TaxTMI 
TaxTMI 
Finance Act, 1990--Explanatory Notes on the provisions relating to direct taxes
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....ns for sections 33AB and 80M ; omitted section 80C and Chapter XXIIB (relating to tax credit certificates) ; amended sections 2, 5, 10, 16, 17, 35K, and Schedule 111 of the Wealth-tax Act, 1957 ; inserted a new section 35EEE in the Wealth-tax Act, 1957 ; amended sections 9, 15 and 16 of the Gift-tax Act, 1958. PROVISIONS IN BRIEF The provisions in the Finance Act, in the sphere of direct taxes relate to the following matters : (i) Prescribing the rates of income-tax on incomes liable to tax for assessment year 1990-91, the rates at which tax will be deductible at source during the financial year 1990-91 from Interest (including interest on securities), dividends, salaries paid to employees, winnings from lotteries or crossword puzzles, winnings from horse-races, insurance commission and other categories of income liable to deduction of tax at source under the Income-tax Act, rates for computation of "advance tax" and charging of income-tax on current incomes in certain cases for the financial year 1990-91. (ii) Retaining with modification as to applicability of the provisions for the levy of surcharge at the rate of 8 per cent. of income-tax. (iii) Amendment of the I....
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....or all persons who are required to furnish their returns of income under section 139(4A) to apply for allotment of permanent account number ; (21) conferring power on Assessing Officers to call for return even before the end of the relevant assessment year ; (22) providing for processing of revised returns under the new procedure for assessment ; (23) modifying the definition of "regular assessment" ; (24) conferring power on an Income-tax Officer to reopen assessment with the approval of the Deputy Commissioner ; (25) providing for penalties for certain defaults by mutual funds ; (26) providing for punishment for contravention of prohibitory order served for effecting seizure ; (27) removing anomalies in certain cases ; and (28) modifying the provisions relating to the valuation of jewellery under the Wealth-tax Act. &....
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....e during the financial year 1990-91 from incomes other than "Salaries" have been specified in Part II of the First Schedule to the Finance Act. These rates apply to income by way of interest including interest on securities, dividends, insurance commission, winnings from lotteries, crossword puzzles and horse races and income other than salary income of non-residents (including non-resident Indians). These rates are basically the same as those specified in Part II of the First Schedule to the Finance Act, 1989, for purposes of deduction of tax at source during the financial year 1989-90. In respect of payments referred to above, the amount of tax so deducted shall be increased by a surcharge calculated at the rate of 8 per cent. of tax deducted. However, no deduction in respect of surcharge shall be made where the payment is made to a non-resident (including a non-resident Indian) or to a foreign company. III. Rates of deduction of tax at source from "Salaries", computation of "advance tax" and charging of income-tax in special cases during the financial year 1990-91. 5. The rates for deduction of tax at source from "Salaries" during the financial year....
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.... total income exceeding Rs. 50,000, the slabs of income and the rates of tax will remain unchanged. The rates of income-tax as per the Finance Act, 1989, and the Finance Act, 1990, are indicated in the Table below : TABLE Finance Act, 1989 Finance Act, 1990 Income level Marginal rate of tax Income level Marginal rate of tax Upto Rs. 18,000 Nil Upto Rs. 22,000 Nil Rs. 18,000— 25,000 20 per cent Rs. 22,000— 30,000 20 per cent Rs. 25,000 — 50,000 30 per cent Rs. 30,000 — 50,000 30 per cent Rs. 50,000—1,00,000 40 per cent Rs. 50,000 — 1,00,000 40 per cent Above Rs. 1,00,000 50 per cent Above Rs. 1,00,000 50 per cent III-B. Co-operative societies. ....
