FINANCE ACT, 1985 – CIRCULAR NO. 421, DATED 12-6-1985
1. Amendments at a glance
 SECTION/SCHEDULE   PARTICULARS
Finance Act
2 & 1st Sch. Rate structure 4-6
Income-tax Act
2(18) Amendment of definition of company in which the public are substantially interested 7
10(10B) Modifications of provisions relating to retrenchment compensation received by a workman 8
10(15) Exemption from income-tax in respect of interest payable to foreign banks performing central banking functions 9
10(26A) Exemption in respect of income of residents of Ladakh extended for further period of three years 10
16(i) Modification of provisions relating to standard deduction in the case of salaried taxpayers 11
17(2)(iii)(c) Modification of provisions relating to perquisites 12
17(2)(vi), 40A(5), Discontinuance of provision for taxation of perquisites
Expln. 2 (b) represented by interest free loans or loans at concessional rate of interest to employees 13
33AB New provisions relating to deduction of contributions to special account with the National Bank for Agriculture and Rural Development 14
35AB New provisions relating to deduction in respect of expenditure on know-how 15
35CC Withdrawal of deduction relating to rural development allowance 16
36(1)(vii)/(viia) Modification of provisions relating to bad and doubtful
& 36 (2) debts made by banking companies 17
36(1)(viii)/(viiia) Modification of provisions relating to deductions in respect of reserves in the case of financial corporations, notified banks, etc. 18
37 Withdrawal of provision for partial disallowance of certain items of business expenditure 19
40A(8) Withdrawal of provisions for partial disallowance of interest paid by non-banking non-financial companies on public deposits 20
40A(12), 58(1) Disallowance of expenditure incurred in connection
(a)(ia) & 80VV with certain proceedings under the Income-tax Act 21
44AB Modification of provisions relating to audit of accounts of certain persons carrying on business or profession 22
53 & 54 Consequential amendment in the provisions relating to exemption of capital gains from a residential house 23
80F Withdrawal of deduction in respect of educational expenses in certain cases 25
80G Modification of provision relating to deduction in respect of donations to certain funds, charitable institutions, etc. 26
80CC Modification of provision relating to deduction in respect of investment in certain new shares 24
80HHC Modification of provisions relating to incentive for export 27
80-I Period extended by another 5 years for deduction in respect of profits and gains from industrial undertakings, etc. 28
80JJ Withdrawal of deduction in respect of profits and gains from business of livestock breeding or poultry or dairy farming 29
80N Withdrawal of deduction in respect of dividends received from certain foreign companies 30
80QQA Extension of tax concession in respect of income of authors of text books in Indian languages 31
80V Withdrawal of deduction of interest on moneys borrowed to pay taxes 32
115 Modification of provisions relating to long-term capital gains in the case of companies 33
115E Modification of provisions relating to certain incomes of non-residents 34
136 Modification of provisions relating to proceedings before income-tax authorities 35
139(1A)(b) Modification of provisions relating to return of income 36
Clause (e) of Consequence of non-submission of report of audit of
Expln. to cost accounts along with returns 37
Section 139(9)
167A Modification of provisions relating to taxation of associations of persons where shares of members are indeterminate or unknown 38
180A New provisions providing for concessional taxation of consideration for know-how 39
208 Raising of threshold for payment of advance tax in certain cases 40
245D Clarificatory amendment of provision or payment of income-tax in case of application to the Settlement Commission 41
273A Modification of provisions relating to reduction or waiver of penalty under section 273A in certain cases 42
278A Amendment of provision relating to punishment for second and subsequent offences 43
Wealth-tax Act
5(1)(i), proviso Withdrawal of exemption from wealth-tax in respect of business assets of charitable and religious trusts 44
Clause (iv) of Modification of provisions relating to exemption from
sub-sec. (1), wealth-tax in respect of certain assets 45
sub-secs. (1A)
& (3) of sec. 5
18B Modification of provisions relating to reduction or waiver of penalty in certain cases 46
22D Clarificatory amendment of provision for payment of wealth-tax in case of application to the Settlement Commission 47
Sch. 1 Reduction in the rates of wealth-tax 48-52
interest-tax act
6(2) Interest-tax not to be charged after 31-3-1985 53
2. Rate structure
Rates of income-tax in respect of incomes liable to tax for the assessment year 1985-86
4.1 In respect of incomes of all categories of tax-payers (corporate as well as non-corporate) liable to tax for the assessment year 1985-86, the rates of income-tax (including surcharge thereon) have been specified in Part I of the First Schedule to the Finance Act. These rates are the same as those laid down in Part III of the First Schedule to the Finance Act, 1984 for the purposes of the computation of “advance tax”, deduction of tax at source from “Salaries” and retirement annuities payable to partners of registered firms engaged in specified professions, and computation of tax payable in certain cases during the financial year 1984-85.
Finance Act, 1985
4.2 The Finance Act, 1984 had allowed companies, which were required to pay “advance tax” during the financial year 1984-85 to make a deposit with the Industrial Development Bank of India in lieu of the surcharge on income-tax payable by them. The Finance Act, 1985 has accordingly made a provision that where a company has made a deposit during the financial year 1984-85 with the Industrial Development Bank of India under the Companies Deposits (Surcharge on Income-tax) Scheme, 1984 framed by the Central Government under section 2(7) of the Finance Act, 1984, and the amount of the deposit so made is equal to or exceeds the amount of surcharge on income-tax payable by it, the surcharge payable by it shall be nil. Where the amount of deposit so made falls short of the amount of the surcharge, the surcharge payable by the company shall be reduced by the amount of the deposit so made.
Finance Act, 1985
Rates for deduction of tax at source during the financial year 1985-86 from income other than “Salaries” and retirement annuities
5. The rates for deduction of income-tax at source during the financial year 1985-86 from incomes, other than “Salaries” and retirement annuities payable to partners of registered firms engaged in specified professions, have been specified in Part II of the First Schedule to the Finance Act. These rates apply to income by way of interest on securities, other categories of interest, dividends, insurance commission, winnings from lotteries and crossword puzzles, income by way of winnings from horse races and income of non-residents (including non-resident Indians) other than salary income. These rates vary from the rates in force during the financial year 1984-85 in three respects. Firstly, in consequence of the proposed reduction in the maximum marginal rate of personal income-tax (referred to in para 6.4 below) to 50 per cent, the rate of deduction of tax at source from winnings from lotteries has been reduced from 30 per cent to 25 per cent, because under section 80TT of the Income-tax Act, a deduction is allowed from such winnings of a sum of Rs. 5,000 plus 50 per cent of the winnings from lotteries in excess of Rs. 5,000. Secondly, in consequence of the proposed discontinuance of the levy of surcharge on income-tax in the case of non-corporate tax-payers (referred to in paragraph 6.3 below), the rates for deduction of tax at source from income of such tax-payers do not also provide for surcharge. Thirdly, in consequence of the proposed reduction in the rates of basic income-tax in the case of companies (referred to in paragraph 6.7 below), the general rate for deduction of tax at source in the case of foreign companies stands reduced from 70 per cent to 65 per cent and the rate of surcharge stands reduced consequentially from 3.50 per cent to 3.25 per cent.
Finance Act, 1985
Rates for deduction of tax at source from “Salaries”, computation of “advance tax” and charging of income-tax in special cases during the financial year 1985-86
6.1 The rates for deduction of tax at source from “Salaries” in the case of individuals during the financial year 1985-86 and also for computation of “advance tax” payable during that year in the case of all categories of tax-payers have been specified in Part III of the First Schedule to the Finance Act. These rates are also applicable for deduction of tax at source during the financial year 1985-86 from retirement annuities payable to partners of registered firms engaged in certain professions (such as, chartered accountants, solicitors, lawyers, etc.) and for charging income-tax during the financial year 1985-86 on current incomes in cases where accelerated assessments have to be made, e.g., provisional assessment of shipping profits arising in India to non-residents, assessment of persons leaving India for good during the financial year 1985-86, assessment of persons who are likely to transfer property to avoid tax, etc. The salient features of the rates specified in the said Part III are indicated hereunder :
Finance Act, 1985
Rates of tax applicable to individuals, Hindu undivided families, unregistered firms, etc.
6.2 Raising of exemption limit – The exemption limit in the case of individuals, Hindu undivided families (other than those with one or more members having independent income exceeding the exemption limit), unregistered firms, associations of persons, etc., has been raised from Rs. 15,000 to Rs. 18,000.
Finance Act, 1985
6.3 Abolition of surcharge – Surcharge on income-tax for purposes of the Union is currently levied at the rate of 12.5 per cent in the case of all categories of non-corporate tax-payers. The levy of surcharge for purposes of the Union has been abolished in the case of all tax-payers (other than companies).
Finance Act, 1985
6.4 Modification in the rates of income-tax – The rate schedule applicable in the case of individuals, Hindu undivided families (other than those having at least one member with independent total income exceeding the exemption limit), unregistered firms, associations of persons, bodies of individuals and artificial juridical persons and the rate schedule applicable in the case of Hindu undivided families with one or more members having independent income exceeding the exemption limit have been restructured. Table 1 and Table 2 below give the rates of income-tax applicable to the aforesaid categories of taxpayers: (a) as specified in Part I of the First Schedule to the Finance Act, i.e., the existing rates; and (b) as specified in Part III of the First Schedule to the Finance Act, i.e., the new rates.
TABLE 1
Slabs of income with rates in the case of individuals, Hindu undivided
families
(other than those covered by Table 2),
unregistered firms, etc.
Income slab
Rates as specified in Part I of the First Schedule to the Finance Act (i.e., existing rates)
Income slab
Rates as specified in Part III of the First Schedule to the Finance Act(i.e., new rates)
Up to Rs. 15,000
Nil
Up to Rs. 18,000
Nil
Rs. 15,001-20,000
20%
Rs. 18,001-25,000
25%
Rs. 20001-25,000
25%
Rs. 25,001-50,000
30%
Rs. 25,001-30,000
30%
Rs. 50,001-1,00,000
40%
Rs. 30,001-40,000
35%
Over Rs. 1,00,000
50%
Rs. 40,001-50,000
40%
Rs. 50,001-70,000
45%
Rs. 70,001-1,00,000
50%
Over Rs. 1,00,000
55%

