TaxTMI 
TaxTMI 
The Finance Act, 1978--Explanatory Notes on the provisions relating to direct taxes
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....r 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 to the Finance Act. These rates are the same as those specified in Part III of the Fi....
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.... 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. These rates are also applicable for deduction of income-tax at source during the financial year 1978-79....
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....tion 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 will be that Indian citizens employed outside India would be able to stay on leave or vacation in India for eighty-nine days in a....
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....lowance 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 any expenditure incurred after March 31, 1978, unless the following conditions are fulfilled:- (i) The domestic company or, as the case may be, the non-corporate taxpayer resident in India is engaged in (a....
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....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 section 35CC in the Income-tax Act under which companies and co-operative societies are entitled to a deduction, in the computation of their taxable profits, of the expenditure incurred by them on any approved programme of rural development. The....
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....pecified 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 calculated as under:- i. where the aggregate expenditure on advertisement, publicity and sales promotion in India does not exceed ¼ per cent of the turnover or, as the case may be, gross receipts of the business or profession 10 per cent of the "adjusted expenditure"; and ii....
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.... "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-section (2A) of section 37 which lays down certain ceiling limits for the allowance of such expenditure. 12.6 These provisions will take effect from 1st April, 1979, and will accordingly apply in relation to the assessment year 1979-80 and subsequent years. [Section 8 of the Finance Act] 13.1 Relaxation of the provisions relating to taxation of capital gains on notional basis in certain cases--Section 52(2).--Sub-section (2) of section 52 of the Income-tax Act provides that if, in the opinion o....
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....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), and the assessee has, within a period of one year before or after that date purchased, or within a period of two years after that date constructed, a house property for the purposes of his own residence (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 the purchase or construction of the new asset. Where the amount of the capital gain exceeds the cost of the new asset, only the excess amount is chargeable to tax. 14.2 Where the new asset is transferred within a period ....
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....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 "unadjusted capital gain" means (i) the recomputed capital gain (i.e., the amount of capital gain computed by taking the enhanced compensation as the full value of the consideration, as reduced by the amount not charged to tax under sub-section (1) of section 54; or (ii) the capital gain attributable to the enhancement of the compensation, whichever is less. This may be illustrated by the following examples:- Example I Rs. 1. Capital gain as computed with reference to the compensation which would have been payable if the enhancement had not been made 50,00....
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....ion. In other cases, the capital gain attributable to the enhancement of the compensation will be the difference between (i) the capital gain as recomputed with reference to the enhanced compensation; and (ii) the capital gain computed with reference to the compensation which would have been payable if the enhancement had not been made. This may be illustrated by the following examples:- Example I Rs. Capital gain computed with reference to the compensation originally awarded (-)20,000 Recomputed capital gain 50,000 Hence, capital gain attributable to the enhancement of the compensation 50,000 Example II Rs. Capital gain computed with reference to the compensation originally awarded 20,000 Recomputed capital gain 50,000 Capital gain attributable to the enhancement of the compensation (i.e., Rs. 50,000 minus Rs. 20,000). 30,000 14.8 In relation to the transfer of any capital asset by way of compulsory acquisition under any law, the term "additional compensation" referred to in paragraph 14.4 above has been defined in clause (1) of the Explanation below sub-section (2) of section 54 to mean the difference between the compensation for the acquisition of such ass....
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....the relevant asset is transferred by the assessee within a period of three years from the date of its purchase are in pari materia with the corresponding provisions in section 54(2), explained in paragraph 14.5 of this Circular. The terms "additional compensation", "unadjusted capital gain" and "capital gain attributable to the enhancement of the compensation" also have the same meaning as explained in paragraphs 14.6 to 14.8 of this Circular. 15.4 The above changes have been made with retrospective effect from 1st April, 1974, and will accordingly apply in relation to the assessment year 1974-75 and subsequent years. [Section 11 of the Finance Act] 16.1 Exemption of capital gain attributable to enhancement of compensation for compulsory acquisition of lands and buildings forming part of industrial undertaking in certain circumstances--Section 54D.-- Section 54D of the Income-tax Act provides exemption from tax in the case of persons owning industrial undertakings in respect of capital gain arising on compulsory acquisition of any land or building used by them for the purposes of the business of the undertaking. The relief is available in cases where the land or building which ....
