Circular No. 528-Income Tax dated 16/12/1988

1. Amendments at a glance

48

FINANCE ACT, 1988

Section/Schedule	Particulars
	Finance Act
2/1st Sch.	Rate structure 4-9
	Income-tax Act
2(28B), 10(20),	Omission of interest on securities as a separate head
10(23A), 10(24),	of income 10.1, 10.2
13A, 14, 18 to
21, 56 (id), 57(i)
and its Expln.,
58(1) (a)/(b)
80P(2) (f), 86A,
89(2), 112A, 181
and 193
10(6) (ii) to (v)	Modification of provisions relating to exemption of remuneration received by diplomatic personnel of foreign countries 11.1, 11.2
10(6) (viia)	Withdrawal of the benefit of exemption of remuneration paid to foreign technicians 12.1, 12.2
10(6A), Expln.	Tax paid by Government or an Indian concern not to
& 10(6B)	form part of the income of non-residents 13.1, 13.2
10(15) (iic)	Exemption from income-tax in respect of interest on relief bonds 14.1-14.5
10(23D)	Amendment of provisions relating to exemption to the income of Mutual Fund 15.1, 15.2
10(31)	Exemption of subsidies received by planters 16.1, 16.2
10A (7)/(8)	Modification of the provisions relating to industrial undertaking in free trade zones 17.1, 17.2
10B	New provision to extend tax holiday to hundred per cent export-oriented units 18.1-18.4
16(i)	Modification of provisions relating to standard deduction in the case of salaried taxpayers 19.1, 19.2
40(a) (i) / 40(d)	Provisions for disallowance of payments to non-residents if no deduction of tax at source 20.1-20.3
43B	Modification of the provisions relating to deduction in respect of certain liabilities 21.1-21.4
43C, 47(v)	Measure to check tax avoidance in cases of transfer 22.1-22.9
44AB, 139(6A)/	Modification of provisions in respect of audit of
9, 271B	accounts 23.1-23.3
44AC, 206C,	New provision for computing profits and gains from
276BB	business of trading in certain goods 24.1, 24.15
44BB(1)	Modification of special provision relating to income from the business of exploration, etc., of mineral oils 25.1, 25.2
79	Modification of the provisions relating to carry forward and set of off taxes in the case of certain companies 26.1-26.4
80CC(1)	Tax incentive for investment in units of any Mutual Fund where such fund subscribes only to eligible issue of capital 27.1
80CCA	Modification of the provisions relating to National Savings Scheme 27.2, 27.3
80HHC	Extension of income of exporters and incentives to supporting manufacturers exporting goods through export/trading houses 28.1-28.8
80L	Modification of provisions relating to exemption of income from certain specified investments 29.1-29.9
80-O	Modification in the provisions relating to deduction in respect of royalty, etc., from certain foreign enterprises 30.1-30.3
115B(2)	Modification of the provisions relating to the determination of tax liability of the Life Insurance Corporation and for setting up a social security fund 31.1-31.4
115F	Modification of the provisions relating to capital gains in the case of non-resident Indians 32.1, 32.2
131 (1A)/(3)	Amendment of provisions concerning powers or discovery, production of evidence, etc. 33.1-33.4
132(1)/(3)	Modifications of provisions relating to searches and seizures 34.1, 34.2
194C (2), Expln.	Strengthening of the provisions relating to tax deduction at source in the cases of contractors 35.1, 35.2
195(2)	Modification of the provisions relating to tax deduction at source on payment to non-residents 36.1-36.4
230A(1)	Liberalisation of the provisions relating to income-tax clearance certificate 37.1, 37.2
246 (1) (o),	Modification of provisions relating to filing of first
246 (2) (a)	appeal 38.1, 38.3
263	Amendment of provision relating to revision of orders prejudicial to revenue 39.1-39.4
279(1)/(2)	Modification of provisions relating to offences and prosecutions 40.1-40.4
Chapter XXII-A	Omission of Chapter XXII-A of the income-tax relating to annuity deposits 41.1
245DD, 281B	Amendment of the provisions relating to provisional attachment of properties to protect revenue in certain cases 42.1-42.3
285A	Omission of the provisions relating to furnishing of information by contractors 43.1, 43.2
293	Bar of suits in civil court to set aside or modify any proceeding 44.1, 44.2
First Sch.,	Liberalisation of provisions in respect of taxation of
rule 5(b)	profits and deduction of tax at source applicable to the General Insurance Corporation and its subsidiaries 45.1-45.4
Eleventh Sch.	Exclusion of cinematograph films from the Eleventh Schedule 46.1
	Wealth-tax Act
5(1) (xvif)	Exemption in respect of relief bonds 14
5 (1) (xxxa)	Modification of provisions relating to exemption value
	of shares in industrial companies 47.1, 47.2
22DD	Amendment of provisions relating to provisional attachment of properties to protect revenue 42
25	Amendment of provisions relating to revision of orders prejudicial to revenue 39
34C	Amendment of provisions relating to provisional attachment of properties to protect revenue 42
34AB (1)/(2),	Amendment of provisions relating to registered valuers
34ACC, 34AD	48.1-48.5
& 34AE
35-I	Modification of provisions relating to offences and prosecution 40
37 (1A)/(3)	Amendment of provisions concerning powers or discovery, production of evidence, etc. 33
43	Bar of suits in civil court to set aside or modify any proceeding 44
Sch. I	Surcharge on Wealth-tax 49
	Gift-tax Act
5(1) (iiid)	Exemption in respect of relief bonds 14
24	Amendment of provisions relating to revision of orders prejudicial to revenue 39
35(3)/(4)	Modification of provisions relating to offences and prosecutions 40
36 (1A)	Amendment of provisions concerning powers or discovery, production of evidence, etc. 33
42	Bar of suits in civil court to set aside or modify any proceeding 44
	Expenditure Tax Act
6, 13, 24	Modification of provisions relating to authorities, their powers, etc. 50.1, 50.2
	Finance Act, 1983
40	Exclusion of certain assets from the net wealth in case of closely-held companies 51.1, 51.2.

2. Rate structure

Finance Act, 1988

Rates of income-tax in respect of income liable to tax for the assessment year 1988-89

4.1 In respect of incomes of all categories of taxpayers (corporate as well as non-corporate) liable to tax for the assessment year 1988-89, the rates of income-tax have been specified in Part I of the First Schedule to the Finance Act, 1988. These rates are the same as those laid down in Part III of the First Schedule to the Finance Act, 1987, as amended by the Finance (Amendment) Act, 1987.

Finance Act, 1988

4.2 Accordingly, in the case of every person having income exceeding fifty thousand rupees, the amount of income-tax shall be increased by a surcharge for purposes of the Union calculated at the rate of 5 per cent of such income-tax.

Further, in the case of profits and gains of life insurance business, the amount of tax computed in accordance with the provisions of section 115B of the Income-tax Act shall be increased by a surcharge calculated at the rate of five per cent of income-tax. Also the amount of income-tax computed in accordance with provisions of section 115BB of the Income-tax Act on any income from winnings from lotteries, etc., shall be increased by a surcharge calculated at the rate of five per cent of the income-tax. However, no surcharge shall be payable by a non-resident.

Finance Act, 1988

Rates for deduction of tax at source during the financial year 1988-89 from incomes other than salaries

5.1 The rates of deduction of income-tax at source during the financial year 1988-89 from incomes, other than salaries , have been specified in Part II of the First Schedule to the Finance Act. These rates apply to income by way of interest on securities, other categories of interest, dividends, insurance commission, winnings from lotteries and crossword puzzles, income by way of winnings from horse races and income of non-residents (including non-resident Indian) other than salary income. There are certain changes in these rates as compared to the rates in force during the financial year 1987-88. During the financial year 1987-88, tax deductible at source on any income by way of winnings from lotteries, crossword puzzles and horse races, in the case of a person being a non-corporate resident assessee was 40 per cent. However, in the case of non-corporate non-resident assessees as well as corporate assessees tax was deductible at the residual rates prescribed for that class of assessees. Section 115BB of the Income-tax Act provides that the income by way of winnings from lotteries or crossword puzzles or races including horse races or card games and other games of any sort or from gambling or betting of any form or nature whatsoever is chargeable to tax at the rate of forty per cent. With a view to bring uniformity in the rate of deduction of tax at source and the rate at which such income is chargeable to tax, in the case of all assessees, Finance Act, 1988 has specifically provided that in the case of corporate assessees as well as non-corporate assessees, whether resident or not, tax will be deducted at source at the rate of forty per cent on any income by way of winnings from lotteries, crossword puzzles and by way of winnings from horse races.

Finance Act, 1988

5.2 The amount of tax so deducted at source shall in the case of every person being a resident in India or a domestic company be increased by a surcharge calculated at the rate of five per cent of the income-tax.

Finance Act, 1988

5.3 In respect of any payment made to a contractor or a sub-contractor, section 194C of the Income-tax Act provides the rate of deduction of tax at source. The amount of income-tax so deducted shall be increased by a surcharge at the rate of five per cent of the income-tax.

Finance Act, 1988

5.4 With the insertion of new section 206C in the Income-tax Act, the Finance Act has also provided that the amount of tax so collected under the section shall be increased by a surcharge calculated at the rate of five per cent of the income-tax.

Finance Act, 1988

Rates for deduction of tax at source from salaries , computation of advance tax and charging of income-tax in special cases during the financial year 1988-89

6.1 The rates of deduction of tax at source from salaries in the case of individuals during the financial year 1988-89 and also for computation of advance tax payable during the year in the case of all categories of taxpayers have been specified in Part III of the First Schedule to the Finance Act. These rates are also applicable for charging income-tax during the financial year 1988-89 on current income in cases where accelerated assessments have to be made, e.g., provisional assessment of shipping profits arising in India to non-residents, assessment of persons leaving India for good during the financial year 1988-89, assessment of persons who are likely to transfer property to avoid tax, where an order has to be passed in a case of search and seizure for calculating the amount of tax on the estimated undisclosed income, etc.

Finance Act, 1988

6.2 The amount of income-tax to be deducted at source or advance tax or income-tax payable shall, in the case of every person having income exceeding fifty thousand rupees, be increased by a surcharge calculated at the rate of five per cent of the income-tax.

However, no surcharge shall be payable by a non-resident.

Finance Act, 1988

6.3 Similarly, in the case of profits and gains of insurance business, the amount of advance tax payable in accordance with section 115B shall be increased by a surcharge computed at the rate of five per cent of the income-tax.

Finance Act, 1988

Rates of tax applicable to individuals, Hindu undivided families, unregistered firms, etc., co-operative societies, registered firms and local authorities

7.1 In the case of individuals, Hindu undivided families, unregistered firms, etc., the rates of income-tax have been specified in Paragraph A of Part III of the First Schedule. In the case of co-operative societies, registered firms and local authorities, the rates of income-tax have respectively been specified in Paragraph B, Paragraph C and Paragraph D of Part III. These rates are the same as those specified in the corresponding paragraph of Part I of the Schedule to the Finance Act, 1987.

Finance Act, 1988

7.2 The amount of income-tax so computed shall in the case of every assessee having income exceeding fifty thousand rupees be increased by a surcharge for purposes of Union, calculated at the rate of five per cent of income-tax.

However, no surcharge shall be payable by a non-resident.

Finance Act, 1988

Rates of tax applicable to companies

8.1 In case of companies the rates of income-tax have been specified in Paragraph E of Part III of the First Schedule. These rates are the same as those specified in the corresponding paragraph of Part I of the Schedule to the Finance Act, 1987.

Finance Act, 1988

8.2 The amount of tax so computed shall, in the case of every company having income exceeding fifty thousand rupees, be increased by a surcharge calculated at the rate of five per cent of income-tax.

Finance Act, 1988

Partially integrated taxation of non-agricultural income with income derived from agriculture

9. As in the past, the Finance Act provides that in the case of individuals, Hindu undivided families, unregistered firms and other associations of persons, etc., the net agricultural income will be taken into account for computation of advance tax and charging of income-tax. These provisions are broadly on same lines as those in earlier years.

