TaxTMI 
TaxTMI 
Explanatory Notes on the provisions thereof
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....tion 1(2) of the Amending Act provides that save as otherwise provided in this Act, it shall come into force at once. AMENDMENTS TO THE INCOME-TAX ACT (i) Exemption by notification of allowances received by Members of Parliament and also by members of State Legislatures 4.1. Under the existing provisions of clause (17) of section 10 of the Income-tax Act, the following were exempted: (a) any daily allowance received by any person by reason of his Membership of Parliament or of any State Legislature or of any Committee thereof. (b) the allowance (initially Rs.500 per month but later increased to Rs.1,000 per month) which the Members of Parliament were entitled to receive, in lieu of additional facilities, under the Members of Parliament (Additional Facilities) rules, 1975. 4.2 In so far as (b) above is concerned, the Members of Parliament (Additional Facilities) Rules, 1975, have been repealed and have been replaced by the Members of Parliament (Constituency Allowance) Rules 1986, with effect from January 3, 1986, under which the Members of Parliament are entitled to a constituency allowance of Rs.1,250 per month. Since the existing provisions refer to the earlier ....
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....mplete tax exemption in respect of the profits and gains derived from an industrial undertaking set up in any free trade zone for a period of five initial assessment years. The tax exemption is granted with reference to the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce any article or thing and each of the four immediately succeeding assessment years. 5.2 As pointed out by various trade associations, such undertakings in the free trade zones do not always earn profit during all the five initial years. In such cases, they cannot avail of the full tax benefit. In order to get over the problem, the exemption for five assessment years has been permitted to be availed of within a longer time frame as per the amending Act by providing in sub-section (3) that a tax payer would be entitled to avail of the exemption, at his option, in respect of any five consecutive assessment years falling within a period of eight years beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things. The proviso to this new sub-section stipulates th....
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.... for residential buildings and 10 per cent for non-residential buildings." 6.2 Pursuant to the above announcement, amendments have been made to section 2, 32A, 34, 35, 38, 41, 43, 50, 55, 57, 59, and 155 of the Income-tax Act. 6.3 As mentioned by the Economic Administration Reforms Commission (Report No.12, para 20), the existing system in this regard requires the calculation of depreciation in respect of each capital asset separately and not in respect of block of assets. This requires elaborate book-keeping and the process of checking by the assessing officer is time consuming. The greater differentiation in rates, according to the date of purchase, the type of asset, the intensity of use, etc., the more disaggregated has to be the record-keeping. Moreover, the practice of granting the terminal allowance as per section 32(1)(iii) or taxing the balancing charge as per section 41(2) of the Income-tax Act necessitate the keeping of records of depreciation already availed of by each asset eligible for depreciation. In order to simplify the existing cumbersome provisions, the Amending Act has introduced a system of allowing depreciation on block of assets. This will mean the cal....
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....at a prescribed percentage of the written down value thereof. (d) The provisions of clause (iia) in sub-section (1) of section 32 had been inserted by the Finance (No.2) Act, 1980, to provide for additional depreciation in respect of new plant or machinery installed before 1-4-1985 in certain cases. These provisions have lost their relevance as they were applicable for the limited period of the Sixth Five Year Plan. Hence, they have been omitted by the Amending Act. (e) The objective underlying the terminal adjustment is to ensure that the total depreciation in relation to any particular item of asset is limited to 100 per cent. This is achieved by the existing provisions of section 32(1)(iii) allowing a deduction for the shortfall in the year of sale, etc. Conversely section 41(2) of the Income-tax Act provides for taxing in the year of sale, etc. the excess depreciation allowed in the past. Because of the introduction of the system of allowing depreciation on blocks of assets at enhanced rates, both these provisions have lost their relevance and hence they have been omitted by the Amending Act. Under the new system the moneys payable in respect of the assets sold, discarded....
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....of section 41 of the Income-tax Act and the Explanation thereunder relating to balancing charge in respect of discarded assets have been omitted. Further, the existing Explanation below section 41(4) of the Income-tax Act has been substituted by another Explanation defining the expressions "moneys payable" and "sold". The former shall include any insurance, salvage or compensation moneys payable in respect of a discarded asset. The latter expression shall include a transfer by way of exchange or a compulsory acquisition under any law but it will not include a transfer of an asset by the amalgamating company to the amalgamated company in a scheme of amalgamation. (k) By an amendment to Explanation 1 to section 43 of the Income-tax Act, it has been provided that where an asset is used for the purposes of business after it ceases to be used for scientific research related to that business, the actual cost to the assessee for depreciation purposes shall be the actual cost to the assessee as reduced by any deduction allowed under section 35 (1)(iv). (l) By an amendment to Explanation 2 to section 43(1) of the Income-tax Act, it has been provided that where an asset is acquired by ....
