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The Finance Act, 1987-Explanatory Notes on the provisions relating to direct taxes
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....amended sections 2, 10, 10A, 27, 32AB, 33AB, 36, 43AB, 45, 47, 49, 53, 54, 54B, 54D, 54E, 54F, 55, 56, 57, 70, 72, 80C, 80CC, 80G, 80-0, 80RRA, 80U, 155, 192, 194, 194A, 194D, 195, 199, 202, 203, 245B, 245C, 245D, 245E, 245F, 245H, 245HA, 245K, 273B and 293 and the Eleventh Schedule of the Income-tax Act; (ii) inserted sections 44BB, 44BBA, 54G, 80CCA, a new Chapter XIIB, sections 195A, 203A, 245BA to 245BD, 245HA, 272BB; (iii) substituted sections 48, 71, 74, 206, 245A; (iv) omitted sections 52, 80T, Chapters VIB, XI, sections 115, 245M, 280ZA, 285 and 286; (v) amended sections 2, 25, 35, 22B, to 22F, 22H, 22K, 31, 43 of the Wealth-tax Act, 1957; (vi) inserted sections 22BA to 22BD, 22HA of the Wealth-tax Act, 1957; (vii) substituted section 22A if the Wealth-tax Act, 1957; (viii) omitted section 22M of the Wealth-tax Act, 1957: (ix) amended sections 2 and 42 of the Gift-tax Act, 1958. &nb....
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.... capital asset by a partner to a firm or on distribution of assets on dissolution of a firm; levying minimum tax on book profits of companies; exempting totally any allowance received by a Member of Parliament under the Members of Parliament (Constitutency Allowance) Rules, 1986; allowing deduction on actual payment of tax or duty if liability is discharged on or before the date on which the return of income is due to be furnished; providing for determination of income at a flat rate in the case of non-residents engaged in the business of operation of aircraft and in the case of all assessees engaged in the business of exploration of mineral oil, etc.; rationalising the provisions relating to set off and carry forward of long-term capital losses; regulating the deduction in respect of royalties, etc.; modifying the scope of deduction of tax at source from salary; raising the monetary limit to Rs. 2,500 in respect of obligation to deduction of tax at source from dividends; facilitating computerised processing of data relating to tax collection by introduction of tax deduction account numbers; modifying the provisions relating to settlement of cases; providing that no suit shall lie ....
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....for deduction of income-tax at source during the financial year 1987-88 from incomes, other than "Salaries" and retirement annuities payable to partners of registered firms engaged in certain professions, have been specified in Part II of the First Schedule to the Finance Act. These rates apply to income by way of interest on securities, other categories of interest, dividends, insurance commission, winnings from lotteries and crossword puzzles, income by way of winnings from horse races and income of non-residents (including non-resident Indians) other than salary income. (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 1987-88: 6. The rates for deduction of tax at source from "Salaries" in the case of individuals during the financial year 1987-88 and also for computation of "advance tax" payable during the 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 1987-88 from retirement annuities payable to partners....
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....tage of their distributable profits as dividends. These provisions had lost much of their relevance with the reduction of the maximum marginal rate of personal tax to 50 per cent. Which is lower than the rate for corporation tax on closely-held companies. Sections 104 to 109 have, therefore, been omitted by the Finance Act, 1987. 10.2 With the deletion of sections 104 to 109 there was a likehood of closely-held companies not distributing their profits to shareholders by way of dividends but by way of loans or advances so that these are not taxed in the hands of the shareholders. To forestall his mainpulation, sub-clause (e) of clause (22) of section 2 has been suitably amended. Under the existing provisions, payments by way of loans or advances to shareholders having substantial interest in a company to the extent to which the company possesses accumulated profits is treated as dividend. The shareholders having substantial interest are those who have a shareholding carrying not less than 20 per cent. Voting power as per the provisions of clause (32) of section 2. The amendment of the definition extends its application to payments made (i) to a shareholders holding not less than ....
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....operty Act, 1882. New sub-clauses (v) & (vi) have been inserted in section 2(47) to prevent avoidance of capital gains liability by recourse to transfer of rights in the manner referred to above. 11.2 The newly inserted sub-clause (vi) of section 2(47) has brought into the ambit of "transfer", the practice of enjoyment of property rights through what is commonly known as Power of Attorney arrangements. The practice in such cases is adopted normally where transfer of ownership is legally not permitted. A person holding the power of attorney is authorised the powers of owner, including that of making construction. The legal ownership in such cases continues to be with the transferor. 11.3 These amendments shall come into force with effect from 1-4-1988 and will accordingly apply to the assessment year 1988-89 and subsequent years. [Section 3(g) of the Finance Act, 1987] Measures of pernalising employers who misutilise contributions to the provident fund or any fund set up under the provisions of the Employees' State Insurance Act, 1948, or any other fund for welfare of employees: 12.1 The existing provisions provide for a deduction in respect of any ....
