AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
Explanatory Notes on the provisions of the Direct Tax Laws (Amendment) Act, 1987 (as amended by the Direct Tax Laws (Amendment) Act, 1989)--Part I--Provisions which have come into force with effect from 1st April, 1988
X X X X Extracts X X X X
X X X X Extracts X X X X
....-In these explanatory notes (including Parts II and 111), the following abbreviations have been used: - (i) The Direct Tax Laws (Amendment) Act, 1987, has been referred to as the "Amending Act, 1987. (ii) The Direct Tax Laws (Amendment) Act, 1989, has been referred to as the "Amending Act, 1989". (iii) The various provisions of the Income-tax, Wealth-tax, Gift-tax and Companies (Profits) Surtax Acts, as they stood before amendments by the Direct Tax Laws (Amendment) Act, 1987, have been referred to as the "old provisions". 2. Objects of the Act.-The Amending Act, 1987, substantially amended the provisions of the Income-tax Act, 1961, the Wealth-tax Act, 1957, the Gift-tax Act, 1958, and the Companies (Profits) Surtax Act, 1964. The main objectives sought to be achieved were : (i) To adopt the financial year as the uniform accounting year for all the assessees. (ii) To discontinue a number of artificial exemptions and deductions as also to omit certain disallowance of business expenditure actually incurred, in order to tax the real income under the head "Profits and gains of business or profession". (iii) To introd....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Commencement of the Amending Act, 1987.-The Amending Act, 1987, contains 189 sections. Most of the amendments come into effect from 1st April, 1989, but some are applicable with effect from 1st April, 1988. The position regarding the dates of application is summarised as under : 4.2 Provisions applicable with effect from the 1st April, 1988.-(i) Section 2, clauses (b), (c), (d), (e), U), (g), (k), (1), (m), items (2) and (4) of sub-clause (i) and sub-clause (ii) of clause (o) of section 3, clause (i) of section 6, sections 27, 30 to 35, 73 to 81, 84 and 123, clauses (1), (13) and (25) of section 126, sections 127,, 130 to 132, 159, 161,1164, 165, 185, 187 and 188 and clause (b) of section 180. (ii) Clauses (a) and (b) of section 37, section 38, clauses (i), (ii), (iii) and (vii) of section 128, sub-clauses (b) and (f) of clause (1) and sub-clause (b) of clause (2) of section 154, sub-clause (ii) of clause (a) of section 155, section 158 and clauses (a), (b) and (c) [except in so far as it relates to omission of clause (xvii) of section 2 of the Gift-tax Act relating to definition of the term "partner"] and (g) of section 162 have also come into effect from 1 st A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ded in the Income-tax Act and unless the context otherwise requires, references to the old designation of the authorities in that Act shall be construed as references to the new designation. 6.2 Section 2 of the Amending Act, 1987, also provides that a reference to the "Income-tax Officer" in the Income-tax Act shall be construed as a reference to an "Assessing Officer". It further provides that a reference to the "Commissioner" in that Act shall be construed as a reference to the "Chief Commissioner or Commissioner". However, a proviso below the said section 2 provides that references to the "Commissioner" occurring in sections 245D (dealing with procedure on receipt of an application by the Settlement Commission), 253 (dealing with appeals to the Appellate Tribunal), 256 (dealing with statement of a case to the High Court), 263 (dealing with revision by the Commissioner of orders prejudicial to Revenue) and 264 (dealing with revision by the Commissioner of other orders) of the Act shall not be construed as a reference to the "Chief Commissioner". The effect is that matters mentioned in these sections shall be dealt with by the concerned Commissioners only and not by the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o mean an Income-tax Officer, an Assistant Commissioner or a Deputy Commissioner, as the case may be, who is exercising jurisdiction as an Assessing Officer under the Act. 6.7 These amendments have come into force with effect from 1st April, 1988. APPOINTMENT, CONTROL AND JURISDICTION OF INCOME-TAX AUTHORITIES 7.1 Appointment and control of income-tax authorities (sections 117 and 118).-Under the old provisions of section 117 of the Income-tax Act, the appointing authorities and the various authorities to be appointed by them were specified in detail. As a result, every time a change was required to be made, it became necessary to amend the Act. The Amending Act, 1987, has, therefore, substituted a new section for the existing one to eliminate the elaborate description of appointing authorities and the authorities that can be appointed by them. The new section empowers the Central Government to appoint such persons as it thinks fit to be the income-tax authorities. It further empowers the Central Government to authorise the Board, a Director-General, a Chief Commissioner, a Director or a Commissioner to appoint income-tax authorities below the rank of Assistant....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. (iii) Section 121A : Jurisdiction of Commissioners (Appeals). (iv) Section 122 : Jurisdiction of Appellate Assistant Commissioners. (v) Section 123 : Jurisdiction of Inspecting Assistant Commissioners. (vi) Section 124 : Jurisdiction of Income-tax Officers. (vii) Section 128 : Functions of Inspectors of Income-tax. In essence, all these sections provided that the income-tax authorities shall perform their functions in the area or over the persons, etc., assigned to them either by the Board or by the Commissioner of Income-tax, depending upon the rank of the income-tax authority. 