The Indian Budget 1996-97 The Indian Economy Overview

INDIAN FISCAL BUDGET ONLINE


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INCENTIVES FOR INFRASTRUCTURE DEVELOPMENT AND INDUSTRIALISATION Income-tax exemption to infrastructure development funds and companies
The availability of adequate infrastructure facilities is vital for accelerating the economic development of the country. In recognition of this fact, the existing provisions of the Income-tax Act provide a five years tax holiday to an enterprise carrying on the business of developing, maintaining and operating any infrastructure facility. However, in order to attract further investment in this sector, an urgent need has been felt for providing more tax incentives to investors.

It is, therefore, proposed to provide tax exemption to such infrastructure capital funds and companies which are established for the purposes of mobilising resources for financing infrastructure facilities.

Accordingly, any income by way of dividends, interest or long-term capital gains of an infrastructure capital fund or an infrastructure capital company from investments made by way of shares or long-term finance in any enterprise carrying on the business of developing, maintaining and operating any infrastructure facility which fulfills the conditions specified in sub- section (4A) of section 80-IA is proposed to be exempt from income-tax.

The expression 'infrastructure capital fund' shall mean a fund operating under a trust deed registered under the provisions of the Registration Act, 1908 established to raise moneys for investments by way of acquiring shares or providing long-term finance to an enterprise engaged in providing infrastructure facility. The expression 'infrastructure capital company' shall mean a company which has made investment by way of acquiring shares or providing long term finance to an enterprise engaged in the business of providing infrastructure facility. The expression 'infrastructure facility' shall mean a road, highway, bridge, airport, port, a rail system, or any other public facility of a similar nature as may be notified by the Central Board of Direct Taxes in this behalf in the Official Gazette. It will also include water supply projects, sewerage, sanitation or irrigation systems. The expression 'long-term finance' shall mean any loan or advance which is repayable along with the interest during a period of not less than 7 years.

The proposed amendment will take effect from 1st April, 1997 and will, accordingly, apply in relation to the assessment year 1997-98 and subsequent years. [Clause 4]

Tax holiday to companies engaged in scientific and industrial Research & Development
Under the provisions of section 80-IA, a five year tax holiday is allowed to an industrial undertaking engaged in the generation or generation and distribution of power or to an industrial undertaking set up in backward States/districts.

The Finance Act, 1995 has provided for another five year tax holiday and a deduction of 30% in the subsequent five years to an enterprise operating and maintaining an infra-structure facility on Build-operate- transfer (B-O-T) or on Build-own-operate-transfer (B-O-O-T) basis.

In our country, there are large gaps in important areas of research on the production system, particularly in production design, engineering, development process and plant engineering.

In order to promote research and development activities, the Bill proposes to provide for a five-year tax holiday under section 80-IA of the Income-tax Act, to approved companies engaged in scientific and industrial research and development activities on commercial lines. This incentive shall be available to any company that has as its main objective, activities in the areas of scientific and industrial research and development and which has been accorded approval by the prescribed authority. Secretary, Department of Scientific and Industrial Research shall be the prescribed authority for this purpose.

The tax holiday shall be available to any company, whether new or existing, which is accorded approval by the prescribed authority at any time before the 1st day of April, 1998. The 100% deduction for a five-year period, shall commence from the assessment year relevant to the previous year in which the approval by the prescribed authority is accorded to such a company.

The proposed amendment will take effect from 1st April,1997 and will, accordingly, apply in relation to the assessment year 1997-98 and subsequent years. [Clause 27]

Tax holiday to infrastructure facilities in the nature of Water supply, Irrigation, Sanitation and Sewerage projects
Under the existing provisions of the Income-tax Act, a five year tax holiday and a deduction of 30% in the subsequent five years (within a period of initial twelve assessment years), is allowed to a company or a consortium of companies, operating and maintaining infrastructure facilities in the nature of roads, highways, bridges, airports, ports, rail systems or any other public facility of a similar nature.

The country needs large investments in the area of public health and irrigation. In order to attract commercial enterprises to operatate such facilities, the Bill proposes to extend the benefit of tax holiday, to other infrastructure facilities like water supply projects, irrigation systems, sanitation and sewerage systems.

The proposed amendment will take effect from 1st April,1997 and will, accordingly, apply in relation to the assessment year 1997-98 and subsequent years. [Clause 27]

Rebate on subscription to shares and debentures offered in approved issues of public companies for infrastructure and power sectors
Under the existing provisions of the Income-tax Act, a rebate of twenty percent. of the sums paid or deposited in Life Insurance Premia, provident fund etc. is available to an individual or a HUF, subject to a maximum of twelve thousand rupees.