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.... as explained in paragraphs 14.6 to 14.8 of this Circular. 16.4 The above changes have been made with retrospective effect from 1st April, 1974, and will accordingly apply in relation to the assessment year 1974-75 and subsequent years. [Section 12 of the Finance Act] 17.1 Modification of the provisions relating to exemption of "long-term capital gains" in cases where the consideration received or accruing as a result of the transfer is invested or deposited in specified assets--Section 54E.--Section 54E of the Income-tax Act provides exemption from income-tax in respect of capital gains arising from the transfer of any capital asset (not being a short-term capital asset) in cases where the full value of the consideration received or accruing as a result of the transfer is invested or deposited by the assessee in specified assets within a period of six months after the date of the transfer. Where only a part of the consideration is so invested or deposited a proportionate part of the capital gain is exempted from income-tax. The Finance Act has made certain modifications in section 54E which are explained hereunder. 17.2 Modifications in the list of specified assets.--The Fina....
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....deposit is made to the effect that he will not take any loan or advance on the security of such deposit during a period of three years from the date on which the deposit is made. (b) The assessee furnishes, along with the return of income for the assessment year relevant to the previous year in which the transfer of the original asset was effected or within such further time as may be allowed by the Income-tax Officer, a copy of the declaration referred to in (a) above, duly attested by an officer not below the rank of sub-agent, agent or manager of such bank or an officer of corresponding rank of the co-operative society. Where exemption under section 54E is allowed to an assessee on the fulfilment of the aforesaid conditions, the assessee will have to furnish to the Income-tax Officer, within ninety days from the expiry of the aforesaid period of three years, a certificate from the officer of the bank or co-operative society referred to in (b) above to the effect that the assessee has not taken any loan or advance on the security of such deposit during the said period of three years. 17.5 Sub-section (2) of section 54E provides for the forfeiture of exemption of capital gains i....
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....", in relation to the transfer of any capital asset the consideration for which was determined or approved by the Central Government or the Reserve Bank of India, means the difference between the amount of consideration for such transfer as enhanced by any court, tribunal or other authority and the amount of consideration which would have been payable if such enhancement had not been made. 17.8 New sub-section (4) inserted in section 54E provides for the forfeiture of exemption of the unadjusted capital gain in cases where the relevant asset is transferred, or converted (otherwise than by transfer) into money, within a period of three years from the date of its acquisition. For this purpose, the amount of capital gain exempted from tax by reason of the amount invested or deposited by the assessee in the relevant asset which is so transferred or converted will be deemed to be income by way of long-term capital gains of the previous year in which the relevant asset is so transferred or converted. Where only some of the relevant assets are so transferred or converted by the assessee, only a proportionate part of the capital gains which had been exempted from tax by reason of the amou....
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....cified authority is also being authorised to indicate such modifications in the proposed scheme of amalgamation as it considers necessary. Where, after examining the scheme and taking into account all relevant facts, the specified authority is satisfied that the conditions referred to in section 72A will be fulfilled if such amalgamation is effected in accordance with such scheme (or in accordance with such scheme as modified in the manner indicated by it), the said authority would intimate to the company which has submitted the scheme of amalgamation that, after the amalgamation is so effected, it would make (unless there is any material change in the relevant facts) a recommendation to the Central Government under section 72A of the Income-tax Act. 18.3 The aforesaid provision takes effect from 1st April, 1978. [Section 14 of the Finance Act] 19.1 Restoration of some concessions earlier withdrawn in the case of certain Hindu undivided families--Section 80A(4).--The Finance Act, 1976, inserted a new sub-section (4) in section 80A of the Income-tax Act withdrawing the following concessions in the case of Hindu undivided families having at least one member with independent incom....
