FINANCE (NO. 2) ACT, 1967 – CIRCULAR NO. 5-P, DATED 9-10-1967

Amendments at a glance

 SECTION/SCHEDULE   Particulars
Finance Act
2 and 1st Sch. Rate structure 7, 8b-11, 22-23, 25-33, 35-36
2(5) Rebate for exports 8a
46 Voluntary disclosure 100-101
Income-tax Act
2(1A), 32(1)(iii) Provisions relating to amalgamation of companies 55-57
[Expln. (2)], 35(5),
35A(6), 36(1)(ix)
(3rd prov.), 41(2),
43(1)(Expln. 7),
43(6) (Expln. 2A),
47 (vi)/(vii), 49(2)
2(37 A), 193(Expln.) Definition of �rates in force� 12
10(27) Exemption from tax of income from business of livestock breeding, poultry, etc., to continue beyond assessment year 1967-68, for an indefinite period 40
10(29) Income of marketing authorities 72
23(2), prov. Computation of income attributable to house property owned and occupied by the assessee for his residence 71
32(1)(v), 33(1) Tax concessions to hotel industry for promoting
(b)(B)(ii), 33(6) tourism 41
(prov.), 43(1),
80B(7), 80-I,
84(3)/80J(6)
33(I)(b)(B)(iii), Expenditure on scientific research 42
35(2)(ia)
33(2), 33A(2), Provisions ancillary and consequential to the new provisions
36(I)(viii), 104(4) for simplification of tax calculations 91
(Expln.), 109(i)(c)
& (d)/(iv), 197(3),
236 [Expln. (2)]
33B, 72(1) (prov.), Rehabilitation allowance 43
80J(4) (prov.)/
84(2) (1st prov.)
43A Special provision to consequential changes in the rate of exchange of currency 61-66
71(2)/(3), 72(1), Short-term capital gains in the case of non-corporate
Prov. (3), 74(1), assessees 87-88
(a)(i), 114
Chap. VIA Deductions in computation of total income and order of priority in allowing deductions under the new Chapter in respect of the same head of income 73-75, 90(2.238)
80C/80A Increase in the limit of maximum amount of personal savings in LIP, provident funds, etc., qualifying for tax relief 38
80G/88 Tax relief in respect of donations to the Prime Minister�s Drought Relief Fund 67, 77
80H, 80B(1)/(9) Tax concession to new industrial undertakings mainly employing displaced persons or repatriates 47
80J/84 Deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business 44, 78
80K/85 Deduction in respect of dividends attributable to profits and gains from new industrial undertakings or ships or hotel business 45-46, 79
80L Exemption from tax in respect of dividend income received from an Indian company, where the total dividend income of the assessee during the year does not exceed Rs. 500 39
80M/85A Rebate on inter-corporate dividends, i.e., dividends received by any company from a domestic company 24, 82
80N/85B Rebate on dividends received by an Indian company from a foreign company on shares in it allotted to the Indian company in consideration of supply of technical know-how or technical services 83
80-O/85C Rebate on royalty, commission, fees, etc., received by an Indian company from a foreign company in consideration of supply to the foreign company of technical know-how or technical services 84
80P/81 Exemption of certain incomes of co-operative societies 80
80Q/82 Exemption of dividends received by a member of a co-operative society from the society 81
80R Tax relief in respect of remuneration received from foreign sources by resident individuals of Indian citizenship for serving in foreign universities as professors, etc. 68-69
80S/112, 112A(c) Income by way of compensation for termination or modification of the terms of managing agency, etc., in the case of non-corporate assessees 85
80T/114 Long-term capital gains in the case of non-corporate assessees 89
87A/80F Tax relief in the case of foreigners resident in India on expenditure incurred by them for the full-time education of their dependent children abroad 76
121 (2), 123 Provisions for facilitating distribution and allocation
124(1)/(2), of work amongst Income-tax Officers on a functional
125 (1)/(2), basis to expedite assessments and improve collections
127, 128 of revenue 48-50
138(1)(a) Disclosure of information regarding assessees to certain authorities without the requirement of making individual applications for such information 59
196 Provision to enable certain Government corporations to receive their income without deduction of tax at source 60
194A Interest other than �Interest on securities� 13-14, 17-19, 34
195 Interest which is wholly exempt from tax 20-21
197(I)(a) Certificate for deduction at lower rate 16
206A Person, paying interest to residents without deduction of tax, to furnish prescribed return 15
280B(I)(b)(vii), Annuity deposit 37
280X(I)(c)(d)
Wealth-tax Act
2(h) Provision for taking powers for the Central Government to declare any statutory corporation as a �company� for purposes of wealth-tax 94-95
8, 8A, 8B, 10, Provisions to facilitate allocation and distribution
11, 11A, 11B of work amongst the tax authorities on a functional basis 52, 92
GIFT-TAX ACT
7, 7A, 7B, 9, 10, Provisions to facilitate allocation and distribution
11, 11A, 11B of work amongst the tax authorities on a functional basis 52, 92
45(da) Exemption of gifts represented by the transfer of assets by a closely-held company to any Indian company in a scheme of amalgamation 58, 93
SURTAX ACT
3(1)(2) (prov.), 18 Provisions to facilitate allocation and distribution of work amongst the tax authorities on a functional basis 53-54, 92, 96
Rule I (v)/(vii) of Computation of chargeable profits 97
1st Sch.
MISCELLANEOUS AMENDMENTS
30 Deposit Insurance Corporation Act 98
32(1)(c) Unit Trust of India Act 99

Rate  Structure

FINANCE (NO. 2)  ACT, 1967

Rate of income-tax for the assessment year 1967-68

7. Under the Finance (No. 2) Act, 1967, the rates of income-tax in respect of the assessment year 1967-68 in the case of all categories of assessees (corporate as well as non-corporate) are the same as under the Finance Act, 1966, subject to two modifications. The main modification pertains to the rebates of income-tax available to assessees (other than foreign companies declaring their dividends outside India) in relation to exports. The other modification, which is purely of a technical nature and does not involve any substantive change, relates to the provisions for the levy of additional income-tax on domestic companies of certain categories with reference to their distributions of equity dividends in excess of 10 per cent of their paid-up equity capital. These modifications are explained hereunder.

FINANCE (NO. 2)  ACT, 1967

8. Rebates of income-tax in relation to exports – Under the Finance Act, 1966, the rebates of income-tax in relation to exports are :

(i)  a rebate of one-tenth of the income-tax attributable to the profits derived by the assessee from the export of any goods or merchandise outside India; and in addition,

(ii)  in the case of an assessee who manufactures specified commodities [i.e., commodities listed in the First Schedule to the Industries (Development and Regulation) Act, 1951, subject to certain exclusions], a rebate of tax, calculated at the average rate of tax applicable to the total income of the assessee on an amount equal to 2 per cent of the sale proceeds of such commodities exported by him directly or sold by him to any other person in India and exported by such person.

The Finance (No. 2) Act, 1967 provides for the grant of the above-mentioned rebates of income-tax, in the case at (i) above, with reference to the profits attributable to the export of the goods or merchandise made before the date of devaluation of the rupee,i.e., before 6-6-1966, and in the case at (ii) above on 2 per cent of the sale proceeds of the specified commodities exported by the manufacturer, or sold by him to an exporter in India, before the said date. Thus, no rebate of income-tax will be available in relation to exports, or sales, to an exporter in India, made after 5-6-1966. This provision has been made in consequence of the reduction in the par value of the rupee with effect from 6-6-1966.

The Board have framed rules for the determination of profits from the export of goods or merchandise out of India for the purpose of the grant of the rebate of tax referred to in item (i) hereinabove. These rules, named as the Income-tax (Determination of Export Profits) (No. 2) Rules, 1967, have been notified in the Gazette of India, Extraordinary, dated 19-9-1967.

FINANCE (NO. 2)  ACT, 1967

8a. Levy of additional  income-tax in the case of certain domestic companies with reference to excess distribution of dividends on their equity capital – The Finance (No. 2) Act, 1967 continues the levy of additional income-tax, provided for under the Finance Act, 1966, in the case of domestic companies of certain categories with reference to their distributions of equity dividends in excess of 10 per cent of their paid-up equity capital as on the 1st day of the relevant previous year. The rate at which such additional income-tax is chargeable is 7.5 per cent as under the Finance Act, 1966.

Under the scheme of the levy of this tax in the Finance Act, 1966, it was chargeable on so much of the total income of the company as does not exceed �the relevant amount of distributions of dividends� by the company. The term �relevant amount of distributions of dividends� had been defined in the Finance Act, 1966 to mean, in substance, the aggregate of�

(a)  that portion of the amount of equity dividends distributed by the company during the previous years relevant to the assessment years 1964-65 and 1965-66 with reference to which it was chargeable to tax at 7.5 per cent thereof by reduction of the rebate of tax otherwise admissible to the company on its total income, in accordance with the provisions of the Finance Acts, 1964 and 1965, but could not be so charged because of the insufficiency of the amount of the said rebate ; and

(b)  the amount by which the dividends declared or distributed by the company during the relevant previous year on its equity capital exceeds 10 per cent of its paid-up equity capital as on the 1st day of the said previous year.

FINANCE (NO. 2)  ACT, 1967

9. Under the Finance Act, 1966, where the total income of the company (as reduced by the amount of any �long-term� capital gains, i.e., capital gains relating to assets other than short-term capital assets included therein) was less than the �relevant amount of distributions of dividends� by the company, the additional income-tax at 7.5 per cent could be calculated only on the amount of such total income. In such a case, the company did not bear the above-mentioned tax in relation to the balance of the �relevant amount of distributions of dividends� by it. In view of this position, the definition in the Finance (No. 2) Act, 1967 of the term �relevant amount of distributions of dividends� by a company comprises (a) the above-mentioned balance of the �relevant amount of distribution of dividends� in respect of which the additional income-tax at 7.5 per cent could not be charged under the provisions of the Finance Act, 1966, and (b) the amount by which the equity dividends declared or distributed by the company during the relevant previous year exceed 10 per cent of its paid-up equity capital as on the 1st day of the previous year. In substance, the basis of computing the �relevant amount of distributions of dividends� by a company in the Finance (No. 2) Act, 1967 is the same as under the Finance Act, 1966. There is only a technical difference in the phraseology used in describing the quantity at (a) above in the definition of the term �relevant amount of distributions of dividends� in the Finance Act, 1966 and in the Finance (No. 2) Act, 1967. This is due to the position that whereas the relevant part of the definition in the Finance Act, 1966 had, necessarily, to refer to the scheme followed in the Finance Acts, 1964 and 1965 of charging tax with reference to distributions of equity dividends by reducing the rebate of tax otherwise due to the company, the relevant part of the definition in the Finance (No. 2) Act, 1967 has to refer to the scheme of charging such tax under the Finance Act, 1966.

FINANCE (NO. 2)  ACT, 1967

10. It may be mentioned that, under the Finance (No. 2) Act, 1967, the rate schedule of income-tax in the case of non-corporate assessees provides for the levy of tax on income under the head �Salaries� at the same rate as any other income included in the total income of the assessee (excepting capital gains which are chargeable to tax, as before, in accordance with the special provisions in the matter contained in  section 114. For the assessment year 1966-67 and earlier years, income under the head �Salaries� was, under a specific provision made in the relevant Finance Act, chargeable to tax at the rate prescribed by the Finance Act of the preceding year. Such provision was made to secure that in a case where the total income of the assessee consisted only of income under the head �Salaries�. It might not be necessary, because of any increase or decrease in the rates of tax brought about by the Finance Act of the relevant assessment year, to raise an additional demand or to grant a refund to the assessee with reference to the tax deducted at source therefrom under the Finance Act of the preceding year. This necessitated two sets of tax calculations in the case of an assessee whose total income consisted of income under the head �Salaries� as well as income under other heads, and resulted in complications in determining the final tax liability. The necessity for dual calculations in this manner has been avoided under the provisions of the Finance (No. 2) Act, 1967 inasmuch as the rates of income-tax prescribed by it for the assessment year 1967-68 are the same as under the Finance Act, 1966.

FINANCE (NO. 2)  ACT, 1967

Rates for deduction of tax at source and for computation of advance tax in respect of incomes assessable for the succeeding assessment year 1968-69

11. The principle followed in the Finance (No. 2) Act, 1967 in prescribing the rates of tax and in making new provisions in the taxation laws is that the 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 due for assessment in the succeeding assessment year, and not retrospectively to incomes earned in the past, except where there are special circumstances justifying the retrospective operation of particular provisions. Accordingly, the new provisions made by the Finance (No. 2) Act, 1967 in the rate structure of tax apply to incomes which fall due for assessment in the succeeding assessment year 1968-69.

FINANCE (NO. 2)  ACT, 1967

12. The Income-tax Act provides for deduction of tax at source from incomes of certain categories. The deduction is to be made at the rate or rates in force. The Income-tax Act also provides for the computation of �advance tax�, and the charge or calculation of income-tax, in special cases, at the rate or rates in force. The annual Finance Acts up to and inclusive of the Finance Act, 1966, prescribed the �rates in force� for deduction of tax at sources, only in respect of incomes other than �salaries�. For the purpose of deduction of tax at source from �salaries� and computation of �advance tax� as also for charging or calculating income-tax in special cases under the relevant provisions of the Income-tax Act, the �rate or rates in force� were taken to be the rates of tax for regular assessment as prescribed in the annual Finance Act. The Finance (No.2) Act, 1967 has made a change in this scheme; it has prescribed two sets of �rates in force�, one for the deduction of tax at source from incomes other than �salaries�, and the other for deduction of income-tax from �salaries� ; computing �advance tax�; and for calculating or charging income-tax under certain provisions of the Income-tax Act, viz., section 132(5), first proviso (calculating income-tax on undisclosed incomes represented by seized assets in certain cases) ; sub-section (4) of section 172 (levy of tax on a provisional basis on the income of non-residents from carriage of cargo or passengers by sea from Indian ports); sub-section (2) of section 174 (assessment of persons leaving India) ; section 175 (assessment of persons likely to transfer property to avoid tax) ; and sub-section (2) of section 176 (assessment of profits of a discontinued business). For this purpose, the Finance (No. 2) Act, 1967 has introduced a new definition of �rate or rates in force� or �rates in force�, in relation to an assessment year or financial year, in new clause (37A) of section 2 and, consequentially, it has deleted the Explanation to section 193, which defined the expression �rates in force� for the purpose of deduction of tax at source under sections 193, 194, 195 and 197. The new definition of �rate or rates in force� or �rates in force� contemplates that the annual Finance Act will prescribe these rates separately for (a) deduction of tax at source from income other than �salaries�, and (b) for all other purposes, such as deduction of tax at source from �salaries�, computation of �advance tax� and calculation or charging of income-tax in special cases, as stated above.

FINANCE (NO. 2)  ACT, 1967

New provisions relating to deduction of tax at source from income other than �salaries�

13. Income receivable by resident persons – The Finance (No. 2) Act, 1967 has introduced a new section 194A under which, any person, excepting an individual or a Hindu undivided family, who credits or pays any interest (other than �interest on securities�) to any person resident in India after 30-9-1967, in an amount exceeding Rs. 400 at a time will be required, subject to certain exceptions, to deduct tax at source therefrom at the rates in force, i.e., at the rates prescribed in the annual Finance Act. The rates prescribed for this purpose in the Finance (No. 2) Act, 1967 are 10 per cent, where such interest income is payable to resident individuals, Hindu undivided families, firms and other non-corporate entities, and 20 per cent where it is payable to a resident company.

FINANCE (NO. 2)  ACT, 1967

14. Where the interest income is, in the first instance, credited to the account of the payee by the payer and is paid subsequently, tax is required to be deducted at source at the time of the credit; where it is not so credited, tax is required to be deducted at source at the time of its payment. Accordingly, where such interest income has been credited to the account of the payee on or before 30-9-1967, the payer will not be liable to deduct tax at source therefrom at the time of its payment although the payment is made after that date. Tax will be required to be deducted at source under section 194A if interest is credited to the account of the payee or paid, without being credited to the account of the payee, at any time after 30-9-1967.

FINANCE (NO. 2)  ACT, 1967

15. The interest income referred to above will not be subject to any deduction of tax at source, where the person entitled to receive the income (excepting a company or a registered firm) furnishes to the payer an affidavit or, alternatively, a statement in writing (signed in the presence of and attested by a gazetted officer of the Central or a State Government or any other specified officer) declaring that his estimated total income liable to tax for the assessment year next following the financial year in which the interest income is credited or paid will be less than the minimum taxable amount. The specified officer referred to above is a tehsildar or a mamlatdar of a taluka or tehsil or any other officer performing functions similar to those of a tehsildar or mamlatdar. All that the gazetted officer or the specified officer has to certify in his attestation in the statement in writing is that the person who has signed the statement is known to him. Persons who credit or pay the interest income without deducting tax at source therefrom by virtue of the affidavits or statements in writing referred to above are required under the new section 206A introduced by the Finance (No. 2) Act, 1967 to furnish return (in the prescribed form and verified in the prescribed manner) to the Income-tax Officer concerned within 30 days from the end of the relevant financial year, showing, inter alia, the names and addresses of such persons and the particulars of the interest income credited or paid.

FINANCE (NO. 2)  ACT, 1967

16. It is also open to any person (excepting a company) who has no taxable income or whose total income justifies deduction of tax at an average rate lower than 10 per cent (at which tax rate is to be deducted at source from interest income) to obtain, from the Income-tax Officer concerned, a certificate under section 197 authorising the payer of the interest income to credit or pay such income without deduction of tax at source or, as the case may be, to deduct tax therefrom at a lower rate as specified in the certificate. Section 197 has been amended by the Finance (No. 2) Act, 1967 to achieve this purpose.

FINANCE (NO. 2)  ACT, 1967

17. Any person falling under any one of the following categories is entitled to receive the interest income without deduction of tax at source under section 194A :

1. A banking company to which the Banking Regulation Act, 1949 applies or a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank).

2. Any financial corporation established by or under a Central, State or Provincial Act, e.g., the Industrial Finance Corporation and the State Financial Corporations.

3. The Life Insurance Corporation of India.

4. The Unit Trust of India.

5. Any company or a co-operative society carrying on the business of insurance.

6. Any other institution or association or body which the Central Government may, for reasons to be recorded in writing, notify in this behalf, in the Official Gazette.

FINANCE (NO. 2)  ACT, 1967

18. The person from whose interest income-tax has been deducted at source under section 194A will, on production before the Income-tax Officer of the certificate of such deduction from the payer, be given credit for the tax deducted at the time of the assessment of his total income for the relevant assessment year [section 199 as amended by the Finance (No. 2) Act, 1967]. If the tax deducted is in excess of the tax due on the total income of the person concerned, the excess will be refundable to him.

FINANCE (NO. 2)  ACT, 1967

19. Persons responsible for deducting tax at source from interest income under section 194A are subject to the same obligations under the Income-tax Act in regard to the payment of the tax deducted to the credit of the Central Government within the time and in the manner specified in the Income-tax Rules, accounting for it to the Income-tax Officer and furnishing a certificate of deduction at source to the recipient of the income, and the same liabilities for failure to deduct the tax or to pay the tax deducted to the credit of the Central Government as are cast upon them by the law in regard to deduction of tax at source from salaries, interest on securities, dividends, etc.

The Finance (No. 2) Act, 1967 has made consequential amendments to the relevant provisions of the Income-tax Act for this purpose. In pursuance of these provisions, the Income-tax Rules have been amended by the Board by a notification dated 6-9-1967, published in the Gazette of India, Extraordinary, dated 7-9-1967. The amended rules specify the period within which the tax deducted at source from interest income is to be paid to the Central Government, the manner in which it is to be paid, the form in which the certificate of deduction of tax at source under section 203 has to be furnished by the payer of the interest to the payee, etc.

FINANCE (NO. 2)  ACT, 1967

20. Tax not to be deducted from interest which is wholly exempt from tax – Under the scheme of the Income-tax Act, deduction of tax at source is only a method of collecting tax on income which is chargeable to tax under the Act. Accordingly, no tax is to be deducted from interest income which under section 10 is not to be included in the total income of the recipient and is, thus, wholly exempt from tax. Such interest income is interest on deposits in Post Office Savings Banks, including cumulative time deposits, and interest credited to the individual accounts of employees participating in a provident fund to which the Provident Funds Act, 1925 applies or a provident fund which is recognised for the purposes of the Income-tax Act, insofar as the interest credited by such a provident fund is exempt from tax under section 10.

