TaxTMI 
TaxTMI 
The Finance Act, 1984-Explanatory Notes on the provisions relating to direct taxes
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....nance Act, 1984 (hereinafter referred to as the Finance Act) has,- (i) amended sections 10, 11, 33B, 35, 35C, 36, 40, 40A, 80CC, 80E, 80L, 80M, 80N, 80-O, 80U, 161, 164, 193, 194, 246, 252, 269C, 269F, 269P, 269T, 281A and the Ninth Schedule to the Income-tax Act, 1961; (ii) inserted four new sections 44AB, 269SS, 271B and 276DD in the Income-tax Act, 1961; (iii) omitted section 80D of the Income-tax Act, 1961; (iv) amended sections 5 and 21A of the Wealth-tax Act, 1957; and (v) amended section 32 of the Unit Trust of India Act, 1963. PROVISIONS IN BRIEF 3. The provisions in the Finance Act, 1984, in the sphere of direct taxes relate to the following matters:- (i) Prescribing the rates of income-tax (including surcharge thereon) on incomes liable to tax for the assessment year 1984-85; the rates at which income-tax will be deductible at source during the financial year 1984-85 from interest (including interest on securities), dividends, salaries, insurance commission, winnings from lotteries and crossword puzzles, winnings from horse races and other categories of income liable to such deduction under the Income-tax Act; and the rates for computa....
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....p; RATE STRUCTURE OF INCOME-TAX (i) Rates of Income-tax in respect of incomes liable to tax for the assessment year 1984-85. 4.1 In respect of incomes of all categories of taxpayers (corporate as well as non-corporate) liable to tax for the assessment year 1984-85, the rates of income-tax (including surcharge thereon) have been specified in Part I of the First Schedule to the Finance Act. These rates are the same as those laid down in Part III of the First Schedule to the Finance Act, 1983 for the purposes of computation of "advance tax", deduction of tax at source from "Salaries" and retirement annuities payable to partners of registered firms engaged in specified professions and computation of tax payable in certain cases during the financial year 1983-84. 4.2 It may be noted that in an Explanation below Paragraph E of Part III of the First Schedule to the Finance Act, 1983, an 'industrial company" was defined to mean a company w....
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....or computation of "advance tax" payable during that 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 deduction of tax at source during the financial year 1984-85 from retirement annuities payable to partners of registered firms engaged in certain professions (such as, chartered accountants, solicitors, lawyers, etc.) and for charging income-tax during the financial year 1984-85, on current incomes in cases where accelerated assessment 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 1984-85, assessment of persons who are likely to transfer property to avoid tax. (iv) Rates of tax applicable to individuals, Hindu undivided families, unregistered firms, etc. 6.2 The rates of income-tax in the case of individuals, Hindu undivided families (other than those having at least one member with independent total income exceeding Rs. 15,000), unregistered firms, associations of persons, bodies of individuals and artificial juridical persons have been specifie....
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....so made is equal to or exceeds the amount of surcharge on income-tax payable by it, the surcharge payable by it shall be reduced to nil. Where the amount of deposit so made falls short of the amount of surcharge, the surcharge payable by the company shall be reduced by the amount of the deposit so made. (vii) Partially integrated taxation of non-agricultural income with income derived from agriculture. 6.7 As in the past, the Finance Act has provided that in the case of individuals, Hindu undivided families, unregistered firms or other associations of persons or bodies of individuals and artificial juridical persons, the net agricultural income will be taken into account for computation of "advance tax" and charging of income-tax on certain incomes in cases where accelerated assessments are required to be made during the financial year 1984-85. These provisions are broadly on the same lines as those contained in the Finance Act, 1983. [Section 2 and the First Schedule to the Finance Act] &nbs....
