FINANCE ACT, 1966 – CIRCULAR NO. 4-P, DATED 21-7-1966

1. Amendments at a glance

5
FINANCE ACT, 1966
 SECTION/SCHEDULE
 PARTICULARS
Finance Act
2nd and 1st Sch.
Rate Structure 4-29; 32-37
2(5)
Export incentives 30-31
Income-tax Act
2(18)
Definition of “company in which the public are substantially interested” 47
2(42A)
Capital gains arising from transfer of certificates issued under National Defence Remittance Scheme 61
13(b)(ii)
Forfeiture of exemption from tax of income of charitable institutions or trusts set up after 31-3-1962 67
32(1)(ii) Prov.
Depreciation allowance in respect of machinery or plant of a small cost 54
32(1)(iv)
Initial depreciation allowance on residential buildings for employees 45
33(1)(iii)(a)
Rate of development rebate in respect of new machinery or plant installed during 1-4-1965 to 31-3-1970 39
33(3), Expln.
Definition of “amalgamation” 42
33A
Development allowance 43
34(3)(a)
Conditions for the allowance of development rebate 40-41
35A
Deduction of capital expenditure on acquisition of patent rights, etc., used for business in instalments over a period of years 62-63
36(1)(viii)
Approved financial corporations – Increase, in the quantum of deduction allowable for amounts credited to special reserve account 44
43(1) Prov., 32(1)(iii) Expln.. (1)
Restriction in regard to depreciation allowance in respect of expensive motor cars 64-66
80A(2)(ii) and Expln.
Deduction in respect of life insurance premiums, sums paid under contracts for deferred annuity on life, etc. 57
85B and 85C
Effective rates of tax in respect of certain inter-corporate dividends and certain royalties, technical service fees, etc. 32-34
86A, 88(1)(a), 235(b)(i) and rule 3(c) of Part A of 1st Sch.
Increase in the limits of the quantum of rebates of tax 36
104(4)(a)
Closely-held Indian companies mainly engaged in the business of construction of ships – Their exclusion from the scope of provisions for levy of penal tax on undistributed profits 52
104(4)(e)
Exclusion of closely-held foreign companies declaring their dividends outside India from the scope of levy of penal tax on undistributed profits 51
109(i)(g), 104(1)(ii)
Rationalisation of provisions relating to computation of “distributable income” of closely-held company 48-49
109(ii)
Definition of “investment company” 50
109(iii)(3)
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 for failure to distribute dividends out of the distributable income attributable to such activities 53
112A
Tax concessions in respect of interest on National Savings Certificates (First Issue) 58
193 Prov. (iv)
Payment of interest on small holdings of Government securities without deduction of tax at source 59
201(1)(Prov.), (1A)
Consequences of failure to deduct tax at source or pay it to Central Government 68-70
288A
Rounding off of the amount of total income to the nearest multiple of Rs. 10 55
288B
Rounding off of tax, interest, penalty, refund, etc., to the nearest multiple of one rupee 56
UNIT TRUST OF India ACT
32
Additional exemption for income from units 60
companies (profits) surtax act
Rule 2(i)(b), (c) of 1st Sch.
Computation of chargeable profits 72-73
3rd Sch.
Rates of surtax 74

 2. Rate structure

FINANCE ACT, 1966

Rate of income-tax (for the assessment year 1966-67) in the case of taxpayers other than companies

4. Individuals, Hindu undivided families, unregistered firms, associations of persons (other than co-operative societies), bodies of individuals and artificial juridical persons – In the case of taxpayers of these categories, the gradation of income slabs and the rates of income-tax applicable thereto are the same as for the assessment year 1965-66, under the Finance Act, 1965. The basis and the  rates for the levy of surcharges on the income-tax calculated on the earned and unearned income of such taxpayers are also identical to those for the assessment year 1965-66. However, a new surcharge, named as the special surcharge, is leviable for the assessment year 1966-67 at the rate of 10 per cent of the amount of income-tax as increased by the amount, if any, of the above-mentioned earned and unearned income surcharges.

FINANCE ACT, 1966

5. While the Finance Act, 1966 has imposed a special surcharge on income-tax, it had also increased the quantum of certain reliefs available to the taxpayers. In this behalf, the amount of tax relief on account of personal allowances, available to resident individuals and resident Hindu undivided families, has been fixed at amounts which are higher than such tax relief available under the Finance Act, 1965, by Rs. 25 in each case. The amount of this tax relief has been calculated, as before, at 5 per cent (which is the rate of income-tax applicable to the first Rs. 5,000 of the total income) on certain higher amounts of personal allowances, varying in accordance with the personal circumstances of the taxpayer. The amount of such tax relief for the assessment year 1966-67 compares with the corresponding amount for the assessment year 1965-66 as follows:

In the case of
Amount of tax relief
1965-66
1966-67
1. An unmarried individual
Rs. 100

[5% of Rs. 2,500]
Rs. 125

[5% of Rs. 2,000]
2. A married individual with no child mainly dependent on him or a Hindu undivided family having no minor coparcener
Rs. 175

[5% of Rs. 3,500]
Rs. 200

[5% of Rs. 4,000]
3. A married individual having one child mainly dependent on him, or a Hindu undivided family having one minor coparcener mainly supported  from  income  of  such family
Rs. 195

[5% of Rs. 3,900]
Rs. 220

[5% of Rs. 4,400]
4. A married individual having more than one child mainly dependent on him, or a Hindu undivided family having more than one minor coparcener mainly supported from the income of such family
Rs. 215

[5% of Rs. 4,300]
Rs. 240

[5% of Rs. 4,800]

The above-mentioned tax relief on account of personal allowances will be available as before, in the case of all resident individuals and Hindu undivided families, irrespective of the magnitude of their total income. Where the amount of tax chargeable on the total income of the taxpayer at the prescribed rates is equal to or less than the amount of the above-mentioned tax relief, no tax will be payable by him and, in any other case, the tax chargeable will be reduced by the amount of the tax relief.

