Circular No. 4-P-Income Tax dated 21/7/1966

FINANCE ACT, 1966

38. A few of the amendments to the Income-tax Act by the Finance Act, 1966 have been dealt with in the foregoing paragraphs. The substance of other amendments made to the Income-tax Act by the Finance Act, 1966, is set out hereinbelow.

 AMENDMENTS  RELATING  TO  PROVISIONS  FOR  CERTAIN DEVELOPMENTAL  INCENTIVES

FINANCE ACT, 1966

Development rebate

39. The rate of development rebate under section 33(1)(iii)( a) in respect of new machinery or plant installed during the 5-year period from 1-4-1965 to 31-3-1970 for the purposes of the business of construction, manufacture or production of any one or more of the articles and things specified in the list in the Fifth Schedule is 35 per cent of the cost thereof, and in respect of such machinery installed after 31-3-1970, it is 25 per cent as against the general rates of 20 per cent and 15 per cent of the cost of new machinery or plant installed for the purposes of any other business during the respective periods. The Finance Act, 1966 has extended the higher rates of development rebate to new machinery or plant installed after 31-3-1966 for the purposes of the business of manufacture or production of tea, newsprint and printing machinery. This has been done by adding the items “tea”, “newsprint” and “printing machinery” to the list of articles and things in the Fifth Schedule with effect from 1-4-1966, with the specific provision that for the purposes of section 33(1), the amendment to the Fifth Schedule shall have effect in respect of machinery or plant installed after 31-3-1966 vide section 37(2) of the Finance Act, 1966.

 FINANCE ACT, 1966

40. One of the conditions laid down in section 34(3)(a) for the allowance of the deduction for development rebate is that an amount equal to 75 per cent of development rebate to be actually allowed is debited to the profit and loss account of the relevant previous year and credited to a reserve account for being utilised during a period of 8 years next following for the purposes of the business of the undertaking, other  than for distribution by way of dividends or profits, etc. This requirement of creating a development rebate reserve of 75 per cent of the amount of development rebate often rendered it difficult for shipping enterprises making a substantial addition to their shipping fleet, to maintain a reasonable level of distribution of dividends to their shareholders. The quantum of the development rebate reserve has, therefore, been reduced in respect of ships acquired after 28-2-1966 from 75 per cent to 50 per cent of the development rebate to be actually allowed.

FINANCE ACT, 1966

41. While some companies have been creating the development rebate reserve by debiting the amount thereof in the “above the line” section of the profit and loss account in which the profits of the relevant year are arrived at, others have been making the debit in the “below the line” section of the profit and loss account, often referred to as the profit and loss appropriation account, which, inter alia, contains credits for the profits, if any, brought forward from the earlier years or amounts transferred from various reserve accounts of the company. The provisions in Part II of Schedule VI to the Companies Act, 1956, in regard to the requirement as to the profit and loss account do not make a distinction between the “above the line” and “below the line” sections of the profit and loss account. The debit for development rebate reserve in the “below the line” section of the profit and loss account is, therefore, to be regarded as adequate compliance with the condition in section 34(3)(a) that the debit should be made to the profit and loss account of the relevant previous year. However, a doubt had arisen in regard to the point as to whether a debit for the development rebate reserve in an amount in excess of the profits of the relevant previous year (as arrived at in the profit and loss account) could be regarded as adequate compliance with the condition that the debit should be made to the profit and loss account of the relevant previous year. This is because in such a case, the excess debit would represent an appropriation out of the profits of earlier years brought forward or the reserves transferred to the profit and loss appropriation account, instead of being an appropriation out of the profits of the relevant previous year. It was, however, not the intention to deny the deduction for development rebate merely for the reason that the amount of the development rebate reserve debited to the profit and loss account exceeded the profits of the relevant previous year as arrived at in the profit and loss account. The Finance Act, 1966 has, therefore, added an Explanation to section 34(3)(a) which states in substance, for the removal of doubts, that the deduction for development rebate shall not be denied by reason only that the amount of development rebate reserve debited to the profit and loss account of the relevant previous year exceeds the amount of the profits of such previous year (as arrived at without making the debit aforesaid) in accordance with the profit and loss account. This Explanation has been given retrospective effect from the commencement of the Income-tax Act. It may be mentioned that this Explanation does not, in any way, affect the existing provision in section 33(2) under which the deduction to be allowed for development rebate for an assessment year is to be limited to such amount as is sufficient to reduce the total income for the assessment year (as computed without making the deduction) to nil.

 FINANCE ACT, 1966

42. The Finance Act, 1966 has also amended the definition of the term “amalgamation” in the Explanation to section 33(3) to enlarge its scope, so as to cover the merger of a foreign subsidiary company with its foreign holding company. The definition of the term “amalgamation” is relevant for the provision in section 33(3) which secures that in a case where a company which has availed of or is entitled to development rebate, in respect of ships, machinery or plant, transfers its business to another company in a scheme of amalgamation, within a period of 8 years following the previous year to which the development rebate relates, the benefit of the development rebate is continued in the hands of the successor company. Ordinarily the development rebate allowed to a person is liable to be withdrawn under section  34(3)(b) if the assets in respect of which development rebate has been granted are sold or otherwise transferred by that person at any time before the above-mentioned period of 8 years to any person other than the Government, a local authority or a corporation set up under a State, Provincial or Central enactment or a Government company. However, in view of the special provisions in section 33(3), the development rebate is not withdrawn where the assets have been transferred by a company to another company in a scheme of amalgamation. Further, section 33(3) confers another benefit on companies acquiring the business of another company in a scheme of amalgamation, by way of allowing the transferee company to carry forward and to deduct from its profits, the amount of development rebate which was due to the transferor company but which could not be availed of by it due to insufficiency of profits. The term “amalgamation” as defined in the Explanation to section 33(3) before its amendment by the Finance Act, 1966, covered the merger of an Indian subsidiary company with its holding company but did not cover the merger of a foreign subsidiary company, carrying on business in India, with its foreign-holding company. This had the unintended effect of discouraging amalgamation in the later cases. To avoid hardship in such cases, the merger of foreign subsidiary companies with their holding companies has also been brought within the purview of the definition of the term “amalgamation”. The amendment made to this definition is effective in respect of the assessment year 1966-67 and subsequent years.

 FINANCE ACT, 1966

Development allowance

43. Section 33A (inserted by the Finance Act, 1965) provides for a deduction for development allowance, in the computation of the profits of business of growing and manufacturing tea in India, at specified percentages of the actual cost of planting of tea bushes after 31-3-1965 on land newly brought under plantation, and also of the actual cost of planting tea bushes during  the period from 1-4-1965 to 31-3-1970 in replacement of tea bushes on land already under plantation. The quantum of the development allowance under this provision, as it stood before its amendment by the Finance Act, 1966, was 40 per cent of the actual cost of planting tea bushes on land newly brought under plantation (including land which had previously been abandoned), and 20 per cent of such cost in a case of replantation of tea bushes on land already under plantation. Further, it was provided that the deduction for the development allowance would be allowed in computing the profits of the fourth previous year reckoned from the previous year in which the land was prepared for planting or replanting, as the case might be. The said provisions have been amended by the Finance Act, 1966 in order to provide a further encouragement to the tea industry for extending the area under tea plantation and renovating its existing plantations. In this behalf, the quantum of development allowance, in a case where new land or previously abandoned land is brought under plantation, has been increased from 40 per cent to 50 per cent of the actual cost of planting, and in a case where tea bushes are planted in replacement of dead or useless bushes on land already under plantation, from 20 per cent to 30 per cent of the actual cost of planting. Further, it has been provided that the deduction for development allowance will be granted in two stages, at  first, in computing the profits of the second previous year reckoned from the previous year in which the land was prepared for planting or replanting, as the case may be, with reference to the actual cost of planting up to that year and thereafter, in computing the profits of the fourth previous year reckoned from the previous year in which the land prepared for planting or replanting. The quantum of the development allowance to be deducted at the second stage will be equal to the difference between (a) the amount of development allowance computed in respect of the whole of the actual cost of planting incurred during the four previous years, and (b ) the development allowance allowed at the first stage, i.e., in respect of the second previous year.

 FINANCE ACT, 1966

Approved financial corporations – Increase, in certain cases, in the quantum of deduction allowable for amounts credited to special reserve account

44. Section 36(1)(viii ) as it existed before its amendment by the Finance Act, 1966, provided for deduction, in the computation of the profits of an approved financial corporation, of an amount up to 10 per cent of its total income carried by it to a special reserve account, as long as the aggregate of the amounts credited to the special reserve account from time to time, did not exceed the paid-up share capital of the corporation. In order to enable small and medium sized approved financial corporations engaged in providing long-term finances for industrial development in India to build up reserves at an accelerated pace, the said provision has been amended by the Finance Act, 1966, to the effect that in the case of such corporations whose paid-up share capital does not exceed Rs. 3 crores, the deduction in respect of amounts credited to special reserve account will be allowed to the extent of 25 per cent of the total income of the relevant previous year, as against the limit of 10 per cent of the total income applicable in other cases. The condition that the deduction will not be allowed when the aggregate of the amounts credited to the special reserve account from time to time exceed the paid-up share capital of the corporation will, however, continue to apply in the case of all approved financial corporations. The above amendment is effective in respect of assessments for and from the assessment year 1966-67.

 FINANCE ACT, 1966

Initial depreciation allowance under section 32(1)(iv) in respect of buildings erected after 31-3-1961 solely for the residence of employees of a business or mainly for the welfare of such persons – Enlargement of the scope of

45. Section 32(1)(iv ) provides for the grant of initial depreciation allowance at 20 per cent of the cost of buildings newly erected after 1-4-1961, solely for the purpose of residence of the employees of a business drawing remuneration not exceeding a specified limit, or for being mainly used for the welfare of such employees as a hospital, creche, school, canteen, library, recreational centre, etc.

Under this provision, as it existed before its amendment by the Finance Act, 1966, the initial depreciation allowance could be granted only where the buildings were meant for the residence or welfare of employees “drawing a remuneration not exceeding two hundred rupees per mensem” (i.e., Rs.  2,400 per annum). This provision has been amended by the Finance Act, 1966 to secure that the benefit of initial depreciation referred to above is made available in respect of newly erected buildings which are to be used solely for the residence, or mainly for the welfare, of employees of a business whose income chargeable under the head “Salaries” is Rs. 7,500 or less as against Rs. 2,400 per annum or less under the earlier provision. This amendment is effective for the assessment year 1966-67 and subsequent years.

PROVISIONS  RELATING  TO  CLOSELY-HELD  COMPANIES

FINANCE ACT, 1966

Rationalisation of certain provisions

46. Closely-held companies, viz., companies which do not satisfy the various tests, laid down in the definition in section 2(18) of a “company in which the public are substantially interested” are, subject to certain exceptions, liable under section 104(1), to pay an additional amount of tax (hereinafter referred to as the penal tax) calculated at a specified percentage of their undistributed income if they fail to distribute dividends up to the statutory percentage of their distributable income. The Finance Act, 1966 has made several amendments to the provisions in the Income-tax Act relating to closely-held companies, including the definition of the term “company in which the public are substantially interested”. The object of these amendments is to rationalise some of these provisions and to liberalise other provisions in certain directions in order to facilitate the development and growth of industry in specified fields in the sector of closely-held companies.