With a view to channelise the savings of the tax payers in the infrastructure sector including power, it is proposed to provide for a tax rebate of a sum equal to twenty per cent. of the amounts invested in debentures of, and equity shares in, a public company engaged in infrastructure including power sector.

The following are the salient features of the proposed provision-
  1. The eligible shares or debentures shall form part of the public issue, which is approved by the Central Board of Direct Taxes on an application made by the company in a prescribed form, in a prescribed manner, setting forth the prescribed particulars;
  2. The proceeds of the issue are wholly and exclusively utilised for the purpose of developing, maintaining and operating a new 'infrastructure facility', as defined under the Income-tax Act, or for generating or for generating and distributing power;
  3. A lock-in-period of three years is to be provided in respect of such equity shares or debentures. In case of any transfer of shares or debentures before three years of acquisition, the entire amount of rebate of tax allowed earlier in any previous year, shall be treated as tax payable in the hands of the subscriber, in the year in which it is transferred;
  4. Where a deduction is claimed and allowed under this clause, the cost of such shares or debentures shall not be taken into account for the purposes of sections 54EA and 54EB;
  5. The amendment also proposes that in respect of the eligible shares or debentures, a higher limit of qualifying investment of seventy thousand rupees shall be available, as against sixty thousand rupees in case of other qualifying investments. By investing only in such shares or debentures, a maximum tax rebate of fourteen thousand rupees may be claimed. In respect of other qualifying investments, the maximum rebate shall continue at the existing level of twelve thousand rupees, which may, however be extended up to fourteen thousand rupees, on further investment up to ten thousand rupees, in the aforesaid shares or debentures.

This amendment shall be effective from 1st April, 1997 and will, accordingly, apply in relation to the assessment year 1997-98 and subsequent years. [Clause 32]

Income-tax exemption to facilitate expansion projects of railways
Under the existing provisions of the Income-tax Act, interest payable by Government or an industrial undertaking on moneys borrowed abroad is not chargeable to tax in the hands of the recipient.

Konkan Railway Corporation Limited is engaged in the construction of a railway line. If the railway line were to be constructed by the Ministry of Railways, income-tax would not be leviable on the interest payable to a foreign lender as Railways are part of the Government. However, interest payable by Konkan Railway Corporation to foreign lenders has to suffer tax , which has to be borne by the Corporation as it is not an "industrial undertaking" as per the meaning given to the expression in the relevant section.

The Bill, therefore, seeks to widen the scope of the definition of the expression "industrial undertaking" so as to include therein an undertaking engaged in construction or operation of rail systems also.

The proposed amendment will take effect from the 1st April, 1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years. [Clause 4]

Income-tax exemption to North-Eastern Development Finance Corporation Limited (NEDFC)
The North-Eastern Development Finance Corporation Limited is registered as a company under the Companies Act, 1956. The company has an authorised capital of Rs. 500 crores and the initial contributions to capital are to be provided by financial institutions such as IDBI, ICICI and UTI leaving scope for contribution from other investors subsequently. The company has been set up at Guwahati with the objective of financing the creation, expansion and modernisation of industrial enterprises and infrastructure projects in the North-Eastern region of the country.

Being an infant development finance institution, serving in a very difficult region of the country, it has been proposed to exempt its income from income-tax for ten years commencing from the assessment year 1996-97. [Clause 86]

Exemption of long-term capital gains in the case of investment in specified assets
Under an earlier provision, long-term capital gains were exempt from tax where the net consideration received or accruing on transfer of a capital asset was invested or deposited in specified financial assets. This exemption ceased to be available in respect of assets transferred after 31.3.92.

In order to provide an impetus to investment in priority sectors of the economy, the Bill seeks to insert a new section 54EA having the following salient features:

  1. Exemption from capital gains to be available in cases where investment in specified bonds or debentures is made out of the net consideration received or accruing from the transfer of the capital asset. The bonds and debentures, re-investment in which will qualify for exemption, would be notified by the Board in the Official Gazette;
  2. Where only part of the net consideration is invested in specified bonds or debentures, proportionate exemption to be available;
  3. A "lock-in" period of 3 years to be provided during which the specified bonds and debentures must be held by the assessee in order to be eligible for the exemptio;
  4. Provision for withdrawal of the exemption if the specified bonds or debentures are transferred before the expiry of the "lock-in" period;
  5. Where the bonds or debentures are transferred or otherwise converted into money (e.g. by pledging them and taking a loan or advance against their security) at any time within the "lock- in" period, the long-term capital gain which was exempted earlier would be taxed in the year of such transfer;
  6. Where exemption from capital gains is availed of in respect of re-investment in specified bonds or debentures, rebate under section 88 not to be available.