TABLE 2
Slabs of income with rates in the case of Hindu undivided families,
having one or more members with independent income
exceeding the exemption limit
Income slab
Rates as specified in Part I of the First Schedule to the Finance Act (i.e., existing rates)
Income slab
Rates as specified in Part III of the First Schedule to the Finance Act(i.e., new rates)
Up to Rs. 8,000
Nil
Up to Rs. 12,000
Nil
Rs. 8,001-15,000
22%
Rs. 12,001-20,000
25%
Rs. 15,001-20,000
27%
Rs. 20,001-40,000
30%
Rs. 20,001-25,000
35%
Rs. 40,001-60,000
40%
Rs. 25,001-30,000
40%
Rs. 60,001-1,00,000
50%
Rs. 30,001-50,000
50%
Over Rs. 1,00,000
55%
Over Rs. 50,000
60%

6.5 Table 3 and Table 4 below respectively show the comparative incidence of tax at selected levels of income in the case of the two aforesaid categories of tax-payers at—
            ( a)       the rates applicable during the financial year 1984-85 for the purposes of computation of “advance tax” and deduction of tax at source from “Salaries” (which have been made applicable to incomes assessable for the assessment year 1985-86) ; and
            ( b)       the rates in the Finance Act for computation of “advance tax” and deduction of tax at source from “Salaries” during the financial year 1985-86.
TABLE 3
Comparative incidence of tax at selected levels of income in the case
of individuals, Hindu undivided families
(other than those
covered by Table 4
), unregistered firms, etc.
Income
Income-tax (including surcharge at existing rates)
Income-tax at new rates without surcharge(which has been abolished)
Tax relief
Tax relief as percen- tage of tax in Col. (2)
(Rs.)
(Rs.)
(Rs.)
(Rs.)
(%)
(1)
(2)
(3)
(4)
(5)
16,000
225
Nil
225
100
17,000
450
Nil
450
100
18,000
675
Nil
675
100
19,000
900
250
650
72.22
20,000
1,125
500
625
55.56
21,000
1,406
750
656
44.66
22,000
1,688
1,000
688
40.76
23,000
1,969
1,250
719
36.52
24,000
1,250
1,500
750
33.33
25,000
2,531
1,750
781
30.86
30,000
4,219
3,250
969
22.97
40,000
8,156
6,250
1,906
23.37
50,000
12,656
9,250
3,406
26.91
60,000
17,719
13,250
4,469
25.22
70,000
22,781
17,250
5,531
24.28
80,000
28,406
21,250
7,156
25.19
90,000
34,031
25,250
8,781
25.80
1,00,000
39,656
29,250
10,406
26.24
1,50,000
70,594
54,250
16,344
23.15
2,00,000
1,01,531
79,250
22,281
21.95
3,00,000
1,63,406
1,29,250
34,156
20.90
4,00,000
2,25,281
1,79,250
46,031
20.43
5,00,000
2,87,156
2,29,250
57,906
20.17

TABLE 4
Comparative incidence of tax at selected levels of income in the case of
Hindu undivided families having one or more members with
independent income exceeding the exemption limit
Income
Income-tax (including surcharge at existing rates)
Income-tax at new rates without surcharge(which has been abolished)
Tax relief
Tax relief as percen- tage of tax in Col. (2)
(Rs.)
(Rs.)
(Rs.)
(Rs.)
(%)
(1)
(2)
(3)
(4)
(5)
13,000
450
250
200
44.44
14,000
900
500
400
44.44
15,000
1,350
750
600
44.44
16,000
1,800
1,000
800
44.44
17,000
2,520
1,250
1,000
44.44
18,000
2,644
1,500
1,144
43.27
19,000
2,948
1,750
1,198
40.64
20,000
3,251
2,000
1,251
38.48
21,000
3,645
2,300
1,345
36.90
22,000
4,039
2,600
1,439
35.63
23,000
4,433
2,900
1,533
34.58
24,000
4,826
3,200
1,626
33.69
25,000
5,220
3,500
1,720
32.95
30,000
7,470
5,000
2,470
33.07
40,000
13,095
8,000
5,095
38.91
50,000
18,720
12,000
6,720
35.90
60,000
25,470
16,000
9,470
37.18
70,000
32,220
21,000
11,220
34.82
80,000
38,970
26,000
12,970
33.28
90,000
45,720
31,000
14,720
32.20
1,00,000
52,470
36,000
16,470
31.39
1,50,000
86,220
63,500
22,720
26.35
2,00,000
1,19,970
91,000
28,970
24.15
3,00,000
1,87,470
1,46,000
41,470
22.12
4,00,000
2,54,970
2,01,000
53,970
21.17
5,00,000
3,22,470
2,56,000
66,470
20.61

Finance Act, 1985
Rates of tax applicable to co-operative societies, registered firms and local authorities
6.6 In the case of co-operative societies, registered firms and local authorities, the rates of income-tax have respectively been specified in Paragraph B, Paragraph C and Paragraph D of Part III of the First Schedule to the Finance Act. These rates are the same as those specified in the corresponding Paragraphs of Part I of the First Schedule, except that the levy of surcharge on income-tax has been discontinued.
Finance Act, 1985
Rates of tax applicable to companies
6.7 Modification in the rates of income-tax – The rates of income-tax on companies have been reduced. At present, closely-held domestic companies are classified into two categories that is, (a) industrial companies, and (b) other companies. This classification has been changed and closely-held companies are now being classified as (a) trading and investment companies; and (b) other companies. The rate of income-tax in the case of widely-held domestic companies has been reduced to 50 per cent, from 55 per cent at present. In the case of a closely-held company, the rate of tax is 60 per cent, if the company is a trading company or an investment company, and 55 per cent in the case of all other closely-held companies (including companies currently classified as “industrial companies”). In the case of a foreign company, the basic rate of income-tax has been reduced to 66 per cent, as against 70 per cent at present.
Finance Act, 1985
6.8 The levy of surcharge at the rate of 5 per cent of the income-tax payable by companies is being continued. However, companies will continue to have the option of making, in lieu of payment of surcharge, a deposit with the Industrial Development Bank of India under a scheme to be framed by the Central Government in this behalf. The deposit will have to be made before the due date for payment of the last instalment of “advance tax” in the case of the company. Where the amount of the deposit so made is equal to or exceeds the amount of surcharge on income-tax payable by it, the surcharge payable by it shall be reduced to nil. Where the amount of deposit so made falls short of the amount of surcharge, the surcharge payable by the company shall be reduced by the amount of the deposit so made.
Finance Act, 1985
Partially integrated taxation of non-agricultural income with income derived from agriculture
6.9 As in the past, the Finance Act has provided that in the case of individuals, Hindu undivided families, unregistered firms, other associations of persons, etc., the net agricultural income will be taken into account for computation of “advance tax”and charging of income-tax. These provisions are broadly on the same lines as those in earlier years.
[Section 2 and the First Schedule to the Finance Act]
3. Amendments to Income-tax Act

FINANCE  ACT, 1985

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

7.1 The Finance Act, 1983 amended section 2(18) of the Income-tax Act which contains the definition of “company in which the public are substantially interested”. The section as amended by that Act provides that where shares of a company are not listed on a recognised stock exchange in India, as on the last date of the relevant accounting year, the company will not be regarded as a company in which the public are substantially interested (i.e., a widely-held company) unless the shares of the company, not being shares entitled to a fixed rate of dividend carrying not less than fifty per cent of the voting power have been allotted unconditionally to or acquired unconditionally by and were throughout the relevant previous year beneficially held by the Government or a statutory corporation or a widely-held company or a wholly-owned subsidiary of such company. If the requisite percentage of shares of the company are not so held, the company is regarded as a closely-held company even though fifty per cent or more of its shares are held by the public generally.

