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| Repealed 31 |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
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Income
|
Rates applicable to companies which have made the prescribed arrangements for the declaration and payment of dividends within India
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Rates applicable to companies which have not made the said prescribed arrangements
|
|||
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Companies in which public are substantially interested and whose total income does not exceed Rs. 25,000
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Other companies
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||||
|
1
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2
|
3
|
4
|
||
|
1. Dividends received from —
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|||||
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(i) a subsidiary Indian company formed and registered before 1-4-1961
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5
|
5
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5
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||
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(ii ) an Indian company, not being a subsidiary, formed and registered before 1-4-1959
|
5
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10
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2
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5
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|
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(iii ) any other Indian company formed and registered on or after 1-4-1959
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5
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10
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10
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||
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2. Other income
|
20
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25
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38
|
||
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 —
|
||
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– on any income-tax free security of the Central or a State Government
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5
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38
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|
– on other securities
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30.
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63
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|
– Dividends —
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||
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– received from an Indian company referred to in section 99(1)(iv)
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25
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25
|
|
-received from any other Indian company —
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||
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(a) which is a subsidiary company formed and registered before 1-4-1961
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30
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30
|
|
(b ) which is not a subsidiary company and is formed and registered before 1-4-1959
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30
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30
|
|
(c ) which is any other company formed and registered on or after 1-4-1959
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30
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35
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|
-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
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–
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50
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– Any other income
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–
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63
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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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