The Bill seeks to insert another section 54EB in the Income-tax Act to provide that the capital gain arising from the transfer of a long-term capital asset will be exempt from tax if the capital gain so arising is re-invested within six months in specified assets to be notified by the Board. If part of the capital gain is so invested in the specified assets, proportionate exemption would be available. A lock-in period of seven years is prescribed. If the asset is transferred before the expiry of the lock-in period of seven years, the exemption will be liable to be withdrawn.

The proposed amendments will take effect from 1st October, 1996, and will apply in the cases where transfer takes place on or after the 1st day of October, 1996. [Clause 19]

MEASURES TO PROMOTE REGIONAL CO-OPERATION
Income-tax exemption to SAARC Fund for Regional Projects
The SAARC Fund for Regional Projects (SFRP) was established in 1991 by the Colombo Declaration of the Heads of State or Government of the Member- Countries of South Asian Association for Regional Cooperation (SAARC) with a view to making available credit on easy terms for the identification and development of projects having a regional character in the fields of industry, energy, agriculture and service sectors. Respective national contributions to the Fund are held by the nodal Development Financing Institutions (DFIs) of SAARC Member-countries. India's contribution is held by the Industrial Development Bank of India (IDBI) which earns income out of investment of these funds.

Keeping in view the objectives of the Fund, it is proposed to exempt the income of the SAARC Fund for Regional Projects from income-tax to ensure that the resources at the disposal of the Fund, and particularly income earned on India's contribution, is used only for the purposes for which the Fund has been set up.

The Bill, therefore, seeks to insert a new clause (23BBC) in section 10 of the Income-tax Act so as to allow income-tax exemption to any income of the SAARC Fund for Regional Projects.

The proposed amendment will take effect retrospectively from 1st April, 1992 and will, accordingly, apply in relation to assessment year 1992-93 and subsequent years. [Clause 4]

RATIONALISATION AND SIMPLIFICATION
Minimum Alternative Tax on companies
In recent times, the number of zero-tax companies and companies paying marginal tax has grown. Studies have shown that inspite of the fact that companies have earned substantial book profits and have paid handsome dividends, no tax has been paid by them to the exchequer.

The new proposal provides for those companies to pay tax on 30% of the book profits, whose total income as computed under the Income-tax Act is less than 30% of the book profits as per the books of account prepared in accordance with Parts II & III of Schedule VI to the Companies Act, 1956. "Book Profit" is defined and certain adjustments are provided in the proposed section.

The proposed amendment will take effect from 1st April, 1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years. [Clause 37]

Amendment in the provisions relating to simplified procedure for small taxpayers
A simplified procedure for small businessmen, carrying on certain specified businesses or vocations, was introduced in the Income-tax Act by the Finance Act, 1992, for persons having income upto Rs. 47,000 and turnover upto Rs. 6,00,000.

It is proposed to raise the turnover limit from six lakh rupees to seven lakh rupees and also to increase the deemed income from Rs.47,000/- to Rs.49,330/-. The tax liability under the scheme would remain at the existing level of Rs. 1400/- at the proposed rates.

The proposed amendment will take effect from 1st April, 1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years. [Clause 38]

Rationalisation of the tax concessions in respect of foreign exchange earnings from service export - sections 80 R, 80RR and 80 RRA.
Under section 80 R of the Income-tax Act, a professor, teacher or a research worker rendering service abroad, is entitled to a deduction from the remuneration received from a foreign university, institution, etc., while computing his income chargeable to tax. This deduction is available to a resident, being an Indian citizen.

Under section 80 RR, a similar deduction is available to an artist, playwright, musician, actor etc., deriving income from a foreign source, in exercise of his profession. This deduction is available to a resident in India, who need not be an Indian citizen.

A similar deduction is available under section 80RRA, to persons rendering service abroad and who are liable to pay tax in India on the entire remuneration received abroad. This deduction is available to an Indian citizen, who is a resident .

