TaxTMI 
TaxTMI 
The Finance Act, 1985-Explanatory Notes on the provisions relating to direct taxes
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....he Finance Act, 1985 (hereinafter referred to as the Finance Act) has,- (i) amended sections 2, 10, 16, 17, 35CC, 36, 37, 40A, 44AB, 54, 58, 80CC, 80G, 80-I, 80QQA, 115, 115E, 136, 139, 208, 245D, 273A and 278A of the Income-tax Act, 1961; (ii) inserted new sections 33AB, 35AB and 180A in the Income-tax Act, 1961; (iii) substituted sections 80HHC and 167A of the Income-tax Act, 1961; (iv) omitted sections 80F, 80JJ, 80N, 80V and 80VV; (v) amended sections 5, 18B, 22D and Schedule I of the Wealth-tax Act, 1957; and (vi) amended section 6 of the Interest-tax Act, 1974. PROVISIONS IN BRIEF 3. The provisions of the Finance Act, 1985, in the sphere of direct taxes, relate to the....
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.... of the definition of a "company in which the public are substantially interested"; and some other matters. (iii) Amendment of Wealth-tax Act, 1957, with a view to providing for an overall exemption up to Rs. 5 lakhs in respect of the aggregate value of one residential house property and other specified assets; withdrawal of exemption from wealth-tax in respect of business assets of certain charitable and religious trusts; modification of the provisions relating to reduction or waiver or penalty in certain cases; reduction in the rates of wealth-tax and some other matters. (iv) Amendment of the Interest-tax Act, 1974, to provide that interest-tax will not be charged in respect of interest accruing or arising to scheduled banks after 31st March, 1985. RAT....
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....y income. These rates vary from the rates in force during the financial year 1984-85 in three respects. Firstly, in consequence of the proposed reduction in the maximum marginal rate of personal income-tax (referred to in para. 6.4 below) to 50 per cent., the rate of deduction of tax at source from winnings from lotteries has been reduced from 30 per cent. to 25 per cent. because under section 80TT of the Income-tax Act, a deduction is allowed from such winnings of a sum of Rs. 5,000 plus 50 per cent. of the winnings from lotteries in excess of Rs. 5,000. Secondly, in consequence of the proposed discontiunance of the levy of surcharge on income-tax in the case of non-corporate taxpayers (referred to in paragraph 6.3 below), the rates for deduction of tax at source from income of such taxpayers do not also provide for surcharge. Thirdly, in consequence of the proposed reduction in the rates of basic income-tax in the case of companies (referred to in paragraph 6.7 below), the general rate for deduction of tax at source in the case of foreign companies stands reduced from 70 per cent. to 65 per cent. and the rate of surcharge stands reduced consequentially from 3.50 per cent. to 3.25....
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....ion limit have been restructured. Table 1 and Table 2 below give the rates of income-tax applicable to the aforesaid categories of taxpayers: (a) as specified in Part I of the First Schedule to the Finance Act, i.e., the existing rates; and (b) as specified in Part III of the First Schedule to the Finance Act, i.e., the new rates. TABLE 1 Slabs of income with rates in the case of individuals, Hindu undivided families (other than those covered by Table 2), unregistered firms, etc. Income slab Rates as specified in Part I of the First Schedule to the Finance Act (i.e., existing rates) Income slab Rates as specified in Part III of the First Schedule to the Finance Act(i.e., new rates) Up to Rs. 15,000 Nil Up to Rs. 18,000 Nil Rs. 15,001-20,000 20% Rs. 18,001-25,000 25% Rs. 20001-25,000 25% Rs. 25,001-50,000 30% Rs. 25,001-30,000 30% Rs. 50,001-1,00,000 40% Rs. 30,001-40,000 35% Over Rs. 1,00,000 50% Rs. 40,001-50,000 40% Rs. 50,001-70,000 45% Rs. 70,001-1,00,000 50% Over Rs. 1,00,000 55% ....
