FINANCE (NO. 2) ACT, 1962 – CIRCULAR NO. 22D, DATED 1-8-1962

1. Amendments at a glance

 Section/Schedule   Particulars
Finance Act
2 and 1st Sch. Rate structure 2-10
2(5) Tax concession for export profits 11-12
2(7)(iii) Definition of earned income 13
Income-tax Act
2(42A) Definition of short-term capital gains 15-16
37(2) Entertainment expenses 24
70, 71(1), 72(1) Set off of loss and carry forward and set off of losses 17-18, 20
74(2) Losses under the head Capital gains of years prior to 1962-63 19
87(1) Income-tax rebate on cumulative time deposits 26
87(3) Higher limits for life insurance premia, etc. 25
88(3) Exemption of donations for charitable purposes 27
109(iii) Statutory percentage of distribution in the case of companies in which public are not substantially interested 28
114, 115 Rates of tax applicable to capital gains 21-23
Wealth-tax Act
5(1)(xx) Withdrawal of exemption in respect of shares held in certain
companies 29
Sch. Rates revised 30
Expenditure tax Act
Repealed 31

2. Rate structure

Finance (No. 2) Act, 1962
Assessees other than companies and registered firms
2. Officers will note that in the rate schedule applicable to individuals, Hindu undivided families, etc., the slab of Rs. 15,001 – Rs. 20,000 has been substituted by two slabs, namely, Rs. 15,000 – Rs. 17,500 and Rs. 17,501 – Rs. 20,000. Secondly, for all the slabs above Rs. 5,000 the rates have been slightly increased as compared to the rates prescribed in the Finance Act, 1961. Thirdly, the basic surcharge for the purposes of the Union has been fixed at 2½ per cent of income-tax and super tax on income chargeable under the head “Salaries” while the rate of this surcharge for other incomes will continue at 5 per cent of the tax as before. A revised ready reckoner is under preparation and will be supplied to officers in due course.
Finance (No. 2) Act, 1962
Registered firms
3. Some changes have been made in the income-tax rate schedule applicable to registered firms. Under the Finance Act, 1961, a registered firm was liable to tax only if its income exceeded Rs. 40,000. This limit has now been reduced to Rs. 25,000. The slab and the rates applicable thereto have been revised. Further, higher rates have been prescribed in the case of registered firms having five or more partners. For this purpose, a minor admitted to the benefits of the partnership should also be regarded as a partner vide the definition of “partner” in section 2(23) read with section 2(7)(i) of the Finance (No. 2) Act, 1962.
Finance (No. 2) Act, 1962
Companies
4. The rates of income-tax applicable to all companies have been fixed at 25 per cent for the assessment year 1962-63 as compared to 20 per cent in the Finance Act, 1961. The effective rates of super tax have been so adjusted as to fix the aggregate of income-tax and super tax payable by a company at 50 per cent in cases where it was payable at 45 per cent under the Finance Act, 1961. Companies which have made the prescribed arrangements for the declaration and payment of dividends within India, in which the public are substantially interested and whose total income does not exceed Rs. 25,000 will continue to be taxed at an aggregate rate which is less by 5 per cent. The aggregate rate of income-tax and super tax applicable to companies which have not made the prescribed arrangements aforesaid will continue at 63 per cent.
Finance (No. 2) Act, 1962
5. The rates of super tax applicable to inter-corporate dividends have also been modified so as to reduce the overall liability on such dividends. The following table shows the effective rates of super tax payable by various types of companies on incomes other than capital gains and royalties (mentioned in paragraph 7 below) for the assessment year 1962-63.
Rates of super tax payable by companies
Income
Rates applicable to companies which have made the prescribed arrangements for the declaration and payment of dividends within India
Rates applicable to companies which have not made the said prescribed arrangements
Companies in which public are substantially interested and whose total income does not exceed Rs. 25,000
Other companies
1
2
3
4
1. Dividends received from —
(i) a subsidiary Indian company formed and registered before 1-4-1961
5
5
5
(ii ) an Indian company, not being a subsidiary, formed and registered before 1-4-1959
5
10
2
5
(iii ) any other Indian company formed and registered on or after 1-4-1959
5
10
10
2. Other income
20
25
38