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.... years. 13.2 The distinction between short-term and long-term capital assets though conforming to the principle of equity of taxation has led to complications. To make the provisions simpler, this distniction has been done away with by insertion of sub-clauses (29A), (29B) and (42B) in section 2 of the Income-tax Act, 1961, substitution of sections 71 and 74 and amendment of sections 70 and 72. To ensure uniform treatment of capital losses and capital gains, losses arising on transfer of long-term capital assets (after they are scaled down by the same percentage of deduction as long-term capital gains) would be treated as any other losses so that they can be set off against income under any other head in the same year and if not fully set-off may be carried forward. The distniction between the carry forward of short-term capital losses and long-term capital losses and has also been removed and all capital losses would be carried forward for 8 succeeding years and set off only against capital gains, if any, in those years. 13.3 The above amendments to sections 2, 70, 71 and 74 of the Income-tax Act shall come into force with effect from 1-4-1988 and will, accordingly, apply in....
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....ublic sector undertakings have formulated voluntary retirement schemes for their employees. With a view to extend relief of such employees, the Finance Act, 1987, by introducing new clause (10C) in section 10, provides exemptions in respect of any payment received by them at the time of their voluntary retirement in accordance with any scheme which the Central Government may approve having regard to the economic viability of the public sector company and other relevant circumstances. This exemption will be available to any employees whether a workman or an executive. 15.3 This 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 4(a) of the Finance Act, 1987] Modification in the nomenclature for exemption of income-tax on certain deposits with post office: 16.1 Section 10(15) of the Income-tax Act exempts within permissible limits interest earned by assessees on certain deposits made with the Post Office Savings Banks. The exemptions covers interest earned on deposits made in the- (i) Post Office Savings Banks under the Post Office Savings Bank (....
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....neous Provisions) Act, 1986, conferred upon the Central Government enabling power to exempt by notification the constituency allowance and other such allowances of the Members of Parliament not exceeding Rs. 1,250 per month. The Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, also extended the exemption in respect of allowances received by a Member of any State Legislature up to Rs. 600 per month in the aggregate. The Central Government by notification in the Official Gazette specified the allowances. The daily allowance received both by the Members of Parliment and State Legislatures was also exempt. 18.2 The Finance Act, 1987, exempts any allowance received by Members of either House of Parliment under the Members of Parliment (Constituency Allowance) Rules, 1986. This deduction is not subject to any notification or any monetary limits. The provisions in relation to members of the State Legislatures or Committees thereof have not been altered. 18.3 The amendment shall come into force restrospectively from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Section 4(c) of the....
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.... be allowed before setting off of brought forward losses. 20.3 The existing provisions could conceivably lead to an interpretation that the deduction is allowable both in the case of the firm and also in the case of the partners in respect of income derived from business carried on by a firm. This was never the intention of the provisions. It has, therefore, been clarified by the Amending Act that the deduction under section 32AB shall be allowed in the hands of the firm and not in the hands of the partners in respect of income derived from the business of the firm. 20.4 Under the existing provisions, as introduced by the Finance Act, 1986, profits of eligible business or profession, means profits as computed in accordance with the Sixth Schedule to the Companies Act, 1956, as reduced by depreciation computed under the provisions of section 32(1) and as increased by the depreciation, debited in the audited profit and loss account. The Finance Act, 1987, has introduced certain further adjustments for arriving at the amount of 'profits of eligible business or profession'. The amount arrived at above will have to be increased by provision for taxation and reserves, etc., and dec....
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....rchasing a "new ship" or "new aircraft" or "new machinery or plant". These expressions have been defined in the Explanation to section 32(1)(vi) of the Income-tax Act which has been deleted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, with effect from 1-4-1988. As a consequence, the Amending Act has amended section 32AB by including the definition of the expressions "new ship", "new aircraft" and "new machinery or plant" in the section itself. 20.9 These amendments will come into force with effect from 1st April, 1987, and will, accordingly, apply to the assessment year 1987-88 and subsequent years. [Section 7 of the Finance Act, 1987] New provisions for computing of taxable income from activities connected with exploration of mineral oils: 21.1 A number of complications are involved in the computation of taxable income of a taxpayer engaged in the business of providing services and facilities in connection with or supply of plant and machinery on hire, used or to be used in the exploration for and exploitation of mineral oils. With a view of simplifying the provisions, the Amending Act has inserted a new section 44BB which....
