TaxTMI 
TaxTMI 
Explanatory Notes on the provisions of the Direct Tax Laws (Second Amendment) Act, 1989
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....me-tax Act; (ii) inserted sections 33AC, 115BBA and 194E in the Income- tax Act; (iii) substituted section 241 of the Income-tax Act; (iv) amended sections 15B, 16, 34A and Schedule III of the Wealth-tax Act, and (v) amended sections 14B, 15 and 33A of the Gift-tax Act. Objects of the Act 3. The main objective of the Second Amending Act is to help the taxpayers by removing the difficulties and anomalies relating to the new assessment procedure as also to grant certain tax concessions so that the taxpayers can avail of them during the current financial year. It also incorporates provisions which are meant to reduce litigation and to withdraw a few unintended tax benefits. Thus, this Act contains provisions to,-- (i) remove certain anomalies and difficulties relating to the new assessment procedure which has come into force from 1st April, 1989; (ii) insert definition of the term 'security' in order to resolve problems of interpretation of the said term and to regularise the tax concessions hitherto enjoyed by the National Savings Certificates VI and VII Issues;....
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....ars, i.e., the year in question and the immediately preceding four years in order to overcome the hardships faced by shareholders on account of very high value of shares at certain points of time due to speculative tendencies. Amendments to the Income-tax Act, the Wealth-tax Act and the Gift-tax Act The following amendments have been made to the Income-tax Act, the Wealth-tax Act and the Gift-tax Act through the Second Amending Act, 1989:-- Deemed registration of firms: 4.1 Under the provisions of section 185 of the Income-tax Act, as they existed prior to their amendment through this Act, it was obligatory for an Assessing Officer to pass an order, on receipt of an application for the registration of a firm, either registering the firm or refusing to register it. Such order was based on an enquiry into the genuineness of the firm and its constitution. However, under the new assessment procedure which has come into force with effect from April 1, 1989, it is not necessary to pass an order of assessment on receipt of a return of income. Only in a limited number of c....
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....989-90 and subsequent years. [Sections 2, 19, 20 and 21 of the Second Amending Act, 1989] Insertion of the definition of the term 'security' and regularisation of tax concessions hitherto enjoyed by the National Savings Certificates VI and VII Issues: 5.1 The term 'security' which has been used in a number of provisions of the Income-tax Act, had not been defined in section 2 of the said Act. This had given rise to problems of interpretation of the said term. For example, National Savings Certificates VI Issue and VII Issue, issued under the Government Savings Certificates Act, 1959, were notified as securities for the purposes of section 80C of the Income- tax Act. Clarifications were also issued that the interest on these certificates was exempt under section 80L subject to specified limits, as these certificates were in the nature of securities. An opinion has now been expressed that the term 'security' which has been defined in the Public Debt Act, 1944, does not cover the National Savings Certificates issued under the Government Savings Certificates Act, 1959. Thus, the notification issued earlier specifying the National Savings Certificates VI and VII Issues as secur....
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....eriod or periods amounting in all to 365 days or more in the four years preceding that year and was in India for a period of 90 days or more in that year. In the case of individuals who are not citizens of India, the period of 90 days or more is restricted to 60 days or more. The non- resident Indians had been representing that the period of 90 days or 60 days was too short, especially for those who had to supervise their investments in India. In order to enable the non-resident Indians to stay in India for a longer period for looking after their investments without losing their 'non-resident' status, clause (b) of the Explanation to clause (c) of sub-section (1) of section 6 has been amended. The period of 90 days provided thereunder has been increased to 150 days. The amended provision will apply not only to a citizen of India but also to a person of Indian origin within the meaning of Explanation to clause (e) of section 115C of the Income-tax Act. Accordingly, a person shall be deemed to be of Indian origin, if he, or either of his parents or any of his grandparents, was born in undivided India. The effect of the amended provision is that, subject to the other conditions pre....
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.... sub-section so that the said authority could be vested in the Central Board of Direct Taxes, under section 295 of the Income-tax Act. Hence, sub-section (5) of section 10 has been substituted with a view to-- (i) delete the first proviso to the said sub-section, and (ii) delete the reference to the Central Government as the authority for prescribing conditions for the purpose of the said sub-section. With the deletion of the first proviso to sub-section (5) of section 10 of the Income-tax Act, the rule-making-power of the Board would have become unfettered. Hence, in the substituted sub-section (5) of section 10, it has been provided that the conditions to be prescribed for the grant of exemption from income-tax thereunder shall be framed having regard to the conditions of the leave travel concession scheme applicable in the case of the employees of the Central Government. 7.2 The above amendment shall come into force with effect from 1st April, 1989, and will, accordingly, apply to the assessment year 1989-90 and subsequent years. [Section 4 of the Second Amending Act, 1989] Cla....