The main provisions made in the Income-tax Act in this behalf are briefly explained in the following paragraphs:

 FINANCE ACT, 1966

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

47. One of the tests in section 2(18) of a “company in which the public are substantially interested” is that its equity capital to the extent of not less than a specified percentage thereof should have been held throughout the previous year by the Government or a corporation set up under a Central or State enactment or a company in which the public are substantially interested (including a wholly owned subsidiary of such a company) or by the public. Under section 2(18 ), as it stood prior to its amendment by the Finance Act, 1966, the specified percentage referred to above in the case of Indian companies wholly engaged in the manufacture or processing of goods or mining or the generation or distribution of electricity or any other form of power was 40, and in the case of other companies, it was 50. Another test of a company in which the public are substantially interested is that the shares in the company carrying not more than a specified percentage of its voting power should, at no time during the previous year, be held by five or fewer persons. In the case of an Indian company wholly engaged in the industrial activities mentioned above, the specified percentage was 60 as against 50 in the case of other companies. The Finance Act, 1966 has amended section 2(18) to secure that the above-mentioned concessional treatment available under its provisions to Indian companies wholly engaged in the industrial activities referred to above is extended to such companies which are mainly but not wholly engaged in such activities, and also that Indian companies mainly engaged in the construction of ships obtain the same concessional treatment.

 FINANCE ACT, 1966

Rationalisation of provisions relating to computation of “distributable income” of a closely-held company

48. As stated before, closely-held companies are liable, subject to certain exceptions, to the levy of penal tax on their undistributed profits if they fail to distribute dividends up to the statutory percentage of their “distributable income”. The “distributable income” of a company is computed in accordance with the provisions in the definition of that expression in section 109(i ) by reducing the total income of the company by the tax chargeable on its total income, other taxes levied on the company by the Government or by a local authority, donations qualifying for rebate of income-tax, losses under the head “Capital gains”, etc. The definition has been amended by the Finance Act, 1966, with effect from 1-4-1966, in order to provide for the deduction, in the computation of the distributable income, of certain items of expenditure of a revenue nature which have been disallowed under the provisions of the Income-tax Act in the computation of the total income of the company. These items are :

  (a)  any expenditure actually incurred for the purposes of the business but not deducted in computing the income chargeable under the head “Profits and gains of business or profession” being—

   (i)  a bonus or gratuity paid to an employee,

  (ii)  legal charges,

 (iii)  any expenditure which is disallowed under the terms of section 40(c), and

 (iv)  any expenditure claimed as a revenue expenditure but not allowed to be deducted as such and not resulting in the creation of an asset or in the enhancement of the value of an existing   asset; and

  (b)  any expenditure wholly and exclusively incurred for the purpose of making or earning any income (other than income chargeable under the head “Profits and gains of business or profession”) included in the total income but not allowed to be deducted in computing such income and not resulting in the creation of an asset or enhancement of the value of an existing asset.

FINANCE ACT, 1966

49. To illustrate the effect of the provision at (b) above, a closely-held company owning house property will be entitled to a deduction in the computation of its distributable income for the municipal taxes paid by it in excess of the amount allowable under section 23 in determining the “annual value” of the house property and also for the expenditure actually incurred by it on repairs to house property or in respect of collection charges in excess of the amounts allowable as a deduction under section 24 in computing the income from house property. The overall effect of the amendments to section 109(i) will be that the distributable income of closely-held companies will, more or less, correspond to its distributable income arrived at on the basis of commercial accounting. In consequence of the provision referred to in the preceding paragraph for the deduction, in the computation of distributable income, of disallowed expenditure of a revenue nature incurred for the purposes of business, the Finance Act, 1966 has omitted the provision in clause (ii) of section 104(1) for the deduction of such expenditure in the computation of the undistributed income of a closely-held company. The undistributed income on which penal tax is leviable under section 104(1) will be taken to be the amount of the distributable income of the company as reduced by the dividends actually distributed by it. The above-mentioned amendments, including the amendment to the definition of “distributable income”, are effective in respect of the assessment year 1966-67 and subsequent years.

 FINANCE ACT, 1966

Amendment to definition of “investment company”

50. The term “investment company” has been defined in section 109(ii). Under this definition, as it existed before its amendment by the Finance Act, 1966, an “investment company” meant a company whose business consisted wholly or mainly in the dealing in or holding of investments. As certain doubts had arisen in the past in the interpretation of the scope of this definition, it has been amended by Finance Act, 1966. Under the definition, as amended with effect from 1-4-1966, an “investment company” means, in substance, a company whose total income consists mainly of income which, in the case of an individual, is regarded as “unearned income”. The term “unearned income” has the same meaning as is assigned to it in section 2(7)(e ) of the Finance Act, 1966, namely income which is not “earned income” as defined in section 2(7)(c ) of that Act.

 FINANCE ACT, 1966

Exclusion of closely-held foreign companies declaring their dividends outside India from the scope of levy of penal tax on undistributed profits under section 104

51. Section 104, as it stood before its amendment by the Finance Act, 1966, did not specifically exclude closely-held foreign companies declaring their dividends outside India from the scope of its provisions for levy of penal tax on undistributed profits. However, in practice, there was hardly any occasion for the levy of penal tax on undistributed profits of closely-held foreign companies in view of the provisions of section 104(2)(ii), which bar the levy of such penal tax in cases where the payment of dividend or a larger dividend than that declared would not have resulted in a benefit to the revenue. Prima facie, there can be no benefit to Indian revenue by way of tax chargeable on dividends where a foreign company declares and pays dividends outside India to its shareholders who would, ordinarily, not be resident in India. In recognition of  this position and also to allay any misapprehensions as to the possibility of penal tax being charged on the undistributed profits of such foreign companies, the Finance Act, 1966 has made a provision in the new clause (e) of section 104(4), with retrospective effect, excluding closely-held foreign companies declaring and paying dividends outside India, from the scope of section 104(1).

 FINANCE ACT, 1966

Closely-held Indian companies mainly engaged in the business of construction of ships – Exclusion of, from the scope of provisions for levy of penal tax on undistributed profits under section 104

52. The Finance Act, 1964 had made a provision contained in section 104(4)(a), exempting closely-held Indian companies wholly or mainly engaged in the business of manufacture or processing of goods or mining or in the generation or distribution of electricity or any other form of power from liability to penal tax under section 104(1) for failure to distribute dividends up to the statutory percentage of their distributable income. The Finance Act, 1966 has extended the benefit of this provision to closely-held Indian companies mainly engaged in the business of construction of ships. This provision is effective for assessments for and from the assessment year 1966-67.

 FINANCE ACT, 1966

Exemption of closely-held Indian companies which are partly, but not mainly, engaged in construction of ships, manufacture or processing of goods, mining or generation or distribution of electricity or any other form of power, from the liability to pay penal tax under section 104 for failure to distribute dividends out of the distributable income attributable to such activities

53. Under section 109(iii )(3), as it existed before its amendment by the Finance Act, 1966, the statutory percentage of distribution of dividends in the case of a closely-held Indian company (other than an investment company) which was partly but not mainly engaged in the manufacture or processing of goods, mining or generation or distribution of electricity or any other form of power was 45 per cent of the distributable income attributable to the above-mentioned industrial activities, and 60 per cent (in certain circumstances 90 per cent) of the distributable income attri-butable to any other activities. This provision has been amended by the Finance Act, 1966, in order to facilitate the creation of reserves by closely-held Indian companies partly but not mainly engaged in the specified industrial activities (viz., construction of ships or manufacture or processing of goods or mining or generation or distribution of electricity or any other form of power) out of their income relating to such industrial activities. The substance of the provisions made in this behalf is as follows :

1. In the case of closely-held Indian companies (including Indian investment companies) a part only of whose total income (less than 51 per cent of the total income) consists of profits and gains attributable to the specified industrial activities, the statutory percentage for distribution of dividends out of the distributable income in relation to the profits and gains attributable to the specified industrial activities will be nil.

The statutory percentage for distribution of dividends out of the distributable income in relation to the remaining part of the total income of  such companies will, in a case where the closely-held Indian company is an investment company, be 90 per cent and where it is not an investment company, it will be 60 per cent or 90 per cent, as the case may be. (In the case of closely-held companies which are not investment companies, the statutory percentage of 90 is applicable where the accumulated profits and reserves of the company exceed a specified percentage of either its paid-up capital plus loan capital belonging to its shareholders, or the book value of the fixed assets of the company, whichever is greater).

2. For the purpose of applying the provisions of section 104 (regarding levy of penal tax on undistributed profits), and all other relevant provisions of Chapter XI of the Income-tax Act, the total income of the company will be taken to be the total income as reduced  by the income attributable to the specified industrial activities. Further, the amount of the dividends actually distributed by the company in relation to the total income so reduced will be taken to be such proportion of the amount of dividends actually distributed by the company as the total income so reduced bears to the full amount of the total income of the company. For example, where the total income of a closely-held Indian company is Rs. 4,00,000,  consisting of profits from the specified industrial activities of Rs. 1,60,000, and profits of Rs. 2,40,000 from trading activities, and the amount of dividends actually distributed by the company in respect of the previous year relevant to the assessment year is Rs. 40,000, the total income for the purpose of applying the provisions of section 104 will be taken to be Rs. 2,40,000, and the amount of dividends actually distributed in relation to such reduced total income will be taken to be 60 per cent of Rs. 40,000, viz., Rs. 24,000. The penal tax in this case will be computed as follows :

	Rs.
Total income for the purpose of section 104 (Rs. 4,00,000 as reduced by Rs. 1,60,000, being the income from the specified industrial activities)	2,40,000
Income-tax thereon at the rate of 65 per cent	1,56,000
Distributable income	84,000
Statutory percentage thereof (60 per cent of Rs. 84,000)	50,400
Dividend actually distributed by the company in relation to the total income for the purposes of section 104 (60 per cent of Rs. 40,000)	24,000
Amount of undistributed income on which penal tax under section 104(1) is chargeable (Rs. 84,000 less Rs. 24,000)	60,000
Penal tax thereon at the rate of 37 per cent	22,200

[Under the provisions of section 109(iii)( 3), prior to its amendment by the Finance Act, 1966, the company would have been liable to a further amount of penal tax of Rs. 14,800 on its undistributed income relating to its income from specified industries, as follows :

	Rs.
Income attributable to the specified industries	1,60,000
Deduct income-tax thereon at the rate of 65 per cent	1,04,000
Distributable income	56,000
Statutory percentage thereof (45 per cent of Rs. 56,000)	25,200
Dividend actually distributed by the company in relation to the income of Rs. 1,60,000 (40 per cent of Rs. 40,000)	16,000
Amount of undistributed income on which penal tax was chargeable (Rs. 56,000 less Rs. 16,000)		40,000
Penal tax thereon, at the rate of 37 per cent		14,800]

The amendments to section 109(iii) are effective in respect of the assessment year 1966-67 and subsequent years.

 PROVISIONS FOR SIMPLIFICATION OF CALCULATIONS
AND ACCOUNTING

FINANCE ACT, 1966

Depreciation allowance in respect of machinery or plant of a small cost

54. In order to simplify the calculation and accounting of depreciation allowance in respect of machinery or plant of a small cost, the Finance Act, 1966 has added a proviso to section 32(1)( ii) to the effect that where the actual cost of machinery or plant does not exceed Rs. 750, the whole of such cost will be allowed to be deducted as depreciation allowance in respect of the previous year in which such machinery or plant is first put to use by the taxpayer for the purpose of his business or profession.