FINANCE  ACT, 1985

7.2 The Finance Act has amended section 2(18) of the Income-tax Act to provide that a company which carries on, as its principal business, the business of acceptance of deposits from its members and which is declared by the Central Government under section 620A of the Companies Act to be a Nidhi or a Mutual Benefit Society shall be regarded as a company in which the public are substantially interested.

FINANCE  ACT, 1985

7.3 The amendment takes effect retrospectively from April 1, 1984 that is,the date from which the definition was amended by the Finance Act,1983 and will, accordingly, apply in relation to the assessment year 1984-85 and subsequent years.

[Section 3 of the Finance Act]

FINANCE  ACT, 1985

Modification of the provisions relating to retrenchment compensation received by a workman

8.1 Under the existing provisions, retrenchment compensation received by a workman is exempt from income-tax subject to certain limits. The maximum amount of retrenchment compensation exempt is the sum calculated on the basis provided in section 25F(b) of the Industrial Disputes Act, or Rs. 20,000, whichever is less.

FINANCE  ACT, 1985

8.2 The Finance Act has raised the aforesaid monetary limit of Rs.20,000 to Rs. 50, 000. The Finance Act has also provided that the aforesaid limit shall not apply in cases where the compensation is paid under any scheme which is approved in this behalf by the Central Government, having     regard to the need for extending special protection to the workmen in the undertaking to which the scheme applies and other relevant circumstances.

FINANCE  ACT, 1985

8.3 The amendments take effect from April 1,1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years.

[Section 4(a) of the Finance Act]

FINANCE  ACT, 1985

Exemption from income-tax in respect of interest payable to foreign banks performing central banking functions

9.1 The Finance Act has inserted a new sub-clause (iiia) in clause (15) of section 10 of the Income-tax Act with a view to providing exemption from income-tax in respect of interest payable to any foreign bank performing central banking functions. This exemption  will be available only where the interest is payable in respect of the deposits made by such bank with any scheduled bank in India with the approval of the Reserve Bank of India

FINANCE  ACT, 1985

9.2 The amendment takes effect from April 1, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years.

[Section 4(b) of the Finance Act]

FINANCE  ACT, 1985

Exemption in respect of residents of Ladakh

10.1 Under an existing provision, income accruing or arising to persons who were residents of the district of Ladakh in the accounting year relevant to the assessment year 1962-63 is exempt from income-tax up to the assessment year 1985-86, if such income is derived from any source in the district of Ladakh or outside India.

FINANCE  ACT, 1985

10.2  The Finance Act has extended this exemption for a further period of three years, that is, for the assessment years 1986-87 to 1988-89.

[Section 4(c) of the Finance Act]

FINANCE  ACT, 1985

Modification of provisions relating to standard deduction in the case of salaried taxpayers

11.1 Under the existing provisions of the Income-tax Act, salaried tax- payers are entitled to a standard deduction in the computation of taxable salary. The deduction is allowed in an amount equal to 25 per cent of the salary or Rs. 6,000, whichever is less. The standard deduction is, however, restricted to Rs.1,000 in the following cases :

  (i)  where the employee is provided with a motor car, motor cycle, scooter or other moped by his employer for use otherwise than wholly and exclusively in the performance of his duties ; or

 (ii)  where the employee is allowed the use, otherwise than wholly and exclusively in the performance of his duties, of any one or more motor cars, out of a pool of motor cars owned or hired by the employer.

FINANCE  ACT, 1985

11.2 The Finance Act has inserted a new Explanation in the section to provide that, for the purposes of the aforesaid provision, the use of any vehicle provided by the employer, for journey by the employee from his residence to his office or other place of work, or from such office or other place of work to his residence shall not be regarded as use of such vehicle otherwise than wholly and exclusively in the performance of his duties.

FINANCE  ACT, 1985

11.3 The amendment takes effect from April 1, 1986 and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years.

[Section 5 of the Finance Act]

FINANCE  ACT, 1985

Modification of the provisions relating to “perquisites”

12.1 Under the existing provisions, the value of any benefit or amenity granted or provided free of cost or at concessional rate by an employer to an employee (not being a director of the company or a person who has a substantial interest in the company) is not regarded as a perquisite received by the employee unless the employee’s income under the head “Salaries” exclusive of the value of any benefits or amenities not provided for by way of monetary payment exceeds Rs. 18,000. In the context of the raising of the exemption limit, the Finance Act, 1985 has raised the said limit to Rs. 24,000. It has also been clarified that, in cases where salary is received from more than one employer, the aggregate salary from these employers will have to be taken into account for the purposes of this provision.

FINANCE  ACT, 1985

12.2 The amendment takes effect from April 1, 1986 and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years.

[Section 6(a) of the Finance Act]

FINANCE  ACT, 1985

Discontinuance of the provision for taxation of perquisites represented by interest-free loans or loans at concessional rate of interest to employees

13.1 Under sub-clause ( vi) of clause (2) of section 17 of the Income-tax Act, inserted by the Taxation Laws (Amendment) Act, 1984, where the employer has advanced any loan to an employee for building a house or purchasing a site or a house and a site or for purchasing a motor car, and either no interest is charged by the employer on such loan or interest is charged at a rate which is lower than the rate of interest which the Central Government may specify in this behalf by notification in the Official Gazette, an amount calculated on the following basis is regarded as perquisite received by the employee and charged to tax accordingly :

  (i)  in a case where such loan is advanced without charging any interest, the amount of interest on such loan at the rate notified;

 (ii)  in a case where such loan is advanced by charging interest, at a rate which is lower than the notified rate, the amount of the difference between the interest on such loan at the rate notified and the interest charged by the employer.

FINANCE  ACT, 1985

13.2 The provision does not apply to employees of the Central Government or any State Governments or an employee (not being a director of a company or a person who has a substantial interest in the company) whose income under the head “Salaries” (exclusive of all benefits and amenities not provided for by way of monetary payment) does not exceed Rs. 18,000.

FINANCE  ACT, 1985

13.3 As a measure of relief to salaried taxpayers, the Finance Act has omitted the aforesaid provision with effect from the date of its insertion, namely, 1st April, 1985. In consequence thereof, sub-clause (vi) of clause (b) in Explanation 2  to section 40A(5) of the Income-tax Act, which defines the term “perquisite” for the purposes of the said section to include the perquisite value represented by interest-free loans or loans at concessional rates of interest, has also been deleted.

[Sections 6(b)  and 12(a) of the Finance Act]

JUDICIAL ANALYSIS

EXPLAINED IN – Paragraph 13 was quoted and explained in P. Krishna Murthy v.  CIT [1997] 224 ITR 183 (Kar.), as follows:

“It becomes obvious by reading this circular that even the Cen­tral Board of Direct Taxes clearly opined that once sub-clause (vi) of clause (b) in Explanation 2 to section 40A(5) of the Act, was deleted, the said action can be said to have been taken as a measure of relief to salaried taxpayers. Consequently, the inter­est-free loan or loans could not be treated as perquisites in their hands. It cannot be disputed that for the assessment year 1991-92, the said Central Board of Direct Taxes circular was holding the field.” (p. 185)

EXPLAINED IN – Paragraph 13 was quoted and explained in  CIT v. M.K. Vaidya [1997] 224 ITR 186 (Kar.), as follows :

“The circulars issued by the Central Board of Direct taxes were to only binding on the Tax Department, but were also in the nature of contemporanea exposition furnishing legitimate aid in the construction of the section. If so, there can be no doubt about the purpose behind enacting clause (vi) in the year 1984 and its subsequent deletion by the Finance Act, 1985. The clear implica­tion is that, but for enacting clause (vi), the grant of a loan to an employee for house building purposes was not hitherto covered by section 17(2) inspite of its clause (iii) and there­fore, clause (vi) has to be inserted by the Amending Act of 1984.” (pp. 194-195).

FINANCE  ACT, 1985

Deduction of contributions to special account with the National Bank for Agriculture and Rural Development

14.1 With a view to encouraging persons engaged in the business of growing and manufacturing tea in India to mobilise resources internally for specified purposes, the Finance Act has inserted a new section 33AB in the Income-tax Act. The section provides that where a person who carries on the business of growing and manufacturing tea in India has, during the previous year, deposited with the National Bank for Agriculture and Rural Development any amount in a special account maintained by such person with that Bank in accordance with the scheme approved in this behalf by the Tea Board, such person shall be allowed a deduction of the amount so deposited during the previous year or 20 per cent of the profits from the business of growing and manufacturing tea in India (before making this deduction), whichever is less. Any excess deposit made in the previous year shall be treated as a deposit made by such person in the next following previous year.

FINANCE  ACT, 1985

14.2 Where any amount is withdrawn by such person from the special account with the Bank, for acquiring any asset, being building, machinery, plant or furniture, the actual cost of such asset shall, for the purposes of the Income-tax Act, be reduced by the amount so utilised. Where the amount withdrawn from the special account is utilised for incurring any expenditure for the purposes of the business of growing or manufacturing tea in India, such expenditure shall be reduced by the amount so utilised and only the resultant sum, if any, shall be taken into account for the purpose of computation of income.

