Circular No. 45-Income Tax dated 2-9-1970

FINANCE ACT, 1970 – CIRCULAR NO. 45, DATED 2-9-1970

Finance Act, 1970

Amendments at a glance 2/9/1970

Section/Schedule	Particulars
	Finance Act
2 and 1st Sch.	Rate structure 2-10
	Income-tax Act
2(14), 47(viii),	Capital gains arising from transfer of agricultural land
54B	in urban areas 29-32
2(16), 116(c),	Definition of �Commissioner� to include Additional Commis-
117(1), 130	sioner for strengthening administrative machinery of the Income-tax Department 38-40
2(37)	Definition of �rate or rates in force� 28
10(20A)	Exemption of income of State housing boards, development boards, etc. 41
10(22A)	Exemption of income of hospitals and other medical institutions 42
11(1)(a),	Exemption of income of public charitable and religious trusts 18-23
(Expln.)/(2)/
(3)/(4), 13,
139(4A), 80G,
Expln. 2
16(iv)	Standard deduction for expenditure on travelling in the case of salaried employees 43-44
35B(1)(b)(iii)	Export markets development allowance 51
36(1)(viii)	Deduction of profits transferred to special reserve account in case of certain financial corporations 52-53
37(2A), (2B)	Entertainment expenditure in businesses and professions 33-34
37(4)	Guest houses maintained in businesses and professions 35-37
80C(2)(g)	Married couples governed by the concept of �community of property� in the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu 45-47
80L	Deduction of income from certain categories of investments 12-15
80MM(1)	Income derived by companies from transfer or servicing of technical know-how 54-55
164	Charge of tax in the case of private discretionary trusts 24-28
193(iia),	Exemption from deduction of tax at source of interest on
194A(3)(vi)/	Certain small savings schemes and bank deposits 16-17
(vii)
195(3)	Payment of income to non-residents without deduction of tax at source in certain cases 48
212(3A),	Extension of time for payment of final instalment of
Prov.	Advance tax in certain cases 49-50
	Wealth-tax Act
2(e)	Exclusion, from the levy of wealth-tax, of agricultural property situated in the State of Jammu and Kashmir 64
5(1)(iv)	Exemption from wealth-tax of one residential house 65
5(1)(ivb)	Exemption from wealth-tax of the value of one farm house 66
5(1)(xxii)/	Exemption from wealth-tax of Government securities
(xxiii)/(xxiv)/	shares in companies, units in the Unit Trust of India,
(xxv)/(xxvi)/	debentures issued by certain institutions or authorities
(xxvii),(1A),	and bank deposits, subject to certain limits 67-72
(3)
11AA	Consequential provision relating to distribution and allocation of work on the functional basis among Commissioners including Additional Commissioners 73
14(1), Prov.	Extension of time for furnishing return of net wealth in certain cases 74-75
21(4)	Taxation of the net wealth of private discretionary trust 76-78
Sch.	Increase in the rates of ordinary wealth-tax and modifications in the scheme of levy of additional wealth-tax on the value of urban lands and buildings included in the net wealth, in the case of individuals and Hindu undivided families 56-63
	Gift-tax Act
5(2) and Sch.	Revision of the rate structure of gift-tax and lowering of the exemption limit 79
11A	Consequential provision relating to distribution of work among Commissioners and Additional Commissioners on functional basis 80
	Unit Trust of India Act
32	Increase in the amount of income on units in the Unit Trust exempt from deduction of tax at source in the case of non-residents 81
	Surtax Act
3	Inclusion of Additional Commissioner of Income-tax in the categories of tax authorities for the purposes of surtax 82

Rate structure

Finance Act, 1970

Rates of income-tax for the assessment year 1970-71

2. The rates of income-tax for the assessment year 1970-71 in the case of all categories of taxpayers (corporate as well as non-corporate) are specified in Part I of the First Schedule to the Finance Act, 1970. These rates – summarised in Annexure I to this circular – are the same as those specified in Part III of the First Schedule to the Finance Act, 1969, for the purpose of deduction of tax at source during the financial year 1969-70 from �salaries� and for computation of advance tax payable during that financial year. Accordingly, where the total income of the taxpayer consists only of income under the head �Salaries� from which tax has been correctly deducted at source during the financial year 1969-70, it will not be necessary to raise any additional demand or grant any refund on completion of the assessment for the assessment year 1970-71.

Finance Act, 1970

Rates for deduction of tax at source from �salaries� and for computation of �advance tax� during the financial year 1970-71

3. The Finance Act, 1970 follows the principle adopted in the Finance Acts of the preceding years that, in prescribing the rates of tax and in making new provisions in the taxation laws, measures which have the effect of bringing about a change in the tax liability or which provide a tax incentive or disincentive in any sphere should apply prospectively to current incomes falling due for assessment in the next following assessment year, and not retrospectively to incomes earned in the past, except where there are special circumstances justifying the retrospective operation of any particular provision. In conformity with this principle, changes in the rate schedule of income-tax, which were considered necessary or desirable, have been made operative prospectively in relation to incomes falling due for assessment in the next following assessment year 1971-72. The rate schedule of tax incorporating these changes is set forth in Part III of the First Schedule to the Finance Act, 1970. These rates apply for the purpose of deduction of tax at source from �salaries� in the case of individuals and from retirement annuities payable to partners of registered firms engaged in certain professions (chartered accountants, solicitors, lawyers, etc.), during the financial year 1970-71; computation of the �advance tax� payable in that year in the case of all categories of taxpayers; and the charging or calculation of income-tax in special cases. These special cases are : section 132(5), first proviso [calculating income-tax on undisclosed income represented by seized assets in certain cases]; section 172(4) [levy of tax on provisional basis on the income of non-residents from shipping of cargo or passengers from Indian ports]; section 174(2) [assessment of persons leaving India]; section 175 [assessment of persons likely to transfer property to avoid tax]; and section 176(2) [assessment of profits of a discontinued business]. The points of difference between the rate structure of tax specified in Part III of the First Schedule (for the financial year 1970-71) on the one hand, and that specified in Part I of the First Schedule (for the assessment year 1970-71) on the other, are explained in paragraphs 4 to 7 hereinbelow.

Finance Act, 1970

4. Individuals, Hindu undivided families, unregistered firms, associations of persons, etc. – Position for assessment year 1970-71 – For the assessment year 1970-71, the rates of basic income-tax on the incomes of these categories of taxpayers rise progressively from 5 per cent, on income in the slab Re.1�Rs. 5,000 to 75 per cent on income in excess of Rs. 2,50,000. A Union surcharge at 10 per cent of the basic income-tax is also leviable in all cases. The progression in the rates of tax is brought about by subjecting income in the successive slabs to tax at steadily increasing rates. Thus, on income in the first six slabs of Rs. 5,000 each (covering a span of Rs. 30,000), the present rates are respectively, 5 per cent, 10 per cent, 17 per cent, 23 per cent, 30 per cent and 40 per cent; in the next two slabs of Rs. 20,000 each (covering the range of Rs. 30,001� Rs. 70,000), the rates are, respectively, 50 per cent and 60 per cent; in the next higher slab covering a span of Rs. 30,000 (Rs. 70,001�Rs. 1,00,000), the rate is 65 per cent; in the next higher slab covering a span of Rs. 1,50,000 (Rs. 1,00,001�Rs. 2,50,000), the rate is 70 per cent; and on income in the slab above Rs. 2,50,000, the rate is 75 per cent.

Finance Act, 1970

5. From the tax as computed at these rates, certain deductions are made, at present, in the case of resident individuals and Hindu undivided families only, so as to afford them some relief according to their personal circumstances. Thus, in the case of a resident unmarried individual, the deduction from the tax is Rs. 125, which is calculated on a personal allowance of Rs. 2,500 at the rate of 5 per cent, being the rate of tax applicable, under the rate schedule, to income in the initial slab of Rs. 5,000. The deduction in the case of a resident married individual, who does not have any dependent child, as also in the case of a resident Hindu undivided family having no minor coparcener is Rs. 200 (5 per cent of Rs. 4,000) which is made up of the allowance for an unmarried individual, namely, Rs. 125, and the allowance for a spouse, namely, Rs. 75. The spouse allowance of Rs. 75 is not available to an individual whose spouse has a taxable income. In other words, where both husband and wife have independent taxable incomes (i.e., income exceeding Rs. 4,000 in each case) neither of them is entitled to the spouse allowance of Rs. 75; each is entitled only to the deduction as far as single individual, namely, Rs. 125. There is a further deduction of Rs. 20 (5 per cent of Rs. 400) for each dependent child or minor coparcener, for maximum of two children or minor coparceners, in the case of a resident married individual or Hindu undivided family, as the case may be. In addition, a resident married individual having a total income not exceeding Rs. 10,000 and supporting a dependent parent or grandparent receives a further deduction of Rs. 20 from his tax. The cumulative effect of these deductions on account of personal allowances, in the case of a resident married individual having two or more dependent children, or a resident Hindu undivided family having two or more minor coparceners, is that no tax is payable on the first Rs. 4,800 of the total income. Where such individual has a total income not exceeding Rs. 10,000 and supports a dependent parent or grandparent, no tax is payable by him on the first Rs. 5,100 of his total income.

Finance Act, 1970

6. The deductions on account of personal allowances, as stated in the preceding paragraph, are not available in the case of unregistered firms, associations of persons and other categories of non-corporate taxpayers, nor are these available in the case of non-residents. However, it is specifically provided, at present, that no tax is payable in the case of a resident non-corporate taxpayer, where the total income does not exceed a specified �small income exemption limit�. The �small income exemption limit� is Rs. 4,000 in the generality of cases, and Rs. 7,000 in the special case of a resident Hindu undivided family which satisfies certain conditions. [These conditions are that the family had, during the relevant year, at least two adult members entitled to claim partition or, alternatively, it had two members (whether adults or otherwise) entitled to claim partition who were not lineally descended one from the other and were not also lineally descended from any other living member of the family.] These �small income exemption limits� are not applicable in the case of non-resident taxpayers. Even in the case of resident taxpayers, the �small income exemption limit� of Rs. 4,000 is significant only in the case of unmarried individuals and also unregistered firms, associations of persons, etc. In the case of married individuals and also Hindu undivided families, the effect of the deduction on account of personal allowances, as stated in the preceding paragraph, is to exempt the first Rs. 4,000 or a higher amount (depending upon the number of children or minor coparceners) from tax altogether.

Finance Act, 1970

7. Position applicable to current incomes – With a view to bringing about an increase in the level of personal taxation at higher income levels, while providing some relief at lower levels (particularly in the case of unmarried individuals), and in the interest of simplification of tax calculations in the case of non-corporate taxpayers, generally, the Finance Act, 1970 has made the following changes in the rate schedule of basic income-tax in the case of individuals, Hindu undivided families, unregistered firms, etc.:
8. The rate of tax in the initial income slab of Rs. 5,000 has been prescribed at nil.
9. The income slabs above Rs. 30,000 have been rearranged and the rates of tax in income slabs over Rs. 40,000 stepped up from the present rates. The revised slabs and rates over Rs. 30,000 are as shown hereunder:

Revised slab of income	Rate of tax	Pre-existing rate of tax	Remarks
Rs.
30,001�40,000	50%	50%	No change
40,001�60,000	60%	50% between Rs. 40,001 and Rs. 50,000 60% between Rs. 50,001 and Rs. 60,000
60,001�80,000	70%	60% between Rs. 60,001 and Rs. 70,000 65% between Rs. 70,001 and Rs. 80,000
80,001�1,00,000	75%	65%
1,00,001�2,00,000	80%	70%
Over Rs. 2,00,000	85%	70% between Rs. 2,00,001 and Rs. 2,50,000 75% on the excess over Rs. 2,50,000.

Together with surcharge at 10 per cent of the basic income-tax, which continues to be leviable, the maximum marginal rate of tax under the Finance Act, 1970 is 93.5 per cent on income in the slab over Rs. 2,00,000, as against the maximum marginal rate of tax (including surcharge) of 82.5 per cent on income in the slab over Rs. 2,50,000 formerly.

3. The deductions from tax on account of personal allowances, in the case of resident individuals and Hindu undivided families have been discontinued, in view of the prescription of a nil rate of tax on income in the initial slab of Rs. 5,000 as stated at (1) above. The benefit in terms of tax (including surcharge), on account of this change, works out as under :

a. Resident married individuals with two or more dependent children, and resident Hindu undivided families with two or more minor coparceners –	Rs. 11 in each case.
[The dependent parent allowance of Rs. 20 has also been discontinued and, consequently, in the case of those who are presently entitled to this allowance, there will be a small increase in the tax payable, by Rs. 11.]
b. Resident married individuals with one dependent child, and resident Hindu undivided families with one minor coparcener	Rs. 33 in each case.
c. Resident married individuals having no dependent child and resident Hindu undivided families having no minor coparcener	Rs. 55 in each case.
d. Resident unmarried individuals	Rs. 137.50 in each case.

Non-resident individuals and Hindu undivided families, as also unregistered firms, associations of persons, etc., whether resident or not, will also benefit in the tax payable by them.

4. The pre-existing �small income exemption limit� of Rs. 4,000, in the generality of cases of resident non-corporate taxpayers, has been dropped altogether. The prescription of a nil rate of tax on income in the initial slab of Rs. 5,000 as stated at (1) above, secures that no tax will be payable by a non-corporate taxpayer unless his income exceeds Rs. 5,000. The pre-existing special exemption limit of Rs. 7,000 in the case of resident Hindu undivided families satisfying certain conditions, however, continues.

[Paragraph A of Part III of the First Schedule to the Finance Act]

Finance Act, 1970

8. Co-operative societies, registered firms, local authorities, the Life Insurance Corporation of India and companies – In the case of these categories of taxable entities, the rates of income-tax specified, respectively, in Paragraphs B, C, D, E and F of Part III of the First Schedule to the Finance Act, 1970, for the purpose of computation of the advance tax payable by them during the financial year 1970-71 are the same as the rates of income-tax specified, respectively, in Paragraphs B, C, D, E and F of Part I of the First Schedule for incomes assessable for the assessment year 1970-71. The Union surcharge at 10 per cent of the basic income-tax, presently leviable in the case of co-operative societies and local authorities, as also the ordinary and special surcharges for purposes of the Union, presently leviable in the case of registered firms, also continue.

[Paragraphs B, C, D, E and F of Part III of the First Schedule to the Finance Act]

Finance Act, 1970

9. Annexure II to this circular sets forth the rates of income-tax as laid down in Part III of the First Schedule to the Finance Act, 1970 incorporating the changes set forth in paragraphs 4 to 7 above. As already stated in paragraph 3, these changes are operative only for the purpose of deduction of tax at source from �salaries� and retirement annuities payable to partners of registered firms engaged in specified professions during the financial year 1970-71, computing advance tax payable during the said financial year, and for charging or calculating income-tax in special cases.