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....; TABLE Finance act, 1989 Finance act, 1990 Income level Marginal rate of tax Income level Marginal rate of tax Firms carrying on business Upto Rs. 10,000 Nil Up to Rs. 15,000 Nil Rs. 10,000 - 25,000 5 per cent Rs. 15,000 - 50,000 6 per cent Rs. 25,000 - 50,000 7 per cent Rs. 50,000 - 1,00,000 12 per cent Rs. 50,000 - 1,00,000 15 per cent Above Rs. 1,00,000 18 per cent Above Rs. 1,00,000 24 per cent Firms carrying on profession : Up to Rs. 10,000 Nil Up to Rs. 15,000 Nil Rs. 10,000 - 25,000 4 per cent Rs. 15,000 - 50,000 5 per cent Rs. 25,000 - 50,000 7 per cent Rs. 50,000 - 1,00,000 10 per cent Rs. 50,000 - 1,00,000 13 per cent Above Rs. 1,00,000 15 per cent Above Rs.1,00,000 22 per cent III-D. Local authorities. 10. In the case of local authorities, the rate of income-tax has been specified in Paragraph D of Pa....
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....dule of the Finance Act.] Streamlining of tax structure. 13. With the reduction in the rates of taxes in the case of domestic companies, registered firms and co-operative societies and on a review of some of the incentives and concessions available to taxpayers, the following incentives and concessions have been withdrawn or modified : - (a) Under the existing provisions of section 32A of the Income-tax Act, a deduction of an amount equal to twenty per cent. of the cost of new ship or aircraft or plant and machinery installed or put to use is allowed in computing the profits and gains from business or profession. This concession has been withdrawn in relation to new ship or aircraft acquired or new plant or machinery installed after the 31st day of March, 1990. Copy of the notification issued in this regard is at annexure. (b) Under the existing provisions of section 32AB of the Income-tax Act, deduction is allowed in respect of deposit with the IDBI/NABARD or amount utilised for the purchase of any new ship, new aircraft or new machinery or plant. This deduction is allowed in computing the taxable profits or gains of business or profession and is equal t....
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....espect of each of the ten assessment 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 small-scale industrial undertakings which begin to manufacture or produce articles or things after the 31st day of March, 1990, will not be eligible for this deduction. &n....
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....ude therein reference to a member of the crew of an Indian ship. This would ensure that Indian seaman working on board an Indian ship would be treated as resident in India for any year only if the stay in India is for 182 days or more in that year. 14.2 This amendment takes effect from the 1st April, 1990. [Section 4 of the Finance Act.] Extension of the retirement benefit scheme to employees of public sector companies. 15. Under the existing provisions of item (i) of sub-clause (iv) of clause (15) of section 10 of the Income-tax Act, exemption from income-tax is available in respect of interest received from Government on deposits made by an employee of a Central Government or a State Government, in accordance with such scheme as the Central Government may, by notification in the Official Gazette, frame in this behalf, out of the moneys due to him on account of his retirement, whether on superannuation or otherwise. The deposits under the aforesaid scheme are also exempt from wealth-tax under section 5(1)(xxviic) of the Wealth-tax Act. 15.1 The aforesaid exemptions have now been extended ....
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....bsp; [Section 5 of the Finance Act.] New provisions relating to Tea Development Account. 17. Section 33AB inserted by the Finance Act, 1985, provided for deduction in respect of the amount deposited by a tea company with the National Bank for Agriculture and Rural Development. By the Finance Act, 1986, a new section 32AB relating to Investment Deposit Account was inserted in the Income-tax Act. Under this provision an assessee was allowed deduction in respect of amounts deposited with the IDBI/NABARD or the amount utilised during the previous year for the purchase of any new ship, aircraft, machinery or plant. Since the scheme of Investment Deposit Account applied also to taxpayers carrying on the business or profession of growing ....
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....the business was continuing or the firm had not been dissolved. In all other cases, viz., death of the taxpayer, partition of the Hindu undivided family and liquidation of the company, the amounts withdrawn on closure of account because of the occurrence of any of these events will not be included in the taxable income even though the amounts have not been utilised for any of the purposes specified in the scheme. (iv) There is an overriding condition that the deduction under this provision cannot be claimed in relation to amounts utilised for the purchase of any machinery or plant to be installed in any office premises or residential accommodation including guest houses ; any office appliance, other than computers ; any other plant or machinery which either is installed in an undertaking producing low priority items specified in the Eleventh Schedule in the Income-tax Act or is an item of plant or machinery entitled to 100 per cent. write off by way of depreciation or for any other reason in any one year. (v) For claiming the deduction, it is necessary that the accounts of the taxpayer are audited by a chartered accountant and the report of the auditor in the pres....