FINANCE  ACT, 1985

14.3 Where any amount released from the special account during any previous year by the Bank for being utilised by such person for the purpose of the business of growing and manufacturing tea in India, in accordance with the scheme, is not so utilised during that previous year, the unutilised amount shall be deemed to be the profits and gains from business and accordingly chargeable to income-tax as the income of such person of that previous year.

FINANCE  ACT, 1985

14.4 The deduction under section 33AB shall be subject to the provisions of section 80VVA relating to restriction on the aggregate amount to be allowed as deduction in the case of companies.

FINANCE  ACT, 1985

14.5 The new provision takes effect from April 1, 1986 and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years.

[Sections 7 and 36(d)( i) of the Finance Act]

FINANCE  ACT, 1985

Deduction in respect of expenditure on “know-how”

15.1 With a view to providing further encouragement for indigenous scientific research, the Finance Act has inserted a new section 35AB in the Income-tax Act. The section provides that any lump sum consideration paid by the taxpayer for acquiring any know-how for use for the purposes of his business will be allowed as deduction by spreading it over 6 years, namely, the year in which the lump sum consideration is paid and the five immediately succeeding years. Where the “know-how” is developed in a laboratory, university or institution, referred to in sub-section (2B) of section 32A, the consideration shall be spread equally over 3 years.

FINANCE  ACT, 1985

15.2 For the purposes of this section, “know-how”means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil well or other source of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto)

FINANCE  ACT, 1985

15.3 The new section will apply in relation to the assessment year 1986-87 and subsequent years.

[Section 8 of the Finance Act]

FINANCE  ACT, 1985

Withdrawal of deduction relating to rural development allowance

16.1 Section 35CC of the Income-tax Act relating to rural development allowance provides that where a company or a co-operative society incurs any expenditure on any programme of rural development, the expenditure so incurred shall be deducted in computing the taxable profits. The deduction is to be allowed only if the approval of the prescribed authority has been obtained in respect of the programme before incurring the expenditure.

FINANCE  ACT, 1985

16.2 The concession is open to abuse as the correctness of claims in  respect of expenditure incurred on rural development programmes is difficult to verify. The Finance Act has discontinued  this concession except in relation to programmes of rural development which have been approved by  the prescribed authority before March 17, 1985 by providing that no such programme shall be approved after March 16, 1985.

[Section 9 of the Finance Act]

FINANCE  ACT, 1985

Deduction in respect of provisions made by banking companies for bad and doubtful debts

17.1 Section 36(1)(vii ) of the Income-tax Act provides for a deduction in the computation of taxable profits of the amount of any debt or part thereof which is established to have become a bad debt in the previous year. This allowance is subject to the fulfilment of the conditions specified in sub-section (2) of section 36.

FINANCE  ACT, 1985

17.2 Section 36(1)(viia ) of the Income-tax Act provides for a deduction in respect of any provision for bad and doubtful debts made by a scheduled bank or a non-scheduled bank in relation to advances made by its rural branches, of any amount not exceeding 1½ per cent of the aggregate average advances made by such branches.

FINANCE  ACT, 1985

17.3 Having regard to the increasing social commitments of banks, section 36(1)(viia) has been amended to provide that in respect of any provision, for bad and doubtful debts made by a scheduled bank [not being a bank approved by the Central Government for the purposes of section 36(1)(viiia) or a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank, an amount not exceeding ten per cent of the total income (computed before making any deduction under the proposed new provision) or two per cent of the aggregate average advances made by rural branches of such banks, whichever is higher, shall be allowed as a deduction in computing the taxable profits.

FINANCE  ACT, 1985

17.4 Section 36(1)(vii ) of the Act has also been amended to provide that in the case of a bank to which section 36(1)(viia) applies, the amount of bad and doubtful debts shall be debited to the provision for bad and doubtful debts account and that the deduction admissible under section 36(1)(vii) shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account.

FINANCE  ACT, 1985

17.5 Section 36(2) has been amended by insertion of a new clause (v) to provide that where a debt or a part of a debt considered bad or doubtful relates to advances made by a bank to which section 36(1)(viia) applies, no such deduction shall be allowed unless the bank has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debt account made under clause (viia) of section 36(1).

[Sections 10(a)( i),(ii) and 10(b) of the Finance Act]

FINANCE  ACT, 1985

Modification of the provisions relating to deductions in respect of reserves in the case of financial corporations, notified banks, etc.

18.1 Financial corporations engaged in providing long-term finance for industrial or agricultural development in India or public companies providing long-term finance for construction or purchase of houses in India for residential purposes are entitled to a deduction, in the computation of their taxable profits of an amount not exceeding 40 per cent of the total income carried to a special reserve. Under the existing provisions, the total income for this purpose is the total income as computed before making any deduction under Chapter VI-A. The Finance Act provides that the deduction shall be of an amount not exceeding 40 per cent of the total income as computed before  making any deduction under the aforesaid provision and Chapter VI-A.

FINANCE  ACT, 1985

18.2 Under another provision, scheduled banks, other than foreign banks, which are engaged in banking operations outside India and approved by the Central Government in this behalf are also entitled to a deduction up to 40 per cent of their total income computed before making any deduction under ChapterVI-A carried by them to a reserve account. The Finance Act provides  that the deduction shall be of an amount not exceeding 40 per cent of the  total income as computed before making any deduction under the aforesaid provision and Chapter VI-A.

FINANCE  ACT, 1985

18.3 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year  1985-86 and subsequent years.

[Section 10(a)( iii) of the Finance Act]

FINANCE  ACT, 1985

Withdrawal of provision for partial disallowance of certain items of business expenditure

19.1 Section 37(3A) of the Income-tax Act provides that where the aggregate expenditure incurred by a taxpayer on any one or more of specified items of expenditure exceeds Rs. 1 lakh, twenty per cent of the such excess shall not be allowed as deduction in computing the taxable profits. The following items of expenditure have been specified for the purpose of this disallowance :

 (a)  Advertisement, publicity and sales promotion.

 (b)  Running and maintenance of aircraft and motor cars.

  (c)  payments made to hotels.

FINANCE  ACT, 1985

19.2 On a review of these provisions, it has been decided to discontinue this disallowance. The Finance Act has accordingly amended section 37 to achieve this objective.

FINANCE  ACT, 1985

19.3 This amendment takes effect from April 1, 1986 and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years.

[Section 11 of the Finance Act]

FINANCE  ACT, 1985

Withdrawal of provision for partial disallowance of interest paid by non-banking non-financial companies on public deposits

20.1 Sub-section (8) of section 40A of the Income-tax Act provides for partial disallowance of interest paid by non-banking non-financial companies on deposits [other than those specifically excluded under clause (b) of the Explanation to the said sub-section] received by them. Under this provision, fifteen per cent of the expenditure incurred by way of interest paid on such deposits is disallowed in computing the profits and gains of business in the case of a company other than a banking company or a financial company.

FINANCE  ACT, 1985

20.2 This provision was introduced in the context of the levy of interest-tax on the interest income of banks. As the levy of interest-tax is being discontinued under section 41 of the Finance Act, the aforesaid provisions relating to disallowance of a portion of the interest paid by companies on their deposits has also been discontinued. As a consequence of omission of section 40A(8) of the Income-tax Act, the Tenth Schedule to the Act containing the list of institutions and bodies which are exempt from the operation of section 40A(8) has also been omitted by the Finance Act.

FINANCE  ACT, 1985

20.3 The Explanation to sections 269SS and 269T provide that for the purposes of the respective sections, “banking company” shall have the meaning assigned to it in clause (a) of the Explanation to section 40A(8). With the omission of section 40A(8), the Finance Act has provided a definition of the term “banking company” on the same lines in section 269SS. This definition will also apply for the purposes  of section 269T of the Act.

FINANCE  ACT, 1985

20.4 These amendments take effect from April 1,1986 and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years.

[Sections 12(b), 36(f), 36(g ) and 36(h) of the Finance Act]

FINANCE  ACT, 1985

Disallowance of expenditure incurred in connection with certain proceedings under the Income-tax Act

21.1 Under section 80VV of the Income-tax Act, any expenditure incurred by an assessee in respect of any proceedings before any income-tax authority or the Appellate Tribunal or any court relating to the determination of any liability under the Income-tax Act by way of tax, penalty or interest is allowed as a deduction in the computation of the taxable income, subject to a ceiling of Rs. 5,000. The Finance Act has deleted the aforesaid provision and inserted a new sub-section (12) in section 40A of the Income-tax Act to provide that no deduction shall be allowed in excess of Rs. 10,000 for any assessment year in respect of any expenditure incurred by the assessee by way of fees or other remuneration paid to any person (other than an employee of the assessee)—

 (a)  for services (not being services by way of preparation of return of  income) in connection with any proceeding under the Income-tax Act before any income-tax authority or the Settlement Commission or the competent authority under Chapter XX-A of the said Act or the Appellate Tribunal or any court ;

 (b)  for services in connection with any other proceeding before any court, being a proceeding relating to tax penalty, interest or any other matter under the Income-tax Act ; and

  (c)  for any advice in connection with tax penalty, interest or any other matter under the Income-tax Act.