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....continued because of extensive damage to or destruction of its building, machinery, plant or furniture as a direct result of natural calamities (such as flood, cyclone, earthquake), riot or civil disturbance, accidental fire, explosion or enemy action. This deduction is allowed in cases where such business is re-established, re-constructed or revived by the assessee within a period of three years from the end of the year in which it was discontinued. The deduction is allowed, in the computation of the profits of the year in which the business is so re-established, re-constructed or revived, in a sum equal to 60 per cent. of the "terminal allowance" admissible to the assessee under section 32(1)(iii) of the Income-tax Act in respect of the damaged or destroyed assets of the assessee's business. The expression "terminal allowance" means the deduction allowable in the year in which the building, machinery, plant or furniture used in a business is sold, discarded, demolished or destroyed. The allowance is equal to the amount by which the salvage value or the insurance money receivable in respect of such assets falls short of their written down value. 9.2 Having regard to the fact th....
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....e on the date on which the instrument of transfer of the land to him has been registered under the Registration Act, 1908, or where he has taken or retained possession of the land in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882, the date on which he has so taken or retained possession of the land. 10.3 The amendment takes effect from 1st April, 1984 and will, accordingly, apply in relation to the assessment year 1984-85 and subsequent years. As stated in paragraph 10.1 above, the new provision will apply only in respect of expenditure incurred on the acquisition of any land after 29th February, 1984. [Section 6(a) of the Finance Act] (v) Withdrawal of weighted deduction in respect of expenditure on scientific research. 11.1 Under section 35(2A) of the Income-tax Act, a weighted deduction equal to one and one-third times the sum paid by a taxpayer to a scientific research association, university, college or other institution approved for the purposes of section 35(1)(ii), or to a public sector company, is allowed in the computation of taxable profits. The weighted deduction is allowed onl....
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....gly, apply in relation to the assessment year 1984-85 and subsequent years. [Section 7 of the Finance Act] (vii) Withdrawal of weighted deduction in respect of salary paid to a physically handicapped employee. 13.1 Under section 36(1)(iia) of the Income-tax Act, in computing the taxable profits, a taxpayer is allowed a weighted deduction equal to one and one-third times the amount of the expenditure incurred on payment of any salary to an employee who is totaly blind or suffers from a permanent physical disability which has the effect of reducing substantially his capacity to engage in a gainful employment or occupation. The deduction is allowed only if the income of the employee concerned chargeable under the head "Salaries" does not exceed Rs. 20,000 and the taxpayer produces before the Income-tax Officer in respect of the first assessment year for which the deduction is claimed, in relation to such employee, a certificate as to his total blindness from a registered medical practitioner being an oculist or, as the case may be, a certificate as to the permanent physical disability from a registered medical practitioner. 13.2 On the consideration that....
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.... ceiling limits on the deductible amount of expenditure incurred by a taxpayer on account of payment of salary to any employee or a former employee or in providing any perquisite, etc., to any such employee. Under this provision, expenditure incurred by a taxpayer on the payment of salary to an employee in respect of the period of his employment in India during the relevant year is not allowed as deduction in computing the taxable profits of the employer to the extent it exceeds an amount calculated at the rate of Rs. 5,000 for each month or part of a month. In addition, the aggregate of expenditure incurred by a taxpayer in providing any perquisites, whether convertible into money or not, to an employee and the amount of expenditure or allowance (such as depreciation allowance) in respect of assets of the taxpayer used by the employee for his own purposes or benefit, is not allowed as deduction in computing the income from business or profession, to the extent it exceeds 20% of the amount of salary payable or an amount calculated at the rate of Rs. 1,000 for each month or part thereof comprised in the period of employment in India during the relevant accounting year, whichever is ....
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....will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 10(a) and (b) of the Finance Act] (ix) Imposition of restrictions on contributions by employers to non-statutory funds. 16.1 Sums contributed by an employer to a recognised provident fund, an approved superannuation fund and an approved gratuity fund are deducted in computing his taxable profits. Expenditure actually incurred on the welfare of employees is also allowed as deduction. Instances have come to notice where certain employers have created irrecoverable trusts, ostensibly for the welfare of employees, and transferred to such trusts substantial amounts by way of contribution. Some of these trusts have been set up as discretionary trusts with absolute discretion to the trustees to utilise the trust property in such manner as they may think fit for the benefit of the employees without any scheme or safeguards for the proper disbursement of these funds. Investment of trust funds has also been left to the complete discretion of the trustees. Such trusts are, therefore, intended to be used as a vehicle for tax avoidance by claiming deduction in respect of such....