7.5 The old provisions of sections 125, 125A, 126, 130 and 130A pro- vided for jurisdiction under certain special circumstances. Section 125 empowered the Commissioner to assign a case from an Income-tax Officer to an Inspecting Assistant Commissioner. Section 125A empowered the Commissioner to confer concurred jurisdiction over a case to an Inspect- ing Assistant Commissioner and an Income-tax Officer. Section 126 empowered the Board to assign cases to a particular authority, notwith- ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or classes of cases shall be exercised or performed by a Deputy Commissioner. 7.9 The new section also makes provisions for conferring concurrent jurisdiction on the Assessing Officer. It is provided that where Assessing Officers performing concurrent functions are of different classes, the authority lower in rank among them shall exercise powers and perform functions as the higher authority amongst them may direct. The Board is further empowered to regulate matters concerning jurisdiction, for pur- poses of furnishing of the return of income or the doing of any other act or thing under the Act or any rule made thereunder by any persons or classes of persons, by issuing a notification in the Official Gazette. 7.10 Jurisdiction of Assessing Officers (section 124).-The old provi- sions of section 124 dealt with jurisdiction of Income-tax Officers. It was also provided that in case of dispute about jurisdiction of an Income-tax Officer, the question shall be decided by the Commissioner or where the dispute related to the areas within the jurisdiction of different Commis- sioners, by the Commissioners concerned or, if they did not agree, by the Board. In regard to the provisions ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... expiry of one month from the date of service of notice under section 142(1) or 143(2) or after the completion of assessment, whichever is earlier, (b) where no such return has been filed, after the expiry of the time allowed by the notice under section 142(1) or under section 148 for furnishing of the return, or the date of hearing specified in a notice issued before passing an order under section 144, whichever is earlier. 7.12 Power to transfer cases (section 127).-Under the old provisions of section 127 of the Income-tax Act, the Commissioner or the Board could transfer cases from one or more income-tax authorities to other income-tax authorities. The Commissioner could transfer a case from one officer to another, within his charge. The Board had similar power to transfer cases from one officer to another irrespective of the fact that the two officers were working under different Commissioners. Even when the Commissioners agreed that the cases could be transferred among their officers, the orders Had to be passed by the Board. 7.13 The Amending Act, 1987, has substituted a new section for the existing section 127. The new section incorporates the prov....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the mutual fund shall be distributed to the unitholders every year), as the Central Government may specify in this behalf by notification in the Official Gazette. An Explanation, at the end of the said new clause, defines the expressions, "public sector bank" and "public financial institution." *The specific mention of the condition relating to distribution of at least 90% of the annual income of the mutual fund amongst the unitholders has, however, been done away with by the Amending Act, 1989, with effect from 1st of April, 1988. [Certain amendments to remove drafting anomalies in the said new clause (23D) have also been made by section 4(g) of the Finance Act, 1988. In this connection, reference may be made to para 5 (pages 12 and 13) of the explanatory notes on the Finance Act, 1988 (Circular No. 528 ([1989] 176 ITR (St.) 154))]. (ii) A new clause (va) has been inserted in sub-section (1) of section 80L of the Act relating to deductions in respect of interest on certain securities, dividends, etc. The said new clause extends the deduction available under this section (up to Rs. 7,000) to the income received by the unitholders in respect of units of a mutual....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... new section 194E in the Act to provide for deduction of tax at source from interest, salary, etc., paid by a firm to its partners. 9.3 Since this scheme of assessment of firms and partners has been withdrawn by the Amending Act, 1989, clause (iv) of sub-section (3) of section 194A has been inserted back and the new section 194E has been omitted retrospectively, with effect from 1st April, 1988, by the Amending Act, 1989. Thus, the old provisions in this regard have been restored. 9.4 Non-deduction of tax at source from payments made to a mutual fund or from payments made by a mutual fund to its unit-holders (sections 196 and 196A).-Under the old provisions of section 196, no tax was to be deducted at source from any sums payable to the Government or to the Reserve Bank of India or to a corporation established by or under a Central Act, the income of which was exempt from income-tax. Since the Amending Act, 1987, has provided tax concessions to mutual funds set up by a public sector bank or a public financial institution by exempting their income under a new clause (23D) inserted in section 10, it is but natural that no tax should be deducted at source from sums paya....