TaxTMI 
TaxTMI 
The Finance Act, 1978--Explanatory Notes on the provisions relating to direct taxes
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....e to such deduction under the Income-tax Act; and the rates for computation of "advance tax" and charging of income-tax on current incomes in certain cases during the financial year 1978-79. (ii) Amendment of the Income-tax Act, 1961, with a view to widening the area of tax incentives for savings; providing greater tax incentive for savings in specified forms; liberalising the scope of certain concessions for promoting construction of houses, particularly for persons in the low and middle income brackets; placing a curb on extravagant and wasteful expenditure in businesses and professions; and a few other matters. (iii) Amendment of the Interest-tax Act, 1974, with a view to discontinuing the levy of interest-tax. (iv) Amendment of the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974, with a view to increasing the rates of compulsory deposit and making certain consequential changes. RATE STRUCTURE OF INCOME-TAX (i) Rates of income-tax for the assessment year 1978-79. 3.1 The rates of income-tax for the assessment year 1978-79, in the case of all categories of taxpayers (corporate as well as non-corporate) are specified in Part I of the Schedule....
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....payable to resident taxpayers during the financial year 1978-79, tax will be deductible at the rate of 34.5 per cent. made up of basic income-tax of 30 per cent. and surcharge of 4.5 per cent. (being 15 per cent. of the income-tax). In view of a specific provision made in new section 194BB of the Income-tax Act, income-tax will be deductible at source only where the income by way of winnings from any horse race to be paid to a person exceeds Rs. 2,500. It is also provided in that section that no deduction will be made from such winnings where the payment is made before 1st June, 1978. 4.3 The provisions of the new section 194BB of the Income-tax Act have been explained in paragraph 25 of this Circular. (iii) 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 1978-79. 5.1 The rates for deduction of tax at source from "Salaries" in the case of individuals during the financial year 1978-79, and for the computation of advance tax payable during that financial year in the case of all categories of taxpayers have been specified in Part III of the Schedule to the Finance Act. The....
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....X ACT, 1961 7.1 Relaxation of the test of "residence" in India in the case of Indian citizens employed outside India--Section 6(1).--Clause (1) of section 6 of the Income-tax Act provides that an individual is said to be resident in India in any previous year, if- (a) he is in India in that year for a period or periods amounting in all to 182 days or more; or (b) he maintains or causes to be maintained for him a dwelling place in India for a period or periods amounting in all to 182 days or more in that year and has been in India for thirty days or more in that year; or (c) having within the four years preceding that year been in India for a period or periods amounting in all to 365 days or more, he is in India for a period or periods amounting in all to sixty days or more in that year. The Finance Act has inserted an Explanation below the said clause (1) to secure that, in the case of an Indian citizen, who is rendering service outside india and who is or has been in India on leave or vacation in the previous year, the period of "thirty days" and "sixty days" respectively referred to in (b) and (c) above would stand extended to ninety days. The effect of this provision....
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....-room. For the purposes of this provision, employees having income chargeable under the head "Salaries" up to Rs. 10,000 are regarded as low-paid employees. The initial depreciation allowance in respect of such buildings is allowed at the rate of 20 per cent. of the actual cost thereof. The Finance Act has raised the rate of initial depreciation allowance in respect of such buildings from 20 per cent. to 40 per cent. 9.2 This amendment will take effect from 1st April, 1979, and will accordingly, apply in relation to the assessment year 1979-80 and subsequent years. [Section 5 of the Finance Act] 10.1 Modification of the scheme of export markets development allowance--Section 35B.--Domestic companies and non-corporate taxpayers resident in India are entitled to a weighted deduction in respect of the expenditure incurred by them on development of export markets, in accordance with the provisions of section 35B of the Income-tax Act. The Finance Act has made three modifications in the scheme of export markets development allowance which are explained hereunder. 10.2 The first modification is that no deduction will be allowed under section 35B in relation to an....
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....of clause (b) of section 35B(1) of the Income-tax Act, will not qualify for weighted deduction. These heads of expenditure are the following:- (a) advertisement or publicity outside India in respect of the goods, services or facilities dealt in or provided by the taxpayer in the course of his business; and (b) distribution, supply or provision outside India of such goods, services or facilities, not being expenditure incurred in India in connection therewith or expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit. 10.6 These amendments take effect from 1st April, 1978. However, as stated in paragraph 10.2 above, the aforesaid modifications will apply only in relation to expenditure incurred after 31st March, 1978. [Section 6 of the Finance Act] 11.1 Deduction in respect of payments to associations and institutions for carrying out rural development programmes--Section 35CCA.--With a view to encouraging companies and co-operative societies to involve themselves in the work of rural welfare and uplift, the Finance (No. 2) Act, 1977, had introduced a new sec....