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....ncome therefrom. In several States where the Apartment Act has not been introduced there is a legal hurdle in transferring the ownership of these flats to individual shareholders. Since the legal ownership remains with the company, the income therefrom is taxed in their hands under the head "Income from house property". At the same time, since the shareholder actually enjoys the income he is assessed under the head "Income from other sources". This has led to taxing the same income twice. There is another practice whereby property is transferred to the purchaser after receiving the consideration but without getting the sale registered under section 54 of the Transfer of Property Act. This is done by executing power of attorney in favour of a persons who by virtue of that power of attorney enjoys the property. In such cases, legally, the property remains with the registered owner but for all practical purposes the holder of the power of attorney is the owner. A similar situation arises where possession of any immovable property is allowed to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882. All thes....
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....re from the net partnership assets. 24.2 With a view to blocking this escape route for avoiding capital gains tax, the Finance Act, 1987, has inserted new sub-section (3) in section 45. The effect of this amendment is that profits and gains arising from the transfer of a capital asset by a partner to a firm shall be chargeable as the partner's income of the previous year in which the transfer took place. For purposes of computing the capital gains, the value of the asset recorded in the books of the firm on the date of the transfer shall be deemed to be the full value of the consideration received or accured as a result of the transfer of the capital asset. 24.3 Conversion of partnership assets into individual assets on dissolution or otherwise also forms part of the same scheme of tax avoidance. Accordingly, the Finance Act, 1987, has inserted new sub-section (4) in section 45 of the Income-tax Act, 1961. The effect is that profits or gains arising from the transfer of a capital asset by a firm to a partner on dissolution or otherwise shall be chargeable as the firm's income in the previous year in which the transfer took place and for the purposes of computation of capital ....
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....ions relating to computation of capital gains: 25.1 Under the existing provisions of section 48 of the Income-tax Act computation of capital gains resulting from the transfer of a capital asset is made by deducting the cost of acquisition, the cost of improvement and the expenditure incurred in connection with transfer from the consideration received on such transfer. In addition to the aforesaid deductions, section 80T provides for certain deductions in respect of long-term capital gains in the case of non-corporate taxpayers. In the case of corporate taxpayers, concessional treatment in respect of long-term capital gains is allowed not by way of deduction but through lower rates prescribed in section 115. 25.2 With the amendment, the statutory deductions or concessions available in sections 80T and 115 have been incorporated in section 48 itself. The present sections 80T and 115 have been omitted. 25.3 The new scheme provides for 100 per cent. deduction in all cases where the long-term capital gain does not exceed Rs. 10,000. Where it exceeds Rs. 10,000, the rates of deduction are as under:- Status of assessee Rates of deduction in&nbs....
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....ons of assessments, the amendments made to sections 54, 54B, 54D and 54F provide for a new scheme for deposit of amounts meant for reinvestment in the new asset. After the aforementioned amendments, where the amount of capital gains or the net consideration, as the case may be, is not appropriated or utilised by the taxpayers for acquisition of the new asset before the date for furnishing the return of income, it shall be deposited by him on or before the due date of furnishing the return of income, under section 139(1) in an account with a bank or institution and utilised in accordance with a scheme framed by the Central Government in this regard. The amount already utilised together with the amounts of deposit shall be deemed to be the amount utilised for the acqusition of the new asset. If the amount deposited is not utilised fully for acquiring the new asset within the period stipulated, the capital gain relatable to the unutilised amount shall be treated as the capital gain of the previous year in which the period specified in these provisions expires. In such cases, the threshold deduction of ten thousand rupees as well as the deduction under section 53 will not be admissible....
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....; 1.5 " 26.4 These amendments will take effect from 1st April, 1988, and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years. [Sections 19, 20, 21 and 23 of the Finance Act, 1987] Exemption of capital gains on shifting of industrial undertakings from urban areas: 27.1 Under section 280ZA, if a company owning an industrial undertaking shifts the undertaking from an urban area, it qualifies to receive a tax credit certificate in respect of capital gains arising from the transfer of plant, machinery, etc. This provision has been omitted with effect from 1-4-1988 by the Finance Act, 1987. 27.2 With an intent to promote decongestion of urban areas as also balanced regional growth, the newly inserted section 54G exempts capital gains on transfer of plant, machinery, land, building, etc., used for the purposes of the business of industr....