Finance Act, 1970

Rates for deduction of tax at source from incomes other than salaries and retirement annuities payable to partners of registered firms engaged in specified professions

10. Part II of the First Schedule to the Finance Act, 1970 specifies the rates at which tax is to be deducted at source from incomes other than �salaries� and retirement annuities payable to partners of registered firms engaged in specified professions. These rates are the same as those specified in Part II of the First Schedule to the Finance Act, 1969.

Amendments to Income-tax  Act

FINANCE ACT, 1970

Nature of amendments

11. The amendments made by the Finance Act, 1970 to the Income-tax Act, 1961, may be broadly classified under the following heads:
12. Measures for facilitating savings and investment.
13. Measures for plugging loopholes in the law leading to tax avoidance.
14. Measures for strengthening the administrative machinery of the Income-tax Department.
15. Measures for providing tax reliefs in certain directions and avoiding inconvenience to assessees in certain cases.
16. Other amendments.

The substance of these provisions is explained in the following paragraphs.

Measures for facilitating savings and investment

FINANCE ACT, 1970

Increase in the quantum of exemption from tax of income from certain categories of investments

12. Under the provisions of the Income-tax Act and Unit Trust of India Act, before their amendment by the Finance Act, 1970, income derived by a taxpayer from investments in certain categories of financial assets enjoyed exemption from tax. These exemptions were :
13. income up to Rs. 1,000 received on units in the Unit Trust of India;
14. income up to Rs. 1,000 by way of dividends on shares in Indian companies;
15. the whole of the interest on�
16. Treasury Savings Deposits Certificates;
17. Post Office Cash Certificates;

  iii. Post Office National Savings Certificates;

1. National Plan Certificates;
2. 12-Year National Plan Savings Certificates;
3. 10-Year Defence Deposit Certificates;

vii. 12-Year National Defence Certificates;

viii. Government of India Defence Certificates;

1. Premium Prize Bonds, 1963;
2. Deposits in Post Office Savings Banks, including deposits in cumulative time deposits accounts in such banks. (The bonus on deposits in C.T.D. Accounts is also exempt firm tax);
3. 5-Year Fixed Deposits under the Government Savings Certificates (Fixed Deposits) Rules, 1968 and the Post Office (Fixed Deposits) Rules, 1968.

[The interest on the investments specified at (c) above is entitled to exemption only to the extent to which the amounts of such Certificates or Deposits do not exceed, in each case, the maximum amount which is permitted to be invested or deposited therein.]

FINANCE ACT, 1970

13. In order to enlarge the area of investments, income from which qualifies for tax relief, and to provide a wider choice to investors to choose the form of investment, the Finance Act, 1970 has replaced the existing exemptions in respect of income on units in Unit Trust of India and dividends on shares in Indian companies by a broader and more liberal provision. Under section 80L, as now amended, deduction will be allowed in an aggregate amount up to Rs. 3,000 in respect of income derived by the taxpayer from one or more of the specified categories of investments, in computing the taxable income. The investments covered by this provision are the following :
14. Securities of the Central Government or any State Government.
15. Debentures, issued by any co-operative society (including a co-operative land mortgage bank or a co-operative land development bank) or any other institution or authority, which may be notified by the Central Government for the purpose of this provision.
16. Deposits under any scheme framed by the Central Government and notified by it for the purpose of this provision.
17. Shares in Indian companies.
18. Units in the Unit Trust of India.
19. Deposits with banking companies or co-operative banks, including land mortgage banks and land development banks.
20. Deposits with a financial corporation which is engaged in providing long-term finance for industrial development in India and which is approved by the Central Government for the purpose of section 36(1)(viii) of the Income-tax Act.

It will be open to the taxpayer to make investments according to his choice in one or more of the above-mentioned categories of financial assets and qualify for the deduction up to Rs. 3,000 in the aggregate in respect of income derived from these investments in the computation of his taxable income. [The existing total exemptions in respect of income derived from investments in various small savings securities and deposits continue independently.]

FINANCE ACT, 1970

14. The provisions of section 80L as amended will be operative from 1-4-1971, and will, accordingly, apply to the assessment year 1971-72, i.e., in relation to income derived from the specified categories of investments during the financial year 1970-71 or any other previous year relevant to the assessment year 1971-72.

FINANCE ACT, 1970

15. Under a consequential amendment to section 80M, it has been provided that in the case of a company deriving income by way of dividends from an Indian company, the deduction under that section (in respect of inter-corporate dividends) will be allowed only in respect of the dividends remaining after the deduction under section 80L. For this purpose, the deduction under section 80L will be attributed to the dividend income only if, and to the extent that, the income other than dividends qualifying for the deduction under that section is insufficient to absorb the deduction of Rs. 3,000 under section 80L. The effect of this provision may be illustrated as under :

	Rs.
1. Income by way of dividends from Indian companies included in the �gross total income� of the company receiving the dividend	10,000
2. Income by way of interest on securities, interest on bank deposits, etc., included in the �gross total income�	2,500
Deduction under section 80L :
3. Deduction against income by way of interest on securities, interest on bank deposits, etc.	2,500
4. Deduction against income by way of dividends from Indian companies	500
Deduction under section 80M :	3,000
5. Dividends included in �gross total income�	10,000
6. Less Deduction under section 80L taken against such dividends (as at item 4 above)	500
Remaining amount of dividends with reference to which deduction under section 80M is to be allowed	9,500

In the above example, if the income by way of interest on securities, interest on bank deposits (other than dividends) is taken at, say Rs. 5,000, the whole of the deduction under section  80L, namely, Rs. 3,000, is to be attributed to such items of income and no part of it should be related to the dividends. Accordingly, the deduction under section 80M will be allowed with reference to the full amount of Rs. 10,000 by way of dividends included in the �gross total income�.

[Section 80L as substituted by section 14 of the Finance Act and section 80M as amended by section 15 of the Finance Act]

 FINANCE ACT, 1970

Exemption from deduction of tax at source of interest on certain small savings schemes and bank deposits

16. With a view to mobilising savings for the public sector both in urban and rural areas so as to provide resources for the Fourth Five Year Plan, the Central Government has instituted a variety of small savings schemes having features which will be attractive to investors in different income groups. Simultaneously, some of the existing small savings schemes are also being modified to make these more attractive to investors. Some of the new small savings schemes carry the advantage of exemption from income-tax on the interest as in the past, while others provide for a higher rate of interest which will be subject to tax but will qualify for the deduction up to Rs. 3,000 under section 80L together with income from other specified categories of financial assets as explained in paragraph 13 above. With a view to encouraging large investments in these schemes, particularly by persons in the rural areas, the Finance Act, 1970 has amended the relevant provisions of the Income-tax Act so as to secure payment of the interest on investments of the taxable category without deduction of tax at source. This facility has been provided in respect of interest on the following new schemes :
17. 7-Year National Savings Certificates (IV Issue);
18. Debentures issued by any co-operative society (including a co-operative land mortgage bank or a co-operative land development bank) or any other institution or authority, which may be notified by the Central Government for the purpose of this exemption;
19. Deposits under any scheme framed by the Central Government and notified by it in the Official Gazette.

Further, in the context of Government�s policy of extending significantly the coverage of banking to rural areas, interest payable by banks to their constituents, which is otherwise subject to deduction of tax at source, has also been exempted from this requirement. This exemption covers interest credited or paid in respect of deposits with banking companies, co-operative banks, land mortgage banks and land development banks. Deposits with non-banking companies, etc., will continue to be subject to deduction of tax at source as at present.

[Section 193 and section 194A as amended by sections 22 and 23 respectively of the Finance Act]

FINANCE ACT, 1970

17. Exemption from tax of the interest on small savings schemes recently instituted by the Central Government – As stated in the preceding paragraph the Central Government has recently instituted a variety of small savings schemes so as to make these attractive to investors in different income groups. Some of the new small savings schemes carry the advantage of exemption from the income-tax on the interest. These are :
18. 7-Year National Savings Certificates (II Issue) including the Bank Series of such certificates.
19. 7-Year National Savings Certificates (III Issue) including the Bank Series of such certificates.
20. Scheme of 3-Year Fixed Deposits with the Government in the State Bank of India and in Post Offices.

The Central Government has issued Notification Nos. SO 2882 and SO 2877, dated 1-9-1970 so as to exempt the interest on the above-mentioned investments totally from tax under the terms of section 10(15)(ii) and (iia).

Measures for plugging loopholes in the law
leading to tax  avoidance

FINANCE ACT, 1970

Public charitable and religious trusts

18. Under the provisions of the Income-tax Act before the amendments made by the Finance Act, 1970, income from property held under trust wholly for charitable or religious purposes is exempt from income-tax to the extent such income is applied to the purposes of the trust in India in the same year. The balance of the income which is accumulated for application to such purposes in India is also exempt from tax so long as such accumulation does not exceed 25 per cent of the income of the trust or Rs. 10,000, whichever is higher. Any accumulation of income in excess of this limit is, all along, subject to tax. A similar exemption is available also in cases where property is held under trust in part only for charitable or religious purposes provided the trust was created before 1-4-1962. In both these types of trusts, accumulation of income beyond the limit of 25 per cent of the income of the trust or Rs. 10,000, whichever is higher, is allowed to be made without attracting tax liability on the excess, if the trust complies with certain procedural formalities (of giving notice to the Income-tax Officer specifying the purpose for which the income is desired to be accumulated, and the period for which the accumulation is proposed to be made) and subject to the requirement that the income so accumulated is invested in Government securities or any other approved securities. The maximum period for which such accumulation may be made under this provision is 10 years, and if the accumulated income is not applied to the purposes for which it was accumulated within one year of the expiry of the 10-year period, the exemption is lost and tax becomes chargeable on the accumulated income.

FINANCE ACT, 1970

19. These tax concessions have facilitated accumulation of tax-exempt funds with charitable and religious trusts and such funds are often used for acquiring control over industry and business. Further, although the law already provides for forfeiture of the exemption in a case where the income of a charitable trust or institution enures, or the income or property of the trust or institution is used or applied, for the benefit of the author of the trust or founder of the institution or any substantial contributor to the trust or institution or their relatives, these provisions have not been effective in preventing indirect benefits being provided to such author, founder, etc., out of the trust funds in a variety of ways. With a view to checking these abuses and reducing the scope for the use of tax-exempt funds of charitable and religious trusts and institutions to acquire control of industry and business, the Finance Act, 1970 has made certain changes in the provisions relating to the exemption from tax of the income of charitable and religious trusts, as explained in the following paragraphs.

FINANCE ACT, 1970

20. Section 11 (relating to exemption from tax of income from property held for charitable and religious purposes) has been amended in the following respects :
21. Exemption from tax will henceforth be allowed only in respect of the income actually applied to the purposes of the trust in India in the same year, and not in respect of income which is accumulated or finally set apart for application to such purposes. However, under the Explanation to section 11(1) as now substituted, it will be open to the trustees to exercise an option in writing to the effect that the income applied to the purposes of the trust in India during the period of three months immediately following the previous year should be deemed to be income applied to such purposes during the previous year. The option is to be exercised before the expiry of the time allowed originally or on extension for furnishing the return of income. Where such option is exercised, the income which is so deemed to have been applied to the purposes of the trust during the previous year will not be taken into account in calculating the income applied to such purposes during the immediately following previous year. Any income which is not applied to the purposes of the trust in India during the previous year to which the income relates, or which is not deemed to have been applied to such purposes during such previous year under the option referred to above, will be subjected to tax as if such income were the total income of an association of persons.
22. The existing provisions in section 11(2) which allows accumulation of the income of the trust for specified purposes for a maximum period of 10 years will continue to be operative subject to the existing condition that the person in receipt of the income informs the Income-tax Officer in writing of the purpose for which the income is being accumulated and also subject to the requirement that the moneys so accumulated are invested in the specified manner. Besides investment in Government securities or any other approved securities as under the existing law, sub-section (2), as amended, allows the deposit of the accumulated moneys in any account with the Post Office Savings Bank [including deposits under the Post Office (Time Deposits) Rules, 1970] or in any banking company, co-operative bank, land mortgage bank or land development bank. Such moneys may also be deposited in an account with any financial corporation which is engaged in providing long-term finance for industrial development in India and which is approved by the Central Government under section 36(1)(viii).
23. Sub-section (3) of section 11 has been amended to provide that if in any year the income which is accumulated for the specified purpose or purposes of the trust is applied to purposes other than charitable or religious purposes or ceases to be accumulated or set apart for application to such purposes, it will become chargeable to tax as the income of that year. Further, if, in any year, the accumulations cease to remain invested in Government securities or other approved securities or deposited in any account in the Post Office Savings Bank or with a banking company, co-operative bank, etc., or with a financial corporation as stated above, then also the income so accumulated will become chargeable to tax as the income of that year. It is further provided that if the accumulations are not utilised for the specified purposes during the period of accumulation or in the year immediately following the expiry of that period, then, the accumulations, to the extent they are not so utilised, will become chargeable to tax as income of the previous year immediately following the expiry of that period.
24. A consequential amendment to section 11(4) makes it clear that in the case of a business undertaking held under trust for charitable or religious purposes, the amount, if any, by which the income computed by the Income-tax Officer exceeds the income shown in the accounts will be deemed to have been applied to purposes other than charitable or religious purposes. Such amount will, accordingly, be chargeable to tax as income of the year for which the computation is made.

FINANCE ACT, 1970

21. Section 13 which specifies the circumstances in which a trust shall forfeit the exemption from tax under section 11 has been substituted by a new section. The main aspects in which the new section differs from the pre-existing section 13 are the following :
22. The provisions for forfeiture of exemption will henceforth apply not only to trusts for charitable purposes and charitable institutions but also to trusts for religious purposes and religious institutions.
23. In the case of trusts and institutions created or established after 31-3-1962, the exemption from tax will be forfeited if under the terms of the trust or the rules governing the institution, any part of the trust income enures for the direct or indirect benefit of the persons specified in new sub-section (3) of section 13. Such persons are : (a) the author of the trust or founder of the institution, (b) any person who has made a substantial contribution to the trust or institution, (c) where the author, founder or substantial contributor is a Hindu undivided family, a member of the family, (d) any relative of such author, founder, substantial contributor or member of the family, and (e) any concern in which any such author, founder, substantial contributor, member of the family or relative has a substantial interest.