The existing provisions provide for a deduction equal to 50 per cent. of such income or remuneration or 75 per cent. of such income or remuneration as is brought into India, whichever is higher

It is proposed to link the deduction under these sections to repatriation of foreign exchange. The deduction under sections 80R, 80RR and 80RRA shall now be equal to 75% of the foreign exchange earnings, which are brought into India with in a period of six months from the end of the previous year. The assessee shall have to furnish a certificate in the prescribed form along with the return of income for claiming the deduction. The due date for filing the return of income in the case of such taxpayers has also been extended to 31st October of the relevant assessment year.

The proposed amendment will take effect from 1st April,1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years. [Clauses 29, 30, 31 &40]

Reduction of Tax Rate on long-term Capital Gains for Domestic Companies
Under the existing provisions of the Income-tax Act, long-term capital gains in the case of domestic companies are taxed at the rate of 30%, while the rate of tax is 20% in case of foreign companies. In order to place both domestic as well as foreign companies on the same footing, the Bill proposes to reduce the rate of long-term capital gains tax in case of domestic companies to 20%.

The proposed amendment will take effect from 1st April, 1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years. [Clause 35]

Extension of due date for filing the return of income in the case of a working partner of a firm
Section 139(1) of the Income-tax Act requires every person, whose income during the previous year exceeds the maximum amount not chargeable to tax, to furnish a return of his income on or before the due date. In the case of a firm carrying on business or profession whose accounts are required to be audited, the due date for filing of the return is the 31st of October. In the case of a working partner of the firm, the due date of filing the return of income is 31st of August. The payment of remuneration to a working partner is to be worked out with reference to the book profits of the firm in accordance with the provisions of section 40(b)(v). The working partner is, therefore, not in a position to know his actual income by way of remuneration from the firm till its accounts are audited.

In order to remove this hardship, it is proposed that the due date for filing of returns of income by working partners of firms whose accounts are required to be audited shall be the 31st day of October of the assessment year, i.e. the due date for filing of the return will be the same in the case of a firm and its working partners.

The proposed amendment will take effect from 1st April, 1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years. [Clause 40]

Rationalisation of Special Procedure for assessment of search cases
The Finance Act, 1995, introduced a new scheme of assessment of undisclosed income determined as a result of search. Under this scheme, the undisclosed income detected as a result of a search initiated after 30.6.95 is assessed separately as the income of a designated period (block) consisting of ten previous years prior to the previous year in which the search was conducted and also the period of the current previous year upto the date of search. The undisclosed income is taxed at a flat rate of 60 per cent.

Field experience in the implementation of the new procedure for block assessments has shown that difficulties are arising in certain areas. These relate to:

  1. Taxation of firms & partners

    The method of computation of "undisclosed income" of a firm & its partners has been laid down in section 158BB(1), which provides for the computation of undisclosed income of a firm and its partners before and after 1.4.93, in accordance with the method of assessment applicable. As per this, in respect of the assessment years prior to A.Y. 1993-94, the firm and the partners would both suffer tax @ 60% in respect of undisclosed income detected during the search in the case of the firm. From assessment year 1993-94 onwards, the firm would first pay tax @ 60% on undisclosed income. Due to adjustment of book profits, the partners' income on account of salary and interest may become higher and the differential would also become taxable @ 60%.

    In order to prevent double taxation of "undisclosed income" first in the hands of the firm and then again in the hands of the partners, the Bill proposes to amend Explanation (b) to sub-section (1) of section 158BB to provide that in the case of a firm, its business income will be taken to be the income before allowing for deduction under clause (b) of section 40 as it existed before 1.4.93 and also as per the present clause (b) of section 40. There would be no effect on the "undisclosed income" of the firm in the hands of the partners.

    The proposed amendment will take effect retrospectively from 1st July, 1995.

  2. Assessment Procedure

    The authority competent to make the block assessment has been laid down in section 158BG of the IT Act. As per this section, the order of assessment for the block period shall be passed by an Assessing Officer not below the rank of an Assistant Commissioner.

    The time limit for completion of block assessment is prescribed in section 158BE of the IT Act. As per this section, the order u/s 158BC shall be passed within one year from the end of the month in which the last of the authorisations for search u/s 132 or for requisition u/s 132A, as the case may be, was executed.

    In order to facilitate the assessment process, and to ensure that the investigation is carried to its logical conclusion in a focused manner, the Bill proposes to provide in the Income-tax Act powers enabling the ADIT(Inv.) or DDIT (Inv.) nominated by the DIT(Inv.) to act as the Assessing Officer. As a corollary to this proposal, it would be provided that the approval of the Director of Income-tax(Inv.), who is an officer equal in rank to the Commissioner, would be obtained before passing the assessment order.

    The proposed amendments will take effect from 1st October, 1996.