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....IT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC)]. Even in a case where an assessee transferred goodwill which he had acquired earlier on payment of a price, the gain from such transfer was held by a High Court to be not taxable, on the ground that the cost of improvement in respect of this asset could not be ascertained in terms of money. 28.2 The Finance Act, 1987, by amending section 55 has provided for the method of computing the cost of acquisition as well as the cost of improvement, where goodwill is transferred. Where goodwill is purchased by the transferor the cost of acquisition will be taken to be the purchase price and in all other cases it shall be taken to be nil. The cost of improvement in either case would be taken to be nil. 28.3 The intention in bringing to tax the capital gains on transfer of goodwill is only to cover those cases where goodwill is actually transferred. Those cases where the transfer is notional, for example, when a new partner is admitted to a firm, would not be covered by the amendment. The new provisions will also not apply to professional firms. 28.4 The amendment shall come into force with effect from 1st April, 1988, and will, acco....
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.... the income of the assessee chargeable to tax under the head "Income from other sources" of the year in which the money was received back. In addition, no deduction would be allowed in respect of any payment made during that year; (vi) it is necessary for the assessee to hold the property for a minimum period of 5 years from the end of the year in which the possession was taken. In case of transfer of such property before the period of 5 years the total amount of the deduction allowed to him under these provisions will be deemed to be the assessee's income of the year in which the property is transferred and shall be chargeable to tax under the head "Income from other sources". 29.2 This amendment comes into force with effect from 1st April, 1988, and will, accordingly, apply to the assessment year 1988-89 and subsequent years. [Section 32 of the Finance Act, 1987] Tax incentive for investment in certain new shares: 30.1 Under the existing provisions of section 80CC of the Income-tax Act, deduction is allowable within limits, in respect of acquisition of certain shares offered for subscription to the public before 1st April, 1987. 30.2 With a vi....
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.... donations to any Regimental Fund (Funds set up by the Army) or Non-Public Fund (Funds set up by the Navy and Air Force), established by the Armed Forces of the Union, for the welfare of the past and present members of such forces or their dependants, shall also qualify for deduction subject to the limit and conditions laid down in section 80G. 32.2 This amendment will come into force with effect from 1st April, 1988, and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years. [Section 35 of the Finance Act, 1987] Modification in the provisions relating to deduction in respect of royalties, etc., from certain foreign enterprises: 33.1 Under the existing provisions of section 80-O of the Income-tax Act, an Indian company is entitled to a deduction, of an amount equal to 50 per cent. of the income, by way of royalty, commission, fees and similar payments, received from the Government of a foreign State or a foreign enterprise for consideration for the use outside India of any patent, invention, model, etc. Such income has either to be received in India in convertible foreign exchange or having been received in foreign e....
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....application of the section itself. In other words, as long as the payment made by the foreign State or foreign enterprise in convertible foreign exchange is received within the specified period in India by or on behalf of the assessee in accordance with the law in this regard (Foreign Exchange Regulation Act, 1973), the assessee would be entitled to the deduction under this section, if the other requirements in this regard are satisfied. 33.5 These amendments will come into force with effect from 1st April, 1988, and, will, accordingly, apply to the assessment year 1988-89 and subsequent years. [Sections 36 and 44 of the Finance Act, 1987] Modification of provisions in respect of remuneration received for services rendered outside India: 34.1 Presently section 80RRA of the Income-tax Act provides for deduction of an amount equal to 50 per cent. of any remuneration received by an individual who is a citizen of India, if such remuneration is received by him in foreign exchange from an employer for any service rendered by him outside India. 34.2 To provide an incentive for brining foreign exchange into India, the Amending Act has enlarged the benefit of ded....
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....bilities, provision for losses of subsidiary companies, etc., if the amount are debited to the profit and loss account. Liabilities relating to expenditure which has been incurred or which has accrued in respect of expenses which are otherwise deductible in computing income will not be added back. The amount so arrived at is to be reduced by- (i) amounts withdrawn from reserves if any, such amount is credited to the profit and loss account; (ii) the amount of income to which any of the provisions of Chapter III applies, if any such amount is credited to the profit and loss account; and (iii) the amount of any brought forward losses or unabsorbed depreciation whichever is less as computed under the provisions of section 205(1)(b) of the Companies Act, 1956, for the purposes of declaration of dividends. Section 205 of the Companies Act requires every company desirous of declaring dividend to provide for depreciation for the relevant accounting year. Further, the company is required under section 205 to set off against the profit of the relevant accounting year, the depreciation debited to the profit and loss account of any earlier year(s) or loss whichever is less. 36.3 S....