3. Amendments to Income-tax Act

AMENDMENTS TO INCOME-TAX ACT

FINANCE ACT, 1988

Omission of interest on securities as a separate head of income

10.1 Under the existing provisions, “Interest on securities” is a separate head of income as enumerated in section 14 of the Income-tax Act. Sections 18 to 21 of the Income-tax Act deal with the definition of, deduction from and amounts not deductible in determining the taxable income under the head “Interest on securities”. In practice, however, securities are held either as stock-in trade or as investment. Hence, as a measure of rationalisation, “Interest on securities” as a separate head of income has been omitted. Such an income will now be assessed either under the head “Profits and gains of business or profession” or “Income from other sources” depending on whether the securities are held as stock-in-trade or as investment. Consequent to the deletion of sections 18 to 21 of the Income-tax Act, suitable amendments have been made in sections 56 and 57 relating to income from other sources. Further sections 86A and 181 of the Income-tax Act relating to interest on tax-free Government securities have been deleted since these provisions have outlived their relevance because no State Government has issued tax-free securities in the recent years. Section 112A of the Income-tax Act relating to interest-free National Savings Certificates (First Issue) has also been deleted since this series of N.S.C. had matured in 1975. Interest on securities has also been defined as per the new section 2(28B) of the Income-tax Act.

FINANCE ACT, 1988

10.2 These amendments shall come into force with effect from 1st April, 1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent years.

[Sections 3, 4, 7, 8, 10, 18, 19, 20, 27 to 30, 36 and 37 of the Finance Act, 1988]

FINANCE ACT, 1988

Modification of provisions relating to exemption of remuneration received by diplomatic personnel of foreign countries

11.1 Under the existing provisions of sub-clauses (ii) to (v) of clause (6 ) of section 10 of the Income-tax Act, remuneration received by diplomatic personnel and members of the staff of the representatives of foreign countries are exempt. Each of the sub-clauses deals with similar categories of income receivable by different officials. As a measure of rationalisation and simplification, sub-clauses (ii) to (v) of clause ( 6) of section 10 have been clubbed together.

FINANCE ACT, 1988

11.2 This amendment shall come into force with effect from 1st April, 1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent years.

[Section 4 of the Finance Act, 1988]

FINANCE ACT, 1988

Withdrawal of the benefit of exemption of remuneration paid to foreign technicians

12.1 Under the existing provisions of sub-clause (viia) of clause (6) of section 10 of the Income-tax Act, the remuneration due to or received by a foreign technician who is in employment of Government or approved scientific research institution or any business is exempt up to an amount of Rs. 4,000 per month, subject to certain specified conditions for a maximum period of 24 months. Further if the employer pays the tax on the remuneration exceeding Rs. 4,000 per month to the Central Government, the perquisite value of tax so paid for the period of 24 months is exempt from taxation in the hands of the foreign technician. The exemption from perquisite value of tax paid by employer can be available for a further period of 24 months if he continues with the approval of the Central Government. The existing provisions are against the avowed policy of achieving self-reliance in the field of science and technology particularly in view of the fact that India possesses the third largest pool of scientific and technical manpower. With a view to overcome the existing distortion against the Indian technicians, the benefit of exemption from total income of remuneration up to an amount calculated at the rate of Rs. 4,000 per month for a period of 24 months received by a foreign technician has been withdrawn. However, as earlier, the exemption in respect of the perquisite value of tax paid by the employer of a foreign technician has been retained.

FINANCE ACT, 1988

12.2 This amendment will be applicable in the case of a foreign technician employed on or after 1st April, 1988.

[Section 4 of the Finance Act, 1988]

FINANCE ACT, 1988

Tax paid by Government or an Indian concern not to form part of the income of non-residents.

13.1 Under the existing provisions of clause (6A) of section 10 of the Income-tax Act, if any income is derived by a foreign company by way of royalty or fees for technical services from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after 31st March, 1976 and approved by the Central Government, the tax paid on such income under the terms of agreement by the Government of India is not to be included in computing the total income of a foreign company. A large number of public sector companies are entering into agreements with foreign companies and consortia of foreign companies whereby such companies or consortia are undertaking turnkey projects with the approval of the Central Government. In most of the cases, the foreign companies insist that the tax on income should be borne by the Indian concern. The tax borne by the Indian concerns are considerable and go to enhance the cost of the project. With a view to reduce the overall cost of such projects, an amendment has been carried out by inserting a new clause (6B ) to provide that the amount of tax paid by Government or an Indian concern on behalf of non-resident or a foreign company in respect of its income will not be included in computing the total income of such non-resident or foreign company. The exemption will be available where such income arises to a non-resident or foreign company in pursuance of an agreement entered into between the Central Government and the Government of a foreign State or an international organisation or any related agreement which has been approved by the Central Government. A consequential amendment also has been made in clause (6A) which provides that the Explanation below that clause will also be applicable to the new clause (6B) of section 10 of the Income-tax Act.

FINANCE ACT, 1988

13.2 This amendment will come into force with effect from 1st April, 1988 and will, accordingly, apply in relation to assessment year 1988-89 and subsequent years.

[Section 4 of the Finance Act, 1988]

FINANCE ACT, 1988

Exemption from income-tax in respect of interest on relief bonds

14.1 In order to raise additional resources to provide relief to drought affected farmers and persons in rural areas, Government decided that a new bond named as “RAHAT PATRAS” be introduced. To make investment in the bonds attractive, the annual rate of interest has been fixed at 9 per cent. The bonds have a maturity period of five years.

FINANCE ACT, 1988

14.2 With a view to make investments in these bonds more attractive, the provisions of the Income-tax, Wealth-tax and Gift-tax Acts have been amended by the Act. By inserting a new sub-clause (iic) in clause (15) of section 10 it has been provided that the interest from “RAHAT PATRAS” will be completely exempt from tax in the hands of individuals and Hindu undivided families only.

FINANCE ACT, 1988

14.3 This amendment will come into force from 1st April, 1989 and will, accordingly, apply in relation to assessment year 1989-90 and subsequent years.

FINANCE ACT, 1988

14.4 Further, by inserting a new clause (xvif) in sub-section (1) of section 5 of the Wealth-tax Act, it has been provided that the investments made by an individual or a Hindu undivided family in the relief bonds will be exempt from wealth-tax without any monetary limits. By amending clause (aa) of sub-section (3) of section 5 of the Wealth-tax Act, it has further been provided that the exemption as above will be available to the original subscriber to the bond or to a person who has held a bond for a period of at least six months before the valuation date. These amendments in the Wealth-tax Act will come into force from 1st April, 1988 and will, accordingly, apply in relation to assessment year 1988-89 and subsequent assessment years.

FINANCE ACT, 1988

14.5 The Gift-tax Act has also been amended by inserting a new clause (iid) of sub-section (1) of section 5 to provide for exemption from gift-tax in respect of transfer of these bonds up to a maximum of rupees five lakhs in value in the aggregate in one or more previous years. The exemption under the Gift-tax Act will, however, be available only to the initial subscriber (individual or Hindu undivided family). This amendment will come into force with effect from 1st April, 1988 and will, accordingly, apply in relation to assessment year 1988-89 and subsequent years.

[Sections 4, 55 and 67 of the Finance Act, 1988]

FINANCE ACT, 1988

Amendment of provisions relating to exemption to the income of Mutual Fund

15.1 The Direct Tax Laws (Amendment) Bill, 1987 inserted clause (23D) in section 10 of the Income-tax Act. Under this provision the income of a Mutual Fund set up by a public sector bank or a public financial institution is exempt. The words used in this clause are “any income from such Mutual Fund”. The intention was to grant exemption from income-tax to the income “of” the Mutual Fund received by such Fund from its investments. Accordingly, this clause has been amended to provide that the income “of” such a Mutual Fund will be exempt.

FINANCE ACT, 1988

15.2 This amendment will come into force with effect from 1st April, 1988 and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years.

[Section 4 of the Finance Act, 1988]

FINANCE ACT, 1988

Exemption of subsidies received by planters

16.1 Under the existing provisions of section 10(30) of the Income-tax Act, any subsidy received from or through the Tea Board by an assessee carrying on business of growing and manufacturing tea in India, is exempt, if such subsidy is received for replantation or replacement of tea bushes or for rejuvenation or consolidation of areas used for cultivation of tea under a scheme specified by the Central Government by notification. As a measure of rationalisation, similar exemption has been extended by inserting clause (31) of section 10 in respect of assessees engaged in the business of growing and manufacturing rubber, coffee, cardamom or such other commodities as the Central Government may, by notification, specify. The subsidy which will qualify for exemption should be received from or through the concerned Board under any scheme for replantation or replacement of rubber plant, etc., or for rejuvenation or consolidation of areas used for their cultivation. To avail of this exemption, a taxpayer is required to furnish to the Assessing Officer along with his return of income for the assessment year concerned or within such further period as the Assessing Officer may allow, a certificate from the concerned Board as to the amount of such subsidy received during the previous year.

FINANCE ACT, 1988

16.2 This amendment will come into force with effect from 1st April, 1989 and will, accordingly, apply in relation to the assessment year 1989-90 and subsequent years.

[Section 4 of the Finance Act, 1988]

FINANCE ACT, 1988

Modification of the provisions relating to industrial undertaking in free trade zones

17.1 Under the existing provisions of section 10A of the Income-tax Act, profits and gains derived by an assessee from a newly established industrial undertaking in free trade zones are not included in his total income subject to certain conditions. The Direct Tax Laws (Amendment) Act, 1987 has amended, with effect from 1st April, 1989, the provisions of section 139 of the Income-tax Act relating to return of income. By the amendment, the provisions regarding issue of notice by the Assessing Officer requiring the assessees to file their returns of income has been omitted. Further, the Assessing Officer will not have any power to extend the dates for filing the return of income. Since references to the provisions of section 139 of the Income-tax Act still continue in sub-sections (5) and (7) of section 10A, they have been suitably amended. Sub-section (8) has been inserted in section 10A of the Income-tax Act to provide that the amendments in section 139 of the Income-tax Act will not have any effect on the provisions of sub-section (5) of this section.

FINANCE ACT, 1988

17.2 These amendments will come into force with effect from 1st April, 1989, and will, accordingly, apply to assessment year 1989-90 and subsequent assessment years.

[Section 5 of the Finance Act, 1988]

FINANCE ACT, 1988

New provision to extend tax holiday to hundred per cent export-oriented units

18.1 Under the provisions of section 10A of the Income-tax Act, a five-year tax holiday is allowed to industrial undertakings manufacturing or producing articles or things in a free trade zone subject to certain conditions. The exemption is available to industrial undertakings which have begun or begins to manufacture or produce articles or things during the previous year relevant to the assessment year commencing on or after 1-4-1981. The tax holiday is at the option of the assessee for five consecutive assessment years falling within the block of eight years beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things. The term “manufacture” includes processing or assembling or recording of programmes on any disc, tape, perforated media or other information storage device.

FINANCE ACT, 1988

18.2 The above tax holiday was not available to a hundred per cent export-oriented undertaking. Such undertakings were eligible only for deduction out of their export profits under section 80HHC of the Income-tax Act. With a view to providing further incentive for earning foreign exchange, a new section 10B has been inserted by the Act so as to secure that the income of a hundred per cent export-oriented undertaking shall be exempt from tax for a period of five consecutive assessment years falling within the block of eight assessment years. The exemption provided under the new section is similar to the one provided to industrial undertakings operating in free trade zones. The exemption under the new provisions will be subject to the following conditions:

(i) That the unit manufactures or produces any articles or things. The term “manufacture” will include any processing or assembling or recording of programmes on disc, tape, perforated media or other information storage device;

(ii) That the unit has not been formed by the splitting up or reconstruction of an existing business;

(iii) That it has not been formed by the transfer to a new business of machinery or plant previously used for any purpose.