 FINANCE ACT, 1966

Provision for rounding off of the amount of total income to the nearest multiple of
Rs. 10

55. Under new section 288A, inserted by the Finance Act, 1966, with effect from 1-4-1966, the amount of the total income, where it is not a multiple of ten rupees, will be rounded off to the nearest multiple of ten rupees. For this purpose, where the total income consists of a part of a rupee, i.e., paise, the paise will be ignored. Thereafter, if the figure in the unit digit of the amount of total income is Rs. 4 or less the total income will be reduced by that figure, and where the figure in the unit digit is Rs. 5 or more, the total income will be increased by the difference between Rs. 10 and that figure so as to make it a multiple of Rs. 10, in either case. [The amount by which the total income is reduced or increased in this manner will be adjusted, in the first instance, against the “earned income” and, as to the balance, if any, against the “unearned income” included therein.] Such rounding off will be done in respect of the final amount of total income as arrived at in accordance with the provisions in the relevant sections of the Income-tax Act up to and inclusive of section 288. As the provisions in section 288A are of a procedural nature, these will apply also to the rounding off of the total income in assessments, completed after 31-3-1966, in respect of the assessment year 1965-66 or any earlier year.

 FINANCE ACT, 1966

Rounding off of tax, interest, penalty, refund, etc., to the nearest multiple of one rupee

56. The Finance Act, 1966 has also made a provision in new section 288B to the effect that the amount of tax (including tax deductible at source or payable in advance), interest, penalty, fine or any other sum payable and the amount of refund due under the provisions of the Income-tax Act will be rounded off to the nearest rupee. For this purpose, fractions of one rupee amounting to 50 paise or more will be increased to one rupee, and the fraction which is less than 50 paise will be ignored. This provision is effective from 1-4-1966, and is also applicable to assessments completed after 31-3-1966 in respect of the assessment year 1965-66 or any earlier year. In relation to assessment year 1964-65 or earlier years, the term “tax”, as defined in section 2(43), means income-tax and super tax chargeable under the provisions of the Income-tax Act. Accordingly, in respect of assessments for the assessment year 1964-65 or earlier years which are completed after 31-3-1966, it will be permissible under section 288B to round off the amount of income-tax and super tax separately. As the surcharges on income-tax or super tax, respectively, form part of income-tax or super tax, only the amount of the income-tax and super tax as increased by the surcharges thereon can be rounded off under section 288B. It is to be kept in view that only the final amount of income-tax or super tax (including the surcharges thereon) as arrived after allowance of all rebates and deductions admissible under the Income-tax Act and the annual Finance Act, and after giving credit for the tax deducted at source or paid in advance is to be rounded off under section 288B.

 PROVISIONS RELATING TO TAX CONCESSIONS IN RESPECT OF CERTAIN PERSONAL SAVINGS AND INVESTMENTS

FINANCE ACT, 1966

Amendments to section 80A (deduction in respect of life insurance premiums, sums paid under contracts for deferred annuity on life, etc.)

57. Section 80A, which provides for the deduction, in the computation of the total income of the taxpayer of a specified percentage of the qualifying amount of premiums paid on life insurance  policies, sums paid under a contract for deferred annuity on life, etc., has been amended by the Finance Act, 1966, with effect from 1-4-1966, to enlarge the sphere of the savings qualifying for such deduction. The substance of these amendments is explained below :

1. Under section 80A, as it existed before its amendment, sums paid under a contract for a deferred annuity which permitted the insured to exercise an option to receive a cash payment in lieu of the annuity, did not qualify for the deduction under the said section because in  the event of exercise of such option, the contract would cease to be a contract for a deferred annuity on the life of the individual.  Under section 80A(2)(ii), as amended, sums paid under a contract to effect or to keep in force a contract for a deferred annuity on the life of an individual taxpayer or his or her spouse will qualify for the deduction under section 80A, “notwithstanding that such contract contains a provision for the exercise by the insured of an option to receive a cash payment in lieu of payment of the annuity”.

2. An Explanation has been inserted in section 80A(2), the effect of which is that, for the purpose of the deduction allowable in respect of the qualifying amount of premiums paid on policies of insurance on the life of the person concerned, an insurance on the life will include :

  (a)  a life insurance policy  of the nature of a pure endowment policy issued by the Life Insurance Corporation under which the sum assured is payable on the date of maturity of the policy, only if the insured person is alive on such date, and which provides, in the event of death of the insured persons before the date of maturity, for the return only of the premiums paid till that date ; and

  (b)  a policy of the nature of children’s deferred endowment assurance policy issued by the Life Insurance Corporation of India. (The object of such a policy is to enable the child, after he has attained majority, to secure an insurance on his life by adopting the policy. The policy vests in him only after such adoption and on his being alive on a date specified in this behalf in this policy). Such a policy will be considered to be a policy on the life of the child even for the period prior to its adoption by the child on attaining majority. In  a case where the child is the assessee and the premiums on such a policy have been paid out of his income chargeable to tax, the deduction of the amount calculated at the specified percentage of the qualifying premiums will be allowed in the computation of his total income and where the child is the male member of a Hindu undivided family and the premiums have been paid out of the family’s income chargeable to tax, such deduction will be allowed in the computation of the total income of the family.

The above-mentioned amendments to section 80A are effective in respect of assessments for and from the assessment year 1966-67. The amended provisions will apply not only in respect of premiums paid on policies of the nature mentioned above which are issued on or after 1-4-1966, but also in respect of premiums paid on such policies issued prior to that date.

 FINANCE ACT, 1966

Extension of the tax concessions under the Income-tax Act in respect of interest on National Savings Certificates (First Issue) to interest on the Bank Series of such certificates

58. Section 112A has been amended  by the Finance Act, 1966, with a view to extending the various tax concessions available in respect of interest on National Savings Certificates (First Issue), to interest on the Bank Series of such certificates. The tax concessions are as follows:

1. The interest on such certificates will be chargeable to tax at the average rate of tax applicable to the other ordinary income of the holder exclusive of such interest as well as capital gains and compensation referred to in section 28(ii). [For the purpose of computing such average rate of tax, the whole of the ordinary income will be treated as “earned income”.]

2. The interest on the certificates will be payable without deduction of tax at source.

 FINANCE ACT, 1966

Provision in section 193 for payment of interest on small holdings of Government securities without deduction of tax at source, in certain cases

59. In order to facilitate investment by resident individuals in Central and State Government securities, a provision has been made by the Finance Act, 1966 in the new clause (iv ) of the proviso to section 193, with effect from 1-4-1966, to secure that interest on such securities will be paid to such individuals without deduction of tax at source in cases where the holder declares in writing before the paying authority that—

  (a)  the amount of his investment in the securities during the relevant period does not exceed Rs. 2,500;

  (b)  he was not previously assessed to income-tax ; and

  (c )  his total income during the relevant previous year was below the minimum taxable amount.

 FINANCE ACT, 1966

Amendment to certain provisions relating to income-tax in section 32 of the Unit Trust of India Act, 1963

60. With a view to encouraging investments by individuals in units of the Unit Trust of India, section 53 of the Finance Act, 1966 has amended section 32 of the Unit Trust of India Act, 1963, to provide that—

  (a)  the first Rs. 1,000 of the income received by an individual unit-holder in respect of the units held by him will be excluded in the computation of his total income under the Income-tax Act, irrespective of the magnitude of his other income ; and that

  (b)  in the case of an individual unit-holder who is not resident in India and whose income in respect of the units held by him does not exceed Rs. 1,000 during the financial year, such income will be paid to him by the Unit Trust of India without any deduction of tax at source, and that where the income exceeds Rs. 1,000, the Trust will deduct tax from the whole of such income at the rate of 15 per cent thereof.

 OTHER  TAX  CONCESSIONS

FINANCE ACT, 1966

Capital gains arising from transfer of certificates from banks in India evidencing the remittance of foreign exchange to India under the National Defence Remittance Scheme, not to be treated as “short-term” capital gains

61. Persons who received remittances in India of foreign exchange transferred from abroad under the National Defence Remittance Scheme (instituted by the Government of India on 26-10-1965, originally for the period up to 28-1-1966 and subsequently extended up to 31-5-1966, on the basis announced in Press Notes issued from time to time) were entitled to receive a certificate in evidence of such remittances from the  “authorised dealer’’ in foreign exchange in India through whom the remittance was received. Such certificates were freely transferable, by sale or otherwise, and any person holding the certificate was entitled to exchange it for an import licence of a value up to a specified percentage of the amount of the foreign exchange remittance evidenced by the certificate. In  order to encourage persons to make remittance of foreign exchange to India from abroad under the National Defence Remittance Scheme, the Finance Act, 1966 amended definition of “short-term capital asset” in section 2(42A) to secure that any capital gains arising from the transfer of the certificates referred to above shall not be treated as capital gains relating to short-term capital assets, notwithstanding that such a certificate was held by the person concerned for a period of not more than twelve months before the date of its transfer.

 FINANCE ACT, 1966

New provision for deduction of capital expenditure on acquisition of patent rights and copyrights used for business, in instalments over a period of years, in the computation of the profits from the business

62. The Finance Act, 1966 has made certain provisions in new section 35A for the deduction, in the computation of the profits of a business, of capital expenditure incurred after 28-2-1966 on the acquisition of patent rights or copyrights used for the purposes of the business. The deduction for such expenditure will be allowable in equal instalments over a period of 14 years or over the period of the unexpired life of the patent rights or copyrights (as reckoned from the previous year in which such rights were acquired), whichever is less. In a case where the patent rights or copyrights (hereinafter referred to as rights) come to an end during the previous year without being subsequently revived, the allowance will be made in respect of that previous year for such part of the cost of acquisition of the rights as remains unallowed. Similarly, where the rights are sold in their entirety during a previous year and the capital sum received on the sale falls short of the cost of the acquisition of the rights remaining unallowed, the amount of the shortfall will be allowed as a deduction in computing the profits of the previous year in which the sale takes place. On the other hand, where the capital sum received on the sale of the whole or a part of the rights exceeds the cost of acquisition of the rights remaining unallowed, the excess (up to the total amount of the allowance made under section 35A in earlier years) will be chargeable to income-tax as the income of the business of the year in which sale took place. In a case where only a part of the rights is sold and the capital sum received on the sale falls short of the cost of acquisition of the rights remaining unallowed, the deduction to be allowed in respect of the year in which such sale takes place and each of the subsequent years for which the allowance is otherwise due will be taken to be the sum arrived at by dividing the amount of shortfall by the number of such years.

FINANCE ACT, 1966

63. In view of the above-mentioned provisions, the instructions issued by the Board in their Circular No. 16(XI-4) of 1961, dated 31-5-1961 and Circular No. 11(XI-5) of 1962, dated 30-4-1962, for the allowance of capital expenditure on the acquisition of patent rights and copyrights as a deduction in computing the profits of a business over a period of 14 years in equal instalments will not be applicable to the allowance of such expenditure incurred after 28-2-1966.

 OTHER AMENDMENTS TO THE INCOME-TAX ACT

FINANCE ACT, 1966

Restriction in regard to depreciation allowance in respect of expensive motor cars

64. The Finance Act, 1966 has amended certain provisions in the Income-tax Act relating to depreciation allowance to provide that in respect of motor cars acquired after 28-2-1966 at a cost exceeding Rs. 25,000 the excess of the cost over Rs. 25,000 will be ignored for computing the depreciation allowance, thereon. For the purpose of computing depreciation allowance, the actual cost of such motor cars will be taken to be Rs. 25,000 only. Clause (1) of section 43 has been amended for this purpose by section 12 of the Finance Act, 1966.