FINANCE ACT, 1966

6. The Finance Act, 1966 has also fixed the limits of total incomes on which no income-tax is chargeable in the case of resident taxpayers, at amounts  which are higher than the corresponding limits under the Finance Act, 1965, by Rs. 1,000, in each case. Thus, in the case of a resident Hindu undivided family satisfying certain conditions (viz., that it has at least two members, aged 18 years or more, who are entitled to claim partition, or at least two members, entitled to claim partition, who are not lineally descended one from the other and who are not lineally descended from any other living members of the family), no income-tax will be payable for the assessment year 1966-67 unless the total income of the family exceeds Rs. 7,000. In the case of any other resident taxpayer, no income -tax will be payable for the assessment year 1966-67 unless the total income exceeds Rs. 4,000. Where the total income exceeds the above-mentioned limits of Rs. 7,000 or Rs. 4,000, as the case may be, income-tax will be payable on the whole of the total income subject to marginal relief in cases where the total income does not exceed Rs. 20,000. The marginal relief consists of limiting the amount of tax payable to 40 per cent of the amount by which the total income exceeds Rs. 7,000 or Rs. 4,000, as the case may be. The provision for marginal relief,  in effect, operates only in the following cases:

In the case of
Range of total income in respect of which marginal relief will be available
1
2
1. A resident Hindu undivided family of the category which is exempt from tax on total income not exceeding Rs. 7,000—
(a) where the family has no minor coparcener and is entitled to personal tax relief of Rs. 200
Where the total income is not more than Rs. 7,833;
(b) where the family has one minor coparcener and is entitled to personal tax relief of Rs. 220
Where the total income is not more than Rs. 7,766;
(c) where the family has more than one minor coparcener and is entitled to personal tax relief of Rs. 240
Where the total income is not more than Rs. 7,700;
2. All other resident taxpayers of the category who are exempt from tax on total incomes, not exceeding Rs. 4,000—
(a) unmarried individual entitled to personal tax relief of Rs. 125
Where the total income is not more than Rs. 4,214;
(b) all other resident taxpayers not entitled to any personal tax relief, e.g., firms, associations of persons, bodies of individuals, etc.
Where the total income is not more than Rs. 4,571;

The provision for marginal relief with reference to the exemption limit of Rs. 4,000 will not be applicable in the case of a resident married individual entitled to tax relief on account of personal allowances in a sum of Rs. 200 or more, because, in such cases, the tax on the first Rs. 4,000 of the total income will be set off by the tax relief on account of personal allowances.

FINANCE ACT, 1966

7. In regard to income under the head “Salaries” assessable for the assessment year 1966-67, the Finance Act provides – on the lines of the corresponding provisions in the Finance Acts of earlier years – that the tax payable thereon will be such proportion of the tax calculated on the total income in accordance with the rates prescribed by the Finance Act, 1965, as the amount of the income under the head “Salaries” bears to the total income. In other words, the tax on the salary income assessable for the assessment year 1966-67 will be calculated at the average rate of tax applicable to the total income in accordance with the rates prescribed by the Finance Act, 1965. Thus, the salary income assessable for the assessment year 1966-67 will not bear the special surcharge on income-tax. Only income other than salary income will bear special surcharge because such income will be chargeable to tax at the average rate of tax applicable to the total income in accordance with the rates prescribed by the Finance Act, 1966, vide Example 1 in Part I of Appendix II.

FINANCE ACT, 1966

8. In a case where the total income includes capital gains, the tax on the capital gains will be computed in accordance with the provisions of section 114, vide Examples 3 and 4 in Part I of Appendix II. The tax on income by way of compensation, referred to in section 28(ii ), will be computed in accordance with the provisions of section 112.

FINANCE ACT, 1966

9. Co-operative societies – In the case of co-operative societies, the rate structure of income-tax for the assessment year 1966-67 is the same as for the assessment year 1965-66. The surcharge which was leviable in the case of co-operative societies for the assessment year 1965-66 on the income-tax calculated on their total income in the slab above Rs. 25,000, at 6¼ per cent of such income-tax, is leviable also for the assessment year 1966-67. However, in addition to this surcharge, a special surcharge will be leviable on co-operative societies for the assessment year 1966-67 at the rate of 10 per cent of the income-tax as increased by the amount of the former surcharge. The Finance Act, 1966 has also provided for an exemption from tax in the case of co-operative societies whose total income does not exceed the limit of Rs. 4,000, which is higher by Rs. 1,000 than the corresponding limit of Rs. 3,000 under the Finance Act, 1965. In a case where the total income exceeds Rs. 4,000,  income-tax will be chargeable on the whole of the total income (subject, of course, to the provisions for tax rebates in section 81), but if the total income does not exceed Rs. 20,000, the amount of tax will be limited, by way of marginal relief, to 40 per cent of the amount by which the total income exceeds Rs. 4,000. Such marginal relief will, in effect, be available in cases where the total income is not more than Rs. 4,571.

FINANCE ACT, 1966

10. Registered firms and local authorities – The rates of income-tax and also the surcharge on income-tax applicable in the case of registered firms and local authorities for the assessment year 1965-66 under the Finance Act, 1965, have been continued by the Finance Act, 1966 for the assessment year 1966-67. The Finance Act, 1966 has, however, imposed a further surcharge, named the special surcharge, on registered firms and local authorities, which will be calculated at the rate of 10 per cent of the amount of income-tax as increased by the amount of the former surcharge.