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....unts receivable by the assessee in regard to any asset falling within that block which is sold, discarded, demolished or destroyed during that previous year. (o) Under the new system, the written down value of any block of assets may be reduced to nil for any of the following reasons:- (A) the moneys receivable by the assessee in regard to the assets sold or otherwise transferred during the previous year together with the amount of scrap value may exceed the written down value at the beginning of the year as increased by the actual cost of any new asset acquired, or (B) All the assets in the relevant block may be transferred during the year. Section 50 of the Income-tax Act prescribing the manner in which the cost of acquisition in the case of depreciable assets may be computed for the purposes of determining the capital gains has been substituted by new provisions by the Amending Act to take care of both the above situations. The particulars of these provisions, overriding section 2(42A) of the Income-tax Act, are as under:- (A) The newly substituted section 50(1) provides that in a case where any block of assets does not cease to exist but the full value of the con....
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.... as follows : Depreciation WDV at the beginning of the assessment year 1988-89 Rs. Rs. Item 1 22,500.00 1,27,500.00 Item 2 30,000.00 1,70,000.00 Item 3 45,000.00 &n....
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....bsp; 4,01,333 Add : Actual cost of new assets acquired 25,000 4,26,333 Add : Expenses incurred wholly and exclusively for sale 5,000 4,31,333 Sale proceeds received in regard to assets sold 5,00,000 Hence, the deemed short-term capital gain will be equal to Rs. 68,667 (Rs. 5,00,000 - Rs. 4,31,333) Example III:- Suppose that in the case of the company "Y" having financial year 1988-89 as the previous year relevant to the assessment year 1989-90, the WDV of a block of assets consisting of factory buildings is Rs.10,00,000 at the beginning of the financial year 1988-89, (i.e. WDV for the financial year 1987-88 less depreciation allowed in respect of the said financial year), this company acquires a godown in May, 1988, for Rs.2,00,000 and then sells the factory building and the godown in December for Rs.9,00,000. If there is no asse....
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.... in the Official Gazette, specify in this behalf. As per the proviso to this new sub-section, no notification may be issued so as to have retrospective effect to a date earlier than 1-4-1983. 7.2 The existing Eighth Schedule to the Income-tax Act incorporated by the Direct Taxes (Amendment) Act, 1974, was amended last by the Finance Act, 1976. As per their notification 27-4-1983, the Ministry of Industry has classified the backward areas into three categories, namely, A, B and C, for the purposes of providing Central investment subsidy, transport subsidy and other concessional finances for the period 1-4-1983 to 31-3-1986. Category "A" districts, as notified from time to time, include "No Industry Districts" and "Special Region District" and they would normally be eligible for inclusion in the Eighty Schedule to the Income-tax Act. 7.3 This amendment has been made retrospectively to avoid hardship to the assessees and to solve administrative problems in respect of the earlier years, namely, the assessment years 1984-85, 1985-86 and 1986-87. For the subsequent assessment years, it is intended to make corresponding changes to the notifications under the Income-tax Act shortly a....
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....gn exchange realisation and fifty per cent. of the remaining export profits subject to the condition that the aggregate deduction shall not exceed the export profits. To illustrate, in a case where the total free on board value of exports is Rs.1,000 and the aggregate of the cost, insurance and freight value of all categories of licences (to be issued by the Chief Controller of Imports and Exports) to which the assessee is entitled during the previous year either against export obligation or against exports as replenishments is Rs.400, the net foreign exchange realisation will be equal to Rs.600. Assuming that the export profits in this case amount to Rs.100, the deduction admissible as per the new provisions will be Rs.24 (4 per cent. of the net foreign exchange realisation) plus Rs.38 [150 per cent. of the remaining export profits, i.e. 50 per cent. of Rs.76 (Rs.100 - 24)], i.e., a total deduction of Rs.62. As per the existing provisions, the admissible deduction in this case would be Rs.50 only. 8.2. It would be noted from the above that the expression "net foreign exchange realisation" has been defined to mean, as per the newly inserted Explanation after clause (b) of the ex....
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....ainst its exports. 8.3 As per the new sub-section (4) inserted after sub-section (3) and before the Explanation, it has been provided that the deduction under sub-section (1) shall not be admissible unless the assessee furnishes in the prescribed form along with the return of income, the report of an accountant as defined in the Explanation below section 288(2) certifying that the deduction has been correctly claimed on the basis of the amount of the net foreign exchange realisation, as determined in accordance with the import and export policy of the Government of India for the relevant period. The form of report and the certificate thereunder will be prescribed in the rules to be framed shortly. 8.4 The amendment shall come into force with effect from 1st April, 1987, and will, accordingly, apply to the assessment year 1987-88 and subsequent years. [Section 11 of the Amending Act] (vi) Providing the date by which a return showing loss is to be furnished and treatment of returns below taxable limit 9.1 Under the existing provisions of section 139(3) of the Income-tax Act, as amended by the Taxation Laws (Amendment) Act, 1970, the Income-tax Officer on an application....