FINANCE  ACT, 1985

21.2 The Finance Act has also inserted a new sub-clause (ia) in clause (a) of sub-section (1) of section 58 of the Income-tax Act to provide that any expenditure of the nature referred to in sub-section (12) of section 40A of the Income-tax Act shall not be allowed as deduction in computing the income chargeable under the head “Income from other sources”. The effect of this amendment is that no part of the expenditure of the nature referred to in clauses (a) to (c) of sub-section (12) of section 40A will be allowed as a deduction in computing the income chargeable under the head “Income from other sources”. This prohibition will apply even in cases where such expenditure is not in excess of Rs. 10,000.

FINANCE  ACT, 1985

21.3 These amendments take effect from April 1, 1986 and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years.

[Sections 11(a), 12(c), 15, 25 and 36( a)(i) of the Finance Act]

FINANCE  ACT, 1985

Modification of the provisions relating to audit of accounts of certain persons carrying on business or profession

22.1 Under the provisions of section 44AB inserted in the Income-tax Act by the Finance Act, 1984, every person carrying on business or profession is required to get his accounts audited by an “accountant” if his total sales, turnover or gross receipts in business or profession are in excess of certain limits. The proviso to the said section lays down that where such person is required by or under any other law to get his accounts audited by an “accountant”, it shall be sufficient compliance with the provisions of the said section if such person gets the accounts of such business or profession audited under such other law and obtains the report of the audit as required under such other law and a further report in the form prescribed under the said section. An “accountant” for the purposes of section  44AB means a chartered accountant within the meaning of the Chartered Accountants Act, 1949, and includes in relation to any State any person who is entitled by virtue of section 226(2) of the Companies Act, 1956 to be appointed to act as an auditor of companies registered in that State.

FINANCE  ACT, 1985

22.2 As the accounts in certain cases may be required to be audited by or under any other law by an auditor who may not be an “accountant” within the meaning of the term as defined for the purposes of section 44AB, the Finance Act has amended the existing provisions to secure that, in a case where the accounts of an assessee are required to be audited by or under any other law, it will suffice if the assessee gets his accounts audited under such other law, even though the person auditing the accounts under that law may not be an “accountant” within the meaning of the term, as defined for the purposes of section 44AB, and obtains the report of the audit under such other law and a further report, from the same person or from an “accountant” as defined for the purposes of the said section in the form prescribed under the said section.

FINANCE  ACT, 1985

22.3 This amendment takes effect from April 1, 1985, i.e., from the date the provisions of section 44AB came into force under the amendment made by the Finance Act, 1984.

[Section 13 of the Finance Act]

FINANCE  ACT, 1985

Consequential amendment in the provisions relating to exemption of capital gains from a residential house

23.1 Section 53 of the Income-tax Act as amended by the Taxation Laws (Amendment) Act, 1984 with effect from 1st April, 1985, provides for complete exemption of long-term capital gain arising from transfer of a residential house in cases where the consideration for the transfer does not exceed Rs. 2 lakhs. In cases where the consideration exceeds Rs. 2 lakhs, the capital gain is exempted proportionately. Section 54 of the income-tax Act provides for exemption of long-term capital gain arising from the sale of a residential house, in a case where the capital gain is used for construction or purchase of another residential house. Section 54 in terms provides that the provisions of the said section shall apply to a long-term capital asset to which the provisions of section 53 are not applicable.

FINANCE  ACT, 1985

23.2 The above-quoted words in section 54 have been omitted by the Finance Act. The effect of this omission will be that exemption under the said section shall not be denied in cases where a part of the capital gain arising from transfer of a house property is exempt under section 53 of the Income-tax Act.

FINANCE  ACT, 1985

23.3 The amendment takes effect from April 1, 1985 and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years.

[Section 14 of the Finance Act]

FINANCE  ACT, 1985

Modification of provision relating to deduction in respect of investment in certain new shares

24.1 Under the existing provisions of section 80CC of the Income-tax Act, a taxpayer subscribing to new equity shares is allowed a deduction in the computation of his taxable income of an amount equal to  50 per cent of the amount invested by him. If the amount invested in a year exceeds Rs. 20,000, the deduction is allowed with reference to an investment of Rs. 20,000 only. The tax concession is available only in respect of subscriptions to an “eligible issue of capital”.

FINANCE  ACT, 1985

24.2 For the purposes of this provision, “eligible issue of capital” means an issue of equity shares which satisfies certain conditions. One of the conditions, specified in clause (a) of sub-section (3) of section 80CC, is that the issue is made by a public company with the main object of carrying on the business of—

  (i)  construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule, or

 (ii)  providing long-term finance for construction or purchase of houses in India for residential purposes.

FINANCE  ACT, 1985

24.3 The Finance Act has modified the aforesaid clause to provide that to be regarded as an eligible issue, such issue should have been made by a public company formed and registered in India and the issue should have been wholly and exclusively for the purpose of carrying on the business referred to in item (i ) or item (ii) of the preceding paragraph.

FINANCE  ACT, 1985

24.4 This amendment takes effect from April, 1, 1985 and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years.

[Section 16 of the Finance Act]

FINANCE  ACT, 1985

Deduction in respect of educational expenses in certain cases

25.1 Section 80F of the Income-tax Act provides for the deduction of expenses incurred by a resident, who is not a citizen of India, on the education of his dependent children outside India. The total amount of deduction allowed is Rs. 1,500 per child, subject to a maximum of Rs. 3,000. In the context of the policy of reducing tax rates and removing concessions which are not considered to be necessary, this concession has been discontinued.

FINANCE  ACT, 1985

25.2 This amendment takes effect from April 1, 1986 and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years.

[Section 17 of the Finance Act]

FINANCE  ACT, 1985

Modification of provision relating to deduction in respect of donations to certain funds, charitable institutions, etc.

26.1 Under section 80G of the Income-tax Act, a taxpayer is entitled to a deduction in the computation of his taxable income of a sum equal to 50 per cent of the donations made by him to certain funds and charitable institutions, or for the repair or renovation of any temple, mosque, gurdwara, church or any other place which is notified by the Central Government for this purpose to be of historic, archaeological or artistic importance or to be a place of public worship of renown throughout any State or States. Donations made to the Government or any approved local authority, institutions or association to be utilised for the purpose of promoting family planning are eligible for hundred per cent deduction. The amount of the donations qualifying for deduction under section 80G is, however, limited to ten per cent of the gross total income of the donor, subject to a monetary limit of Rs. 5 lakhs. The aforesaid ceiling limit, however, does not apply in relation to donations made to the National Defence Fund, the Jawaharlal Nehru Memorial Fund, the Prime Minister’s Drought Relief Fund, the Prime Minister’s National Relief Fund and the National Children’s Fund.

FINANCE  ACT, 1985

26.2 Under one of the amendments made by the Finance Act in section 80G, donations to the Prime Minister’s National Relief Fund will be eligible for hundred per cent deduction. Under another amendment, donations to the Indira Gandhi Memorial Trust will be placed at par with donations to other funds of national importance and, therefore, eligible for deduction under section 80G without any ceiling on the amount of donations qualifying for deduction.

FINANCE  ACT, 1985

26.3 The first amendment takes effect from April 1, 1986 and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. The second amendment takes effect from April 1, 1985 and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. Thus, donations made to the Indira Gandhi Memorial Trust at any time during the accounting year relevant to the assessment year 1985-86 will qualify for deduction under section 80G of the Income-tax Act.

[Section 18 of the Finance Act]

FINANCE  ACT, 1985

Modification of the provisions relating to incentive for export

27.1 Under section  80HHC of the Income-tax Act, an assessee, being an Indian company or a person (other than a company) who is resident in India, is entitled to a deduction in the computation of the taxable income, of an amount equal to 1 per cent of the export turnover plus a further amount equal to 5 per cent of the incremental export turnover.

FINANCE  ACT, 1985

27.2 With a view to providing exporters with requisite resources for  modernisation, technological upgradation, product development and other activities, and raising their efficiency and productivity, not only in the export sector but also in the economy as a whole, the Finance Act has substituted section 80HHC to provide that an assessee, being an Indian company or a person (other than a company) who is resident in India exports out of India during the previous year any goods or merchandise to which this section applies, will be allowed deduction of an amount, not exceeding 50 per cent of the profits derived by the assessee from the export of such goods or merchandise. The provision of new section 80HHC(1) lays down that an amount equal to the amount of the deduction claimed should be debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be utilised for the purposes of the business of the assessee. The provisions of the new section will apply to all goods or merchandise (other than mineral oil and minerals and ores) if  the sale proceeds of such  goods or merchandise exported out of India are receivable by the assessee in convertible foreign exchange.

FINANCE  ACT, 1985

27.3 In a case where the business carried on by the assessee consists exclusively of export out of India of the goods or merchandise to which the provisions of this section apply, the profits derived from the export of goods or merchandise for the purposes of the proposed concession shall be the profits of the business as computed under the head “Profits and gains of business or profession”. In a case where the business carried on by the assessee does not consist exclusively of export out of India of the goods or merchandise to which the provisions of this section apply, the profits derived from the export of the goods or merchandise shall be the amount which bears to the profits of the assessee as computed under the head “Profits and gains of business or profession” the same proportion as the amount of the export turnover bears to the total turnover of the business carried on by the assessee.