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.... paid-up capital of the company, the excess will be disregarded for the purpose of allowance of deduction under this provision. For the above purpose, the paid-up capital of the company shall exclude the amounts capitalised from reserves. The reserve so credited will have to be utilised for the purchase of a new ship for the assessee's own business within a period of eight years next following the previous year in which the reserve was created. If such reserve is not so utilised, it shall be deemed to be the income of the assessee in the year immediately following the period of eight years and charged to tax accordingly. Within the aforesaid period of eight years and before the acquisition of a new ship, the amount credited to the reserve account can be utilised for the business of the assessee, except for distribution of dividends or profits or for remittance outside India either as profits or for creation of any asset. In cases where the amount of reserve is utilised in violation of the aforesaid condition, it will be deemed to be the income of the assessee for the year in which the amount has been so misutilised. Further, if a new ship acquired out of the reserve account is sold....
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....value of the Indian rupee vis-a-vis the foreign currency in which the investment is made by them, they are adversely affected when they sell such shares or debentures. In order to overcome this situation, sub- section (1) of section 48 of the Income-tax Act has been amended to provide that the computation of capital gains on the transfer of shares and debentures of Indian companies, in the case of non-resident Indians, shall be made by converting the cost of acquisition, the consideration for transfer and the expenditure incurred in connection with such transfer into the foreign currency in which the investment was made. The capital gains as computed in such foreign currency shall be reconverted into Indian currency. The conversion of Indian currency into foreign currency and the reconversion of foreign currency into Indian currency shall be at the rate of exchange prescribed by the Board in this behalf. The above method of computation of capital gains shall apply in respect of capital gains accruing or arising for every reinvestment made thereafter in the shares in and debentures of the Indian companies. The term 'non- resident Indian' shall have the meaning as given to it in clau....
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....Second Amending Act, 1989] Restricting the tax concession to the Jeevan Dhara Scheme of the Life Insurance Corporation under section 80CCA only: 11.1 The Finance Act, 1988, amended the provisions of section 80CCA of the Income-tax Act to provide that any investment in an annuity plan of the Life Insurance Corporation as the Central Government may, by notification in the Official Gazette, specify, will be allowed as deduction up to an amount of Rs.20,000 (Rs.30,000 from assessment year 1989-90) in the previous year in which such investment was made. On the other hand, section 80C of the Income-tax Act also provides for tax concession in respect of contributions to effect or to keep in force a contract for a deferred annuity on the life of the taxpayer or his spouse or child. The Jeevan Dhara Scheme of the Life Insurance Corporation, which is one of the two schemes of the Life Insurance Corporation notified for the purposes of section 80CCA, is also a deferred annuity scheme. A number of instances had come to notice wherein taxpayers had claimed deduction from their total income in respect of contributions to the Jeevan Dhara Scheme of the Life Insurance Corporation both under ....
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....ection 7 of the Second Amending Act, 1989] Rationalisation in the taxation provisions for non-resident sportsmen and sports bodies: 13.1 Under the provisions of the Income-tax Act, any income which accrues or arises or is deemed to accrue or arise in India is taxable in the hands of a non-resident. As per section 9(1)(i) of the Income-tax Act, all incomes accruing or arising directly or indirectly from any source of income in India are deemed to accrue or arise in India. Therefore, any guarantee money paid to the foreign sports teams/Boards and payments to individual players on account of the sports activities taking place in India is liable to be taxed in India. Under section 195 of the Income-tax Act, it is also necessary to deduct tax at source at the time of payment/ credit of such income. On the other hand, in countries like the United Kingdom, Australia and New Zealand, the income of the visiting non-resident sportsmen or sports bodies is either not taxes or taxed at lower rates. Further, practical difficulties were being experienced in enforcing the provisions of the Income-tax Act with regard to the payments to be made to the non-resident sportsmen or sports bodies. T....
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.... deduction shall be allowed under sub-section (2) of section 48 as well while computing investment income or income by way of long-term capital gains. 14.2 The above amendment shall come into force retrospectively from the 1st day of April, 1988, and will, accordingly, apply to the assessment year 1988-89 and subsequent years. [Section 11 of the Second Amending Act, 1989] Due date for filing of income-tax returns of the partners of a firm: 15.1 Section 139 of the Income-tax Act specifies the due dates on or before which the returns of income are to be filed by different categories of taxpayers. In the case of a partnership firm whose accounts are required to be audited under the Income-tax Act or any other law, the due date for filing of the income-tax return is the 31st day of October of the assessment year. However, in the case of the partners of such a firm, the due date specified in section 139 was the 31st day of August of the assessment year. This created difficulties in the case of the partners because their correct share in the profits of the firm could be known only towards the end of the month of October b....