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....shall be deemed never to have been furnished. As per the proviso to this sub-section, a return of income below taxable limit shall not be treated as non est in the following circumstances: (a) a return furnished in response to a notice under section 148(2); (b) a return of a partner of a firm; (c) a return of a person who has claimed exemption of income from property held for charitable or religious purposes; (d) a return of loss which has been furnished before the 31st day of July of the assessment year relevant to the previous year during which the loss was sustained; (e) a return furnished under sub-section (4B) in respect of a political party; (f) a return furnished in support of a claim for refund under section 237. 9.4 These amendments shall come into force with effect from 1st April, 1986, and will be applicable to the assessment year 1986-87 and subsequent years. 9.5. It may be clarified that the assessments already completed before the enactment of the Amending Act will not be rectified. further, keeping in view, the fact that the new sub-section (3) comes into force with effect from 1st April, 1987, a return of loss filed for the assessment year 19....
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....r members as the Central Government thinks fit. Section 245B(1A) providing for the contingency when the post of one or the other member of the settlement commission as presently constituted, is vacant has become irrelevant and hence has been omitted. Similarly, section 245D(5) being a provision subject to section 245B(2A) has also been omitted. In section 245B(3) which provides for the appointment of the Chairman and members of the Commission, the Amending Act has included Vice-Chairman and members of the Commission, the Amending Act has included Vice-Chairman also for this purpose. Further, the second proviso in section 245B(3) enabling any two members of the Central Board of Direct Taxes to serve as members of the Settlement Commission has now become irrelevant and has been omitted. 11.2 The Amending Act has further substituted new sub-sections (5), (6) and (7) in section 245F of the Income-tax Act. It has been provided that the powers and functions of the Settlement Commission may be exercised or discharged by Benches constituted by the Chairman of the Settlement Commission from amongst the members thereof. Such a Bench shall consist of three members one of whom shall be the ....
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....t that he had no such mental state with respect to the offence. Accordingly, the intention of the Government was announced by the LTFP to amend the direct tax laws also to provide similar provisions so that once evasion is proved, the intention to evade need not be proved by the Department. 12.3 Apart from the above, in the context of the existing scheme of accepting returns with incomes up to Rs.1 lakh without scrutiny, which is based on trust, it is only logical that the burden should be cast on the assessee to prove his innocence if he has concealed the particulars of his income or to prove the existence of reasonable cause if he has committed any other default under the direct tax laws. 12.4 The salient features of the amendments made to the provisions relating to penalty are as under: (a) Under section 221 of the Income-tax Act, penalty is payable when an assesse is in default or is deemed to be in default in making the payment of tax. However, no penalty is to be levied, as per the second proviso to section 221(1) if the Income-tax Officer is satisfied that the default was for good and sufficient reasons. This proviso has been substituted to secure that the burden of....
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....ealed the particulars of his income or furnished inaccurate particulars thereof. In a series of decisions beginning with the judgment in 1970, in the case of CIT vs. Anwar Ali [1970] 76 ITR 696, (SC) based on the law as it stood prior to 1-4-1964, the Supreme Court laid down the following basic principles for levying penalty under these provisions: (i) an order imposing a penalty is the result of quasi-criminal proceedings and the burden lay with the Income-tax Department to establish that the disputed amount represented his income; and (ii) the Department has to prove that the assessee had consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars thereof. The inadequacy of the Explanation added by the Finance Act, 1964, led to the substitution by the Taxation Laws (Amendment) Act, 1975, of four Explanations. The existing Explanation 1 to section 271(1) provides for the situation where no explanation for the failure is offered by the assessee or where the explanation that has been offered is found to be false or where the assessee is not able to substantiate the explanation offered by him. In all these cases, the amount added ....
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....e (a) or (b) of section 139(1) and specifies in the statement the manner in which such income has been derived and pays the taxes that are due thereon, no penalty shall be leviable. (d) Under the existing provisions, prosecution has been provided under section 276A(i) for non-compliance with the provisions of section 178 (1), under section 276A(ii) and (iii) for non-compliance with the provisions of section 178(3), under section 276AA for non-compliance of the provisions of section 269AB or 269-I, under section 276AB for non-compliance with the provisions of sections 269UC, 269UE(2) and 269UL(2), under section 276B for failure to deduct or pay tax as per Chapter XVIIB, etc., under section 276DD for non-compliance with the provisions of section 269SS, and under section 276E for non-compliance with the provisions of section 269T if the failure is without reasonable cause or excuse. From the above provisions, the words "without reasonable cause or excuse" have been omitted. This will mean that committing of the actus reus of the particulars offence by itself will attract prosecution. At the same time by inserting a new section 278AA, the Amending Act has provided that notwithstandi....