FINANCE (NO. 2)  ACT, 1967

21. In regard to the tax deductible at source during the current financial year from income by way of �interest on securities� and from dividends receivable by persons resident in India, including domestic companies, the rates prescribed by the Finance (No. 2) Act, 1967 are the same as under the Finance Act, 1966, namely, 22 per cent.

FINANCE (NO. 2)  ACT, 1967

22. Incomes receivable by non-resident persons and companies which are not domestic companies – The rates for deduction of tax at source, under the Finance (No. 2) Act, 1967 from the incomes of non-resident non-corporate persons during the current financial year, are the same as under the Finance Act, 1966.

FINANCE (NO. 2)  ACT, 1967

23. In respect of dividends receivable by foreign companies (i.e., companies other than domestic companies) from any domestic company, the rates for deduction of tax, under the Finance (No. 2) Act, 1967 are slightly lower than under the Finance Act, 1966, as shown below :
Rate of tax deductible at source

FINANCE (NO. 2)  ACT, 1967

  1. In respect of dividends receivable by foreign companies (i.e., companies other than domestic companies) from any domestic company, the rates for deduction of tax, under the Finance (No. 2) Act, 1967 are slightly lower than under the Finance Act, 1966, as shown below :
 Rate of tax deductible at source
Under the Finance(No. 2) Act, 1967 Under the Finance Act, 1966
1. Dividends received by a foreign company from a closely-held Indian company mainly engaged in any of the specified priority industries.  

 

14%

 

 

15%

2. Dividends received by a foreign company from any domestic company, other than a closely-held Indian company referred to in (1) above.  

 

24.5%

 

 

25%

FINANCE (NO. 2)  ACT, 1967

24. The above-mentioned rates of 14 per cent and 24.5 per cent have been specified in consequence of the provision in new section 80M introduced by the Finance (No. 2) Act, 1967 with effect from 1-4-1968 in replacement of section 85A under which companies are entitled to a partial rebate of income-tax on dividends received by them from any domestic company. Under  the new section 80M, which is designed to simplify calculation of tax in the case of companies whose total income includes inter-corporate dividends, such companies will be entitled to a straight deduction, in the computation of their total income, of a specified percentage of such dividends. Foreign companies are entitled, under this section, to deduct 80 per cent of the dividends received by them from a closely-held Indian company engaged in any of the specified priority industries, leaving 20 per cent of such dividends to bear tax at the rate of 70 per cent currently applicable to the total income of a foreign company. This results in an incidence of tax of 14 per cent on the whole of such dividends (70 per cent of 20 per cent). In respect of dividends received from any other domestic company, a foreign company is entitled, under the new section 80M, to deduct 65 per cent thereof in the computation of its total income. This leaves the balance of the dividends of 35 per cent to bear tax at 70 per cent, which results in an incidence of tax of 24.5 per cent (70 per cent of 35 per cent) on the whole of such dividends. The rates at which tax is to be deducted at source from inter-corporate dividends receivable by foreign companies have been determined on the above-mentioned basis.

FINANCE (NO. 2)  ACT, 1967

25. The rates specified in the Finance (No. 2) Act, 1967 in the case of foreign companies for deduction of tax at source from incomes, other than dividends from domestic companies, are the same as under the Finance Act, 1966.
JUDICIAL ANALYSIS

Explained in – Para 18 was Referred to and explained in ITO v. Elecon Engg. Co. Ltd. [1991] 41 TTJ (Ahd.) 393, with the following observations :

5.3 It will also be worthwhile to make a useful reference to the Circular No. 5-P, dated 9th October, 1967 issued by the CBDT, containing explanatory notes for explaining the various provi�sions of Finance (No. 2) Act, 1967 published in Taxman Direct taxes Circulars Vol. II (1985 Edn.) at page 174. In para 18 of the said circular appearing at page 180, it has been clarified that the person from whose interest, income-tax has been deducted at source under section 194 will, on production before the ITO of the certificate of such deduction from the payer, be given credit for the tax deducted at the time of the assessment of his total income for the relevant assessment year. The amendment made in section 199 by the Finance Act, 1987 w.e.f. 1st June, 1987 pro�viding that credit of such tax deducted at source shall be given for the assessment year for which such income is assessable now gives the statutory recognition to the aforesaid view expressed in the Board�s circular. The view taken by the CIT (A) is clearly in consonance with the aforesaid Board�s circular …� (p. 398).

FINANCE (NO. 2)  ACT, 1967

Rates for deduction of tax at source from �salaries�, computation of advance tax and calculating or charging income-tax in special cases, in respect of the current financial year 1967-68

26. These rates, which are specified in Part III of the First Schedule to the Finance (No. 2) Act, 1967 differ from the rates of tax from making regular assessments for the assessment year 1967-68, only in providing some tax relief in certain cases. These tax reliefs are explained in the following paragraphs.

FINANCE (NO. 2)  ACT, 1967

27. Non-corporate assessees – A resident individual (whether unmarried or married) whose total income does not exceed Rs. 10,000 and who has incurred any expenditure during the previous year for the maintenance of one or more of his parents or grand-parents mainly dependent on him is entitled to tax relief on account of personal allowances in an amount which is higher than that available in other cases, by Rs. 20. The additional tax relief of Rs. 20 has been calculated on a fixed amount of Rs. 400, by way of the allowance for maintenance of dependent parents or grand-parents, at 5 per cent, which is the rate of income-tax applicable to the first Rs. 5,000 of the total income. The term �grand parent� comprises grand-parents on the paternal as well as the maternal side. As stated above, the higher amount of tax relief on account of personal allowance is to be granted only where the parent or grand-parent is mainly dependent on the individual. It has been specifically provided that where the parent or grand-parent with reference to whom the tax relief is claimed has personal income from all sources, in respect of the relevant previous year, in a sum higher than Rs. 1,000, such parent or grand-parent will not be treated as being mainly dependent on the individual.

FINANCE (NO. 2)  ACT, 1967

  1. The maximum amount of tax relief on account of personal allowances available to resident individuals maintaining one or more dependent parents or grand-parents and having a total income not exceeding Rs. 10,000, compares with the maximum amount of tax relief on account of personal allowances available to other resident individuals, as follows :
Assessee entitled to the tax relief Maximum amount of tax relief available on account of personal allowance in the case of
resident  individuals with total income not exceeding Rs. 10,000 and maintaining   a dependent parent    or   grandparent other resident individuals
1 2 3
 

1. Unmarried individual

Rs.

145

(5% of Rs. 2,900)

Rs.

125

(5% of Rs. 2,500)

2. Married individual  with  no dependent child 220

(5% of Rs. 4,4 00)

200

(5% of Rs. 4,000)

3. Married individual with one dependent child 240

(5% of Rs. 4,800)

220

(5% of Rs. 4,400)

4. Married  individual  with    more  than  one dependent child 260

(5% of Rs. 5,200)

240

(5% of Rs. 4,800)

Note :  In respect of the assessment year 1967-68, the maximum amount of relief on account of �personal allowance� available to resident individuals (whether or not they maintain a dependent parent or grand-parent) is as shown in column 3. In the case of resident Hindu undivided families, the maximum amount of tax relief on account of personal allowances, in respect of the assessment year 1967-68, as well as for the purpose of computing the �advance tax� payable by them during the current financial year, is the same as specified in the Finance Act, 1966. The amount of such tax relief is Rs. 200, where the Hindu undivided family has no minor coparcener ; Rs. 220, where it has one minor coparcener mainly supported from the income of the family ; and Rs. 240, where it has more than one minor coparcener mainly supported from the income of the family.

FINANCE (NO. 2)  ACT, 1967

29. Where the total income of a resident individual maintaining one or more dependent parents or grand-parents exceeds Rs. 10,000, he is entitled to the lower amount of tax relief on account of personal allowances as shown in column (3) of the table in the preceding paragraph. However, where the total income of such an individual exceeds Rs. 10,000 by a small amount, he will be entitled to marginal relief by way of limiting his tax liability to the aggregate of (a) the tax which would have been chargeable if his total income had been Rs. 10,000, and (b) 40 per cent of the excess of the total income over Rs. 10,000. It will be seen from calculations that such marginal relief will be available only where the total income of such an individual does not exceed Rs. 10,080. It may be stated that the above-mentioned provision for marginal relief does not apply in a case where the resident individual has a total income less than Rs. 10,000 or does not incur any expenditure on the maintenance of the dependent parent or grand-parent; in such a case, where the total income of the resident individual exceeds Rs. 4,000 by a small amount, marginal relief will be granted, under the general provisions, by limiting the amount of tax payable to 40 per cent of the amount by which the total income exceeds Rs. 4,000.

FINANCE (NO. 2)  ACT, 1967

30. In the case of an individual or a Hindu undivided family, the first Rs. 30,000 of the unearned income (exclusive of interest on Government securities or income on units of the Unit Trust of India), has been exempted from the unearned income surcharge, i.e., surcharge on the income-tax attributable to unearned income. (For the assessment year 1967-68, only the first Rs. 15,000 of such income is exempt from the unearned income surcharge.) In respect of the income in the slab over Rs. 30,000, unearned income surcharge will be leviable at the same rates as are applicable for the assessment year 1967-68, namely, 20 per cent of the income-tax on such income in the slab of Rs. 30,000�Rs. 50,000, and 25 per cent of the income-tax on such income in the slab over Rs. 50,000.

FINANCE (NO. 2)  ACT, 1967

31. Corporate assessees – A domestic company in which the public are substantially interested and whose total income does not exceed Rs. 50,000 will be chargeable to tax on its total income at the concessional rate of 45 per cent. (In respect of the assessment year 1967-68, this concessional rate of 45 per cent is applicable only where the total income of such a company does not exceed Rs. 25,000). Where the total income of a domestic company in which the public are substantially interested exceeds Rs. 50,000, the rate of tax on the total income is 55 per cent as before. However, in such a case, the company will be entitled to marginal relief by way of limiting the tax payable on its total income to the aggregate of (a) tax which would have been payable if its total income had been Rs. 50,000, and (b) 80 per cent of the amount by which the total income exceeds Rs. 50,000. It will be seen from calculations that such marginal relief will be available where the total income of the company exceeds Rs. 50,000 but does not exceed Rs. 70,000.

FINANCE (NO. 2)  ACT, 1967

32. In consequence of the above-mentioned provision for the levy of tax at the concessional rate of 45 per cent in the case of domestic companies in which the public are substantially interested and whose total income does not exceed Rs. 50,000, such companies have been excluded with effect from 1-4-1968 (i.e., for and from the assessment year 1968-69) from the benefit of the provision in the Income-tax Act for the deduction, in the computation of total income of domestic companies, of 8 per cent of the profits derived by them from specified priority industries. Companies which have been excluded from the benefit of the above-mentioned provisions are domestic companies in which the public are substantially interested and whose �gross total income�, i.e., the total income as computed before making any deduction under the provisions of Chapter VIA, is Rs. 50,000 or less. Provision in this matter is contained in sub-section (2) of the new section 80-I, which is to replace the corresponding provisions in the existing section 80E with effect from 1-4-1968. [Under section 80E, which is effective up to and inclusive of the assessment year 1967-68, a domestic company in which the public are substantially interested and whose total income does not exceed Rs. 25,000 is not entitled to the above-mentioned deduction.]

FINANCE (NO. 2)  ACT, 1967

33. In cases where the demand for advance tax for the current financial year has already been made and the assessee asks for a deduction in the demand in view of his entitlement to any of the above-mentioned tax reliefs, the order making the demand may be rectified by the Income-tax Officer under section 154.

FINANCE (NO. 2)  ACT, 1967

Computation of the �advance tax� where the total income on which such tax is to be calculated includes interest on which tax would be deductible at source during the current financial year under the new section 194A

34. Section 209(a)(iii) [relating to computation of �advance tax�] provides that the income-tax calculated on the total income with reference to which the demand of �advance tax� is made in a financial year, �shall be reduced by the amount of income-tax which would be deductible during the said financial year in accordance with the provisions of sections 192 to 194, section 194A and section 195 on any income included in the said total income�. [The reference to section 194A in the said provision has been inserted by section 31 of the Finance (No. 2) Act, 1967.] Accordingly, where the total income with reference to which the demands for �advance tax� is made during the current financial year includes any income by way of interest (other than �interest on securities�) on which tax would be deductible at source under section 194A during the current financial year, the �advance tax� is to be reduced by the amount of the tax which would be so deductible. The amount of the tax which would be deductible under section 194A to be estimated by the Income-tax Officer with reference to the information available in the relevant assessment records and the information, if any, furnished by the assessee. It is to be kept in view that tax is deductible at source under section 194A, only where the interest is payable by a person other than an individual or Hindu undivided family, after 30-9-1967, in amounts, exceeding Rs. 400 at a time and that persons of the categories enumerated in sub-section (3) of that section (e.g., banking companies, insurance companies, etc.) are entitled to receive their interest income without deduction of tax at source. To illustrate, where it is seen from the facts of the case that the interest income has been credited or paid to the assessee before 1st October of the relevant previous year or that the interest credited or paid at a time is not more than Rs. 400, or that the interest is payable only by the individual or Hindu undivided families, the �advance tax� payable is to be computed without making any adjustment thereto on account of the provisions of section 194A. Where it is seen that interest income has been paid or credited to the assessee by a person other than an individual or a Hindu undivided family, in an amount or amounts exceeding Rs. 400 at a time, after the 30th September of the relevant previous year, the advance tax has to be reduced by the tax �which would be deductible�� from the interest during the financial year under section 194A. The amount of the tax which would be deductible at source under section 194A has to be estimated with reference to the facts of each case. In order to estimate the tax deductible under section 194A, the Income-tax Officer should have information on the following points:

(a)  individual items of credit or receipt of interest – to see whether these exceed Rs. 400 or not ;

(b)  the status of the payer of each item – whether he is a person other than an individual or Hindu undivided family.

If these details are not available on record, the Income-tax Officer need not call for these details for issuing the notice for �advance tax� or revising it, but may estimate individual payments of interest exceeding Rs. 400 at a time received from persons other than individuals and Hindu undivided families, and adjust the demand of �advance tax� accordingly.

FINANCE (NO. 2)  ACT, 1967

Provisions relating to annuity deposits

35. Rates of annuity deposits in respect of the assessment year 1967-68 and for the annuity deposits to be made in the current financial year in relation to income liable to tax for the succeeding assessment year 1968-69 – The rates for annuity deposits on incomes liable to tax for the current assessment year 1967-68 are the same as were specified in the Finance Act, 1966, for making annuity deposits during the financial year 1966-67 in relation to incomes falling due for assessment in the assessment year 1967-68.

In respect of annuity deposits to be made by resident non-corporate taxpayers during the financial year 1967-68, in relation to their current incomes falling due for assessment in the succeeding assessment year 1968-69, the rates at which such deposits are to be calculated are higher than the rates applicable to the deposits in relation to the assessment year 1967-68, by 20 per cent thereof, all along the line. This increase in the rates has been brought about through the amendments made to section 3 of, and the Second Schedule to, the Finance (No. 2) Act, 1967 by the Taxation Laws (Amendment) Ordinance, 1967. The increased rates of annuity deposits for the current financial year 1967-68 compare with the rates of annuity deposits on incomes assessable for the assessment year 1967-68 as follows :

Range of total income Rate of annuity deposit
to  be  made during the current financial year  1967-68  as increased  by the Ordinance in  respect  of  income assessable for the asst. year 1967-68
Not over Rs. 15,000 Nil Nil
Over Rs, 15,000 but not over Rs. 20,000 6% 5%
Over Rs, 20,000 but not over Rs. 40,000 9% 7.5%
Over Rs, 40,000 but not over Rs. 70,000 12% 10%
Over Rs, 70,000 15% 12.5%

FINANCE (NO. 2)  ACT, 1967

36. It may be mentioned that the Taxation Laws (Amendment) Ordinance, 1967 has also amended section 280X (relating to liability to pay additional income-tax in certain cases for failure to make the annuity deposit or for making a short deposit), to make it obligatory on persons whose total income is over Rs. 15,000 but not over Rs. 25,000 to make annuity deposits during the current financial year in an amount calculated at the difference between the rates of annuity deposits as increased and the original rates. Thus, it will be obligatory on persons having a total income over Rs. 15,000 but not over Rs. 20,000 to make an annuity deposit calculated on their adjusted total income at 1 per cent (6 per cent minus 5 per cent), and on persons having a total income over Rs. 20,000 but not over Rs. 25,000 at 1.5 per cent (9 per cent minus 7.5 per cent). If they fail to make a deposit to this extent or make a short deposit, they will be liable to pay additional income-tax for the assessment year 1968-69 with reference to the amount of such deposit or the shortfall in the deposit from that amount, subject to marginal relief where the total income exceeds Rs. 15,000 or, as the case may be, Rs. 25,000, by a small amount.

FINANCE (NO. 2)  ACT, 1967

37. The Finance (No. 2) Act, 1967 has not made any change in the provisions of the Income-tax Act relating to annuity deposits for the assessment year 1967-68. However, in respect of the succeeding assessment year 1968-69 and subsequent years, the Finance (No. 2) Act, 1967 has made the following changes in the law relating to annuity deposits :

1. Annuity deposit will not be required to be made with reference to the income arising to a depositor in a foreign country whose laws prohibit or restrict the remittance of money to India. Such income will continue to be outside the purview of annuity deposits even if the prohibition of, or restriction on, the remittance of money to India is removed by the foreign country concerned after the relevant previous year [Section 280B(1)(b)(vii)].

2. An individual aged more than 60 years on the last day of the previous year relevant to the assessment year will not be liable to pay additional tax under section 280X for failure to make annuity deposit or for making a short deposit. (In respect of the assessment year 1967-68, the age limit for this purpose continues to be 70 years.)

3. The additional tax chargeable under section 280X for failure to make the annuity deposit will not be levied where the amount of annuity deposit required to be made is Rs. 100 or less. The additional income-tax under the said section will not be levied also where (a) the deficiency in the deposit actually made is not more than Rs. 100, or (b) the deficiency, being more than Rs. 100, is not more than 10 per cent of the annuity deposit required to be made [Section 280X(1)(c) and (d)].
Amendments  to  Income-tax  Act

PROVISIONS  FOR  ENCOURAGING  PERSONAL
SAVINGS  AND  INVESTMENT

FINANCE (NO. 2)  ACT, 1967

Increase in the limit of maximum amount of personal savings in life insurance, provident funds, etc., qualifying for tax relief

38. Individuals making savings out of their income chargeable to tax in specified media (viz., life insurance policies, including contracts for deferred annuities on life, provident funds governed by the Provident Funds Act, 1925, recognised provident funds, approved superannuation funds or a 10-year or 15-year cumulative time deposit account in Post Office Savings Banks) are at present entitled to tax relief under section 80A by way of the deduction, in the computation of their total income, of a specified percentage of the qualifying amount of such savings. Hindu undivided families are also entitled to such deduction with reference to the qualifying amount of their savings through life insurance policies. The amount of such savings qualifying for the above-mentioned tax relief is limited, under section 80A, to 25 per cent of the total income of the individual or the Hindu undivided family (as computed before making any deduction under Chapter VIA and before any deduction on account of annuity deposits), subject to a monetary ceiling of Rs. 12,500 in the case of an individual and Rs. 25,000 in the case of a Hindu undivided family. In respect of the assessment year 1968-69 and subsequent years, the percentage limit on such savings qualifying for tax relief in the case of an individual has been increased to 30 per cent of his �gross total income� (i.e., the total income as computed before making any deduction under Chapter VIA or in respect of annuity deposits and without including in the total income, any income of the spouse or minor child, etc., of the individual, under section 64), and the alternative monetary limit, to Rs. 15,000. Similarly, in the case of Hindu undivided families, the percentage limit on the amount of savings qualifying for tax relief has been increased to 30 per cent of the �gross total income� of the family, and the alternative monetary limit, to Rs. 30,000. Provision in the matter has been made by the Finance (No. 2) Act, 1967 in new section 80C which is to replace section 80A with effect from 1-4-1968, i.e., for and from the assessment year 1968-69. However, the quantum of the deduction admissible to individuals and Hindu undivided families with reference to the qualifying amount of the savings referred to above remains unaltered, this being 60 per cent of the first Rs. 5,000 of the qualifying amount of savings, and 50 per cent of the balance thereof.