FINANCE ACT, 1966

65. Further, clause (1 ) of the Explanation to section 32(1) has been amended by section 6(b) of the Finance Act, 1966 to provide for certain adjustments in the computation of the amount of terminal allowance to be made under section 32(1)(iii) and the terminal charge to be made under section 41(2), in a case where the motor car in respect of which the actual cost for the purposes of depreciation has been limited to Rs. 25,000 is sold, discarded, demolished or destroyed. The effect of the amendment is that the amount of “moneys payable” in respect of the motor car in such a case will be taken to be such proportion of the actual amount of sale proceeds, insurance, compensation or salvage moneys and scrap value, if any, as the sum  of Rs. 25,000 bears to the actual cost of the motor car to the taxpayer, without restricting it to Rs. 25,000. The basis to be adopted in determining the amount of the terminal charge in such a case is illustrated in the following example:

EXAMPLE : A motor car is purchased after 28-2-1966 for the purpose of a business at a cost of Rs. 50,000. It is subsequently sold for Rs. 40,000. At the time of its sale, its written down value (computed by deducting the depreciation allowed from the ceiling amount of Rs. 25,000) is Rs. 12,800. The profits liable to tax in this case will be calculated as follows :

		Rs.
Written down value of the motor car		12,800
Amount of the adjusted sale proceeds	Rs. 40,000 × 25,000/50,000	20,000
Amount of the profits chargeable to tax (being the amount by which the adjusted sale proceeds exceed the written down value, namely, Rs. 20,000 minus Rs. 12,800)		7,200

FINANCE ACT, 1966

66. If, in the above example, the motor car was sold for Rs. 24,000, the adjusted amount of the sale proceeds will be :

24,000  ×  25,000/50,000

i.e.,

Rs. 12,000. The deduction for the terminal allowance to be made under section 32(1)(iii) will thus be Rs. 800 [Rs. 12,800 minus Rs. 12,000]. It may be mentioned that the term “motor car” will not include a motor lorry, truck or bus.

 FINANCE ACT, 1966

Amendment to section 13(b)(ii) relating to forfeiture, in certain circumstances of exemption from tax of the income of charitable institutions or trusts set up after 31-3-1962

67. Section 13(b )(ii) as it existed before its amendment by the Finance Act, 1966, provided for the forfeiture of exemption from tax available under section 11 in respect of the whole of the income derived by a charitable trust or institution, set up after 31-3-1962, from its trust property in a case where under the terms of the trust or the rules governing the institution, any part of such income enured directly or indirectly for the benefit of certain “excluded” persons, viz., the author of the trust or founder of the institution and where the author or founder is  a Hindu undivided family, any member of such family, and any relative of such author, founder or member. This provision has been substituted by a new provision by section 5 of the Finance Act, 1966, with effect from 1-4-1966, i.e., in relation to assessments for and from the assessment year 1966-67. The substance of the new provisions is as follows :

1. A charitable trust or institution set up after 31-3-1962 will, subject to the provision stated in (2) below, forfeit the exemption from tax on the whole of its income from property held under trust in respect of any previous year, if under the terms of the trust or the rules governing the institution, any part of such income enures directly or indirectly for the benefit of certain “excluded” persons, or in fact, any part of the income or property of the trust is used or applied during the previous year directly or indirectly for the benefit of any such “excluded” person. [The “excluded” persons referred to above are the author or founder of the trust or institution or in a case where the author or founder is a Hindu undivided family, any member of such a family, or any person who has made a substantial contribution to the trust or institution or any relative of such author, founder, member or substantial contributor.]

2. In  a case where the amount of the income enuring directly or indirectly for the benefit of any relative of such author, founder, member or substantial contributor under the terms of the trust or the rules governing the institution, or the amount of income actually used or applied for the benefit of any such relative during the previous year together with the value of the benefit derived by him from the user or application of the property of the trust or institution, does not exceed a sum calculated at 25 per cent of the income of the trust or institution in respect of the previous year, the exemption from tax will be forfeited only in respect of that part of the income of the trust or institution which is equal to the amount of the income so enuring or used or applied, together with the value of the benefit so derived from the user or application of the property of the trust or institution. Where the amount of the income of the trust or institution enuring or used or applied for the benefit of any such relative, taken together with the value of the benefit derived by him from the user or application of the property of the trust or institution exceeds 25 per cent of its income of the previous year relevant to the assessment year, the exemption from tax under section 11 will be forfeited in respect of the whole of the income of the previous year. It may be mentioned  that where the income of the trust or institution enures or is used or applied for the benefit of more than one such relative, the amount of such income or the value of such benefit in all such cases has to be taken into account cumulatively for the purposes of section 13(b )(ii). The questions as to whether or not the property of a charitable trust or institution is used or applied directly or indirectly for the benefit of any “excluded” person, and if it is so, what is the value of the benefit arising to the excluded person from such user or application, have to be decided and determined on the facts of each case. It is not practicable to indicate a uniform basis for applying the provisions of section 13(b)( ii) in such cases because the property of a trust or institution can be used or applied for the benefit of an “excluded” person in diverse ways. A few instances in which the property of a trust or institution may be taken to be used or applied for the benefit of an “excluded” person would be the use of house property belonging to the trust or institution by such person free of rent or at a concessional rent ; lending of money by the trust or institution to any such person free of interest or at a concessional rate of interest ; payment of remuneration by the trust or the institution to any ‘excluded’ person for services rendered by him in an amount clearly in excess of the payment which would have been normally made to any other person for similar services, etc. The value of the benefit conferred on the “excluded” person in such cases would be determinable, respectively, with reference to the fair rental value of the house property, the prevailing market rate of interest, and the payment which would have been  normally made by the trust or institution to a person other than the “excluded” person for the services rendered by him.

 FINANCE ACT, 1966

Amendment to section 201 relating to consequences of failure to deduct tax at source or to pay it to the credit of the Central Government

68. Persons responsible for paying salaries, interest on securities, dividends, etc., are required, under the provisions of sections 192 to 195, to deduct tax at source from the amount of such payments. Under section 200, such persons are required to pay the tax so deducted within the prescribed time to the credit of the Central Government or as the Board directs. Under rule 30 of the Income-tax Rules, 1962, the prescribed time for the payment of the tax  deducted to the credit of the Central Government is, ordinarily, one week from the date of the deduction except that the tax deducted from salaries may be paid, with the approval of the Income-tax Officer, in quarterly instalments on 15th June, 15th September, 15th December and  15th March of the financial year. (These provisions apply in cases other than those where the tax is deducted by or on behalf of Government.)

FINANCE ACT, 1966

69. Section 201 provides that where a person defaults in the fulfilment of the obligation to deduct tax at source and to pay it to the credit of the Central Government within the prescribed time, he will be treated as an “assessee in default in respect of the tax”. Accordingly, such a defaulter is liable to the imposition of a  penalty under section 221 in an amount not exceeding the amount of tax in arrears, in the same manner as assessees who are in default in making payment of the arrears of the tax due from them in respect of their own assessments. However, the proviso to section 201 as it existed before its amendment by the Finance Act, 1966, barred the imposition of a penalty on a person defaulting in fulfilling his obligations to deduct and pay the tax unless the Income-tax Officer was satisfied that such person had wilfully failed to deduct or pay the tax. The effect of the proviso was that even where the facts and circumstances of a case clearly led to the conclusion that the default was without good and sufficient reasons, the penalty under section 271 could not be imposed on the defaulter unless it was further established that his failure to deduct and pay the tax was wilful or deliberate. This requirement of establishing the wilfulness of the default rendered the provision for imposition of penalty virtually ineffective in the majority of cases. The proviso to section 201 has, therefore, been amended by the Finance Act, 1966 to enable the imposition of the penalty if the Income-tax Officer is satisfied that the defaulter had failed to deduct and pay the tax to the credit of the Central Government, within the prescribed time “without good and sufficient reasons”. Further, the Finance Act, 1966 has introduced a provision in the new sub-section (1A) of section 201 providing that such a defaulter will be liable to pay simple interest at 6 per cent per annum on the amount of the tax from the date on which such tax was deductible to the date on which such tax is actually paid to the credit of the Central Government. It may be mentioned that in computing the period for which such interest is chargeable, the period  prescribed in rule 30 of the Income-tax Rules for making the payment to the credit of the Central Government is not to be excluded.

The above-mentioned provisions of section 201 are not applicable in cases where the tax is deductible by or on behalf of the Government, vide  section 204.

FINANCE ACT, 1966

70. The amendments to section 201 take effect  from 1-4-1966. Accordingly, the amended provisions relating to imposition of penalty will be applicable in cases where the default occurs on or after 1-4-1966 or having occurred before that date, continues to exist on or after that date. The provisions in sub-section (1A) of section 201, regarding charging of interest, will operate only as respects periods of default subsequent to 31-3-1966.

FINANCE ACT, 1966

71. The Finance Act, 1966 has made certain amendments to the First Schedule and the Third Schedule to the Companies (Profits) Surtax Act.

 FINANCE ACT, 1966

Computation of chargeable profits

72. The amendments made to the First Schedule relate to rule 2(i) thereof which provides for the deduction, in the computation of the chargeable profits of a company, of the income-tax payable by the company on its total income exclusive of certain items of tax, one of which is the income-tax chargeable on the company under the annual Finance Act with reference to its distributions of equity dividends. The income-tax chargeable on domestic companies with reference to their distributions of equity dividends will continue to be excluded, as before, from the amount of income-tax allowable as a deduction in the computation of their chargeable profits, but an amendment of a drafting nature has been made to the relevant provision in consequence of the provision in the Finance Act, 1966, for the levy of such tax on a new basis with reference to the “relevant amount of distribution of dividends” in respect of equity capital.

FINANCE ACT, 1966

73. Another amendment to rule 2(i) of the First Schedule consists of the introduction of a provision in the new clause (c) thereof which, in effect, provides that the penal tax payable by a closely-held company under section 104 of the Income-tax Act will not be allowed as a deduction in the computation of its chargeable profits. This provision has been made in view of the position that the allowance of a deduction for such penal tax resulted almost in a stalemate in the computation of chargeable profits. The reason for the stalemate is that the ascertainment of such penal tax itself depends on the determination of the company’s liability to surtax ; this is because the penal tax is charged at the specified rate on the amount of “distributable income” of the company as reduced by the dividends actually distributed, and the “distributable income” in its turn, can be determined only after allowing a deduction (under section 15 of the Surtax Act) for the surtax payable by the company. The above-mentioned provision prohibiting the deduction of penal tax chargeable under section 104 of the Income-tax Act in the computation of chargeable profits is of retrospective effect from the commencement of the Surtax Act. Accordingly, the surtax assessments in which such penal tax has been allowed as a deduction in computing the chargeable profits have to be rectified now under section 13 of the Surtax Act.