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.... the disallowance of a part of such expenditure in the computation of taxable profits. The main features of the new sub-section (3A) read with related sub-sections (3B), (3C) and (3D) inserted in section 37 are as follows:- (a) The provision for the disallowance of a specified portion of such expenditure will apply only in relation to expenditure on advertisement, publicity and sales promotion in India. (b) Although this provision will apply to all categories of taxpayers carrying on any business or profession, no disallowance will be made in cases where the aggregate amount of such expenditure does not exceed Rs. 40,000. (c) Where a taxpayer has set up an industrial undertaking for the manufacture or production of any articles, no disallowance will be made under this provision in respect of expenditure on advertisement, publicity or sales promotion incurred by the taxpayer for the purposes of the business of such undertaking for three previous years, namely, the previous year in which such undertaking begins to manufacture or produce such articles and the two previous years immediately following that year. 12.2 The amount to be disallowed under this provision will be c....
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....d to be a "small newspaper" if the average circulation of the newspaper in the calendar year in which such advertisement has been published is certified by the prescribed authority as not exceeding 15,000 copies. "Average circulation", in relation to any newspaper, will be taken to be the number arrived at by dividing the aggregate of the number of copies of such newspaper circulated during the calendar year by the total number of days on which such newspaper was published in that year. The term "newspaper" is not confined to a "daily" newspaper, but would also cover periodicals and journals. 12.4 As the terms "publicity" and "sales promotion" have a wide amplitude, expenditure incurred by taxpayers on fashion shows; beauty contests; consumer gift offers; and free samples or gifts will fall within the ambit of new sub-section (3A) of section 37 of the Income-tax Act. 12.5 For the removal of doubts, it has been clarified that nothing contained in new sub-section (3A) shall apply in relation to expenditure in the nature of entertainment expenditure incurred by a taxpayer in connection with advertisement, publicity or sales promotion and such expenditure shall be governed by sub....
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....ns in such cases with reference to the compensation or, as the case may be, consideration as so enhanced or further enhanced, it is no longer necessary to invoke the provisions of section 52(2) of the Income-tax Act in cases where the taxpayer questions the adequacy of the consideration determined or approved by the Central Government or the Reserve Bank of India. In view thereof, the words" and the adequacy of the consideration so determined or approved is not questioned by the assessee" occurring in clause (b) of the proviso to section 52(2) of the Income-tax Act have been omitted retrospectively from 1st April, 1974. [Section 9 of the Finance Act] 14.1 Exemption of capital gain attributable to enhancement of compensation for compulsory acquisition of residential house property in certain circumstances--Section 54.--Section 54 of the Income-tax Act provides that where the capital gain arises from the transfer of a house property, which in the two years immediately preceding the date of transfer was being used by the assessee or a parent of his mainly for the purpose of his own or the parent's own residence (hereinafter referred to as the original asset), ....
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....te constructed, a house property for the purposes of his own residence (hereinafter referred to as the relevant asset), then, the "unadjusted capital gain" will not be charged to tax, to the extent it has been utilised for purchasing or, as the case may be, constructing, the relevant asset. Where the amount of the unadjusted capital gain exceeds the cost of purchase or construction of the relevant asset, only the excess amount will be chargeable to tax. 14.5 Where the assessee transfers the relevant asset within a period of three years from the date of its purchase or construction, then, for the purposes of determining the amount of capital gain arising from the transfer of the relevant asset (i) the cost of the relevant asset will be taken at nil, if the amount of the unadjusted capital gain exceeded the cost of the relevant asset; and (ii) the cost of the relevant asset will be reduced by the amount of the unadjusted capital gain, if such unadjusted capital gain was equal to or less than the cost of the relevant asset. In the result, the exemption of the unadjusted capital gain on the purchase or construction of the relevant asset would stand forfeited. 14.6 The expression ....
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....ich would have been payable if the enhancement had not been made 50,000 2. Capital gain as recomputed with reference to the enhanced compensation 1,50,000 3. Capital gain attributable to the enhancement of the compensation (Rs. 1,50,000—Rs. 50,000) 1,00,000 4. Cost of the new asset 40,000 In this case, Rs. 40,000 would not have been charged to tax under sub-section (1) of section 54. Hence, although the recomputed capital gain of Rs. 1,50,000 at (2) above as reduced by the amount not charged to tax under sub-section (1) of section 54 is (Rs. 1,50,000--Rs. 40,000) Rs. 1,10,000, the unadjusted capital gain in this case will be the capital gain attributable to the enhancement of the compensation, i.e., Rs. 1,00,000 only. 14.7 The "capital gain attributable to the enhancement of the compensation" is to be computed in accordance with clause (2) of the Explanation to new sub-section (2) of section 54. The said clause (2) provides that in a case where the computation of capital gain, made with reference to the compensation which would have been payable had such enhancement not be....