For the purposes of these provisions, the term �relative� will have the enlarged connotation as under the existing law. According to the definition of �relative� in section 2(41) an individual�s relatives will comprise the individual�s husband, wife, brother, sister and lineal ascendants and descendants of the individual. For the purposes of the provision in section 13, �relative� includes also a lineal descendant of a brother or sister of the individual.

Under new Explanation 3 to section 13, a person will be deemed to have a substantial interest in a concern if, where the concern is a company, equity shares carrying not less than 20 per cent of the voting power are, at any time during the previous year, owned beneficially by such person or partly by such person and partly by one or more of the other persons mentioned in sub-section (3); in the case of a concern other than a company, the test will be that such person by himself or jointly with one or more of the other persons mentioned in sub-section (3) is entitled at any time during the previous year to not less than 20 per cent of the profits of the concern.

3. In the case of a trust or institution created or established after 31-3-1962, the exemption from tax will be forfeited also where the trust income or property is used or applied during the relevant year for the direct or indirect benefit of the author of the trust and other persons mentioned in sub-section (3). This provision applies also in the case of a trust or institution created or established prior to 1-4-1962, but in such cases, it is specifically provided that this shall not lead to forfeiture of the exemption if such use of the trust income or property is in compliance with a mandatory provision in the terms of the trust or a mandatory rule governing the institution.
4. New sub-section (2) of section 13 sets forth certain categories of transactions which would be considered as tantamount to the use or application of the trust income or property for the benefit of the specified persons. These transactions, specified in clauses (a) to (h) of sub-section (2), are broadly the following :
5. lending of the income or property of the trust or institution to any of the specified persons without either adequate security or adequate interest or both;
6. making available land, building or other property of the trust or institution for the use of any of the specified persons without charging adequate rent or other compensation;
7. payment of excessive remuneration to any of the specified persons for services rendered by him to the trust or institution;
8. making the services of the trust or institution available to any of the specified persons without adequate remuneration or other compensation;
9. purchase of shares, securities or other properties for the trust or institution from any of the specified persons for more than adequate consideration;
10. sale of shares, securities or other property of the trust or institution to any of the specified persons for less than adequate consideration;
11. diversion of a substantial portion of the income or property of the trust or institution in favour of any of the specified persons ;
12. investment of the trust funds in any concern in which any of the specified persons has a substantial interest.

The transactions at (a), (b) and (h) above will result in forfeiture of the exemption not only where these are entered into for the first time during the previous year, but also where these had been entered into in any earlier previous year and the arrangements continue to be in force for any period during the relevant previous year. However, it has been specifically provided that in respect of transactions at (a) to (g) above, these would not result in the forfeiture of exemption from tax in the case of a religious trust or religious institution, whenever created or established, or a charitable trust or institution, created or established before 1-4-1962, insofar as these transactions secured the use or application of the trust income or property for the benefit of the specified persons in relation to any period before 1-6-1970. If any such transaction entered into before that date continues inforce on or after that date, it will result in the forfeiture of the exemption. For instance, if a house property belonging to a charitable trust created before 1-4-1962, is let out on a concessional rent to the author of the trust (without there being any mandatory term in the trust deed in this behalf) and such concessional letting continues to be in force after 31-5-1970, the case would fall within the scope of the provision referred to in (b) above and the trust will forfeit the exemption from tax on the whole of its income. [It may, however, be noted that the exclusion of transactions securing the use or application of the trust income or property in relation to any period before 1-6-1970 from leading to forfeiture of the exemption, does not apply in the case of charitable trusts or institutions created or established after 31-3-1962. In the case of such trusts and institutions, the provisions of section 13 (prior to the amendments made by the Finance Act, 1970) already prohibited any such use or application of the trust income or property.]

5. In regard to the transactions referred to in clause (h) of sub-section (2) of section 13, it has been specifically provided that investment of the trust funds in any concern in which any of the specified persons has a substantial interest would result in forfeiture of the exemption from tax only where such investment is made after 31-12-1970, or having been made before 1-1-1971, the funds continue to remain so invested after 31-12-1970. In other words, if a trust which has invested its funds in any such concern, arranges to divest itself of such investments before 1-1-1971, it will not forfeit the exemption from tax on this ground. Further, by virtue of new sub-section (4) of section 23, even where such investment continues to be held after 31-12-1970, the exemption from tax will be forfeited on the whole of the income of the trust only where the quantum of the investment of the trust funds in the relevant concern exceeds 5 per cent of the capital of that concern. Where the investment does not exceed 5 per cent of the capital of the concern, the exemption from tax will be forfeited by the trust only in relation to the income from such investment and not in relation to the remainder of its income.
6. For the purposes of the provision in clause (h) of sub-section (2) of section 13, relating to investment of the trust funds in any concern in which any of the specified persons has a substantial interest, it may be noted that this provision has to be applied only with reference to investments in the capital of the concern as distinct from investments in the debentures of a company or by way of loans to a company or other concern. This is because under clause (a) of sub-section (2), a trust will be deemed to have used or applied its income or property for the benefit of the specified persons if any part of such income or property is, or continues to be, lent to any such person for any period during the previous year without adequate security or adequate interest or both. From this it follows that if the lending of the trust funds to any of the specified concerns either by way of debentures or otherwise is for adequate security and for adequate interest, that would not constitute use or application of the income or property for the benefit of any of the specified persons. If clause (h) of sub-section (2) is applied to such lending by way of debentures or loans for adequate security and on adequate interest, that would nullify the provision in clause (a) and render it otiose. Such an interpretation will not be a harmonious interpretation of the provisions in clause (a) and clause (h), and cannot, therefore, be sustained.

FINANCE ACT, 1970

22. The amendments to sections 11 and 13 as stated in the preceding paragraphs 20 and 21 will take effect from 1-4-1971 and will, accordingly, be operative for and from the assessment year 1971-72. With effect from the same assessment year, persons in charge of charitable or religious trusts or institutions will be under a statutory obligation to furnish a return of income of the trust in all cases where the total income of the trust as computed without availing of the exemption under section 11(1) exceeds the maximum amount which is not chargeable to tax. This has been secured by the insertion of a new sub-section (4A) in section 139. The return of income in such cases is to be furnished in a form to be laid down for this purpose in the Income-tax Rules and verified in the prescribed manner and should also set forth such other particulars as may be prescribed under the Income-tax Rules. Such a return will be treated for all the purposes of the Income-tax Act as a return under sub-section (1) of section 139. Accordingly, the time for furnishing the return as specified in that section, namely, 30th June of the assessment year or six months from the end of the previous year, in respect of a business if later, will apply in the case of trusts also.

[Section 11  as amended by section 5 of the Finance Act, section 13 as substituted by section 6 of the Finance Act, and section 139 as amended by section 20 of the Finance Act]

FINANCE ACT, 1970

23. Section 80G, relating to tax relief in respect of donations to charitable institutions, and funds, etc., has also been amended by the Finance Act, 1970, in the context of the provisions in section 13 as substituted by the Finance Act, 1970. Under section 80G, donations to a charitable institution or fund will qualify for tax relief only where the institution or fund is entitled to exemption from tax on its income under the provisions of sections 11 and 12. The effect of the provisions in section 13, as explained in paragraph 21 above, will be that a charitable trust or institution would forfeit the exemption from tax on its income if the funds of the trust or institution are invested in any concern in which the author of the trust, founder of the institution or any of the other persons specified in this behalf has a substantial interest. Accordingly, where the charitable institution or fund holds investments in any such concern, it will not satisfy the test of being eligible for exemption from tax on its income for the purpose of section 80G and, consequently, persons making donations to such an institution or fund would lose the tax relief in respect of their donations. As it is not the intention to deny tax relief to persons making  donations to a charitable institution or fund which has invested its moneys in any of the prohibited concerns only up to the limit of 5 per cent of the capital of the concern, Explanation 2 appearing below sub-section (5) of section 80G has been amended. This amendment makes it clear that persons making donations to charitable institutions and funds will continue to be eligible for tax relief on such donations by way of deduction under section 80G, notwithstanding that the institution or fund is denied the exemption from tax under section 11  on income arising to it from any investment in a concern in which the author, founder or any of the specified persons has substantial interest, where the aggregate of the funds invested by it in such a concern does not exceed 5 per cent of the capital of that concern. It may be noted that where such investment exceeds 5 per cent of the capital of the concern, the trust will forfeit the exemption from tax on the whole of its income and, in that event, donations to such a trust will fail to qualify for tax relief under section 80G.

[Section 80G as amended by section 13 of the Finance Act]

JUDICIAL ANALYSIS

EXPLAINED IN – In CIT v. Sarladevi Sarabhai Trust No. 2 [1988] 172 ITR 698 (Guj.) the amendment to section 13 was explained with the following observations (after reproducing para 21.6 of the Circular) :

�This circular clearly indicates that section 13(2)(h) will cover only those cases in which investments are made by the assessee-trust in the capital of the concerns to which section 13(2) applies. The circular further indicates that in the case of lendings by trust, the provisions of clause (a) of sub-section (2) of section 13 will apply and not section 13(2)(h) and any contrary interpretation would not be a harmonious interpretation of clauses (a) and (h) of sub-section (2) of section 13. It is, therefore, obvious that on the facts of such cases, if at all, clause (a) of sub-section (2) of section 13 will apply and not clause (h) thereof, if it is shown that the lending was without adequate security or adequate interest or both. Under these circumstances, if deposits are made by a trust in such concern, such deposits will not be covered by section 13(2)(h) and if at all, it is only section 13(2)(a) which would apply to such deposits. Consequently, the case of the Revenue that to such donation made by the assessee-trust, section 13(2)(h) will apply cannot be countenanced. It stands squarely answered against the Revenue by the aforesaid circular No. 45 of the Board itself. The said circular obviously is binding on the Revenue. . . .� (pp. 712-713)

EXPLAINED IN – In Trustees of Watumull Foundation (I)  v. Asstt. Director of Inspection [1994] 48 ITD 239 (Bom.-Trib.) the above circular was explained with the following observations :

�It transpires from the perusal of the above circular that section 13(2)(h) will cover only those cases in which investments are made by the assessee-trust in the capital of the concerns to which section 13(3) applies. It further indicates that in the case of lendings by trust, the provisions of section 13(2)(a) will apply and not section 13(2)(h) and any contrary interpretation would not be a harmonious interpretation of clauses (a) and (h) of section  13(2).�

 FINANCE ACT, 1970

Private discretionary trusts

24. Under the provisions of section 164, before the amendment made by the Finance Act, 1970, income of a trust in which the shares of the beneficiaries are indeterminate or unknown, is chargeable to tax as a single unit treating it as the total income of an association of persons. This provision affords scope for reduction of tax liability by transferring property to trustees and vesting discretion in them to accumulate the income or apply it for the benefit of any one or more of the beneficiaries, at their choice. By creating a multiplicity of such trusts, each one of which derives a comparatively low income, the incidence of tax on the income from property transferred to the several trusts is maintained at a low level. In such arrangements, it is often found that one or more of the beneficiaries of the trust are persons having high personal incomes, but no part of the trust income being specifically allocable to such beneficiaries under the terms of the trust, such income cannot be subjected to tax at the high personal rate which would have been applicable if their shares had been determinate.

FINANCE ACT, 1970

25. In order to put an effective curb on the proliferation of such trusts, and to reduce the scope for tax avoidance through such means, the Finance Act, 1970 has replaced section 164 by a new section. Under section 164 as so replaced, a �representative assessee�, who receives income for the benefit of more than one person whose shares in such income are indeterminate or unknown, will be chargeable to income-tax on such income at the flat rate of 65 per cent or the rate which would be applicable if such income were the total income of an association of persons, whichever course would be more beneficial to the Revenue.

FINANCE ACT, 1970

26. With a view to obviating hardship in genuine cases where the circumstances are such that tax evasion could not be considered to be the main purpose of creating the trust, certain exceptions have been specified where the flat rate of tax of 65 per cent will not apply. These exceptions are as under :
27. Where none of the beneficiaries of the trust has any other income chargeable to income-tax, the income of the trust will be charged to tax at the progressive rates of tax applicable in the case of an association of persons.

Under these circumstances, even if the shares of the beneficiaries had been specified, the tax chargeable on the trust income would have been lower than the tax chargeable if the income of the trust is treated as a single unit and taxed as the total income of an association of persons. In judging whether the beneficiaries of the trust had any other income chargeable to income-tax, no account will be taken of their agricultural income which is exempt from Central taxation altogether.

2. Similarly, where the trust was created under a will, the flat rate of 65 per cent will not apply to its income, and tax will be charged only at the progressive rates of tax applicable in the case of an association of persons.

This is based on the consideration that the trust comes into effect only after the death of the testator and, therefore, estate duty would have been paid on the property passing on his death (except where the death occurred before the Estate Duty Act came into force, i.e., 15-10-1953). Even otherwise, a person who creates a discretionary trust under his will may not be considered as doing this for the purpose of evading tax liability. The trust would, ordinarily, be created only for satisfying a genuine need to provide for the support and maintenance of the testator�s children or other relatives.

3. An exception is also provided in favour of trusts created during the lifetime of the settlor where all the beneficiaries are relatives of the settlor and they were at the time of creation of the trust mainly dependent on him for their support and maintenance. This exemption, however, applies only to trusts created before 1-3-1970.

This exception is based on the consideration that the trust would have been created for satisfying a genuine need to provide for the support and maintenance of the settlor�s dependent relatives and the trust being irrevocable it would cause real hardship if the income of such a trust is charged to tax at the high rate of 65 per cent year after year. The benefit is not, however, allowed to trusts coming into existence after Budget day because any one who creates a discretionary trust hereafter will be doing so in the full knowledge that the income would be liable to tax at the minimum rate of 65 per cent.

For the purpose of this provision, �relative� includes not only the wife and children of the settlor but also brother or sister, parent, grandparent as well as grandchildren, great grandchildren, etc. In all these cases, the benefit of exemption from the flat rate of 65 per cent will be available only where it is shown that these  relatives were, at the relevant time, mainly dependent   on the settlor for their support and maintenance. This provision will accordingly cover cases where a discretionary trust was created  any time in the past to provide for, e.g., a  widowed sister, a disabled brother, besides the wife and  children, including grandchildren of the settlor, all of whom were being  maintained  and supported by the settlor. If any of these relatives had their own independent means of livelihood, they would not be considered as being mainly dependent on the settlor for their support and maintenance.

4. Another exception to the provision for taxation of the income at the rate of 65 per cent is where the income is receivable by the trustees on behalf of a provident fund, superannuation fund, gratuity fund, pension fund or any other fund created bona fide by a person carrying on a business or profession exclusively for the benefit of persons employed in such business or profession. It may be noted in this connection that under section 10(25)(ii) and (iii), the income received by the trustees on behalf of a recognised provident fund or an approved superannuation fund is completely exempt from taxation. In the case of other provident funds and superannuation funds and also gratuity funds, pension funds and other funds for the benefit of employees of a business or profession, the income will be chargeable to tax at the rates of tax applicable to an association of persons, which is already the existing position.