FINANCE (NO. 2)  ACT, 1967

Exemption from tax in respect of dividend income received by any assessee from an Indian company, where the total dividend income of the assessee during the year does not exceed Rs. 500

39. In order to encourage investment in shares in Indian companies, it has been provided in the new section 80L that where the total amount of the dividend income included in the �gross total income� of any assessee (corporate or non-corporate) in respect of the previous year does not exceed Rs. 500, the whole of the dividend income from Indian companies included therein will be allowed as a deduction in computing the total income of the assessee. The term �gross total income� is defined in clause (5) of section 80B to mean the total income computed in accordance with the provisions of the Act, before any deduction under Chapter VIA or under section 280-O) (in respect of annuity deposits), and without applying the provisions of section 64 (i.e., before including in the total income of the individual the income of his spouse, minor child, etc., on which the individual is assessable under section 64). The new section 80L takes effect from 1-4-1968, i.e., for and from the assessment year 1968-69. Where the total amount of the dividend income included in the assessee�s �gross total income� exceeds Rs. 500, the above-mentioned deduction in respect of dividends from Indian companies is not admissible and the whole of the dividend income remains liable to lax. The limit of Rs. 500 is to be applied to the gross amount of the dividend income (i.e., the net amount of dividends as increase by the tax deducted on the dividends at source), as reduced by any expenditure allowable as a deduction under section 57 in computing the dividend income, namely, any commission or remuneration paid for realising the dividends and any other expenditure of a revenue nature incurred wholly and exclusively for earning the dividend income. No deduction is to be allowed in respect of the dividend income which arises to the spouse or the minor child of an individual and is includible in the total income of the individual under section 64. This is because the deduction under section 80L is to be allowed in respect of dividend income from Indian companies included in the assessee�s �gross total income� which, in accordance with the definition of that term in section 80B(5) is to be computed without applying the provisions of section 64.
Developmental  Incentives

FINANCE (NO. 2)  ACT, 1967

Continuance of the existing exemption from tax of income from business of livestock breeding, poultry or dairy farming, beyond the assessment year 1967-68, for an indefinite period

40. Under the original provisions of clause (27) of section 10 any assessee deriving income from the business of livestock breeding or poultry or dairy farming is exempt from tax on such income for the three assessment years 1965-66, 1966-67 and 1967-68. Having regard to the continuing need of our country for the growth and development of such activities to supplement our food resources, the Finance (No. 2) Act, 1967 has amended the provision to secure that the exemption provided by it is continued beyond the assessment year 1967-68 for an indefinite period.

FINANCE (NO. 2)  ACT, 1967

Tax concessions for promoting tourism in the country

41. The Finance (No. 2) Act, 1967 has made several provisions in the Income-tax Act to provide certain tax incentives for the promotion of tourism in our country, inter alia, to augment our foreign exchange earnings. The substance of these tax concessions is as follows :

An Indian company, owning a newly constructed hotel building and using it as a hotel, will, in a case where the erection of the building has been completed after 31-3-1967, be entitled to a deduction on account of initial depreciation allowance in a sum equal to 25 per cent of the actual cost of erection of the building to the company. The deduction is to be allowed in computing business profits of the previous year in which the erection of the building is completed or of the immediately succeeding previous year where the building is first brought into use as a hotel in that year. The initial depreciation allowance is admissible only where the hotel is for the time being approved by the Central Government in this behalf. The amount of the initial depreciation allowance is not to be deducted from the actual cost of the building for the purpose of calculating its written down value on which normal depreciation allowance is admissible to the company. However, for all other  purposes of the Act, the initial depreciation allowance will be taken into account, for instance, in applying the provision in section 34(2)(i) under which the aggregate of the deductions allowed on account of depreciation allowance in respect of an asset is to be limited to the actual cost of that asset to the assessee.

The above-mentioned provision for the grant of initial depreciation allowance is contained in the new clause (v) of section 32(1) and takes effect from 1-4-1968, i.e., for and from the assessment year 1968-69.

2. The business of a hotel carried on by an Indian company will be treated as a �priority industry� for the purposes of the Income-tax Act where the hotel is, for the time being, approved in this behalf by the Central Government. An Indian company engaged in such business will be entitled to the following tax concessions :

It will be entitled to deduct development rebate on new machinery or plant installed in the hotel at the higher rate of 35 per cent of the cost thereof where it is installed during the period from 1-4-1967 to 31-3-1970 and at 25 per cent of the cost thereof, where it is installed after 31-3-1970, as against the normal rate of development rebate in the case of non-priority industries of 20 per cent of the cost of new machinery or plant installed therein up to 31-3-1970, and 15 per cent of the cost of new machinery or plant installed after 31-3-1970. The provision in sub-section (6) of section 33, which bars the allowance of deduction on account of development rebate in respect of machinery or plant installed after 31-3-1965 in any office premises or residential accommodation including any accommodation in the nature of the guest house, will not apply in respect of any machinery or plant installed by an Indian company in any premises used by it as a hotel [Section 33(1)(b)(B)(ii) as substituted by the Finance (No. 2) Act, 1967 and the new proviso to section 33(6)].

An Indian company will be entitled to a deduction, in the computation of its total income, of 8 per cent of the profits derived by it from a hotel business and included in its �gross total income�. The deduction will be admissible to the Indian company only where its �gross total income�, viz., its total income as computed under the provisions of the Income-tax Act before making any deduction under Chapter VIA thereof, is more than Rs. 50,000. The deduction is admissible for and from the assessment year 1968-69 [Section 80-I read with the definition of the term �priority industry� in new section 80B(7)]

3. The conditions in section 84(3) for the eligibility of an Indian company to the 5-year �tax holiday� concession in respect of profit from a newly established hotel (viz., exemption from tax of profits up to 6 per cent per annum of the capital employed in the hotel for a period of 5 years commencing from the year in which the hotel starts functioning) have been liberalised. With effect from 1-4-1967 (i.e., for and from the assessment year 1967-68), the condition that the hotel building should not have been previously used for any purpose has been replaced by the condition that the building should not have been previously used as a hotel. Further, the condition that the Indian company running the hotel should also be the owner of the premises has been removed altogether. These changes will facilitate the setting up of new hotels by Indian companies in places of tourist interest in buildings which have been taken by them on hire or on lease or in buildings which have been previously used for residential or other purposes. [Section 84(3), as substituted with effect from 1-4-1967, and new section 80J(6) which replaces section 84 with effect from 1-4-1968].

4. Under the existing provisions of clause (1) of section 43 (definition of the term �actual cost� of an asset), the actual cost of a motor car acquired by any assessee after 28-2-1966 for an amount exceeding Rs. 25,000 is taken for the purpose of calculating depreciation allowance, to be Rs. 25,000 only, and the excess over that amount is ignored. This provision has been amended by the Finance (No.  2) Act, 1967 to secure that in respect of motor car which is acquired by any assessee after 31-3-1967 at a cost exceeding Rs. 25,000 for being run on hire for tourists, depreciation allowance will be calculated with reference to the full amount of the actual cost thereof without limiting it to Rs. 25,000. The new provision is effective for and from the assessment year 1968-69.

FINANCE (NO. 2)  ACT, 1967

Provisions for encouraging scientific research

42. Under the existing provisions of the Income-tax Act, an assessee who instals any new machinery or plant for the purpose of scientific research related to the business carried on by him is eligible for a deduction by way of development rebate on such machinery or plant at the general rate of 20 per cent of the cost thereof. Further, an assessee who incurs any capital expenditure on scientific research related to the business carried on by him (e.g., capital expenditure incurred for acquiring a building or machinery or plant or other equipment for scientific research) is entitled, under the existing provisions of section 35 to deduct such expenditure from his business profits over a period of five years, in equal instalments, commencing from the year in which the expenditure is incurred. The Finance (No. 2) Act, 1967 has amended the relevant provisions in the Income-tax Act with effect from 1-4-1968, i.e., for and from the assessment year 1968-69, to provide further incentives for the promotion of scientific research   in the country. The substance of the new provisions is as follows :

1. New machinery or plant acquired and installed by an assessee after 31-3-1967 for the purpose of scientific research related to his business will be eligible for development rebate at the higher rate applicable to any new machinery or plant installed in any of the specified priority industries, i.e., at 35 per cent of the actual cost of the new machinery or plant installed up to 31-3-1970, and at 25 per cent of the actual cost thereof where it is installed after 31-3-1970 [Section 33(1)(b)(B)(iii), as substituted with effect from 1-4-1968].

2. The amount of capital expenditure incurred by an assessee after 31-3-1967, on scientific research related to his business will be allowed to be deducted in full in computing his business profits of the year in which such expenditure is incurred [Section 35(2)(ia)].

FINANCE (NO. 2)  ACT, 1967

Tax  concessions for facilitating re-establishment or revival of the business of an industrial undertaking which has been discontinued because of damage to, or destruction of, its capital assets in specified circumstances

43. The Finance (No. 2) Act, 1967 has made provisions in the Income-tax Act, with effect from 1-4-1967 (i.e., for and from the assessment year 1967-68), granting certain tax concessions to facilitate the revival or reconstruction of the business of an industrial undertaking carried on in India which has been discontinued in specified circumstances. These tax concessions are available only where the business of an industrial undertaking carried on in India by any assessee was discontinued because of extensive damage to, or destruction of, its capital assets (building,  machinery, plant or furniture owned by the assessee and used for the purpose of the business) as a direct result of specified causes and is,  thereafter, re-established, reconstructed or revived by the same assessee within a specified time limit. The specified causes referred to above are :

(a)  flood, typhoon, hurricane, earthquake, cyclone or other convulsion of nature ; or

(b)  riot or civil disturbance ; or

(c)  accidental fire or explosion ; or

(d)  action by an enemy or action taken in combating an enemy (whether with or without a declaration of war).

The business has to be re-established, reconstructed or revived by the assessee at any time before the expiry of three years from the end of the previous year in which it was discontinued , i.e., during the previous year in which it was discontinued or during any of the three succeeding previous years. The tax concessions are available in relation to the business which has been so re-established, revived, etc. The concessions extend only to industrial undertakings whose business consists mainly of generation or distribution of electricity or any other form of power, construction of ships, manufacture or processing of goods or mining. The above-mentioned conditions for eligibility to the tax concessions under reference have been specified in the new section 33B relating to the grant of �rehabilitation allowance� in such cases. Other tax concessions in such cases have been provided by making certain amendments to some of the existing provisions in the Income-tax Act. The substance of the new provisions is as under :

1. Under the new section 33B, an assessee who re-establishes, reconstructs or revives the business of the industrial undertaking as stated above will be entitled to a deduction by way of �rehabilitation allowance� in the computation of his business income in respect of the previous year in which the business is re-established, reconstructed, etc. The rehabilitation allowance is to be computed in a sum equal to 60 per cent of the �terminal allowance�, if any, admissible to him under section 32(1)(iii) in respect of the capital assets (building, machinery, plant or furniture) of the industrial undertaking, which had been damaged or destroyed due to any of the specific causes mentioned above.

[The �terminal allowance� under section 32(1)(iii) consists in the deduction, in the computation of the business profits of the assessee, of the amount by which the sale proceeds or insurance, salvage or compensation moneys receivable by him in respect of damaged or destroyed or discarded buildings, machinery, plant or furniture of the business, taken together with the scrap value thereof fall short of the written down value of such capital asset.]

Where an assessee  is not entitled to such terminal allowance, the �rehabilitation allowance� in his case will be nil.

An assessee may be carrying on more than one business relating to separate industrial undertakings ; in such a case, he will be entitled to rehabilitation allowance in relation to the particular business which was discontinued due to the specified causes and has subsequently been revived or reconstructed. Discontinuance of the business of an industrial undertaking implies the complete cessation of that business and not merely  a cessation of some of the activities of that business or the closing down of a few units or sub-units of the industrial undertaking.

It may be stated that unlike the deduction on account of development rebate or development allowance, which is limited to the assessable profits of the relevant year, the deduction on account of rehabilitation allowance is to be allowed in full in computing the business profits; where the deduction results in a loss or an increase in the amount of the loss otherwise computed, the resultant loss is to be treated in the same manner as any other business loss for the purpose of setting it off against other profits of the assessee during the relevant year and for carrying forward the unabsorbed loss to subsequent years for being set off against the profits of those years.

2. The unabsorbed business loss of the undertaking which is discontinued in the circumstances stated hereinabove, including the past business losses of that undertaking brought forward from earlier years, is eligible for being carried forward and set off against profits of the re-established, reconstructed or revived business up to a period of 8 years, reckoned from the year in which the business was re-established, reconstructed or revived by the assessee [New proviso to section 72(1)].

3. The condition specified in section 84(2)(i) to the effect that an industrial undertaking will not be eligible for the �tax holiday� concession (i.e., exemption from tax of profits up to 6 per cent per annum of the capital employed in the industrial undertaking for the initial five years) if it is formed by splitting up or reconstruction of a business already in existence, will not apply in the case of an industrial undertaking which was discontinued in any one of the specified circumstances and is subsequently re-established, reconstructed or revived within the specified period [Newly added first proviso to section 84(2) and the proviso to new section 80J(4) which replaces section 84 with effect from 1-4-1968].

FINANCE (NO. 2)  ACT, 1967

Enlargement of the scope and liberalisation of the provisions relating to the �tax holiday� concession in the case of new industrial undertakings and hotels

44. Several changes have been made in the provisions in section 84 relating to the �tax holiday� concession, with a view to widening their scope and liberalising them in certain directions. The above-mentioned section will be effective up to and inclusive of the assessment year 1967-68 only as it is to be replaced, with effect from 1-4-1968, by the new section 80J incorporated in Chapter VIA. Under the new section 80J, �tax holiday� profits, which are eligible for a rebate of tax under the existing section 84 will, for and from the assessment year 1968-69, be allowed as a straight deduction in computing the assessee�s total income. The provisions of section 80J are virtually the same as those of section 84 (as amended) in all respects, except that section 80J provides an additional tax benefit to assessees by way of enabling them to carry forward the �deficiency� in their profits in any year during the �tax holiday� period for being set off against the profits in subsequent years, up to a specified period. The substance of the new provisions in section 84 and in section 80J is as under :

1. An industrial undertaking operating a cold storage plant in India will be eligible for the �tax holiday� concession in the same manner as an industrial undertaking which manufactures or produces articles in India. The conditions for eligibility to the �tax holiday� are the same for industrial undertakings of both the categories, except that in the case of industrial undertakings operating cold storage plants, there in no stipulation as to the minimum number of workers to be employed therein. The �tax holiday� benefit will be available in respect of profits derived from cold storage plants, retrospectively, with effect from 1-4-1962, i.e., for and from the assessment year 1962-63 [Section 84(2)(iii), as substituted and section 80J(4)(iii)].

2. The condition that the �tax holiday� concession will not be available in the case of an industrial undertaking which has been formed by the splitting up of the reconstruction of a business already in existence will not apply in the case of an industrial undertaking set up in reconstruction or revival of an industrial undertaking which had been discontinued in any of the circumstances set forth in section 33B and has been reconstructed or revived within the period specified in that section [New first proviso to section 84(2) and the proviso to section 80J(4)].

3. The condition specified in section 84(2)(ii) for eligibility to the �tax holiday� concession in the case of an industrial undertaking,viz., that it should not be formed by the transfer to a new business, inter alia, of a building previously used for any purpose, will be deemed not to have been contravened where the industrial undertaking is set up in rented premises. There is a corresponding provision in the new section 80J(4)(ii), the effect of which is that an industrial undertaking which is set up in rented or leased premises will qualify for the �tax holiday� concession, subject to the fulfilment of other conditions laid down in this behalf. The above-mentioned amendment to section 84 is effective from 1-4-1967, i.e., for the assessment year 1967-68. Section 80J, which replaces section 84 with effect from 1-4-1968, is effective for and from the assessment year 1968-69, as stated before.

4. The following changes have been made in the conditions specified in sub-section (3) of section 84 for eligibility of an Indian company to the �tax holiday� concession in respect of the profits derived by it from a hotel :

The condition that the hotel business is not carried on in a building which was used previously for any purpose has been replaced by the condition that the hotel business is not carried on in building which was used previously as a hotel.

The condition that the hotel business is carried on in premises which are owned by the company has been omitted.

The above-mentioned changes in section 84 are effective from 1-4-1967, i.e., for the assessment year 1967-68. The provisions in this behalf in section 80J(6) are identical to the amended provisions of section 84(3).

The effect of the above-mentioned changes is that for the assessment year 1967-68 and subsequent years, an Indian company which is carrying on the business of a hotel in a building which has been taken by it on rent or lease and which was not previously used as a hotel, will also qualify for the �tax holiday� concession, subject to the fulfilment of the other conditions laid down in this behalf.

5. An Indian company deriving profits from a ship will, subject to the fulfilment of certain conditions, be eligible for the �tax holiday� concession in respect of such profits, retrospectively, with effect from 1-4-1962, i.e., for and from the assessment year 1962-63. The conditions to be fulfilled in respect of the ship for eligibility to the �tax holiday� concession are that (a) it should be owned by the company and wholly used for the purposes of the company�s business ; (b) it should not have been owned or used in Indian territorial waters by a person resident in India at any time before the date of its acquisition by the Indian company ; and (c) it should be brought into use by the Indian company at any time during the 23-year period from 1-4-1948 to 31-3-1971 [Section 84(3A) and section 80J(5)].

6. It has been mentioned above that the new section 80J, which is to replace section 84, with effect from 1-4-1968, provides for a straight deduction of the �tax holiday� profits (i.e., profits derived from the eligible industrial undertaking, hotel or ship to the extent of 6 per cent of the capital employed in the relevant previous year in the undertaking, hotel or ship, as computed in accordance with the Income-tax Rules) in the computation of the assessee�s total income. Such deduction is to be allowed from the assessee�s profits from the eligible industrial undertaking, hotel or ship included in the �gross total income� of the assessee, i.e., the profits computed under the provisions of the Income-tax Act before any deduction under Chapter VIA or under section 280-O (in respect of annuity deposits) and without applying the provisions of section 64 relating to the inclusion in the total income of an individual, in certain circumstances, of the income of his spouse or minor child, etc. Where the assessee is entitled to a deduction under section 80H (deduction, in the case of a new industrial undertaking mainly employing displaced persons or repatriates and satisfying certain conditions, of 50 per cent of its profits for a specified period of years), or to a deduction under section 80-I (deduction in the case of a domestic company, of 8 per cent of the profits derived by it from any of the specified priority industries), effect is to be given at first to those deductions, and the deduction under section 80J in respect of the �tax holiday� profits is to be allowed only from the balance of the profits of the eligible industrial undertaking or hotel included in the �gross total income� of the assessee.

The period for which the �tax holiday� profits are deductible under section 80J is the same as the period for which the existing section 84 provides for the grant of a rebate of tax on the �tax holiday� profits, namely, seven successive assessment years in the case of a co-operative society, and five successive assessment years in the case of any other assessee, commencing, in either case, from the assessment year next following the previous year in which the eligible industrial undertaking begins to manufacture or produce articles or to operate its cold storage plant or the eligible ship is first brought into use or the business of the eligible hotel starts functioning [Section 80J(1) and (2)].

7. The new section 80J also provides for the grant of relief in respect of any �deficiency� of profits in relation to any assessment year falling within the �tax holiday� period. The �deficiency� is the amount by which the profits and gains derived by the assessee from the eligible industrial undertaking or ship or hotel and included in his �gross total income� for any assessment year within the �tax holiday� period, falls short of the amount calculated at 6 per cent per annum of the capital employed in the  eligible industrial undertaking, ship or hotel during the previous year  relevant to that assessment year. Where there are no profits and gains, or where there is a loss, the �deficiency� in relation to an assessment year is to be taken to be an amount calculated at 6 per cent per annum on the capital employed in the undertaking, ship or hotel during the relevant previous year. No �deficiency� is to be computed in relation to any assessment year prior to the assessment year 1967-68. Thus, the earliest assessment year in respect of which any relief on account of �deficiency� can be allowed is the assessment year 1967-68. The relief in respect of the �deficiency� relating to an assessment year is granted by way of carrying it forward and setting it off against the assessable profits of the assessee from the eligible industrial undertaking, ship or hotel for subsequent years, up to the eighth year as reckoned from the first assessment year in the �tax holiday� period. The assessable profits against which the deficiency can be so set off are the profits derived from the eligible industrial undertaking, ship or hotel, as reduced by the deductions, if any, under section 80H or section 80-I and the primary deduction under section 80J (i.e., the deduction of profits up to 6 per cent of the capital employed in the eligible industrial undertaking, ship or hotel). Where an assessee is entitled to set off against the assessable profits of an assessment year, any deficiency relating to  two or more past assessment years, the deficiency relating to the earliest one of such assessment years is to be set off at first, followed by a set off of the �deficiency� in respect of the next assessment year, and so on.