FINANCE ACT, 1966

Rates of annuity deposits for the assessment year 1966-67 and provisions for annuity deposits in relation to subsequent assessment years

11. The rates of annuity deposits required to be made under Chapter XXIIA of the Income-tax Act in respect of income chargeable to tax for the assessment year 1966-67 are the same as for the assessment year 1965-66, vide section 3 of the Finance Act, 1966, and the Second Schedule thereto. The Finance Act, 1966 has made important changes, explained below, in the provisions of the Income-tax Act, in respect of the annuity deposits to be made with reference to the total income  chargeable to tax for the assessment year 1967-68 and subsequent years. These changes do not affect the provisions of the law relating to annuity deposits in respect of income assessable for the assessment year 1966-67 or earlier years. Thus, for the assessment year 1966-67, the amount of the deposit calculated at the prescribed rates will be allowable as a deduction in the computation of the total income even though the advance deposit made during the financial year 1965-66 falls short of the required amount, and the amount of such shortfall will be required to be made good by a further deposit on the basis of self-assessment or on the basis of the provisional assessment, or regular assessment, as the case may be. Arrears of deposits in respect of the assessment year 1966-67 and earlier years will also continue to be recoverable in the same manner as arrears of tax. The method of computation of annuity deposits in respect of the assessment year 1966-67 has been illustrated in Examples 2, 3 and 4 of Part I of Appendix II.

FINANCE ACT, 1966

12. The changes made by the Finance Act, 1966 in the provisions of the Income-tax Act relating to annuity deposits for the assessment year 1967-68 and subsequent years are designed to modify certain features of the scheme of annuity deposits which resulted in hardship or inconvenience to depositors and also to simplify the administration of the scheme of deposits. The substance and the effect of these changes in the law, which have been made by sections 29,30, 31 and 32 of the Finance Act, 1966, read with the Third Schedule thereto, may be briefly stated as follows:

1. Annuity deposits in relation to income assessable for the assessment year 1967-68 and subsequent years will be required to be made, at the rates prescribed in the annual Finance Act, during the financial year immediately preceding the assessment year. The Income-tax Officer will have the authority to allow the depositor to make the deposit after the relevant financial year only in such cases and circumstances, and subject to such conditions, as may be specified in the Annuity Deposit Scheme framed by the Central Government.

The rates at which annuity deposits are to be made during the financial year 1966-67 in relation to the income assessable for the assessment year 1967-68 are the same as are applicable to annuity deposits for the assessment year 1966-67, vide section 3 of the Finance Act, 1966 and the Second Schedule thereto.

Such annuity deposits can be made by the depositor at any time during the relevant financial year in one lump sum or in instalments of his choice. The deposits will have to be made by the depositors on their own volition and the Income-tax Department will not issue any notice for this purpose. There will be no requirement of making annuity deposits on the basis of self-assessment or provisional or regular assessments. Evidence as to the amount of deposit actually made during a financial year will have to be furnished by the depositor before the Income-tax Officer only for the purpose of claiming the deduction for such deposit in the computation of his total income for the relevant assessment year.

2. There will be no liability to the recovery of any shortfall in annuity deposits relating to the assessment year 1967-68 and subsequent years, and depositors will also not be liable to the imposition of a penalty for their failure to make the deposits during the relevant financial year or the extended time as allowed by the Income-tax Officer.

3. Taxpayers who do not wish to make any annuity deposits in relation to the assessment year 1967-68 or any subsequent year, will not be required to furnish any written declaration in this behalf before the Income-tax Officer. They can make deposits at their option, in any amount of their choice, though in the event of failure to make the deposit or of the deposit made being short of the required amount, they will incur a liability, subject to certain exceptions, for the payment of an additional amount of income-tax under the provisions explained in items (5) and (6) below.

4. In respect of the assessment year 1967-68 and subsequent years, the deduction allowable under section 280-O for the amount of annuity deposits, in the computation of the total income, will be limited to the amount of the deposit actually made by the taxpayer during the financial year immediately preceding the assessment year or the extended time allowed for the purpose, and where no annuity deposit has been made, no deduction will be allowable. Provisions to this effect have been made in section 280-O, in view of the position  that in respect of the income assessable for the assessment year 1967-68 and subsequent years, deposits will be made at the option of the taxpayer in any amount of his choice, and any shortfall in the deposit  from the amount calculated at the prescribed rate will not be recoverable.

5. Taxpayers who are required under Chapter XXIIA to make annuity deposits, but do not make  any deposit or make a short deposit, will be liable,  subject to certain exceptions, to pay an additional amount of income-tax, under section 280X, calculated with reference to the amount of the deposit or the shortfall, as the case may be. Taxpayers falling under the following categories will be exempt from the levy of such additional income-tax:

(a) persons whose total income of the previous year relevant to the assessment year does not exceed Rs. 25,000; and

(b) individuals who are more than 70 years of age on the last day of the previous year relevant to the assessment year.

6. The amount of the above-mentioned additional income-tax chargeable under section 280X will, stated simply, be equal to one-half of the amount which the taxpayer retains with himself by not making the deposit or making a short deposit. Thus, in the case of a taxpayer who does not make the deposit, the additional income-tax will be equal to one-half of the amount arrived at by deducting from the amount of the deposit required to be made, the difference between—

(a) the tax calculated on his total income, and

(b) the tax which would have been payable if his total income had been reduced by the amount of annuity deposit required to be made.