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.... the profit and loss account of the relevant previous year and credited to a reserve account. 18.1 In the context that appropriation to a reserve presupposes existence of sufficient profits and it should suffice if the required amount is so appropriated before the deduction by way of development rebate came to be allowed, the Central Board of Direct Taxes through a circular clarified that the requirement of creation of reserve will be considered to have been satisfied if the accumulated reserves in respect of the said machinery or plant up to the year or years of actual deductions is equal to seventy-five per cent. of the amount of development rebate to be actually allowed. This means that in a year when profits are insufficient or there are no profits, the creation of reserve was not mandatory. 18.2 The Supreme Court in the case of Shri Shubhlaxmi Mills Ltd. [1989] 177 ITR 193, has held that in order to claim the deduction on account of development rebate, it is obligatory that the reserve should be created in the year of acquisition/installation of machinery or plant, etc., even in a case where there are no profits. If the decision of the Supreme Court is to be ....
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....object the undertaking of any programme of afforestation. For this purpose, both the association/institution and the programme of afforestation will have to be approved by the prescribed authority. Moreover, any payment made to a Fund for afforestation to be set up and notified in this behalf will also qualify for deductions under sections 35CCB and 8OGGA of the Income-tax Act. 19.1 These amendments will take effect from 1st April, 1991, and will, accordingly, apply in relation to the assessment year 1991-92 and subsequent years. &n....
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.... [Section 13 of the Finance Act.] Modification of special provisions for computing profits and gains from the business of trading in certain goods. 21. Under the existing provisions of section 44AC of the Income-tax Act, in the case of a trader in alcoholic liquor for human consumption (other than Indian made foreign liquor), forty per cent. of the purchase price paid or payable is deemed to be his income. As a result of different systems prevailing in different States, the term purchase price is being understood in different ways. Therefore, an Explanation has been inserted in clause (a) of sub-section (1) of section 44AC to provide that purchase price shall mean all amounts paid or payable to obtain country liquor, excluding the amount paid or payable towards the bid money in an auction or the highest accepted offer in a tender or any other mode. 21.1. At present, the provisions of section 44AC apply where the goods of the specified nature are sold by the Central Government, a State Government, any local authority, a statutory corporation or authority, a company or a firm. The Explanation below section 44AC has been amended to include co-operative so....
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....l be levied on the income-tax payable by him after allowing the tax rebate under the aforesaid provisions. 22.5 The effect of the new provision is illustrated as under : Existing New Rs. Rs. Gross Total Income 70,000 70,000 Deduction under section 80C (assuming savings of Rs. 14,500) 10,000 Nil Total Income 60,000 70,000 Tax on total income 12,900* 15,600** Tax rebate on savings of Rs. 14,500 Nil 2,900 *As per the existing rates. ....
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....tual funds or the Unit Trust of India will be allowed to invest in such Government securities as may be approved by the Board, in this behalf ; (ii) that the tax concession under the new section 88A will not be available to any scheme floated by any mutual fund or the Unit Trust of India. the subscription to which closes after 30th September, 1990. 23.3 A new section 27IBB has been introduced to provide that if any mutual fund or the Unit Trust of India referred to in sub-section (1) of section 88A, fails to invest any amount of subscription to the units issued under any scheme referred to in the said sub-section in the eligible issue of capital within a period of six months specified in that sub-section, the Deputy Commissioner may levy a penalty of a sum equal to twenty per cent. of the amount not subscribed by the mutual fund or the Unit Trust of India in the eligible issue of capital. 23.4 This scheme will lapse after 31st March, 1991. 23.5 The newly inserted sections 88A and 271BB will come into force from the 1st day of April, 1991, and will, accordingly, apply in relation to the assessment year 1991-92 and subsequent years. [Sections 30 and 43 of the Finance A....