FINANCE  ACT, 1985

27.4 Clause (a ) of the Explanation to section 80HHC defines the term “convertible foreign exchange” as foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange, for the purposes of the Foreign Exchange Regulation Act, 1973 and any rules made thereunder. The definition of convertible foreign exchange is the same as contained in section 80-O of the Income-tax Act. The Government have issued a Press Note on 21-6-1983 clarifying that receipt of sale proceeds in non-convertible rupees from bilateral account countries (e.g., Russian Roubles) will be treated on par with sale proceeds received in other convertible foreign exchange for the purposes of section 80HHC of the Income-tax Act.

FINANCE  ACT, 1985

27.5 The amendment takes effect from April 1, 1986 and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years.

[Section 19 of the Finance Act]

FINANCE  ACT, 1985

Deduction in respect of profits and gains from industrial undertakings, etc.

28.1 Under section 80-I of the Income-tax Act, a “tax holiday” is granted, inter alia, to new industrial undertakings (including cold storage plants) which commence production within the period of four years next following 31st March, 1981 or ships which are brought into use within the period of four years next following 1st April, 1981 or hotels which start functioning after 31st March, 1981 but before 1st April, 1985. Under the existing provisions, 20 per cent of the profits and gains (25 per cent in the case of companies) derived from such industrial undertakings or a ship or the business of a hotel are allowed as a deduction in computation of the total income of the assessee for certain initial years.

FINANCE  ACT, 1985

28.2 The provisions relating to tax holiday are intended to provide an incentive for investment in certain desired directions and promote industrialisation. In view of the continued need to provide this incentive, the Finance Act has extended this concession by another five years, that is, in relation to new industrial undertakings which commence production before 1st April, 1990; ships which are brought into use on or before the said date; and hotels which start functioning before the said date.

[Section 20 of the Finance Act]

FINANCE  ACT, 1985

Deduction in respect of profits and gains from business of livestock breeding or poultry or dairy farming

29.1 Under the provisions of section 80JJ  of the Income-tax Act, a taxpayer deriving income from the business of livestock breeding or poultry or dairy farming is entitled to a deduction in the computation of his total income of an amount equal to fifteen per cent of the aggregate profits and gains derived from these sources of Rs. 15,000, whichever is higher. Where the aggregate  amount of such profits and gains does not exceed Rs. 15,000, the entire amount is exempt from tax. In computing  the deduction in relation to profits and gains derived from the business of poultry farming, profits and gains in excess of Rs. 1 lakh are ignored.

FINANCE  ACT, 1985

29.2 In the context of the raising of the exemption limit, reduction in tax rates and the fact that this concession is open to abuse, the Finance Act has discontinued the tax concession under section 80JJ of the Income-tax Act.

FINANCE  ACT, 1985

29.3 This amendment takes effect from April 1, 1986 and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years.

[Sections 21 and 36(a)( ii), (c) and (d)(ii ) of the Finance Act]

FINANCE  ACT, 1985

Deduction in respect of dividends received from certain foreign companies

30.1 Section 80N of the Income-tax Act provides for a deduction in the computation of the total income of fifty per cent of the income by way of dividends received  by an Indian company on shares allotted to it in a foreign company in consideration of any patent, invention, design, technical “know-how”, etc., made available or technical services rendered to the foreign company.

FINANCE  ACT, 1985

30.2 With the reduction in rates of corporation tax and the limited utility of this concession at present, the Finance Act has discontinued the concession under section 80N of the Income-tax Act.

FINANCE  ACT, 1985

30.3 This amendment takes effect from April 1, 1986 and will, accordingly apply in relation to the assessment year 1986-87 and subsequent years.

[Sections 22, 36(b), 36(d)(iii ) and 36(e) of the Finance Act.]

FINANCE  ACT, 1985

Extension of tax concession in respect of income of authors of text books in Indian languages

31.1 Section 80QQA of the Income-tax Act provides for a deduction in the computation of the total income of an author, of an amount equal to 25 per cent of his income derived from text books, etc., in Hindi and other Indian languages. The deduction is available in respect of any lump sum consideration for the assignment or grant of any of his interests in the copyright of any such books or of royalties or copyright fees, whether receivable in lump sum or otherwise. The deduction is allowed only where the following conditions are fulfilled :

  (i)  the book has been prescribed or recommended as a text book by any University for a degree or a post-graduate course or is a dictionary, thesaurus or encyclopaedia;

 (ii)  the book, dictionary, thesaurus or encyclopaedia is written in a language specified in the Eighth Schedule to the Constitution.

The deduction is admissible for the assessment years 1980-81 to 1984-85 (both inclusive).

FINANCE  ACT, 1985

31.2 In order to encourage the writing of such books, the Finance Act has extended the tax concession in section 80QQA for a further period of 5 years, i.e., for the assessment years 1985-86 to 1989-90 (both inclusive).

[Section 23 of the Finance Act]

FINANCE  ACT, 1985

Deduction of interest on moneys borrowed to pay taxes

32.1 Section 80V of the Income-tax  Act provides for a deduction in respect of interest paid by the taxpayer on moneys borrowed for payment of income-tax. In the context of the policy of reducing the tax rates and removing concessions which are not considered to be necessary, the Finance Act has deleted this provision.

FINANCE  ACT, 1985

32.2 This amendment takes effect from April 1, 1986 and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years.

[Section 24 of the Finance Act]

FINANCE  ACT, 1985

Modification of the provisions relating to long-term capital gains in the case of companies

33.1 Under the existing provisions in section 115 of the Income-tax Act, long-term capital gains relating to buildings or lands or any rights in buildings or lands are taxed at the rate of 40 per cent in a case where the assessee is a company in which the public are substantially interested and the total income of the company (exclusive of long-term capital gains) does not exceed Rs. 1 lakh. In the case of other companies, the long-term capital gains relating to buildings or lands or any rights in buildings or lands are subjected to tax at the higher rate of 50 per cent.

FINANCE  ACT, 1985

33.2 As differential rates of income-tax with reference to the quantum of taxable income of companies have been discontinued by the Finance Act, 1983, this differential in rates in relation to such capital gains has also been discontinued by the Finance Act by amending section 115 of the Income-tax Act. Under the amended provision long-term capital gains relating to buildings or lands or any rights  therein will be chargeable to tax at a uniform rate of 50 per cent in the case of all companies.

FINANCE  ACT, 1985

33.3 The amendment applies in relation to the assessment year 1986-87 and subsequent years.

[Section 26 of the Finance Act]

FINANCE  ACT, 1985

Modification of the provisions relating to certain incomes of non-residents

34.1 Under the existing provisions of section 115E of the Income-tax Act, in the case of a “non-resident Indian”,  income-tax is payable at the rate of twenty per cent of the “investment income” and income by way of long-term capital gains. The income-tax so calculated is increased by a surcharge at the rate of twelve and a half per cent of such income-tax.

FINANCE  ACT, 1985

34.2 In view of the abolition of surcharge on income-tax in respect of all categories of non-corporate taxpayers, the Finance Act had deleted the requirement of payment of surcharge on income-tax by non-resident Indians under the aforesaid provision.

FINANCE  ACT, 1985

34.3 The amendment takes effect from April 1, 1986 and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years.

[Section 27 of the Finance Act]

FINANCE  ACT, 1985

Modification of the provisions relating to proceedings before income-tax authorities

35.1 Under section 136 of the Income-tax Act, proceedings before an income-tax authority are deemed to be judicial proceedings within the meaning of sections 193 and 228 and for the purposes of section 196 of the Indian Penal Code. The Finance  Act has amended the said section to also provide that an income-tax authority shall  be deemed to be a Civil Court for the purposes of section 195, but not for the purposes of Chapter XXVI of the Code of Criminal Procedure, 1973. This amendment is intended to secure that prosecution proceedings for offences under the relevant provisions of the Indian Penal Code may be launched on the complaint of the concerned income-tax authority.

FINANCE  ACT, 1985

35.2 The amendment takes effect from April 1, 1974, that is, the date from which the Code of Criminal Procedure, 1973 came into force.

[Section 28 of the Finance Act]

FINANCE  ACT, 1985

Modification of the provisions relating to return of income

36.1 Under section 139(1A) of the Income-tax Act, a person whose income chargeable under the head “Salaries” (exclusive of the value of all benefits or amenities not provided for by way of monetary payment ) does not exceed Rs. 18,000 is not required to furnish a voluntary return of income, if certain conditions specified in this regard are fulfilled. In the context of the raising of the exemption limit, the Finance Act has raised the aforesaid limit of  Rs. 18,000 to Rs. 24,000.

FINANCE  ACT, 1985

36.2 The amendment takes effect from April 1, 1986 and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years.

[Section 29(a) of the Finance Act]

FINANCE  ACT, 1985

Submission of report of audit of cost accounts

37.1 Under section 139(9) of the Income-tax Act, a return of income is considered defective if certain conditions specified in this behalf are not fulfilled. One of the conditions is that where the accounts of the assessee have been audited, the return shall be accompanied by copies of the audited profit and loss account, balance sheet and the auditor’s report.