Unlike the provisions of section 10A of the Income-tax Act, even the existing hundred per cent export-oriented undertakings will be eligible to avail of the tax holiday for a full period of five assessment years in a block of eight years. For this purpose, an assessee may, at his option, before the due date of furnishing the return of income for the assessment year 1989-90, furnish to his Assessing Officer a declaration in writing that the exemption may be allowed to him for any five consecutive years falling within a period of eight years commencing on the first day of April, 1989. In respect of the new units, i.e., those which begin to manufacture or produce articles or things at any time after the commencement of the previous year relevant to the assessment year 1989-90, the exemption will be available over a period of five consecutive assessment years falling within the block of eight years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce any article or thing. Both in respect of existing and the new units, the assessee will have the option of choosing the five consecutive assessment years in the block of eight years in which he would avail of the exemption.

FINANCE ACT, 1988

18.3 As defined in the Explanation (i) below sub-section (7) of the newly inserted section 10B of the Income-tax Act, a hundred per cent export-oriented undertaking, is an undertaking which has been approved as such by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by section 14 of the Industries (Development and Regulation) Act, 1951, and the rules made under that Act.

FINANCE ACT, 1988

18.4 This amendment will come into force with effect from 1st April, 1989 and will, accordingly, apply in relation to assessment year 1989-90 and subsequent years.

[Section 6 of the Finance Act, 1988]

FINANCE ACT, 1988

Modification of provisions relating to standard deduction in the case of salaried taxpayers

19.1 Under the existing provisions of clause (i) of section 16 of the Income-tax Act, salaried assessees are entitled to a standard deduction in the computation of their income. This deduction is allowed of an amount equal to thirty per cent of the salary subject to a ceiling of Rs. 10,000. With a view to providing further relief to this class of assessees, the standard deduction has been raised to thirty-three and one-third per cent of the salary subject to an enhanced ceiling of Rs. 12,000.

FINANCE ACT, 1988

19.2 This amendment will come into force with effect from 1st April, 1989 and will, accordingly, apply in relation to assessment year 1989-90 and subsequent years.

[Section 9 of the Finance Act, 1988]

FINANCE ACT, 1988

Provisions for disallowance of payments to non-residents if no deduction of tax at source.

20.1 Under the existing provisions of clause (a) of section 40 of the Income-tax Act, any interest not being an interest on loan issued for public subscription before 1-4-1938, which is payable outside India on which tax has not been paid or deducted and in respect of which there is no person in India who may be treated as agent under section 163 of the Income-tax Act is not deductible in the computation of income chargeable under the head “Profits and gains of business or profession”. In order to ensure effective compliance of the provisions of section 195 of the Income-tax Act relating to tax deduction at source in respect of payments outside India, the scope of the above provision has been extended to cover payments in respect of royalty, fees for technical services or other sum chargeable under the Income-tax Act. Further, under the existing provisions, disallowance can be made only if there is no person who can be treated as an agent of the non-resident. The Finance Act, 1987 had amended these provisions to secure that even when a person paying is himself an agent of the non-resident, the tax should be deducted. Consequently, even if there is an agent, non-deduction of tax at source will be in contravention of the law which will now result in disallowance. The condition of their being agents is not necessary as it provides an escape route to the persons making these payments. Consequently, the words “and in respect of which there is no person in India who may be treated as an agent under section 163”, have been omitted from sub-clause (i ) of clause (a) of section 40 of the Income-tax Act.

FINANCE ACT, 1988

20.2 It has been provided by the Amending Act that if, in any subsequent year, tax is deducted at source or paid, such sum will be allowed as a deduction in computing the income chargeable to tax of that year.

FINANCE ACT, 1988

20.3 These amendments will come into force with effect from 1st April, 1989 and will, accordingly, apply in relation to assessment year 1989-90 and subsequent years.

[Section 11 of the Finance Act, 1988]

FINANCE ACT, 1988

Modification of the provisions relating to deduction in respect of certain liabilities

21.1 Under the existing provisions of section 43B of the Income-tax Act deduction for any amount payable by the assessee by way of tax or duty under any law or any sum payable as an employer by way of contribution to any provident fund or superannuation fund is allowed as a deduction in computing the income of that person in the year in which such sum is actually paid by him. An amendment was carried out by the Finance Act, 1987 whereby the time for making payment in respect of tax or duty under any law was extended to the due date applicable in the case of an assessee for furnishing the return of income under section 139(1) of the Income-tax Act in respect of the previous year in which the liability to pay such sum was incurred. The due date by which the payment on account of provident fund, gratuity fund, superannuation fund, etc., is to be made is the date by which the assessee is required as an employer to credit an employee’s contribution to the employee’s account in the relevant fund under the relevant Act, Rule or Notification.

FINANCE ACT, 1988

21.2 The words “tax” and “duty” have been the subject-matter of judicial interpretation and there is controversy as to whether they cover statutory levies like cess, fees, etc. Some appellate authorities have held that such cess or fees cannot be covered by the expressions “tax” or “duty”. Such an interpretation is against the legislative intent and, therefore, by way of clari-fication, an amendment has been carried out to provide that cess or fees by whatever name called, which have been imposed by any statutory authority, including a local authority, will be allowed as a deduction only if these are actually paid.

FINANCE ACT, 1988

21.3 A marked tendency has been noticed that on one pretext or the other some taxpayers postpone the payment of interest on loans provided by the various financial institutions and thus the money recoverable by these institutions is used for business purposes even though it has been claimed as a deduction from the income. With a view to improve the liquidity position of the public financial institutions and to prevent misuse of the limited resource of finance available to trade and industry, section 43B of the Act has been amended to provide that any sum payable as interest on any loan or borrowing from any public financial institutions in accordance with the terms and conditions of the agreement governing such loan or borrowing, shall not be allowed as a deduction if the same is not actually paid before the due date applicable in his case for furnishing the return of income. As per the new Explanation 3 to section 43B of the Income-tax Act, the term “public financial institution” shall have the same meaning as assigned to it in section 4A of the Companies Act, 1956.

FINANCE ACT, 1988

21.4 These amendments will come into force with effect from 1st April, 1989 and will, accordingly, apply in relation to assessment year 1989-90 and subsequent years.

[Section 12 of the Finance Act, 1988]

FINANCE ACT, 1988

Measure to check tax avoidance in cases of transfer

22.1 Under the existing provisions of section 47 of the Income-tax Act, any transfer of capital assets from the holding company to its wholly-owned subsidiary company or vice versa is not treated as a transfer, in certain circumstances. Consequently, the capital gains arising out of such transfer is not charged to tax. The exemption of capital gains is, however, withdrawn under section 47A of the Act, if,—

(i) the capital asset so transferred is, within a period of 8 years from the date of transfer, converted by the transferee-company into, or is treated by it as, stock-in-trade of its business; or

(ii) the parent company or its nominee or the holding company ceases to hold the whole of the share capital of the subsidiary company before the expiry of a period of 8 years from the date of transfer.

In order to circumvent the operation of section 47A of the Act, transferee holding/subsidiary companies are resorting to a device of converting the capital asset as stock-in-trade at the time of transfer itself. With a view to plug this loophole, a proviso after clause (v) has been inserted in section 47 of the Income-tax Act to secure that any profits derived by a holding company in a transfer of a capital asset after the 29th February, 1988 to its wholly-owned subsidiary company or vice versa will be subject to tax under the head “Capital gains” in a case where capital asset is taken over as stock-in-trade by the transferee-company at the time of the transfer itself.

FINANCE ACT, 1988

22.2 This amendment will apply to any transfer made after 29th February, 1988.

FINANCE ACT, 1988

22.3 Another device resorted to by the taxpayers is to revalue the stock-in-trade taken over by an amalgamated company at the time of amalga-mation. Similar device is resorted to consequent upon a total or a partial partition of a Hindu undivided family or in cases where there is a transfer either by way of gift or under a will or an irrevocable trust. By this device, the amalgamating company or transferor, as the case may be, is not liable to tax on the difference arising on account of revaluation of the stock-in-trade at a higher value. The amalgamated company also reduces its tax liability on the profit accruing to it in the subsequent sale of the stock-in-trade.

FINANCE ACT, 1988

22.4 With a view to counteracting the above devices for tax avoidance a new section 43C has been inserted by the Finance Act, 1988 to provide that where an asset, acquired under a scheme of amalgamation, is sold by an amalgamated company after the 29th day of February, 1988, as its stock-in-trade, then, in computing the profits and gains derived from the sale of such stock-in-trade the cost of the acquisition of stock-in-trade to the amalgamated company shall be the cost of the acquisition of such stock-in-trade or the asset, to the amalgamating company as increased by the cost, if any, of any improvement thereto and the expenditure incurred wholly and exclusively in connection with such transfer.

FINANCE ACT, 1988

22.5 The provision of the new section 43C will thus apply to the following cases of revaluation:

(i) where the stock-in-trade of the amalgamating company is taken over at revalued price by the amalgamated company under the scheme of amalgamation;

(ii) where a capital asset of the amalgamating company is taken over as stock-in-trade by the amalgamated company after revaluation under the scheme of amalgamation.

FINANCE ACT, 1988

22.6 The situation referred to at (ii) above will, in turn, cover three situations:

(a) where the capital asset is converted into stock-in-trade by the amalgamating company with revaluation and the revalued asset is taken over by the amalgamated company under a scheme of amalgamation;

(b) where the capital asset is taken over as stock-in-trade by the amalgamated company at a revalued price at the time of amalgamation;

(c) where the capital asset of the amalgamating company is taken over by the amalgamated company, under a scheme of amalgamation as a capital asset and then converted into stock-in-trade and revalued.

FINANCE ACT, 1988

22.7 In a case referred to at (c) above, where the revaluation and conversion of capital asset into stock-in-trade takes place in the hands of the amalgamated company, the provisions of section 45(2) will apply. So in such a case, the provision of the new section 43C will not apply. This has been done with a view to ensure that a taxpayer does not face double taxation in respect of the same transaction. However, where the stock-in-trade referred to in item (i) as well as at (a) and (b ) above are sold after 29th February, 1988, the provisions of the new section 43C shall apply.

FINANCE ACT, 1988

22.8 A similar provision in section 43C has also been made to cover cases where the asset sold as stock-in-trade has been acquired by the assessee either by way of total or partial partition of a Hindu undivided family or under a gift or will or an irrevocable trust and such asset is sold as stock-in-trade after 29th February, 1988.

FINANCE ACT, 1988

22.9 The new provision shall come into effect in respect of sale of stock-in-trade made by the amalgamated company, members of Hindu undivided families, donees, etc., after the 29th day of February, 1988 and shall, accordingly, apply in respect of assessment year 1988-89 and subsequent years.

[Sections 13 and 17 of the Finance Act, 1988]

FINANCE ACT, 1988

Modification of provisions in respect of audit of accounts

23.1 Under the existing provisions of section 44AB of the Income-tax Act, it is obligatory for a person carrying on business or profession to get his accounts audited by a Chartered Accountant before the “specified date” if the sales turnover or the gross receipts exceed the present limit. Under the existing provisions the “specified date” in relation to the accounts of the previous year means the date of the expiry of four months from the end of the previous year or where there is more than one previous year from the end of the previous year which expired last before the commencement of the assessment year or the 30th day of June of such assessment year, whichever date falls later. The Direct Tax Laws (Amendment) Act, 1987 has amended section 139 whereby different time limits have been prescribed for filing of the return of income by assessees having income from business and by those having income from sources other than business. In view of the staggering of the dates for the filing of the returns, the specified date by which the statutory audit must be completed has been amended. The “specified date” in relation to the accounts of the previous year have been amended as under:

(a) where the assessee is a company 31st December of the assessment year;

Sub-section (6A) of section 139 of the Income-tax Act provides that an assessee engaged in any business or profession should furnish along with a return of income certain particulars. This section has been amended so as to provide that an assessee engaged in any business or profession who is required to get his accounts, audited under section 44AB of the Income-tax Act should file an audit report along with the return of income. Further, section 139(9) of the Income-tax Act has also been amended to provide that a return of income shall be regarded as defective if the audit report obtained under section 44AB of the Income-tax Act is not furnished with the return of income.