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.... a claim is so made, such unexpended amount shall be returned by the trustee to the assessee as early as possible. The assessee may also claim that any asset being land, building, machinery, plant or furniture acquired or constructed by the fund, trust, company, association of persons, body of individuals, society or any other institution out of the sums paid by the assessee be transferred to him and where any such claim is so made such asset shall be transferred to the assessee as early as possible. 16.5 The aforesaid, provisions take effect retrospectively from 1st April, 1980, and will, accordingly, apply in relation to the assessment year 1980-81 and subsequent years. [Section 10(c) of the Finance Act] (x) Compulsory audit of accounts of certain persons carrying on business or profession. 17.1 Accounts maintained by companies are required to be audited under the Companies Act, 1956. Accounts maintained by co-operative societies are also required to be audited under the Co-operative Societies Act, 1912. There is, however, no obligation on other categories of taxpayers to get their accounts audited. 17.2 A proper audit for tax purposes would ensu....
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....s year or years relevant to an assessment year, means the date of the expiry of four months from the end of the previous year or, where the assessee has more than one previous year, from the end of the previous year which expired last before the commencement of that assessment year or the 30th June of that assessment year, whichever is later. 17.6 New section 271B inserted by the Finance Act provides that if any person fails, without reasonable cause, to get his accounts audited in respect of any previous year or years relevant to an assessment year or to obtain a report of such audit as required under the aforesaid provision, the Income-tax Officer may direct that such person shall pay, by way of penalty, a sum equal to one-half per cent. of the total sales, turnover or gross receipts, as the case may be, in the business, or the gross receipts in the profession, in such previous year or years subject to a maximum of one lakh rupees. 17.7 Under an amendment made in section 246 of the Income-tax Act, an appeal shall lie to the Commissioner (Appeals) against an order imposing penalty under section 271B. 17.8 The provisions will take effect from 1st April, 1985, and will, acc....
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.... [Section 13 of the Finance Act] (xiii) Withdrawal of deduction in respect of payments for securing retirement annuities. 20.1 Under section 80E of the Income-tax Act, an Indian citizen resident in India, who is chargeable to tax in respect of his share in the income of a registered firm, which renders professional service as a chartered accountant, solicitor, lawyer or an architect or such other professional service as may be notified by the Central Government, is eligible for claiming a deduction for the sums paid for securing retirement annuities, up to a maximum of Rs. 5,000 or 10 per cent. of the gross total income, whichever is less. The deduction is not admissible to a taxpayer whose unearned income exceeds Rs. 10,000 or who is entitled to any pension or is participating in any pension scheme. 20.2 The aforesaid provision applies only to a small category of taxpayers. Besides, section 80C of the Income-tax Act provides for various modes of savings including premium paid for a contract for a deferred annuity. Such savings up to Rs. 40,000 by an individual taxpayer qualify for deduction under section 80C of the Act. In view of the large choice of a....
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....it Trust of India and interest on deposits under any notified National Deposit Scheme. Hitherto, a special exemption up to Rs. 3,000 was allowed under section 32 of the Unit Trust of India Act, only in respect of income on units of the Unit Trust of India. As stated in paragraphs 37.1 and 37.2 of this circular. the relevant provisions of section 32 of the said Act have, in consequence, been omitted by the Finance Act. 21.6 Under the second proviso, a further exemption up to Rs. 2,000 has been allowed in respect of income by way of interest on deposits under any notified National Deposit Scheme. The effect of the amendments is illustrated by the following example:- Income exempt under section 80L Rs. Rs. (i) Income from dividend 8,000 7,000 (ii) Income from units of Unit Trust of India 4,000 3,000 (iii) Income from deposits under a notified National Deposit Scheme 4,000 2,000 16,000 12,000 21.7 The amendments take effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. &....
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...., commission, etc., from certain foreign sources. 24.1 Section 80-O of the Income-tax Act provides for a deduction of the whole of the income of an Indian company received by way of royalty, commission, fees, or any similar payments from the Government of a foreign State or a foreign enterprise for the provision of technical know-how or technical services in the computation of taxable income subject to the fulfilment of certain conditions specified in that section. 24.2 The aforesaid concession which has been on the statute book for nearly two decades was introduced primarily to stimulate the flow of technology from the country. As the flow of technology from the country now does not need fiscal support of this order, the Finance Act has amended section 80-O to reduce the deduction from 100 per cent. to 50 per cent. of such income. 24.3 This amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 18 of the Finance Act] (xviii) Modification of provision relating to deduction in the case of totally blind or physically handicapped persons. 25.1 Under section....