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....000 17,719 13,250 4,469 25.22 70,000 22,781 17,250 5,531 24.28 80,000 28,406 21,250 7,156 25.19 90,000 34,031 25,250 8,781 25.80 1,00,000 39,656 29,250 10,406 26.24 1,50,000 70,594 54,250 16,344 23.15 2,00,000 1,01,531 79,250 22,281 21.95 3,00,000 1,63,406 1,29,250 34,156 20.90 4,00,000 2,25,281 1,79,250 46,031 20.43 5,00,000 2,87,156 2,29,250 57,906 20.17 TABLE 4 Comparative incidence of tax at selected levels of income in the case of Hindu undivided families having one or more members with independent income exceeding the exemption limit Income Income-tax (including surcharge at existing rates) Income-tax at new rates without surcharge(which has been abolished) Tax relief Tax relief as percen- tage of tax in Col. (2) (Rs.) (Rs.) (Rs.) (Rs.) (%) (1) (2) (3) (4) (5) 13,000 450 250 200 44.44 14,000 900 500 400 44.44 15,000 1,350 750 600 44.44 16,000 1,800 1,000 800 44.44 17,000 2,520 1,250 1,....
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....se of a foreign company, the basic rate of income-tax has been reduced to 65 per cent. as against 70 per cent. at present. 6.8 The levy of surcharge at the rate of 5 per cent. of the income-tax payable by companies is being continued. However, companies will continue to have the option of making, in lieu of payment of surcharge, a deposit with the Industrial Development Bank of India under a scheme to be framed by the Central Government in this behalf. The deposit will have to be made before the due date for payment of the last instalment of advance tax in the case of the company. Where the amount of the deposit 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. Partially integrated taxation of non-agricultural income with income derived from agriculture. 6.9 As in the past, the Finance Act has provided that in the case of individuals, Hindu undivided families, unregistered firms, other associations of persons, etc., the ne....
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....n was amended by the Finance Act, 1983 and will, accordingly, apply in relation to the assessment year 1984-85 and subsequent years. [Section 3 of the Finance Act] Modification of the provisions relating to retrenchment compensation received by a workman. 8.1 Under the existing provisions, retrenchment compensation received by a workman is exempt from income-tax subject to certain limits. The maximum amount of retrenchment compensation exempt is the sum calculated on the basis provided in section 25F(b) of the Industrial Disputes Act, or Rs. 20,000, whichever is less. 8.2 The Finance Act has raised the aforesaid monetary limit of Rs. 20,000 to Rs. 50,000. The Finance Act has also provided that the aforesaid limit shall not apply in cases where the compensation is paid under any scheme which is approved in this behalf by the Central Government, having regard to the need for extending special protection to the workmen in the undertaking to which the scheme applies and other relevant circumstances. 8.3 The amendments take effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Section....
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....his residence to his office or other place of work, or from such office or other place of work to his residence shall not be regarded as use of such vehicle otherwise than wholly and exclusively in the performance of his duties. 11.3 This amendment takes effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Section 5 of the Finance Act] Modification of the provisions relating to "perquisites". 12.1 Under the existing provisions, the value of any benefit or amenity granted or provided free of cost or at concessional rate by an employer to an employee (not being a director of the company or a person who has a substantial interest in the company) is not regarded as a perquisite received by the employee unless the employee's income under the head "Salaries" exclusive of the value of any benefits or amenities not provided for by way of monetary payment exceeds Rs. 18,000. In the context of the raising of the exemption limit, the Finance Act, 1985, has raised the said limit to Rs. 24,000. It has also been clarified that, in cases where salary is received from more than one employer, the aggrega....
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....on of contributions to special account with the National Bank for Agriculture and Rural Development. 14.1 With a view to encouraging persons engaged in the business of growing and manufacturing tea in India to mobilise resources internally for specified purposes, the Finance Act has inserted a new section 33AB in the Income-tax Act. The section provides that where a person who carries on the business of growing and manufacturing tea in India has, during the previous year, deposited with the National Bank for Agriculture and Rural Development any amount in a special account maintained by such person with that Bank in accordance with the scheme approved in this behalf by the Tea Board, such person shall be allowed a deduction of the amount so deposited during the previous year or 20 per cent. of the profits from the business of growing and manufacturing tea in India (before making this deduction), whichever is less. Any excess deposit made in the previous year shall be treated as a deposit made by such person in the next following previous year. 14.2 Where any amount is withdrawn by such person from the speical account with the Bank, for acquiring any asset, being building, mac....