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....een inserted in the Income-tax Act in respect of deduction relating to investment made in accordance with the Equity Linked Savings Scheme which will be notified by the Central Government. 25.1 Under the new provisions, a deduction shall be allowed in the case of an assessee, being an individual, a Hindu undivided family and certain categories of associations of persons or bodies of individuals in relation to the investment made under any plan framed in accordance with the Equity Linked Savings Scheme. The investment will be in the units of Mutual Funds specified under clause (23D) of section 10 or Unit Trust of India. The deduction shall be allowed on so much of the amount invested as does not exceed ten thousand rupees. 25.2 The new provision also provides that when any amount in respect of which deduction has been allowed is returned to the assessee either by way of repurchase of the units by the Fund or the Trust or on the termination of the plan, it shall be deemed to be his income for the previous year in which the amount is returned. Further, where the amount is so returned to a member of a Hindu undivided family or of an association of persons after ....
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..... 26.2 The amendment will take effect from 1st April, 1991, and will, accordingly, apply in relation to the assessment year 1991-92 and subsequent years. [Section 18 of the Finance Act.] Modification of provisions relating to exemption of income from exports. 27. At present exporters are given incentives by way of Cash Compensatory Support (CCS), drawback of duty and import entitlement licences. The taxation of CCS has been a subject matter of litigation. The Calcutta High Court in the case of Jeevan Lal (1929) Ltd. [1983] 142 ITR 448 held that the CCS received by an exporter was a revenue receipt and was subject to income-tax. The Special Bench of the Income-tax Appellate Tribunal has, however, in a case, distinguished the aforesaid decision and come to the conclusion that the CCS was a capital receipt and hence not subject to tax. The Department's view all along has been that CCS or any other subsidy received by an exporter as an export incentive is a reve....
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....the existing provisions of section 80HHD of the Income-tax Act, persons engaged in the business of hotel or as a tour operator or travel agent is allowed a deduction of 50 per cent. of the profits derived from services provided to foreign tourists and so much of the balance profits as is credited to a reserve account to be utilised for specified, purposes. This section applies only to services provided to foreign tourists the receipts of which are received in convertible foreign exchange. In order to make the condition in this regard identical to that in section 80HHC, section 80HHD has been amended to provide that the deduction will be allowed to the extent the receipts in relation to services provided to foreign tourists, are received in or brought into India in convertible foreign exchange within a period of six months from the end of the previous year or within such extended period as the Chief Commissioner or Commissioner of Income-tax may allow on being satisfied that the assessee was prevented from complying with this requirement for reasons beyond his control. 28.2 In view of the fact that the exporters/hotels, etc., are being allowed a period of six months f....
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....ess shall include the three export incentives, viz., CCS, duty drawback and sale of import entitlement licences. 28.8 Whereas the term "export turnover" is defined in section 80HHC, the term "total turnover" had not been defined earlier. This has given rise to various interpretations about the inclusion of the items like cash compensatory support, drawback of duty, profits on sale of import entitlement licences, in the total turnover of the business carried on by the exporter. Therefore, a new clause (bb) has been inserted in the Explanation to section 80HHC in order to clarify that these items will not be included in the term "total turnover". Further, the meaning of the term "export turnover" has been restricted to mean the FOB sale proceeds actually received by the assessee in convertible foreign exchange within six months of the end of the previous year or within such further time as the Chief Commissioner or Commissioner may allow in this regard. 28.9 These amendments (other than the amendment in section 80HHC(2)(a) relating to exclusion of supporting manufacturer from the requirement of bringing in convertible foreign exchange), will take effect from 1....