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.... as the original asset), and the assessee has, within a period of two years after that date purchased any other land for being used for agricultural purposes (hereinafter referred to as the new asset), then, the capital gain will not be charged to tax to the extent it has been utilised for acquiring the new asset. Where the amount of the capital gain exceeds the cost of acquisition of the new asset, only the excess is charged to tax. The exemption is, however forfeited (in the manner explained in paragraph 14.2 of this Circular) if the assessee transfers the new asset within a period of three years from the date of its purchase. 15.2 The Finance Act has re-numbered section 54B of the Income-tax Act as sub-section (1) thereof and inserted a new sub-section (2) in the said section. The new sub-section (2) provides that where the transfer of the original asset is by way of compulsory acquisition under any law and the compensation awarded for such acquisition is enhanced by any court, tribunal or other authority, and the assessee has, within a period of two years after the date of receipt of the "additional compensation" purchased any land for being used for agricultural purposes (h....
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....manner explained in paragraph 14.2 of this Circular) if the new asset is transferred within a period of three years of its purchase or construction. 16.2 The Finance Act has re-numbered section 54D of the Income-tax Act as sub-section (1) thereof and inserted a new sub-section (2) in the said section. The new sub-section (2) provides that where the compensation awarded for the compulsory acquisition of the original asset is enhanced by any court, tribunal or other authority, and the assessee has, within a period of three years after the date of receipt of the "additional compensation", purchased any land or building or constructed any other building for the purposes of shifting or re-establishing the industrial undertaking or setting up another industrial undertaking (hereinafter referred to as the relevant asset), then, the "unadjusted capital gain" will not be charged to tax, to the extent it has been utilised for purchasing or, as the case may be, constructing the relevant asset. Where the amount of the unadjusted capital gain exceeds the cost of purchase or construction of the relevant asset, only the excess amount will be chargeable to tax. 16.3 The provisions relating t....
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....- (a) the investment is made in equity shares; (b) such equity shares form part of an eligible issue of capital" as defined in sub-section (3) of new section 80CC, inserted in the Income-tax Act by section 17 of the Finance Act; (c) the assessee has subscribed to or purchased the shares in the manner specified in sub-section (4) of new section 80CC. The aforesaid provisions of section 80CC have been explained in paragraphs 21.3 and 21.4 of this Circular. 17.3 Where the cost of the equity shares referred to above is taken into account for the purposes of exemption of capital gain under section 54E, a deduction with reference to such cost will not be allowed under section 80CC of the Income-tax Act. 17.4 The second modification made by the Finance Act is in respect of clause (vi) of Explanation 1 below sub-section (1) of section 54E whereunder fixed deposits for a period of not less than three years with the State Bank of India and its subsidiary banks, nationalised banks and co-operative societies engaged in carrying on the business of banking (including co-operative land mortgage banks and co-operative land development banks) have been included as a specified asse....
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.... inserted a new sub-section (3) in section 54E to provide that where the transfer of the original asset is by way of compulsory acquisition under any law, or where the consideration for the transfer of the original asset is determined or approved by the Central Government or the Reserve Bank of India, and the compensation or, as the case may be, consideration for such transfer is enhanced by any court, tribunal or other authority, and the assessee has, within a period of six months after the date of receipt of the "additional compensation" or "additional consideration", invested or deposited the entire additional compensation or consideration in any specified asset (hereinafter referred to as the relevant asset), then, the "unadjusted capital gain" will not be charged to tax. However, where only a part of such additional compensation or consideration is invested or deposited in any specified asset, only a proportionate part of the "unadjusted capital gain" will be exempted from income-tax. 17.7 For the purposes of this provision, the expression "unadjusted capital gain" means so much of the recomputed capital gain (i.e., the capital gain computed with reference to the enhanced c....
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....en an amalgamation of a company owning an industrial undertaking or a ship with another company and the Central Government, on the recommendation of the "specified authority", is satisfied that the amalgamation is in the public interest and that certain conditions laid down in the law in this behalf are fulfilled. Where the Central Government is so satisfied, it may make a declaration to that effect and thereupon, notwithstanding anything contained in any other provision of the Income-tax Act, the accumulated loss and unabsorbed depreciation of the amalgamating company is deemed to be the loss or, as the case may be, depreciation allowance, of the amalgamated company, for the previous year in which the amalgamation is effected and can be carried forward and set off by it accordingly. 18.2 Under the existing provisions, the "specified authority" can make a recommendation to the Central Government under section 72A only after the company having the accumulated loss and unabsorbed depreciation allowance has amalgamated with the other company. The Finance Act has inserted a new sub-section (3) in section 72A to enable such companies to obtain an "advance ruling" in this regard from ....