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.... relation to the assessment year 1986-87 and subsequent years. [Section 8 of the Finance Act] Withdrawal of deduction relating to rural development allowance. 16.1 Section 35CC of the Income-tax Act relating to rural development allowance provides that where a company or a co-operative society incurs any expenditure on any programme of rural development, the expenditure so incurred shall be deducted in computing the taxable profits. The deduction is to be allowed only if the approval of the prescribed authority has been obtained in respect of the programme before incurring the expenditure. 16.2 The concession is open to abuse as the correctness of claims in respect of expenditure incurred on rural development programmes is difficult to verify. The Finance Act has discontinued this concession, except in relation to programmes of rural development which have been approved by the prescribed authority before 17th March, 1985, by providing that no such programme shall be approved after 16th March, 1985. [Section 9 of the Finance Act] Deduction in respect of provisions made by banking companies for bad and doubtful debts. 17.1 Section 36(1)(vii) of the In....
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....banks, etc. 18.1 Financial corporations engaged in providing long-term finance for industrial or agricultural development in India or public companies providing long-term finance for construction or purchase of houses in India for residential purposes, are entitled to a deduction, in the computation of their taxable profits, of an amount not exceeding 40 per cent. of the total income carried to a special reserve. Under the existing provisions, the total income for this purpose is the total income as computed before making any deduction under Chapter VI-A. The Finance Act provides that the deduction shall be of an amount not exceeding 40 per cent. of the total income as computed before making any deduction under the aforesaid provision and Chapter VI-A. 18.2 Under another provision, scheduled banks, other than foreign banks, which are engaged in banking operations outside India and approved by the Central Government in this behalf are also entitled to a deduction up to 40 per cent. of their total income computed before making any deduction under Chapter VI-A carried by them to a reserve account. The Finance Act provides that the deduction shall be of an amount not exceeding 40....
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....ntaining the list of institutions and bodies which are exempt from the operation of section 40A(8) has also been omitted by the Finance Act. 20.3 The Explanation to sections 269SS and 269T provide that, for the purposes of the respective sections, "banking company" shall have the meaning assigned to it in clause (a) of the Explanation to section 40A(8). With the omission of section 40A(8), the Finance Act has provided a definition of the term "banking company" on the same lines in section 269SS. This definition will also apply for the purposes of section 269T of the Act. 20.4 These amendments take effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Sections 12(b), 36(f), 36(g) and 36(h) of the Finance Act] Disallowance of expenditure incurred in connection with certain proceedings under the Income-tax Act. 21.1 Under section 80VV of the Income-tax Act, any expenditure incurred by an assessee in respect of any proceedings before any income-tax authority or the Appellate Tribunal or any court relating to the determination of any liability under the Income-tax Act by way of tax, penalty or int....
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....iness or profession are in excess of certain limits. The proviso to the said section lays down that where such person is required by or under any other law to get his accounts audited by an "accountant", it shall be sufficient compliance with the provisions of the said section if such person gets the accounts of such business or profession audited under such other law and obtains the report of the audit as required under such other law and a further report in the form prescribed under the said section. An "accountant" for the purposes of section 44AB means a chartered accountant within the meaning of the Chartered Accountants Act, 1949, and includes in relation to any State any person who is entitled by virtue of section 226(2) of the Companies Act, 1956, to be appointed to act as an auditor of companies registered in that State. 22.2 As the accounts in certain cases may be required to be audited by or under any other law by an auditor who may not be an "accountant" within the meaning of the term as defined for the purposes of section 44AB, the Finance Act has amended the existing provisions to secure that, in a case where the accounts of an assessee are required to be audited b....
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....of his taxable income of an amount equal to 50 per cent. of the amount invested by him. If the amount invested in a year exceeds Rs. 20,000, the deduction is allowed with reference to an investment of Rs. 20,000 only. The tax concession is available only in respect of subscriptions to an "eligible issue of capital". 24.2 For the purposes of this provision, eligible issue of capital means an issue of equity shares which satisfies certain conditions. One of the conditions specified in clause (a) of sub-section (3) of section 80CC is that the issue is made by a public company 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, or (ii) providing long-term finance for construction or purchase of houses in India for residential purposes. 24.3 The Finance Act has modified the aforesaid clause to provide that to be regarded as an eligible issue, such issue should have been made by a public company formed and registered in India and the issue should have been wholly and exclusively for the purpose of carrying on the business referred....