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....uld become payable if the business is carried on in partnership. 26.2 In order to counteract such attempts at tax avoidance, the Finance Act has inserted a new sub-section (1A) in section 161 of the Income-tax Act which provides that where any income in respect of which any person mentioned in clause (iv) of sub-section (1) of section 160 of the Income-tax Act (i.e., a trustee appointed under a trust declared by a duly executed instrument in writing, whether testamentary or otherwise, including a wakf deed) is liable as representative assessee consists of or includes profits and gains of business, income-tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate. "Maximum marginal rate", for this purpose, means the rate of income-tax (including surcharge) applicable in relation to the highest slab of income in the case of an individual or an association of persons as specified in the Finance Act of the relevant year. However, with a view to avoiding hardship in genuine cases, it has been specifically provided that the provision for charging the entire income of the trust at the maximum marginal rate of income-tax wil....
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....for the benefit of his employees. The Finance Act has inserted a second proviso to section 164(1) of the Income-tax Act to provide that in a case where the income derived by the trustees of a discretionary trust consists of, or includes, profits and gains of business, the provisions of the first proviso shall apply only if the profits and gains are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the only trust so declared by him. In other words, in such cases the income of the discretionary trust would be charged to tax at normal rates applicable to individuals and not at the maximum marginal rate of income-tax. 27.2 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and the subsequent years. [Section 21(a) of the Finance Act] (xx) Levy of income-tax at maximum marginal rate in the case of charitable and religious trusts which forfeit tax exemption. 28.1 Income derived by charitable or religious trusts is exempt from tax to the extent to which such income is applied....
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....th a view to ensuring that the income or property of charitable or religious trusts is not used or applied, directly or indirectly, for the private benefit of the specified categories of persons and that the trust funds are not invested in contravention of the investment pattern laid down in the Income-tax Act, the Finance Act has inserted a proviso to sub-section (2) of section 164 of the Income-tax Act which lays down that in a case where the relevant income is derived from property held under trust wholly for charitable or religious purposes and the whole or any part of such income forfeits tax exemption in the circumstances mentioned at (a) to (c) of paragraph 28.2 above, the trust shall be charged to tax at the maximum marginal rate, that is, the rate of income-tax (including surcharge) applicable to the highest slab of income in the case of individuals, associations of persons, etc. A similar provision has been made in the second proviso to sub-section (3) of section 164 in respect of cases where the relevant income is derived from property held under trust in part only for charitable or religious purposes. 28.6 It may be noted that new sub-section (1A) inserted in section....
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....e from any interest on debentures paid to an individual, who is resident in India if the following conditions are fulfilled, namely:- (i) the debentures have been issued by a company in which the public are substantially inserted; (ii) the debentures are listed in a recognised stock exchange in India; (iii) the interest is paid by the company by an account payee cheque; and (iv) the aggregate amount of interest paid or likely to be paid by the company to the holder of the debentures during the financial year does not exceed Rs. 1,000. 29.3 Similarly, it will not necessary to deduct tax from income by way of dividends paid by a company in which the public are substantially interested to a shareholder, being an individual who is resident in India, if:- (a) the dividends are paid by such company by an account payee cheque; and (b) the amount of such dividends, or, as the case may be, aggregate amount of such dividends distributed or paid, or likely to be distributed or paid, during the financial year by such company to the shareholder does not exceed Rs. 1,000. 29.4 The amendments take effect from 1st June, 1984, and will, accordingly, apply in respect of inter....