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....984 Rs. Rs. Loss excluding Loss excluding depreciation 3,00,000 depreciation 80,000 Depreciation 1,00,000 Depreciation 4,00,000 Year 1985 Profit before Profit before depreciation 5,00,000 depreciation 5,00,000 Less : Depreciation as per books 2,00,000 Less : Depreciation 4,00,000 3,00,000 1,00,000 Less : Deduction Less : Business loss for under section205(2) for the year 1984 1,00,000 2,00,000 1984 80,000 20,000 C.F. Business loss 1984 3,00,000 Less : Unabsorbed depreciation 20,000 Nil C.F. unabsorbed depreciation 1985 3,80,000 Year 1986 Net loss as per Business loss (—) 10,00,000 books before (—) 10,00,000 Add : Depreciation as depreciation per Income-tax Depreciation....
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....isclose such other salary to the employer. In such cases, the employer normally cannot be held liable for not making adequate deductions. With a view to simplify the provisions of deduction of tax at source in such cases and also to check avoidance of tax on salary received by an employee from more than one employer, section 192 has been amended. 37.3 The new sub-section (2) inserted in section 192 provides for deduction of tax at source by such employer (as the taxpayer may choose) from the aggregate salary of the employee who is or has been in receipt of salary from more than one employer. The employee is now required to furnish to the present employer details of the income under the head "Salaries" due or received from the former/other employer and also tax deducted at source therefrom, in writing and duly verified, by him and by the former/other employer. The present employer will be required to deduct tax at source on the aggregate amount of salary (including salary received from former or other employer). 37.4 Under the existing provisions of section 89(1), it is the Income-tax Officer who is empowered to give relief from the incidence of tax at a higher rate in a case ....
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....abling powers have been conferred on the Central Board of Direct Taxes under section 197 to make rules for prescribing procedure in relation to the issue of certificates by the assessing officer for authorising non-deduction of tax at source or for deduction at a lower rate. 38.4 The provisions relating to furnishing of annual return in respect of tax deduction at source incorporated presently in sections 285 and 286 have been by the Amending Act inserted in section 206. Consequently sections 285 and 286 have been omitted. 38.5 The Amending Act has introduced a new section 195A which lays down the method of calculation of tax deductible at source in cases where payments are made tax free. Under clause (6A) of section 10, the tax before by an Indian resident on royalty, etc., paid to foreign companies is not treated as part of the income of the foreign recipients. Section 195A provides for grossing up of the tax only if it forms part of the income. Since tax exempted under section 10(6A) does not form part of the total income, there would be no grossing up of such tax for the purposes of tax deduction at source. Similarly, the tax borne by the employer, to the extent it is exe....
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....rms of section 203A 40.3 These amendments will come into force from 1st June, 1987. [Sections 55, 68 and 69 of the Finance Act, 1987] Modification of provisions relating to settlement of cases: 41.1 Chapter XIXA of the Income-tax Act deals with the entire scheme for settlement of cases. With a view to ensure the functioning of a Bench in certain situations which have so far prevented it from discharging its powers, the Amending Act has introduced new sections 245BA, 245BB and 245BC. In case the Chairman, Voice Chairman or any of the Members of a Bench is unable to discharge his functions, for whatever reasons, the remaining two persons will now be comptetent to constitute a Bench and pass orders on matters covered by applications for settlement. In such a situation, the Senior Member will preside over the Bench. Where a presiding officer, looking to the nature of a case, considers that it should be heard by a Bench consisting of 3 members, he may make a reference in this regard to the Chairman for transfer to such Bench as the Chairman deems fit. Where there is a difference of opinion between the Members of a Bench, the majority decisions will prevail. Where the ....
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....on failure of such a person to comply with any other condition subject to which the immunity is granted. 41.5 As a measure of further rationalisation, the Amending Act empowers the Settlement Commission to reopen past assessments up to a period of 10 years as against 8 years under the existing provisions. The Commission has also been invested with the powers to send a case back to the Income-tax Officer if the assessee does not co-operate. In such cases, the Income-tax Officer will dispose of the case in accordance with the provisions of the Act, as if no application under section 245C had been made. 41.6 Corresponding amendments in Chapter V-A (sections 22A to 22M) of the Wealth-tax Act, dealing with settlement of cases in respect of wealth-tax have also been effected. 41.7 These amendments will come into force with effect from 1st June, 1987. [Sections 57 to 67 and 77 to 87 of the Finance Act, 1987] Bar of suits in civil courts to set aside or modify any order passed: 42.1 Under the existing provisions of section 239, no suit can be brought in any civil court to set aside or modify any assessment order made under the Income-tax Act and no prosecution, suit....