Finance (No. 2) Act, 1962
6. Definition of subsidiary company – As the Income-tax Officers are aware, concessional rates of tax have been prescribed in respect of dividends received by a company from a subsidiary company. The term “subsidiary company” had not been defined in the earlier Finance Acts. In order to put the matter beyond doubt, a definition of this term has now been provided in Expla­nation II to Paragraph D of Part II of the First Schedule to the Finance (No. 2) Act, 1962. The Explanation provides that a compa­ny shall be deemed to be a subsidiary of another company if that other company holds more than half in nominal value of the equity share capital of the first mentioned company. It should be noted that this definition will hold good irrespective of the defini­tion provided in the Companies Act, 1956. The alternative test regarding the control of the composition of board of directors or the taking into account of preference shares for determining whether the parent company controls more than half of the total voting power of the subsidiary company as provided in the Compa­nies Act will be ignored. Similarly, the provision in the Compa­nies Act that a company A which is a subsidiary of a company B which in turn is a subsidiary of Company C will also be regarded as a subsidiary of a company C will not hold good for the purposes of the Finance Act. For the purposes of the Finance Act, a company A will be regarded as a subsidiary of company B if company B holds directly more than half in nominal value of the equity share capital of company A.
Finance (No. 2) Act, 1962
7. Royalties – The effective rate of tax (income-tax and super tax) on royalties received by a foreign company (i.e., a company which has not made the prescribed arrangements for the declaration and payment of dividends within India) from an Indian concern in pursuance of an agreement made with the Indian concern on or after 1-4-1961 and which has been approved by the Central Government will continue at 50 per cent.
Finance (No. 2) Act, 1962
8. Bonus shares – The effective rate of super tax payable with reference to bonus shares issued will continue at 12½ per cent.
Finance (No. 2) Act, 1962
Rates of deduction of tax at source
9. Assessees other than companies – In the case of assessees other than companies, rates for deduction of tax at source from inter­est on securities, dividends, etc., remain unchanged.
Finance (No. 2) Act, 1962
10. Companies – In the case of companies the rates at which tax is to be deducted at source during the financial year 1962-63 are set forth in the following table. It will be noticed that the changes made in these rates are in accordance with the changes made in the effective rates of tax applicable to companies for regular assessments.
Rates for deduction of tax (including super tax) at
source in the case of companies
Income
Rates applicable to companies which have made the prescribed arrangements for the declaration and payment of dividends within India
Rates applicable to companies which have not made the said prescribed arrangements
1
2
3
-Interest —
– on any income-tax free security of the Central or a State Government
5
38
– on other securities
30.
63
– Dividends —
– received from an Indian company referred to in section 99(1)(iv)
25
25
-received from any other Indian company —
(a) which is a subsidiary company formed and registered before 1-4-1961
30
30
(b ) which is not a subsidiary company and is formed and registered before 1-4-1959
30
30
(c ) which is any other company formed and registered on or after 1-4-1959
30
35
-Royalties payable by an Indian concern in pursuance of an agreement which is made on or after 1-4-1961 and which is approved by the central government
50
– Any other income
63

3. Tax concession for export profits

By way of rebate of tax

11. Section 2(5) of the Finance (No. 2) Act, 1962 provides for a tax concession in the case of profits derived from the export of goods or merchandise out of India. This tax concession will be admissible in the case of all assessees except companies which have not made the prescribed arrangements for the declaration and payment of dividends within India. The tax concession has been given in the form of a rebate of tax which will be equal to the income-tax and super tax calculated respectively at one-tenth of the average rate of income-tax and the average rate of super tax on the amount of export profits included in the total income. If the export profits are set off against any losses in the process of computing the total income, no tax concession will be avail­able. Rules will be issued shortly laying down the method as to how the amount of such export profits should be computed in a case where the assessee derives income by sales in India in addition to income from exports.

Finance (No. 2) Act, 1962

12. It should be noticed that this tax concession will be available only to the person who exports the goods or merchandise out of India. If a manufacturer himself exports the goods or merchandise out of India, he will get the benefit of this conces­sion. But if he sells such goods or merchandise to another mer­chant or manufacturer in India who in turn exports them out of India, it is the latter and not the former who will get the benefit of the tax concession.

4. Amendments to Income-tax Act

Definition of earned income

13. It would have been noticed that the Income-tax Act does not contain any definition of the term earned income because that definition is no longer necessary for the purpose of the Act. The preferential treatment of earned income is effected by way of a lighter rate of surcharge prescribed in the Finance Acts. A definition of the term earned income has, therefore, now been included in the Finance (No. 2) Act, 1962 vide section 2(7)(iii). The definition follows closely the definition embodied in the Indian Income-tax Act, 1922 with a minor change to the effect that the words his past services or occurring in section 2(6AA)(c) of the 1922 Act have been omitted. This is because any superannuation allowance or pension given to the assessee in respect of his own services will be taxable under the head Salaries and would, therefore, be automatically includible in the scope of the earned income by virtue of clause (a) of section 2(6AA) or clause (a) of section 2(7)(iii) of the Finance (No. 2) Act, 1962.

Finance (No. 2) Act, 1962

Taxation of capital gains

14. For the purposes of levying tax on capital gains, a distinction has been made between capital gains relating to short-term capital assets and capital gains relating to capital assets other than short-term capital assets.