FINANCE  ACT, 1985

37.2 With a view to facilitating scrutiny of accounts, the Finance Act has amended section 139(9) to also provide that where the cost accounts of an assessee have been audited under section 233B of the Companies Act,1956, the return shall be treated as defective unless it is also accompanied by the report under that section.

FINANCE  ACT, 1985

37.3 The amendment takes effect from April 1, 1985 and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years.

[Section 29(b) of the Finance Act]

FINANCE  ACT, 1985

Modification of the provisions relating to taxation of associations of persons where shares of members are indeterminate or unknown

38.1 Section 167A(2) of the Income-tax Act provides that where the individual shares of the members of an association of persons in any part of the income of such association are indeterminate or unknown, the income-tax payable shall be the aggregate of the amount of income-tax on such part of the total income at the maximum marginal rate and the amount of income-tax which would have been chargeable if the remaining part of the total income were its total income.

FINANCE  ACT, 1985

38.2 The existing provisions are being misused by some taxpayers for tax avoidance. A large number of associations of persons are formed without specifying the shares of members in a small part of the income, with the result that such part gets taxed at the maximum marginal rate while the major portion of the income gets taxed at low rates of tax depending upon the size of the income. With a view to countering tax avoidance through this method, the Finance Act has amended section 167A to secure that, where the individual shares of the members of an association of persons in the whole or any part of the income of such association are indeterminate or unknown, income-tax will be charged on the whole of the total income of the association at the maximum marginal rate.

FINANCE  ACT, 1985

38.3 The amendment takes effect from April 1, 1985 and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years.

[Section 30 of the Finance Act]

FINANCE  ACT, 1985

Provision for concessional taxation of consideration for know-how

39.1 With a view to encouraging the development of indigenous know-how, the Finance Act has made a special provision for taxation of lump sum consideration received or receivable for know-how.

FINANCE  ACT, 1985

39.2 The new section provides that where the time taken by an individual who is resident in India for developing any know-how is more than twelve months, he may elect that the gross amount of the lump sum consideration received or receivable by him during the previous year for allowing the use of such know-how, be spread equally over three years, namely the year in which such amount is received or is receivable and the two immediately preceding years and charged to tax accordingly. On his exercising such an option, the assessments for the two preceding years, if already made, would be rectified under section 154 of the Income-tax Act and, for this purpose, the period of four years specified in sub-section (7) of section 154 for rectifying the assessment order shall be reckoned from the end of the financial year in which the assessment relating to the previous year in which the lump sum consideration is received or receivable by such individual is made.

FINANCE  ACT, 1985

39.3 For the purposes of this section, the expression “know-how” has the meaning assigned to it in new section 35AB inserted in the Income-tax Act by section 8 of the Finance Act. [Para 15.2]

FINANCE  ACT, 1985

39.4 The new section will apply in relation to the assessment year 1986-87 and subsequent years.

[Section 31 of the Finance Act]

FINANCE  ACT, 1985

Raising of threshold for payment of advance tax in certain cases

40.1 Income-tax is required to be paid in advance during every financial year in three equal instalments by specified dates on the assessee’s current income (other than capital gains or income by way of winnings from lotteries, race winnings etc.) liable to tax for the assessment year next following the said financial year. Advance tax is payable only where the income of the assessee subject to advance tax exceeds the specified limit. Under the existing provisions, the monetary limit specified in this behalf in the case of an assessee, other than a company, a local authority, a registered firm and a Hindu undivided family having at least one member whose total income of the previous year exceeds the exemption limit, is Rs. 15,000.

FINANCE  ACT, 1985

40.2 With the raising of the exemption limit in the case of individuals, Hindu undivided families (other than those having at least one member whose independent total income exceeds the exemption limit), associations of persons, unregistered firms, etc., from Rs. 15,000 to Rs. 18,000, the monetary limit specified for the purpose of payment of advance tax in respect of such assessees has been raised from Rs. 15,000 to Rs. 18,000 to coincide with the exemption limit in their case. A Hindu undivided family which has one or more members with taxable income exceeding Rs. 15,000 is required to pay advance tax if its income (exclusive of capital gains, etc.) exceeds Rs. 12,000. With the raising of the exemption limit, the aforesaid limit of Rs. 15,000 is also being raised to Rs. 18,000.

FINANCE  ACT, 1985

40.3 The amendments take effect from May 24, 1985, that is, the date on which the Finance Bill received the assent of the President and will, accordingly, apply in relation to advance tax payable during the financial year 1985-86 and subsequent years.

[Section 32 of the Finance Act]

FINANCE  ACT, 1985

Clarification regarding payment of income-tax in case of application to the Settlement Commission

41. Under the provisions of sub-section (2A) of section 245D, as inserted by the Taxation Laws (Amendment) Act, 1984, the applicant is required to pay the additional amount of income-tax payable on the income disclosed in the application within 35 days of the receipt of a copy of the order passed by the Settlement Commission. The relevant provision has been amended by the Finance Act to clarify that the assessee shall be required to pay the additional amount of income-tax payable on the income disclosed in the application to the Settlement Commission only if the Settlement Commission passes an order under sub-section (1) of section 245D allowing the application for settlement to be proceeded with. The amended provision takes effect retrospectively from October 1, 1984, that is, from the date the said sub-section was inserted by the Taxation Laws (Amendment) Act, 1984.

[Section 33 of the Finance Act]

FINANCE  ACT, 1985

Modification of the provisions relating to reduction or waiver of penalty under section 273A in certain cases

42.1 Under the provisions of section 273A of the Income-tax Act, the Commissioner of Income-tax is empowered to reduce or waive the amount of penalty imposed or imposable on any assessee, for, inter alia, concealment of particulars of income or for furnishing of inaccurate particulars of income. This power can be exercised in a case where the assessee makes voluntarily and in good faith, a full and true disclosure of his income prior to the detection by the Income-tax Officer of the concealment of the particulars of income or of inaccuracy of the particulars of income furnished by the assessee.

FINANCE  ACT, 1985

42.2 The Taxation Laws (Amendment) Act, 1984 inserted a new Explanation 2 in section 273A(1) of the Income-tax Act to provide that where books of account, cash, jewellery, etc., belonging to a person are seized during a search carried out under section 132 of the Income-tax Act, and within 15 days of such seizure, the person makes a full and true disclosure of his income to the Commissioner, such person shall be deemed to have made, for the purposes of section 273A(1)(b) of the Income-tax Act, full and true disclosure prior to the detection by the Income-tax Officer of the concealment of particulars of income or of the inaccuracy of particulars furnished in respect of such income.

FINANCE  ACT, 1985

42.3 In the context of the need to bring tax evaders to book, the grant of any immunity to persons who choose to come forward to declare their concealed income only after incriminating evidence has been found in their possession, will not be regarded as proper or justifiable. The Finance Act has, accordingly, deleted the aforesaid Explanation .

FINANCE  ACT, 1985

42.4 The amendment takes effect from May 24, 1985, that is, the date on which the Finance Bill received the assent of the President and has been enacted into law.

[Section 34 of the Finance Act]

FINANCE  ACT, 1985

Amendment of provision relating to punishment for second and subsequent offences

43.1 Section 278A of the Income-tax Act provides that where a person who has been convicted of an offence specified in that section is again convicted for the same offence, he shall be punishable for the second and every subsequent offence with rigorous imprisonment for a minimum term of six months and a maximum term of seven years and with fine.

FINANCE  ACT, 1985

43.2 Section 269SS of the Income-tax Act debars persons from taking or accepting after 30th June, 1984 from any other person any loan or deposit otherwise than by an account payee cheque or account payee bank draft if the amount of such loan or deposit or the aggregate amount of such loan or deposit is Rs. 10,000 or more. Section 276DD provides that if a person without reasonable cause or excuse, takes or accepts any loan or deposit in contravention of the aforesaid provision, he shall be punishable with imprisonment for a term which may extend to two years and shall also be liable to fine equal to the amount of such loan or deposit.

FINANCE  ACT, 1985

43.3 The Finance Act has amended section 278A of the Income-tax Act so as to also include an offence under section 276DD within the scope of section 278A. The effect of this amendment will be that a person convicted of an offence under section 276DD for the second and every subsequent time shall be punishable with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine.

[Section 35 of the Finance Act]

4. Amendments to Wealth-tax Act

Withdrawal of exemption from wealth-tax in respect of business assets of charitable and religious trusts

44.1 Under section 5(1)(i) of the Wealth-tax Act, any property held by an assessee under trust or other legal obligation for any public purpose of a charitable or religious nature in India is not included in the net wealth of the assessee.