  3. Definition of "block period"

    Under section 158B(a), the block period has been defined to include ten previous years preceding the previous year in which the search was conducted under section 132. Before the adoption of the uniform previous year, assessees were allowed to have any accounting period as the previous year under section 3 of the Income-tax Act. Consequently, the block period will be different in different cases depending upon the previous years adopted by the assessees before 1.4.89.

    In view of this, the Bill proposes to amend the definition of block period as consisting of previous years relevant to ten assessment years. This will make the block period uniform in the cases of all assessees.

    The proposed amendment will take effect retrospectively from 1st July, 1995.

  4. Special Audit

    Under the provisions of section 142(2A), the Assessing Officer, may with the approval of the Chief Commissioner or the Commissioner, direct the assessee to get his accounts audited by a Chartered Accountant.

    In the new scheme of block assessment of search cases, difficulty is being experienced in getting such special audit done. This is for the reason that section 158BA(1) contains a non-obstante clause which states that notwithstanding anything contained in any other provision of the Act, the Assessing Officer shall proceed to assess the undisclosed income in accordance with the provisions of Chapter XIV-B. A time limit of one year for completion of the block assessment has been prescribed under section 158BE. In a case where a special audit is required, the time taken in obtaining the report of such audit is excluded by virtue of item (iii) of Explanation 1 to section 153. Due to the operation of the non-obstante clause, this exclusion of time is not possible in cases of block assessment. Hence in such cases very little time is left for completing the assessment.

    In order to remove the difficulty outlined above, the Bill proposes to amend section 158BE to provide for exclusion from the period of limitation of the period commencing on the day on which the Assessing Officer directs the assessee to get his accounts audited and ending on the day on which the assessee is required to furnish the report of such audit.

    The proposed amendment will take effect retrospectively from 1st July, 1995.

  5. Stay granted by Court

    Item (ii) of Explanation 1 of section 153 provides for exclusion from the period of limitation of the period during which a stay or injunction has been granted by a Court in respect of any assessment proceedings. This enables the Assessing Officer to complete the assessment on vacation of the stay, even after the expiry of the normal period of limitation. There is no such specific provision in Chapter XIV-B of the Act in respect of block assessments. In view of the non-obstante clause, the exclusion provided in section 153 would not be available in such block assessment cases. Situations may arise where a stay is granted by a Court in respect of block assessment cases. In such a situation, it is possible that the assessment may get barred by limitation due to operation of the non-obstante clause.

In order to preclude such an eventuality, the Bill proposes to amend section 158BE to provide for exclusion from the period of limitation of the period during which stay granted by a Court is in operation.

The proposed amendment will take effect retrospectively from 1st July, 1995. [Clauses 3, 39, 43, 44, 45 & 46]

Modification of provisions of section 148
Under the existing provisions of the Income-tax Act, in cases where the Assessing Officer has reason to believe that income has escaped assessment, a notice can be issued to an assessee for filing a return of his income within a specified period, not being less than thirty days. In the printed form of notice under section 148, the assessee was required to furnish a return of his income within thirty days. The above position in law was in force from 1.4.89.

Notices issued under section 148 have been held to be invalid by the Income-tax Appellate Tribunal on the ground that whereas the statute allows the tax payer a time, "not being less than thirty days", the notice gives the direction to file a return "within a period of thirty days". The Bombay High Court in the case of Commissioner of Income-tax vs. Ekbal & Co. (13 ITR 154) decided a similar issue by laying down that 'the expressions "within thirty days" and "not less than thirty days" are two quite different things'. In view of the aforesaid decisions of the Bombay High Court and of the Income-tax Appellate Tribunal, it is proposed to provide in section 148 that the Assessing Officer may require the assessee to furnish the return within the period specified in the notice.

The proposed amendment will take effect retrospectively from 1.4.89 and will, accordingly, apply in relation to notices issued under section 148 on or after that date. [Clause 41]

Amendment of time limit for completion of assessments and reassessments
Under the existing provisions of the Income-tax Act, the time limit for making an order of assessment is two years from the end of the assessment year in which the income was first assessable. However, in certain circumstances the time is extended, or certain periods are excluded from the period of limitation.

In cases where special audit is ordered, the Assessing Officer is of the opinion that, having regard to the nature and complexity of the accounts of the assessee and the interests of the revenue, it is necessary so to do, he may, with the previous approval of the Chief Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant nominated by the Chief Commissioner or Commissioner in this behalf. The assessee is required to furnish a report of such audit in the prescribed form duly signed and verified by the accountant. In such cases, the period commencing from the date on which the Assessing Officer directs the assessee to get his accounts audited under section 142(2A) and ending with the date on which the assessee furnishes a report of such audit is excluded while reckoning the period of limitation for completion of the assessment. As per the existing provisions, the special audit report is to be submitted within the time allowed by the Assessing Officer subject to a maximum of 180 days.