Finance (No. 2) Act, 1962

15. Definition of short-term capital asset – A definition of short-term capital asset has been provided in section 2(42A) for this purpose. This definition provides that a short-term capital asset means a capital asset held by an assessee for not more than twelve months immediately preceding the date of its transfer. Where the capital asset consists of a share held in a company which has gone into liquidation, the period subsequent to the date on which the company goes into liquidation shall be excluded for the purposes of determining the period for which such share has been held by the assessee. Further, where the capital asset is one which becomes the property of the assessee in the circumstances mentioned in clauses (i) to (iii) of section 49(1), the period for which the asset was held by the previous owner referred to in the said section has to be included for determining whether the capital asset has been held by the asses­see for more than twelve months or not. No rules are proposed to be made for the present under clause (ii) of the Explanation to section 2(42A). If, however, any difficulty is experienced in determining the holding period of any other type of capital asset, the case should be reported to the Board.

Finance (No. 2) Act, 1962

16. Differentiation between short-term and long-term capital gains – The differentiation between capital gains relating to short-term capital assets (hereinafter referred to as short-term capital gains) and capital gains relating to capital assets other than short-term capital assets (hereinafter referred to as long-term capital gains) is made in two material aspects : first, in the matter of set off and carry forward of losses and, secondly, in the matter of rates of tax which are applicable thereto.

Finance (No. 2) Act, 1962

17. Set off and carry forward of losses – Losses relating to short-term capital assets (hereinafter referred to as short-term capital losses) under the head Capital gains – Such a loss can be set off only against short-term capital gains as well as long-term capital gains. Any such loss as is not fully so set off can be carried forward to the succeeding assessment year or years to be set off only against short-term capital gains for those years. The carry forward period is the same as in the case of business losses, viz., eight assessment years.

Finance (No. 2) Act, 1962

18. Losses relating to capital assets other than short-term capital assets (hereinafter referred to as long-term capital losses) can be set off only against capital gains relating to any other long-term capital asset. Any such loss as is not fully so set off can be carried forward to the succeeding assessment year or years to be set off against long-term capital gains only for those years. The carry forward period in respect of long-term capital losses is, however, restricted to four assessment years.

Finance (No. 2) Act, 1962

19. Losses of years prior to 1962-63 – Such portion of the losses under the head Capital gains relating to the assessment years prior to 1962-63 as could not be fully set off in the assessment for 1961-62 and were to be carried forward under the provisions of the 1922 Act should be dealt with as follows : The loss should be broken up into short-term capital losses and long-term capital losses. The portion which relates to short-term capital assets shall be carried forward and set off only against short-term capital gains for the assessment year 1962-63 or a subse­quent assessment year. The portion which relates to long-term capital assets, shall be carried forward and set off only against long-term capital gains for the assessment year 1962-63 or a subsequent year. In both the cases, the loss shall not be carried forward for more than eight assessment years immediately succeed­ing the assessment year for which the loss was first computed under the 1922 Act.

Finance (No. 2) Act, 1962

20. Amendments necessary for achieving the purpose as mentioned above have been made in sections 70 and 74. The amendments made by the Finance (No. 2) Act, 1962, in sections 71 and 72 are mostly of a clarificatory or consequential nature.

Finance (No. 2) Act, 1962

21. Rates of tax applicable to capital gains – The provisions of sections 114 and 115 have been amended for prescribing different rates of tax regarding short-term capital gains and long-term capital gains. Broadly speaking, short-term capital gains will be taxed at the rate applicable to a total income comprised of the amount of such capital gains and all other incomes except (i) long-term capital gains; and (ii) compensation or other payments referred to in section 28(ii). Long-term capital gains will be taxable either at a flat rate of 25 per cent or at a rate ap­plicable to a total income comprised of the amount of such capi­tal gains and all other incomes except (i) short-term capital gains; and (ii) compensation or other payments aforesaid, which­ever is less.

Finance (No. 2) Act, 1962

22. In this connection, the proviso to section 114 may also be noted which stipulates that (i) where the total income (i.e., including capital gains) does not exceed the sum of Rs. 10,000, the tax payable in respect of long-term capital gains shall be nil; and (ii) the tax payable in respect of long-term capital gains shall not, in any case, exceed half of the amount, if any, by which the amount of long-term capital gains exceeds Rs. 5,000.

Finance (No. 2) Act, 1962

23. In the case of companies, the capital gains (short-term capital gains or long-term capital gains) will be liable to income-tax at the rate of 25 per cent, i.e., the same rate which is applicable to the other income of the company. Long-term capital gains are to be taxed to super tax at the rate of 5 per cent. Short-term capital gains are to be aggregated with all other incomes (except long-term capital gains) and taxed to super tax accordingly.