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....usiness of a hotel carried on by an Indian company. 29.1 The deduction is allowed at the rate of twenty-five per cent. in the case of a company and twenty per cent. in other cases. 29.2 The period for which such deduction is allowed is 10 assessment years in the case of a co-operative society and 8 assessment years in other cases beginning with the assessment year relevant to the year in which the industrial undertaking begins to manufacture or produce articles or things or to operate cold storage plant or plants or the ship is first brought into use or the business of hotel starts functioning. It is also provided that the event enabling the grant of this tax concession, viz., commencement of manufacture or production or bringing the ship into use etc., should have occurred before April 1, 1990. 29.3 In view of the need to promote industrial growth by encouraging the setting up of new industrial undertakings, etc., the tax concession under section 80-I has been extended for a further period of five years. Accordingly, industrial undertakings which begin to manufacture or produce articles or things or bring into use of ship or carry on the business of a hotel wh....
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....ting to inter corporate dividends. 31. Under the existing provisions of section 80M of the Income-tax Act, a domestic company is allowed deduction of an amount equal to sixty per cent. of the dividend received from another domestic company. There is no statutory obligation on the recipient domestic company to declare dividends out of the dividends received. 31.1 In order to ensure that dividend income is taxed only where it finally rests, a new section 80M has been substituted for the existing section. Henceforth, the existing deduction of sixty per cent. without any further condition as regards distribution as dividend would be applicable only to a scheduled bank, a public financial institution, a State Financial Corporation, a State Industrial Investment Corporation or a company registered under section 25 of the Companies Act, 1956 (a company set up for charitable and other useful purposes, which does not pay dividend to its members). In respect of any other domestic company, the deduction shall be limited to the amount of dividend received as does not exceed the amount of dividend distributed. Accordingly, if a domestic company receives any dividen....
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....erson leaving India for employment abroad and serving there continuously for more than thirty-six months becomes a non-resident and hence is not subject to Indian Income-tax in respect of the foreign income. The limitation of thirty-six months in sections 80R and 80RRA has, therefore, lost its significance and has, therefore, been deleted. 32.2 These amendments will take effect from 1st April, 1991, and will, accordingly, apply in relation to the assessment year 1991-92 and subsequent years. [Sections 27, 28 and 29 of the Finance Act]. Modification of special provisions relating to certain incomes of non-resident Indians. 33. In the case of non-resident Indians, investment income from "specified assets" and long-term capital gains is charged to tax at a flat rate of 20 per cent. under Chapter XII-A of the Income-tax Act (sections 115C to 115-I). The existing provisions of section 115-I provide that a non-resident Indian may opt not to be governed by the provisions of Chapter XII-A....
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....ill take effect from 1st April, 1990. [Sections 33, 53 and 59 of the Finance Act.] Allowing the firms to file their returns even if their income is below the taxable limit. 35. Under the existing provisions of sub-section (10) of section 139 of the Income-tax Act, a return of income which shows the total income below the taxable limit is deemed never to have been furnished. A proviso to this section contains certain exceptions to this rule. One of the exceptions mentioned in clause (b) of the proviso is in respect of a partner of a firm. Thus, return of a partner of a firm can be filed even if the income shown is below the taxable limit. A similar exception is also necessary in the case of a firm, because the share declared by the partner in a firm which has income below the taxable limit, will remain undetermined unless such a firm is also allowed to file its return of income. 35.1 Clause (b) of the proviso to sub-section (10) of section 139 has, therefore, been amended to make an exception, not only in the case of a partner of a firm, but also in the case of a firm, so that a firm as well as the partner can file their returns of income even if ....
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....e corresponding provisions of section 16(4) of the Wealth-tax Act and section 15(4) of the Gift-tax Act. 37.3 These amendments will take effect from 1st April, 1990. [Sections 36, 54 and 60 of the Finance Act.] Processing of revised returns under the new Procedure for assessment. 38. Under the provisions of sub-section (1) of section 143 of the Income-tax Act, a return of income is processed for recovery of any tax or interest due from the assessee or for the issue of any refund due to him on the basis of the return, without making an assessment. If a revised return under section 139(5) is filed by the assessee after action under sub-section (1) of section 143 has been completed on the basis of the earlier return, there is no provision in section 143 for the revision of the intimation already sent to the assessee. 38.1 A situation may arise where income declared in the earlier return has been increased as a result of prima facie adjustments made under the first proviso to clause (a) of sub-section (1) and additional income-tax has been charged under sub-section (1A), but the assessee revises his return declaring therein the increased income (after making the ad....