To illustrate, the effect of the above-mentioned provisions for the carry forward and set off of �deficiency� : where, in the case of a company manufacturing certain articles, the calendar year 1965 (previous year for the assessment year 1966-67) was the fifth year from the year in which it commenced manufacture, the company will not be entitled to carry forward any deficiency relevant to that year or any earlier year, to the assessment year 1967-68 or any subsequent year. But, in the above example, if the year 1965 was the fourth year from the year in which the company started manufacture, the company would be entitled to carry forward �its deficiency�, if any, in respect of its profits of 1966, which are assessable for the assessment year 1967-68, to the assessment year 1968-69. Insofar as such deficiency is not absorbed by the profits assessable for the assessment year 1968-69, the company will be allowed to carry forward the unabsorbed �deficiency� to the next assessment year, and so on, uptil the assessment year 1970-71, that being the eighth assessment year as reckoned from the assessment year relevant to the accounting year in which the company started manufacture [Sub-section (3) of section 80J].
JUDICIAL ANALYSIS

EXPLAINED IN – Citing reference to sub-paragraph 7 of para�graph 44, the Tribunal observed as follows, in Hind  Wire Indus�tries Ltd. v. ITO [1987] 28 TTJ (Cal.), 41 :

�… We are inclined to agree with the contention of the revenue that paragraph 7 of the circular dated 9-10-1967 has gone beyond the jurisdiction of the CBDT  when it envisages granting of relief under section in Chapter VI of the Act even when there is no gross total income of the new unit. …� (p. 43)

EXPLAINED IN – Sub-paragraph 7 above was referred to in Hind Wire Industries Ltd. v. CIT [1992] 195 ITR 450 (Cal.), with the following obser�vations :

�The contention of the Revenue that section 80J(3) does not contemplate any contingency like loss for the purpose of carry forward of deficiency cannot be accepted. If this contention is accepted, the whole object of the section would be made nugatory. It is now well-settled that profits and gains would also include negative figure (loss). It may be mentioned that this court in the case of Indian Aluminium Co. Ltd. v. CIT [1980] 122 ITR 660, considered the question whether the assessee could claim set off of the deficiency relating to earlier years against the profits of the current year. In other words, the question was whether, in a case where the assessee, admittedly, had suffered loss but did not make any claim for carry forward of deficiency and no defi�ciency was carried forward, in the subsequent years, such defi�ciency could be allowed against the profits of the year in which such claim was made. This decision would show that the contingen�cy of a loss being suffered by an industrial undertaking is one of the normal and usual incidents of the business which cannot be ignored in construing the provisions of section 80J(3). The �deficiency� referred to in section 80J is the amount by which the profits and gains derived by an assessee from the eligible undertaking and include in its gross total income for any assess�ment year within the tax holdings period falls short of the amount calculated at six per cent per annum on the capital em�ployed in the eligible undertaking during the previous year relevant to that assessment year. Where there are no profit and gains, or where there is a loss for any such assessment year, the deficiency in relation to that assessment year is to be taken to be an amount calculated at six per cent per annum on the capital employed in the undertaking during the relevant previous year.

We may add that, in paragraph 7 of Circular No. 5-P, dated Octo�ber 9, 1987, issued by the Central Board of Direct Taxes, it was clarified that deficiency is required to be computed even when the new industrial undertaking suffers a loss.

We are, therefore, unable to sustain the view of the Tribunal that where an industrial undertaking suffers loss, it is not entitled to the carry forward of deficiency under section 80J(3).� (pp. 452-53).

FINANCE (NO. 2)  ACT, 1967

Provisions relating to exemption from tax of the shareholder of a company on dividends attributable to the �tax holiday� profits of the company

45. A shareholder of a company receiving dividends which are attributable to �tax holiday� profits of the company is entitled, under section 85, to a rebate of tax on such dividends. In consequence of the extension of the �tax holiday� concession in section 84 to industrial undertakings operating cold storage plants and Indian companies deriving profits from ships, with retrospective effect from 1-4-1962, the above-mentioned section 85 has also been amended, retrospectively, from the same date. The effect of the amendment is that the shareholder of any company receiving from it any dividends which are attributable to its �tax holiday� profits from an eligible industrial undertaking operating a cold storage plant, and the shareholder of an Indian company receiving from it dividends which are attributable to its �tax holiday� profits from an eligible ship, will be entitled to a rebate of tax under section 85 on such dividends.

FINANCE (NO. 2)  ACT, 1967

46. The above-mentioned section 85 is to be replaced by the new section 80K, with effect from 1-4-1968 (i.e., for and from the assessment year 1968-69). The new section 80K is designed to simplify tax calculations by eliminating the requirement of calculation of rebate of tax at the average rate of tax applicable to the total income of the assessee. It provides for a straight deduction, in the computation of the total income of the shareholder of a company of that part of the dividend received from the company which is attributable to its profits on which (a) it is entitled to a rebate of tax under section 84 for any assessment year up to and inclusive of the assessment year 1967-68, or (b) in respect of which it is entitled to a deduction under section 80J (the new �tax holiday� provision which replaces the existing �tax holiday� provision under section 84, with effect from 1-4-1968). As stated earlier, the new section 80J provides firstly, for a deduction from the assessee�s profits and gains from the eligible industrial undertaking, ship or hotel of an amount up to 6 per cent per annum of the capital employed in the undertaking, ship or hotel, in the relevant previous year during the �tax holiday� period, and, secondly, for a deduction in respect of any �deficiency� relating to any year falling within the �tax holiday� period, by way of setting it off against the assessable profits from the eligible undertaking, ship or hotel, during subsequent years, up to a specified number of years. The profits in respect of which a deduction has been allowed to a company under section 80J by setting off the �deficiency� as stated above are also to be taken into account in applying the provisions of section 80K in the case of share-holders of companies.

FINANCE (NO. 2)  ACT, 1967

Tax concession to new industrial undertakings mainly employing displaced persons or repatriates

47. An important tax concession has been provided in the new section 80H to newly set up industrial undertakings providing employment mainly to �displaced persons� or �repatriates� or members of their families. The main provisions in the matter, which take effect from 1-4-1968 (i.e., for and from the assessment year 1968-69), are as follows :

1. Any assessee who derives profits from an industrial undertaking, which satisfies certain conditions, and begins to manufacture or produce articles in any part of India at any time during the 3-year period from 1-4-1967 to 31-3-1970, will be entitled to a deduction, in the computation of his total income, of an amount of 50 per cent of such profits included in his �gross total income�, subject to a maximum deduction of Rs. 1 lakh. This deduction is admissible for 10 successive assessment years commencing from the assessment years next following the year in which the industrial undertaking begins to manufacture or produce articles.

2. In order to be eligible for the deduction referred to in (1) above, the industrial undertaking has to satisfy the following conditions :

(i)  It should not be formed by the splitting up or reconstruction of a business already in existence or by the transfer to it of a building, machinery or plant previously used for any purpose.

(ii)  It should have a minimum number of 40 workers on every working day throughout the relevant previous year.

(iii)  The average number of displaced persons or repatriates (including members of their families) employed by it on each working day during every month in the previous year relevant to the assessment year should not be less than 60 per cent of the corresponding average number of all persons employed in the undertaking. The assessee will be required to produce a certificate in this behalf from the authority which may be specified for this purpose in the Income-tax Rules.

The term �displaced person� has been defined in section 80B(1) to mean a person who has migrated to India from the districts of Noakhali and Comilla on or after 1-10-1946, or from any other area, now forming part of East Pakistan on or after 1-6-1947. The term �repatriate� has been defined in section 80B(9) to mean a person of Indian origin who has migrated to India after specified dates from Mozambique, Burma, Ceylon or any other country notified by the Central Government in the Official Gazette in this behalf.

In considering whether the condition in item (iii) above regarding the minimum percentage of employment of displaced persons or repatriates has been satisfied or not in a particular case, the Income-tax Officer has to proceed on the basis of the certificate in the matter obtained by the assessee from the authority specified for this purpose in the Income-tax Rules.
Measures for rationliasation of certain
provisions of the Law

FINANCE (NO. 2)  ACT, 1967

Provisions for facilitating distribution and allocation of work amongst Income-tax Officers on a functional basis to expedite assessments and improve collections of revenue

48. The Finance (No. 2) Act, 1967 has made certain amendments to the provisions in Chapter XIII of the Income-tax Act, relating to the jurisdiction of income-tax authorities to facilitate the distribution and allocation of work amongst Commissioners of Income-tax, Inspecting Assistant, Commissioners of Income-tax and Income-tax Officers on a functional basis. Certain ancillary provisions in the matter have also been made. The new provisions take effect from 1-4-1967. The essence of the functional basis of distribution and allocation of work amongst Income-tax Officers is that in respect of a particular case or cases, the work to be performed is assigned to two or more Income-tax Officers in terms of distinctive functions, such as the function of making the assessment, collection or recovery of the tax, and various other miscellaneous functions, such as taking proceedings for the demand and collection of �advance tax�, giving effect to appellate orders, etc., or various other sub-divisions of the functions that the Income-tax Officer  has to perform in relation to an assessee under the Income-tax Act. The functional system of working implies that two or more Income-tax Officers will have concurrent jurisdiction in respect of the same assessee or assessees, whether identified with reference to specified areas, persons or classes of persons, incomes or classes of income or cases or classes of cases, but in respect of such assessee or assessees, each Income-tax Officer will perform only the particular functions which have been specifically assigned to him. In contradistinction to the functional system of working, the �unitary� system of working consists in assigning jurisdiction over an assessee or assessees to only one Income-tax Officer, who performs all the functions of an Income-tax Officer in relation to such assessee or assessees. Under the �unitary� system of working some of the functions to be performed in relation to an assessee may not receive adequate and timely attention of the Income-tax Officer because of his preoccupation with other functions or the time and energy of an experienced and proficient officer may be spent on comparatively minor functions which could be easily handled by officers of lesser experience and capability. Compared to the �unitary� system of working, the main advantages of the functional system of working are :

(a)  specialisation in particular function ;

(b)  timely attention to, and due concentration on, all important functions, thus avoiding a situation where the collection and recovery function or issue of refunds in consequence of appellate orders, etc., may not be promptly attended to ;

(c)  streamlining the flow of work amongst Income-tax Officers and also the staff in the Income-tax Offices, to bring about quicker disposal of assessments and other proceedings, which is advantageous both to the assessee and the Income-tax Department ; and

(d)  utilisation of the available man-power resources of the Department to the best advantage in efficiency of performance at all levels of personnel.

Besides, the functional system of working also enables the reduction of work in the compilation of tax statistics and maintenance of various registers, and records, as  these can be compiled and maintained for the Income-tax District or range as a whole, instead of being compiled and maintained, separately, for each Income-tax Officer, as under the unitary system.

FINANCE (NO. 2)  ACT, 1967

49. The substance of the main provisions made in the Income-tax Act for facilitating the allocation and distribution of work in the Income-tax Department on the functional basis is stated below :

1. Where two or more Commissioners of Income-tax have been  vested by the Board with jurisdiction in respect of the same area, persons or classes of persons, incomes or classes of income or cases or classes of cases, they will perform such functions in relation thereto as the Board may, by general or special order in writing, specify for the distribution and allocation of the work to be performed [Section 121(2)].

2. The Commissioner of Income-tax may vest an Inspecting Assistant Commissioner with jurisdiction with reference to specified cases or classes of cases, besides vesting him with jurisdiction in respect of specified areas, persons or classes or persons or incomes or classes of income [Section 123(1)].

3. Where two or more Inspecting Assistant Commissioners of Income-tax have been assigned jurisdiction by the Commissioner in respect of the same area, persons or classes of persons, incomes or classes of income, cases or classes of cases, they will have concurrent jurisdiction and will perform such functions in relation thereto as the Commissioner may, by general or special order in writing, specify, for the distribution and allocation of the work to be performed by them [Section 123(2)].

4. Jurisdiction may be assigned by Commissioners of Income-tax to Income-tax Officers with reference to specified cases or classes of cases, besides specified areas, persons or classes of persons or incomes or classes of incomes [Section 124(1)].

5. Where under a  jurisdiction order made by the Commissioner under sub-section (1) of section 124, referred to above, two or more Income-tax Officers have jurisdiction in respect of the same area, persons or classes of persons, incomes or classes of income, or cases or classes of cases, they will have concurrent jurisdiction and will perform such functions in relation to the said area, persons or classes of persons, etc., as the Commissioner or the Inspecting Assistant Commissioner authorised by the Commissioner in this behalf, may, by  general or special order in writing, specify, for the distribution and allocation of the work to be performed [Section 124(2)].

6. In consequence of the above-mentioned provision in section 124(2) for the distribution and allocation of work on a functional basis amongst two or more Income-tax Officers having concurrent jurisdiction over the same assessee or assessees, the Finance (No. 2) Act, 1967 has introduced a new section 130A. It has been provided in that section that in respect of any function to be performed by an Income-tax Officer under any provision of the Act in relation to an assessee, the Income-tax Officer referred to in that provision will be taken to be�

(a)  where only one Income-tax Officer has jurisdiction over the assessee, such Income-tax Officer ;

(b)  where two or more Income-tax Officers have concurrent jurisdiction over the assessee, the Income-tax Officer empowered to perform the relevant function by the Board, or the Commissioner, or the Inspecting Assistant Commissioner authorised by the Commissioner in this behalf, as the case may be.

7. Commissioners have been empowered, under the new provision in clause (b) of section 125(1), to assign comparatively simple and minor functions of an Income-tax Officer (such as the work relating to advance tax, collection of tax in simple cases, rectification of errors, giving effect to appellate orders, etc.) to any Inspector of Income-tax or any member of the ministerial staff subordinate to the Commissioner or to any other income-tax authority subordinate to him by issue of a general or special order, subject to such conditions, restrictions or limitations as may be specified in such order. Such order can be made only in respect of a specified area, cases or classes of cases, persons or classes of persons or incomes or classes of income. The Commissioner is barred from assigning the more important functions of an Income-tax Officer under specified sections of the Income-tax Act to Inspectors or members of the ministerial staff, unless he is specifically authorised in this behalf by the Board, by a general or special order, in writing. The specified sections of the Income-tax Act referred to above are : 131 [power regarding discovery, production of evidence, etc.] ; 132 [search and seizure] ; 132A [application of retained assets] ; 140A [self-assessment] ; 143 [assessment] ; 144 [best judgment assessment] ; 146 [reopening of assessment at the instance of the assessee]; 147 [income escaping assessment] ; 148 [issue of notice where income has escaped assessment] ; 162 [right of representative assessee to recover tax paid : certificate by the Income-tax Officer as to the amount to be retained by the representative assessee from the assets of the principal] ; 163 [persons who may be treated by an Income-tax Officer to be an �agent� of a non-resident] ; 171 [assessment after partition of a Hindu undivided family]; 172 [assessment of non-residents on profits arising to them in India from occasional shipping business] ; 174 [assessment of persons leaving India] ; 175 [assessment of persons likely to transfer property to avoid tax] ; 176 [assessment of income of discontinued business or profession] ; 177 [assessment of the income of an association of persons which has discontinued its business or which has been dissolved] ; 178 [procedure for collection of existing and anticipated tax liability of companies in liquidation : obligations and liabilities of the liquidator or the receiver of any assets of the company] ; 183 [assessment of unregistered firms] ; 184 [application for registration of a firm] ; 185 [procedure on receipt of application for registration of a firm] ; 189 [assessment of the income of a firm whose business or profession has been discontinued or of a firm which is dissolved] ; 221 [penalty leviable when tax is in default]; 222 [certificate to the Tax Recovery Officer] ; 226 [modes of recovery of tax other than issue of certificate to Tax Recovery Officer] ; 228 [recovery of Indian tax in Pakistan and Pakistan tax in India] ; 253 [appeals to the Appellate Tribunal by the Income-tax Officer under Commissioner�s directions] ; 271 [imposition of penalty for failure to furnish returns, comply with notices, concealment of income, etc.] ; 272 [levy of penalty for failure to give notice of discontinuance of business or profession] ; 273 [levy of penalty for false estimate or failure to pay advance tax] ; and 274 [procedure for imposition of penalty under Chapter XXI].

As a corollary to the new provision in section 125(1)(b) enabling the Commissioner to make an order, assigning specified functions of an Income-tax Officer in respect of a specified area, cases or classes of cases, persons or classes of persons, etc., to an Inspector of Income-tax or any  member of the ministerial staff, it has been provided in the new clause (b) of section 125(2) that where such an order is made, references in the Income-tax Act, or, in any rule made thereunder, to the Income-tax Officer, shall be deemed to include references to the Inspector of Income-tax or member of the ministerial staff specified in the order. This provision is applicable only in relation to the functions specifically assigned to the Inspector of Income-tax or a member of the ministerial staff by the Commissioner in terms of his order under section 125(1)(b).

8. The provisions of section 127, relating to the power of the Board and the Commissioner to transfer any case from one Income-tax Officer to another, have been enlarged to enable the allocation and distribution of the work to be performed in such a case amongst two or more Income-tax Officers on a functional basis. For this purpose, it have been provided that any case may be transferred by the Commissioner (after following the existing procedure of giving the assessee a reasonable opportunity of being heard, wherever it is possible to do so, etc.) from one or more Income-tax Officers subordinate to him to any other Income-tax Officer or Income-tax Officers also subordinate to him, and that the Board may also similarly transfer any case from one or more Income-tax Officers to any other Income-tax Officer or Income-tax Officers. It has also been provided that where any case has been transferred from one or more Income-tax Officer(s) to two or more Income-tax Officers, the latter mentioned Income-tax Officer(s) will have concurrent jurisdiction over the case and will perform such functions in relation to that case as the Board or the Commissioner (or any Inspecting Assistant Commissioner authorised by the Commissioner in this behalf), may, by general or special order in writing, specify, for the distribution and allocation of the work to be performed. A case may be transferred at any stage of the proceedings and the transfer will not render necessary the reissue of any notice already issued by the Income-tax Officer or Income-tax Officers from whom the case is transferred. The definition of the term �case� appearing in the Explanationto section 127, remains the same as before.

9. In consequence of the new provision in section 125(1)(b) referred to in item (7) above, section 128 relating to the functions of the Inspectors of Income-tax has been amended to provide that Inspectors of Income-tax will perform such functions in the execution of the Income-tax Act as are assigned to them by the Commissioner by an order under section 125(1)(b) or otherwise, or by any other income-tax authority under whom they are appointed to work.

FINANCE (NO. 2)  ACT, 1967

Provisions in the Wealth-tax Act, Gift-tax Act, and the Companies (Profits) Surtax Act, to facilitate the allocation and distribution of work amongst the tax authorities on a functional basis, in line with the provisions in the Income-tax Act

50. The jurisdiction of the tax authorities under the Wealth-tax Act, the Gift-tax Act, and the Companies (Profits) Surtax Act, is linked with the jurisdiction exercised by the income-tax authorities under the Income-tax Act. In view of this position, the Finance (No. 2) Act, 1967 has made amendments to the Wealth-tax Act, the Gift-tax Act and the Companies (Profits) Surtax Act, making provisions therein in regard to the jurisdiction of the tax authorities under the said Acts on the same lines as in the Income-tax Act. The objects underlying the amendments in the matter to these Acts are the same as of the amendments to the Income-tax Act explained in paragraph 49 above, namely, to enable the distribution and allocation of work amongst the tax authorities (other than appellate authorities) on a functional basis.

FINANCE (NO. 2)  ACT, 1967

51. In the Wealth-tax Act, the changes in the matter have been carried out by making the following amendments :

1. Section 8, relating to the jurisdiction of Wealth-tax Officers, has been amended on the same lines as the amended section 124 of the Income-tax Act.

2. Substitution of the former section 8A by the new sections 8A and 8B ; of these, the new section 8A authorises the Commissioner to assign by general or special order, in writing, specified functions of a Wealth-tax Officer to an Inspector of Wealth-tax or any member of the ministerial staff, on the same lines, and subject to similar limitations, as provided in section 125(1)(b) of the Income-tax Act. The new section 8B, which corresponds to the old  section 8A, contains provisions in regard to the powers of the Board and the Commissioner to transfer a  particular case from one or more Wealth-tax Officers to any other Wealth-tax Officer or Wealth-tax Officers, on the same lines as the amended provisions of section 127 of the Income-tax Act.

3. Section 10, relating to the jurisdiction of Commissioners of Wealth-tax, has been amended on the same lines as the amended provisions of section 121 of the Income-tax Act.

4. Section 11, relating to the jurisdiction of Inspecting Assistant Commissioners of Wealth-tax, has been amended on the same lines as the amended section 123 of the Income-tax Act.

5. Section 11A, relating to the functions of the Inspector of Wealth-tax has been amended on the same lines as the amended provisions of section 128 of the Income-tax Act.