FINANCE ACT, 1970

27. Section 164 as substituted includes certain ancillary provisions which make it clear that in respect of income derived from property held under trust wholly for charitable or religious purposes, so much of such income as is not entitled to exemption under section 11 will be chargeable to tax as if it were the income of an association of persons. Where property is held under trust in partonly for charitable or religious purposes, and the income which is applicable to other purposes is receivable on behalf of beneficiaries whose shares are indeterminate or unknown, the tax chargeable would be the greater of either (a) or (b) hereinbelow :
28. the tax on the whole of the income, to the extent it is not entitled to exemption under section 11, as if it were the total income of an association of persons;
29. the aggregate of�
30. i.          the tax on that part of the income which is applicable to charitable or religious purposes, to the extent it is not exempt under section 11, at the rates applicable to an association of persons, and
31. ii. tax on the income which is applicable to other purposes at the rate of 65 per cent.

Here also, exceptions have been provided from the flat rate of 65 per cent on the same lines as set forth in (1), (2) and (3) of paragraph 26 above.

 FINANCE ACT, 1970

28. The provisions of section 164 as substituted will come into effect on 1-4-1971, i.e., for and from the assessment year 1971-72. By an amendment to the definition of �rate or rates in force� in section 2(37A) it has been provided that for purposes of computation of �advance tax� in a case falling under section 164, the appropriate rate will be the rate of 65 per cent specified in that section or the rates of income-tax specified under the relevant year�s Finance Act in the case of an association of persons, whichever is applicable. Accordingly, advance tax will be payable during the financial year 1971-72 and subsequent years on the income of private discretionary trusts in accordance with the provisions of section 164 as explained in the preceding paragraphs.

[Section 2(37A) as amended by section 3(c) of the Finance Act, and section 164 as substituted by section 21 of the Finance Act]

 

  FINANCE ACT, 1970

Capital gains arising from transfer of agricultural land in urban areas

29. Capital gains arising from the transfer of a capital asset have been chargeable to income-tax for several years past. Where the transfer of the capital asset is effected within a period of 24 months from the date of its acquisition by the assessee, the capital gain is treated on a par with ordinary income and charged to tax on that basis. Gains arising from the transfer of a capital asset held by the assessee for more than 24 months are charged to tax on a concessional basis. In the case of companies, such gains are taxed at the rate of 40 per cent where they relate to lands and buildings, and at 30 per cent where they relate to other assets. In the case of non-corporate taxpayers, only a certain portion of the capital gains in excess of Rs. 5,000 is included in the taxable income. This proportion is 55 per cent where the gains relate to lands and buildings and 35 per cent where they relate to other assets.

FINANCE ACT, 1970

30. Prior to the amendment made by the Finance Act, 1970, the definition of the term �capital asset� in section 2(14) excluded from its scope, inter alia, agricultural land in India. Accordingly, no liability to tax arose on gains derived from transfer of agricultural land in India. This exemption of agricultural land from the scope of levy of tax on capital gains has a historical origin and is not due to any bar in the Constitution on the competence of Parliament to legislate for such levy. Agricultural land situated in municipal and other urban areas is essentially similar to non-agricultural land in such areas in its potentialities for use due to the progress of urbanisation and industrialisation. The Finance Act, 1970 has, accordingly, amended the relevant provisions of the Income-tax Act so as to bring within the scope of taxation capital gains arising from the transfer of agricultural land situated in certain areas. For this purpose, the definition of the term �capital asset� in section 2(14) has been amended so as to exclude from its scope only agricultural land in India which is not situate in any area comprised within the jurisdiction of a municipality or cantonment board and which has a population of not less than ten thousand persons according to the last preceding census for which the relevant figures have been published before the first day of the previous year. The Central Government has been authorised to notify in the Official Gazette any area outside the limits of any municipality or cantonment board having a population of not less than ten thousand up to a maximum distance of 8 kilometres from such limits, for the purposes of this provision. Such notification will be issued by the Central Government, having regard to the extent of, and scope for, urbanisation of such area, and, when any such area is notified by the Central Government, agricultural land situated within such area will stand included within the term �capital asset�. Agricultural land situated in rural areas, i.e., areas outside any municipality or cantonment board having a population of not less than ten thousand and also beyond the distance notified by the Central Government from the limits of any such municipality or cantonment board, will continue to be excluded from the term �capital asset�.

FINANCE ACT, 1970

31. The amendment to section 2(14), as stated in the preceding paragraph, applies from 1-4-1970, i.e., for and from the assessment year 1970-71. However, by an amendment to section 47 it has been specifically provided that no capital gain or loss will be computed with reference to any transfer of agricultural land in India effected before 1-3-1970.

FINANCE ACT, 1970

32. The effect of the amendments to section 2(14) and section 47, as stated above, will be that capital gains arising from transfer of agricultural lands situated in the municipal and other urban areas on or after 1-3-1970, will become liable to taxation even where such land was held for bona fide agricultural purposes, often as the main source of livelihood. With a view to relieving the burden of taxation on the capital gains in such cases, a provision has been made, in a new section 54B, for exempting from tax the capital gain arising from the transfer of agricultural land in certain circumstances. Under the new section 54B, where the capital gain arises from transfer of land which in the two years immediately preceding the date of transfer was being used by the assessee or a parent of his for agricultural purposes, and the assessee has, within a period of two years after that date purchased any other land (whether in the same area or elsewhere) for being used for agricultural purposes, then the capital gain will not be charged to tax to the extent that it has been utilised for acquiring the fresh land. Where the amount of the capital gain exceeds the cost of acquisition of the fresh land, only the excess will be chargeable to tax. The concession will, however, be forfeited if the  assessee transfers the fresh land acquired by him within a period of three years from the date of its purchase.

[Section 2(14) as amended by section 3(a) of the Finance Act; sections 47 and 54B as amended by section 11 of the Finance Act]

JUDICIAL ANALYSIS

EXPLAINED IN – In Raghottama Reddy  v. ITO [1988] 169 ITR 174 (AP) the above circular was explained with the following observations :

�A perusal of the two circulars indicates – if they can be taken as reflecting the intention of Parliament – that for taxing the capital gain arising from agricultural lands situated within municipalities, etc., Parliament thought that it would be sufficient to amend the definition of �capital asset� – and that was done by the Finance Act, 1970 (No. 19 of 1970). The amendment of the definition of �agricultural income� was altogether for a different purpose, as is clearly set out in the circular. But, as we have pointed out, the mere amendment of the definition of �capital asset� is not sufficient to clothe Parliament with the power to tax agricultural income. For that purpose, the definition of �agricultural income� itself had to be amended, which would then have reflected back into entry 82 of List I.� (pp. 192-93)

See also B.S. Jayachandra v. ITO [1986] 161 ITR 190 (Kar.) at page 199.

 FINANCE ACT, 1970

Entertainment expenditure incurred in businesses and professions

33. Under section 37, prior to its amendment by the Finance Act, 1970, entertainment expenses incurred in businesses and professions, including expenditure incurred through grant of entertainment allowances to directors or employees or through �expense accounts� operated by them, have been allowable as a deduction in computing the profits and gains of the business and profession, subject to certain limits specified in the law for this purpose. The maximum deduction available in any case is Rs. 30,000 and this limit is reached when the profit of the business or profession amount to Rs. 1,20,00,000.

FINANCE ACT, 1970

34. With a view to curbing the tendency for ostentatious entertainment by business houses, the Finance Act, 1970 has amended section 37 by inserting a new sub-section (2B) in that section under which entertainment expenditure incurred in India after 28-2-1970 will be disallowed altogether in computing the profits and gains of business or profession. Entertainment expenditure incurred outside India will continue to be admissible as a deduction subject to the limits already provided in the law in this behalf. This provision takes effect from 1-4-1970, and applies to assessments for and from the assessment year 1970-71.

[Section 37(2A) as amended by section 10(a) of the Finance Act, and section 37(2B) inserted by section 10(b) of the Finance Act]

FINANCE ACT, 1970

Guest houses maintained in businesses and professions

35. Under the Income-tax Act, prior to its amendment by the Finance Act, 1970, expenditure incurred by an assessee on the maintenance of guest houses for the purposes of his business or profession has been allowable as a deduction in computing the profits and gains of the business or profession, subject to certain limits and conditions specified in rule 6C of the Income-tax Rules. This rule covers expenditure on guest houses maintained at the principal place of the business or profession in India, any place where the assessee has an establishment for processing of raw materials, manufacture, processing or production of any article or thing, or any other industrial establishment employing not less than 50 whole-time employees throughout the relevant year, and, in the case of a business or profession having not less than 100 whole-time employees on its rolls also �holiday homes� for the use of such employees while on leave. The rule also covers guest houses at Delhi and at two other places in India which may be either the capital of a State Government or any other place which is of direct importance to the business or profession. Banking companies are allowed to maintain guest houses at Bombay to facilitate liaison with the Reserve Bank of India. Accommodation hired or reserved in a hotel for a period of more than six months during the year is treated as a guest house for the purposes of the rule.

FINANCE ACT, 1970

36. These provisions have been found to be of little effect in curbing proliferation of guest houses. In order to place an effective check on lavish expenditure on maintenance of guest houses, the Finance Act, 1970 has inserted a new sub-section (4) in section 37, under which expenditure incurred after 28-2-1970, on the maintenance of guest houses other than �holiday homes�, will be disallowed altogether in computing the profits and gains of business or profession. This provision will cover not only the establishment and other charges for running the guest house but also depreciation on the building where this is owned by theassessee, and rent paid for the accommodation where this is taken on hire or lease. Depreciation on assets, such as air-conditioners, refrigerators, cooking ranges, furniture and fittings, etc., in the guest house will also be disallowed under the proposed provision. Where any charges are recovered from persons using the guest house, these will be deducted from the expenditure on maintenance and the depreciation, and only the balance will be disallowed in computing the profits of the business or profession. The provision, as proposed, will not, however, apply to �holiday homes� maintained by an assessee employing in his business or profession not less than 100 whole-time employees throughout the relevant year, where the �holiday home� is intended for the exclusive use of such employees while on leave.

FINANCE ACT, 1970

37. The provision in sub-section (4) of section 37 takes effect from 1-4-1970, and will be applicable for and from the assessment year 1970-71. However, the provision for disallowance of depreciation on the building in which the guest house is located and on the assets in the guest house, in clause (ii) of the said sub-section (4), will apply only from the assessment year 1971-72.

[Section 37(4) inserted by section 10(c) of the Finance Act]

STRENGTHENING THE ADMINISTRATIVE MACHINERY OF THE
INCOME-TAX DEPARTMENT

FINANCE ACT, 1970

Present set up

38. The field organisation of the Income-tax Department is, at present, organised into territorial charges with one or more Commissioners of Income-tax at the head. Each Commissioner is assisted by several Inspecting Assistant Commissioners of Income-tax who supervise and control the work of  the Income-tax Officers assigned to their charge. The jurisdiction of Commissioners of Income-tax is laid down by the Board, and, within their respective jurisdictions, they also perform the functions of  Commissioners of Wealth-tax and Gift-tax as also Controllers of Estate Duty. In recent years, the functions of the Commissioner of Income-tax have increased enormously both in the technical sphere, partly statutory and partly non-statutory, and on the administrative side, with the result that the present strength of Commissioners is found to be inadequate for timely performance of all these functions.

FINANCE ACT, 1970

New cadre of Additional Commissioners

39. With a view to ensuring greater attention to the functions of Commissioners of Income-tax, without fragmenting their charges into non-viable units, and enabling them to devote special attention to problem areas, such as accumulation of assessments and areas of taxes, tax evasion, survey and the proper and efficient management of their charges, Government have created a new cadre of Additional Commissioners on a lower scale of pay, to take over some of the statutory and non-statutory functions ofCommissioners of Income-tax and thereby release senior officers for more important administrative and managerial duties. The Finance Act, 1970 has, accordingly, amended the relevant provisions of the Income-tax Act so as to include Additional Commissioners among the categories of income-tax authorities, and particularly within the term �Commissioners� as defined in section 2(16). These Additional  Commissioners will have the same status and functions under the statute as Commissioners of Income-tax. The Income-tax Act already allows distribution and allocation of work among  Commissioners of Income-tax on the functional basis. Under section 121, the Central Board of Direct Taxes has the power to assign to more than one  Commissioner (which expression will hereafter include Additional  Commissioner) concurrent jurisdiction over the same area or persons or classes of persons or incomes or classes of income or cases or classes of cases, and to distribute and allocate the work among these Commissioners (including Additional  Commissioners) on the functional basis. By an amendment of section 130, it has been specifically provided that where such concurrent jurisdiction over an  assessee is assigned to two or more  Commissioners (including Additional  Commissioners), the  Commissioner competent to perform any function in relation to such  assessee will be the  Commissioner (or Additional  Commissioner) to whom such function has been assigned under the order of the Board.

[Section 2(16) as amended by section 3(b) of the Finance Act; sections 116, 117 and 130 as amended respectively by sections 17, 18 and 19 of the Finance Act]

FINANCE ACT, 1970

40. Functions of Additional Commissioners – By Notification No. 87, dated 29-3-1970, published in Part II, Section 3(ii) of the Gazette of India, the Central Board of Direct Taxes has assigned to Additional Commissioners of Income-tax the following functions of the Commissioner of Income-tax:
41. Functions to be performed by the Additional Commissioners of Income-tax:
42. revisionary powersunder sections 263 and 264;
43. sanction for proceedings under section  147(a) and issue of notice  under section  148 [section 151(2)];
44. approval of annuity contractunder section  80E(3) and withdrawal of approval;
45. relief when salary, etc., is paid in arrears or in advanceunder section  89(1);
46. determination of period to be excluded for interest calculation -section 243(2);
47. determination of appearance by authorised representativesunder section  288(4);
48. recognition of Provident Funds under Part A of the Fourth Schedule;
49. approval of Superannuation Funds under Part B of the Fourth Schedule;
50. approval of Gratuity Funds under Part C of the Fourth Schedule;
51. corresponding powers under the Gift-tax Act and Wealth-tax Act.
52. Functions to be performed by the Additional Commissioners of Income-tax (Recovery) – All the functions of the Commissioner of Income-tax, under the 1961 Act and the 1922 Act, in connection with the recovery of taxes including stay of demands, withholding of refunds under section 241 and the work of Tax Recovery Commissioners.