 FINANCE ACT, 1966

Rates of surtax

74. In regard to the amendments to the Third Schedule, one of these consists of the reduction in the rate of surtax chargeable for the assessment year 1966-67 and subsequent years from the earlier rate of 40 per cent to 35 per cent of the net chargeable profits, vide paragraph 13 of this Circular. The other one consists of deletion of the provisions in the Third Schedule (in respect of assessments for and from the assessment year 1966-67) for the allowance, in the case of domestic companies, of a special rebate of one-fifth of the surtax attributable to profits derived by them from specified priority industries. This amendment has been made in consequence of the new provision made in section 80E for the allowance, in the case of domestic companies, of a deduction of 8 per cent of the amount of such profits in the computation of their total income, vide paragraphs 26 and 27 of this Circular.

APPENDIX I

Rates of Income-tax for the assessment year 1966-67, rates of annuity deposits for the assessment year 1966-67 and the deposit to be
made during the financial year 1966-67 and rates of tax
deductible at source from certain incomes
during the financial  year 1966-67

A. TAXPAYERS OTHER THAN COMPANIES

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

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

On total  income—

(1)	not exceeding Rs. 5,000	5 per cent of total income ;
(2)	exceeding Rs. 5,000 but not exceeding Rs. 10,000	Rs. 250 plus 10 per cent of the excess over Rs. 5,000 ;
(3)	exceeding Rs. 10,000 but not exceeding Rs. 15,000	Rs. 750 plus 15 per cent of the excess over Rs. 10,000 ;
(4)	exceeding Rs. 15,000 but not exceeding Rs. 20,000	Rs. 1,500 plus 20 per cent of the excess over Rs. 15,000 ;
(5)	exceeding Rs. 20,000 but not exceeding Rs. 25,000	Rs. 2,500 plus 30 per cent of the excess over Rs. 20,000
(6)	exceeding Rs. 25,000 but not exceeding Rs. 30,000	Rs. 4,000 plus 40 per cent of the excess over Rs. 25,000 ;
(7)	exceeding Rs. 30,000 but not exceeding Rs. 50,000	Rs. 6,000 plus 50 per cent of the excess over Rs. 30,000 ;
(8)	exceeding Rs. 50,000 but not exceeding Rs. 70,000	Rs. 16,000 plus 60 per cent of the excess over Rs. 50,000 ;
(9)	exceeding Rs. 70,000	Rs. 28,000 plus 65 per cent of the excess over Rs. 70,000.

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

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

                                                                                                                        Limit of total

                                                                                                    income not

                                                                                                                        Chargeable to

                     In the case of                                                                           Income-tax

                                                                                                                                  Rs.

Resident Hindu undivided family which has at least two members,

aged not less than 18 years, who are entitled to  claim partition                  7,000

or

which has at least two members, entitled to claim partition who are not lineally descended one from the other or who are not lineally descendent from any other member of the family.

1. Resident taxpayers other than Hindu undivided families referred    to in (a) above                                                                                                     4,000

Where the total income does not exceed Rs. 20,000, the tax chargeable is limited by way of marginal relief, to 40 per cent of the amount by which the total income exceeds the above limits of Rs. 7,000 or Rs. 4,000, as the case may be.

2. Tax relief in the case of resident individuals and Hindu undivided families on account of personal allowances : Resident individuals and Hindu undivided families are entitled to a reduction in the amount of the tax chargeable on their total income, by way of relief on account of personal allowances, up to the respective amounts specified in the following table :

                                                                                Amount of

In the case of                                                                                             tax relief

                                                                                                                           Rs.

1. an unmarried individual                                                                            125

2. a married individual who has no child mainly dependent on him,

or a Hindu undivided family which has no minor coparcener                 200

3. a married individual who has one child mainly dependent on

him, or a Hindu undivided family which has one minor coparcener

mainly supported from the income of such family                                    220

4. a married individual who has more than one child mainly dependent

on him, or a Hindu undivided family which has more than one minor

coparcener mainly supported from the income of such family                 240

Surcharges on income-tax

(1) Surcharge on the income-tax on unearned income (excluding, in the case of individuals and HUFs interest on Government securities and dividends on units of the Unit Trust of India) :

        Rate of surcharge

1. On  the  income-tax  calculated  on the first                  Nil

        Rs. 15,000 of such income

2. On  the  income-tax    calculated   on   such                20 per  cent  of  the

        slab of Rs. 15,001 – Rs. 50,000                                 amount of such income-tax

3. On  the   income-tax   calculated   on   such                25  per  cent  of  the

income in the slab above Rs. 50,000                               amount of such income-tax

(2) Surcharge on the income-tax calculated on earned income (in the case of an individual or a HUF, earned income together with interest on Government securities and dividends on units of the Unit Trust of India)—

1.  On  the  income-tax  calculated  on the  first

Rs. 1,00,000 of such income                                            Nil

2. On the income-tax calculated on such  income         5 per cent of the

in the slab of Rs. 1,00,001 – Rs. 2,00,000                    amount of such income-tax

3.  On  the income-tax calculated on such income        10 per cent of the

in the slab of Rs. 2,00,001 – Rs. 3,00,000                    amount of such income-tax

4.  On the  income-tax calculated on such income        15 per cent of the

in  the  slab of above Rs. 3,00,000                                  amount   of   such  income-tax

(3) Special Surcharge : The special surcharge is leviable at the rate of 10 per cent of the aggregate of the amounts of income-tax and the above-mentioned unearned and earned income surcharges, if any.

Special provisions

(1) Where the total income includes income chargeable under the head “Salaries”, the income-tax (including surcharges on income-tax) in respect of such income is leviable at the average rate of tax applicable to the total income in accordance with the rates of tax prescribed by the Finance Act, 1965.

(2) The tax on any capital gains included in the total income of a taxpayer other than a company is to be computed in accordance with the provisions of section 114. The provisions in the matter are as follows :

“Short-term” capital gains (i.e. , capital gains derived from the transfer of capital assets held for not more than 12 months, before the date of the transfer) : The tax on such gains is chargeable at the average rate of tax applicable to the total income as reduced by the “long-term” capital gains (i.e., gains other than “short-term” capital gains) as well as the amount of any compensation chargeable to income-tax under section 28(ii) and any interest on National Savings Certificates (First Issue) and the Bank Series of such certificates.

“Long-term” capital gains : If the total income of the taxpayer does not exceed Rs. 10,000, no tax is chargeable on the “long-term” capital gains included therein. Further, the first Rs. 5,000 of the “long-term” capital gains are not chargeable to tax.

The tax on the chargeable “long-term” capital gains (i.e. , long-term capital gains as reduced by Rs. 5,000) is leviable as follows :

	Rate of tax
1. Chargeable “long-term” capital gains relating to lands and buildings or any rights therein	At three fourths of the average rate of tax applicable to the total income as reduced by the “long-term” capital gains as well as the amount of any compensation referred to in section 28(ii) and any interest on National Savings Certificates (First Issue) and the Bank Series of such certificates, but subject to a minimum tax of 15 per cent of the chargeable long-term capital gains.
2. Chargeable “long-term” capital gains relating to other assets	At one-half of the average rate of tax referred to against item (i) above, subject to a minimum tax of 15 per cent of the chargeable long-term capital gains.The tax on compensation referred to in section 28(ii) is to be computed in accordance with the provisions of section 112 and the tax on the interest on National Saving Certificates (First Issue) as also the Bank Series of such certificates under section 112A. The tax on ordinary income (i.e., on the total income as reduced by all capital gains, compensation and the interest referred to above) is charged at the appropriate rates of tax applicable thereto, as if it were the total income.

2. Co-operative societies

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

(1) On total  income  not exceeding Rs. 5,000		5 per cent of the total income
On total income exceeding	but not  exceeding
(2) Rs. 5,000	Rs. 10,000	Rs. 250 plus 10 per cent of the excess over Rs. 5,000
(3) Rs. 10,000	Rs. 15,000	Rs. 750 plus 15 per cent of the excess over Rs. 10,000
(4) Rs. 15,000	Rs. 20,000	Rs. 1,500 plus 20 per cent of the excess over Rs. 15,000
(5) Rs. 20,000	Rs. 25,000	Rs. 2,500 plus 25 per cent of the excess over Rs. 20,000
(6) Rs. 25,000	—	Rs. 3,750 plus 41 per cent of the excess over Rs. 25,000.

Provision for exemption from tax of small incomes : No income-tax is chargeable on a co-operative society whose total income does not exceed Rs. 4,000. Where the total income does not exceed Rs. 20,000, the income-tax chargeable is limited, by way of marginal relief, to 40 per cent of the amount by which the total income exceeds Rs. 4,000.

Surcharges on income-tax

	Rate of surcharge
(1)  Surcharge on income-tax :
(i)  on  the   income-tax   calculated on  the first Rs. 25,000 of the  total income	Nil
(ii)  on the income-tax calculated on the balance of the total income	6¼ per cent of the  amount of such Income-tax

(2) Special surcharge : The rate of this surcharge is 10 per cent of the amount of income-tax as increased by the amount, if any,  of the surcharge referred to in (1) above.

3. Registered firms

Rates of income-tax (exclusive of surcharges on income-tax)
On total income :
a.  not exceeding Rs. 25,000	Nil
b. exceeding Rs. 25,000 but not exceeding Rs. 50,000	6 per cent of the excess over  Rs. 25,000
c. exceeding Rs. 50,000 but not exceeding Rs. 1,00,000	Rs. 1,500 plus 8 per cent of    the    excess    over Rs. 50,000
d. exceeding Rs. 1,00,000	Rs. 5,400 plus 12 per cent of the excess  over Rs. 1,00,000.
Surcharges on income-tax
(1)  Surcharge  on income-tax :	Rate of surcharge
In the case of—
(a) a registered firm whose total income, to the extent of 51 per cent thereof or more, consists of income derived from a profession carried on by the firm	10 per cent of the amount  of  the income-tax
(b) any other registered firm	20 per cent of the amount of the income-tax.
(2) Special surcharge : The rate of this surcharge is 10 per cent of the amount of income-tax as increased by the surcharge on income-tax referred to in (1) above.
4. Local authorities
Rate of income-tax (exclusive of surcharges on income-tax)
On the whole of the total income	45 per cent

Surcharges on income-tax

(1) Surcharge on income-tax : The rate of this surcharge is 10 per cent of the amount of income-tax.

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

B. COMPANIES

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

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

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

2. Companies other than the Life Insurance Corporation of India

Rates of income-tax
I. In the case of a domestic company—
(A) (1) where the company is a company in which the public are substantially interested,—
(i) in a case where the total income does not exceed Rs. 25,000	45 per cent of the total  income
(ii) in a case where the total income exceeds Rs. 25,000	55 per cent of the total income
(2) where the company is not a company in which the public are substantially interested,—
(i) in the case of an industrial company,—
(1) on so much of the total income as does not exceed Rs. 10,00,000	55 per cent
(2) on the balance, if any, of the total income	60 per cent
(ii) in any other case	65 per cent of the total income
and
(B) in addition, where the company is—
(i) a company in which the public are substantially interested, or
(ii) a company as is referred to in clause (iii) of sub-section (2) or clause (a) or clause (b) of sub-section (4) of section 104 of the Income-tax Act, or
(iii) such a company as is exempt from the operation of section 104 of the said Act by a notification issued under the provisions of sub-section (3) of that section,
on  so  much  of  the  total income  as  does  not exceed the relevant amount of distribution of dividends by the company	7.5 per cent

Provision for marginal relief in the case of a domestic company in which the public are substantially interested and whose total income exceeds Rs. 25,000

In the case of such a company, the income-tax payable shall be limited to the aggregate of (a) the income-tax which would have been payable by it if its total income had been Rs. 25,000, and (b ) 80 per cent of the amount of which its total income exceeds Rs. 25,000.