FINANCE ACT, 1988

23.2 Under the existing provisions of section 271B of the Income-tax Act, penalty is leviable in a case where any person fails to get his accounts audited in respect of his income in any year or to obtain a report as required under section 44AB of the Act. By the Amending Act such penalty will now be leviable also in cases of failure on the part of an assessee to furnish his report of such audit along with the return of income filed under section 139(1) of the Act or along with the return of income filed in response to a notice under section 142(1) of the Act.

FINANCE ACT, 1988

23.3 These amendments will come into force with effect from 1st April, 1989 and will, accordingly, apply in relation to the assessment year 1989-90 and subsequent years.

[Sections 14, 35 and 45 of the Finance Act, 1988]

FINANCE ACT, 1988

New provision for computing profits and gains from business of trading in certain goods

24.1 The Amending Act has introduced a new section 44AC in the Income-tax Act, 1961, which is a special provision for computing profits and gains in the case of persons engaged in the trading of (i) country liquor, (ii) timber obtained under a forest lease, (iii) timber obtained by any mode other than under a forest lease; and (iv) any other forest produce not being timber (hereinafter referred to as specified goods). The rates for working out the profit in respect of trading in each of these items for computing the income chargeable to tax under the head “Profits and gains of business or profession” have been enumerated in the section. Further, the Finance Act, 1988 has also introduced section 206C in the Act which provides for “collection of tax” at source, at the time of purchase of any of the goods specified in section 44AC of the Act.

FINANCE ACT, 1988

24.2 The objects of the introduction of the new provisions for working out the profits on a presumptive basis is to get over the problems being faced in assessing the income of and recovering the taxes in the cases of persons trading in country liquor, timber and forest produce. A large number of such persons either do not maintain any books of account or the books maintained are irregular and incomplete. Locating such persons after the contract or agreement became impossible in many cases, Further in such cases, even if the assessment was completed, the Income-tax Department found it extremely difficult to collect the tax from them. Thus assessment of income and recovery of taxes from such businessmen posed serious problems.

FINANCE ACT, 1988

24.3 The presumptive rate of profit will be applied in the cases of all buyers (except a “public sector company”) who purchase the specified goods and trade in the same. The provisions of the section will, however, apply only in respect of the goods obtained from a “Seller”, as defined in the Explanation below sub-section (3) of section 44AC of the Income-tax Act.”Seller” as per this Explanation means the Central Government, a State Government or any local authority or corporation or authority established by or under a Central, State or Provincial Act, or any company or firm. A “buyer” who obtains goods in the course of a second sale except where such a sale is made by a “public sector company” will not come within the purview of the section. Thus, if ‘A’ buys logs of timber from ‘B’ who had purchased the same at an auction, the provisions of section 44AC of the Income-tax Act will apply only to ‘B’ and not to ‘A’. However, if, ‘B’ is a public sector company, then buyer ‘A’ will be liable to have his income determined on a presumptive basis in accordance with the provisions of section 44AC.

FINANCE ACT, 1988

24.4 As mentioned above, the newly introduced section 44AC of the Act applies only in the case of persons engaged in the trading of goods referred to therein. This provision will, therefore, not apply in cases where the goods purchased by a “buyer” are utilised for the purposes of manufacturing, processing or producing any article or thing. As the goods purchased have to be “traded in” as per these provisions, if the same are destroyed or lost subsequently, there would be no occasion for trading in such goods in such an eventuality. Hence the tax collected under section 206C of the Act would have to be refunded if such loss is proved. Proviso to sub-section (1) of section 206 of the Income-tax Act ensures that no tax will be collected at source from a buyer who purchases goods for the purposes of manufacturing, processing or producing any article or thing. If a buyer on an application made by him obtains a certificate from his Assessing Officer and furnishes the same to the seller, that the goods to be purchased are to be utilised in the carrying on of any of the activities referred to above, no tax will be collected under section 206C of the Act. The manufacture and sale of country liquor is controlled and supervised by the State Excise authorities and liquor is retailed in the same commercial form as purchased. There will, therefore, be no occasion for a liquor contractor to obtain a certificate of the type referred to above. However, if a “buyer” of timber obtains the same for say making furniture, the provisions of section 44AC of the Income-tax Act will not apply and no collection of tax will be required to be made, on his obtaining the requisite certificate from his Assessing Officer, Similarly, if a buyer purchases timber as an actual user for construction of a house no collection of tax will be required to be made under section 206 of the Income-tax Act.

FINANCE ACT, 1988

24.5 The term “manufacturing” has been interpreted in several court decisions. It generally refers to “production of articles for use from raw, semi-raw or prepared materials by giving these materials new forms, qualities, properties or combinations, whether by hand labour or machinery”. In the case of Kutty Flush Doors & Furniture Co. (P.) Ltd. (Civil Appeal No. 468 of 1988), a case arising under the Central Excises and Salt Act, 1944, the conversion of timber logs by sawing them into sizes and dried timber did not tantamount to any manufacture. The Supreme Court observed that “it may be worthwhile to note that ‘manufacture’ implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But something more was necessary and there must be transformation; a new and different article must emerge having a distinct name, character or use”. Thus manufacture implies bringing in something new. In the case of forest produce, biris made from tendu leaves and tobacco brings into existence a new and different article. Consequently, a “buyer” who obtains tendu leaves for making biris and not for trading in such leaves will fall outside the purview of the new sections 44AC and 206C of the Income-tax Act.

FINANCE ACT, 1988

24.6 The term “processing” has a wider meaning than the term “manufacture”. Buyers carrying on the activity of processing will fall within the purview of section 206C(1) of the Act. Though sawing of logs of timber into different sizes may not fall within the meaning of the term “manufacture”, a view could be taken that it constitutes processing. But, mere cutting of timber into smaller sizes to make its marketability and packing easy would not constitute processing. The broad distinction between “manufacture” and “processing” is that manufacture involves bringing into existence of a new product; a product which is of a different chemical composition or whose integral structure is different. Processing could be said to be doing specific acts to something for changing its shape or size.

FINANCE ACT, 1988

24.7 The presumptive rates of profits specified in respect of different commodities in section 44AC of the Income-tax Act for determining the income chargeable to tax will be applied to the amount paid or payable by the as the purchase price in respect of such goods. The purchase price for this purpose will be the cost of the commodity inclusive of any excise duty, sales tax, or any other levy, whatever its nomenclature, paid for by the buyer for obtaining the goods. Purchase price will not, however, include any freight or transportation charges. In the case of buyers of liquor, the purchase price will include the cost of the bottle, label, sealing charges, etc.

FINANCE ACT, 1988

24.8 In a case where the business carried on by the assessee consists exclusively of trading in the items to which provisions of section 44AC of the Income-tax Act apply, the deemed rate of profit will be applicable only for determining income chargeable to tax under the head “Profits and gains of business or profession”. No other item of expenditure incurred in the trading of any of the goods specified in the section will be allowable. However, where the business carried on by the assessee does not exclusively consist of trading in the commodities specified in section 44AC of the Income-tax Act and where separate accounts are not maintained or are not available, the amount of expenses attributable to the other business carried on by the assessee, for the purpose of allowing these would be worked out on the basis of the same proportion as the turnover of such other business bears to the total turnover of the business.

FINANCE ACT, 1988

24.9 In so far as the deductions under Chapter VI-A of the Income-tax Act are concerned, the same will be allowed from the income so determined under section 44AC of the Income-tax Act. For example, the income of a trader in biri leaves who is an exporter, will be first determined in accordance with the provisions of section 44AC of the Income-tax Act and, thereafter, he would be eligible to claim the deduction under section 80HHC of the Income-tax Act, 1961.

FINANCE ACT, 1988

24.10 As mentioned above, the “seller” referred to in section 44AC of the Income-tax Act has to collect tax at source from the buyer as required by the new provisions of section 206C of the Income-tax Act when any of the items specified in section 44AC are sold. The collection of tax at source has to be made at the time when the “seller” debits the amount payable by the “buyer” or at the time of receipt of such amount, whichever is earlier. The sum to be collected by the “seller” at source will be percentage of the amount payable by the “buyer”. The Table in sub-section (1) of section 206C of the Income-tax Act specifies the percentages to be collected at source by the “seller” in respect of the different commodities to which the section applies. If the total amount payable by a buyer to the “seller” is Rs. 100, the sum to be collected at source will be Rs. 10 in the case of “timber obtained by any mode other than under a forest lease”. The collection of tax at source in respect of the commodities referred to above will not be 10 per cent of the amount of the presumptive rate of profit laid down in section 44AC of the Income-tax Act [i.e., 10 per cent or 15 per cent of the amount payable by the “buyer”]. Collection shall also be made of surcharge for purposes of the Union calculated at the rate of 5 per cent of such collection.

FINANCE ACT, 1988

24.11 It has already been mentioned that no tax will be collected at source in cases where a buyer obtains a certificate from his Assessing Officer to the effect that the goods to be purchased will be utilised by him for manufacturing, processing or producing articles or things. The certificate to be issued by the Assessing Officer shall be valid for a period not exceeding one year from the date of certificate. The Assessing Officer will have the power to cancel the certificate at any time before the expiry of the specified period if it comes to his knowledge that the buyer is not utilising the specified items purchased for the purposes of manufacturing, processing or producing any articles or things. The certificate will be addressed to a particular “seller” and that “seller” will not collect tax at source from any purchase made by the buyer for such period as the certificate is valid. A “buyer” will, therefore, have to obtain separate certificates from the Assessing Officer for such “seller” from whom he would be making purchases. A single certificate should not bear the name of more than one “seller”. The certificate should be issued by the Assessing Officer and accepted by the “seller” only if it is as per Form No. 27C of the Income-tax Rules, 1962, and not in any other manner.

FINANCE ACT, 1988

24.12 There may be cases where for the purchase of any of the items specified in section 44AC, the “buyer” may have to pay the cost of the item plus excise duty to a particular “seller” and any other tax or payment towards the purchase of the same item to another. For example, in some States for the purchase of liquor, the retailer has to pay the cost of liquor plus excise duty to the State Excise Department. The sales tax is paid by this retailer for the liquor directly to the Sales Tax Authorities. For the price of the bottles, labels and sealing charges the payments are made to the distilleries from where the liquor is lifted. In such cases, the State Excise Department will have to collect tax at source at 15 per cent of the total of the cost of liquor plus excise duty plus sales tax inclusive of the cost of the bottles, labels and sealing charges. This is because of the fact that cost to the buyer can be worked out only after taking into account all these amounts together.

FINANCE ACT, 1988

24.13 The amount collected by the “seller” shall be deposited in the account of the Central Government within seven days of the date of collection. Further, the “seller” has to furnish to the “buyer” a certificate within 10 days of the date of collection of tax from him stating therein the tax collected, the rate at which the tax has been collected and such other particulars as have been prescribed in Form No. 27D of the Income-tax Rules, 1962. Credit of the tax so collected will be given to the buyer at the time of his assessment. If a “seller” responsible for collecting the tax fails to do so he will still be liable to pay the tax to the credit of the Central Government within seven days of the date of collection which will be the date of debiting the account of the buyer or at the time of receipt of such amount, whichever is earlier. In addition, if the “seller” does not collect the tax or after collecting the same fails to pay it to the credit of the Central Government, he will be liable to pay simple interest at the rate of two per cent per month or part thereof of the amount of such tax from the date on which such tax was collectible, to the date on which tax is actually paid.

FINANCE ACT, 1988

24.14 The new section 276BB of the Income-tax Act provides for prosecution of a person who fails to pay to the credit of the Central Government, the tax collected by him as required under the provisions of section 206C of the Income-tax Act and punishment for a term which shall not be less than three months but which may extend to seven years and with fine.

FINANCE ACT, 1988

24.15 This amendment relating to section 44AC of the Income-tax Act will come into force with effect from the 1st April, 1989, and will, accordingly, apply in relation to assessment year 1989-90 and subsequent years. The provisions relating to collection of tax under section 206C of the Income-tax Act have come into force with effect from the 1st June, 1988.