It has been the experience of the Department that in a few cases where special audit is ordered, the assessees do not co-operate with the accountant as a result of which the report is not prepared and, therefore, not furnished. In such cases the normal time limit of two years is operative and the Assessing Officer does not get any additional time for the purpose of making an assessment because the time taken for furnishing the audit report is excluded only if the report of such audit is furnished. In order to overcome this problem, it is proposed to provide that the period commencing from the date on which the Assessing Officer directs the assessee to get his accounts audited and ending on the date on which the report of such audit was required to be furnished, shall be excluded from the period of limitation.

The proposed amendment will take effect from 1st April,1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years. [Clauses 42]

Modification of provisions containing definitions of certain terms relevant to income from profits and gains of business or profession
Under the existing provisions, the term "actual cost" means the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. The sub-section contains a proviso and eight explanations, which explain this term in various situations. A number of cases have come to notice where the instrument of sale and lease-back (SLB) transactions has been used as a tax planning device to reduce tax liabilities. There have been cases where assets, having nil or nearly nil written down value, have been sold at higher prices, especially, where 100 per cent. depreciation allowance is admissible, and the buyer again claimed depreciation on these assets at the sale value. There have also been cases where such SLB transactions have been effected at a value much higher than the fair market value of the assets. In order to curb such transactions i.e. where an asset has been sold and re- acquired by an assessee by way of lease, hire or otherwise, it is proposed that the "actual cost" for the purpose of deduction of depreciation allowance shall be the written down value at the time of transfer in the hands of the seller.

The proposed amendment will come into effect from 1st April,1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years. [Clause 16]

Modifications of provisions relating to incomes which do not form part of the total income
Under the existing provisions of the Income-tax Act, any sum received under a Life Insurance Policy including the sum allocated by way of bonus on such policy is not included in income. The only exception is in respect of the amount received by a guardian in respect of a policy on life of a handicapped dependant where the dependant predeceases the guardian. The policy of LIC, known as "Keyman Insurance Policy", provides for an insurance policy taken by a business organisation or a professional organisation on the life on an employee, in order to protect the business against the financial loss which may occur from the employee's premature death. The "Keyman" is an employee or a director whose services are perceived to have a significant effect on the profitablity of the business. It has come to notice that a number of companies are using the "Keyman Insurance Policy" as a tax planning device to pass on large sums to their directors and employees, etc. with no tax liability. Therefore, it is proposed to tax any sum received by the company on such policies as profits and gains of business or profession. It is further proposed to tax the surrender value of the policy, endorsed in favour of the employee, or the sum received by him at the time of retirement, as profits in lieu of salary. In cases of other persons such as a Chairman, or a Director, where the employer-employee relationship does not subsist, the surrender value of the policy or the amount received under this policy, is sought to be taxed as "income from other sources". The proposed amendment will come into effect from 1st October, 1996. [Clauses 3, 4, 8, 10 & 20]

Modification of provisions relating to expenditure on eligible projects or schemes
Under the existing provisions of the Income-tax Act, where an assessee incurs any expenditure by way of payment of any sum to a public sector company or a local authority or to an association or institution approved by the National Committee for carrying out any eligible project or scheme, he shall be allowed a deduction of the amount of such expenditure incurred during the previous year. 'Eligible project or scheme' means a project or a scheme for promoting the social and economic welfare of, or uplift of, the public, as the Central Government may, by notification in the Official Gazette, specify in this behalf on the recommendations of the National Committee. No power is conferred on the National Committee in explicit terms to withdraw the approval granted to an association or an institution, or to recommend to the Central Government the denotification of an eligible project or a scheme.

It is generally understood that an authority has power to undo something which it has the power to do. Therefore, the power of approval normally includes the power to withdraw the approval. It is proposed to grant statutory recognition to the aforesaid principle by vesting the requisite powers in the National Committee to withdraw approval, earlier granted to an association or to an institution, and to recommend the withdrawal of notification regarding an eligible project or a scheme to the Central Government. The proposed amendment will take effect from 1st October, 1996. [Clause 13]

Modification of the provisions relating to deduction from profits derived from the business of providing long-term finance
Under the existing provisions of the Income-tax Act, any special reserve created by a financial corporation, engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India or by a public company formed and registered in India, with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent. of the profits derived from such business, is allowed as a deduction subject to certain conditions. An amendment carried out by the Finance Act, 1995, has resulted in allowing the deduction from total income computed before making any deduction under this 'section' and not before making deduction under this 'clause'. As this was not the intention, it is proposed to rectify this error.