The term “domestic company” means an Indian company or any other company, which has, in respect of its income chargeable to tax for the assessment year 1966-67, made the prescribed arrangements for the declaration and payment of dividends within India.

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

The expression “relevant amount of distributions of dividends” means the aggregate of the amount of—

(a)  that portion of the amount of equity dividends declared or distributed by the company during the previous years relevant to the assessment years 1964-65 and 1965-66 with reference to which tax was chargeable on the company at 7½ per cent thereof by reduction of the rebate of tax admissible to it, respectively, under the provisions of the Finance Acts, 1964 and 1965, but could not be charged because of insufficiency of the amount of such rebate ; and

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

II. In the case of a company other than a domestic company—(i)  on so much of the total income as consists of—

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

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

and where such agreement has, in either case, been approved

by the  Central Government                                              50 per cent

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

Special provisions regarding computation of tax on “long-term” capital gains (i.e., capital gains other than “short-term” capital gains), in the case of companies

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

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

“Short-term” gains (i.e., capital gains arising from the transfer of a capital asset held by the taxpayer for not more than 12 months before the date of the transfer), are chargeable to income-tax at the rates of income-tax applicable, under the Finance Act, 1966, to the total income of the company.

C. RATES OF INCOME-TAX DEDUCTIBLE AT SOURCE DURING THE FINANCIAL YEAR 1966-67 FROM INCOME OTHER THAN INCOME CHARGEABLE UNDER THE HEAD “SALARIES” UNDER SECTIONS 193 TO 195

Recipient of income	Nature of income from which tax is deductible	Rate of tax deductible at source Income tax          Surcharge                Total
(1)	(2)	(3)		(4)	(5)
(1) Persons other than companies
(a) Where the person is resident in India	Interest on securities other than tax-free securities; dividends	18%		4%	22%
(b) Where the person is not resident in India	(i)  All income other than interest on tax-free securities	Income-tax and surcharges income-tax calculated no the whole of such income, if such income had been the total income, subject to a minimum deduction of income- tax @ 25% and surcharge @ 8% of the amount of such income
	(ii) Interest on tax-free securities	12.5%	4%			16.5%
(2) Companies
(a) Domestic company	Interest on securities other than tax-free securities; dividends	22%	Nil			22%
(b) company other than a domestic company	(i)dividends payable by a closely held  indian  company   mainly engaged   in   the   business  of generation  or  distribution  of electricity or construction, manufacture or production of any one or more of the articles and things listed in the fifth schedule to the Income- tax Act	15%	NIL			15%
	(ii) Dividends payable by a domestic company other than a company referred to in (i) above	25%	nil			25%
	(iii) Royalties or fees for rendering technical services received from an indian concern, respectively, under a post-31-3-1961 and a post-29-4-1964 agreement approved central government in by the either case	50%	nil			50%
	(iv) Interest on tax-free securities	44%	nil			44%
	(v) Any other income	70%	nil			70%

The term”tax-free securities” means any security of the Central Government issued or declared to be tax-free or any security of a State Government issued income-tax free, the income-tax whereon is payable by the State Government.
RATES OF ANNUITY DEPOSITS UNDER CHAPTER XXIIA OF THE INCOME-TAX ACT IN RESPECT OF INCOME CHARGEABLE TO TAX FOR THE ASSESSMENT YEAR1966-67 AND FOR ANNUITY DEPOSITS TO BE MADE DURING THE FINANCIAL YEAR 1966-67 IN RESPECT OF INCOME CHARGEABLE TO  TAX  FOR  THE  ASSESSMENT  YEAR  1967-68

Where the total income before deduction of annuity deposit	Rate % of the adjusted total income	Marginal relief provision
1	2	3
(1) does not exceed Rs. 15,000	Nil
(2) is between 15,001 and Rs. 20,000	5 per cent	The annuity deposit shall be limited to one-half of the amount by which the total income exceeds Rs. 15,000 ;
(3) is between Rs. 20,001 and Rs. 40,000	7½ per cent	The annuity deposit shall be limited to 5 per cent of the adjusted total income up to Rs. 20,000 plus  one-half of the amount by which the total income exceeds Rs. 20,000 ;
(4) is between Rs. 40,001 and Rs. 70,000	10 per cent	The   annuity   deposit   shall be limited to 7½  per cent of the adjusted total income up to Rs. 40,000 plus one-half of the amount by which the total income exceeds                Rs. 40,000 ;
(5) is above Rs. 70,000	12½ per cent	The annuity deposit shall be limited to 10 per cent of the adjusted total     income up to Rs. 70,000 plus one-half of the amount by which the     total  income  exceeds           Rs. 70,000.

The term “adjusted total income” means the total income computed without deduction of annuity deposit and reduced by the aggregate of the following items of income :

a. any compensation received by an employee from his employer on the termination of his employment or the modification of the terms and conditions of the employment ;

b. any payment received by an employee from any unrecognised provident fund or an unapproved superannuation fund in excess of his own contributions to the fund and the interest on such contributions ;

c. salary received in arrears for a past year or in advance for a future year ;

d. share in the profits of an unregistered firm or an association of persons, where the firm or association is itself liable to make an annuity deposit ;

e. any compensation received on the termination of managing agency, etc. ;

f. capital gains ; and

g. annuity due in respect of the annuity deposit made in any earlier year

APPENDIX II

Examples of computation of tax for the assessment year 1966-67Part I
Resident Individuals
(With more than one dependent child)
EXAMPLE 1 :
Particulars of income	Rs.
Income chargeable under the head “Salaries”	14,600
Dividends from companies (gross amount)	1,000
	Total	15,600
Other particulars	Rs.
Premiums paid on life insurance policy	600
Deposits in a 10-year account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959	400
	Total	1,000
Computation of total income chargeable to tax
Income as above	15,600
Less: Deduction admissible under section 80A in respect of life insurance premiums and deposits in the Post Office Cumulative Time Deposit  Account, of Rs. 1,000 @ 60% thereof	600
[The deduction will be made in computing the income under the head “Salaries” vide section 80A(5). The salary income will thus be reduced to Rs. 14,000]	Total income	15,000
Computation of tax
1. Tax on the income chargeable under the head “Salaries”, i.e., on Rs. 14,000 at the average rate of tax applicable to the total income in accordance with the rates of tax prescribed by the Finance Act, 1965 :	Rs
Income-tax on the total income of Rs. 15,000 in accordance with the Finance Act, 1965	Rs. 1,500
Less :  Amount  of tax relief on account of personal allowance	Rs. 215Rs. 1,285
Average rate of tax %1,285 × 100/15,000= 8.567%
Tax on Rs. 14,000 at 8.567%	1,199.38
2. Tax on income other than salaries, i.e., on Rs. 1,000, at the average rate of tax in accordance with the Finance Act, 1966 :
Income-tax on the total income of Rs. 15,000	Rs.  1,500
Less :  Tax relief on account of personal allowance	Rs. 240Rs. 1,260
Add : Special surcharge (at 10% of Rs. 1,260)	Rs. 126Rs. 1,386