MEASURES FOR PROVIDING TAX RELIEF AND AVOIDING INCONVENIENCE TO ASSESSEES IN CERTAIN CASES

FINANCE ACT, 1970

State housing boards, development boards, etc.

41. Several States have set up statutory Housing Boards for the framing and execution of housing and other development schemes. These Boards are autonomous organisations and they play an important role in implementing the housing programmes of Government for the common good. As these Boards are serving an important public purpose and do not exist for private profit, the Finance Act, 1970 has made a specific provision in a new clause (20A) of section 10 exempting the income of such Boards from tax altogether. This provision exempts from tax any income of an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both. This provision has been made with effect from 1-4-1962 that being the date of commencement of the Income-tax Act.

[Section 10(20A) inserted by section 4(a) of the Finance Act]

 FINANCE ACT, 1970

Hospitals and other medical institutions

42. Hitherto, universities and other educational institutions existing solely for educational purposes and not for purposes of profit have enjoyed complete exemption from tax on their incomes. However, in the case of hospitals and similar other institutions for treatment of illness, there has been no specific exemption from tax, unlike in the case of Universities. Medical institutions come under the category of charitable institutions and had to satisfy the conditions relating to application of not less than 75 per cent of their current incomes to their objects in the same year in order to qualify for exemption from tax on the remainder which is accumulated. In the context of the modifications in the provisions relating to the exemption from tax of the income of charitable and religious trusts and institutions (vide paragraphs 20 and 21 of this circular), the Finance Act, 1970 has inserted a new clause (22A) in section 10 under which the income of hospitals and other medical institutions which exist solely for philanthropic purposes and not for purposes of profit will be totally exempt from tax. This provision covers also institutions for treatment of mental defectiveness as also those for treatment of persons during convalescence or of persons requiring medical attention or rehabilitation. The income of all these categories of institutions will be exempt from tax altogether, as in the case of Universities and other educational institutions. The amendment takes effect from 1-4-1970 and accordingly applies for and from the assessment year 1970-71.

[Section 10(22A) inserted by section 4(b) of the Finance Act]

 FINANCE ACT, 1970

Standard deduction for expenditure on travelling in the case of salaried employees

43. Hitherto, a salaried taxpayer owning a conveyance (motor car, motor cycle, scooter, bicycle, etc.) and using it for the purpose of employment, has been eligible for a standard deduction from his salary income to cover the expenditure incurred by him on the maintenance of the conveyance and its wear and tear attributable to its use for the purpose of employment. The standard deduction for a motor car has been Rs. 200 per month where the gross yearly salary does not exceed Rs. 25,000, and Rs. 250 per month, where it exceeds Rs. 25,000; for a motor cycle, scooter or other moped, it has been Rs. 50 per month, and for bicycle, Rs. 5 per month. The standard deduction has not been available in the case of salaried employees who do not own a conveyance and use the public transport system in travelling for the purpose of employment.

FINANCE ACT, 1970

44. With a view to providing some relief in the tax to salaried taxpayers who do not own any conveyance but use the public transport system for travelling for purposes of employment, the Finance Act, 1970 has amended section 16(iv) so as to allow a standard deduction of Rs. 35 per month (Rs. 420 for the year) to all salaried taxpayers other than those who own and use a motor car or a motor cycle, a scooter or other moped for the purpose of their employment. The standard deduction for a motor cycle, scooter or other moped has been increased from Rs. 50 to Rs. 60 per month. The standard deduction for a motor car has been prescribed in a uniform amount of Rs. 200 per month irrespective of the gross salary level, as against Rs. 250 per month for those having gross yearly salary exceeding Rs. 25,000 and Rs. 200 for others hitherto. The standard deduction of Rs. 35 per month will be admissible to those who do not own any conveyance, as also to those who own a bicycle or any other conveyance, not being a motor car, motor cycle, scooter or other moped. No proof of actual expenses incurred will be required to be furnished in the case of any salaried taxpayer. The amended provisions will apply from 1-4-1971, i.e., for and from the assessment year 1971-72, and will accordingly be applicable in relation to salary incomes of the financial year 1970-71. As under the pre-existing provision, the standard deduction will not be available to an employee who is in receipt of a conveyance allowance whether as such or as part of his salary.

[Section 16 as amended by section 7 of the Finance Act]

 FINANCE ACT, 1970

Married couples governed by the concept of �community of property� in the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu

45. The Income-tax Act was extended to the former Portuguese possessions of Goa, Daman and Diu and Dadra and Nagar Haveli with effect from 1-4-1963, by a Presidential Regulation under article 240 of the Constitution. Under the personal law governing persons domiciled in these Union territories, married couples are subject to the system of �community of property� under which all present and future belongings of each spouse become the joint property of both the spouses. The joint ownership of the property continues as long as the marriage subsists. In view of this position, income from all properties, including business, shares, securities and other investments, which before the marriage belonged to the spouses separately, as also income from properties acquired by either spouse after the marriage, belongs to them jointly and the assessment of such income has to be made on the spouses jointly in the status of an association of persons or body of individuals. In regard to income from salary and other income derived by personal exertion, however, the spouses will be assessable individually on their separate incomes.

FINANCE ACT, 1970

46. The Finance Act, 1970 has amended section 80C (relating to tax relief in respect of long-term savings in specified media in the case of individuals and Hindu undivided families) so as to extend to married couples governed by the system of �community of property� in the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu the benefit of tax relief on their long-term savings in the specified media on the same lines as are presently available in the case of individuals. Under the section as amended, married couples in these Union territories who are assessable to income-tax in the status of an association of persons or body of individuals by reason of their being governed by the Portuguese personal law of �community of property� will be entitled to tax relief with reference to the savings effected by them out of their income chargeable to tax by way of: (i) premiums paid on policies of insurance or contracts for deferred annuities on the life of either spouse or on the life of any child of either spouse ; (ii) deposits in a 10-year or 15-year account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959; and (iii) contributions to the Public Provident Fund set up by the Central Government. Savings in these forms will qualify for tax relief up to 30 per cent of the gross total income of the association or body, or Rs. 15,000, whichever is less, as in the case of individuals. The tax relief will be allowed by deducting 60 per cent of the first Rs. 5,000 and 50 per cent of the balance of the qualifying amount of savings in computing the taxable income of the association or body.

FINANCE ACT, 1970

47. The amendment, as stated in the preceding paragraph, will come into effect on 1-4-1971, and will, accordingly, apply for and from the assessment year 1971-72. In regard to the period up to and including the assessment year 1970-71, similar relief has been allowed to such married couples in these Union territories by the issue of a Removal of Difficulties Order by the Central Government under section 7 of the Taxation Laws (Extension to Union Territories) Regulation, 1963.

[Section 80C as amended by section 12 of the Finance Act]

 FINANCE ACT, 1970

Payment of income to non-residents without deduction of tax at source in certain cases

48. Under section 195, any person responsible for paying to a non-resident, including a foreign company, any income by way of interest, other than �interest on securities� or any other sum (other than dividends) which is chargeable to income-tax in India, is required to deduct tax at source on such income at the time of payment. [Income by way of salaries, �interest on securities� and dividends are also subject to deduction of tax at source in all cases, regardless of whether the recipient of the income is resident or not resident in India.] This provision causes avoidable inconvenience to persons and concerns, who though technically not resident in India, conduct their activities in this country on a more or less permanent basis through a branch or other establishment and are regularly assessed to income-tax here. Besides, the existing provision, if interpreted strictly, would require tax to be deducted at source with reference to the income element embedded in payments made by a large number of consumers for goods or services provided by non-resident concerns operating in India. With a view to avoiding hardship and inconvenience in such cases, the Finance Act, 1970 has made a specific provision in section 195 under which any non-resident, including a foreign company, may obtain, from the Income-tax Officer, a certificate authorising him to receive payments of income by way of interest (other than �interest on securities�) or any other sum (other than dividends) which is chargeable to tax in India, without deduction of tax at source. Such application may be made in the cases and under the circumstances to be specified by the Central Board of Direct Taxes in the Income-tax Rules. The Rules will also specify the conditions subject to which such a certificate may be granted by the Income-tax Officer and provide for other connected matters. Every person responsible for paying such interest or other sum to the holder of a certificate granted under this provision shall pay such income without deducting tax at source so long as the certificate is in force, i.e., the period specified in the certificate, or if it is cancelled by the Income-tax Officer earlier, till such cancellation.

[Section 195 as amended by section 24 of the Finance Act]

 FINANCE ACT, 1970

Extension of time for payment of final instalment of advance tax in certain cases

49. The Finance Act, 1969 made certain changes in the scheme of payment of advance tax under the Income-tax Act with a view to making the scheme more effective. Under the provisions as amended, advance tax is payable during the financial year 1969-70 and subsequent years by all categories of persons in three equal instalments, as against four instalments in certain categories of cases and three in others under the earlier law. These instalments are due on 15th June, 15th September and 15th December of the financial year in the case of a person deriving 75 per cent or more of his total income from a source or sources for which he closes his accounts on 31st December or earlier. In other cases, the instalments are due on 15th September, 15th December and 15th March. Another change made in 1969 placed a statutory obligation on the taxpayer to make an estimate of his current income and pay advance tax thereon if such tax exceeds the advance tax demanded from him by more than one-third of the latter amount. Formerly, there was no such obligation on the taxpayer to pay a higher amount of advance tax than that demanded by the Income-tax Officer. These provisions lead to some hardship to taxpayers in those cases where the accounts of the business carried on by the taxpayer are closed on 31st December or 31st March because, in such a case, it will be difficult for him to make a reasonably accurate estimate of the profits of such business before closing of accounts on expiry of the account year. The statutory provisions on the other hand, require such a taxpayer to make an estimate of his current income and pay advance tax on the basis 15 days before the date of closing of the accounts.

FINANCE ACT, 1970

50. With a view to relieving hardship and inconvenience to taxpayers in such cases, the Finance Act, 1970 has made a provision in section 212 authorising the Commissioner of Income-tax to extend the due date for payment of the last instalment of advance tax in deserving cases. Such extension will be granted by the Commissioner where he is satisfied, that, having regard to the nature of the business carried on by the  assessee and the date of expiry of the previous year in respect of such business, it will be difficult for the assessee to furnish the estimate of his current income and of the advance tax payable by him on such income before the due date of the final instalment. The assessee will, however, be required to pay the advance tax demanded from him by the Income-tax Officer on or before the due date specified in the law for this purpose and, if he does this, he may be allowed time to furnish the estimate of his current income and of the advance tax payable thereon up to a period of 30 days following the last day of the previous year in respect of his business. Where such extension is granted by the Commissioner, the assessee may pay the further amount of advance tax (i.e., the amount by which the advance tax already paid by him falls short of the advance tax payable in accordance with his estimate on or before the date so extended.

[Section 212(3A) as amended by section 25 of the Finance Act]

OTHER AMENDMENTS

FINANCE ACT, 1970

Export markets development allowance

51. The Finance Act, 1968 introduced a new provision in section 35B under which domestic companies and resident non-corporate taxpayers, incurring expenditure under specified heads for development of export markets for Indian goods on a long-term basis, are entitled to an export markets development allowance in the computation of their taxable profits. This allowance consists of a weighted deduction in an amount equal to one and one-third times the amount of the qualifying expenditure. One of the heads of expenditure specified in the relevant provision as qualifying for the weighted deduction is that incurred on �distribution, supply or provision outside India� of the goods, services or facilities dealt in or provided by the taxpayer in the course of his business. This provision is susceptible of the interpretation that expenditure incurred by an exporter on payment of ocean freight, insurance,  etc., in connection with sale of goods to a foreign purchaser on the c.i.f. basis, would qualify for the weighted deduction. As this is not the intention underlying the provision, the Finance Act, 1970 has amended section 35B so as to make it clear that expenditure on �distribution, supply or provision outside India� of goods, services or facilities will not include expenditure incurred in India in connection therewith or expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in  transit. This amendment takes effect retrospectively from 1-4-1968, from which date the relevant provision was introduced.

[Section 35B of the Income-tax Act as amended by section 8 of the Finance Act]

 FINANCE ACT, 1970

Deduction of profits transferred to special reserve account in case of certain financial corporations

52. Under section 36(1)(viii), financial corporations engaged in providing long-term finance for industrial development in India are entitled to a deduction in the computation of their taxable profits, of amounts transferred by them out of such profits to a special reserve account up to a specified percentage of their total income. This concession is admissible only where the financial corporation is approved by the Central Government for this purpose. Up to and inclusive of the assessment year1965-66, the amount of the deduction under this provision was limited to 10 per cent of the total income of the corporation. Under the Finance Act, 1966, the quantum of the deduction was increased to 25 per cent of the total income in the case of a financial corporation having a paid-up capital of not exceeding Rs. 3 crores. This amendment was made with a view to facilitating the building up of internal resources of these corporations at a fast pace, so as to enable them to dispense with the need for obtaining subventions from the State Governments. The amendment made by the Finance Act, 1966, was effective from 1-4-1966 and was applicable to assessments for the assessment year 1966-67 and subsequent assessment years. The intention was that in the assessment for 1966-67, any financial corporation which was already entitled to the deduction up to 10 per cent of its total income under the earlier law, should qualify for the increased quantum of deduction if it transferred the necessary further amount to the reserve in the accounts of the relevant previous year.

FINANCE ACT, 1970

53. Financial corporations which maintain their accounts for the year ending on 30th June or near date would have closed their accounts for the previous year relevant to the assessment year 1966-67 and these accounts may also have been adopted at the general meeting of the shareholders, before the introduction of the Finance Bill, 1966. In such a case, the financial corporation can appropriate the additional amount of 15 per cent to the special reserve only in the accounts of the following year. In order to remove any doubts about the applicability of the amended provision for the allowance of deduction up to 25 per cent of the total income in the case of such a corporation for the assessment year 1966-67, the Finance Act, 1970 has made a clarificatory amendment to section 36(1)(viii). The amendment makes it clear that where the amount carried to the special reserve in the previous year relevant to the assessment year 1966-67 by such a financial corporation falls short of 25 per cent of its total income, it will nevertheless be entitled to the deduction up to 25 per cent of its total income if it transfers a further amount to such reserve in the immediately following year over and above the amount in respect of which it is entitled to the deduction for the assessment year 1967-68.

[Section 36(1)(viii) as amended by section 9 of the Finance Act]

 FINANCE ACT, 1970

Income derived by Indian companies from transfer or servicing of technical �know-how�

54. The Finance Act, 1969 introduced a new provision, in section 80MM, with effect from 1-4-1970, for the concessional taxation of income received by an Indian company by way of royalties, technical service fees, etc., from any business concern in India in consideration of providing technical know-how or technical services to such concern. Under the provision, the company will be entitled to a deduction of 40 per cent of such income in the computation of its taxable income. This provision is intended to encourage the development of local know-how by Indian companies and thereby minimise the repetitive import of technology.