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.... difficulties both for the taxpayers as well as the Income-tax Department. For example, the taxpayers would have been denied the issue of refund as a result of a regular assessment completed under section 143(3) on or after 1st April, 1989, in respect of the assessment year 1988-89 or the earlier assessment years. The assessee could also be made available to pay additional income-tax at the rate of 20 per cent. for the assessments for the assessment year 1988-89 and earlier assessment years completed on or after 1st April, 1989. Similarly, in the case of returns filed before 1st April, 1989, pertaining to the assessment year 1988-89 and the earlier years, notices under section 143(2) of the Income-tax Act could not have been issued in case the prescribed period of limitation for their service had lapsed. To overcome these difficulties, Removal of Difficulties Order under section 298(3) of the Income-tax Act was passed on 23rd March, 1989. In this order, it was specified that the provisions of section 143 of the Income-tax Act as they stood before the commencement of the Direct Tax Laws (Amendment) Act, 1987, were to apply in respect of assessments for the assessment year commencing....
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.... is due to be paid. Similarly, in cases where as a result of adjustments made to the returned income, the amount of refund claimed by the assessee is reduced, no intimation was necessary. As a result, in certain cases, the assessees remained ignorant about the adjustments made to the amount of income/loss returned by them. To overcome this problem, section 143 has been amended to provide that where adjustments are made to the returned income/loss, then notwithstanding that no tax or interest is found due from the assessee, an intimation shall be sent to him. 17.2 Section 16 of the Wealth-tax Act and section 15 of the Gift-tax Act have also been amended on the above lines. 17.3 Clause (b) of sub-section (1) of section 143 provided that where as a result of any appellate, revisionary or settlement order, etc., relating to any earlier assessment year and passed subsequent to the filing of the return for a later assessment year, there was any variation in the carried forward loss, deduction, etc., claimed in the return, then the necessary adjustments could be made in the said return. However, this provision did not cover the variations resulting on account of the orders under sec....
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....ase of the firms, associations of persons, etc., giving rise to such variations. 17.6 Sub-section (2) of section 143 provided that in a case referred to under sub-section (1) of section 143, the Assessing Officer could serve a notice on the assessee in specified circumstances asking him to attend his office or produce evidence in support of his return. Therefore, a view was being taken that in cases where a return had been correctly filed after payment of tax and interest due on the basis of the return and no action under sub-section (1) of section 143 was found necessary, it would not be possible to issue a notice under sub-section (2) of section 143. However, the legislative intent was not to restrict the scope of sub-section (2) of section 143 only to those cases wherein action had been taken under the provisions of section 143(1). Hence, sub-section (2) of section 143 has been amended to specify that a notice thereunder can be issued in all cases where a return has been made under section 139 or in response to a notice under sub-section (1) of section 142. 17.7 Section 16 of the Wealth-tax Act and section 15 of the Gift-tax Act, have also been amended on the above lines. ....
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.... Amendment to provisions of section 195: 19.1 Section 195 of the Income-tax Act was amended by the Finance Act, 1987, to provide for deduction of tax at source on payment of certain sums to non-residents either at the time of credit of the same to their account or at the time of payment thereof in cash or by the issue of a cheque, etc., whichever was earlier. Prior to this amendment, the requirement to deduct tax at source was only at the time of payment in cash or by cheque, etc. After the aforesaid amendment had come into force with effect from 1st June, 1987, a number of public sector banks had represented that they would have to restructure the interest schedule and also the maturity period of the various deposit schemes relating to non-resident accounts on account of the requirement to deduct tax at source at the time of credit of interest to such accounts. After considering the practical difficulties pointed out by these banks, it was decided to revert to the pre-amendment situation in respect of deduction of tax at source out of payments of interest to the accounts of the non-residents by the Government or a public sector bank or a public financial institution. Hence, sec....
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....mposition of penalty was initiated, whichever period expired later. A view was being taken that the aforesaid bar of limitation would apply even to the penalty proceedings initiated prior to 1st April, 1989, and pending on that date. Therefore, it was contended that pending penalty proceedings initiated prior to 1st October, 1988, would get barred by limitation on 1st April, 1989. To avoid penalty proceedings in such cases from getting time barred and to be on the safe side, Removal of Difficulties Order under section 298(3) of the Income-tax Act was passed on 23rd March, 1989. In this Order, it was specified that the provisions of section 275 of the Income-tax Act, as they stood before the commencement of the Direct Tax Laws (Amendment) Act, 1987, were to apply in respect of any action for imposition of penalty initiated on or before 31st day of March, 1989. A provision to this effect has now been incorporated in section 275 itself, as sub-section (2) thereof. 21.2 The above amendment shall come into force retrospectively from 1st April, 1989. [Section 26 of the Second Amending Act, 1989] Valuation of shares of compan....