Average rate of tax % 1,386 × 100/15,000 = 9.24%
Tax on Rs. 1,000 @ 9.24%	92.40
Total amount of tax (Rs. 1199.38 + 92.40)	1,291.78
Tax payable (as rounded off under section 288B)	1,292.00
EXAMPLE 2 :
Particulars of income	Rs.
Income from a proprietary business	50,000
Annuity received in respect of annuity deposits under the Income-tax Act	625
	Total	50,625
Other particulars
Premiums paid in respect of life insurance policy	10,200
Deposits in a 15-year account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959	1,800
	Total	12,000
Computation of total income chargeable to tax
Income as above	50,625
Less : Deduction admissible under section 80A in respect of the amount of life insurance premiums and deposits in the 15-year Cumulative Time Deposit Account in the Post Office, @60% of the first Rs. 5,000 and 50% of the balance  thereof	6,500
[By the deduction of Rs. 6,500, the  business income   will  be reduced to Rs. 43,500]	44,125
Less : Annuity deposit required to be made at 10% of Rs. 43,500	4,350
	39,775
[The annuity income of Rs. 625 is to be excluded from Rs. 44,125 in computing the amount of annuity deposit vide section 280B(1)( b)(vi).]
Total income (as rounded off under section 288B)	39,780
Computation of tax
Income-tax on Rs. 39,780	10,890
Less : Tax relief on account of personal allowance	240
	10,650
Add :  Special surcharge  @ 10% of the tax	1,065
Tax payable	11,715
EXAMPLE 3 :
Particulars of income
Interest on Government securities	3,500
Income from house property	12,000
Income from proprietary business	50,000
“Long-term” capital gains (arising from the transfer of capital assets held for more than one year prior to the date of transfer)	4,528
Dividends on units of the Unit Trust of India	1,500
Other dividends from companies	5,000
Annuity in respect of annuity deposit under the Income tax  Act	625
	Total	77,153
Other particulars
Premiums paid on life insurance policies	10,000
Expenditure on the medical treatment of a dependent relative (nephew) in a hospital. (The person concerned has been certified by a registered medical practitioner to be suffering from a physical disability having the effect of reducing considerably his capacity for normal work. He was an in-patient in the hospital for 7 months. His personal income during the year from certain investments was Rs. 1,000)	2,500
Computation of total income chargeable to tax
Income as above	77,153
Less : Amount to be excluded in computing the total income : Dividends on the units in the Unit Trust of India, to the extent of Rs. 1,000, excludible under section32(1)(b) of the  Unit Trust of India Act, 1963	Rs. 1,00076,153
Less :
a. Deduction under section 80A in respect of life insurance premiums of Rs. 10,000 (at 60% of the first Rs. 5,000 and 50%  of the balance)	Rs. 5,500
b. Deduction in respect of expenditure on medical treatment of handicapped dependant under section 80B. [Deduction specified under section 80B(2)(i), Rs. 2,400 as reduced by Rs. 1,000 being the  personal  income  of  the  handicapped dependant]	Rs. 1,400	6,900
	69,253
Less : Deduction under section 280-O in respect of annuity deposit required to be made	6,410
	62,843
[Annuity deposit is calculated on Rs. 64,100 (income of Rs. 69,253 as reduced by the capital gains of Rs. 4,528 and the annuity of Rs. 625, these being excludible in calculating the deposit) at the prescribed rate of 10%]	62,843
Total income as rounded off under section 288A	62,840
[The above deductions of Rs. 5,500 in respect of life insurance premiums, Rs. 1,400 for expenditure on the medical treatment of the handicapped dependant, Rs. 6,410  for annuity deposit and the reduction by Rs. 3 in the rounding off of the total income will be made from the earned income. The business income will, thus, be reduced to Rs. 36,687]
Computation of tax
1. Tax on the total income as reduced by the long-term capital gains, i.e., Rs. 58,312
Income-tax at the prescribed rate	20,987.20
Less :  Tax relief on account of personal allowance	240.00
	20,747.20
Add :  Surcharge on income-tax in respect of the unearned income other than interest on Government securities and income from units in the Unit Trust of India	80.00
[Total income as reduced by the long-term capital gains, is Rs. 58,312. The unearned income (other than interest on Government securities and income from units in the  Unit Trust of India) included therein is Rs. 17,000 consisting of income from house property of Rs. 12,000 and dividends from companies of Rs. 5,000. The tax on the first Rs. 15,000 of such income being exempt from unearned income surcharge, the surcharge  is leviable on the tax on the balance of such income, viz., on the tax on Rs. 2,000. Tax on Rs. 2,000 in the income slab over Rs. 15,000 is Rs. 400. Unearned income surcharge on the tax of  Rs. 400 at the prescribed  rate of 20%  is Rs. 80]	20,827.20
Add : Further, special surcharge at 10% of the aggregate of the income-tax and the unearned income surcharge (10% of Rs. 20,827.20)	2,082.72
2. Tax on the “long-term” capital gains. [The first Rs. 5,000 of “long-term” capital gains is not chargeable to tax, vide section 114(b)(ii )]	Nil
Total tax	22,909.92
Tax payable (as rounded off under section 288B)	22,910.00
EXAMPLE 4
Particulars of income
Income from house property	5,000
Income from proprietary business	1,30,000
Capitals gains
“Short-term” gains (arising from the transfer of capital assets held for not more than one year prior to the date of the transfer)	Rs. 5,000
“Long-term” gains (arising from the sale of house  property acquired several years before  the date  of the sale)	Rs. 1,00,000	Rs1,05,000
Dividends from companies	10,000
Annuity in respect of annuity deposit under the Income- tax  Act	2,250
Total	2,52,250
Other particulars
Premiums paid in respect of life insurance policies	11,000
Advance annuity deposit made	16,000
Computation of total income chargeable to tax
Income as above	2,52,250
Less : Deduction admissible under section 80A in respect of life insurance premiums of Rs. 11,000 (at 60% of the first Rs. 5,000 and at 50% of the balance thereof)	6,000
Total income before deduction of annuity deposit	2,46,250
Less : Deduction for the amount of annuity deposit required to be made (section 280-O). [The annuity deposit required to be made is calculated on the above income of Rs. 2,46,250 as reduced by the capital gains of Rs. 1,05,000 and annuity of Rs. 2,250, i.e., on Rs. 1,39,000, at the prescribed rate of 12½ % thereof. The amount of Rs. 17,375 so arrived at has been rounded off under section 280Q  to Rs. 17,380]	17,380
[As the advance annuity deposit made is only Rs. 16,000 the individual will be required to make a further deposit of Rs. 1,380]
Total income	2,28,870
[The above-mentioned deductions of Rs. 6,000 in respect of life insurance premiums and Rs. 17,380 in respect of annuity deposit will be made from the earned income. The amount of  the business income will, thus, be reduced to Rs. 1,06,620]
Computation of tax on the total income
1. Tax on the total income as reduced by the capital gains, i.e., on Rs. 1,23,870
Income-tax at the prescribed rate	63,015.50
Less : Tax relief on account of personal allowance	240.00
	62,775.50
Add : Surcharge on the income-tax on the earned income in excess of Rs. 1 lakh. [The earned income included in the total income is Rs. 1,08,870 (viz., business income of Rs. 1,06,620 and annuity income of Rs. 2,250) which exceeds Rs. 1 lakh (being the amount of earned income exempt from surcharge) by Rs. 8,870. The income-tax on Rs. 8,870 in the income slab over Rs. 1 lakh is Rs. 5,765.50. The surcharge thereon at 5% is Rs. 288.27]	Rs.288.27
[The unearned income is only Rs. 15,000 (income from house property Rs. 5,000 and from dividends Rs. 10,000); hence no surcharge on the tax on unearned income is leviable]	63,063.77
Add : Special surcharge at 10% of the aggregate of the income-tax and the earned income surcharge (10% of Rs. 63,063.77)	6,306.37
	69,370.14
2. Tax chargeable on the capital gains
(A) Tax on “short-term” capital gains of Rs. 5,000 at the average rate of tax applicable to the total income as reduced by the “long-term” capital gains	2,838.70
[Total income as reduced by “long-term” capital gains is Rs. 1,28,870 (consisting of earned income of Rs. 1,08,870, and unearned income of Rs. 20,000). Income-tax on Rs. 1,28,870, including earned income surcharge, unearned income surcharge and special surcharge is Rs. 73,165.14]
[The average rate of tax 73,165.14 × 100/1,28,870 is 56.774%. Tax on the “short-term” capital gains of Rs. 5,000 at 56.774% thereof is Rs. 2,838.70]
(B) Tax on “long-term” capital gains	40,451.95
[The chargeable amount of “long-term” capital gains (Rs. 1,00,000 less the first Rs. 5,000 of the gains not chargeable to tax) is Rs. 95,000. Tax on Rs. 95,000 at 3/4 of the average rate of tax on the total income as reduced by the long-term capital gains (3/4 of the average rate of tax of 56.774% referred to in (A) above), viz ., at 42.581% is Rs. 40,451.95]
Tax on the total income as reduced by the capital gains	69,370.14
Tax on the “short-term” capital gains	2,838.70
Tax on the “long-term” capital gains	40,451.95
	Total	1,12,660.79
Tax payable (as rounded off under section 288B)	1,12,661

PART II

1. Domestic companies, i.e., Indian companies and other companies which have made the prescribed arrangements for the declaration and payment of dividends within India