The expression "long-term finance" was not earlier defined. It is also proposed to define the expression "long-term finance" was not earlier defined. It is also proposed to define the expression "long-term finance" to mean any loan or advance, where the terms under which monies are loaned or advanced provide for repayment alongwith interest thereof during a period of not less than seven years.

The proposed amendments will take effect from 1st April,1996 and will, accordingly, apply in relation to assessment year 1996-97 and subsequent years. [Clause 14]

Modification of provisions relating to depreciation
The following amendments are proposed to be made:-
  1. Depreciation on fractional ownership -

    Under the existing provisions of the Income-tax Act, depreciation is allowed in respect of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession. The admissibility of the allowance is based upon two conditions, namely, that the asset is owned by the assessee and it is used for the purposes of the business or profession. In the case of Banarasi Das Gupta Vs. CIT, 166 ITR 783 (SC), it was held that there is hardly any scope for holding the view that the benefit of section 10(2)(vi) of the Income-tax Act, 1922, concerning allowance of depreciation would be admissible in respect of fractional ownership of the asset. The honourable Supreme Court further pointed out that under the scheme of the Act, it is the assessee who alone is entitled to maintain such claim of depreciation and it would indeed be difficult within the framework of the claim contained in the statute to maintain a separate value of a portion of the asset to work out depreciation. A large number of big projects are currently being undertaken, in which the assets are financed by a number of companies and, therefore, each of the participating companies owns a fraction of the asset. The asset is subject to wear and tear on use. However, the aforesaid decision of the Supreme Court comes in the way of allowing depreciation to companies who are fractional owners of assets. It is proposed to get over this decision and allow depreciation in respect of fractional ownership of an asset.

  2. Depreciation in case of succession and amalgamation -

    The existing provisions provide for depreciation allowance on assets acquired by an assessee during the previous year and which are put to use for the purposes of business or profession for a period of less than one hundred and eighty days in a previous year. It is provided that the depreciation allowance in such cases will be restricted to fifty per cent. of the amount calculated at the prescribed rates. In the cases of succession in business and amalgamation of companies, the predecessor in business and the successor or amalgamating company and amalgamated company, as the case may be, are entitled to depreciation allowance on the same assets, which in aggregate exceeds the depreciation allowance admissible for a previous year at the prescribed rates. It is proposed to restrict the aggregate deduction for this allowance in a year to the deduction computed at the prescribed rates and apportion the allowance in the ratio of the number of days for which the assets were used by them.

  3. Carry forward and set-off of depreciation -

    In cases where full effect cannot be given to the depreciation allowance in any previous year, owing to there being no profits or gains chargeable for that year, or owing to the profits or gains chargeable being less than the allowance, the allowance or part thereof to which effect has not been given shall be added to the amount of allowance for depreciation for the following previous year and deemed to be part of that allowance for that previous year, and so on for the succeeding previous years. The net effect is that unabsorbed depreciation allowance of a year is added to the depreciation allowance of the next year. Thus, the unabsorbed depreciation allowance, in a case where profits are insufficient in the subsequent years, is carried forward indefinitely. On the other hand, the business losses are allowed to be carried forward for a period of eight years only. In order to promote efficiency in industry and proper management of assets, it is proposed to bring the provisions regarding unabsorbed depreciation at par with business loss for the purposes of carry forward and set-off.

    The proposed amendments will take effect from 1st April,1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years. [Clause 11]

Modification of provisions relating to allowance of weighted deduction in respect of any sum paid for scientific research undertaken under an approved programme
Under the existing provisions of the Income-tax Act, one of the pre- conditions for allowance of weighted deduction is that the sum shall be used for scientific research undertaken under a programme approved in this behalf by the prescribed authority. For this purpose, the prescribed authority is the Director General of Income-tax (Exemptions) in concurrence with the Secretary, Department of Scientific and Industrial Research. It is proposed to delete the requirement of approval of the programme by the aforesaid prescribed authority and the requisite approval to the programme shall be given by the head of the concerned National Laboratory or the University or the Indian Institute of Technology. The proposed amendment will take effect from 1st October, 1996. [Clause 12]

Modification of provisions regarding certain deductions to be allowed on actual payment
Under the existing provisions of the Income-tax Act, deduction of any sum payable by the assessee as interest on any loan or borrowing from any public financial institution, or a state financial corporation or a state industrial investment corporation is allowed in the year in which such interest is actually paid irrespective of the year in which the liability to pay such sum was incurred. It is proposed that deduction of any interest on any loan or borrowing from a scheduled bank would also be allowed on actual payment basis.