6. It has been provided in the new section 11B that in respect of any function to be performed by a Wealth-tax Officer under any provision of the Wealth-tax Act in relation to any assessee, the  Wealth-tax Officer referred to therein shall be :

(a)  in a case where only one Wealth-tax Officer has jurisdiction over the assessee, such Wealth-tax Officer ; and

(b)  in a case where two or more Wealth-tax Officers have concurrent jurisdiction over the assessee, the Wealth-tax Officer empowered to perform such function by the Board, or by the Commissioner, or the Inspecting Assistant Commissioner of Wealth-tax authorised by the Commissioner in this behalf.

FINANCE (NO. 2)  ACT, 1967

52. In the Gift-tax Act, the changes relating to jurisdiction of tax authorities have been carried out by making the following amendments :

1. Section 7, relating to the jurisdiction of Gift-tax Officers, has been amended on the same lines as the amended provisions of section 124 of the Income-tax Act.

2. Substitution of the former section 7A by two new sections 7A and 7B : of these, the new section 7A authorises the Commissioner to make a general or special order, in writing, assigning specified functions of the Gift-tax Officer to an Inspector of Gift-tax or any member of the ministerial staff, in the same manner and subject to similar restrictions, as provided in section 125(1)(b ) of the Income-tax Act. The new section 7B, which corresponds to the old section 7A, enables the Board and the Commissioner to transfer any case from one or more Gift-tax Officers to any other Gift-tax Officer or Gift-tax Officers, in the same manner as the amended provisions of section 127 of the Income-tax Act.

3. Section 9, relating to the jurisdiction of Commissioners of Gift-tax has been amended on the same lines as the amended provisions of section 121 of the Income-tax Act.

4. Section 10, relating to the jurisdiction of the Inspecting Assistant Commissioners of Gift-tax, has been amended on the same lines as the amended provision of section 123 of the Income-tax Act.

5. Section 11, relating to the functions of Inspectors of Gift-tax, has been amended on the same lines as the amended provisions of section 128 of the Income-tax Act.

6. Renumbering of the former section 11A [control of gift-tax authorities] as section 11B and introduction of a new section 11A before section 11B as so renumbered : the new section 11A, which is on the lines of the new section 130A of the Income-tax Act, provides that in respect of any function to be performed by a Gift-tax Officer under any provision of the Gift-tax Act in relation to any assessee, the Gift-tax Officer referred to therein shall be :

(a)  in a case where only one Gift-tax Officer has jurisdiction over the assessee, such Gift-tax Officer ;

(b)  where two or more Gift-tax Officers have concurrent jurisdiction over the assessee, the Gift-tax Officer empowered to perform such function by the Board or by the Commissioner or the Inspecting Assistant Commissioner of Gift-tax authorised by the Commissioner of Gift-tax in this behalf.

FINANCE (NO. 2)  ACT, 1967

53. In the Companies (Profits) Surtax Act, the changes relating to the jurisdiction of tax authorities have been carried out by making the following amendments :

1. It has been provided in sub-section (1) of section 3 that an Inspector of Income-tax will have the like powers and perform the like functions under the Companies (Profits) Surtax Act as he has and performs under the Income-tax Act.

2. The provisions of section 18, which apply specified provisions of the Income-tax Act to proceedings relating to surtax, subject to such modifications as may be prescribed by the Board, have been enlarged to apply to such proceedings, inter alia, the following sections of the Income-tax Act, namely : 118 [control of income-tax authorities] ; 125 [powers of Commissioner respecting specified cases or persons, including the power to assign specified functions of an Income-tax Officer to Inspectors of Income-tax or a member of the ministerial staff]; 129 [change of an incumbent of an office : continuance of proceedings from the stage at which the proceedings were left by the previous incumbent]; 130 [authority competent to take or continue certain proceedings]; and 130A [Income-tax Officer competent to perform any function or functions].

FINANCE (NO. 2)  ACT, 1967

54. It may be stated here that section 132A, relating to application of moneys, bullion, jewellery or other valuable article or thing seized under sub-section (1) of section 132 and retained under sub-section (5) of that section, has also been applied for the purposes of surtax.

FINANCE (NO. 2)  ACT, 1967

Amendments to provisions relating to amalgamation of companies

55.The Finance (No. 2) Act, 1967 has made several provisions in the Income-tax Act, and also one provision in the Gift-tax Act, with a view to facilitating the merger of uneconomic company units with other financially sound company units in the interest of increased efficiency and productivity. A few of the amendments in the matter to the Income-tax Act are intended to clarify the intention underlying the provisions which existed previously, while others are designed to remove certain tax liabilities which are attracted in the case of an �amalgamating company� (i.e., the company which merges into another company) as well as the shareholders of the amalgamating company who receive shares in the �amalgamated company� (i.e., the company  in which the enterprise of the other company is merged) in lieu of their shareholdings in the amalgamating company. All these amendments take effect from 1-4-1967, i.e., for and from the assessment year 1967-68.

FINANCE (NO. 2)  ACT, 1967

56. One of these amendments relates to the definition of the term �amalgamation� in relation to companies, which was formerly contained in the Explanation to section 33(3) and has been shifted by the Finance (No. 2) Act, 1967 to the new clause (1A) of section 2. The new definition clarifies that the term �amalgamation� includes not only the merger of two or more companies to form one company but also the merger of one or more companies with another existing company. In the new definition, the scope of the term �amalgamation� has also been enlarged. The former definition of the term �amalgamation�, in the Explanation to section 33(3), provided that shareholders holding not less than 9/10th in value of the shares in the amalgamating company should become shareholders of the amalgamated company by virtue of the amalgamation. This condition had the effect of excluding from the scope of the term �amalgamation� the case of the merger of companies where, immediately before the amalgamation, the amalgamated company held more than 1/10th in value of the share in the amalgamating company. This is because, in such a case, the above-mentioned condition could not be satisfied. To remove this disability, it has been provided that in applying the said condition (viz., that shareholders holding not less than 9/10th in value of the shares in the amalgamating company should become shareholders of the amalgamated company by virtue of the amalgamation), the shares in the amalgamating company held by the amalgamated company or its nominees or subsidiaries immediately before the amalgamation, will not be taken into account. To illustrate, where company �A� merges with another company �B� in a scheme of amalgamation and immediately before the amalgamation, company �B� held 20 per cent of the shares in company �A�, the above-mentioned condition will be satisfied if shareholders holding not less than 9/10th in value of the remaining 80 per cent of the shares in company �A�,  i.e., 72 per cent thereof (9/10th of 80), become shareholders of company �B� by virtue of the amalgamation. In this illustration, if the amalgamating company �A� is a wholly-owned subsidiary of the amalgamated company �B�, the entire share capital of company �A� held by company �B� will be excluded for the purpose of the above-mentioned condition. The effect of this is that where the whole of the share capital of a company is held by another company or by a nominee or subsidiary of such other company, the merger of the two companies will qualify as an �amalgamation� within the meaning of that term in the new definition, if all the other conditions specified in the definition are fulfilled. In view of this position, the provision in the former definition of �amalgamation� in theExplanation to section 33(3), to the effect that �amalgamation� includes the merger of a subsidiary company in the holding company where the whole of the share capital of the subsidiary company is held by the holding company or its nominee, becomes superfluous and has, therefore, not been incorporated in the new definition. In other respects, the provisions in the definition of �amalgamation� are the same as in the former definition in the Explanation to section 33(3).

[A doubt has been raised in certain quarters whether the transfer by a subsidiary company of its assets to its parent company in a scheme of amalgamation may be held to result in a distribution of �dividend� by the subsidiary company to its parent company to the extent of its accumulated profits, within the meaning of the term �dividend� in sub-clause  (a), or sub-clause (c), of section 2(22).

Under sub-clause (a) of section 2(22), �dividend� includes any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company. This provision is attracted only where (a) a company distributes its accumulated profits to its shareholders, and (b) such distribution entails the release by the company to its shareholders of all or any part of its assets. However, where a company transfers its assets to another company in a scheme of amalgamation, such transfer may not be regarded as a �distribution� by the company of its accumulated profits to its shareholders even though its accumulated profits are embedded in the assets so transferred by it. This will be clear if one considers a case where, before the amalgamation of two companies, only a part of the shares of the amalgamating company were held by the amalgamated company and the remaining part by other shareholders ; in such a case the other shareholders will not receive any part of the assets transferred by the amalgamating company to the amalgamated company.

Under sub-clause  (c) of section 2(22), �dividend� includes any distribution made by a company to its shareholders on its liquidation to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not. This provision is attracted only in a case where a company goes into liquidation and not where it merges with another company in a scheme of amalgamation without going into liquidation.

The Board, are, therefore, of the view that the provisions of sub-clause (a) or (c) of section 2(22) are not attracted in a case where a company merges with another company in a scheme of amalgamation].

FINANCE (NO. 2)  ACT, 1967

57. The substance of the remaining amendments to the provisions in the Income-tax Act relating to amalgamation of companies is explained below. These provisions apply only in  a case where the amalgamated company is an Indian company:

1. There will be no computation of any �profit� under section 41(2) in the case of the amalgamating company with reference to the consideration receivable by it in respect of any building, machinery or plant or furniture transferred by it to the amalgamated company. [The profit under section 41(2) is the excess of the sale proceeds or other moneys receivable by the assessee in respect of any building, machinery or plant or furniture, over the written down value thereof, to the extent of the depreciation allowance actually granted on such assets.] As a corollary to this, there will be no computation, in the case of the amalgamating company of any �terminal allowance� under section 32(1)(iii). [�Terminal allowance� is the allowance for the amount by which the sale proceeds or other moneys receivable by the assessee in respect of any building, machinery, plant or furniture fall short of the written down value thereof.]

This has been achieved by amending clause (2) of Explanation to section 32(1)(iii) which defines the term �sold�, in relation to any building, machinery, plant or furniture, to include a �transfer by way of exchange or a compulsory acquisition under any law for the time being in force�. This definition of the term �sold� is relevant for the computation of the �terminal allowance� under section 32(1)(iii) as well as the �profit� under section 41(2). The definition, as amended by the Finance (No. 2) Act, 1967, provides that the term �sold� does not include a transfer in a scheme of amalgamation of any asset by the amalgamating company to the amalgamated company, where the amalgamated company is an Indian company.

2. As a corollary to the provision at (1) above, it has been provided in the new Explanation 7 to section 43(1) that the �actual cost� of any building, machinery, plant or furniture transferred by an amalgamating company to the amalgamated company (where such company is an Indian company) will be taken in the assessment of the amalgamated company to be the same as in the case of amalgamating company. Similarly, under the new Explanation 2A to section 43(6), the �written down value� of the transferred capital asset to the amalgamated company will be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purpose of its business. Further, for the purposes of the provision in section 34(2)(i), namely, that the aggregate amount of the deduction allowable for depreciation in respect of an asset will be limited to its actual cost to the assessee, it has been provided in the Explanation to the said provision that in respect of an asset transferred by an amalgamating company to the amalgamated company, the depreciation allowed on such assets to the amalgamating company will also be taken into account in computing the said aggregate. The effect of this is that where the amalgamating company had availed of any initial depreciation allowance in respect of any asset transferred by it to the amalgamated company, such initial depreciation allowance will be taken into account in applying the above-mentioned provisions of section 34(2)(i), in the case of the amalgamated company.

[It may be mentioned that where in the assessment of the amalgamating company on its income for the period prior to the amalgamation any depreciation in respect of assets transferred by it to the amalgamated company remained unabsorbed, the amalgamated company will not be entitled to carry forward and deduct such unabsorbed depreciation in its own assessments. This is in view of the position that under section 43(6), read with Explanation 3 thereto, the �written down value� of the asset will be taken in the hands of the amalgamating company to be its actual cost to that company less all depreciation actually allowed to it in respect thereof, including also the unabsorbed depreciation allowance.]

3. Where, the amalgamating company sells or otherwise transfers to the amalgamated company (being an Indian company) any capital asset used by it for scientific research related to its business, or any capital asset of the nature of patent right or copyrights or any capital asset used for promoting family planning amongst its employees, the amalgamated company will be entitled to amortise the capital cost of such assets against its profits, under the relevant provisions of the Income-tax Act, viz., sections 35, 35A and 36(1)(ix), respectively, in the same manner and to the same extent as the amalgamating company would have been, if it had not sold or transferred the asset to the amalgamated company. In such a case, the amalgamating company will not be entitled to any of the terminal benefits under the provisions of sections 35, 35A and 36(1)(ix) in relation to such capital asset [Section 35(5), section 35A(6) and third proviso to section 36(1)(ix)].

4. No capital gain or loss will be computed in the assessment of the amalgamating company in respect of any capital asset transferred by it to the amalgamated company, where the latter company is an Indian  company [Section 47(vi)].

For the purpose of computing, in the case of the amalgamated company, any capital gain or loss in respect of any asset which is received by it from the amalgamating company and is subsequently sold or otherwise transferred by the amalgamated company to any other person, the �cost of acquisition� of such asset will be taken to be the �cost of acquisition� thereof as determined in the hands of the amalgamating company, together with the cost of any improvement of the assets [Section 49].

5. No capital gain or loss will be computed in the case of a shareholder of an amalgamating company with reference to the �transfer� by him of any share or shares in the amalgamating company in consideration of the allotment to him of any share or shares in the amalgamated company (being an Indian company).

However, when the share or shares in the amalgamated company are subsequently sold or transferred by him, the capital loss or gain will be computed by taking the cost of acquisition  of such shares to be the cost of acquisition to him of the shares in the amalgamating company [Sections 47(vii) and 49(2)].

FINANCE (NO. 2)  ACT, 1967

New provision in the Gift-tax Act to exclude, from the purview of the gift-tax, gifts represented by the transfer of assets by a closely-held company to any Indian company in a scheme of amalgamation

58. A provision has been made in the new sub-clause (da) of section 45 of the Gift-tax Act, with effect from 1-4-1967 (i.e., for and from the assessment year 1967-68) to secure that there will be no liability to gift-tax in the case of a company in which the public are not substantially interested in respect of any gift represented by the transfer by it of any asset to an Indian company in a scheme of amalgamation. It has been provided that for the purpose of the above-mentioned provision, the term �amalgamation� will have the same meaning as in the definition thereof in the new clause (1A) of section 2.

It may be stated that Government companies (as defined in section 616 of the Companies Act, 1956), corporations established under a Central, State or Provincial Act, public companies satisfying certain conditions (viz., that the affairs of the company or the shares in the company carrying more than 50 per cent of the total voting power were at no time during the previous year controlled or held by less than 6 persons), as well as subsidiaries of companies of the last mentioned categories, are already exempt from gift-tax under the provisions of section 45 of the Gift-tax Act.

FINANCE (NO. 2)  ACT, 1967

Provision for enabling disclosure of information regarding income-tax assessees to certain authorities without the requirement of making individual applications for such information

59. Section 138(1), relating to disclosure of information about income-tax assessees, has been amended by the Finance (No. 2) Act, 1967 with effect from 1-4-1967 to facilitate exchange of information about tax evaders by the Income-tax Department with other tax authorities or enforcement authorities. Section 138(1), as it stood before the amendment, enabled the Commissioner of Income-tax to disclose any information regarding the income-tax assessment of any assessee to any person who made an application to him in this behalf, if the Commissioner was satisfied that it would be in the public interest to furnish the information. The effect of this provision was that, except in the case of authorities who were entitled under any law for the time being in force to obtain any information about income-tax assessees, such information could be furnished only to the extent and in the manner specified in the said provision. The requirement, under this provision, of making applications in individual cases for obtaining information stood in the way of a general exchange of information about tax evaders between the income-tax and other tax authorities or enforcement authorities. This was because where other tax authorities had no knowledge of a particular income-tax assessee, they could not be in a position to make an application under section 138(1) for disclosure of information about him. To remove this difficulty, sub-section (1) of section 138 has been amended as follows :

1. A provision has been made in the new sub-clause (a) of section 138(1), enabling the Board, or any other income-tax authority specified by it by a general or special order in this behalf, to disclose information relating to income-tax assessees to (a) any officer, authority or body functioning under any law relating to the imposition of any tax, duty or cess, (b) to authorities administering the Foreign Exchange Regulation Act, 1947, or (c) to any other officer, authority or body functioning under any other law as may be notified by the Central Government, without requiring any such officer, authority or body to make an application for disclosure of the information. Under this provision, the Board or other income-tax authorities may furnish such information relating to any assessee in respect of any assessment made under the 1922 Act or the 1961 Act, as may, in their opinion, be necessary for the purpose of enabling the above-mentioned officers, authorities or bodies to perform their functions under the respective laws.

2. The provision which existed previously in sub-section (1) of section 138 has been shifted to clause (b) of that sub-section. This provision will continue to apply as hitherto, except in cases which are covered by the above-mentioned provision in sub-clause (a) of section 138(1).

FINANCE (NO. 2)  ACT, 1967

Provision to enable corporations, set up under a Central Act and exempt from tax on their income, under any law for the time being in force, to receive their income without deduction of tax at source

60. The Government and the Reserve Bank of India are already entitled, under section 196, to receive, without deduction of tax at source, interest on securities and dividends on shares owned by them or in which they have full beneficial interest. The scope of this provision has been extended by the Finance (No. 2) Act, 1967, with effect from 1-4-1967, to corporations which are set up under a Central Act and are exempt from tax on their income under any law for the time being in force (such as the Industrial Development Bank of India). Further, the provision has also been extended to cover interest (other than �interest on securities�) receivable by the Government or the Reserve Bank of India or the corporations referred to above.
PROVISIONS FOR TAX RELIEF IN CERTAIN CASES

FINANCE (NO. 2)  ACT, 1967

Special provision consequential to changes in the rate of exchange of currency

61. The par value of the rupee was lowered by 36.5 per cent with effect from 6-6-1966. In consequence of this change, the value in rupees, of a unit of any foreign currency has increased by 57.5 per cent. Thus, the par rate of exchange between the rupee and the US dollar became Rs. 7.50 per $ 1, as against Rs. 4.76 per $ 1 before the devaluation of the rupee. The value of other foreign currencies in terms of Indian currency has also similarly gone up by 57.5 per cent with effect from the date of devaluation of the rupee. The effect of this is that assessees who had imported capital assets from abroad before the date of the devaluation of the rupee, on deferred payment terms or against loans in foreign currency, have incurred an additional liability in rupees for payment of the instalments of the cost of the assets or of the loan in foreign currency remaining outstanding as on the date of devaluation, i.e.,6-6-1966. Such assessees would have suffered a hardship if the additional rupee liability referred to above were not to be taken into account for the purpose of granting depreciation allowance in respect of the imported assets, or for other purposes, e.g.,amortisation, against the profits, of the capital cost of imported assets consisting of patent rights and copyrights or of imported assets used by the assessee for scientific research related to his business, or for computing the amount of capital gain or loss arising from the subsequent sale or transfer of the imported capital assets. In order to avoid such hardship, and also to provide for the converse situation where, due to any devaluation of the currency of a foreign country or revaluation of the Indian currency in the future, there is a reduction in the liability of an assessee for payment of instalments of the cost of assets imported by him from abroad or repayment of foreign loans against which such assets are required, the Finance (No. 2) Act, 1967 has made special provisions in the new section 43A. The substance of these provisions, which take effect from 1-4-1967, i.e., for and from the assessment year 1967-68, is explained in the following paragraphs.

FINANCE (NO. 2)  ACT, 1967

62. The provisions of the new section 43A apply in a case where an assessee has acquired any capital asset from abroad for the purpose of his business or profession, on credit or on deferred payment terms, or against a loan in foreign currency, and the whole or a part of the cost of such asset or of the loan in foreign currency, is outstanding as on the date on which there is a change in the rate of exchange of currency. In such a case where, in consequence of the change in the rate of exchange of currency, there is an increase or reduction in the assessee�s liability as expressed in Indian currency  for payment of the whole or a part of the cost of the assets or of the loan in foreign currency, the original actual cost, to the assessee, of the machinery or plant or other capital asset, is required to be increased or, as the case may be, reduced, correspondingly for the following purposes :

(a)  in respect of assets on which depreciation allowance is admissible, for the purpose of determining the actual cost thereof and also its written down value : depreciation allowance, but not development rebate, will be calculated with reference to the actual cost of the asset as so adjusted ;

(b)  in respect of capital assets used by an assessee for scientific research related to his business, for the purpose of amortising the capital cost of such assets against the profits of the business under section 35(1)(iv) ;

(c)  in respect of capital assets represented by patent rights or copyrights, for the purpose of amortisation of the capital cost thereof against the profits of the assessee under section 35A ;

(d)  in respect of capital assets used by a company for promoting family planning amongst its employees, for the purpose of amortising the capital cost thereof against the company�s profits under section 36(1)(ix) ; and

(e)  in respect of any capital asset (other than a capital asset on which depreciation allowance is admissible), for the purpose of determining the cost of acquisition thereof to the assessee in computing the capital gain or loss arising to the assessee at the time of the sale or transfer of the capital asset.