[Sections 2, 15, 40 and 46 of the Finance Act, 1988]

JUDICIAL ANALYSIS

EXPLAINED IN – Para 24 was Explained in ITO v. Shyam Timber Traders [1995] 124 Taxation 144 (Trib.), in the following words:

“. . . It is notable that section 206C was also introduced by the Finance Act, 1988 and it provides for collection for tax at source at the time of purchase of any of the goods specified in section 44AC of the Act. As per CBDT Circular No. 528 dated 16-12-1988 the object of the introduction of the new provisions for working out the profits on the presumptive basis was to get over the problems faced in assessing the income and recovering the taxes in the cases of persons dealing mainly in liquor, timber and forest produce. Thus this section was introduced in the Act with a view to help the Assessing Officer in framing assessments in special cases only. It is notable that the amend­ments later on made relating to section 44AC of the Act came into force with effect from 1-4-1989 and has to apply in relation to assessment year 1989-90 and subsequent years. The provisions relating to collection of tax under section 206C of the Act came into force with effect from 1-6-1988. It is therefore, obvious that the two sections have to be read together and a harmonious construction has to be given to them to make them effective. At the same an interpretation which creates some factional meaning to the section cannot be accepted. We are, therefore, of the opinion that as this section has been brought in the Act with effect from 1-4-1988 only, the transactions made by the assessee upto 31-3-1988 have to be excluded. . . . ” (p. 147)

EXPLAINED IN – In Sitaram Parita v. ACIT [1994] 51 ITD 65 (Indore), the Tribunal quoted para 24.9 above, and observed:

“From the above it is clear, that trader in biri leaves comes within the ambit of section 44AC. . . .”

FINANCE ACT, 1988

Modification of special provision relating to income from the business of exploration, etc., of mineral oil

25.1 Under the existing provisions of section 44BB of the Income-tax Act, the income of taxpayers. Whether resident or non-resident, who are en-gaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used or to be used in the exploration for and exploitation of mineral oils is computed at ten per cent of the aggregate of the amounts paid or payable to the taxpayer or to any person on his behalf, whether in or out of India on account of the provisions of such services or facilities. On this account there are cases where hardship is caused to the resident taxpayers by eroding their financial base even though their efforts result in substantial savings in foreign exchange. With a view to give an incentive to indigenisation and to save foreign exchange, section 44BB of the Income-tax Act has been amended so as to restrict the application of these provisions to the cases of only non-resident taxpayers. In respect of resident taxpayers, their income will be computed under the other provision of the Income-tax Act.

FINANCE ACT, 1988

25.2 This amendment will come into force retrospectively from the 1st April, 1983, i.e., the date from which the provisions of the section have come into force and will, accordingly, apply in relation to the assessment year 1983-84 and subsequent years.

[Section 16 of the Finance Act, 1988]

FINANCE ACT, 1988

Modification of the provisions relating to carry forward and set off of taxes in the case of certain companies

26.1 Under the existing provisions of section 79 of the Income-tax Act, no loss incurred by a closely-held company in any year prior to the previous year in which a change in its shareholding took place, is allowed to be carried forward and set off against its income, unless the conditions mentioned in that section are satisfied. The first condition is that on the last day of the previous year, there is no change in the beneficial holding of shares of the company, carrying not less than 51 per cent of the voting power. The second condition is the satisfaction of the Assessing Officer that the change in the shareholding was not effected with a view to avoid or reduce any liability to tax.

FINANCE ACT, 1988

26.2 Some courts have held that the above two conditions are cumulative in effect and unless both are satisfied, the assessee cannot be deprived of the benefit of carry forward of loss. As per these decisions the burden of proof to show that the change in the shareholding has been effected with a view to avoid or reduce the tax liability envisaged in clause (b) of this section is on the Assessing Officer. To set at rest the judicial controversy in this regard, clause (b) of section 79 has been deleted by the Amending Act.

FINANCE ACT, 1988

26.3 With a view to avoiding hardship likely to be caused in genuine cases, it has also been provided that the set off of brought forward losses in the case of closely-held companies will not be denied in a case where change in shareholding to the extent of 51 per cent or more of the voting power takes place in the event of death of any shareholder or on account of a gift by any shareholder to his relatives, as defined in section 2(41 ) of the Income-tax Act, 1961.

FINANCE ACT, 1988

26.4 These amendments will come into force with effect from 1st April, 1989, and will, accordingly, apply in relation to assessment year 1989-90 and subsequent years.

[Section 21 of the Finance Act, 1988]

FINANCE ACT, 1988

Tax incentive for investment in units of any Mutual Fund where such fund subscribes only to eligible issue of capital

27.1 Under the existing provisions of section 80CC of the Income-tax Act, deduction is allowable within limits in respect of acquisition of equity shares forming part of any eligible issue of capital.

With a view to provide tax incentive for investment in units of any Mutual Fund specified under clause (23D) of section 10, the Amending Act has extended the concession available under section 80CC to investment in such units also if the Mutual Fund subscribes only to eligible issue of capital.

This amendment will take effect from 1st April, 1989 and will, accordingly, apply in relation to assessment year 1989-90 and subsequent years.

[Section 22 of the Finance Act, 1988]

FINANCE ACT, 1988

Modification of the provisions relating to National Savings Scheme

27.2 Under the existing provisions of section 80CCA of the Income-tax Act, an individual, a Hindu undivided family and certain categories of association of persons or bodies of individuals, are allowed deduction equal to 50 per cent of the deposits made under the National Savings Scheme. The amount that qualified for deduction is limited to Rs. 20,000 in a year. Further, fifty per cent of the withdrawals representing the deposit or the interest accruing thereon is deemed to be the income of the previous year in which the withdrawal is made. With a view to provide further incentives to the net savings, the Finance Act has amended section 80CCA to provide that hundred per cent of the deposits made under the Scheme will be allowed as a deduction in the year of deposits and consequently the whole amount of withdrawal will be taxed as income in the previous year in which such withdrawal is made. As a social security measure, the scope of this section has been extended to any such annuity plan of the Life Insurance Corporation, as the Central Government may notify in this behalf. The annuity plans of the LIC which have been notified are the “Jeewan Dhara”, and “Jeewan Akshey”.

FINANCE ACT, 1988

27.3 The overall limit of investment for both the National Savings Scheme and the annuity plans of the LIC is Rs. 20,000 for the assessment year 1988-89. The maximum amount which would qualify for deduction from assessment year 1989-90 onwards will be Rs. 30,000.

[Section 23 of the Finance Act, 1988]

FINANCE ACT, 1988

Extension of income of exporters and incentives to “supporting manufacturers” exporting goods through “export/trading houses”

28.1 Under the existing provisions of sub-section (1) of section 80HHC of the Income-tax Act, taxpayers exporting goods or merchandise are allowed a deduction of an amount equal to four per cent of the net foreign exchange realisation and fifty per cent of the balance profits. Sub-section (1) has been substituted by new sub-sections (1) and (1A) with a view to provide a further incentive to export efforts.

FINANCE ACT, 1988

28.2 The new sub-section (1) provides that deduction will be allowed to the taxpayers exporting goods or merchandise of a sum equal to the whole of the profits derived by it from the export of goods or merchandise. As in the past, the deduction will be available only if the sale proceeds of such goods or merchandise exported out of India are receivable in convertible foreign exchange.

FINANCE ACT, 1988

28.3 As a measure to provide incentive to persons exporting goods through or by any other person, being a recognised Export House or Trading House, the Board had issued a Circular No. 466, dated the 14th August, 1986, enabling the sharing of tax benefits under the section between recognised Trading Houses or Export Houses on one hand and the exporter actually exporting the goods through them on the other. Since doubts have been raised that the benefit given by the circular is beyond the intention and spirit of the provision, as a measure to provide benefit to the supporting manufacturers exporting goods through the recognised Export House or Trading House a new proviso to sub-section (1) of the section has been inserted. The said proviso provides that where an Export House or Trading House issues a certificate in a prescribed form that in respect of any amount of export turnover, deduction under sub-section (1) is to be allowed to a supporting manufacturer, the amount of deduction available to the Export House or the Trading House shall be reduced by such an amount which bears to the total profits of the export business of the Export House or the Trading House issuing the certificate, the same proportion as the amount of export turnover specified in the certificate bears to the total export turnover of the Export House or the Trading House, as the case may be.

FINANCE ACT, 1988

28.4 As a measure to extend the benefit provided under sub-section (1) to the supporting manufacturers, a new sub-section (1A) has been inserted to provide that where the supporting manufacturer has sold goods to any Export House or Trading House in respect of which the latter has issued a certificate in the prescribed form in accordance with the provisions of sub-section (1) read with the proviso, deduction will be allowed in the computation of the income of the supporting manufacturer; of the whole of the profits derived by it from the sale of goods or merchandise to the Export House or Trading House, as the case may be, in respect of which the certificate was issued by the latter. For this purpose:

(i) Export House or the Trading House has been defined as being the holder of an Export House Certificate or the Trading House Certificate, as the case may be;

(ii) the new Explanation ( d) defines “Export House Certificate” or “Trading House Certificate” to mean a valid Export House Certificate or the Trading House Certificate, as the case may be, issued by the Chief Controller of Imports and Exports, Government of India;

(iii) the new Explanation ( e) defines “supporting manufacturer” to mean a person being an Indian company or any other person, resident in India, manufacturing goods or merchandise and selling such goods to the Export House or Trading House for the purposes of export.

FINANCE ACT, 1988

28.5 With a view to enabling the supporting manufacturers to compute the profit derived from the sale of goods or merchandise to the Export House or the Trading House, a new sub-section (3A) has been inserted. The new sub-section (3A) provides that where the business carried on by the supporting manufacturer consists exclusively of the sale of goods or merchandise to one or more Export Houses or Trading Houses, the whole of the profits derived from the business by the supporting manufacturers shall be deemed as the profits derived from the sale of goods to the Export Houses or Trading Houses. However, where the business carried on by the supporting manufacturer does not consist exclusively of sale of goods or merchandise to one or more Export Houses or Trading Houses, the profits derived by the supporting manufacturer from sale of goods to the Export House or the Trading House, shall be the amount which bears to the total profits of the business of the supporting manufacturer the same proportion as the turnover in respect of sale to the Export House or Trading House bears to the total turnover of the business carried on by the supporting manufacturer.

FINANCE ACT, 1988

28.6 The new sub-section (4A) provides that the deduction to the supporting manufacturer shall not be allowed unless it furnishes in the prescribed forms along with the return of its income—

(a) the report of an Accountant certifying that the deduction has been correctly claimed on the basis of the income derived by the supporting manufacturer in respect of sale of goods or merchandise to the Export House or the Trading House. For this purpose, the Accountant shall be the one as defined in the Explanation below sub-section (2) of section 288; and

(b) a certificate from the Export House or the Trading House that in respect of the export turnover mentioned in the certificate, the Export House or the Trading House has not claimed any deduction under this section. The certificate issued by the Export House or the Trading House shall be certified by the Auditor auditing the account of the Export House or the Trading House under the provisions of this Act or under any law.

FINANCE ACT, 1988

28.7 The working of the benefit under this section, as can be shared between a recognised Export House or a Trading House with the supporting manufacturer, has been illustrated in the example below:

Total export earnings in convertible foreign exchange of an Export House	— Rs. 50 crores
Net profit from exports @ 2 per cent	— Rs.1 crore
Amount of deduction eligible under section 80HHC(1)	—Rs.1 crore
Export earnings in convertible foreign exchange in respect of purchases made from supporting manufacturer	— Rs. 50 lakhs
Profit from such export @ 2 per cent	— Rs. 1 lakh
Purchase price of goods in the hands of Export House in respect of items purchased from supporting manufacturer	— Rs. 45 lakhs
Profit to supporting manufacturer on sale to Export House @ 10 per cent	— Rs. 4.5 lakhs
Case I:
Where the Export House does not issue a certificate under proviso to sub-section (1) of section 80HHC. Deduction allowable to Export House under section 80HHC(1)	— Rs. 1 crore
Case II:
Where the Export House issues certificate in favour of the supporting manufacturer:
Deduction allowable to the Export House under proviso to section 80HHC(1)	— Rs.(100 –1) lakhs
	= Rs. 99 lakhs
Deduction allowable to supporting manufacturer under section 80HHC(1A)	— Rs. 4.5 lakhs

As a consequence the benefit contained in Circular No. 466, dated the 14th August, 1986 is deemed as withdrawn.