The proposed amendment will take effect from 1st April,1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years. [Clause 17]

Provision for concessional tax on income from shares, etc., in Public Sector Companies disinvested by Government
Under the existing provisions of the Income-tax Act, a concessional treatment has been provided to non-resident taxpayers in respect of income arising by way of interest, dividends or long-term capital gains from such bonds or shares of an Indian company which are issued in accordance with a scheme notified by the Central Government and which are purchased in foreign currency. Such income is charged to tax at a rate of 10% only.

It is now proposed to extend this concessional treatment to income by way of interest, dividends or long-term capital gains, on such bonds or shares of a public sector company which are sold either by the Central Government or by a State Government to a non-resident assessee in foreign currency.

The proposed amendment will take effect from 1st April, 1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years. [Clause 36]

Enhancement of the limit for payment of advance tax
Under the existing provisions of the Income-tax Act, liability for payment of advance tax during a financial year arises when the amount of such tax payable during that year is one thousand five hundred rupees or more.

The limit of one thousand five hundred rupees was fixed in1988. The low limit causes inconvenience to small tax payers and increases workload for banks and the Income-tax Department.

It is, therefore, proposed to raise the threshold limit for payment of advance tax from the present one thousand five hundred rupees to five thousand rupees.

The proposed amendment will take effect from the 1st October, 1996. [Clause 51]

Payment of advance tax relatable to capital gain etc., to be allowed in the remaining instalments Under the existing provisions of the Income-tax Act, penal interest is not charged on account of underestimate or failure to estimate either the amount of capital gain or of income from winnings from lottery, horse races, etc., if the assessee pays the whole of the tax payable in respect of such incomes, as part of the instalment of advance tax which is immediately due.

This requirement of paying the whole of the tax causes hardship as the entire tax has to be paid on a short notice. In many cases, even the sale proceeds of the capital asset may not have been received before the advance tax payment becomes due.

It is, therefore, proposed to allow the assessees to pay the tax relatable to the capital gain or to income from winnings from lottery, horse races, etc., as part of the remaining instalments of advance tax which are due in the financial year.

The proposed amendment will take effect from 1st April, 1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years.

It is also proposed to omit the second proviso to sub-section (1) of section 234C(1) as it was applicable only to assessment year 1991-92. [Clause 52]

Registration of charitable and religious trusts
Under the existing provisions of the Income-tax Act, exemption from income-tax in respect of the income of a charitable or religious trust or institution is available only if certain conditions are satisfied. One of these conditions is that the person in receipt of the income shall make an application for registration of the trust or institution in the prescribed form and in the prescribed manner to the Chief Commissioner or Commissioner of Income-tax within the specified time. However, there is no provision in the Income-tax Act for processing of such an application and granting or refusal of registration to the concerned trust or institution.

Hence, it is proposed to provide for a procedure to be followed for grant of registration to a trust or institution, according to which, the Chief Commissioner or Commissioner shall call for documents and information and hold enquiries regarding the genuineness of the trust or institution. After he is satisfied about the charitable or religious nature of the objects and genuineness of the activities of the trust or institution, he will pass an order granting registration and if he is not so satisfied, he will pass an order refusing registration, subject to the condition that an opportunity of being heard shall be provided to the applicant before an order of refusal to grant registration is passed by the Chief Commissioner or Commissioner and the reasons for refusal of registration shall be mentioned in such order. The order granting or refusing registration has to be passed within six months from the end of the month in which the application for registration is received by the Chief Commissioner or Commissioner and a copy of such order shall be sent to the applicant.

It is also proposed to provide that the grant of registration shall be one of the conditions for grant of income-tax exemption.

These amendments shall take effect from the 1st April, 1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years. [Clause 5 & 6]

Omission of redundant sections of Chapter VI-A of the Income-tax Act, 1961
It is proposed to omit sections 80CC, 80J and 88A of the Income-tax Act which have become redundant. The omission of sections 80CC, 80J & 88A from the Income-tax Act shall take effect from 1.4.1993, 1.4.1989 and 1.4.1994 respectively. [Clauses 21, 28 & 33]

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