The above-mentioned adjustment to the original actual cost to the assessee of the imported capital asset is to be made in respect of the previous year in which there is an increase or reduction in the assessee�s liability in terms of Indian currency for payment of the whole or part of the cost of the asset or for repayment of the foreign loan against which the asset has been acquired. With reference to the recent devaluation of the rupee, this will be the previous year in which the date of devaluation, viz., 6-6-1966, falls.

FINANCE (NO. 2)  ACT, 1967

63. The term �rate of exchange� has been defined in Explanation 1 to section 43A(1), to mean the rate of exchange determined or recognised by the Central Government for the conversion of Indian currency into foreign currency, or foreign currency into Indian currency. The terms �foreign currency� and �Indian currency� have been defined to have the same meanings as in section 2 of the Foreign Exchange Regulation Act, 1947.

FINANCE (NO. 2)  ACT, 1967

64. In determining the increase or decrease in an assessee�s liability in terms of Indian currency in respect of assets imported by him from abroad in the circumstances mentioned above, only the actual liability to be met by the assessee has to be taken into account. Where a whole or a part of such liability is to be met directly or indirectly by any other person or authority, it is to be ignored. Further, where an assessee has entered into a contract with an �authorised dealer� in foreign exchange for providing him with a specified sum in foreign currency on or after stipulated future date at an agreed rate of exchange, to enable the assessee to meet the whole or part of the liability referred to above, the increase or reduction in the assessee�s liability in respect of the sum specified in the contract is to be worked out with reference to the rate of exchange at which the assessee is to receive foreign currency from the authorised dealer under the contract.

FINANCE (NO. 2)  ACT, 1967

65. It has been expressly provided in sub-section (2) of section 43A that the above-mentioned provisions for adjustment to the original actual cost of imported capital assets due to an increase or reduction in the assessee�s liability for payment of the instalments of the cost of the asset or for repayment of the foreign loan against which the asset has been acquired, will not be applicable in computing the actual cost of the asset for the purpose of the deduction on account of development rebate under section 33.

FINANCE (NO. 2)  ACT, 1967

66. It may be stated here that it is not necessary, for entitlement  to the benefits of the above-mentioned provisions of section 43A, that the price of the capital assets imported by an assessee from abroad on credit or deferred payment terms prior to the date of the devaluation of the rupee, should be payable to the foreign supplier in foreign currency. Section 43A(1) refers to �foreign currency� only in relation to loans against which capital assets have been imported by an assessee from abroad before the date of the change in the rate of exchange of the currency, and not in relation to assets imported from abroad otherwise than against loans in foreign currency. There are agreements between the Government of India and the Governments of certain East European countries, e.g., Bulgaria, Czechoslovakia, Yugoslavia, etc., under which capital equipment imported from these countries has to be paid for by Indian importers in non-convertible Indian rupees. Soon after the devaluation of the rupee, the Government of India entered into protocols with the Governments of these East European countries, under which all �unimplemented portions of contracts� for export of goods from those countries to India were to be immediately revalued, in line with the new par value of the rupee, by proportionately increasing the value of such goods in terms of rupees by 57.5 per cent. Under these protocols, the �unimplemented portions of contracts� include (a) payments due on or after 6-6-1966 under terms of deferred payment on earlier shipments, and (b) payments due in full or in part on 6-6-1966 on earlier shipments for which documents were, on that date, in the process of negotiation or were consigned already on collection basis. Accordingly, where in accordance with these protocols, an assessee has actually accepted an additional liability in rupees for payment of the amount due under the �unimplemented portions of contracts� in respect of goods imported from the East European countries on deferred payment terms, before the date of devaluation of the rupee, he will be entitled to the benefits of section 43A(1). Regarding this, the Deputy Prime Minister and the Minister of Finance stated as follows in his speech in the Lok Sabha, on 24-7-1967 at the time of moving the Finance (No. 2) Bill, 1967, for consideration ;

�Doubts have been expressed in certain quarters whether this provision (section 43A) will apply in the case of industrial units which have imported capital equipment on deferred payment terms from East European countries and which have to be paid for in non-convertible Indian rupees. In these cases also, there would be an increase in the liability in terms of rupees in pursuance of the protocols entered into by the Government of India with the foreign Governments concerned in consequence of the change in the par value of the rupee. I would like to make it clear that the existing provisions in the Bill are applicable equally to such cases, even though the whole or a part of the cost of the imported assets is to be paid in non-convertible Indian rupees and not in any foreign currency.�

FINANCE (NO. 2)  ACT, 1967

Tax relief in respect of donations to the Prime Minister�s Drought Relief Fund

67. The provisions of section 88 have been amended by the Finance (No. 2) Act, 1967 to secure that donations made by any assessee to the Prime Minister�s Drought Relief Fund qualify for rebate of income-tax in the same manner as donations to the National Defence Fund or to the Jawaharlal Nehru Memorial Fund, i.e., without applying any ceiling limit to the amount of such donations qualifying for rebate of tax. [The ceiling limit on the amount of the donations for charitable purposes qualifying for rebate of tax is 10 per cent of the total income of the donor or Rs. 2,00,000, whichever is less.]. The amount of the rebate of income-tax allowable in respect of donations to the Prime Minister�s Drought Relief Fund will, however, be limited, as in the case of all other donations qualifying for rebate of tax under section 88, to 27.5 per cent thereof in the case of company donors and to 50 per cent thereof in the case of other donors.

The above-mentioned provision is effective for the assessment year 1967-68 and so it will cover donations made to the Prime Minister�s Drought Relief Fund during the preceding financial year or any other accounting year relevant for that assessment year. The provisions of section 88 will be replaced with effect from 1-4-1968, i.e., for and from the assessment year 1968-69, by the provisions in the new section 80G. The new provisions in section 80G, which are dealt with hereinafter along with other new provisions made in the Income-tax Act, for simplifying tax calculations, provide for a straight deduction, in the computation of the total income of the donor, of a specified percentage of the amount of the donations qualifying for rebate of tax under section 88.

FINANCE (NO. 2)  ACT, 1967

Tax relief in respect of remuneration received from foreign sources by resident individuals of Indian citizenship for serving in foreign universities and other educational institutions as professors, teachers or research workers

68. A provision has been made in the new section 80F to provide tax relief to professors, teachers, or research workers of Indian citizenship who work for a short period during a financial year in a foreign university or other educational institutions and remain resident in India for tax purposes in that year. Previously, such persons were liable to tax in India on the whole of the remuneration received by them from the foreign university or educational institution without any allowance for the expenditure incurred by them out of such remuneration for meeting higher living costs and other essential expenditure in the foreign country. To relieve this hardship, it has been provided in the new section 80F that such individuals will be entitled to a deduction, in the computation of their total income, of 50 per cent of the remuneration received by them from a foreign university or other educational institution, or any other association or body established outside India which may be notified in this behalf by the Central Government in the Official Gazette. However, where such an individual renders continuous service abroad for more than 36 months, the remuneration received by him for any period of service after the expiry of the said 36 months will not qualify for the above-mentioned deduction.

FINANCE (NO. 2)  ACT, 1967

69. The above-mentioned provision in section 80F takes effect, retrospectively, from 1-4-1966, i.e., it is applicable to assessments for the assessment year 1966-67 and subsequent years. This provision is to be replaced with effect from 1-4-1968 by the new section 80R in consequence of redrafting of the provisions of Chapter VIA to include in that Chapter certain new provisions designed to simplify tax calculations.

MEASURES FOR SIMPLIFYING THE COMPUTATION OF
TOTAL INCOME AND CALCULATION OF TAX UNDER
THE INCOME-TAX ACT

FINANCE (NO. 2)  ACT, 1967

Nature of amendments

70. The Finance (No. 2) Act, 1967 has made a large number of amendments to the Income-tax Act with a view to simplifying the computation of total income and calculation of the tax thereon. Of these amendments, one relates to the computation of income attributable to house property owned and occupied by the assessee. Other amendments relate to the provisions in the Income-tax Act for granting tax relief to assessees on incomes and payments of certain categories. Under the present law, such tax relief is granted, mainly, by allowing the assessee full or partial rebate of tax calculated on the qualifying incomes or payments at the average rate of tax applicable to the total income of the assessee. Some instances of such incomes are : certain incomes of co-operative societies, dividends received by the member of a co-operative society from the society, �tax holiday� profits and dividends attributable to the �tax holiday� profits of the company paying the dividends, on which rebate of tax is granted at the full average rate of tax applicable to the total income. An instance of income on which partial rebate of tax is granted is income by way of dividends received by any company from a domestic company, on which rebate of tax is granted in a sum calculated at the difference between the tax on such dividends at the average rate of tax applicable to the total income of the company receiving the dividends, and a specified percentage of the dividend income. Instances of payments or expenditure of certain categories at present qualifying for tax relief by way of grant of rebate of tax are : expenditure up to a specified limit incurred by a resident individual of foreign citizenship for the full-time education of a dependent child in educational institutions abroad, on which rebate of tax is granted at the full average rate of tax applicable to the total income of the individual, and the amount of qualifying donations made by any assessee to certain funds, charitable institutions, etc., rebate of tax on which in calculated at the average rate of tax applicable to the total income but is limited, in the case of company donors, to 27.5 per cent of the qualifying donations, and in the case of other donors, to 50 per cent of such donations. There are also certain categories of  incomes of non-corporate assessees, such as �compensation� received on termination or modification of the terms of a managing agency, etc., and capital gains, in respect of which tax relief is provided under the present law by levying tax at a concessional rate, this being the average rate of tax applicable to certain components of the total income or a specified percentage of such average rate of tax. To simplify tax calculations in such cases, most of the provisions in the Income-tax Act for grant of full or partial rebate of tax or levy of tax at the concessional rate have been replaced by the Finance (No. 2) Act, 1967, with effect from 1-4-1968 (i.e., from the assessment year 1968-69) by provisions for a deduction, in the computation of the total income of the assessee, of the whole or a specified percentage of the incomes or payments qualifying at present for full or partial rebate of tax or charge of tax at a concessional rate. The total income as computed after allowing such deductions will bear full tax at the appropriate rates, thereby eliminating the refinements in calculations involved in working out the tax relief with reference to the average rate of tax applicable to the total income or to particular components of the total income of the assessee. Under the new provisions the incidence of tax has been maintained, to the extent it was possible consistently with the objective of simplification of tax calculations, at more or less, the same level as under the existing provisions. In consequence of the new provisions in the matter, certain other amendments have also been made to some of the provisions of the Income-tax Act with effect from 1-4-1968. A gist of the above-mentioned provisions is given in the following paragraphs.

FINANCE (NO. 2)  ACT, 1967

Simplification of the computation of income attributable to house property owned and occupied by the assessee for his residence

71. In computing the income attributable to house property owned and occupied by an assessee for his own residence, the annual value of such house property is determined under section 23(2), in a sum equal to the full amount of its annual value (i.e., its annual letting value) as reduced by 50 per cent thereof, or Rs. 1,800, whichever is less. Under the proviso to section 23(2), as it stood before its amendment by the Finance (No. 2) Act, 1967 the reduced annual value so arrived at was further limited to 10 per cent of the total income of the assessee, and any excess over that limit was ignored. The prescription of the above-mentioned limit of 10 per cent of the total income of the assessee gave rise to certain complications in calculating the assessable annual value of the house property. This is because the total income itself comprises the net assessable income from such house property, which is to be arrived at after allowing various deductions from the reduced annual value, e.g., allowance for repairs at one-sixth of the annual value, and other expenses, such as ground rent, and interest payable on the mortgage, if any, of the property. In view of this position, the annual value of such house property was, in practice, computed by applying a formula derived from an algebraic equation. In recent years, the application of this formula had given rise to certain complications because of introduction of provisions in the Income-tax Act for the allowance of certain deductions, the amount of which varies with the magnitude of the total income, e.g., the deduction in respect of annuity deposit, which is calculated at the prescribed rates on the adjusted total income of the assessee, and the deduction of a specified percentage of the eligible amount of savings qualifying for tax relief. In order to resolve this difficulty, the proviso to section 23(2) has been amended to provide that the annual value of house property owned and occupied by an assessee for his own residence will be limited to 10 per cent of his other income (i.e., income other than that from the self-owned and self-occupied house property) as computed before making any deduction under Chapter VIA or for annuity deposit. The deductions admissible under Chapter VIA comprise, inter alia, the deduction of a specified percentage of the amount of savings through life insurance, Government or recognised provident funds, etc., qualifying for tax relief, deduction for expenditure incurred by a resident individual or Hindu undivided family on the medical care of handicapped dependants, etc.

The above-mentioned amendment is effective from 1-4-1967 (i.e., for and from the assessment year 1967-68).

FINANCE (NO. 2)  ACT, 1967

Income of marketing authorities

72. An authority constituted under the law for the time being in force for the marketing of commodities is entitled, under section 83, to a rebate of tax on the income derived by it from the letting of godowns or warehouses for storage, processing, or facilitating the marketing of commodities. This provision is to be replaced with effect from 1-4-1968 (i.e., for and from the assessment year 1968-69) by a provision in the new clause (29) of section 10 under which the whole of the income mentioned above will be excluded in computing the total income of the marketing authority.

FINANCE (NO. 2)  ACT, 1967

Provisions in the new Chapter VIA for deduction, in the computation of total income, of the whole or the specified percentage of incomes and payments of certain categories at present qualifying for full or partial rebate of tax or levy of tax at a concessional rate

73. Apart from the provision referred to in the preceding paragraph, all other provisions made by the Finance (No. 2) Act, 1967 in the Income-tax Act for the deduction, in the computation of the total income, of the whole or the specified percentage of incomes and payments of certain categories which, under the present law, qualify for full or partial rebate of tax or levy of tax at a concessional rate, are contained in the new Chapter VIA set out in the Third Schedule to the Finance (No. 2) Act, 1967. The new Chapter VIA is to replace the existing Chapter VIA with effect from 1-4-1968, i.e., for and from the assessment year 1968-69. The existing Chapter VIA provides for certain deductions which are to be made in computing the total income, these being : (a) �deductions in respect of certain payments�, viz., sums paid as life insurance premiums, contributions to provident funds, etc., expenditure incurred by resident individuals of Hindu undivided families in respect of medical treatment, etc., of their handicapped dependents, payments made by partners of registered firms engaged in certain professions for securing retirement annuities, and (b) �other deductions�, consisting of the deduction admissible to certain domestic companies in an amount equal to 8 per cent of the profits derived by them from any of the specified priority industries, and the deduction to resident individuals of Indian citizenship serving abroad in a sum equal to 50 per cent of the remuneration received by them from foreign sources for rendering services abroad as a professor, teacher or a research worker. The latter mentioned provisions has been inserted by the Finance (No. 2) Act, 1967 in the existing Chapter VIA retrospectively from 1-4-1966 (vide paragraph 68 above). The new Chapter VIA includes all the provisions of the existing Chapter VIA as amended by the Finance (No. 2) Act, 1967 but there are certain new features in its scheme and its scope is also considerably wider than that of the existing Chapter VIA. The sections of the existing Chapter VIA have been renumbered in the new Chapter VIA, in order to adjust them in the scheme of provisions in the new Chapter. The new Chapter VIA has 20 sections [sections 80A to 80T], as against 6 sections in the existing Chapter VIA, and it is divided in three parts, viz., Part A, containing certain general provisions applicable to the whole of the Chapter as well as definitions of certain words and expressions occurring in the new Chapter ; Part B, which provides for deductions in respect of certain payments in the computation of the total income ; and Part C, which provides for deductions in respect of certain incomes in the computation of the total income. The table in the Annexure sets forth the provisions in the new Chapter VIA and the corresponding provisions in the existing Chapter VIA together with the marginal titles thereof and cross references to the paragraphs of this Circular in which the provisions in the new Chapter VIA have been dealt with.

FINANCE (NO. 2)  ACT, 1967

74. The main features of the scheme or the provisions in the new Chapter VIA relating to deductions to be allowed in computing the total income, are as follows :

1. The deduction in respect of specified categories of payments or expenditure qualifying for tax relief will be allowed from the �gross total income� of the assessee. The deduction in respect of incomes of specified categories qualifying for tax relief will be allowed from such incomes included in the �gross total income� of the assessee.

The term �gross total income� as defined in clause (5) of section 80B means, in the case of a company, the total income computed in accordance with the provisions of the Income-tax Act, before making any deduction under Chapter VIA, and, in the case of a non-corporate assessee, the total income as computed in  accordance with the provisions of the Income-tax Act before making any deduction under Chapter VIA or under section 280-O (in respect of annuity deposits) and without applying the provisions of section 64, i.e., without including in the total income of an individual the income of the individual�s spouse or a minor child, etc., under terms of the said section 64.

2. Where an assessee is entitled to a deduction in respect of income of a particular category (e.g., profits and gains derived from an industrial undertaking or dividends received from a domestic company) under two or more provisions in the new Chapter VIA, the deductions under those provisions are to be allowed in a specified order of priority. The order of priority in the matter is stated hereafter in paragraph 90. There is no order of priority for the allowance of deductions admissible under the new Chapter VIA with reference  to payments or expenditure.

3. The aggregate amount of the deductions allowable under the new Chapter VIA is to be limited to the �gross total income� of the assessee and any excess over it is to be ignored. To illustrate, if the �gross total income� of an individual for the assessment year 1968-69 consists wholly of �tax holiday� income from an eligible industrial undertaking qualifying for deduction in full under section 80J, the total income of the individual will be reduced to nil by that deduction and he will not be able to avail of any deduction for that year under section 80C in respect of any portion of the qualifying amount of life insurance premiums, etc., paid by him during the previous year.

4. Where a firm, association of persons or body of individuals is entitled to a deduction under any provision of the new Chapter VIA the partners of the firm or members of the association or body will not be entitled to any deduction under that provision in the computation of their share in the income of the firm, association or body, as the case may be.

The specific provisions in the new Chapter VIA under which firms, association of persons or bodies of individuals are entitled to deductions are section 80G [deduction in respect of donations to certain funds, charitable institutions, etc.]; section 80H [deduction in the case of new industrial undertakings, mainly employing displaced persons, etc.] ; section 80J [deduction in respect of �tax holiday� profits from an eligible industrial undertaking] ; section 80K [deduction in respect of dividends received from a company, to the extent such dividends are attributable to the �tax holiday� profits of the company from an eligible industrial undertaking, ship or hotel] ; section 80L [deduction in respect of dividend received from Indian companies, where the total amount of the dividend income of the assessee does not exceed Rs. 500] ; section 80S [deduction in respect of �compensation� for termination of managing agency, etc., in the case of a non-corporate assessee] ; and section 80T [deduction in respect of long-term capital gains in the case of a non-corporate assessee]. In all such cases, where the assessee  is a firm, association of persons or body of individuals, the above-mentioned deductions will be allowed in computing the total income of the assessee and not in computing the income falling in the share of the partners of the firm or members of association of persons or body of individuals. The rationale of this provision is that the income derived by a person from his share in the income of a firm, association of persons or body of individuals is determined with reference to the total income of the firm, association or body, as computed after allowing all deductions admissible under the Income-tax Act. If a further deduction were to be allowed to the partner or member under Chapter VIA in computing his share in the income of the firm, association or body, it would amount to a double deduction.

FINANCE (NO. 2)  ACT, 1967

75. The provisions introduced in the new Chapter VIA in replacement of the existing  provisions for the allowance of full or partial rebate of tax on incomes and payments of certain categories and for charging tax on certain incomes at concessional rates, may be classified under the following heads :

1. Deductions in respect of expenditure or payments of certain categories on which full or partial rebate of tax is admissible to assessees under the present law.

2. Deductions in respect of incomes of certain   categories on which full rebate of tax is admissible under the present law.

3. Deductions in respect of incomes of certain categories on which a partial rebate of income-tax is admissible under the present law.

4. Deductions in respect of incomes of certain categories which are chargeable to tax, under the present law, at a concessional rate.

A gist of the provisions in the new Chapter VIA under the above-mentioned heads is given in the following paragraphs.
Deductions in respect of expenditure or payments
of certain categories on which full or
partial rebate of tax is admissible to
assessees under the present law

FINANCE (NO. 2)  ACT, 1967

Tax relief in the case of foreigners resident in India on expenditure incurred by them for the full-time education of their dependent children abroad

76. Under the existing law (section 87A, which is effective up to and inclusive of the assessment year 1967-68), foreigners who are resident in India and incur expenditure for the full-time education of their dependent children abroad, are entitled to a rebate of tax, calculated at the average rate of tax applicable to their total income, on a sum of Rs. 2,000 per child, up to a maximum of two children. The amount qualifying for the rebate is limited to 25 per cent of the total income of the assessee.