In a case where the annuity deposit made falls short of the amount of annuity deposit required to be made, the additional income-tax chargeable will be equal to one-half of the amount arrived at by deducting from the amount of such shortfall, the difference between—

(a) the tax calculated on his total income (as computed after deduction of the annuity deposit actually made), and

(b) the tax which would have been payable if the total income had been reduced by the amount of the shortfall referred to above.

For the purpose of computing the above-mentioned additional income-tax, the amount of annuity deposit required to be made will be taken to be the amount of annuity deposit calculated on the adjusted total income of the taxpayer at the prescribed rate or the amount by which the total income for the relevant assessment year (as computed without making any deduction for annuity deposit) exceeds Rs. 25,000, whichever is less. This provision, which limits the amount of the annuity deposit required to be made to the amount by which the total income of the depositor exceeds Rs. 25,000, is meant to provide marginal relief in respect of levy of additional income-tax to taxpayers whose total income exceeds Rs. 25,000 by a small amount. Such marginal relief has been provided in view of the position that taxpayers whose total income for the assessment year 1967-68 or any subsequent year does not exceed Rs. 25,000 are not liable to the additional income-tax under section 280X for their failure to make annuity deposit or for making a short deposit. The effect of the above-mentioned marginal provision is illustrated in the following example:

EXAMPLE

Assessment year 1967-68  – Resident – Married individual with more than one child

Rs.
Earned income
26,000
Amount of deposit required to be made as calculated at the prescribed rate of 7½ per cent
1,950
Amount by which the total income exceeds Rs. 25,000
1,000(A)
Amount of deposit actually made
Nil
Tax on the total income of Rs. 26,000 (assuming that the rates of  tax  and  special  surcharge   for  the  current  assessment year are applicable)
4,576(B)
Total income as reduced by the amount of the annuity deposit required  to  be  made,  as  limited  under  the  marginal  relief provision  to  Rs. 1,000, being  the excess of the total income of Rs. 26,000 over Rs. 25,000
25,000
Tax payable on the reduced total income of Rs. 25,000 (calculated at the rates of tax for the current assessment year)
4,136 (C)
Difference in the tax figures at (B) and (C)
440(D)
Amount by which the annuity deposit required to be made as limited to the sum as at (A), exceeds the difference in tax as at (D) above (Rs. 1,000 minus Rs. 440)
560(E)
Additional income-tax payable [being one-half of the figure at (E) above]
280

It is to be kept in view that although for the purpose of levy of additional income-tax the required amount of annuity deposit is limited to the amount by which the total income exceeds Rs. 25,000, it will be open to the depositor to make a deposit up to the amount calculated at the prescribed rate and if he does so he will be entitled to a deduction of that amount under section 280-O, in the computation of his total income.

7. In the case of taxpayers having income chargeable under the head “Salaries” section 280P (as it stood before its amendment by section 30 of the Finance Act, 1966) made it mandatory for persons responsible for paying the salary to compute the amount of tax deductible at source therefrom on the amount of salary income as reduced by the amount of annuity deposit calculated thereon at the prescribed rate. Under section 280P as amended with effect from 1-4-1966, it will be permissible (and not mandatory) for the paying authority to deduct the amount of the annuity deposit (calculated at the prescribed rate) from the salary income for the purpose of computing the tax required to be deducted therefrom. However, in the case of a person whose salary income does not exceed Rs. 25,000, the tax to be deducted therefrom will be calculated without making any deduction for the amount of annuity deposit except where the person concerned intimates the paying authority, in writing, by the 31st December of the financial year, of his intention to make the deposit and specifies the amount which he so intends to deposit. Where such an intimation has been given, the tax deductible at source from the salary income will be calculated on such income as reduced by the amount of the deposit so specified. These provisions have been made in view of the position that the making of annuity deposits in relation to the assessment year 1967-68 and subsequent years is optional in all cases and in the case of depositors whose total income does not exceed Rs. 25,000, there is no liability to pay additional income-tax for failure to make the deposit or for making a short deposit.

FINANCE ACT, 1966

Rates of tax in the case of companies for the assessment year 1966-67

13. The basic rates of income-tax applicable under the Finance Act, 1966 to the income of various classes of companies for the assessment year 1966-67 are, with certain exceptions, higher than the effective rate of income-tax (gross rate of tax less the  rebates admissible) for the assessment year 1965-66 by certain percentages not exceeding 5 per cent of the total income. On the other hand, the Finance Act, 1966 has reduced the rate of surtax chargeable on companies under the Companies (Profits) Surtax Act, 1964 for and from the assessment year 1966-67 by 5 per cent from 40 per cent to 35 per cent of the net chargeable profits.

FINANCE ACT, 1966

14. Life Insurance Corporation of India – In the case of the Life Insurance Corporation of India, the rate of income-tax for the assessment year 1966-67 on its profits and gains from life insurance business is 52.5 per cent as against 47.5 per cent for the assessment year 1965-66. The rate of tax on the profits and gains of the Corporation from its business other than life insurance is the same  as is applicable to the total income of a domestic company in which the public are substantially interested, viz., 55 per cent. [The term “domestic company” as defined in section 2(7) of the Finance Act, 1966, means an Indian company, or any other company which in respect of its income chargeable to tax for the assessment year 1966-67 has made the prescribed arrangements for the declaration and payment within India of the dividends payable out of such income.]