FINANCE ACT, 1970

55. Under the provision as originally introduced in the Finance Bill, 1969, there was a stipulation that the concessional basis of taxation will be available only where the agreement under which the technical know-how or technical services are provided, has been approved by the Central Government before 1st October of the relevant assessment year. During the clause-by-clause consideration of that Bill in the Lok Sabha, an amendment was made to this provision which had the effect of making the concessional basis of taxation available subject only to the condition that the approval of the Central Government to the relevant agreement should have been applied for before 1st October of the assessment year, even though approval may be refused subsequently. As the provision for approval of the agreement by the Central Government was intended to prevent abuse of the tax concession, the Finance Act, 1970 has made a clarificatory amendment to the above-mentioned provision in section 80MM so as to make it clear that the tax concession will be available only where the relevant agreement is approved by the Central Government and that such approval is to be applied for before 1st October of the relevant assessment year.

[Section 80MM as amended by section 16 of the Finance Act]

AMENDMENTS TO WEALTH-TAX ACT

Finance Act, 1970

Increases in the rates of ordinary wealth-tax and modifications in the scheme of levy of additional wealth-tax on the value of urban lands and buildings included in the net wealth, in the case of individuals and Hindu undivided families

56. Under the Wealth-tax Act, wealth-tax is chargeable on the net wealth in the case of individuals, Hindu undivided families and companies. The charge of wealth-tax on the net wealth of companies was suspended under the Finance Act, 1960, and has not been revived. In the case of individuals and Hindu undivided families, the rates of ordinary wealth-tax for the assessment year 1970-71 range from 0.5 per cent in the lowest slab of net wealth (after the initial exemption of Rs. 1 lakh in the case of individuals and Rs. 2 lakhs in the case of Hindu undivided families), to a maximum of 3 per cent on net wealth in the slab over Rs. 20 lakhs. As a measure for bringing about socio-economic equality and reducing concentration of wealth, the Finance Act, 1970 has increased the rates of ordinary wealth-tax in the case of individuals and Hindu undivided families with effect from 1-4-1971, i.e., for and from the assessment year 1971-72. The revised rates are: 1 per cent in the lowest slab of net wealth (following the initial exemption of Rs. 1 lakh in the case of individuals and Rs. 2 lakhs in the case of Hindu undivided families as at present) up to Rs. 5,00,000; 2 per cent on net wealth in the slab Rs. 5,00,001 � Rs. 10,00,000 ; 3 per cent in the slab Rs. 10,00,001 � Rs. 15,00,000; 4 per cent in the slab Rs. 15,00,001 � Rs. 20,00,00; and 5 per cent on the net wealth in excess of Rs. 20,00,000.

Finance Act, 1970

57. Since the assessment year 1965-66, additional wealth-tax has been leviable on the value of lands and buildings situated in cities and towns with a population exceeding one lakh and included in the net wealth of individuals and Hindu undivided families. Certain initial exemptions ranging from Rs. 2 lakhs to Rs. 5 lakhs are provided depending upon the population of the city or town in which the lands and buildings are situated. There is a further exemption of Rs. 2 lakhs in all cases, and on the balance of the value of such lands and buildings, additional wealth-tax is levied at rates ranging from 1 per cent to 4 per cent. The 4 per cent rate applies to the value of urban lands and buildings over Rs. 19 � 22 lakhs depending upon the population of the city or town in which such assets are situated. �Business premises� (i.e., buildings and lands used by the taxpayer for the purposes of his own business or profession) are excluded from the scope of the levy. The Finance Act, 1970 has made certain modifications in the scheme of levy of additional wealth-tax in the case of individuals and Hindu undivided families, as explained in the following paragraphs.

Finance Act, 1970

58. For and from the assessment year 1971-72, additional wealth-tax will be leviable on the net value of lands and buildings situated in �urban areas� and included in the net wealth of the individual or Hindu undivided family. For the purpose, �urban area� is defined to mean any area within the limits of a municipality or cantonment board which has a population of not less than 10,000 according to the latest census for which relevant figures have been published. Power has been vested in the Central Government to bring within the term �urban area�, by notification in the Official Gazette, any area falling outside the limits of any such municipality or cantonment board and up to a maximum distance of 8 kilometres from such limits. This will be done by the Central Government having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations.

Finance Act, 1970

59. �Business premises� will continue to be excluded from the proposed levy, as at present. But the definition of �business premises� has been modified to bring guest houses maintained by business concerns within the scope of the levy of additional wealth-tax.

Finance Act, 1970

60. The initial exemption of the value of lands and buildings (other than business premises) in �urban areas� is fixed in a uniform amount of Rs. 5 lakhs, regardless of the population of the place where these assets are situate. On the excess of the value of such lands and buildings over Rs. 5 lakhs, additional wealth-tax will be charged at the rate of 5 per cent in the slab Rs. 5,00,001 � Rs. 10,00,000, and 7 per cent in the slab over Rs. 10,00,000.

Finance Act, 1970

61. Where the net wealth of the assessee includes the value of his interest as a partner in a firm or as a member of an association of persons, and the assets of such firm or association include lands and buildings (other than business premises) situated in �urban areas� then, the interest of the assessee in such firm or association shall be regarded as partaking of the character of lands and buildings in �urban areas� to a proportionate extent. For this purpose, the ratio of the value of such �urban assets� possessed by the firm or association to the net wealth of the firm or association will be ascertained, and such ratio will be applied to the value of the assessee�s interest in the firm or association to determine the extent to which such interest is to be treated as �urban assets�. Likewise, where the net wealth of an assessee includes the value of equity shares in a closely-held company, i.e.,a company in which the public are not substantially interested ascertained by the tests laid down in section 2(18) an appropriate proportion of the value of such shares will be regarded as consisting of �urban assets�. This proportion will be the extent to which the net wealth of the company includes the value of �urban assets�.

Finance Act, 1970

62. It has been specifically provided that in determining the value of lands and buildings in �urban areas� (other than business premises) for the purpose of levy of additional wealth-tax, deduction will be allowed from the gross value of such assets for debts incurred for the purpose of acquiring, improving, constructing, repairing, renewing or reconstructing such land or building. But in respect of other debts which are deductible in computing the net wealth of the assessee, these will first be deducted from the gross value of assets other than lands and buildings in �urban areas� (excluding business premises), and only the balance, if any, will be deducted from the value of such lands and buildings.

Finance Act, 1970

63. The above-mentioned provisions, for increases in the rates of ordinary wealth-tax and changes in the scheme of levy of additional wealth-tax on the value of urban lands and buildings, will be effective from 1-4-1971, i.e., for and from the assessment year 1971-72. The maximum rate of ordinary wealth-tax was increased to 3 per cent with effect from the assessment year 1969-70 under the Finance Act, 1968. In the context of this change and the further increases in the rates of ordinary and additional wealth-tax under the Finance Act, 1970, the provision in rule 2 at the end of Part II of the Schedule to the Wealth-tax Act, which has the effect of limiting to 2.5 per cent the wealth-tax chargeable in the case of individuals and Hindu undivided families with reference to the value of shares held by them in a company, has been omitted retrospectively from 1-4-1969.

[Schedule as amended by section 26(f) of the Finance Act]

Finance Act, 1970

Exclusion, from the levy of wealth-tax, of agricultural property situated in the State of Jammu and Kashmir

64. By an amendment made in the Wealth-tax Act through the Finance Act, 1969, the levy of wealth-tax in the case of individuals and Hindu undivided families was extended to the value of agricultural property, with effect from 1-4-1970, i.e., from the assessment year 1970-71. Parliament�s competence to legislate for the extension of the levy of wealth-tax to agricultural property is derived from article 248 of the Constitution (relating to the residuary powers of legislation) and entry 97 of the Union List in the Seventh Schedule to the Constitution. However, article 248 and entry 97 of the Union List, in the form in which they apply to the State of Jammu and Kashmir, do not cover taxes on the capital value of assets being agricultural land. In view of this position under the Constitution, the relevant provision in the Wealth-tax Act has now been amended to make it clear that the extension of the levy of wealth-tax to agricultural property under the amendment made in 1969 will not apply in relation to agricultural land in the State of Jammu and Kashmir.

[Section 2(e) as amended by section 26(a) of the Finance Act]

Finance Act, 1970

Amendment of the provision relating to exemption of one residential house from wealth-tax

65. The Wealth-tax Act, at present, contains a provision in section 5(1)(iv) under which one house or part of a house belonging to the assessee and exclusively used by him for residential purposes is not to be included in the net wealth. Where such house is situated in a place with a population exceeding 10,000, the exemption is limited to Rs. 1 lakh of the value of such house or part of a house. But where the house is situated in any other place, the whole of its value is exempt from wealth-tax. The provision in section 5(1)(iv) has been amended by the Finance Act, 1970, to extend the limit of Rs. 1 lakh over the value of a residential house eligible for exemption under this provision, to such houses situated even in areas with a population not exceeding 10,000. In effect, therefore, the exemption of the value of one residential house will be limited to Rs. 1 lakh in all cases. This provision will be effective from 1-4-1971, and will be applicable for and from the assessment year 1971-72.

[Section 5(1)(iv) as amended by section 26(b) of the Finance Act]

Finance Act, 1970

Exemption from wealth-tax of the value of one farm house

66. Under section 5(1)(iv), before its amendment by the Finance Act, 1970, as stated in the preceding paragraph, a �farm house� (i.e., a residential house used by the taxpayer which is situated on agricultural land and which is used by him for supervising or directing his agricultural operations) was exempt from wealth-tax irrespective of its value, because such farm houses would, by and large, be situated in places having a population of not more than 10,000 persons. Under the clause as amended by the Finance Act, 1970, the exemption will hereafter be limited to Rs. 1 lakh even in such cases. Persons having extensive agricultural holdings may have farm houses situated in the midst of such holdings, the value of which may even exceed Rs. 1 lakh; and such persons may also own a residential house apart from the farm house. As a farm house is essential to direct agricultural operations, the Finance Act, 1970 has inserted a new clause (ivb) in section 5(1) for exempting one farm house altogether from wealth-tax irrespective of its value. Under the new clause (ivb), one building or one group of buildings owned by a cultivator of agricultural land (or by a person receiving rent or revenue out of agricultural land) will be completely exempt from wealth-tax, subject to the condition that such building or group of buildings is on or in the immediate vicinity of agricultural land and is required by the owner, by reason of his connection with the land, for use as a dwelling house, store-house or out-house.

[Section 5(1)(ivb) as inserted by section 26(b) of the Finance Act]

Finance Act, 1970

Exemption from wealth-tax of Government securities, shares in companies, units in the Unit Trust of India, debentures issued by certain institutions or authorities and bank deposits, subject to certain limits

67. The Wealth-tax Act already provides for the exemption of investments in several small savings and other schemes of Government in computing the net wealth of individuals and Hindu undivided families. These cover (a) 5-Year Fixed Deposits with the Central Government in the State Bank of India or in Post Offices, (b) investments in specified small savings certificates to the extent of the maximum amount permitted to be invested or deposited therein, and (c) deposits in Post Office Savings Banks Accounts and Cumulative Time Deposits in Post Office Savings Banks. An individual can currently invest in the deposits and small savings schemes of the Central Government up to a maximum of Rs. 1,20,000 in his own name and up to a similar amount in the joint names of himself and his wife or in the names of his minor children. No exemption from wealth-tax is presently available in respect of units in the Unit Trust of India, Government securities (other than 6�% Gold Bonds, 1977, 7% Gold Bonds, 1980 and National Defence Gold Bonds, 1980, and the small savings certificates mentioned above), or shares in Indian companies (except for a five-year period in respect of shares in certain manufacturing companies, forming part of the initial issue of equity share capital made by such companies after 31-3-1964).

Finance Act, 1970

68. In order to widen the area of investments in financial assets qualifying for exemption from wealth-tax, the Finance Act, 1970 has extended the exemption from wealth-tax to the following categories of investments :
69. Securities of the Central Government or of any State Government.
70. Shares in Indian companies.
71. Debentures, issued by any co-operative society (including a co-operative land mortgage bank and a co-operative land development bank) or any other institution or authority, which may be notified by the Central Government in the Official Gazette for the purpose of this exemption.
72. Units in the Unit Trust of India.
73. Deposits in banking companies, or co-operative banks, including land mortgage banks and land development banks.
74. Deposits with a financial corporation which is engaged in providing long-term finance for industrial development in India and which is provided for the purposes of section 36(1)(viii).

Finance Act, 1970

69. There will be an overall limit of Rs. 1,50,000 on the exemption in respect of investments in the above-mentioned assets taken together with the investments already exempt from wealth-tax, namely, the 5-Year Fixed Deposits with the Central Government and investments or deposits in various small savings schemes of the Central Government already in existence or which may be instituted hereafter. The limit of Rs. 1,50,000 will not, however, apply to Cumulative Time Deposits in Post Office Savings Banks, or to the Gold Bonds mentioned earlier, which will continue to be exempt as before. The existing exemption for a 5-year period of shares in certain manufacturing companies, where these form part of the initial issue of equity capital by such companies after 31-3-1964, will also be outside the purview of the above-mentioned limit. Investments in the newly instituted 7-Year National Savings Certificate (II Issue), (III Issue) and (IV Issue), 3-Year Fixed Deposits1 with the Central Government in the State Bank of India or in Post Offices and the schemes of Recurring Deposits and Time Deposits in Post Offices,2 will also be exempt from wealth-tax, subject to the overall limit of Rs. 1,50,000 mentioned above. It will be open to the investor to make investments in any one or more of the above-mentioned categories of assets at his choice and qualify for the exemption up to Rs. 1,50,000.

Finance Act, 1970

70. The exemption of investments in the above-mentioned categories of financial assets up to an aggregate value of Rs. 1,50,000 will be available only in respect of such of these investments as are held by the assessee for a period of at least six months ending with the valuation date. In the case of shares in Indian companies, these will qualify for the exemption if they are held by the assessee from the date of their first issue or for six months ending with the valuation date whichever period is shorter.

Finance Act, 1970

71. As investments in the small savings certificates and deposits schemes of the Central Government already exempt from tax may, in some cases, exceed the limit of Rs. 1,50,000, it has been specifically provided that such investments made before 1-3-1970 will continue to enjoy exemption even if their aggregate value exceeds the limit of Rs. 1,50,000, as long as they continue to be held by the assessee.