Under the provision in section 80F of the new Chapter VIA, the assessee will be entitled to a deduction, in the computation of his total income, of an amount of Rs. 1,500 for each child, up to two children. The maximum  amount of the deduction will, thus, be Rs. 3,000.

FINANCE (NO. 2)  ACT, 1967

Tax relief in respect of donations to certain funds, charitable institutions, etc.

77. Under the provisions of section 88, which is effective up to and inclusive of the assessment year 1967-68, and has been amended by the Finance (No. 2) Act, 1967 to bring within its purview donations made to the Prime Minister�s Drought Relief Fund, any assessee who makes certain donations is entitled to a rebate of tax on the qualifying amount of such donations. The donations eligible for rebate of tax are :

(a)  donations to the National Defence Fund, the Jawaharlal Nehru Memorial Fund and the Prime Minister�s Drought Relief Fund ;

(b)  donations to any fund or institution set up in India for charitable purposes and satisfying certain conditions ;

(c)  donations to the Government or to any local authority, to be utilised for any charitable purpose ; and

(d)  donations for the repair or renovation of temples, mosques, gurdwaras, etc., notified by the Central Government to be of historic, archaeological or artistic importance or to be places of public worship of renown.

In respect of donations to the National Defence Fund, Jawaharlal Nehru Memorial Fund and the Prime Minister�s Drought Relief Fund, the whole of the amount thereof qualifies for rebate, but other donations qualify for the rebate within specified maximum limits. In respect of donations to funds or institutions set up for charitable purposes and donations to the Government or to any local authority, the cumulative maximum limit is 10 per cent of the donor�s total income as reduced by any part thereof on which a rebate of income-tax is allowable under any other provision of the Income-tax Act, subject to an alternative monetary limit of Rs. 2 lakhs. In respect of donations, for the repair or renovation of temples, mosques, gurdwaras, etc., referred to above, taken together with donations, if any, to charitable institutions or funds or to the Government or any local authority, the maximum limit in terms of percentage of the total income is the same as stated before, but the alternative monetary limit is higher, viz., Rs. 5 lakhs. In all cases, the rebate of tax is calculated at the average rate of tax applicable to the total income of the donor but, in the case of company donors, the amount thereof is limited to 27.5 per cent of the amount of the qualifying donations, and in other cases, to 50 per cent of the qualifying donations.

The above-mentioned provisions for rebate of tax on qualifying donations are to be replaced with effect from 1-4-1968 by the provisions in section 80G in the new Chapter VIA. Under section 80G, donors will be entitled to a deduction, in the computation of their total income, of a specified percentage of the qualifying amount of donations on which they are entitled to rebate of tax under the present law. In the case of company donors, the deduction will be in an amount equal to 50 per cent of the qualifying donations, and in the case of all other donors, 55 per cent of such donations. It may be mentioned that under section 80G also, the amount of the qualifying donations (exclusive of donations to the National Defence Fund, Jawaharlal Nehru Memorial Fund and the Prime Minister�s Drought Relief Fund) is limited to 10 per cent of the donor�s �gross total income� (as reduced by any portion thereof on which he is entitled to a rebate of income-tax and also any portion on which he is entitled to a deduction under any other provision of the new Chapter VIA), or Rs. 2 lakhs, whichever is less.
Deductions in respect of incomes of certain
categories on which full rebate of tax is
admissible under the present law

FINANCE (NO. 2)  ACT, 1967

�Tax holiday� profits derived from an eligible industrial undertaking by any assessee and from an eligible hotel or ship by Indian companies

78. Under section 84, any assessee deriving profits from a newly set up industrial undertaking satisfying certain conditions, and an Indian company deriving profits from a hotel or ship satisfying certain conditions are entitled to a rebate of tax on such profits up to an amount equal to 6 per cent per annum of the capital employed in the undertaking, hotel or ship, for a specified period of years. Section 84 has been amended by the Finance (No. 2) Act, 1967, inter alia, to extend its provisions retrospectively from the commencement of the Act, to industrial undertakings operating cold storage plants and Indian companies deriving profits from ships satisfying certain conditions.

The above-mentioned provisions of section 84 are to be replaced with effect from 1-4-1968 (i.e., for and from the assessment year 1968-69) by the provisions in section 80J in the new Chapter VIA. Under the new provisions the whole of the amount of the �tax holiday� profits (i.e., profits derived from an eligible industrial undertaking, ship or hotel to the extent of an amount calculated at 6 per cent per annum on the capital employed in the undertaking, ship or hotel) together with the element of �deficiency�,   if   any,  will  be  allowed  as  a  deduction  in  computing  the total  income  of  the assessee  for  the  specified  period  of  years.  The relevant provisions of the new section 80J have been explained earlier in paragraph 44.
JUDICIAL ANALYSIS

EXPLAINED IN – In Hind Wire Industries Ltd. v. CIT  [1992] 65 Taxman 303 (Cal.) it was held that in paragraph 78 of Circular No. 5-P, dated 9-10-1967, issued by the CBDT, it was clarified that deficiency is required to be computed even when the new industrial undertaking suffers a loss.

FINANCE (NO. 2)  ACT, 1967

Dividends attributable to the �tax holiday� profits of a company

79. A shareholder of a company is entitled, under section 85, to a rebate of tax on that part of the dividend received by him from the company which is attributable to the �tax holiday� profits of the company, i.e., profits on which it is entitled to a rebate of tax under section 84. The Finance (No. 2) Act, 1967 has amended this section, retrospectively, from the commencement of the Act, to extend its benefit to dividends from any company attributable to its profits from a cold storage plant and dividends from an Indian company attributable to its profits from a ship on which the company is entitled to a rebate of tax under section 84.

The above-mentioned provision is to be replaced, with effect from 1-4-1968, by the provision in section 80K, in the new Chapter VIA. Under section 80K, shareholders of companies will be entitled to a deduction, in the computation of their total income, of that portion of the dividend received by them from the company which is attributable to its �tax holiday� profits (including the element of �deficiency�, if any) in respect of which it is entitled to rebate of tax under section 84 for assessment years up to and inclusive of the assessment year 1967-68 or a deduction under the new section 80J. These provisions have been explained earlier in paragraph 46.

FINANCE (NO. 2)  ACT, 1967

Certain incomes of co-operative societies

80. Section 81 provides for a rebate of tax to co-operative societies in respect of the following incomes :

1. Profits and gains from a business of banking or providing credit facilities to the members of the co-operative society.

2. Profits and gains from a cottage industry.

3. Profits and gains from marketing of agricultural produce of the members of the society.

4. Profits and gains from activities consisting of purchase of agricultural implements, seeds, livestock or other articles intended for agriculture and supply of these to the members of the society.

5. Profits and gains from processing, without the aid of power, the agricultural produce of the members of the society.

6.  Profits and gains derived by a primary co-operative society from supply of milk raised by its members to a federal milk co-operative society.

7. Profits and gains derived by a co-operative society from a business [other than an insurance business or any business of the nature specified at (1) to (6) hereinabove] to the extent of Rs. 15,000 of such profits.

8. Any interest or dividends received by a co-operative society from its investment with any other co-operative society.

9.  Income derived from the letting of godowns or warehouses for storage or processing or facilitating the marketing of commodities.

10. In a case where the total income of a co-operative society does not exceed Rs. 20,000, and the society is not a housing society or an urban consumers� society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power, its income under the heads �Interest on securities� and �Income from house property�.

The provisions in section 81 for grant of rebate of tax on the above-mentioned incomes of co-operative societies are to be replaced by the provisions in section 80P in the new Chapter VIA with effect from 1-4-1968, i.e., for and from the assessment year 1968-69. Under the new section 80P, co-operative societies will be entitled to a deduction, in the computation of their total income, of the whole of their income on which they are at present eligible for rebate of tax. The conditions, qualifications and limits as to the incomes of co-operative societies eligible for deduction under the new section 80P are the same as laid down in the existing section 81 for the purpose  of rebate of tax on such incomes.

FINANCE (NO. 2)  ACT, 1967

Dividends received by a member of a co-operative society from the society

81. An assessee who is a member of a co-operative society is entitled under section 82, to a rebate of tax on the dividends received by him from the society. This provision is to be replaced with effect from 1-4-1968 by the provision in section 80Q in the new Chapter VIA, under which the whole of the dividends mentioned above will be allowed as a deduction in computing the total income of members of co-operative societies.

DEDUCTIONS IN RESPECT OF INCOMES OF CERTAIN
CATEGORIES ON WHICH A PARTIAL REBATE OF
INCOME-TAX IS ADMISSIBLE UNDER
THE PRESENT LAW

FINANCE (NO. 2)  ACT, 1967

Rebate on inter-corporate dividends, i.e. dividends received by any company from a domestic company

82. Under section 85A, inter-corporate dividends referred to above are eligible for a partial rebate of tax. The amount of such rebate is equal to the difference between :

(a)  the tax calculated on the inter-corporate dividends at the average rate of tax applicable to the total income of the recipient company, and

(b)  the tax calculated on the dividends at 25 per cent thereof (15 per cent where the recipient of the dividend is a foreign company and the company paying the dividend is a closely-held Indian company mainly engaged in any of the specified priority industries).

The above-mentioned provision is to be replaced with effect from 1-4-1968 (i.e., for and from the assessment year 1968-69) by the provision in section 80M in the new Chapter VIA. Under the new section 80M, a company will be entitled to a deduction, in the computation of its total income, of an amount calculated at the following percentages of the dividends received by it from any domestic company :

1. Dividends received by a foreign company (i.e., a company other than a domestic company) :
(a) from a closely-held Indian company mainly  engaged in any of the specified priority industries  

80 per cent of such dividends

(b) from any  domestic company  other than an Indian company referred to at (a) above 65 per cent of such dividends
2. Dividends  received   by   a  domestic company   from   any  other   domestic company 60 per cent of such dividends.

FINANCE (NO. 2)  ACT, 1967

Dividends received by an Indian company from a foreign company on shares in it allotted to the Indian company in consideration of supply of technical �know-how� or technical services

83. An Indian company is entitled, under section 85B, to a partial rebate of tax on dividends received by it on shares in a foreign company allotted to it in consideration of supply of technical �know-how� or technical services to the foreign company. Such rebate of tax is calculated in the same manner as provided in section 85A in respect of inter-corporate dividend referred to in the preceding paragraph. After allowance of the rebate, the incidence of tax works out, in the generality of cases, to 25 per cent thereof.

The provision in section 85B is to be replaced, with effect from 1-4-1968, by the provision in section 80N contained in the new Chapter VIA. Under the new section 80N, Indian companies will be entitled to a deduction, in the computation of their total income, of 60 per cent of the amount of the dividends referred to above.

FINANCE (NO. 2)  ACT, 1967

Royalty, commission, fees, etc., received by an Indian company from a foreign company in consideration of supply to the foreign company of technical �know-how� or technical service

84. Under section 85C, Indian companies are entitled to a partial rebate of tax on such income in the same manner as provided in section 85A in respect of inter-corporate dividends. After the grant of such rebate of tax, the incidence of tax on such income, in the generality of cases, is 25 per cent thereof.

The provision mentioned above is to be replaced with effect from1-4-1968, by the provision in section 80-O contained in the new Chapter VIA. Under the new provision, Indian companies will be entitled to a deduction, in the computation of their total income, of 60 per cent of the amount of the income referred to above.

DEDUCTIONS IN RESPECT OF INCOMES OF CERTAIN
CATEGORIES WHICH ARE CHARGEABLE TO TAX,
UNDER THE PRESENT LAW AT A
CONCESSIONAL RATE

FINANCE (NO. 2)  ACT, 1967

Income by way of compensation for termination or modification of the terms of managing agency, etc., in the case of non-corporate assessees

85. Under section 112, a non-corporate assessee whose total income includes income by way of compensation received on the termination or modification of the terms of a managing agency, etc., is chargeable to tax on such total income in a sum equal to the aggregate of :

(a)  the tax calculated on his ordinary income [i.e., income other than compensation, capital gains and interest on National Savings Certificates (First Issue)] at the average rate of tax applicable to such ordinary income ;

(b)  the tax calculated on the income by way of compensation at the average rate of tax applicable to the aggregate of the ordinary income and one-third of such compensation ; and

(c)  the tax on the interest on National Savings Certificates (First Issue) and on capital gains, if any, computed in accordance with section 112A(b) and section 114(b), respectively.

The provisions mentioned above are to be replaced, with effect from1-4-1968, by the provisions contained in section 80S in the new Chapter VIA. Under the new section 80S, a non-corporate assessee having income by way of compensation will be entitled to a deduction, in the computation of his total income, of an amount equal to 25 per cent of such income, subject to a maximum deduction of Rs. 1,00,000. The effect of this will be that the balance of the income by way of compensation included in the total income will bear tax at the average rate  of tax applicable to the total income.

Where the total income of the assessee also includes interest on National Savings Certificates (First Issue), the tax thereon will be determined in accordance with the special provisions contained in section 112A. The provisions in that section have not been modified by the Finance (No. 2) Act, 1967 except that clause (c) thereof, which referred to computation of tax on income by way of compensation and capital gains, respectively, in accordance with sections 112 and 114, has been omitted with effect from 1-4-1968.

FINANCE (NO. 2)  ACT, 1967

Capital gains in the case of non-corporate assessees

86. Under the present law, capital gains are classified, for purposes of tax, into two categories. One of these is �short-term� capital gains, i.e., gains relating to capital assets which were held by the assessee for a period of not more than 12 months. The other one is �long-term� capital gains, i.e., relating to capital assets held by assessee for more than 12 months.

FINANCE (NO. 2)  ACT, 1967

87. Short-term capital gains – Where the total income of a non-corporate assessee includes �short-term� capital gains, the tax payable on the total income, under section 114, is the aggregate of :

(a)  tax calculated on  the  assessee�s ordinary income [i.e., income other than capital gains, compensation and interest on National Savings Certificates (First Issue)] at the average rate of tax applicable to such income ;

(b)  tax calculated on the �short-term� capital gains at the average rate of tax applicable to the aggregate of the ordinary income and the �short-term� capital gains;

(c)  tax calculated on the �long-term� capital gains, if any, included in the total income in accordance with section 114(b)(ii) ; and

(d)  tax on income by way of compensation and interest on National Savings Certificates (First Issue), if any, computed in accordance with section 112(iii) and section 112A(b), respectively.

Thus, under the present law, while the �short-term� capital gains included in the total income of a non-corporate assessee are chargeable to tax at the average rate of tax applicable to the aggregate of his ordinary income and the �short-term� capital gains, the ordinary income is chargeable to tax at a concessional rate. The present law also bars the set off of losses relating to �short-term� capital assets in a year against the assessee�s ordinary income in that year. Such losses are carried forward to succeeding years and set off against �short-term� capital gains only.

The Finance (No. 2) Act, 1967 has omitted the above-mentioned provisions for levy of tax at a concessional rate on the ordinary income of a non-corporate assessee having �short-term� capital gains. The effect of this will be that in such cases, tax will be chargeable on the whole of the total income (including �short-term� capital gains) at the appropriate rate of tax applicable to it, except where the total income includes interest on National Savings Certificates (First Issue), on which tax is chargeable in accordance with the special provisions contained in section 112A.

FINANCE (NO. 2)  ACT, 1967

88. As a corollary to the above-mentioned change (with effect from 1-4-1968) in the scheme of charging tax on non-corporate assessees having �short-term� capital gains, the Finance (No. 2) Act, 1967 has made a provision in the new sub-section (3) of section 71 (relating to set off of loss under one head against income under another) and also consequential provisions in sections 72 and 74 to secure that losses relating to �short-term� capital assets in a year are permitted to be set off against an assessee�s ordinary income in that year. These amendments to sections 71, 72 and 74 also take effect from 1-4-1968. It may be mentioned that the Finance (No. 2) Act, 1967 has not made any change in the existing provisions in section 74 under which unabsorbed loss relating to �short-term� capital assets in respect of a year is allowed to be carried forward and set off only against the net gains relating to �short-term� capital assets in succeeding years, up to a period of eight years.

FINANCE (NO. 2)  ACT, 1967

89. Long-term capital gains – Such capital gains are sub-divided, for purposes of tax, into two categories, viz., (a) gains relating to lands and buildings or any rights therein ; and (b) gains relating to other �long-term� capital assets.

Under the present law, no tax is chargeable on �long-term� capital gains included in the total income of a non-corporate assessee where the total income does not exceed Rs. 10,000. Further, where the total income of a non-corporate assessee exceeds Rs. 10,000 but the �long-term� capital gains included therein do not exceed Rs. 5,000, no tax is chargeable on such gains. Where the total income of such an assessee exceeds Rs. 10,000 and the �long-term� capital gains included therein also exceeds Rs. 5,000, the excess is chargeable to tax. In such a case, where the total income does not include any income by way of �short-term� capital gains or compensation or interest on National Savings Certificates (First Issue) the tax chargeable thereon under the present law is the aggregate of�

(a)  the tax calculated on the total income as reduced by the �long-term� capital gains, at the average rate of tax applicable to the reduced total income ; and

(b)  the tax on the chargeable gains (i.e., �long-term� capital gains reduced by the first Rs. 5,000 thereof) calculated�

(i)  on the �chargeable gains� relating to lands and buildings or any rights therein, at three-fourth of the average rate of tax referred to at (a) above ; and

(ii)  on the �chargeable gains� relating to other capital assets, at one-half of the average rate of tax referred to at (a) above.

The above-mentioned provisions in section 114 are to be replaced, with effect from 1-4-1968 (i.e., for and from the assessment year 1968-69), by the provisions contained in section 80T in the new Chapter VIA. The effect of the provisions in the new section 80T of the Act is as follows :

1. Where the �gross total income� of a non-corporate assessee does not exceed Rs. 10,000, the whole of the �long-term� capital gains included therein will be allowed as a deduction in computing his total income.

2. Where the �gross total income� of a non-corporate assessee exceeds Rs. 10,000, he will be entitled to a deduction, in the computation of his total income, of�

(a)  in respect of �long-term� capital gains relating to lands and buildings or any rights therein, the first Rs. 5,000 of such gainsplus 45 per cent of the balance thereof, if any ; and

(b)  in respect of �long-term� capital gains relating to other capital assets, the first Rs. 5,000 thereof [only insofar as such deduction has not been availed of under (a) above] plus 65 per cent of the balance, if any.

FINANCE (NO. 2)  ACT, 1967

Order of priority in allowing certain deductions under the new Chapter VIA in respect of the same head of income

  1. It has been stated earlier in paragraph 74(2) that where in respect of income of a particular category, an assessee is entitled to deductions under two or more provisions in the new Chapter VIA, such deductions are to be allowed in a specified order of priority. There are two categories of incomes in respect of which an assessee may be entitled to a deduction under two or more provisions in the new Chapter VIA, these being (a) profits derived from industrial undertakings, and (b) dividends received from companies.

In respect of the category at (a) above, the order of priority in allowing deductions under the relevant sections in Chapter VIA is as follows :

Section Subject-matter of the deduction
80H Profits derived by any assessee (whether corporate or non-corporate) from an industrial undertaking which is newly set up and begins to manufacture or produce articles in India at any time during the three-year period from 1-4-1967 to 31-3-1970, and provides employment mainly to displaced persons or repatriates or members of their families :
The deduction admissible is 50 per cent of such profits, subject to a maximum deduction of Rs. 1,00,000, for ten assessment years, commencing from the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles.
80-I Profits and gains derived by certain domestic companies (i.e., companies in which the public are substantially interested and whose gross total income exceeds Rs. 50,000 and closely-held companies) from any of the specified priority industries :
The deduction admissible is in an amount equal to 8 per cent of such profits.
80J Profits derived by an assessee (corporate or non-corporate) from a newly established industrial undertaking manufacturing or producing any articles or operating a cold storage plant in India and satisfying certain conditions ; and profits derived by an Indian company from a ship or hotel business, satisfying certain conditions :
The deduction in respect of such profits is admissible for a specified period of years in an amount up to 6 per cent per annum of the capital employed in the undertaking, ship or hotel. Besides, any �deficiency� in the profits during the �tax holiday� period is allowed to be carried forward and set off against the profits of succeeding years up to a specified period.
80P Profits and gains derived by a co-operative society from an industrial undertaking :
Section 80P provides for deduction also in respect of certain other categories of incomes of co-operatives societies but those deductions are outside the scheme of priorities and are to be allowed independently.
In regard to category (b) above, viz., income consisting of dividends received from companies, the order of priority in allowing deductions under the relevant sections in the new Chapter VIA is as follows :
Section Subject-matter of the deduction
80K That portion of the dividends received by a shareholder (whether corporate or non-corporate) of a company which is attributable to the �tax holiday� profits of the company, i.e., profits in respect of which the company is entitled to a rebate of tax under section 84 or the profits in respect of which the company is entitled to a deduction under the new section 80J including the element of �deficiency�, if any, carried forward and set off under that section :
The whole of the amount of dividends attributable to the �tax holiday� profits of the company paying the dividends is allowable as a deduction.
80L Dividends received by any assessee (whether corporate or non-corporate) from an Indian company, where the aggregate of income by way of dividends included in his �gross total income� does not exceed Rs. 500 :
The whole of the amount of dividends from Indian companies is allowable as a deduction.
80M Inter-corporate dividends, i.e., dividends received by any company from a domestic company :
A specified percentage of such dividends is allowable as a deduction. The specified percentage has to be applied to the balance of the inter-corporate dividends remaining after allowing the deductions under sections 80K and 80L.