FINANCE ACT, 1966

15. Domestic companies – In the case of a domestic company in which the public are substantially interested (including a company which is a wholly owned subsidiary of a company in which the public are substantially interested), the basic rate of income-tax for the assessment year 1966-67 is 45 per cent of the total income where such income does not exceed Rs. 25,000 and 55 per cent where the total income exceeds Rs. 25,000. The corresponding effective rates of tax in the case of such companies under the Finance Act, 1965 were 42.5 per cent and 50 per cent respectively. In the case of a domestic “industrial” company in which the public are not substantially interested and which is not a wholly owned subsidiary of a company in which the public are substantially interested, the rate of income-tax for the assessment year 1966-67 in respect of the first Rs. 10,00,000 of its total income is 55 per cent, and on the balance of the total income, it is 60 per cent. The corresponding effective rates of income-tax in the case of such companies under the Finance Act, 1965, were 50 per cent of the first Rs. 10,00,000 of the total income, and 60 per cent of the balance thereof. In a case where a domestic company is not an “industrial” company and is also not a company in which the public are substantially interested, or which is a wholly owned subsidiary of a company in which the public are substantially interested, the rate of income-tax  for the assessment year 1966-67 on the whole of its total income is 65 per cent, as against 60 per cent for the assessment year 1965-66. [The term “industrial company” as defined in section 2(7) of the Finance Act, 1966, means, in substance, a company whose total income, to the extent of 51 per cent thereof or more, consists of profits derived from the business of generation or distribution of electricity or any other form of power or the construction of ships or the manufacture or processing of goods or mining.]

FINANCE ACT, 1966

16. In addition to income-tax calculated at the rates mentioned in the preceding paragraph, domestic companies of certain categories are chargeable under the Finance Act, 1966, to an additional amount of income-tax, at the rate of 7.5 per cent on their total income to the extent of the “relevant amount of distribution of dividends” during the previous year in respect of their equity capital. The various categories of domestic companies liable to such tax are: (a ) companies in which the public are substantially interested as also wholly owned subsidiaries of such companies; and (b) such of the companies in which the public are not substantially interested as are exempt from the levy of additional income-tax chargeable under section 104(1) on the undistributed profits of a company on account of its failure to distribute dividends up to the statutory percentage of its distributable income. Companies referred to in (b ) above, which are exempt from the levy of additional income-tax on their undistributed profits, are (i ) companies referred to in section 104(2)( iii), namely those whose share capital to the extent of 75 per cent thereof, or more, is beneficially held throughout the previous year by a charitable institution or fund established in India, whose income from dividends is exempt from tax under section 11; (ii) companies which are exempt from the levy of additional tax under section 104(1) under the terms of notification issued by the Central Government under section 104(3); (iii) Indian companies whose business consists mainly in the manufacture or processing of goods, mining or in the generation or distribution of electricity or any other form of power; and (iv) Indian companies owning capital assets, consisting of plant and machinery (other than office appliances or road transport vehicles), of a value of Rs. 50 lakhs or more as on the last day of the previous year. In other words, the additional amount of income-tax with reference to the “relevant amount of distribution of dividends” in respect of equity capital is chargeable in the case of all domestic companies except those which are liable to the levy of additional income-tax under section 104(1) in the event of failure to distribute dividends up to the statutory percentage of their distributable income.

FINANCE ACT, 1966

17. Under the Finance Acts of 1964 and 1965, the additional tax chargeable from such domestic companies with reference to their distributions of equity dividends during the previous year was leviable at the rate of 7.5 per cent of the whole of their equity dividends, except where the company had declared its maiden dividend not earlier than the past period of five years, reckoned from the relevant previous year. In the latter case, the said tax was charged with reference only to the amount by which the equity dividends declared or distributed by the company during the previous year exceeded 10 per cent of its paid-up equity capital. Such tax was chargeable under the Finance Acts of 1964 and 1965 by reduction of the rebate of tax due to the company under the respective Acts.

FINANCE ACT, 1966

18. The basis of levy of tax under the Finance Act, 1966, on domestic companies of the categories referred to above, with reference to their distributions of equity dividends is altogether different from the basis laid down under the Finance Acts of 1964 and 1965. Under the Finance Act, 1966, such tax will be chargeable at the rate of 7.5 per cent on so much of the total income of the company as does not exceed the “relevant amount of distributions of dividends”. The expression “relevant amount of distributions of dividends” means, in substance, the aggregate amount of—

(a) that part 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 of 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 first day of the previous year.

FINANCE ACT, 1966

19. Thus, in relation to the equity dividends declared or distributed during the previous year by a domestic company of the categories referred to in paragraph 16 above, the additional income-tax at 7.5 per cent will be chargeable for the assessment year 1966-67, only with reference to the amount by which such dividends exceed 10 per cent of the paid-up equity capital of the company as on the first day of the previous year. Equity dividends up to the first 10 per cent of such paid-up equity capital are thus, excludible for the purpose of levying such tax, in all cases. Further, as stated before, such tax will be calculated only on that part of the total income which does not exceed “the relevant amount of distributions of dividends”.  Consequently, where the “relevant amount of distributions of dividends” exceeds the total income of the company for the assessment year 1966-67, the excess will not be taken into account in calculating the tax.

FINANCE ACT, 1966

20. Further, in a case where the total income of a domestic company includes “long-term” capital gains [i.e., capital gains other than those relating to “short-term capital assets”], the total income for the purpose of charging tax thereon at 7.5 per cent with reference to the “relevant amount of distributions of dividends” will be taken to be the total income as reduced by the amount of the “long-term” capital gains. This is because under the provisions of section 115 [which has overriding effect for the purpose of computing the tax by virtue of section 2(4) of the Finance Act, 1966], the tax on the long-term capital gains is to be computed at the percentages specified therein, viz., 40 per cent, where such gains relate to lands or buildings or any rights therein, and 30 per cent where such gains relate to other classes of capital assets. An illustration of the computation of tax in such a case is given in Example 3 in Part II of Appendix II.