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....ill be eligible for hundred per cent. deduction. Under another amendment, donations to the Indira Gandhi Memorial Trust will be placed at par with donations to other funds of national importance and, therefore, eligible for deduction under section 80G without any ceiling on the amount of donations qualifying for deduction. 26.3 The first amendment takes effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. The second amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. Thus, donations made to the Indira Gandhi Memorial Trust at any time during the accounting year relevant to the assessment year 1985-86, will qualify for deduction under section 80G of the Income-tax Act. [Section 18 of the Finance Act] Modification of the provisions relating to incentive for export. 27.1 Under section 80HHC of the Income-tax Act, an assessee, being an Indian company or a person (other than a company) who is resident in India, is entitled to a deduction in the computation of the taxable income, of an amount equal to 1 per cent.....
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....nge which is for the time being treated by the Reserve Bank of India as convertible foreign exchange, for the purposes of the Foreign Exchange Regulation Act, 1973, and any rules made thereunder. The definition of convertible foreign exchange is the same as contained in section 80-O of the Income-tax Act. Government have issued a Press Note on 21-6-1983 clarifying that receipt of sale proceeds in non-convertible rupees from bilateral account countries (e.g., Russian Roubles) will be treated on par with sale proceeds received in other convertible foreign exchange for the purposes of section 80HHC of the Income-tax Act. 27.5 The amendment takes effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Section 19 of the Finance Act] Deduction in respect of profits and gains from industrial undertakings, etc. 28.1 Under section 80-I of the Income-tax Act, a "tax holiday" is granted, inter alia, to new industrial undertakings (including cold storage plants) which commence production within the period of four years next following March 31, 1981, or ships which are brought into use within the period of four y....
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....dends received by an Indian company on shares allotted to it in a foreign company in consideration of any patent, invention, design, technical "know-how", etc., made available or technical services rendered to the foreign company. 30.2 With the reduction in the rates of corporation tax and the limited utility of this concession at present, the Finance Act, has discontinued the concession under section 80N of the Income-tax Act. 30.3 This amendment takes effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Sections 22, 36(b), 36(d)(iii) and 36(e) of the Finance Act] Extension of tax concession in respect of income of authors of text-books in Indian languages. 31.1 Section 80QQA of the Income-tax Act provides for a deduction, in the computation of the total income of an author, of an amount equal to 25 per cent. of his income derived from text books, etc., in Hindi and other Indian languages. The deduction is available in respect of any lumpsum consideration for the assignment or grant of any of his interests in the copyright of any such books or of royalties or copyright fees, whether receiva....
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....dings or lands or any rights therein will be chargeable to tax at a uniform rate of 50 per cent. in the case of all companies. 33.3 The amendment applies in relation to the assessment year 1986-87 and subsequent years. [Section 26 of the Finance Act] Modification of the provisions relating to certain incomes of non-residents. 34.1 Under the existing provisions of section 115E of the Income-tax Act, in the case of a "non-resident Indian", income-tax is payable at the rate of twenty per cent. of the "investment income" and income by way of long-term capital gains. The income-tax so calculated is increased by a surcharge at the rate of twelve and a half per cent. of such income-tax. 34.2 In view of the abolition of surcharge on income-tax in respect of all categories of non-corporate taxpayers, the Finance Act had deleted the requirement of payment of surcharge on income-tax by non-resident Indians under the aforesaid provision. 34.3 The amendment takes effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Section 27 of the Finance Act] Modification of the provisions relating to p....
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....under that section. 37.3 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 29(b) of the Finance Act] Modification of the provisions relating to taxation of associations of persons where shares of members are indeterminate or unknown. 38.1 Section 167A(2) of the Income-tax Act provides that where the individual shares of the members of an association of persons in any part of the income of such association are indeterminate or unknown, the income-tax payable shall be the aggregate of the amount of income-tax on such part of the total income at the maximum marginal rate and the amount of income-tax which would have been chargeable if the remaining part of the total income were its total income. 38.2 The existing provisions are being misused by some taxpayers for tax avoidance. A large number of associations of persons are formed without specifying the shares of members in a small part of the income, with the result that such part gets taxed at the maximum marginal rate while the major portion of the income gets taxed at low rates of tax depending upon the size....
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....ther than capital gains or income by way of winnings from lotteries, race winnings, etc.) liable to tax for the assessment year next following the said financial year. Advance tax is payable only where the income of the assessee subject to advance tax exceeds the specified limit. Under the existing provisions, the monetary limit specified in this behalf in the case of an assessee, other than a company, a local authority, a registered firm and a Hindu undivided family having at least one member whose total income of the previous year exceeds the exemption limit, is Rs. 15,000. 40.2 With the raising of the exemption limit in the case of individuals, Hindu undivided families (other than those having at least one member whose independent total income exceeds the exemption limit), associations of persons, unregistered firm, etc. from Rs. 15,000 to Rs. 18,000, the monetary limit specified for the purpose of payment of advance tax in respect of such assessees has been raised from Rs. 15,000 to Rs. 18,000 to coincide with the exemption limit in their case. A Hindu undivided family which has one or more members with taxable income exceeding Rs. 15,000 is required to pay advance tax if it....