FINANCE ACT, 1988

28.8 This amendment will take effect from the 1st April, 1989 and will, accordingly, apply in relation to the assessment year 1989-90 and subsequent years.

[Section 24 of the Finance Act, 1988]

FINANCE ACT, 1988

Modification of provisions relating to exemption of income from certain specified investments

29.1 Under the existing provisions of sub-section (1) of section 80L of the Income-tax Act, deduction is allowed in computing gross total income of an assessee, being an individual, a Hindu undivided family or an association of persons or a body of individuals consisting of, in either case, only of husband and wife, governed by the system of community of property in the State of Goa and the Union territories of Dadra and Nagar Haveli, in respect of income derived from certain specified securities, dividends, etc. The deduction is, however, subject to an overall ceiling of Rs. 7,000.

FINANCE ACT, 1988

29.2 The first proviso to sub-section (1) provides that where the aforesaid income includes any income by way of interest on deposits made under notified National Deposit Scheme or income in respect of units of the Unit Trust of India, a further deduction will be allowed of an amount which has not been allowed by way of deduction under sub-section (1) subject to an overall limit of Rs. 3,000.

FINANCE ACT, 1988

29.3 The second proviso to sub-section (1) provides that if any income by way of interest on deposits under the notified National Deposit Scheme has remained unallowed after providing deduction under sub-section (1) or under the proviso to sub-section (1), deduction shall be allowed to the unavailed part of such income, subject to an overall ceiling of Rs. 2,000.

FINANCE ACT, 1988

29.4 With a view to providing an incentive for investment in certain specified assets, the Finance Act, 1988 has amended sub-section (1) of section 80L and the proviso to the sub-section. Under the amended provisions of sub-section (1), in addition to the income from the existing modes of investment deduction shall also be allowed, subject to an overall ceiling of Rs. 7,000 in respect of income by way of interest and deposits under the Post Office (Monthly Income Account) Rules, 1987 and interest on deposits with or dividend received from any public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, provided that the company is approved by the Central Government for the purpose of clause (viii) of sub-section (1) of section 36 of the Income-tax Act.

FINANCE ACT, 1988

29.5 The first proviso to sub-section (1) provides that in addition to interest on deposits made under the notified National Deposit Scheme and income from units of the Unit Trust of India, income received in respect of units of a Mutual Fund specified under clause (23D) of section 10 and income by way of interest on deposits with, or dividend received from any public company formed and registered in India with the main object of carrying on business of providing long-term finance for construction or purchase of houses in India for residential purposes, to the extent that such income has not been allowed under sub-section (1), shall be further allowed in computing the total income subject to an overall limit of Rs. 3,000.

FINANCE ACT, 1988

29.6 The second proviso as amended by the Finance Act, 1988 to sub-section (1) provides that any income by way of interest on deposits under the notified National Deposit Scheme or dividend received from any Indian company, in the aggregate, to the extent such income has not been allowed as a deduction under sub-section (1) or the first proviso to the said sub-section (1), shall be further allowed as deduction subject to an overall ceiling of Rs. 3,000. Thus, in computing the gross total income of an assessee, deduction under sub-section (1) and the provisos thereto shall be allowed as follows:

Sl. No.	Deduction up to Rs. 7,000	Deduction up to Rs. 3,000 to the extent not adjusted under column (2)	Deduction up to Rs. 3,000 to the extent not adjusted under column (2) or column(3)
(1)	(2)	(3)	(4)
1.	(i) Interest on security of the Central Government or a state Govt.	(i) Interest on deposits under the notified National Deposit Scheme	(i) Interest on deposits under the notified National Deposit Scheme
	(ii) Income on notified debentures issued by any institution or authority or any public sector company, or co-operative society.	(ii) Income from units of Unit Trust of India	(ii) Dividend from any Indian company
	(iii) Interest on deposits under the notified National Deposit scheme.	(iii) Income received in respect of units of a Mutual Fund specified under clause (23D) of section 10; and
	(iv) Interest on deposits under the notified scheme framed by the Central Government	(iv) Interest on deposits or dividends received from any approved public company formed and registered in India with the main object of carrying on the business of providing long term finance for construction or purchase of houses in India for residential purposes.
	(v) Interest on deposits under the Post Office (Monthly Income Account) Rules, 1987.	–	–
	(vi) Dividends from any Indian company.	–	–
	(vii) Income from units of Unit Trust of India.	–	–
	(viii) Income received in respect of units of a Mutual Fund specified under clause (23D) of section 10.	–	–
	(ix) Interest on deposits with a banking company or a co-operative society engaged in carrying on the business of banking.	–	–
	(x) Interest on deposits with banks or co-operative societies not covered by (ix) but being a ban established by or under any law made by the Parliament as approved by the Central Government.	–	–
	(xi) Interest on deposits with an approved financial corporation which is engaged in providing long term finance for industrial development in India.	–	–
	(xii) Interest on deposits with any authority constituted in India by or under any law for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages or for both.	–	–
	(xiii) Interest on deposits with a co-operative society, not being a co-operative society referred to in item (ix), made by a member of the society.	–	–
	(xiv) Dividends from any co-operative society	–	–
	(xv) Interest on deposits with, or dividend received from any approved public company formed and registered in India with the main object of carrying on business of providing long term finance for construction or purchase of houses in India for residential purposes.	–	–

FINANCE ACT, 1988

29.7 The amount of deduction eligible under sub-section (1) of section 80L and the provisos to the said sub-section are illustrated in the examples below:

Example 1 : Income of an assessee being individual includes:—

		Rs.
(i)	Interest on deposits in banks	6,000
(ii)	Dividend from Indian Company	6,000
(iii)	Interest on units of UTI	1,000
(iv)	Income from Mutual Fund referred to under section 10(23D )	1,500
	Amount qualifying for deduction under section 80L(1)	14,500
	Permissible deductions
(a)	Deduction under section 80L(1)[(i) + (ii) restricted
	to Rs. 7,000]	7,000
(b)	Deduction under 1st proviso [(iii) + (iv)]	2,500
(c)	Deduction under 2nd proviso [out of (ii) after
	adjustment of Rs. 1,000 under (a)]	3,000
	Total deduction under section 80L	12,500

Example 2: Income of an assessee, being an individual, includes:—

(i)	Interest on deposits in banks	3,000
(ii)	Income from units of UTI	2,000
(iii)	Dividend from any approved company set up to
	provide long-term finance for housing	3,000
(iv)	Dividend from Indian company	8,000
	Amount qualifying for deduction	16,000
	Permissible deductions
(a)	Deduction under section 80L (1) [(i) + (iv) restricted to Rs.
	7,000]	7,000
(b)	Deduction under 1st proviso [(ii) + (iii)] restricted to Rs.
	3,000	3,000
(c)	Deduction under 2nd proviso [amount of (iv) after
	adjustment of Rs. 4,000 under (a)]	3,000

FINANCE ACT, 1988

29.8 The inter se priority for adjustment to claim deduction under sub-section (1) and the provisos thereto will be at the option of the assessee.

FINANCE ACT, 1988

29.9 These amendments will come into force from the 1st day of April 1989 and will, accordingly, apply in relation to the assessment year 1989-90 and subsequent assessment years.

[Section 25 of the Finance Act, 1988]

FINANCE ACT, 1988

Modification in the provisions relating to deduction in respect of royalty, etc., from certain foreign enterprises

30.1 Under the existing provisions of section 80-O of the Income-tax Act, an Indian company deriving income by way of royalty, commission, fees or any similar payment from the Government of a foreign State or a foreign enterprise, is entitled to a deduction of fifty per cent of such income received in convertible foreign exchange. This tax concession is available if the agreement under which such an income is derived, is approved by the Central Board of Direct Taxes. Prior to the 1st April, 1972 this approval was required to be given by the Central Government. By an amendment to section 80-O, the Finance Act has delegated the power to the Chief Commissioner or the Director General, as the case may be, to give approval to the agreement. Regarding a further amendment to the second proviso to section 80-O, it has been provided that the agreements already approved by the Board prior to the 1st April, 1989, will not require fresh approval of the Chief Commissioner or the Director General. Every application pending for approval under this section with the Board immediately before the 1st April,1989, shall stand transferred to the concerned Chief Commissioner or Director General for disposal.

FINANCE ACT, 1988

30.2 The above amendments will come into force with effect from the 1st April, 1989, and will accordingly, apply in relation to the assessment year 1989-90 and subsequent years.

FINANCE ACT, 1988

30.3 An amendment to section 80-O was effected by the Finance Act, 1987 which might restrict the scope of the section by denying the deduction to an Indian company when it receives income in convertible foreign exchange outside India or when after receipt of income, it converts it into convertible foreign exchange outside India and bring the same into India. The provisions may be open to interpretation that unless the income is received in convertible foreign exchange directly in India, the benefit of the deduction will not be allowed. An amendment to section 80-O has, therefore, been effected by the Finance Act by way of clarification that the deduction under this section shall be allowed even in respect of income which has been received in convertible foreign exchange outside India or having been converted into convertible foreign exchange outside India, is brought into India in accordance with any law for the time being in force for regulating payments and dealing in foreign exchange.

FINANCE ACT, 1988

30.4 This amendment will take effect retrospectively from the 1st April, 1988 and will, accordingly apply in relation to the assessment year 1988-89, and subsequent years.

[Section 26 of the Finance Act, 1988]

FINANCE ACT, 1988

Modification of the provisions relating to the determination of tax liability of the Life Insurance Corporation and for setting up a social security fund

31.1 Under the existing provisions of section 44 of the Income-tax Act, the profits and gains of life insurance business are computed in accordance with the rules contained in the First Schedule to the Act. The profits and gains so computed are charged to tax at the rate of 12.5 per cent as provided in section 115B of the Income-tax Act.

FINANCE ACT, 1988

31.2 In order to introduce a social security scheme for the weaker and more vulnerable sections of society, a “Social Security Fund” has been created. The premium to be paid for socially oriented group insurance scheme will be partly subsidised from this Fund.

FINANCE ACT, 1988

31.3 With a view to generate resources for setting up this fund, the Finance Act has inserted sub-section (2) to section 115B so as to provide,—

(i) In addition to the tax computed as per the new sub-section (1) the Corporation shall be liable to deposit an amount equal to thirty-three and one-third per cent of the tax in such social security fund as may be notified, by the Central Government.

(ii) The proviso to new sub-section (2) enables the LIC of India to deposit during the previous year relevant to the assessment year 1989-90, an amount not less than two and one-half per cent of the profits and gains of the life insurance business in such security fund. Where such a deposit is made, the amount of income-tax payable by the LIC shall be reduced by an amount equal to two and one-half per cent of such profits and gains, and the deposit of thirty-three and one-third per cent required to be made shall also be calculated on the income-tax as so reduced.

FINANCE ACT, 1988

31.4 This amendment will come into force with effect from the 1st April, 1989, and will accordingly, apply for one year, i.e., for the assessment year 1989-90 only.

[Section 31 of the Finance Act, 1988]

FINANCE ACT, 1988

Modification of the provisions relating to capital gains in the case of non-resident Indians.

32.1 Chapter XII-A of the Income-tax Act, 1961, contains special provisions for taxing certain incomes of non-resident Indians being individuals. Under the existing provisions of section 115F of the Income-tax Act, any amount of capital gains arising to a non-resident Indian from the transfer of a “foreign exchange asset” is exempt from tax if the amount of net consideration received on the transfer is invested or deposited within a period of six months from the date of transfer in certain prescribed modes of investment for a minimum period of three years. One of the prescribed modes of reinvestment permissible under sub-section (1) of section 115F is the deposit in the Non-resident (External) Account in any bank in India in accordance with the provision of the Foreign Exchange Regulation Act, 1973. The amounts deposited in this account are freely transferable and, hence, it becomes difficult to verify that the invested amount has remained in the account for a minimum period of three years which entitles the non-resident to avail of the exemption under the aforesaid provisions. For better monitoring, the Finance Act has amended sub-section (1) to section 115F to exclude the Non-residents (External) Account from the prescribed modes of investment. The non-resident Indian would, however, be entitled to invest the sale proceeds in other specified assets for getting the exemption.