 FINANCE ACT, 1966

21. The Finance Act, 1966 does not provide for the levy of tax on domestic companies with reference to the face value of bonus shares or the amount of bonus issued by them to their shareholders during the previous year. Under the Finance Act, 1965 and earlier  years, such tax was chargeable in the case of domestic companies at the rate of 12.5 per cent of the face value of the bonus shares or the amount of bonus issued by them. This tax, which yielded a small amount of revenue, has been discontinued having regard, inter alia, to the widespread criticism that it acted as a psychological disincentive to the revival of the capital market.

FINANCE ACT, 1966

22. The Finance Act, 1966 has also removed, with effect from 1-4-1966, the provisions contained in sections 45, 114 and 115 relating to the levy of tax, in the case of persons investing in the equity shares of companies and receiving bonus shares, on the notional capital gains represented by the fair market value of the bonus shares as on the 31st day from the date of their allotment. The effect of this is that for the assessment year 1966-67 and subsequent years, capital gains in respect of bonus shares held as a capital asset will be computed only where the taxpayer has actually transferred the bonus shares during the relevant previous year. Such capital gains will be computed in accordance with the general provisions in the Income-tax Act relating to the computation of capital gains arising from the transfer of capital assets.

FINANCE ACT, 1966

23.Companies other than domestic companies – In the case of companies other than domestic companies (i.e., those who are neither Indian companies nor have made the prescribed arrangements  for the declaration and payment of dividends within India), the rate of income-tax for the assessment year 1966-67 on income by way  of royalties or fees for technical services received from an Indian concern under an agreement entered into, respectively, after 31-3-1961 and 29-2-1964, and approved, in either case, by the Central Government, is the same as for the assessment year 1965-66, viz., 50 per cent. However, the rate of income-tax in respect of the income of such companies from all other sources is 70 per cent as against 65 per cent for the assessment year 1965-66.

FINANCE ACT, 1966

24. Simplification of tax calculations in the case of companies – The rate schedule of income-tax in the Finance Act, 1966 in the case of companies has been drafted, on a pattern which is altogether different from that in the Finance Act, 1965 and earlier years, in order to simplify calculations of tax. Certain provisions have also been made in the Income-tax Act for achieving this purpose.

FINANCE ACT, 1966

25. Under the Finance Act, 1965, the effective rate of tax in the case of companies was arrived at by the process of (i) calculating tax on the total income of the company at the gross rate of 80 per cent thereof; (ii) calculating the rebates of income-tax allowable to the company at the specified rates, which varied according to the class of the company concerned and also the class of the income included in the total income; (iii) reducing the amount of  the rebate so arrived at, in the case of domestic companies, by the amount of tax chargeable on the company with reference to the amount of its bonus issues and distributions of equitydividends; and (iv ) deducting from the gross amount of tax referred to in (i), the reduced amount of the rebate, if any, referred to in (iii) above. All the items of rebates, except for the rebate in the case of certain domestic companies on their profits from specified priority industries, had been provided for with a view to levying tax on domestic companies with reference to the amount of their bonus issues or distributions of equity dividends.

In the rate schedule of income-tax in the Finance Act, 1966, there is  no provision for the allowance of rebates, and the rates at which tax is chargeable on the income of various classes of companies have been stated therein directly. This has been achieved, inter alia, by discontinuing the provision for the levy of tax on domestic companies with reference to the amount of their bonus issues, the levying tax on such companies with reference to the relevant amount of distributions of equity dividends only on that part of their total income which does not exceed the relevant amount of such distributions.

FINANCE ACT, 1966

26. One of the items of rebates of tax allowable to domestic companies under the Finance Act, 1965 related to their profits and gains attributable to the business of generation or distribution of electricity or construction, production or manufacture of any one or more of the articles or things relating to priority industries, specified in Part III of the First Schedule to that Act. The amount of this rebate was equivalent to 10 per cent of the normal effective rate of tax applicable to the company. This tax relief in the form of rebate has been replaced by the Finance Act, 1966, by a new provision in section 80E. Under the said provision, a deduction is allowable in the case of eligible domestic companies for an amount equal to 8 per cent of their profits from specified priority industries in the computation of their total income. All domestic companies are eligible for this deduction except for only one category of companies in which the public are substantially interested, namely, those whose total income (as computed before the allowance of the deduction) does not exceed Rs. 25,000. Such companies are not entitled to the deduction because they are liable to tax on their total income under the Finance Act, 1966, at the concessional rate of 45 per cent. The specified priority industries referred to above are the generation or distribution of electricity or any other form of power or the construction, manufacture or production of any one or more of the articles and things specified in the list in the Fifth Schedule. The Finance Act, 1966 has added three new items to this list, namely, “tea”, “newsprint” and “printing machinery”, with effect from 1-4-1966. For the purpose of the deduction allowable under section 80E, these additions to the list in the Fifth Schedule are effective in respect of assessments for the assessment year 1966-67 and subsequent years. It may be mentioned that the list in the Fifth Schedule comprises all the items enumerated in the list of articles and things in Part III of the First Schedule to the Finance Act, 1965, besides including “newsprint” and “printing machinery” which did not form part of the latter. [The items “coal” and “lignite” which formed part of the list in Part III of the First Schedule to the Finance Act, 1965, were included in the Fifth Schedule to the Income-tax Act by the Finance (No. 2) Act, 1965.]

