Paragraph A of Part I of the First Schedule to the Finance Act, 1965, whichever is greater]
(b) a company which is –
(i) an Indian company, or a foreign company declaring and paying its dividends within India
20%
(ii) a foreign company declaring and paying its dividends outside India
65%
3. Royalties or fees for rendering technical services receivable by a foreign company declaring and paying its dividends outside India, from an Indian concern, respectively, under a post 31-3-1961 and a post – 29-2-1964 agreement, approved by the Central Government
50%
4. Any interest other than interest on securities and any other sum chargeable to tax, payable to –
(a) a person, other than a company, not resident in India
30%
[ or the tax calculated on the total amount payable, in accordance with the rate schedule in Paragraph A of Part I of the First Schedule to the Finance Act, 1965, whichever is greater]
(b) a foreign company declaring and paying its dividends outside India
65%

More Under Income Tax

Leave a Comment

Your email address will not be published. Required fields are marked *