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....ulative Time Deposit Accounts qualify for tax relief. 20.2 The tax relief, in all cases, is allowed by deducting the whole of the first Rs. 4,000 of the qualifying savings plus 50 per cent. of the next Rs. 6,000 plus 40 per cent. of the balance of such savings, in computing the taxable income of the taxpayer. Long-term savings qualify for the tax relief only to the extent that such savings do not exceed the ceiling limits laid down in this behalf. In the case of individuals, the ceiling limit applicable in the generality of cases is 30 per cent. of the "gross total income" or Rs. 20,000, whichever is less. A higher ceiling limit is laid down in the case of authors, playwrights, artists, musicians and actors. The ceiling limit in their case is 40 per cent. of the professional income of the author, playwright, artist, musician or actor plus 30 per cent. of the remaining part of the "gross total income" or Rs. 50,000, whichever is less. In the case of a married couple 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 ceiling limit is the same as in the case of individuals generally. In the case of H....
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.... allowed only with reference to the cost of such of the shares (the aggregate cost whereof does not exceed Rs. 10,000) as are specified by the taxpayer in this behalf. Where a taxpayer who has acquired certain shares in any previous year, pays the whole or a part of the amount, if any, remaining unpaid on such shares, within a period of six months from the end of that previous year, the amount so paid by him will be regarded as having been paid by the taxpayer towards the cost of such shares in the previous year in which the shares were acquired by him. 21.3 For the purposes of this provision, an "eligible issue of capital" means an issue of equity shares which satisfies the following conditions:- (a) The issue is made by a public company formed and registered in India with the main object of carrying on the business of (i) construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule to the Income-tax Act; or (ii) providing long-term finance for construction or purchase of houses in India for residential purposes. Shares issued by a public company formed and registered in India with the main object o....
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....l be regarded as having acquired any shares on the date on which his name is entered in relation to those shares in the register of members of the company. 21.6 Where a deduction is claimed and allowed to a taxpayer under this section with reference to the cost of any equity shares, the cost of such shares will not be taken into account for the purposes of exemption of capital gains under section 54E of the Income-tax Act. 21.7 Although this provision takes effect from 1st April, 1978, it has been specifically provided that only investment made in any previous year relevant to the assessment year 1979-80 or any subsequent assessment year will qualify for the purposes of this concession. [Section 17 of the Finance Act] 22.1 Exemption from tax of co-operative societies engaged in supplying milk--Section 80P(2).--Profits derived by a primary co-operative society from the supply of milk raised by its members to a federal milk co-operative society are exempt from income-tax under clause (b) of sub-section (2) of section 80P of the Income-tax Act. The Finance Act has substituted the said clause (b) by a new clause with a view to extending the scope of the existing exemption to prima....
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....hanced or further enhanced by any court, tribunal or other authority. 23.3 The new sub-section (7A) provides that, in such cases, the computation or, as the case may be, computations made earlier shall be deemed to have been wrongly made and the Income-tax Officer shall recompute the capital gain arising from such transfer by taking the compensation or consideration as enhanced or further enhanced to be the full value of the consideration received or accruing as a result of the transfer, and shall make the necessary amendment. The period of limitation of four years for amending the 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 consideration was received by the assessee. 23.4 The new sub-section (7A) takes effect retrospectively from 1st April, 1974, and will accordingly, apply in relation to the assessment year 1974-75 and subsequent years. 23.5 Recomputation of capital gain for providing exemption with reference to the cost of relevant asset--Section 155(8A), (9A), (10)(b) and (10B).--Income-tax Officers may sometimes recompute the capital gain under new sub-section (7A) of sec....