FINANCE ACT, 1988

32.2 This amendment will come into force with effect from 1st April, 1989, and will, accordingly, apply in relation to assessment year 1989-90 and subsequent years.

[Section 32 of the Finance Act, 1988]

FINANCE ACT, 1988

Amendment of provisions concerning powers or discovery, production of evidence, etc.

33.1 Under the existing provisions of section 131(1A) of the Income-tax Act, the powers of a civil court in certain matters like issuing of commissions, enforcing attendance of witnesses, etc., have been conferred on income-tax authorities including the Director General and the Director. Similar powers have also been conferred on authorised officers under section 132 of the Act to enable them to record a statement before the commencement of a search. The amendment made in this section by the Direct Tax Laws (Amendment) Act, 1987, however, does not extend the powers conferred by this section to a Deputy Director and an Assistant Director even though they are also associated with investigation of cases and search and seizure work. The Finance Act has, therefore, amended sub-section (1A) of section 131 to extend the powers vested in the section to a Deputy Director and an Assistant Director also.

FINANCE ACT, 1988

33.2 Further, under the existing provisions of section 131(3) of the Act, an Assessing Officer or an Assistant Director is not empowered to retain the books of account and documents impounded by him beyond a period of fifteen days without the approval of the Chief Commissioner or the Commissioner of Income-tax. There are situations where it becomes necessary to impound books of account and other documents of persons who fall within the jurisdiction of Chief Commissioners or Commissioners who are not located in the same city. In such cases obtaining their approval is a time-consuming process. In order to overcome this, an amendment has been made in sub-section (3) by amending clause (b) in the proviso [as amended by section 2 of the Direct Tax Laws (Amendment) Act, 1987] to substitute the words “the Chief Commissioner or Commissioner therefor” by the words “the Chief Commissioner or Director General or Commissioner or Director, therefor, as the case may be”. The effect of the amendment would be that in those cases where it becomes necessary to retain the books of account and documents beyond a period of 15 days, by the Assistant Director, he can, in cases where the Chief Commissioner or Commissioner cannot be approached without loss of time, etc., get the approval for retention from Director General or Director, as the case may be, who are of the same rank as Chief Commissioner and Commissioner of Income-tax.

FINANCE ACT, 1988

33.3 Similar amendments have been carried out in the corresponding provisions of section 37 of the Wealth-tax Act and section 36 of the Gift-tax Act.

FINANCE ACT, 1988

33.4 These amendments will come into force from 1st June, 1988.

[Sections 33, 64 and 70 of the Finance Act, 1988]

FINANCE ACT, 1988

Modifications of provisions relating to searches and seizures

34.1 Under the existing provision of sub-section (1) of section 132 an authorised officer may seize books of account, documents, money, bullion, jewellery or other valuable articles or things found during the search, if he finds them incriminating or unaccounted. Seizure of an article or thing by the authorised officer means that he has to take physical possession of the same and remove it to a safe place. It is, however, always not possible to take physical possession due to the volume, weight or other physical characteristics of an article or thing or due to its being of a dangerous nature. The Finance Act has, therefore, inserted a second proviso to sub-section (1) of section 132 to enable the authorised officer to take “constructive possession” by directing the person who is in immediate possession or control thereof, not to remove, part with or otherwise deal with such an article or thing without the permission of authorised officer. Such an order shall be deemed to be seizure of such valuable articles or things. Since exercising of the powers of taking “constructive possession” have been incorporated in sub-section (1) of section 132 and will amount to seizure, it has been clarified in sub-section (3) that the issue of prohibitory orders under the later sub-section will be for reasons other than those for which “constructive possession” can be taken by the authorised officer.

FINANCE ACT, 1988

34.2 This amendment will come into force from the 1st April, 1989.

[Section 34 of the Finance Act, 1988]

FINANCE ACT, 1988

Strengthening of the provisions relating to tax deduction at source in the cases of contractors

35.1 Under the existing provisions of section 194C of the Income-tax Act, deduction of tax at source is required to be made from the payment of any sum to resident contractors or sub-contractors for carrying out any work at the time of payment or credit of such sum to the account of such person. It has been found that this provision also is being circumvented by a large number of persons by adopting the device of crediting such a sum to a ‘suspense account’. With a view to prevent postponement of liability to deduct tax at source and credit the same to the account of the Central Government through this device, an Explanation has been inserted in section 194C by the Finance Act, so that the tax will now have to be deducted at source either on accrual or at the time of credit to the account of the payee or at the time of payment whichever event occurs first. Further, it has also been clarified that any sum credited to the “suspense account” or any other account, by whatever name called, is to be deemed to be a credit for the purposes of tax deduction at source under section 194C. This amendment is on the same lines as in the Explanation to sub-section (1) of section 194A inserted by the Finance Act, 1987.

FINANCE ACT, 1988

35.2 This amendment will come into force from 1st June, 1988.

[Section 38 of the Finance Act, 1988]

FINANCE ACT, 1988

Modification of the provision relating to tax deduction at source on payment to non-residents

36.1 Under the existing provision of section 195(2) of the Income-tax Act, a person responsible for paying to a non-resident any sum other than interest on securities, dividend and salary, may make an application to the Assessing Officer to determine, in the prescribed manner, the appropriate proportion of such sum to be chargeable under the Act, for the purposes of tax deduction at source.

FINANCE ACT, 1988

36.2 Under the existing rule 10 of the Income-tax Rules, 1962, it is provided as to how the income component of the payments to non-residents as mentioned above can be computed for the purposes of this section. Further, Part II of the First Schedule to the Finance Act provides the appropriate rates of tax on various forms of income payable to non-residents for purposes of tax deduction at source.

FINANCE ACT, 1988

36.3 In order to rationalise the provisions, it is proposed to amend section 195(2) of the Income-tax Act to authorise an Assessing Officer to determine the income component of the payment to non-residents by general or special order in any case which may arise, rather than giving a general power to determine the income in a prescribed manner.

FINANCE ACT, 1988

36.4 This amendment will come into force from 1st March, 1988.

FINANCE ACT, 1988

Liberalisation of the provisons relating to income-tax clearance certificate

37.1 The existing provisions of section 230A prohibit the registration of any transfer of immovable property valued at more than Rs. 1 lakh unless the transferor obtains a certificate from his Assessing Officer that either tax has been paid or satisfactory arrangement for payment of tax liability has been made. The limit of Rs. 50,000 has been raised to Rs. 1 lakh by the Direct Tax Laws (Amendment) Act, 1987. The Finance Act has, further, enhanced this limit to Rs. 2 lakhs.

FINANCE ACT, 1988

37.2 This amendment shall be deemed to have come into force from the 1st day of April, 1988.

[Section 41 of the Finance Act, 1988]

FINANCE ACT, 1988

Modification of provisions relating to filing of first appeal

38.1 Under the existing provisions of section 246(1) of the Income-tax Act, no appeal has been provided against the order of penalty passed by an Assessing Officer under section 272BB of the Income-tax Act. This penalty is leviable for failure to make an application for allotment of a tax deduction account number under section 203A of the Act. With a view to provide an appeal against such an order of penalty, the Finance Act has inserted the words “section 272BB” in sub-clause (o) of clause (iva) of sub-section (1) of section 246 of the Income-tax Act.

FINANCE ACT, 1988

38.2 This amendment will come into force retrospectively with effect from the 1st June, 1987.

FINANCE ACT, 1988

38.3 The Finance Act, 1987 omitted Chapter XI of the Income-tax Act containing provisions relating to additional income-tax on undistributed profits with effect from 1st April, 1988. With the deletion of section 104 of the Act an amendment was also made in clause (a) of sub-section (2) of section 246 omitting the words “or an order under section 104, made against the assessee being a company” with effect from the 1st April, 1988. The result is that there is no provision for filing an appeal against the order passed under section 104 of the Act. With a view to removing this anomaly, the Finance Act has amended clause (a) of sub-section (2) of section 246 to restore the provision as they stood before the amendment made by the Finance Act, 1987.

FINANCE ACT, 1988

38.4 This amendment will come into force with effect from the 1st April, 1988.

[Section 43 of the Finance Act, 1988]

FINANCE ACT, 1988

Amendment of provision relating to revision of orders prejudicial to revenue

39.1 Under the existing provisions of section 263 of the Income-tax Act, the Commissioner of Income-tax is empowered to call for and examine the record of any proceeding and if he considers that the order passed by the Assessing Officer is erroneous insofar as it is prejudicial to the interests of revenue, he may pass an order enhancing or modifying the assessment or cancelling the same with a direction to make it afresh. The provisions as presently worded have given rise to two areas of controversy. The first is relating to the interpretation of the word “record” and the second is regarding the issue relating to merger of the order of the Assessing Officer with the order of the appellate authority. Courts have held in some cases that the word ‘record’ occurring in section 263 could not mean the record as it stood at the time of examination by the Commissioner but the record as it stood at the time when the order was passed by the Assessing Officer. Limiting the power of the Commissioner only to the situation that was existing at the time of making the assessment is to make the provision too restrictive, as many times information comes on record from various sources which indicate that the order of the Assessing Officer is erroneous and prejudicial to the interests of revenue. The above interpretation of the term “record” by some court besides being against the legislative intent also defeats the very objective sought to be achieved which is to revise the orders on the basis of records as is available to the Commissioner at the time of examination. With a view to clarifying the legislative intent of the term “record”, a definition of the term “record” has been inserted in the Explanation to sub-section (1) of section 263 by the Finance Act to include all records relating to any proceedings under the Act available at the time of examination by the Commissioner. This has been carried out for removal of doubts.

FINANCE ACT, 1988

39.2 Regarding the circumstances under which the order of an Assessing Officer merges with that of an appellate authority, conflicting decisions have been given by the Courts. The judicial controversy centres around the question as to whether the entire order of assessment passed by an Assessing Officer merges with the order the first appellate authority or the merger is only with respect to that part of the order of the Assessing Officer which relates to the matters considered and decided by such an authority. Some High Courts have held that there is complete merger once an appeal is decided against an order even on one or two points alone, while a number of High Courts have held that there is only a partial merger confined to points adjudicated upon. To eliminate any further litigation, the Finance Act has amended section 263 by inserting an Explanation to the effect that the Commissioner will be competent to revise an order of assessment passed by an Assessing Officer on all matters except those that have been considered and decided in appeal. This amendment also has been carried out for removal of doubts.

FINANCE ACT, 1988

39.3 Similar amendments have been carried out under section 25 of the Wealth-tax Act and section 24 of the Gift-tax Act.

FINANCE ACT, 1988

39.4 These amendments will come into force with effect from 1st June, 1988.

[Sections 44, 57 and 68 of the Finance Act,1988]

FINANCE ACT, 1988

Modification of provisions relating to offences and prosecutions

40.1 Under the existing provisions of section 279 of the Income-tax Act, prosecution for offences mentioned in sub-section (1) of the section can be launched at the instance of the Commissioner of Income-tax. The section also empowers the Commissioner to compound offences mentioned in section 279 of the Income-tax Act either before or after the institution of prosecution proceedings. The existing provisions empower only the Commissioner to authorise launching of prosecution. There may be cases where an offence is committed before a Commissioner (Appeals) or an appropriate authority as referred to in section 269UA of the Income-tax Act. As both these authorities are of the same rank as the Commissioner, it should not be necessary for them to approach the Commissioner for sanction for launching a prosecution. The Finance Act has therefore amended clause (1) of section 279 so as to provide that where prosecution is to be launched by a Commissioner (Appeals) or an appropriate authority the previous sanction of the Chief Commissioner or Commissioner will not be necessary. Similarly, by amendment of sub-section (2) of section 279 it has been provided that where an offence is committed before the Commissioner (Appeals) or the appropriate authority, they will not have to approach the Commissioner for compounding the offence. Further, the Finance Act in keeping with other enactments has substituted the expression “except at the instance of” by the expression “except with the previous sanction of”.

