Circular No. 3-P-Income Tax dated 11/10/1965

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 :

 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:

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)

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]

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]