FINANCE (NO. 2)  ACT, 1967

Provisions ancillary and consequential to the new provisions for simplification of tax calculations

91. In consequence of the new provisions introduced in the Income-tax Act with effect from 1-4-1968, for the deduction, in the computation of the total income, of the whole or a specified percentage of certain incomes and payments now qualifying for full or partial rebate of tax or charge of tax at a concessional rate, the Finance (No. 2) Act, 1967 has amended certain other provisions of the Income-tax Act with effect from the same date. These consequential amendments are briefly as follows :

1. The existing sections of the Income-tax Act, relating to grant of rebate of tax or levy of tax at a concessional rate, which are to be replaced with effect from 1-4-1968, by new provisions, as well as references to those sections in other provisions of the Income-tax Act, have been omitted with effect from the same date.

2. Under the existing provisions of section 33(2) and section 33A(2), the deductions for any year on account of development rebate and development allowance, respectively, are limited to the assessee�s total income of that year as computed without making the said deductions. (Any amount of development rebate or development allowance which remains unabsorbed is carried forward to the following assessment year.) The relevant provisions have been amended to secure that for the assessment year 1968-69, and subsequent years, the deduction on account of development rebate or development allowance will be limited to the assessee�s total income as computed without making the said deductions and also without making any deduction under the new Chapter VIA or any deduction on account of annuity deposit under section 280-O. These amendments have been made in view of the position that the deductions under the new Chapter VIA are to be allowed from the assessee�s �gross total income�, and the deduction under section 280-O, on account of annuity deposit, is to be allowed from the total income as computed under all other provisions of the Income-tax Act. Section 36(1)(viii) provides for the deduction, in the computation of business profits of approved financial corporations of the amount transferred by them from their profits to a special reserve account up to a specified percentage of their �total income�. This provision has been amended to secure that the specified percentage will be applied to the financial corporation�s total income as computed before making any deduction under the new Chapter VIA.

3. Section 104(4) provides an exemption to closely-held domestic companies of certain categories from the requirement of distribution of dividends up to the statutory percentage of their distributable income. One of these categories of companies is an Indian company whose business consists mainly in the construction of ships, manufacture or processing of goods, mining, or generation or distribution of electricity or any other form of power. The Explanation to section 104(4) provides that the business of a company shall be deemed to consist mainly of the activities mentioned above if the income attributable to such activities included in its �total income� for the relevant previous year is not less than 51 per cent of such total income. This provision has been amended to secure that the said percentage will be applied to the �gross total income� of the company, i.e., total income as computed before allowing the deductions under new Chapter VIA.

4. Section 109 defines the terms �distributable income�, �investment company�, �trading company�, and �statutory percentage�. [These terms are relevant to the provisions in the Act relating to the requirement of distribution of dividends by closely-held companies of certain categories up to the statutory percentage of their distributable income.] Under the existing provisions of section 109, the �distributable income� of the company is computed with reference to its �total income�. The term �investment company� has been defined to mean a company whose �total income� consists mainly of income which, if it had been the income of an individual, would have been regarded as unearned income. The term �trading company� has been defined to mean a company whose business consists mainly in dealing in goods or merchandise manufactured, produced or processed by a person other than that company and whose income attributable to such business included in its �total income� is not less than 51 per cent of the amount of such �total income�. The definition of the term �statutory percentage� in the case of an Indian company whose income is only partly derived from the specified industrial activities also refers to the �total income� of the company. In these definitions, references to the term �total income� have been substituted, with effect from 1-4-1968, by references to the �gross total income� of the company. The term �gross total income� has been defined in the new clause (iv) of section 109 to mean the total income computed in accordance with the provisions of the Income-tax Act before making any deduction under Chapter VIA. These amendments have been made in view of the position that whereas under the existing scheme of granting tax relief in the form of full or partial tax rebate, the incomes qualifying for the rebate continue to form a part of the total income of the assessee, the whole of such incomes or a specified percentage thereof will, under the scheme of the new Chapter VIA, be allowed as a straight deduction in computing the total income.

5. Under the existing provisions of section 197(3), a company which is entitled to a rebate of tax on its �tax holiday� profits under section 84 is authorised to pay the dividends attributable to such profits to its shareholders without deducting tax at source therefrom. The appropriate portion of such dividends on which the shareholders of the company  are entitled to a rebate of tax under section 85 of the Act is to be determined by the Income-tax Officer on an application by the company in this behalf. This provision has been amended with effect from 1-4-1968, to substitute references therein to the existing section 84 and section 85 by a reference to section 80K in the new Chapter VIA under which a shareholder of a company is entitled to a deduction, in the computation of his total income, in respect of the dividends attributable to the �tax holiday� profits of the company paying the dividends.

6. Under section 236, a domestic company which pays to its shareholders any dividends attributable to its profits which were actually charged to income-tax for any assessment year prior to the assessment year 1960-61 and deducts tax therefrom at source, is entitled to a tax credit in a sum equal to 10 per cent of such dividends. For the purpose of this provision, the dividends declared by a company in respect of any previous year are deemed first to have come out of the �distributable income� of that previous year and the balance, if any, out of the undistributed part of the  �distributable income� of earlier previous years. The �distributable income� of any previous year is computed, under Explanation 2  to section 236, with reference to the �total income� of the company. The relevant provision in the said Explanation has been amended with effect from 1-4-1968, to secure that the �distributable income� of any previous year in the case of a company is determined with reference to its total income as computed before making any deduction under the new Chapter VIA.

 

Amendments to Wealth-tax Act, Gift-tax Act and
Companies (Profits) Surtax Act

FINANCE (NO. 2)  ACT, 1967

Allocation  and distribution of work amongst tax authorities

92. The amendments made by the Finance (No. 2) Act, 1967 to the Wealth-tax Act, the Gift-tax Act and the Companies (Profits) Surtax Act, relate largely to provisions about the jurisdiction of, and distribution and allocation of work amongst the tax authorities under these Acts. These amendments are designed to facilitate the allocation and distribution of work amongst the tax authorities (other than appellate authorities) exercising jurisdiction under the Wealth-tax Act, the Gift-tax Act and the Companies (Profits) Surtax Act, on a functional basis, in line with the scheme of similar provisions made by the Finance (No. 2) Act, 1967 in the Income-tax Act. The substance of the provisions in the matter in the Wealth-tax Act, the Gift-tax Act and Companies (Profits) Surtax Act, has been stated earlier in paragraphs 51, 52 and 53, respectively.

FINANCE (NO. 2)  ACT, 1967

93. As regard the Gift-tax Act, there is only one amendment in it besides those relating to the jurisdiction of gift-tax authorities. This amendment relates to the exemption of �closely-held� companies from gift-tax on the value of gifts by way of transfer by them of any asset to an Indian company in a scheme of amalgamation. This has been dealt with earlier in paragraph 58. Other amendments to the Wealth-tax Act and the Companies (Profits) Surtax Act are dealt with in the following paragraphs.
Wealth-tax  Act

FINANCE (NO. 2)  ACT, 1967

Provision for taking powers for the Central Government to declare any statutory corporation as a �company� for purposes of wealth-tax

94. The term �company� is defined for the purposes of wealth-tax in section 2(h). The scope of this definition has been enlarged by the Finance (No. 2) Act, 1967, retrospectively, with effect from the commencement of the Wealth-tax Act, to include therein a statutory corporation (i.e., a corporation set up under a Central, State or Provincial Act) which is declared by the Central Government by general or special order to be a company for the purposes of the Wealth-tax Act. Before this amendment, the term �company� comprised a company as defined in section 3 of the Companies Act, 1956 ; a company which is treated as a company within the meaning of any law in force relating to companies in the State of Jammu and Kashmir ; or a company incorporated outside India and having a place of business in India. This definition did not cover a statutory corporation. The new provision, which accords the status of a �company� to a statutory corporation declared by the Central Government to be a �company� for the purposes of wealth-tax, is analogous to the provision in section 2(17)(ii) of the Income-tax Act which accords the same status for the purposes of income-tax to �any association whether incorporated or not and whether Indian or non-Indian�, if it is declared by general or special order of the Board to be a company. The difference between the two provisions is that for the purposes of wealth-tax such a declaration can be made only by the Central Government, whereas for income-tax, the declaration can be made by the Board.

FINANCE (NO. 2)  ACT, 1967

95. The above-mentioned amendment to the definition of �company� in the Wealth-tax Act has been made in view of recent rulings of the Courts to the effect that a statutory corporation is liable to be assessed to wealth-tax in the status of an individual. The effect of the declaration of a statutory corporation as a company under the new provision in the Wealth-tax Act will be that in common with a company formed and registered under the Companies Act, 1956, the statutory corporation will be liable to wealth-tax for the assessment years up to 1959-60 at the concessional rate of 1/2 per cent of its net wealth (subject to the exemptions specified in section 45), and will be exempt from wealth-tax for subsequent assessment years by virtue of section 13 of the Finance Act, 1960 which exempts companies from wealth-tax with effect from 1-4-1960.
Companies (Profits) Surtax  Act

FINANCE (NO. 2)  ACT, 1967

Provisions to facilitate allocation and distribution of work amongst the tax authorities on a functional basis

96. Section 18 of the Companies (Profits) Surtax Act applies for the purposes of surtax, the provisions of specified sections of the Income-tax Act, subject to such modifications as may be prescribed by the Board. The Finance (No. 2) Act, 1967 has amended section 18 to apply certain further sections of the Income-tax Act to surtax with effect from 1-4-1967. Some of these sections of the Income-tax Act have been newly applied to proceedings relating to surtax in consequence of amendments made to the Income-tax Act for facilitating the distribution and allocation of work amongst officers in the Income-tax Department on a functional basis. These sections have been referred to earlier in paragraph 53. Two other sections of the Income-tax Act which have been newly applied to proceedings under the Companies (Profits) Surtax Act are : section 288A, relating to rounding off of the total income to the nearest multiple of ten rupees, and section 288B, relating to the rounding off of tax, interest, penalty, fine or any other sum payable by, and the amount of refund due to an assessee, to the nearest rupee. These provisions of the Income-tax Act will apply to proceedings relating to surtax subject to such modifications as the Board may prescribe in the rules made under the Surtax Act.

FINANCE (NO. 2)  ACT, 1967

Computation of chargeable profits

97. The remaining amendments to the Surtax Act relate to the rules for computing chargeable profits. These amendments, which take effect from 1-4-1968 (i.e., for and from the assessment year 1968-69), are consequential to some of the new provisions made by the Finance (No. 2) Act, 1967 in the Income-tax Act with effect from 1-4-1968, for simplifying the calculation of tax relief in certain cases.

The new provisions of the Income-tax Act which have necessitated these amendments are : provisions for deduction, in the computation of the total income of a company, of (a) the �tax holiday� profits derived from an eligible industrial undertaking, hotel or ship together with the element of �deficiency�, if any [section 80J, explained earlier in paragraph 44], and (b) an amount equal to 50 per cent of the qualifying donations made by the company [section 80G, explained in paragraph 77]. In view of the position that the chargeable profits of a company for the purposes of surtax are derived from its total income as computed under the provisions of the Income-tax Act, companies would automatically be exempt from surtax, from the assessment year 1968-69 onwards, on the whole of their �tax holiday� profits (including the element of �deficiency�, if any)  and also on one-half of the amount of the qualifying donations made by them during the relevant previous year. Consequently, the Finance (No. 2) Act, 1967 has made the following amendments to the provisions in rule 1 of the First Schedule to the Surtax Act with effect from 1-4-1968 :

1. The provision in clause (v) of rule 1, under which a company is entitled to a deduction from its total income (as computed under the Income-tax Act) of the �tax holiday� profits qualifying for rebate of income-tax under section 84 of that Act, has been omitted.

2. The provision in clause (vii) of rule 1, under which a company is entitled to a deduction from its total income of the whole of the amount of donations qualifying for rebate under section 88 of the Income-tax Act, has been substituted by a provision under which a company will be entitled to deduct only 50 per cent of the amount of the qualifying donations.

Miscellaneous  amendments  and  provisions

FINANCE (NO. 2)  ACT, 1967

Deposit Insurance Corporation

98. The Finance (No. 2) Act, 1967 has amended the Deposit Insurance Corporation Act, 1961, to secure that the Deposit Insurance Corporation is exempted from tax on its profits and gains for a further period of 5 years beyond the assessment year 1967-68 up to which it was hitherto exempt from tax.

FINANCE (NO. 2)  ACT, 1967

Unit trust

99. Section 45 of the Finance (No. 2) Act, 1967 has made a provision relating to the Unit Trust of India Act, 1963, to secure that the exemption from surtax hitherto available to the Unit Trust of India on its income, and to its contributories on the income received by them  from the Trust, is made operative retrospectively from the commencement of the Companies (Profits) Surtax Act, 1964, i.e., from 1-4-1964.

FINANCE (NO. 2)  ACT, 1967

Voluntary disclosure

100. Further, the Finance (No. 2) Act, 1967 has made a provision, contained in section 46 thereof, to remove certain difficulties arising in the implementation of the scheme under section 68 of the Finance Act, 1965, relating to levy of tax on a special basis on unaccounted incomes disclosed under that scheme. The provisions in the matter are dealt with in the following paragraphs.

FINANCE (NO. 2)  ACT, 1967

101. Section 68 of the Finance Act, 1965 (relating to voluntary disclosure of unaccounted incomes) provided for the levy of income-tax on incomes declared under the scheme during the specified period up to 31-5-1965, at a flat ad hoc rate (in general, 60 per cent). Incomes on which income-tax has been paid in accordance with the provisions of the said section 68 are immune from being charged to tax under the provisions of the Income-tax Act. Under the scheme, a declarant who did not pay the tax on the income declared by him at the time of the declaration was permitted to furnish security (in the form of a bank guarantee, Government securities, assignment of shares in companies or mortgage of any  immovable property) for the payment of the tax due from him. Such persons were required to furnish an undertaking to pay the tax within a period not exceeding six months from the date of the declaration. However, in a number of such cases, the tax due has been paid in full, after the expiry of the above-mentioned time limit of six months. In certain other cases, a part of the tax is still outstanding. In such cases, the provisions of the scheme gave rise to the following difficulties :

1. Section 68 of the Finance Act, 1965 does not contain any specific provision for the enforcement of the security furnished by the declarants, for realising the outstanding demand due from them. It does not also enable the Income-tax Department to take proceedings for recovering such demands, under the provisions of the Income-tax Act. In the circumstances, the security furnished by the declarant could be enforced only through the process of civil law which involves litigation and long delays.

2. The provisions of section 68 of the Finance Act, 1965 do not state clearly whether a declarant who pays the tax on the income declared by him after the stipulated period of six months would be entitled to immunity from being charged to tax on such income under the provisions of the Income-tax Act.

In order to resolve the above-mentioned difficulties, section 46 of the Finance (No. 2) Act, 1967 has made the following provisions :

1. Any amount of tax on the declared income remaining outstanding on the date immediately following the expiry of the above-mentioned period of six months, will be deemed to be taxed due from the declarant under the provisions of the Income-tax Act and will be recoverable from the declarant in the same manner as any other arrear of income-tax demand. Accordingly, the declarant will also be liable to pay simple interest under section 220(2) of the Income-tax Act for the period of default in the payment of the arrear of tax, and also be liable to the imposition of a penalty under section 221 of that Act if he continues to be in default. For the purpose of initiating recovery proceedings in respect of such demands by issue of a certificate to the Tax Recovery Officer, the normal time limit under section 231 of the Income-tax Act, viz., one year from the end of the financial year in which the assessee is deemed to be in default, has been extended, by one year to two years. Thus, recovery proceedings in such cases can be commenced at any time up to 31-3-1968.

2. The tax paid or recovered from the declarant in respect of the income declared by him, at any time after the expiry of the period of six months stipulated in section 68 of the Finance Act, 1965, will be deemed to be tax paid by the declarant in accordance with the said section 68 and, thereby, the declarant will be immune from being charged to tax under the provisions of the Income-tax Act in respect of such income.

ANNEXURE

Table showing the provisions of new Chapter VIA (effective from 1-4-1968) and the corresponding provisions (effective up to and inclusive of the assessment year 1967-68) in the existing Chapter VIA and other chapters of the Income-tax Act, with marginal titles of the provisions and cross references to paragraphs of this circular in which the new provisions have been dealt with

Provisions of the new Chapter VIA                 Corresponding provisions of the                                                                                                 existing chapter VIA and other Chapters

Section Marginal title Cross refer-ences to paragraphs in this circular Remarks Section Marginal title Remarks
1 2 3 4 5 6 7
80A Deductions to be made in computing total income 73,74 These are general provisions
80B Definitions 74 Contains definitions of 9 terms, of which definitions of �displaced person�, �domestic company�, �foreign company�, �gross total income�, �priority industries� and �repatriate� are new 80D Definitions Chapter VIA contains definitions of 3 terms only
80C Deductions in respect of life insurance premia, contributions to provident fund, etc. 38 80A Deductions in respect of life insurance premia, annuties and contributions to provident fund, etc. Chapter VIA
80D Deduction in respect of medical treatment, etc., of handicapped dependants 73 80B Deduction in respect of medical treatment, etc., of handicapped persons Chapter VIA
80E Deduction in respect of payments for securing retirement annuities 73 80C Relief relating to payment for securing retirement annuities Chapter VIA
80F Deduction in respect of educational expenses in certain cases 76 87A Rebate on educational expenses in certain cases Chapter VIII
80G Deduction in respect of donations to certain funds, charitable institutions, etc. 67, 77 88 Donations for charitable purposes Chapter VIII
80H Deduction in the case of new industrial undertakings employing displaced persons, etc. 47 New provision
80-I Deduction in respect of profits and gains from priority industries in the case of certain companies 32, 41(ii) (b) & 73 80E Deductions in respect of profits and gains from specified industries in the case of certain companies Chapter VIA
80J Deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases 44, 78 Contains a new provision for carry forward and set off of deficiency 84 Income of newly established industrial undertakings or hotels Chapter VII
80K Deduction in respect of dividends attributable to profits and gains from new industrial undertakings or ships or hotel business 45, 79 85 Dividend from new industrial undertaking or hotel Chapter VII
80L Deduction in respect of dividends in certain cases 39 New provision
80M Deduction in respect of certain inter-corporate dividends 82 85A Deduction of tax on intercorporate dividends Chapter VII
80N Deduction in respect of dividends received from certain foreign companies 83 85B Deduction of tax on dividends received from certain foreign companies Chapter VII
80-O Deduction in respect of royalties, etc., received from certain foreign companies 84 85C Deduction of tax on reyalties, etc., received from certain foreign companies Chapter VII
80P Deduction in respect of income of co-operative societies 80 81 Income from co-operative societies Chapter VII
80Q Deduction in respect of dividends from co-operative societies 81 82 Dividends from co-operative societies Chapter VII
80R Deduction in respect of remuneration from certain foreign sources in the case of professors, teachers, etc. 68, 69, 73 80F Deduction in respect of remuneration from certain foreign sources in the case of professors, teachers, etc. Chapter VIA newly inserted by the Finance (No. 2) Act with effect from 1-4-1966
80S Deduction in respect of compensation for termination of managing agency, etc., in the case of assessee other than companies 85 112 Tax on compensation Chapter XII
80T Deduction in respect of long-term capital gains in the case of assessees other than companies 89 114 Tax on capital gains in cases of assessees other than companies Chapter XII

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