Finance Act, 1970

72. The above-mentioned provisions are effective from 1-4-1971, i.e., for and from the assessment year 1971-72.

[Sections 5(1) and 5(3) as amended, and new sub-section (1A) inserted in section 5, by section 26(b) of the Finance Act]

Finance Act, 1970

Consequential provision in the Wealth-tax Act relating to distribution and allocation of work on the functional basis among Commissioners of Wealth-tax including Additional Commissioners

73. The Wealth-tax Act already provides for the distribution and allocation of work among Commissioners of Wealth-tax on the functional basis by orders of the Central Board of Direct Taxes. In the context of the creation of a cadre of Additional Commissioners of Income-tax to take over some of the functions of the Commissioners and allocation of the work on the functional basis among Commissioners and Additional Commissioners for the purposes of the Wealth-tax Act as well, the Finance Act, 1970 has made a specific provision in new section 11AA. Under the new section, in a case where two or more Commissioners (including Additional Commissioners) have been vested with concurrent jurisdiction over any assessee, the Commissioner competent to perform any function under the Wealth-tax Act will be the Commissioner (or Additional Commissioner) who is empowered to perform such functions under the orders made by the Board under the existing provisions for distribution and allocation of the work among them.

[Section 11AA inserted by section 26(c) of the Finance Act]

Finance Act, 1970

Provision for extension of the time for furnishing return of net wealth in certain cases

74. Under the provisions of the Wealth-tax Act, it is obligatory for every person who is liable to wealth-tax to furnish the return of his wealth voluntarily before 30th June of the assessment year. Where a person is not able to furnish the return by that date for any reason, he may apply to the Wealth-tax Officer for extension of the time for furnishing the return, and the Wealth-tax Officer is authorised to allow such extension in deserving cases. Where the net wealth of an assessee includes the value of assets held in a business or profession for which the accounts are closed after 31st December preceding the assessment year, the furnishing of the return of wealth by 30th June causes inconvenience to him. This is because until the accounts have been closed and the balances ascertained (which takes a few months) the assessee will not be in a position to ascertain the value of his business assets for inclusion in his return of wealth. Under the corresponding provisions of the Income-tax Act, such an assessee is allowed time up to 6 months from the close of the accounting year to furnish his return of income.

Finance Act, 1970

75. In order to avoid inconvenience to the assessees in the above-mentioned types of cases, the Finance Act, 1970 has made a specific provision in section 14 under which the assessee will be allowed time for furnishing the return of his net wealth up to the date by which he is required to furnish the return of income in respect of such business or profession under the Income-tax Act, where the time for furnishing the return of income is extended by the Income-tax Officer, such extension will be operative also for furnishing the return of net wealth in such cases.

[Section 14 as amended by section 26(d) of the Finance Act]

Finance Act, 1970

Taxation of the net wealth of a private discretionary trust

76. As explained in paragraph 24 of this circular, private discretionary trusts afford scope for reduction of tax liability both in respect of income-tax on the income derived from the property settled on such trusts and wealth-tax on the assets of such trusts. In order to put an effective curb on the proliferation of such trusts, the Finance Act, 1970 has amended section 21(4) for subjecting the assets settled on such a trust to wealth-tax at the flat rate of 1.5 per cent or at the appropriate higher rate of wealth-tax which would be applicable if such assets were held by an individual (who is a citizen of India and resident in India) at the progressive rates of tax applicable in the case of an individual. The flat rate of 1.5 per cent will be applied under this provision to the whole of the net wealth without the initial exemption of Rs. 1 lakh which is available under the rate schedule of ordinary wealth-tax in the case of individuals. Where the assets of the trust include lands and buildings in urban areas to which the additional wealth-tax applies (vide paragraphs 58-62 of this circular), such additional wealth-tax will also be chargeable for the purpose of ascertaining whether the appropriate rate of wealth-tax chargeable on such net wealth in the case of an individual is higher than the flat rate of 1.5 per cent. Where the aggregate of ordinary wealth-tax and additional wealth-tax (if any) exceeds wealth-tax at the rate of 1.5 per cent on the net wealth, the higher amount will be the wealth-tax payable.

Finance Act, 1970

77. This provision is complementary to the provision in the Income-tax Act for charging income-tax on the income of a discretionary trust at the flat rate of 65 per cent or at the appropriate higher rate of tax which would be applicable if such income were the total income of an association of persons (vide paragraph 25 of this circular). As under the provision in the Income-tax Act, exemptions have been provided from the charge of wealth-tax at the flat rate of 1.5 per cent in the following types of cases :
78. Where the assets are held under a trust declared by a will.
79. Where the assets are held under a trust created by a non-testamentary instrument before 1-3-1970, and the Wealth-tax Officer is satisfied, having regard to all the circumstances existing at the relevant time that the trust was created, bona fide,exclusively for the benefit of the dependent relatives of the settlor, and where the settlor is a Hindu undivided family, exclusively for the benefit of the dependent members of the family.
80. Where the assets are held by the trustees on behalf of a provident fund, superannuation fund, gratuity fund, pension fund or any other fund created bona fide by a person carrying on a business or profession exclusively for the benefit of persons employed in such business or profession.

In these categories of cases, the net wealth of the trust will be chargeable to wealth-tax at the rates applicable in the case of an individual.

Finance Act, 1970

78. The provision, as stated above, will be effective from 1-4-1971, i.e., for the assessment year 1971-72 and subsequent years.

[Section 21(4) as amended by section 26(e) of the Finance Act]

Amendments to Gift-tax Act

Finance Act, 1970

Revision of the rate structure of gift-tax and lowering of the exemption limit

79. The Gift-tax Act has till now provided a general initial exemption of Rs. 10,000 in respect of gifts made by any person during the relevant year. On the balance of the value of all taxable gifts, after deducting this initial exemption, gift-tax was chargeable at progressive rates rising from 5 per cent on the first slab of Rs. 15,000 to 50 per cent on the amount by which the total value of all taxable gifts exceeds Rs. 14,90,000. The corresponding rates of estate duty range from 4 per cent on the first taxable slab of principal value (after an initial exemption of Rs. 50,000) to 85 per cent on the principal value of the estate over Rs. 20 lakhs. With a view to bringing the rates of gift-tax more in line with the rates of estate duty and to reducing opportunities for avoidance of estate duty liability by making gifts, the Finance Act, 1970 has made the following changes in the rate structure of gift-tax :
80. The value of gifts generally exempt from gift-tax has been reduced from Rs. 10,000 to Rs. 5,000.
81. The slabs of taxable gifts have been regarded and the rates of gift-tax in some of the slabs have been revised upward. Under the revised rate schedule, the rate of gift-tax on the first slab of Rs. 20,000 of the value of all taxable gifts, [i.e., after deducting the initial exemption of Rs. 5,000 as stated at (1) above] is 5 per cent; on the next slab Rs. 20,001�Rs. 50,000 the rate is 10 per cent; in the slab Rs. 50,001�Rs. 1,00,000, 15 per cent; in the slab Rs. 1,00,001�Rs. 2,00,000, 20 per cent; in the slab Rs. 2,00,001�Rs. 5,00,000, 25 per cent; in the slab Rs. 5,00,001�Rs. 10,00,000, 30 per cent; in the slab Rs. 10,00,001�Rs. 15,00,000, 40 per cent; in the slab Rs. 15,00,001�Rs. 20,00,000, 50 per cent; and on the value of all taxable gifts over Rs. 20,00,000, the rate of gift-tax is 75 per cent. These modifications are effective from 1-4-1971 and will, accordingly, apply for and from the assessment year 1971-72.

[Section 5(2) and the Schedule as amended respectively by section 27(a) and (c) of the Finance Act]

Finance Act, 1970

Consequential provision relating to distribution of work among Commissioners and Additional Commissioners on functional basis

80. The Gift-tax Act already provides for the distribution and allocation of work among Commissioners of Gift-tax on the functional basis by the order of the Central Board of Direct Taxes. In the context of the creation of a cadre of the Additional Commissioners of Income-tax to take over some of the functions of the Commissioners and with a view to enabling the distribution and allocation of the work on the functional basis among Commissioners and Additional Commissioners for the purpose of the Gift-tax Act as well, the Finance Act, 1970 has made a specific provision in new section 11A. Under the new section, in a case where two or more Commissioners (including Additional Commissioners) have been vested with concurrent jurisdiction over any assessee, the Commissioner competent to perform any function under the Gift-tax Act will be the Commissioner (or Additional Commissioner) who is empowered to perform such functions under the orders made by the Board under the existing provisions for distribution and allocation of the work among them.

[Section 11A inserted by section 27(b) of the Finance Act]

Amendments to Unit Trust of India Act

Finance Act, 1970

Increase in the amount of income on units exempt from deduction of tax at source in the case of non-residents

81. Section 32 of the Unit Trust of India Act, before its amendment by the Finance Act, 1970, specified the tax concessions available in respect of income-tax to persons investing in units in the Unit Trust of India. Under one of these exemptions, an individual unit-holder was entitled to exemption from tax in respect of the first Rs. 1,000 of income in respect of units received by him from the Trust. Under another provision, no tax was deductible from income in respect of units, payable to a non-resident where such income does not exceed Rs. 1,000; where such income exceeds Rs. 1,000, deduction of income-tax was to be made at the rate of 15 per cent from the whole of such income. In the context of the amendment of section 80L of the Income-tax Act for exempting income up to Rs. 3,000 from specified categories of investments including units in the Unit Trust of India (videparagraphs 12 and 13 of this circular), the Finance Act, 1970, has made the following changes in the relevant provisions of the Unit Trust of India Act :
82. The existing provisions conferring exemption from tax up to Rs. 1,000 on income in respect of units has been deleted.
83. In the case of income in respect of units paid to a unit-holder who is a non-resident, tax will be deductible at source from such income only where it exceeds Rs. 3,000, as against Rs. 1,000 under the provision, before amendment.

[Section 32 as amended by section 38 of the Finance Act]

Amendment to companies (profits) Surtax  Act

FINANCE ACT, 1970

Inclusion of Additional Commissioners of Income-tax in the categories of tax authorities for the purposes of surtax

82. Under the existing provision in section 3, the tax authorities for the purposes of that Act are the same as those for the purposes of the Income-tax Act. In the context of the amendment to the Income-tax Act to include Additional Commissioners of Income-tax in the categories of income-tax authorities (vide paragraphs 38 and 39 of this circular), the Finance Act has made a consequential amendment to the relevant provision in the Companies (Profits) Surtax Act to include Additional Commissioners of Income-tax among the tax authorities for the purposes of that Act.

[Section 3 as amended by section 39 of the Finance Act]

ANNEXURE I

Rates of Income-tax for tax assessment year 1970-71

1. TAXPAYERS OTHER THAN COMPANIES
2. Individuals, Hindu undivided families, unregistered firms, associations of persons (other than co-operative societies), bodies of individuals and artificial juridical persons

Rates of income-tax (exclusive of surcharge on income-tax)

On total income�
(1)  not exceeding Rs. 5,000	5 per cent of the total income ;
(2) exceeding Rs. 5,000 but not exceeding Rs. 10,000	Rs. 250 plus 10 per cent of the excess over Rs. 5,000 ;
(3) exceeding Rs. 10,000 but not exceeding Rs. 15,000	Rs. 750 plus 17 per cent of the  excess over Rs. 10,000 ;
(4) exceeding Rs. 15,000 but not exceeding Rs. 20,000	Rs. 1,600  plus  23 per cent of the excess over Rs. 15,000 ;
(5) exceeding Rs. 20,000 but not exceeding Rs. 25,000	Rs. 2,750  plus  30 per cent of the excess over Rs. 20,000 ;
(6) exceeding Rs. 25,000 but not exceeding Rs. 30,000	Rs. 4,250  plus  40 per cent of the excess over Rs. 25,000 ;
(7) exceeding Rs. 30,000 but not exceeding Rs. 50,000	Rs. 6,250  plus  50 per cent of the excess over Rs. 30,000 ;
(8) exceeding Rs. 50,000 but not exceeding Rs. 70,000	Rs. 16,250  plus  60 per cent of the excess over Rs. 50,000 ;
(9) exceeding Rs. 70,000 but not exceeding Rs. 1,00,000	Rs. 28,250  plus  65 per cent of the excess over Rs. 70,000 ;
(10) exceeding Rs. 1,00,000 but not exceeding Rs. 2,50,000	Rs. 47,750  plus  70 per cent of the excess over Rs. 1,00,000 ;
(11) exceeding Rs. 2,50,000	Rs. 1,52,750 plus  75 per cent of the excess over Rs. 2,50,000.

Provisions in the case of resident taxpayers for certain exemptions and reliefs in respect of income-tax.

1. Exemptions from income-tax on total incomes not exceeding certain amounts :

In the case of	Limit of total income not chargeable to income-tax Rs.
a. Resident Hindu undivided family which has at least two members, aged not less than 18 years, who are entitled to claim partition, or which has at least two members, entitled to claim partition who are not lineally descended one from the other and also who are not lineally descended from  any other living member of the family	7,000
b. Resident taxpayers other than Hindu undivided families referred to in(a) above	4,000

Where the total income does not exceed Rs. 20,000, the tax chargeable after allowing the tax relief on account of personal allowances as at (2) below (where due) is limited, by way of marginal relief, to 40 per cent of the amount by which the total income exceeds the above limit of Rs. 7,000 or Rs. 4,000, as the case may be.

2. Tax relief in the case of resident individuals and Hindu undivided families on account of personal allowances :
3. A resident individual whose total income does not exceed Rs. 10,000 and who has, during the previous year, incurred any expenditure on the maintenance of any one or more of his parents or grandparents mainly dependent on him, is entitled to a reduction in the amount of tax chargeable on his total income, on account of personal allowances, up to the respective amounts specified in the following table :

	Amount of tax Relief Rs.
Unmarried individual	145
Married individual who has no child mainly dependent on him	220
Married individual who has one child mainly dependent on him	240
Married individual who has more than one child mainly dependent on him	260

In the case of a married individual whose spouse has an independent taxable income exceeding Rs. 4,000, the amount of tax relief will be Rs. 145, Rs. 165 and Rs. 185, respectively, instead of Rs. 220, Rs. 240 and Rs. 260.

1. Resident individuals other than those referred to in (a) above and resident Hindu undivided families are entitled to a reduction in the amount of the tax chargeable on their total income, on account of personal allowances, up to the respective amounts specified in the following table :

	Amount of tax relief Rs.
Unmarried individual	125
Married individual who has no child mainly dependent on him, or a  Hindu undivided family which has no minor coparcener	200
Married individual who has one child mainly dependent on him, or a Hindu undivided family which has one minor coparcener mainly supported from the income of such family	220
Married individual who has more than one child mainly dependent on him, or a Hindu undivided family which has more than one minor  coparcener  mainly supported from the income of such family	240

In the case of a married individual whose spouse has an independent taxable income exceeding Rs. 4,000, the amount of tax relief will be Rs. 125, Rs. 145, Rs. 165, respectively, instead of Rs. 200, Rs. 220 and Rs. 240.