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....a maximum of Rs. 3,000. (Section 80L) (vi) Deduction in respect of profits and gains from the business of publication of books. (Section 80QQ) The Finance Act has deleted the said sub-section (4) and has thus restored the position as it obtained prior to the amendment made by the Finance Act, 1976 19.2 This amendment will take effect from 1st April, 1979, and will accordingly apply in relation to the assessment year 1979-80 and subsequent years. [Section 15 of the Finance Act] 20.1 Liberalisation of the provision relating to deduction in respect of long-term savings in specified media--Section 80C.--Under section 80C of the Income-tax Act, tax relief is allowed in respect of long-term savings effected by certain categories of taxpayers out of their income chargeable to tax. In the case of an individual, long-term savings through life insurance or deferred annuity policies (without cash option) on the life of the individual, his spouse or child; certain provident funds and superannuation funds; Unit-linked Insurance Plan and 10-Year and 15-Year Cumulative Time Deposit Accounts, qualify for tax relief. In the case of Hindu undivid....
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....spect of the next Rs. 5,000 will continue at the existing rate of 50 per cent., and in respect of the balance, at the rate of 40 per cent. (ii) The monetary limit of the savings qualifying for the deduction has been increased from Rs. 20,000 to Rs. 30,000 in the case of individuals, as also married couples governed by the system of community of property in force in the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu. [The monetary limit of Rs. 30,000 currently applicable to the qualifying savings by Hindu undivided families will remain unchanged.] 20.4 The changes indicated in the preceding paragraph will take effect from 1st April, 1979, and will accordingly apply for the assessment year 1979-80 and subsequent years. [Section 16 of the Finance Act] 21.1 Deduction in respect of investment in equity shares of new industrial companies--New section 80CC.--With a view to stimulating investment in equity shares of new industrial companies, the Finance Act has inserted a new section 80CC in the Income-tax Act which provides for the grant of a tax concession in the case of (a) individuals; (b) Hindu undivided families; and (c) associations....
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....which had originally been incorporated as a private company but has become a public company under the provisions of the Companies Act, 1956, an issue of equity shares made by it for the first time after it has become a public company will not be regarded as an eligible issue of capital, if- (i) such company had declared, distributed or paid any dividend when it was a private company; or (ii) any of the shares forming part of such issue are offered for subscription at a premium. In case any question arises as to whether any issue of equity shares would constitute an "eligible issue of capital" for the purposes of the proposed concession, the question shall be referred to the Central Government whose decision in the matter would be final. 21.4 This tax concession will not be available unless the taxpayer has subscribed to or purchased the shares in the manner specified hereunder:- (a) the taxpayer should have subscribed to the shares in pursuance of an offer for public subscription made by the company or in pursuance of a reservation or an option made in his favour by reason of his being a promoter of the company; or (b) the taxpayer should have purchased the shares....
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....year 1979-80 and subsequent year. [Section 18 of the Finance Act] 23.1 Recomputation of capital gains on receipt of additional compensation or consideration--Section 155(7A).--Under the existing provisions of the Income-tax Act, the capital gain arising from the transfer of a capital asset is charged to tax in the previous year in which the asset is transferred. The capital gain is computed by deducting from the full value of the consideration received or accruing as a result of the transfer (i) the cost of acquisition of the asset as increased by the cost of improvements thereto; and (ii) the expenditure incurred in connection with the transfer. Where the transfer of the capital asset is by way of compulsory acquisition under any law, the capital gain has to be computed by taking the compensation awarded by the Government as the full value of the consideration, eventhough the adequacy of the compensation may be questioned by the assessee. On additional compensation being awarded to the assessee, the earlier computation can be revised within four years from the end of the assessment year, by taking the enhanced compensation as the full value of the consider....