FINANCE ACT, 1966

27. It will be observed that the deduction under section 80E referred to above is allowable in computing the profits and gains from the specified priority industries included in the total income “as computed in accordance with the other provisions” of the Income-tax Act. The effect of this provision is that the deduction under section 80E will be allowed from the profits from the specified priority industries as computed after allowing all the deductions admissible in computing the business income under sections 30 to 43 and also after giving effect to the relevant provisions for set off or carry forward of loss, contained in Chapter VI. The business income of a company may consist of profits from the specified priority industries, as well as profits from other business activities, and the company may also have a loss in the same previous year under a head of income other than “Profits and gains of business or profession” or a business loss carried forward from earlier years and eligible for set off against the business profits of that previous year. In such case, a question may arise as to whether the loss of the relevant previous year under a head other than “Profits and gains of business or profession”, or the business loss carried forward from earlier years should be set off on a proportionate basis, both, against the profits from the specified priority industries and the profits from other business activities. If the loss is set off on a proportionate basis, the quantum of the deduction available in respect of the former profits under section 80E may be reduced to the disadvantage of the company. The Income-tax Act does not, however, provide for the set off of losses on a proportionate basis against income from different types of categories of business activities. It will, therefore, be permissible for the company to claim that the loss should be set off, in the first instance, against its business profits other than profits from the specified priority industries and as to the balance, if any, against its profits from the specified priority industries.

FINANCE ACT, 1966

28. The First Schedule to the Finance Act, 1966 does not contain any list of articles and things relating to priority industries because the list of articles and things contained in the Fifth Schedule to the Income-tax Act is relevant, both, for the purpose of the deduction under section 80E and the deduction under section 33 for development rebate at the higher rate of 35 per cent in respect of new machinery or plant installed in priority industries.

FINANCE ACT, 1966

Removal from the Third Schedule to the Companies (Profits) Surtax Act, 1964 of the provision for special rebate of surtax in respect of profits derived by domestic companies from specified priority industries

29. In view of the position that the chargeable profits of a company, for the purpose of surtax, are determined with reference to its total income as computed under the Income-tax Act, the deduction, under section 80E, of 8 per cent of its profits from specified priority industries in the computation of its total income will, automatically, have the effect of providing a relief to the company also in respect of surtax on such profits. The provisions in the Third Schedule to the Companies (Profits) Surtax Act, 1964 for the allowance of a rebate of one-fifth of the surtax attributable to the profits derived by domestic companies from the business of generation or distribution of electricity, or of construction, manufacture or production of the articles or things relating to priority industries ( which were listed in paragraph 2 of the said Third Schedule) have, therefore, been removed by the Finance Act, 1966, with effect from 1-4-1966, i.e.,  in respect of assessments for and from the assessment year 1966-67.

 FINANCE ACT, 1966

Rebate of tax to exporters for the assessment year 1966-67

30. Section 2(5) of the Finance Act, 1966 continues, for the assessment year 1966-67, the rebates of tax available under the Finance Act, 1965, to non-corporate taxpayers and domestic companies in relation to export of goods or merchandise outside India during the previous year. These tax rebates are :

(a) a rebate of tax calculated at one-tenth of the average rate of tax applicable to the total income, on the profits from exports during the previous year, included in the total income ; and in addition

(b) in the case of taxpayers of the above-mentioned categories, who are engaged in the manufacture of any articles specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 other than certain articles specifically excluded by section 2(5)(c ) of the Finance Act, 1966, a rebate, at the average rate of tax applicable to the total income, calculated on an amount equal to 2 per cent of the sale proceeds of such articles exported by the taxpayers outside India during the previous year, or sold to any other person in India who himself has exported such goods outside India.

FINANCE ACT, 1966

31. For the purpose of the tax rebate referred to at (a) in the preceding paragraph, the amount of profits from exports included in the total income will be determined in accordance with the Income-tax (Determination of Exports Profits) Rules, 1966, notified by the Board in the Gazette of India, Extraordinary, dated 11-7-1966.

 FINANCE ACT, 1966

Effective rates of tax in respect of certain inter-corporate dividends and certain royalties, technical service fees, etc.

32. A company receiving dividends from any domestic company is entitled, under section 85A, to a rebate of income-tax which has the effect of limiting the tax on such dividends to a specified percentage of the dividends. In a case where the recipient of the dividend is a foreign company (i.e.,  a company other than an Indian company which has not made the prescribed arrangements for the declaration and payment of dividends within India), and the dividends have been paid by an Indian company in which the public are not substantially interested and which is mainly engaged in the generation or distribution of electricity or construction, manufacture or production of any of the articles or things specified in the Fifth Schedule to the Income-tax Act, the tax on the dividends is limited to 15 per cent thereof. In all other cases, the tax on inter-corporate dividends received from any domestic company is limited to 25 per cent thereof. The Finance Act, 1966 has not made any change in these effective rates of tax in respect of such inter-corporate dividends.

JUDICIAL ANALYSIS

Explained in – In CIT  v. Central Bank of India Ltd. [1990] 185 ITR 6 (Bom.) (FB ) it was observed that no part of paragraph 32 of Circular No. 4P, dated July 21, 1966 can be read as being an order, instruction or direction which it has categorically to be, if it is to bind the officials of the revenue.