Finance (No. 2) Act, 1962

Entertainment expenses

24. Section 4 of the Finance (No. 2) Act, 1962 has made certain amendments in section 37(2) which have the effect of reducing the amount of entertainment expenses which are admissible as a deduc­tion in the case of a company. The graduated rates applicable to various slabs of income for this purpose have been reduced from 3/4 per cent and ýÿ per cent to ýÿ per cent and ýÿ per cent, respectively, with the result that the maximum amount admissible has been reduced from Rs. 1 lakh to Rs. 60,000.

Finance (No. 2) Act, 1962

Higher limits for life insurance premia, etc.

25. Section 8(ii) of the Finance (No. 2) Act, 1962 amends section 87(3) raising the limit up to which income-tax rebate is avail­able in respect of life insurance premia, contributions to provi­dent funds, etc., to Rs. 10,000 in the case of individuals and Rs. 20,000 in the case of Hindu undivided families as compared to the limits of Rs. 8,000 and Rs. 16,000, respectively prevalent hitherto. The other limit, viz., one-fourth of the total income of the assessee continues as before. These enhanced limits will apply for and from the assessment year 1962-63.

Finance (No. 2) Act, 1962

Income-tax rebate on cumulative time deposits

26. Under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959, an individual is entitled to make deposits in a 5-year account or a 10-year account or a 15-year account. Deposits can be made of prescribed sums every month and are generally repayable, along with interest, after the expiry of the period of 5 or 10 or 15 years, as the case may be. The interest on such deposits is already exempt from income-tax and super tax and is not includible in total income under section 10(15). Section 8(i) of the Finance (No. 2) Act, 1962 amends section 87(1) so as to provide that the deposits made in the 10-year account or 15-year account under the aforesaid Rules will be entitled to a rebate of income-tax only (and not super tax) in the same manner as contri­butions to recognized provident funds or premia paid for life insurance. It should be noted that deposits made in a 5-year account under the aforesaid Rules shall not be eligible for such rebate of income-tax. The benefit will be admissible only in respect of deposits made in a 10-year or a 15-year account. It should be further noted that the limit of Rs. 10,000 or one-fourth of the total income, whichever is less, will apply under section 87(3) to the aggregate of the amounts covered by the existing sub-section (1) of section 87 plus the amount of depos­its made in the 10-year or 15-year account under the aforesaid Rules.

Finance (No. 2) Act, 1962

Exemption of donations for charitable purposes

27. Section 9 of the Finance (No. 2) Act, 1962 amends section 88(3) by the addition of a proviso which has the effect of increasing the maximum limit up to which exemption is available in respect of donations for charitable purposes to 10 per cent of the total income (as reduced by any portion thereof which is exempt from tax) or Rs. 2 lakhs, whichever is less, as compared to 7ýÿ per cent of such total income or Rs. 1,50,000, whichever is less, existing before. However, these enhanced limits will apply to donations made during the previous year relevant to the as­sessment year 1993-64 or any subsequent year and will not apply for the purpose of the assessment year 1962-63.

Finance (No. 2) Act, 1962

Statutory percentage of distribution in the case of companies in which public are not substantially interested

28. Section 10 of the Finance (No. 2) Act, 1962 amends section 109(iii). Under the Act before this amendment, a company in which the public are not substantially interested was required to distribute at least 50 per cent of its distributable income if it was an industrial company and 65 per cent, if it was any other type of company (other than an investment company). The said percentages of 50 and 65 have been reduced with effect from the assessment year 1962-63 to 45 and 60 respectively. These reductions have been made in view of the increase in the company rate of income-tax. The statutory percentage of minimum distribu­tion in respect of investment companies, viz., 90 per cent re­mains unchanged.

5. Amendments to Wealth-tax Act

FINANCE (NO. 2) ACT, 1962

Exemption in respect of shares held in certain companies

29. Section 12(1) of the Finance (No. 2) Act, 1962 omits section 5(1)(xx). The exemption hitherto available under the said section in respect of shares held in companies referred to in section 45(d) will, therefore, not be admissible for the assessment year 1962-63 or any subsequent assessment year.

FINANCE (NO. 2) ACT, 1962

Rates revised

30. Section 12(2) of the Finance (No. 2) Act, 1962 amends Parts I and II of the Schedule. The slabs in the rate schedule have been cast and the rates of tax on the two highest slabs have been raised. The revised rates should be applied in calculating the wealth-tax in respect of the assessments for the year 1962-63. Consequent to the increase in the maximum rate of wealth-tax to 25 per cent, the rate of 2 per cent mentioned in rule 2 of Part II of the Schedule has also been changed to 2.5 per cent.

6. Expenditure-tax Act

Repealed

31. Section 13 of the Finance (No. 2) Act, 1962 provides that expenditure tax is not to be charged for any financial year commencing on or after 1-4-1962. In this connection, attention is invited to the instructions given in Boardýÿs Letter F.No. 1/10/62-ET, dated 29-6-1962.

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