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.... the aforesaid monetary limit to Rs. 50,000. 31.5 These amendments take effect from 1st June, 1984. [Sections 25, 26 and 27 of the Finance Act] (xxiv) Prohibition against taking or accepting certain loans and deposits in cash. 32.1 Unaccounted cash found in the course of searches carried out by the Income-tax Department is often explained by taxpayers as representing loans taken from or deposits made by various persons. Unaccounted income is also brought into the books of account in the form of such loans and deposits, and taxpayers are also able to get confirmatory letters from such persons in support of their explanation. 32.2 With a view to countering this device, which enables taxpayers to explain away unaccounted cash or unaccounted deposits, the Finance Act has inserted a new section 269SS in the Income-tax Act debarring persons from taking or accepting, after 30th June, 1984, from any other person any loan or deposit otherwise than by an account payee cheque or account payee bank draft if the amount of such loan or deposit or the aggregate amount of such loan and deposit is Rs. 10,000 or more. This prohibition will also apply in cases where on the....
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.... or accepted after 30th June, 1984. [Sections 28, 29 and 31 of the Finance Act] (xxv) Modification of provisions relating to effect of failure to furnish information in respect of properties held benami. 33.1 Under section 281A of the Income-tax Act, the real owner of any property held benami or any person acting on his behalf is debarred from instituting any suit in any court to enforce any right in respect of any property held benami unless the income from such property or the property itself has been disclosed in any return of income or net wealth furnished by the claimant or a notice in the prescribed form and containing the prescribed particulars in respect of the property has been given by him to the Income-tax Officer. The existing provisions do not lay down any time-limit for such disclosure in the return of income or net wealth or for such notice to the Income-tax Officer. As such, the required disclosure in the return of income or net wealth and the required notice can be given by the real owner at any time before the suit is instituted. 33.2 With a view to curbing the wide-spread practice of benami holding of property, the Finance Act has tighten....
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....e Commissioner of Income-tax. It will be obligatory for the Commissioner to given the certified copy within 14 days from the receipt of the application. 33.7 The amendments take effect from 1st April, 1984. [Section 32 of the Finance Act] AMENDMENTS TO THE WEALTH-TAX ACT (i) Enlargement of the scope of exemption in respect of one house. 34.1 Under section 5(1)(iv) of the Wealth-tax Act, the value of one house (or part of a house) belonging to the assessee is exempt from wealth-tax up to Rs. 1 lakh. The Finance Act has amended the provision to raise this exemption to Rs. 2 lakhs. 34.2 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 34(a)(i)(1) of the Finance Act] (ii) Modificat....
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....; 2,70,000 2,70,000 II. Shares in Indian companies 3,00,000 2,65,000 Units of the Unit Trust of India 50,000 35,000 Deposits under National Deposit Scheme 20,000 20,000 3,70,000 3,20,000 III. Shares in Indian companies 3,00,000 2,65,000 Units of the Unit Trust of India 1,00,000 35,000 Deposits under National Deposit Scheme 1,00,000 25,000 5,00,000 3,25,000 35.6 The amendments take effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 34(a)(i)(2) and (3), (ii) and (iii) of the Finance Act] (iii) Levy of wealth-tax at maximum marginal rate in the case of charitable and religious trusts which forfeit tax exemption. 36.1 Under section 5(1)(i) of the Wealth-tax Act, any property held under trust or any other legal obligation for any public purpose of a charitable or religious nature in India is exempt from wealth-tax. However, section 21A of the Wealth-tax Act provides that the exemption from wealth-tax is forfeited if,- (a) any part of the trust property or any inco....
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.... approved for the purposes of section 35(1)(ii) of the Income-tax Act, which is applied solely for the purposes of the association is exempt from income-tax. The Finance Act, 1983, amended this provision to provide that this exemption will not be available if any income by way of contributions received by the association are invested or deposited after 29th February, 1983, otherwise than in one or more of the forms or modes specified in section 11(5) of the Income-tax Act in relation to investment or deposit of moneys by charitable or religious trusts and institutions. Exemption from income-tax is also denied if any funds of the association, invested or deposited before 1st March, 1983 (otherwise than in the forms or modes referred to above), continue to remain so invested or deposited after 30th November, 1983. Further, tax exemption is also denied to such associations in cases where they hold any shares in any company (not being a Government company as defined in section 617 of the Companies Act, 1956) or a statutory corporation after 30th November, 1983. 36.6 With a view to bringing the provisions of the Wealth-tax Act in this regard in line with the provisions of section 10(....