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....y raise a controversy whether even the processing of a return under sub-section (1) of the new section 143, is included in "regular assessment". 39.1 Therefore, clause (40) of section 2 has been amended to clarify that regular assessment would mean only an assessment made under sub-section (3) of section 143 or section 144. 39.2 Similar amendment has been made in the corresponding provisions of section 2(cb) of the Wealth-tax Act. 39.3 These amendments will take effect retrospectively from April 1,1989. [Sections 3 and 51 of the Finance Act]. Removal of anomaly in taxing interest on securities. 40. Before deletion of the head "Interest on Securities" by the Finance Act, 1988, with effect from 1st April, 1989, the interest chargeable under this head used to be taxed on due basis. With the deletion of the provisions relating to this head of income, such income is now taxed either under the head "Profits and gains of business or profession" or under the head "Income from other s....
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....ction 268 of the Income-tax Act. 42. Under the existing provisions of section 268, if an assessee is not furnished with a copy of the order, then, in computing the period of limitation for filing an appeal, the time required for obtaining a copy of such order is to be excluded. This provision needs to be applied also in deciding the limitation period for making a reference application under section 256 of the Act. Therefore, an amendment has been made in section 268 to provide that the time required for obtaining copy of the order complained would be excluded in computing the period of limitation for filing reference application under section 256 as well. 42.1 This amendment will take effect from 1st April, 1990. [Section 42 of the Finance Act.] Penalties for certain defaults to be levied by a Deputy Commissioner. 43. Sections 271C, 271D and 271E, which were inserted in the Income-tax Act with effect from 1st April, 1989, by the Direct Tax Laws (Amendment) Act, 1987, provide for the levy of penalties for certain defaults. Penalty under section 271C is levied for failure to deduct tax at source. Penalty under section 271D may be levied for fail....
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....ances where, on account of the physical characteristics, volume or weight of the articles to be seized, it is not possible to take physical possession and remove them to a safe place. The contravention of such a prohibitory order has not been made punishable. 44.2 Accordingly, section 275A has been amended to provide for punishment also for contravention of an order made by the authorised officer under the second proviso to sub-section (1) of section 132. 44.3 Further, section 37A of the Wealth-tax Act contains provision for issue of prohibitory orders similar to those mentioned above. However, there are no provisions in the Wealth-tax Act corresponding to section 275A of the Income-tax Act. To remedy this situation and ensure effective compliance, a new section 35EEE has been inserted in the Wealth-tax Act, which contained provisions similar to those of section 275A of the Income-tax Act discussed earlier. 44.4 These amendments will take effect from 1st April, 1990. [Sections 47 and 56 of the Finance Act.] Omission of Chapter XXII-B of the Income-tax Act relating to tax credit certificates. 45. Chapter XXII-B of the Income-tax Act contains provi....
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.... 1]. WEALTH-TAX Amendment of section 35K of the Wealth-tax Act. 47. Sub-section (1) of section 35K of the Wealth-tax Act provides that a person shall not be proceeded against for an offence under section 35A (relating to wilful attempt to evade tax, etc.) or section 35D (relating to false statement in verification, etc.) in respect of which penalty for concealment of wealth has been reduced or waived under section 18B. The applicability of the said sub-section (1) was restricted till the assessment year 1988-89 by an amendment made by the Direct Tax Laws (Amendment) Act, 1987, because penalty for concealment of wealth was omitted by the said Amendment Act. However, since penalty for concealment of wealth has been restored by the Direct Tax Laws (Amendment) Act, 1989, with effect from 1st April, 1989, it is necessary that this restriction in the applicability of the provisions of sub-section (1) of section 35K is also removed from that date. 47.1 Sub-section (1) of section 35K has, accordingly, been amended so that its provisions would apply to any assessment year. 47.2 This amendment will take effect retrospectively from 1st April, 1989. ....