EXAMPLE 1 :
INDIAN COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED
Particulars of income		Rs.
Income from business (derived from the manufacture of automobile ancillaries)		24,500
Dividends received from a “domestic company”		400
Total income chargeable to tax		24,900
[Although the company’s business income consists of profits derived from the manufacture of “automobile ancillaries” specified in item No. (20) in the list of articles and things relating to priority industries in the Fifth Schedule, it will not be entitled under section 80E to the deduction of 8% of such profits in the computation of its total income as its total  income (before such deduction) does not exceed  Rs. 25,000]
Computation of tax
Income-tax on the total income of Rs. 24,900 @ 45% thereof		11,205
Less :  Deduction of tax under section 85A in respect of inter-corporate dividends		80
[The tax chargeable on the dividend income of Rs. 400 at the average rate of tax of 45% applicable to the total income of the company is Rs. 180, which exceeds 25% of the dividend income, viz., Rs. 100, by Rs. 80. The company is, therefore, entitled under section 85A to a deduction of Rs. 80]
Tax payable by the company		11,125
EXAMPLE 2
INDIAN COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED
Particulars of income
Income from business :
(a) derived from the manufacture of certain articles enumerated in the list of articles and things relating to priority industries in the Fifth Schedule		Rs. 24, 00,000		Rs.
(b) derived from other activities		Rs. 4,80,000		28,80,000
Capital gains :
(a) “short-term” capital gains (derived from the sale of certain shares in companies held for less than one year before the date of the sale)		Rs. 50,000
(b) “long-term” capital gains (derived from the sale of certain lands and buildings held by the company for several years before the date of the sale)		Rs. 1,50,000		2,00,000
Dividends received from domestic companies(gross amount)		20,000
		31,00,000
Other particulars
“Previous year” relevant to the assessment year 1966-67		Calendar year 1965
Dividends declared by the company during 1965 in respect of its equity capital		8,00,000
Paid-up equity capital of the company as on 1-1-1965		64,00,000
[During 1964, the company had declared dividends of Rs. 8 lakhs in respect of its equity capital and had been charged to income-tax for the assessment year 1965-66 with reference to the entire amount of such distributions @7.5% thereof by reduction of the rebate of income-tax otherwise due to the company under the Finance Act, 1965]
“Relevant amount of distributions of dividends” with reference to which additional income-tax @7.5% is chargeable from the company for the assessment year 1966-67, under the Finance Act, 1966		1,60,000
[This is the excess of the equity dividends of Rs. 8 lakhs declared during 1965, over Rs. 6,40,000 being 10% of the  equity capital of the company as on 1-1-1965]
Donations to charitable institution, eligible for rebate of tax under section 88		50,000
Computation of total income chargeable to tax
Income as above		31,00,000
Deduct : 8% of the profits derived from the manufacture of articles relating to priority industries specified in the Fifth Schedule deductible under section 80E (8% of Rs. 24,00,000)		1,92,000
Total income		29,08,000
[The business income after the above deduction will be Rs. 26,88,000]
Computation of tax
1. Tax on “long-term” capital gains of Rs. 1,50,000 @ 40% thereof [vide section 115(ii)(a )]		60,000.00
2. Tax on the total income as reduced by the “long-term” capital gains, i.e., on Rs. 27,58,000 @ 55% thereof		15,16,900.00
Add :  Income-tax chargeable at 7.5% on so much of the total income (reduced by the “long-term” capital gains) as does not exceed the “relevant amount of distributions of dividends” (7.5% of Rs. 1,60,000)		12,000.00
		15,88,900.00
Less :
(a) deduction of tax admissible under section 85A in respect of inter-corporate dividends		Rs. 5,927.80		Rs.
[The tax calculated on the inter-corporate dividends of Rs. 20,000 at the average rate of tax applicable to the total income of the company, viz., @ 54.639% is Rs. 10,927.80. This exceeds the amount of 25% of the amount of inter-corporate dividends, viz., Rs. 5,000 by Rs. 5,927.80. The company is, therefore, entitled under section 85A to a deduction of tax of Rs. 5,927.80]
(b) deduction of tax admissible under section 88 in respect of donations to charitable institution (27.5% of Rs. 50,000)		Rs. 13,750.00		19,677.80
		15,69,222.00
Tax payable (as rounded off under section 288B)		15,69,222.00
Example 3
INDIAN COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED
Particulars of income			Rs.
Income from business (derived from trading activities)			50,000
“Long-term” capital gains (derived from the sale of certain lands and buildings acquired by the company several years before the date of the sale)			2,50,000
Total income			3,00,000
Other particulars
“Previous year” relevant to the assessment year 1966-67			Calendar year 1965
Dividends declared by the company during 1965 on its equity capital by utilising a part of its general reserves			75,000
Paid-up equity capital as on 1-1-1965			5,00,000
Amount of dividends in excess of 10% of the above paid-up equity capital (Rs. 75,000 minus Rs. 50,000)			25,000 (X)
Amount of equity dividends declared by the company during 1964, with reference to which income-tax was chargeable from the company @ 7.5% for the assessment year 1965-66 but could not be charged due to insufficiency of the rebate of income-tax admissible to the company under the Finance  Act, 1965			30,000 (Y)
[The equity dividends declared during 1964 amounted to Rs. 1,50,000. The income-tax chargeable with reference to such dividends @ 7.5% thereof amounted to Rs. 11,250 which, under the Finance Act, 1965, was leviable by reduction of the rebate of income-tax admissible to the company, under that Act. However, the rebate admissible to the company for the assessment year 1965-66 under the Finance Act, 1965 was only Rs. 9,000 (30% of its total income of Rs. 30,000). The “dividend tax” @ 7.5% of the equity dividends could, therefore, be charged to the extent of Rs. 9,000 only, i.e., on dividends amounting to Rs. 1,20,000. Thus, the “dividend tax” could not be charged in respect of equity dividends amounting to Rs. 30,000]
“Relevant amount of distributions of dividends”, i.e. , the amount with reference to which additional tax @ 7.5% thereof is chargeable for the assessment year 1966-67 under the Finance Act, 1966 [Rs. 25,000(X) plus Rs. 30,000(Y)]			55,000
Computation of tax on the total income
1. Tax on the “long-term” capital gains of Rs. 2,50,000@ 40% thereof [vide  section 115(ii)(a )]			1,00,000
2. Tax on the total income as reduced by the “long-term” capital gains, i.e., on Rs. 50,000 @ 55% thereof			27,500
			1,27,500
Add : Income-tax @ 7.5% on so much of the total income reduced by the “long-term” (capital gains) as does not exceed the “relevant amount of distributions of dividends” (7.5% of Rs. 50,000)			3,750
Tax payable			1,31,250
EXAMPLE 4 :
INDIAN COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED
Particulars of income			Rs
Income from house property			50,000
Income from business :
(a) profits derived from the manufacture of certain articles enumerated in the list in the Fifth Schedule			Rs. 25,00,000
(b) profits derived from the manufacture of certain other articles, part of which were exported			Rs. 9,00,000		34,00,000
“Short-term” capital gains “derived” from the sale of certain shares in companies, held for less than one year before the date of the sale			60,000
Dividend received from a “domestic company”			40,000
			35,50,000
Other particulars			Calendar year 1965
“Previous year” relevant to the assessment year 1966-67
Dividends declared by the  company during 1965 on its equity capital			7,50,000
Paid-up equity capital of the company as on 1-1-1965			50,00,000
“Relevant amount of distributions of dividends” (being the excess of the equity dividends declared over 10% of the paid-up equity capital of the company as on 1-1-1965), with reference to which the company is chargeable to additional income-tax @ 7.5% thereof			2,50,000
[The company was charged to tax for the assessment year 1965-66 under the provisions of the Finance Act, 1965, with reference to the entire amount of equity dividends declared by it during the relevant previous year]
Profits from export of certain articles manufactured by the company			5,00,000
[The amount of such export sales was Rs. 50 lakhs. The articles manufactured and exported by the company are included in the list of articles in the First Schedule to the Industries (Development and Regulation) Act, none of which is excluded under section 2(5)(c) of the Finance Act, 1966, and the company is, accordingly, eligible under section 2(5)(a)( ii) of the Finance Act, 1966, to a rebate of tax on an amount equal to 2% of the export sales]
			Rs.
Computation of total income chargeable to tax
Income as above			35,50,000
Deduct : Amount calculated at  8% on the profits of Rs. 25 lakhs derived by the company from the manufacture of articles specified in the Fifth Schedule, deductible under section 80E			2,00,000
[The business income of Rs. 34,00,000 will be reduced to Rs. 32,00,000 after the deduction of Rs. 2,00,000]
Total income			33,50,000
Computation of income-tax
Tax on the total income of Rs. 33,50,000 @ 55% thereof			18,42,500
Add : Income-tax @ 7.5% on so much of the total income as does not exceed the “relevant amount of distributions of dividends” (7.5% of Rs. 2,50,000)			18,750
			18,61,250
Less :
(a) deduction of tax in respect of inter-corporate dividends (under section 85A)			Rs. 12,224
[Average rate of tax on the total income of the company is 55.56%. The amount of tax calculated at this rate on the dividends of Rs. 40,000 is Rs. 22,224. This exceeds the amount of 25% of the dividends of Rs. 40,000, viz., Rs. 10,000 by Rs. 12,224 which is the deduction  of tax of tax admissible under section 85A]
(b) deduction of tax under  section 2(5)(a)( i) of the Finance Act, 1966 in respect of the profits of Rs. 5 lakhs from exports			Rs. 27,780
[The rebate on the export profits of Rs. 5 lakhs has been calculated at 1/10th of the average rate of tax applicable to the total income of the company]
(c) deduction of tax under section 2(5)(a)( ii) of the Finance Act, 1966 calculated on 2% of the export sales of Rs. 50 lakhs			Rs. 55,560		95,564
[2% of the export sales of Rs. 50 lakhs is Rs. 1 lakh. The tax calculated on this amount at the average rate of tax applicable to the total income of the company is Rs. 55,560 which is the amount of deduction admissible]
Tax payable			17,65,686
COMPUTATION OF SURTAX CHARGEABLE FROM THE COMPANY FOR THE ASSESSMENT YEAR 1966-67 UNDER THE COMPANIES (PROFITS) SURTAX ACT, 1964
Further relevant particulars:			Rs.
Reserves, including development rebate reserve, as on 1-1-1965			20,00,000
Debentures as on 1-1-1965			15,00,000
Loans, as on 1-1-1965 , from banks (for the creation of capital assets in India and repayable over a period of 7 years)			15,00,000
Other loans from banks, as on 1-1-1965			18,00,000
Interest on debentures and long-term borrowings from banks for creation of capital assets in India, allowed as a deduction in the computation of the total income			2,03,940
Cost of shares in companies, as on 1-1-1965			4,00,000
Computation of chargeable profits
Total income computed under the Income-tax Act			33,50,000
Deduct :
(a) “Short-term” capital gains			Rs. 60,000
(b) dividends received from domestic companies			Rs. 40,000
(c)  amount of deduction of income-tax allowed to the company under section 2(5)(a)( i) and (ii) of the Finance Act,1966, in respect of export profits, and on 2% of the export sales			Rs. 83,340		1,83,340
			31,66,660
Deduct further :			Rs.
Income-tax payable on the total income, viz., Rs. 17,65,686 as reduced by Rs. 62,086 being the aggregate of the under mentioned items, viz.,			17,03,600
			14,63,060
a. tax payable on  the “short-term” capital gains Rs. 33,336 (calculated on “short-term” capital gains of Rs. 60,000 at the average rate of tax of 55.56%);
b. tax payable on dividends received from domestic companies Rs. 10,000; and
c. income-tax payable with reference to the “relevant amount of distributions of dividends”—Rs. 18,750
Add :  Interest on debentures and long-term loans from banks for creation of capital assets in India			2,03,940
Chargeable profits			16,67,000
Computation of capital
Paid-up equity capital, as on 1-1-1965			50,00,000
Reserves, including development rebate reserve, as on1-1-1965			20,00,000
Debentures, as on 1-1-1965			15,00,000
Long-term borrowings, as on 1-1-1965, from banks for      creation of capital assets in India			15,00,000
[The cost of the shares  in companies, held by the company, viz., Rs. 4,00,000 is not deductible from the “capital” as computed above, as such cost is less than the amount of the company’s other brrowings from banks as on 1-1-1965, namely, Rs. 18 lakhs]			1,00,00,000
“Statutory deduction” @ 10% of the “capital”			10,00,000
Computation of surtax			Rs.
Chargeable profits as above			16,67,000
Amount by which the chargeable profits exceed the”statutory deduction” [Rs. 16,67,000 minus Rs. 10,00,000]			6,67,000
Surtax payable @ 35% thereof			2,33,450
EXAMPLE 5 :
“Closely-held” Indian company (i.e., an Indian company which is not a company in which the public are substantially  interested)
Particulars of income
Income from business :
1. Profits derived from the manufacture or production of certain articles specified in the list of articles and things  relating to priority industries in the Fifth Schedule			Rs.  20,00,000
2. Profits from other manufacturing activities			Rs.  5,00,000		25,00,000
Dividends from “domestic companies”			12,000
			25,12,000
Other particulars
“Previous year” relevant to the assessment year 1966-67			Calendar year 1965
Paid-up equity capital as on  1-1-1965			32,00,000
Dividends declared during 1965 in respect of the equity capital			4,00,000
“Relevant amount of distributions of dividends”, (i.e. dividends in excess of 10% of the paid-up equity capital, as on 1-1-1965) with reference to which additional income-tax @ 7.5% thereof is chargeable from the company under the Finance Act, 1966			80,000
[The company  was charged to tax for the  assessment years 1964-65 and 1965-66, with reference to the entire amount of its distributions of equity dividends during 1963 and 1964, respectively, by reduction of the rebates of tax due to it for those assessment years under the Finance Acts, 1964 and 1965]
Computation of total income chargeable to tax
Income as above			25,12,000
Deduct : The amount calculated at 8% of the profits from the manufacture or production of  the articles specified in the List in the Fifth Schedule, deductible under section 80E			1,60,000
[After the above deduction, the business income will be reduced to Rs. 23,40,000]
Total income			23,52,000
Computation of tax
Income-tax on the first Rs. 10,00,000 @ 55% thereof			Rs.5,50,000
Income-tax on the balance of the total income, i.e., on Rs. 13,52,000 @ 60%			Rs. 8,11,200		13,61,200.00
Add : 7½% of so much of the total income as does not exceed the “relevant amount of distributions of divi-dends” (7½% of Rs. 80,000)			6,000.00
			13,67,200.00
[Although the company is a closely-held company, it is exempt under section 104(4)(a) from the requirement of compulsory distribution of dividends up to the statutory percentage of its distributable income. It is, therefore, chargeable to income-tax with reference to the “relevant amount of distributions of dividends”]
Less : Amount of deduction of tax under section 85A in  respect of dividends from domestic companies			3,975.48
[The average rate of tax on the total income of the company is 58.129%. The income-tax calculated at this rate on the dividends of Rs. 12,000  is Rs. 6,975.48 which exceeds the amount of 25% of the dividends, viz., Rs. 3,000 by Rs. 3,975.48, which  is the amount of  deduction admissible under section 85A]			13,63,224.52
Income-tax payable (as rounded off under section 288B)			13,63,225
B. Company other than a domestic company
EXAMPLE 6 :
COMPANY (OTHER THAN AN INDIAN COMPANY) WHICH HAS NOT MADE THE PRESCRIBED ARRANGEMENTS FOR THE DECLARATION AND PAYMENT OF DIVIDENDS WITHIN INDIA
Particulars of income			Rs.
Income from business of growing and manufacturing tea(income exclusive of agricultural income)			15,00,000
Royalties in respect of certain patent rights received from an Indian concern under an agreement entered into after 31-3-1961, and approved by the Central Government			24,000
Dividends from a closely-held Indian company mainly engaged in the manufacture of certain articles specified inthe list of articles in the Fifth Schedule			20,000
			15,44,000
Other particulars			Rs.
“Previous year” relevant to the assessment year 1966-67- Twelve months ended on 31-3-1966
Expenditure incurred during the “previous year” on expansion of the area under tea plantation, being the actual cost of planting comprising the cost of preparing the land and seeds, cuttings, nurseries, etc.			50,000
Total income chargeable to tax			15,44,000
[Although tea is one of the articles specified in the list of articles and things relating to priority industries in the Fifth Schedule, the company is not entitled under section 80E to the deduction of 8% of the profits derived by it from the manufacture of tea, because it is not a domestic company.
The company is also not entitled, for the assessment year 1966-67, to the deduction for “development allowance”, under section 33A in respect of the expenditure incurred by it during the previous year for planting tea bushes, because such  deduction will be admissible only in computing the profits of the second “previous year” reckoned from the previous year in which the land is prepared for planting. The company will,  thus, be entitled to the deduction for “development allowance” in the computation of its profits of the “previous year” relevant to the assessment year 1967-68 with  reference to the actual cost of planting upto that “previous year”]
Computation of tax
Income-tax on the royalty income of Rs. 24,000@ 50% thereof			12,000
Income-tax on the balance of the total income, i.e., on Rs. 15,20,000 @ 70% thereof			10,64,000
			10,76,000
Less : Deduction of tax under section 85A in respet dividends			10,938
[The average rate of tax on the total income of the company is 69.69% and the tax at that rate on the dividends of Rs. 20,000 works out to Rs. 13,938. This exceeds the amount of 15% of the dividends, viz., Rs. 3,000 by Rs. 10,938 which is the amount of deduction of tax admissible under section 85A]
Tax payable			10,65,062