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the SBI mutual fund. Therefore, to remove this unintended hardship, sub-section (1) of the new section 196A provides, without mentioning the persons making payment, that no deduction of tax shall be made from any income payable in respect of units of a mutual fund, specified under section 10(23D), to its unitholders. (ii) The earlier section 196A provided for non-deduction of tax in respect of payment to all the unitholders of a mutual fund. However, if the unitholder is a foreign company, it does not get the benefit of deduction under section 80L and thus, no part of its income is exempt. Moreover, section 115A of the Act has been amended by the Amending Act of 1989 to levy a straight tax at 25% on the income of a foreign company received in respect of units of a mutual fund which are purchased in foreign currency. Consequently, sub-section (1) of the new section 196A, substituted by the Amending Act, 1989, does not exempt from deduction of tax at source the income received by a foreign company in respect of units of a mutual fund. Sub-section (2) of the said section 196A further provides that where the unitholder is a foreign company, the person responsible for making the p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e date of last instalment, which is now 15th March in all cases, will be known to the assessee and he can very well pay advance tax thereon in the last instalment. The Amending Act, 19871 had, therefore, substituted a new section 207 to provide that advance tax shall be payable during any. financial year on the current income of the assessee which would be chargeable to tax for the assessment year immediately following the financial year. This will include all items of income liable to be included in the assessee's total income. Thus, capital gains and incomes of casual nature referred to in section 2(24)(ix) will also be taken into account while estimating the current income for payment of advance tax. 10.3 Under the old provisions of section 208, the liability to pay advance tax was attracted in case the income liable to advance tax exceeded the following limits :- (i) Rs. 2,500 in the case of a company or a local authority. (ii) Rs. 20,000 in the case of a registered firm. (iii) Rs. 12,000 in the case of an HUF, which has at least one member, whose income exceeds Rs. 18,000. (iv) Rs. 18,000 in any other case. In cases at (iii....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ncial year as follows :- (a) Where the calculation is made by the assessee for paying the advance tax, either of his own accord or on the basis of the estimate of his current income which may be filed after the assessee is served with a notice by the Assessing Officer under section 210(3) or (4) for payment of advance tax, income-tax on the current income shall be calculated at the rates in force in that financial year. (b) Where calculation is made by the Assessing Officer for making an order under section 210(3) requiring the assessee to pay advance tax, he shall adopt the total income assessed by way of regular assessment of the latest previous year or the total income returned by the assessee for any subsequent previous year, whichever is higher, and calculate income-tax thereon at the rates in force in that financial year. (c) Where calculation is made by the Assessing Officer for making an amended order under section 210(4) on the basis of a return filed or a regular assessment completed subsequently for a previous year later than that adopted in an order under section 210(3), income-tax shall be calculated on the total income declared in such subsequent return or to....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... on his current income and pay the same in instalments as specified in section 211. He is not required to file any statement/estimate of advance tax payable. (ii) Sub-section (2) allows an assessee to subsequently revise the advance tax payable in the remaining instalments in accordance with the revised estimate of his current income, without any requirement of filing a revised estimate. (iii) Sub-section (3) empowers the Assessing Officer to pass an order requiring an assessee, who had earlier been assessed to income-tax, but has not paid any advance tax during the relevant financial year, to pay advance tax calculated in the manner laid down in section 209. Such an order must be passed during the financial year but not later than the last day of February. (iv) Sub-section (4) empowers the Assessing Officer to pass a revised order for payment of advance tax by the assessee where, subsequent to the passing of the original order, but before the first day of March, a return of income in respect of any later year has been furnished or any regular assessment for a later year has been made. (v) Sub-section (5) enables the assessee to furnish his own estimate of c....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... when assessee deemed to be in default.-The old provisions of section 218 dealt with the circumstances under which the assessee was deemed to be in default for payment of advance tax. The Amending Act, 1987, has substituted a new section 218, which contains new provisions in this respect consequential to the changes made in the scheme of advance tax, as explained in the preceding paragraphs. 10.14 These amendments have come into force with effect from 1st April, 1988. [Sections 76 to 81 and 84 of the Amending Act, 1987] Notes : (i) The Amending Act, 1989, has made an amendment in section 209 of the Act, which is consequential to the insertion of section 206C relating to collection of tax at source, with effect from 1st June, 1988, by the Finance Act, 1988. The consequential amendment in section 209 also comes into force with retrospective effect from 1st June, 1988. [Section 35 of the Amending Act, 1989] (ii) The provisions of section 214 relating to interest payable by the Government on the excess amount of advance tax paid by the assessee have been replaced, with effect from the assessment year 1989-90, by the provisions of a new section 244A, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tional tax at 20% provided in sub-section (1A) and non-issue of refunds in regular assessments under the provisions of sub-section (3) of the new section 143, services of notice under sub-section (2) of the new section 143 within the limitation period of six months and the applicability of the provisions relating to the charge of mandatory interest for late/non-filing of return and default in the payment of advance tax contained in sections 234A to 234C, which are intimately connected with the provisions of the new section 143, but are applicable only to the assessment year 1989-90 and subsequent assessment years. (ii) Similarly, it was found that it was not practicable to apply the amended provisions of section 275, coming into force from April 1, 1989, which have substantially reduced the time limit for completion of penalty proceedings from the earlier two years to six months, to all the old penalty proceedings pending on April 1, 1989. In view of the reduced limitation period available under the amended provisions, a very large number of penalty proceedings, which were more than six months old, would have to be completed by March 31, 1989. 11.3 The Income-tax (Removal of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the Amending Act, 1987, has, therefore, been omitted by section 95(o) of the Amending Act, 1989. AMENDMENTS TO THE WEALTH-TAX ACT, 1957 13. The Amending Act, 1987, has made several amendments to the provisions of the Wealth-tax Act in order to bring its provisions relating to designation, appointment, control and jurisdiction of authorities, tax incentives to mutual funds and power of the Central Government to remove difficulties, broadly in line with the corresponding amendments made to the provisions in the Income-tax Act by this Amending Act. These amendments came into effect from 1st April, 1988. Any gaps or shortcomings in this respect have been removed through certain amendments made by the Finance Act, 1988, and the Amending Act, 1989. The Table below shows the provisions of the Wealth-tax Act that have been so amended and the corresponding provisions, if any, in the Income-tax Act. The Table also indicates the sections of the Amending Act, 1987, or the Finance Act, 1988, or the Amending Act, 1989, which have carried out the necessary amendments: Sl. No. Section of the Amending Act1987/Finance Act, 1988/Amending Act, 1989 Section of the Wealth- tax A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....) and (4) Insertion of new section to empower the Central Government to remove any difficulty in giving effect to the provisions of the Wealth-tax Act, as amended by the Amending Act, 1987. *The provisions in respect of items at Sl. Nos. 3, 9 and 10 which are Star-marked are further explained in the following paras. 14.1 Tax incentives to mutual funds set up by banks, etc.-The Amending Act, 1987, has provided the following tax concessions in respect of a mutual fund specified in section 10(23D) of the Income-tax Act :- (i) A new clause (xxiva) has been inserted in sub-section (1) of section 5 of the Act, relating to exemptions under the Wealth-tax Act, to provide that the value of units of a mutual fund income of which is exempt under section 10(23D) of the Income-tax Act, 1961, shall not be included in the net wealth of the unit holders for wealth-tax purposes. Sub-section (1A) of the said section 5 has also been amended to include reference of new clause (xxiva) in that sub-section, so that exemption from wealth-tax in respect of units of a mutual fund will be subject to the overall ceiling of Rs. 5 lakhs, a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion (5) of that section] shall apply in relation to any assessment for the assessment year 1988-89 or any earlier assessment year. The only other section in the Wealth-tax Act, relating to penalties is section 18A, which does not contain any limitation provisions. It was, therefore, not necessary to make any provision in this respect in the Wealth-tax (Removal of Difficulties) Order, 1989. [Section 159 of the Amending Act, 1987] AMENDMENTS TO THE GIFT-TAX ACT, 1958 16. The Amending Act, 1987, has made certain amendments, effective from 1st April, 1988, to the provisions of the Gift-tax Act, in order to bring its provisions, relating to designation, appointment, control and jurisdiction of authorities, and power of Central Government to remove difficulties, broadly in line with the corresponding provisions in the Income~tax and Wealth-tax Acts, as amended by the Amending Act, 1987. Any gaps or shortcomings in this respect have been removed through certain amendments made by the Finance Act, 1988, and the Amending Act, 1989. The Table below shows the provisions of the Gift-tax Act that have been so amended and the corresponding provisions, if any, in the Income-t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se in giving effect to the provisions of the Gift-tax Act, as amended by the Amending Act, 1987. The provisions of the said section 47 are exactly on the same lines as those of the new sub-sections (3) and (4) inserted in section 298 of the Income-tax Act. 17.2 Under the provisions of the said section 47, the Gift-tax (Removal of Difficulties) Order, 1989, was passed, vide G. S. R. No. 377(E), dated March 23, 1989 ([1989] 176 ITR (St.) 322), to provide that the provisions of section 15, as they stood before the commencement of the Amending Act, 1987, shall apply in respect of assessments for the assessment year 1988-89 and earlier assessment years. This removed certain difficulties in the application of the provisions of the new section 15 relating to procedure of assessment, on the same lines as done by the Income-tax (Removal of Difficulties) Order, 1989, passed. simultaneously in respect of the provisions of the new section 143 of the Income-tax Act (please see paras. 11.2-11.4 ante). 17.3 The Gift-tax (Removal of Difficulties) Order, 1989, however, does not provide for removal of difficulties in respect of limitation for imposition of penalties under the Gift-tax Act, as ....