FINANCE ACT, 1988

40.2 The Finance Act has also omitted references to section 276AA which has already been omitted by the Finance Act, 1986, and sections 276DD and 276E which have been omitted by the Direct Tax Laws (Amendment) Act, 1987 and inserted a reference to section 276 which has been introduced by the Direct Tax Laws (Amendment) Act, 1987, in sub-section (1) of the section.

FINANCE ACT, 1988

40.3 The Finance Act by an amendment also provides that an offence, prosecution for which is to be launched by the Commissioner (Appeals) or the appropriate authority can be compounded by the Board or by any income-tax authority not below the rank of a Director General or a Chief Commissioner authorised by the Board in this behalf. In other cases an offence can be compounded by the Chief Commissioner or Commissioner.

FINANCE ACT, 1988

40.4 The corresponding provisions contained in section 35-I of the Wealth-tax Act and the sub-sections (3) and (4) of section 35 of the Gift-tax Act have been amended on the same lines.

FINANCE ACT, 1988

40.5 These amendments will come into force with effect from the 1st April, 1989.

[Sections 47, 63 and 69 of the Finance Act, 1988]

FINANCE ACT, 1988

Omission of Chapter XXII-A of the Income-tax Act relating to annuity deposits

41.1 Chapter XXII-A of the Income-tax Act contains provisions relating to annuity deposits. This was introduced in 1964 with the object of mopping up resources for the Government. The scheme which came into existence from the assessment year 1964-65 was discontinued with effect from the 1st April, 1969. The repayments under the scheme were taxable in the years of repayment of the annuity. The last of such payments fell due in 1979. The provisions have, therefore, ceased to be operative with effect from the assessment year 1980-81. The Chapter containing these provisions have, therefore, been deleted by the Finance Act, 1988, with effect from the 1st day of April, 1988.

[Section 48 of the Finance Act, 1988]

FINANCE ACT, 1988

Amendment of the provisions relating to provisional attachment of properties to protect revenue in certain cases

42.1 Under the existing provisions of section 281B of the Income-tax Act, an Assessing Officer, with the prior approval of the Commissioner can provisionally attach any property belonging to the assessee to protect the interests of revenue during the pendency of any assessment or reassessment proceedings. This provision is being circumvented by a large number of persons by alienating their properties during the pendency of proceedings under section 132(5) of the Income-tax Act relating to searches and seizures which are not assessment proceedings. Further, some taxpayers file applications with the Settlement Commission so that on admission of the application, the jurisdiction of the Assessing Officer to make provisional attachment gets ousted. During the pendency of such application the taxpayers very often alienate their properties. To prevent alienation of properties in such type of cases the Finance Act has inserted an Explanation after sub-section (1) of section 281B of the Income-tax Act to extend the powers of provisional attachment so that these could be exercised even during the pendency of proceedings under section 132(5) of the Income-tax Act. Further, new section 245DD has been inserted to confer the powers of provisional attachment on the Settlement Commission as well.

FINANCE ACT, 1988

42.2 Under the existing provisions a provisional attachment ceases to have effect after the expiry of six months from the date of order. The Commissioner or Chief Commissioner is empowered to extend the above-said period of six months up to a maximum of two years. By the insertion of a second proviso to sub-section (2) of section 281B of the Income-tax Act, the Finance Act has provided for the exclusion of the period commencing from the date on which an application under section 245C is made to the date of passing of the order under section 245D(1) of the Income-tax Act in the computation of the two-year period.

FINANCE ACT, 1988

42.3 On the same lines, the Finance Act has amended section 34C of the Wealth-tax Act and inserted a new section 22DD in the Wealth-tax Act.

FINANCE ACT, 1988

42.4 These amendments will come into force with effect from the 1st April, 1988.

[Sections 42, 49, 56 and 62 of the Finance Act, 1988]

FINANCE ACT, 1988

Omission of the provisions relating to furnishing of information by contractors

43.1 Under the existing provisions of section 285A of the Income-tax Act, a contractor is required to file particulars of the contract in a prescribed form to the Assessing Officer in a case where the value of the contract exceeds fifty thousand rupees. In view of the provisions of section 194C of the Income-tax Act which make it incumbent on a person to deduct tax at source while making a payment to a contractor, the requirement of obtaining information under section 285A of the Income-tax Act has been omitted.

FINANCE ACT, 1988

43.2 This amendment comes into force with effect from the 1st April, 1988.

[Section 50 of the Finance Act, 1988]

FINANCE ACT, 1988

Bar of suits in civil court to set aside or modify any proceeding

44.1 Under the existing provisions of section 293 of the Income-tax Act, no suit shall lie in any civil court to set aside or modify any order made under the Act. Similar provisions are contained in section 43 of the Wealth-tax Act and section 42 of the Gift-tax Act. Some Courts while interpreting section 293 have held that the bar of suits in civil courts is confined to orders only and not to proceedings under the Income-tax Act. On this basis, stay orders have been given in respect of proceedings before the Income-tax authorities. As this was not the legislative intent, section 293 of the Income-tax Act has been amended to provide that no suit shall lie in any civil court to set aside or modify any order in any proceeding taken or order made under the Act.

FINANCE ACT, 1988

44.2 Similar amendments have been made in the corresponding provisions of the Wealth-tax Act (section 43) and the Gift-tax (section 42).

FINANCE ACT, 1988

44.3 These amendments will come into force with effect from the 1st March, 1988.

[Sections 51, 65 and 71 of the Finance Act, 1988]

FINANCE ACT, 1988

Liberalisation of provisions in respect of taxation of profits and deduction of tax at source applicable to the General Insurance Corporation and its subsidiaries

45.1 Under the existing provisions of section 44 of the Income-tax Act, the profits and gains of any insurance business is computed in accordance, with the rules contained in the First Schedule to the Act. Under rule 5 of this Schedule, profits and gains of any business of insurance other than life insurance are taken to be balance of profits disclosed in the annual accounts furnished to the Controller of Insurance subject to certain adjustments. One of the adjustments provided therein is in respect of any amount either written off or reserved in the accounts to meet depreciation or loss on the realisation of investment which is to be allowed as deduction. Similarly, any sum credited to the account, due to apprecia-tion of or gain on the realisation of investment is taken as part of the profits and gains of the business. To enable the General Insurance Corporation and its subsidiaries to play a more active role in capital markets for the benefit of policy-holders, the Finance Act has amended sub-rule (b) of rule 5 of the First Schedule to provide for exemption of the profits earned by them on the sale of investment. As a corollary, it has also been provided that the losses incurred by the General Insurance Corporation on the realisation of the investment shall not be allowed as a deduction in computing the profits chargeable to tax.

FINANCE ACT, 1988

45.2 This amendment will take effect from the 1st April, 1989, and will, accordingly, apply in relation to the assessment year 1989-90 and subsequent years.

FINANCE ACT, 1988

45.3 Under the provisions of sections 193 and 194 of the Income-tax Act, tax is deducted at source at the time of payment of, inter alia, interest on securities or dividend to the General Insurance Corporation or its subsidiaries. As a measure of administrative convenience, the General Insurance Business (Nationalization) Act, 1972, has been amended to provide that in respect of any payment of dividend or interest on securities made to the General Insurance Corporation or its subsidiaries, no tax shall be deducted at source.

FINANCE ACT, 1988

45.4 This amendment will come into force with effect from the 1st June, 1988.

[Sections 52 and 86 of the Finance Act, 1988]

FINANCE ACT, 1988

Exclusion of cinematograph films from the Eleventh Schedule

46.1 The Eleventh Schedule to the Income-tax Act contains a list of non-priority articles and things to which the benefits of provisions of section 32AB and other sections of the Act are not applicable. Item 9 of this Schedule relates to “Cinematograph Films and Projectors”. The articles that fall under the category of cinematograph films cater to the priority needs of the country in various vital fields like medicine, communication and education. Cinematograph films have, therefore, been excluded from the non-priority list of articles or things from the Eleventh Schedule. “Projectors” will, however, continue to be included as an item in the Eleventh Schedule.

[Section 53 of the Finance Act, 1988]

4. Amendments to Wealth-tax Act

5. Amendments to Expenditure-tax Act

JUDICIAL ANALYSIS

EXPLAINED IN – In ACWT v. Aniaria Estate (P.) Ltd. [1995] 55 ITD 53 (Ahd.), it was observed as follows :

“. . . The Finance Act, 1988 has inserted a new proviso and Explanation to sub-section (3). According to the new proviso where any item referred to in clauses (i), (ii), (iii ), (iv), (v) and (vi ) of sub-section (3) is held by a company as stock-in-trade in a business carried on by it or, where any motor car is registered as a taxi and is used as such in the business of running of motor car on hire carried on by the company, such assets shall not form part of the net wealth of the company for the purpose of levy of wealth-tax. As stated above, the assessee-company carries on the business in real estate and the shops and flats were being constructed for sale and as such these would be the stock-in-trade for the company. Now the question is whether this proviso though inserted by the Finance Act, 1988 should be applied retrospectively. In our opinion, it can be safely applied retrospectively because as per Circular No. 528 dated 16-12-1988, the proviso was brought on the statute “with a view to removing the unintended hardship of the closely-held companies on account of provisions of sub-section (3), and provide incentive for growth and modernisation”. Reli­ance in this context is placed on the ratio of decision of Guja­rat High Court in the case of CIT v. Chandulal Venichand [1994] 73 Taxman 349 where the High Court after elaborate discussions held that the proviso which is remedial and curative in nature and has been brought into force to remedy the unintended hardship relates back to the date, the section was introduced.” (pp. 58-59)

FINANCE ACT, 1988

51.7 By amending clause ( i) to sub-section (3), it has been provided that where any precious metal or alloy is held by a closely-held company for use as a raw material for industrial undertakings such assets will not be taken as part of the net wealth for the purpose of levy of wealth-tax.

FINANCE ACT, 1988

51.8 By inserting a proviso to clause (v), the Finance Act has provided that in a case where any unused land otherwise forming part of the net wealth under the clause, is held by the company for industrial purposes, the said land will not be taken as part of the net wealth for the purpose of levy of wealth-tax for a period of two years from the date of its acquisition. By substituting the existing clause (vi) of sub-section (3) by a new clause any building or part thereof and land appurtenant thereto used by the company as cinema house has been excluded from the scope of levy of wealth-tax.

FINANCE ACT, 1988

51.9 By inserting new clauses (via) and (vib ) in sub-section (3) it has been provided that any building used as residential accommodation in the nature of a guest house or any building used as a residential accommodation by any Director, Manager, Secretary or any other employees of the company, such employees holding not less than one per cent of the equity share of the company or used by a relative of any person who holds not less than one per cent of such equity share, shall form part of the net wealth for purposes of levy of wealth-tax. For this purpose, the Explanation to clause (vib) provides that for the purpose of the clause, the term ‘relative’ will have the same meaning as assigned to it in clause (b) of Explanation 1 of section 80F of the Income-tax Act.

FINANCE ACT, 1988

51.10 The Finance Act, 1988 has inserted a new proviso and Explanation to sub-section (3). According to the new proviso where any item referred to in clauses (i), (ii), (iii ), (iv), (v) and (vi ) of sub-section (3) is held by a company as stock-in-trade in a business carried on by it or, where any motor car is registered as a taxi and used as such in the business of running of motor car on hire carried on by the company, such assets shall not form part of the net wealth of the company for the purpose of levy of wealth-tax.

FINANCE ACT, 1988

51.11 The new Explanation provides that in respect of any gold, silver, platinum or any precious metal, etc., the question whether such assets are held by the company as stock-in-trade of the business carried on by it or otherwise, will be decided in accordance with the directions issued by the Central Board of Direct Taxes. Such directions will be by way of special or general order and will take into account the ratio which the yearly turnover of the business of the company bears to the average stock of such assets held by the company.

FINANCE ACT, 1988

51.12 The proposed amendment to sub-section (3) will take effect from 1st April, 1989, and will, accordingly, apply in relation to the assessment year 1989-90 and subsequent assessment years. It may be clarified that the amendment will not have retrospective effect.

[Section 87 of the Finance Act, 1988]