FINANCE ACT, 1966

33. The Finance Act, 1966 has made two new provisions (introduced in sections 85B and 85C with effect from 1-4-1966) providing for a concessional effective rate of tax of 25 per cent on income consisting of dividends and also royalty, commission, fee or similar payments received by Indian companies from foreign companies in the following cases :

(a) where the dividends have been received by the Indian company on shares in a foreign company allotted to it in consideration of the Indian company having provided or rendered or having agreed to provide or render to the foreign company any technical “know-how” or technical services under an agreement approved by the Central Government in this behalf before the first day of October of the relevant assessment year [section 85B]; and

(b) where the royalty, commission, fees or any other similar payment has been received by the Indian company from a foreign company in consideration for the use of any technical “know-how” or in consideration of technical services provided or rendered, or agreed to be provided or rendered by the Indian company to the foreign company under an agreement approved by the Central Government in this behalf before the first day of October of the relevant assessment year [section 85C].

FINANCE ACT, 1966

34. Under each of the provisions mentioned above, the tax on the income under reference (i.e., dividends or, as the case may be, royalty, commission, fees, or any similar payment) will be limited to 25 per cent of the amount of such income by the allowance of a rebate to the Indian company for so much of the tax calculated on such income at the average rate of tax applicable to the total income, as exceeds the amount of 25 per cent of the income. It may be mentioned that the concessional rate of income-tax of 25 per cent under section 85C in respect of royalties, fees, etc., is applicable whether or not the Indian company is holding any shares in the foreign company from which the royalty or fees, etc., are received. The provisions in both the sections 85B and 85C are effective in respect of assessments for and from the assessment year 1966-67. The object of these provisions is to encourage Indian companies to export their technical “know-how” and skill abroad to developing countries in order to expand their business activities and augment the foreign exchange resources of the country.

FINANCE ACT, 1966

Rates of tax deductible at source during the financial year 1966-67 from interest on securities, dividends, etc.

35. The rates at which tax is deductible at source under sections 193 to 195 during the financial year 1966-67 from income other than that chargeable under the head “Salaries” have been specified in Part II of the First Schedule to the Finance Act, 1966. In respect of interest on securities and dividends payable to persons other than companies who are resident in India, or to domestic companies, the rate at which tax is deductible at source has been prescribed at 22 per cent as against 20 per cent under the Finance Act, 1965. The increase by 2 per cent (which amounts to 10 per cent of 20 per cent) is in consonance with the levy by the Finance Act, 1966, of the special surcharge of 10 per cent of the aggregate of the tax and other surcharges on the tax payable by non-corporate taxpayers, and the corresponding increase in the rate of tax in the case of companies. In the case of non-resident non-corporate taxpayers also, the minimum flat rate of tax deductible at source from interest, dividends, etc., payable to them has been increased from 30 per cent as prescribed by the Finance Act, 1965, by 10 per cent thereof, to 33 per cent. The rates at which tax is deductible at source from dividends paid by a domestic company to any foreign company, and also from royalties and technical service fees paid to foreign company by Indian concerns under approved agreements entered into after specified dates, are the same as under the Finance Act, 1965.

 FINANCE ACT, 1966

Increase in the limits of  the quantum of rebates of tax under the Income-tax Act in certain cases

36. In consequence of the imposition by the Finance Act, 1966 of the special surcharge on income-tax in the case of non-corporate taxpayers and the increase in the basic rates of income-tax in the case of companies by approximately 10 per cent of the previous level of income-tax, a few amendments have been made by that Act to certain provisions of the Income-tax Act, in order to increase the quantum of rebates as follows:

1. The limit on the quantum of rebate of income-tax under section 86A in respect of tax-free securities (i.e., securities of the Central Government issued or declared to be income-tax free, or any security of a State Government issued income-tax free, income-tax whereon is payable by the State Government) will be 27.5 per cent of the interest as against the earlier limit of 25 per cent. Likewise, the quantum of rebate of income-tax available in respect of interest on tax-free securities under rule 3(c) of Part A of the First Schedule to the Income-tax Act, in cases where the profits of Life Insurance business are computed with reference to the annual average of the surplus disclosed by actuarial valuation, has been increased from 25 per cent to 27.5 per cent of the amount of such interest.

2. In regard to the rebate of income-tax available under section 235 to shareholders of companies in respect of dividends which are attributable to the agricultural income of the company and on which the company has paid agricultural income-tax, the limit on the quantum of the rebate has been increased from 25 per cent to 27.5 per cent.

3. The limit on the quantum of the rebate of income-tax available to companies under section 88 in respect of donations referred to in that section has also been increased from 25 per cent to 27.5 per cent.

The above-mentioned provisions are effective in respect of assessments for and from the assessment year 1966-67.

 FINANCE ACT, 1966

Increase in the limit under section 4A of the Preference Shares (Regulation of Dividends) Act, 1960, on the quantum of income-tax deductible by companies (for retention by them) out of dividends on certain preference shares

37. Under the provisions of section 4A of the Preference Shares (Regulation of Dividends) Act, 1960, the quantum of income-tax which a company may retain with itself out of the stipulated dividends payable by it on its “subject to income-tax” preference shares was limited to 25 per cent of the stipulated dividend. This provision has been amended by the Finance Act, 1966 to the effect that the amount of income-tax to be deducted by the company for retention by itself, from dividends on such shares, declared after 28-2-1966, will be limited to 27.5 per cent of the aggregate of the stipulated dividend and the amount, if any, by which the stipulated dividend is increased under section 3(3) of the Preference Shares (Regulation of Dividends) Act, 1960. The increase in the quantum of the above-mentioned deduction by 2.5 per cent from 25 per cent to 27.5 per cent has been authorised in view  of increase in the rate of tax on companies by the Finance Act, 1966.

3. Amendments to Income-tax Act

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.

4. Amendments to Companies (Profits) Surtax Act

FINANCE ACT, 1966

  1. 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

  1. 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

  1. 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

  1. 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-termcapital 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-termcapital 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

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