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....om deduction of tax at source from the interest payable on these Bonds, the Finance Act has inserted a new clause (ib) in the proviso to section 193 of the Income-tax Act exempting such interest from the requirement of deduction of income-tax at source. 24.2 The amendment takes effect from 1st April, 1978. [Section 20 of the Finance Act] 25.1 Deduction of tax at source from income by way of winnings from horse races--Section 194BB.--The Finance Act has inserted a new section 194BB in the Income-tax Act to provide for deduction of tax at source from income by way of winnings from horse races at such rates as may be prescribed in the Finance Act of the relevant year. The main features of this provision are explained below:- (a) The obligation to deduct tax at source will apply only where such winnings are paid by a bookmaker or a person to whom a licence has been granted by the Government under any law for the time being in force for horse racing in any race course or for arranging for wagering or betting in any race course. (b) No tax will be deducted at source where the income by way of winnings from any horse race to be paid to a person is Rs. 2,500 or less, or where the pay....
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....the Schedule to the Finance Act provides for the deduction of tax at source from such winnings at the rate of 34.5 per cent. (income-tax 30 per cent. plus surcharge 4.5 per cent.) in the case of resident non-corporate taxpayers. In the case of non-resident non-corporate taxpayers, tax will be deductible on the same basis as is currently applicable to income other than interest payable on a tax-free security, i.e., at the rate of 34.5 per cent. or the higher appropriate rate applicable to the winnings from horse races if such winnings were the total income of the person. 25.2 Consequential changes have also been made in sections 197, 198, 199, 200, 202, 203, 204 and 205 of the Income-tax Act with a view to placing the tax deducted at source from horse race winnings on a par with the tax deducted at source from other categories of income. 25.3 The aforesaid provisions take effect from 1st April, 1978. However, as stated above, deduction of tax at source will not be made in cases where such winnings are paid before 1st June, 1978. [Sections 21 and 32 of, and the Schedule to, the Finance Act] 26.1 Computation and payment of advance tax by assessees on a voluntary basis--New sectio....
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....le by him with reference to his current income. (b) In the case of a taxpayer who has been previously assessed by way of regular assessment under the Income-tax Act, the statement or, as the case may be, estimate in lieu of statement referred to in (a) above will have to be sent to the Income-tax Officer before the date on which the first instalment of advance tax is due in the case of the taxpayer. In the case of a person who has not previously been assessed by way of regular assessment under the said Act, the estimate of advance tax referred to in (a) above may be sent at any time before the date on which the last instalment of advance tax is due in his case. The estimated amount of advance tax is to be paid in such cases in one instalment on the date specified in section 211 or, as the case may be, in equal instalments on such specified dates, if more than one, falling after the date on which the estimate is sent by the taxpayer. (c) A taxpayer will have the option to revise the statement or estimate (including estimate in lieu of statement) sent by him, if his current income, according to his own estimate, would be lower than that shown in the statement or estimate or for any....
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.... of the assessed tax as defined in section 215(5). 26.5 The Finance Act has also made certain consequential changes in section 273 of the Income-tax Act to provide for levy of penalty under that section in cases where a person furnishes an estimate of advance tax payable by him under section 209A which he knew or had reason to believe to be untrue or where a person fails without reasonable cause to furnish an estimate of advance tax in accordance with the provisions of section 209A. The provisions as amended provide for the imposition of penalty in such cases on the same basis and to the same extent as in relation to defaults under the corresponding provisions of section 212 of the Income-tax Act. 26.6 The aforesaid provisions will take effect from 1st June, 1978, and will accordingly, apply in relation to advance tax payable during the financial year 1978-79 and subsequent years. [Section 22 to 31 of the Finance Act] AMENDMENT TO THE INTEREST-TAX ACT, 1974 27.1 The Interest-tax Act, 1974, provides for the levy of a tax at the rate of 7 per cent. on the gross amount of interest received by scheduled banks on loans and advances made in India. Banks were expected to adjust the....