Where the total income of a resident individual exceeds Rs 10,000 but does not exceed Rs. 20,000 and he has incurred expenditure on the maintenance of a dependent parent or grandparent, the tax chargeable is limited by way of marginal relief, to the tax which would have been payable by him if his total income had been  Rs. 10,000 [i.e., after the tax relief as at (a) above] plus 40 per cent of the amount by which the total income exceeds Rs. 10,000.

Note : A parent or grandparent of an individual shall not be treated as being mainly dependent on such individual if the income of the parent or the grandparent from all sources in respect of the previous year exceeds Rs. 1,000.

Surcharge on income-tax

Surcharge is leviable at the rate of 10 per cent of the amount of income-tax.

2. Co-operative Societies

Rates of income-tax (exclusive of surcharge on income-tax)

(1) On total income not exceeding Rs. 10,000	15 per cent of the total income;
(2) On   total    income   exceeding Rs.  10,000 but  not exceeding Rs. 20,000	Rs. 1,500 plus 25 per cent of the  excess; over Rs. 10,000;
(3) On   total    income   exceeding Rs. 20,000	Rs. 4,000 plus 40 per cent  of the  excess over Rs. 20,000.

Surcharge on income-tax

Surcharge is leviable at the rate of 10 per cent of the amount of income-tax.

3. Registered firms

Rates of income-tax (exclusive of surcharges on income-tax)

On total income�
(1) not exceeding Rs. 10,000	Nil;
(2) exceeding Rs. 10,000  but not exceeding Rs. 25,000	4 per cent of the excess over Rs. 10,000;
(3) exceeding  Rs.  25,000  but not exceeding Rs. 50,000	Rs. 600 plus 6 per cent of the excess  over Rs. 25,000;
(4) exceeding  Rs. 50,000 but not exceeding Rs. 1,00,000	Rs. 2,100 plus 12 per cent of the  excess over Rs. 50,000;
(5) exceeding Rs. 1,00,000	Rs. 8,100 plus 20 per cent of the excess over Rs. 1,00,000.

Surcharges on income-tax

(1) Ordinary surcharge on income-tax�	Rate of surcharge
(a)  a registered  firm whose total income to the extent of 51 per cent thereof or more, consists of income derived from a profession carried on by the firm	10 per cent of the amount of the income-tax;
(b) any other registered firm	20 per cent of the amount of the income-tax.
(2) Special surcharge.

The rate of this surcharge is 10 per cent of the amount of income-tax as increased by the ordinary surcharge on income-tax referred to in (1) above.

4. Local authorities

Rate of income-tax (exclusive of surcharge on income-tax)

On the whole of total income                  50 per cent.

Surcharge on income-tax

Surcharge is leviable at the rate of 10 per cent of the amount of income-tax.

1. COMPANIES
2. Life Insurance Corporation of India (established under the Life Insurance Corporation Act, 1956)

Rates of income-tax

(i) On that  part  of  its total  income which  consists   of   profits   and gains from life insurance business	52.5 per cent
(ii) On the balance, if any, of the total income	The rate of income-tax Applicable under  item  (2) below  to  the  total income of a domestic company which is a company in which the  public are substantially interested.

Note : In the case of a company other than the Life Insurance Corporation of India, whose total income includes profits and gains from life insurance business, the rate of tax on such profits is also 52.5 per cent ; the balance, if any, of the total income is chargeable to tax at the rates applicable under item (2) below to the total income of the company.

2. Companies other than the Life Insurance Corporation of India

Rates of income-tax

1. I. In the case of domestic company�

(1) where the company is a company in which the public are substantially interested,�
(i) in a case  where  the  total income does not exceed Rs. 50,000	45 per cent of the total income;
(ii) in a case where the total income exceeds Rs. 50,000	55 per cent of the total income ;
(2) where the company is not a company in which the public are substantially interested,�
(i) in  the case of an industrial company�
(1) on so much of the total income as does not exceed Rs. 10,00,000	55 per cent;
(2)  on the balance, if any, of the total income	60 per cent
(ii) in any other case	65 per cent of the total income

Provision for marginal relief in the case of a domestic company in which the public are substantially interested and whose total income exceeds Rs. 50,000

In the case of such a company, the income-tax payable shall be limited to the aggregate of (a) the income-tax which would have been payable by it if its total income had been Rs. 50,000, and (b) 80 per cent of the amount by which its total income exceeds Rs. 50,000.

[The term �domestic company� means an Indian company or any other company which has made the prescribed arrangements for the declaration and payment of dividends within India.

The term �industrial company� means a company which is mainly engaged in the generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining. A company is deemed to be mainly engaged in such a business if the income attributable to any one or more of the aforesaid activities included in its gross total income for the previous year is not less than 51 per cent of such total income.]

1. In the case of a company other than a domestic company�

(i) on so much of the total income as consists of�

(a) royalties received from an Indian concern in pursuance of an agreement made by it with the Indian concern after the 31st March, 1961, or

(b) fees for rendering technical services received from an Indian concern in pursuance of an agreement made by it with the Indian concern after the 29th February, 1964,

and where such agreement has, in either case,

been approved by the Central Government                          50 per cent;

(ii) of the balance, if any, of the total income                            70 per cent.

1. SPECIAL PROVISIONS REGARDING COMPUTATION OF TAX OF �LONG-TERM� CAPITAL GAINS (I.E., CAPITAL GAINS OTHER THAN �SHORT-TERM� CAPITAL
   GAINS) IN THE CASE OF COMPANIES

In the case of companies, income-tax on �long-term� capital gains included in their total income is chargeable at the rates specified in section 115(ii) of the Income-tax Act, and not at the rates of tax applicable to the total income of the company. The rates of income-tax specified in section 115(ii) of the Income-tax Act are as follows :

(a) in respect of �long-term� capital gains relating to  lands  or buildings or any rights therein	40 per cent of the amount of such capital gains;
(b) in respect of �long-term� capital gains other than  those  referred  to   in  (a) above	30 per cent of the amount of such capital gains.

�Short-term� capital gains (i.e., capital gains arising from the transfer of a capital asset held by the taxpayer for not more than 24 months before the date of the transfer) are chargeable to income-tax at the rates of income-tax applicable to the total income of the company.

ANNEXURE II

Rates of income-tax for deduction of tax at source from �salaries� and retirement annuities and for computing �advance tax�
payable during the financial year 1970-71

1. TAXPAYERS OTHER THAN COMPANIES
2. Individuals, Hindu undivided families, unregistered firms, associations of persons (other than co-operative societies), bodies of individuals and artificial juridical persons

Rates of income-tax (exclusive of surcharge on income tax)

On total income�
(1) not exceeding Rs. 5,000	Nil ;
(2) exceeding  Rs. 5,000  but not exceeding Rs. 10,000	10 per cent of the excess over  Rs. 5,000
(3) exceeding Rs. 10,000 but not exceeding Rs. 15,000	Rs. 500 plus 17 per cent of the excess over Rs. 10,000;
(4) exceeding Rs. 15,000  but not exceeding Rs. 20,000	Rs. 1,350 plus 23 per cent of the excess over Rs. 15,000;
(5) exceeding Rs. 20,000 but not exceeding Rs. 25,000	Rs. 2,500 plus 30 per cent of the excess over Rs. 20,000;
(6) exceeding Rs. 25,000 but not exceeding Rs. 30,000	Rs. 4,000 plus 40 per cent of the excess over Rs. 25,000;
(7) exceeding Rs. 30,000 but not exceeding Rs. 40,000	Rs. 6,000 plus 50 per cent of the excess over Rs. 30,000;
(8) exceeding Rs. 40,000 but not exceeding Rs. 60,000	Rs. 11,000 plus 50 per cent of the excess over Rs. 40,000;
(9) exceeding Rs. 60,000 but not exceeding Rs. 80,000	Rs. 23,000 plus 70 per cent of the excess over Rs. 60,000;
(10) exceeding Rs. 80,000 but not exceeding Rs. 1,00,000	Rs. 37,000 plus 75 per cent of the excess over Rs. 80,000;
(11) exceeding Rs. 1,00,000 but not exceeding Rs. 2,00,000	Rs. 52,000 plus 80 per cent of the excess over Rs. 1,00,000 ;
(12) exceeding Rs. 2,00.000	Rs. 1,32,000 plus 85 per cent of the excess over Rs. 2,00,000.

Note : In the case of a Hindu undivided family, no tax is payable unless the total income exceeds Rs. 7,000, if the family�

(a) has at least two adult members (over 18 years) who were entitled to claim partition; or

(b) has at least two members (not being adults) who are entitled to claim partition and who are not lineally descended one from the other or from any other living member of the family.

Further, where the total income of such a Hindu undivided family exceeds Rs. 7,000 but does not exceed Rs. 7,660, the income-tax payable thereon is limited to 40 per cent of the amount by which the total income exceeds Rs. 7,000.

Surcharge on income-tax

Surcharge is leviable at the rate of 10 per cent of the amount of income-tax.

2. Co-operative societies

Rates of income-tax (exclusive of surcharge on income-tax)

(1) On total income not exceeding Rs. 10,000	15 per cent of the total  income.
(2) On total income exceeding Rs. 10,000 but not exceeding Rs. 20,000	Rs. 1,500 plus 25 per cent of the excess over Rs. 10,000.
(3) On total income exceeding Rs. 20,000	Rs. 4,000 plus 40 per cent of  the excess over Rs. 20,000.

Surcharges on income-tax

Surcharge is leviable at the rate of 10 per cent of the amount of income-tax.

3. Registered firms

Rates of income-tax (exclusive of surcharge on income-tax)

On total income�
(1) not exceeding Rs. 10,000	Nil;
(2) exceeding Rs. 10,000 but not exceeding Rs. 25,000	4 per cent of the excess over Rs. 10,000;
(3) exceeding Rs. 25,000 but not Rs. 50,000	Rs. 600 plus  6 per cent of the excess over exceeding Rs. 25,000;
(4) exceeding Rs. 50,000 but not exceeding Rs. 1,00,000	Rs. 2,100 plus 12 per cent of the excess over Rs. 50,000;
(5) exceeding Rs. 1,00,000	Rs. 8,100 plus 20 per cent of the  excess over Rs. 1,00,000.

Surcharges on income-tax

(1) Ordinary surcharge on income-tax	Rate of surcharge
(a) a registered  firm  whose total income to the extent of 51 per cent thereof  or more, consist of income derived from a profession carried on by the firm	10 per cent of the amount of income tax;
(b) any other registered firm	20 per cent of the amount of  income-tax.
(2) Special surcharge.

The rate of this surcharge is 10 per cent of the amount of income-tax as increased by the ordinary surcharge on income-tax referred to in (1) above.

4. Local authorities

Rate of income-tax (exclusive of surcharge on income-tax)

On the whole of total income                              50 per cent.

Surcharge on income-tax

Surcharge is leviable at the rate of 10 per cent of the amount of income-tax.

1. COMPANIES
2. Life Insurance Corporation of India (established under the Life Insurance Corporation Act, 1956)

Rates of income-tax

(i) On that part of its total income which consists  of profits and gains from life insurance business	52.5 per cent
(ii) On the balance, if any, of the total income	The rate of income-tax applicable under item (2) below to the total income of a domestic company which  is  a company in which  the  public  are substantially interested.

Note : In the case of a company other than the Life Insurance Corporation of India, whose total income includes profits and gains from the life insurance business, the rate of tax on such profits is also 52.5 per cent; the balance, if any, of the total income is chargeable to  tax at the rates applicable under item (2) below to the total income of the company.

2. Companies other than the Life Insurance Corporation of India

Rates of income-tax

1. In the case of a domestic company�

I. In the case of a domestic company�
(1) where the company is a company in which the public are substantially interested,�
(i) in a case where the total income does not exceed Rs. 50,000	45 per cent of the total income;
(ii) in a case where the total income exceeds Rs. 50,000	55 per cent of the total income;

(2) where the company is not a company in which the public are substantially interested�

(i) in the case of an industrial company,�
(1) on  so  much  of  the  total income as does not exceed Rs. 10,00,000	55 per cent;
(2) on  the  balance,  if any, of the total income	60 per cent;
(ii) in any other case	65 per cent of the total  income.

Provision for marginal relief in the case of a domestic company in which the public are substantially interested and whose total income exceeds Rs. 50,000

In the case of such a company, the income-tax payable shall be limited to the aggregate of (a) the income-tax which would have been payable by it if its total income had been Rs. 50,000, and (b) 80 per cent of the amount by which its total income exceeds Rs. 50,000.

The term �domestic company� means an Indian company or any other company which has, in respect of its income chargeable to tax for the assessment year 1970-71 made the prescribed arrangements for the declaration and payment of dividends within India.

The term �industrial company� means a company which is mainly engaged in the generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining. A company is deemed to be mainly engaged in such a business if the income attributable to any one or more of the aforesaid activities included in its gross total income for the previous year is not less than 51 per cent of such total income.

1. In the case of a company other than a domestic company�

(i) on so much of the total income as consists of,�

(a) royalties received from an Indian concern in pursuance of an agreement made by it with the Indian concern after the 31st March, 1961, or

(b) fees for rendering technical services received from an Indian concern in pursuance of an agreement made by it with the Indian concern after the 29th February, 1964

and where such agreement has, in either case,

been approved by the Central Government     50 per cent;

(ii) on the balance, if any, of the total income       70 per cent.

1. SPECIAL PROVISIONS REGARDING COMPUTATION OF TAX ON �LONG-TERM� CAPITAL GAINS (I.E., CAPITAL GAINS OTHER THAN �SHORT-TERM� CAPITAL
   GAINS) IN THE CASE OF COMPANIES

In the case of companies, income-tax on �long-term� capital gains included in their total income is chargeable at the rates specified in section 115(ii) and not at the rates of tax applicable to the total income of the company. The rates of income-tax specified in section 115(ii) are as follows :

 

(a) in respect of �long-term� capital gains relating to lands or buildings or any rights therein	40 per cent of the amount of such capital gains;
(b) in respect of �long-term� capital gains other than those referred to in (a) above	30 per cent of the amount of such capital gains.

 

�Short-term� capital gains (i.e., capital gains arising from the transfer of a capital asset held by the taxpayer for not more than 24 months before the date of the transfer) are chargeable to income-tax at the rates of income-tax applicable to the total income of the company.