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....e assessment order. 23.6 Accordingly, the Finance Act has amended section 155 of the Income-tax Act to provide that, in such cases, the Income-tax Officer will amend the earlier order so as to exclude the amount of the unadjusted capital gain not chargeable to tax in accordance with the provisions of sections 54, 54B, 54D and 54E as amended by the Finance Act. The period of limitation of four years for amending an assessment order laid down in the Income-tax Act will, in such cases, run from the end of the previous year in which the additional compensation or, as the case may be, consideration was received by the assessee. The relevant provisions made in this behalf in section 155 of the Income-tax Act are the following:- (i) New sub-section (8A) for recomputation of capital gain in cases falling under section 54. (ii) New sub-section (9A) for recomputation of capital gain in cases falling under section 54B. (iii) New clause (b) inserted in sub-section (10) for recomputation of capital gain in cases falling under section 54D. (iv) New sub-section (10B) for recomputation of capital gain in cases falling under section 54E. 23.7 The new sub-sections (8A), (9A) and (1....
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.... the punter in that horse race as reduced by the amount invested by way of bet on the particular horse or horses which won the race, and not by the amount invested on the horse or horses which lost in that race. Hence, where a punter investes Rs. 100 each on two horses--horse 'A' and horse 'B'--in a particular horse race, and he wins Rs. 500 on the bet placed on horse 'A' but loses the bet on horse 'B', the winnings of the punter from this horse race would be Rs. 400 (Rs. 500--Rs. 100) and not Rs. 300 (Rs. 500--Rs. 200). (d) Where the income by way of winnings from a horse race payable to a person exceeds Rs. 2,500, tax will have to be deducted at source from such winnings even though the winnings may be paid to the person in instalments of less than Rs. 2,500. Similarly, where the bookmaker or other person responsible for paying the winnings from horse races credits such winnings and debits the losses to the individual account of the punter, the set-off of the losses against the income would constitute constructive payment of such income. Hence, where the income by way of winnings from a horse race credited to the individual account of the punter exceeds Rs. 2,500, tax will hav....
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.... is required to pay advance tax voluntarily on the basis of his current income as estimated by him. The existing legal position is unsatisfactory inasmuch as a taxpayer who is being regularly assessed to income-tax will have no liability to pay advance tax if an advance tax notice is not served on him. Besides, if new taxpayers who may not be familiar with the income-tax law are called upon to pay advance tax voluntarily, it is only appropriate that taxpayers who are being regularly assessed to income-tax should also be required to pay advance tax on a voluntary basis. 26.2 In view of these considerations, the Finance Act has introduced a new section 209A in the Income-tax Act to secure that every person irrespective of whether he has been assessed to income-tax or not, pays advance tax on a voluntary basis, if his current income for the relevant year is likely to exceed the amount specified in section 208(2) of the Income-tax Act. The main features of the new provision are indicated hereunder:- (a) A taxpayer who has been previously assessed by way of regular assessment under the Income-tax Act will be required to send a statement of advance tax payable by him to the Income-....
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....nt or estimate by more than 33-1/3 per cent. of the latter. (d) Every statement and estimate, including an estimate in lieu of statement, will have to be made in the prescribed form and verified in the prescribed manner. (e) Although every person will be required to pay advance tax voluntarily, the Income-tax Officer will continue to have the power to issue a notice for payment of advance tax in individual cases under section 210 of the Income-tax Act. 26.3 Consequential changes have also been made in sections 208, 209, 211, 212, 215, 216, 217 and 218 of the Income-tax Act. These amendments are intended to secure that the provisions of the said sections apply in relation to computation and payment of advance tax on a voluntary basis under section 209A as they apply in relation to payment of advance tax under the existing provisions of the Income-tax Act. 26.4 The Finance Act has also amended section 273 of the Income-tax Act relating to false estimate of, or failure to pay, advance tax. Section 273(1) as amended provides, inter alia, for the levy of penalty in cases where- (a) the assessee has furnished a statement of advance tax under section 209A(1)(a) which he kne....
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....eduled banks by about 1 per cent. 27.2 As a step towards re-alignment of interest rates, the Finance Act has discontinued the levy of interest-tax in relation to interest accruing or arising to scheduled banks after 28th February, 1978. 27.3 The amendment takes effect from 1st April, 1978. It is, however, relevant to note that as the calendar year is the previous year in the case of scheduled banks, interest which has accrued or arisen in the months of January and February, 1978, will be chargeable to interest-tax in their case for the assessment year 1979-80. [Section 33 of the Finance Act] AMENDMENTS TO THE COMPULSORY DEPOSIT SCHEME (INCOME-TAX PAYERS) ACT, 1974 28.1 Increase in the rates of compulsory deposit.--Under the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974, individuals who are citizens of India, Hindu undivided families and trustees of discretionary trusts are required to make compulsory deposits if their "current income" exceeds Rs. 15,000. In order to mobilise additional resources in the form of savings, the Finance Act has raised the rates of compulsory deposit. Hitherto, the rate of compulsory depos....