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....jewellery, etc., belonging to a person are seized during a search carried out under section 132 of the Income-tax Act, and within 15 days of such seizure, the person makes a full and true disclosure of his income to the Commissioner, such person shall be deemed to have made, for the purposes of section 273A(1)(b) of the Income-tax Act, full and true disclosure prior to the detection by the Income-tax Officer of the concealment of particulars of income or of the inaccuracy of particulars furnished in respect of such income. 42.3 In the context of the need to bring tax evaders to book, the grant of any immunity to persons who choose to come forward to declare their concealed income only after incriminating evidence has been found in their possession, will not be proper or justificable. The Finance Act has accordingly deleted the aforesaid Explanation. 42.4 The amendment takes effect from May 24, 1985, that is, the date on which the Finance Bill received the assent of the President and has been enacted into law. [Section 34 of the Finance Act] Amendment of provision relating to punishment for second and subsequent offences. 43.1 Section 278A of the Income-tax Act pro....
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....lling in specified categories. Conformably with the said provision, the Finance Act has amended the provisions of the Wealth-tax Act so as to withdraw the exemption from wealth-tax in respect of business assets of public charitable or religious trusts and institutions. However, in line with the provisions contained in the Income-tax Act, the assets held in business will continue to be exempt from wealth-tax in the following cases: (a) where the business is carried on by a trust wholly for public religious purposes and the business consists of printing and publication of books or publication of books or the business is of a kind notified by the Central Government in this behalf in the Official Gazette; (b) the business is carried on by an institution wholly for charitable purposes and the work in connection with the business is mainly carried on by the beneficiaries of the institution. 44.3 The amendment takes effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Section 37(a)(i) of the Finance Act] Modification of the provisions relating to exemption from wealth-tax in respect of certain assets.....
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....Taxation Laws (Amendment) Act, 1984, inserted a new Explanation 2 to sub-section (1) of section 18B of the Wealth-tax Act to provide that where any books of account or other documents belonging to a person are seized under section 37A of the Wealth-tax Act and, within 15 days of such seizure, the person makes a full and true disclosure of his net wealth, such person shall be deemed to have made a full and true disclosure of his concealed wealth prior to detection by the Wealth-tax Officer. 46.3 In the context of the need to bring tax evaders to book, the immunity provided to persons who choose to come forward to declare their concealed wealth only after incriminating evidence has been found in their possession, is not regarded as proper or justifiable. The Finance Act has, accordingly, deleted the provisions providing immunity in such cases. 46.4 The amendment takes effect from 24th May, 1985, that is, the date on which the Finance Bill received the assent of the President and has been enacted into law. [Section 38 of the Finance Act] Clarification regarding payment of wealth-tax in case of application to the Settlement Commission. 47. Under the provisions of sub-....
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.... in the Table below:- Table Wealth Wealth-tax at existing rates Wealth-tax at new rates Tax relief Tax relief as percentage of tax in Col. (2) (1) (2) (3) (4) (5) (Rs.) (Rs.) (Rs.) (Rs.) (%) 2,50,000 1,250 Nil 1,250 100 5,00,000 3,750 1,250 2,500 66.67 10,00,000 13,750 3,750 10,000 72.73 15,00,000 28,750 8,750 20,000 69.57 20,00,000 53,750 13,750 40,000 74.42 25,00,000 78,750 23,750 55,000 69.84 50,00,000 2,03,750 73,750 1,30,000 63.80 50. The rates of wealth-tax applicable in the case of a Hindu undivided family with one or more members having net wealth exceeding the exemption limit have also been revised. Whereas the existing rate schedule did not provide for a nil rate slab, the new rate schedule provides a nil rate slab up to Rs. 1,50,000. The exemption limit for such Hindu undivided families, however, remains unchanged at Rs. 1,50,000. The existing rates of wealth-tax and the new rates of wealth-tax applicable in the case of such Hindu undivided families are indicated in the table below: Table Exi....