Finance Act, 1985

44.2 By an amendment made in the Income-tax Act by the Finance Act, 1983, exemption from income-tax in respect of profits and gains of business of public charitable or religious trusts was withdrawn except in the case of trusts falling in specified categories. Conformably with the said provision, the Finance Act has amended the provisions of the Wealth-tax Act so as to withdraw the exemption from wealth-tax in respect of business assets of public charitable or religious trusts and institutions. However, in line with the provisions contained in the Income-tax Act, the assets held in business will continue to be exempt from wealth-tax in the following cases :

(a) where the business is carried on by a trust wholly for public religious purposes and the business consists of printing and publication of books or publication of books or the business is of a kind notified by the Central Government in this behalf in the Official Gazette ;

(b) the business is carried on by an institution wholly for charitable purposes and the work in connection with the business is mainly carried on by the beneficiaries of the institution.

Finance Act, 1985

44.3 The amendment takes effect from April 1, 1986 and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years.

[Section 37(a)(i) of the Finance Act]

Finance Act, 1985

Modification of the provisions relating to exemption from wealth-tax in respect of certain assets.

45.1 Under the Wealth-tax Act, one house belonging to the taxpayer up to the value of Rs. 2 lakhs is exempt from wealth-tax. The value of specified assets held by the taxpayer up to Rs. 2,65,000 and the value of units in the Unit Trust of India or deposits under the National Deposit Scheme or both, up to an aggregate amount of Rs. 35,000, is also exempt from wealth-tax. The aggregate exemption under these provisions works out to Rs. 5 lakhs.

Finance Act, 1985

45.2 With a view to providing taxpayers with a wider choice of investing in tax-exempt assets, the Finance Act has deleted the separate ceiling limits in respect of the exemption of the aforesaid assets and provided an overall exemption up to Rs. 5 lakhs in respect of the aggregate value of these assets. However, the additional exemption up to Rs. 25,000 exclusively provided in respect of deposits under the National Deposit Scheme will continue to be available.

Finance Act, 1985

45.3 The amendment takes effect from April 1, 1986 and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years.

Finance Act, 1985

45.4 Under an existing provision, exemption from wealth-tax in respect of deposits under the National Deposit Scheme is allowed only if the deposit is held by the taxpayer for a period of at least six months ending with the relevant valuation date. The Finance Act has removed the said restriction of period of holding in the case of deposits under the National Deposit Scheme.

Finance Act, 1985

45.5 The aforesaid amendment takes effect from April 1, 1985 and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years.

[Sections 37(a)(ii) and 37(b) and (c) of the Finance Act]

Finance Act, 1985

Modification of the provisions relating to reduction or waiver of penalty in certain cases

46.1 Under the existing provisions of section 18B of the Wealth-tax Act, the Commissioner of Wealth-tax is empowered to reduce or waive the amount of penalty imposed or imposable on a person who has concealed the particulars of any asset or has furnished inaccurate particulars of any assets or debts. This power can be exercised in a case where the assessee makes voluntarily and in good faith, a full and true disclosure of his assets prior to the detection by the Wealth-tax Officer of the concealment of particulars of assets or of the inaccuracy of the particulars furnished in respect of any asset or debt.

Finance Act, 1985

46.2 The Taxation Laws (Amendment) Act, 1984 inserted a new Explanation 2 to sub-section (1) of section 18B of the Wealth-tax Act to provide that where any books of account of other documents belonging to a person are seized under section 37A of the Wealth-tax Act, and, within 15 days of such seizure, the person makes a full and true disclosure of his net wealth, such person shall be deemed to have made a full and true disclosure of his concealed wealth prior to detection by the Wealth-tax Officer.

Finance Act, 1985

46.3 In the context of the need to bring tax evaders to book, the immunity provided to persons who choose to come forward to declare their concealed wealth only after incriminating evidence has been found in their possession, is not regarded as proper or justifiable. The Finance Act has, accordingly, deleted the provisions providing immunity in such cases.

Finance Act, 1985

46.4 The amendment takes effect from May 24, 1985, that is, the date on which the Finance Bill received the assent of the President and has been enacted into law.

[Section 38 of the Finance Act]

Finance Act, 1985

Clarification regarding payment of wealth-tax in case of application to the Settlement Commission

47. Under the provisions of sub-section (2A) of section 22D, as inserted by the Taxation Laws (Amendment) Act, 1984, the applicant is required to pay the additional amount of wealth-tax payable on the wealth disclosed in the application within 35 days of the receipt of a copy of the order passed by the Settlement Commission. The Finance Act has amended the relevant provision to clarify that the assessee shall pay the additional amount of wealth-tax payable on the wealth disclosed in the application to the Settlement Commission only if the Settlement Commission passes an order under sub-section (1) of section 22D allowing the application for settlement to be proceeded with. The amended provision will take effect retrospectively from October 1, 1984, that is, from the date the said sub-section was inserted by the Taxation Laws (Amendment) Act, 1984.

[Section 39 of the Finance Act]

Finance Act, 1985

Reduction in the rates of wealth-tax

48. The rates of wealth-tax applicable in the case of individuals and Hindu undivided families are laid down in Part I of Schedule I to the Wealth-tax Act. The said rate schedule has been substituted by a new rate schedule. The new rate schedule also raises the exemption limit for wealth-tax from Rs. 1,50,000 to Rs. 2,50,000. Whereas the existing rate schedule did not provide for a nil rate slab, the new rate schedule has a nil rate slab up to Rs. 2,50,000. The existing rates of wealth-tax and the new rates of wealth-tax applicable in the case of an individual or Hindu undivided family (other than a Hindu undivided family with one or more members whose net wealth exceeds the exemption limit) are indicated in the Table below :

Table

Existing rates New rates
(a) Up to Rs. 2,50,000 1/2% (a) Up to Rs. 2,50,000 nil
(b) Rs. 2,50,001 – 5,00,000 1% (b) Rs. 2,50,001 – 10,00,000 1/2%
(c) Rs. 5,00,001 – 10,00,000 2% (c) Rs. 10,00,001 – 20,00,000 1%
(d) Rs. 10,00,001 – 15,00,000 3% (d) Over Rs. 20,00,000 2%
(e) Over Rs. 15,00,000 5%

Finance Act, 1985

49. Comparative incidence of wealth-tax at selected levels of net wealth in the case of individuals and Hindu undivided families (other than those having one or more members with independent net wealth exceeding the exemption limit) at the existing rates and new rates is indicated in the Table below :

Table

Wealth Wealth-tax at existing rates Wealth-tax at new rates Tax relief Tax relief as percentage of tax in Col. (2)
(1) (2) (3) (4) (5)
(Rs.) (Rs.) (Rs.) (Rs.) (%)
2,50,000 1,250 Nil 1,250 100
5,00,000 3,750 1,250 2,500 66.67
10,00,000 13,750 3,750 10,000 72.73
15,00,000 28,750 8,750 20,000 69.57
20,00,000 53,750 13,750 40,000 74.42
25,00,000 78,750 23,750 55,000 69.84
50,00,000 2,03,750 73,750 1,30,000 63.80

Finance Act, 1985

50. The rates of wealth-tax applicable in the case of a Hindu undivided family with one or more members having net wealth exceeding the exemption limit have also been revised. Whereas the existing rate schedule did not provide for a nil rate slab, the new rate schedule provides a nil rate slab up to Rs. 1,50,000. The exemption limit for such Hindu undivided families, however, remains unchanged at Rs. 1,50,000. The existing rates of wealth-tax and the new rates of wealth-tax applicable in the case of such Hindu undivided families are indicated in the Table below :

Table

Existing rates New rates
(a) Up to Rs. 2,50,000 1ýÿ% (a) Up to Rs. 1,50,000 Nil
(b) Rs. 2,50,001 – 5,00,000 2% (b) Rs. 1,50,001 – 5,00,000 1%
(c) Rs. 5,00,001 – 10,00,000 3% (c) Rs. 5,00,001 – 10,00,000 2%
(d) Over Rs. 10,00,000 5% (d) Over Rs. 10,00,000 3%

51. Comparative incidence of wealth-tax at selected levels of net wealth in the case of such Hindu undivided families is indicated in the Table below :

Table

Wealth Wealth-tax at existing rates Wealth-tax at new rates Tax relief Tax relief as percentage of tax in Col. (2)
(1) (2) (3) (4) (5)
(Rs.) (Rs.) (Rs.) (Rs.) (%)
2,50,000 3,750 1,000 2,750 73.33
5,00,000 8,750 3,500 5,250 60.00
10,00,000 23,750 13,500 10,250 43.16
15,00,000 48,750 28,500 20,250 41.54
20,00,000 73,750 43,500 30,250 41.02
25,00,000 98,750 58,500 40,250 40.76
50,00,000 2,23,750 1,33,500 90,250 40.34

Finance Act, 198552. The new rate schedules take effect from April 1, 1986 and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years.

[Section 40 of the Finance Act]

5. Amendments to Interest-tax Act

53.1 The Interest-tax Act, 1974 which was enacted as an anti-inflationary measure provides for the levy of a tax on the gross amount of interest received by scheduled banks as loans and advances made in India.

Finance Act, 1985

53.2 With a view to providing larger internal funds with banks for meeting their increasing social commitments, the Finance Act has provided that interest-tax will not be charged in respect of interest accruing or arising to scheduled banks after 31st March, 1985.

[Section 41 of the Finance Act]

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