Report No. 12

List I

Summary Of Important Changes Proposed In The Income-Tax Act And Embodied In The Draft Clauses In Appendix I.

Existing Section 2. [Draft Clause 2(5)1.-The definition of "assessee" has been amplified to cover all the situations in which a person becomes assessable for, or liable for the payment of, tax or other sum.

Existing Section 2. [Draft Clause 2].-Several new definitions have been added, important amongst them being "assessment", "assessment year", "average rate of income-tax and super-tax" and "tax".

Existing Section 2(4A). [Draft Clause 2(10)].-Item (iii) of the existing definition of Capital asset, excluding land from which the income derived is agricultural income, has been redrafted and replaced by the words "any agricultural land in India".

Existing Section 2(8). [Draft Clause 2(25)].-The existing definition of "Magistrate", which includes a Second Class Magistrate empowered by the Central Government (or in the State of Jammu and Kashmir by the State Government) to try offences under the Act, has been altered so as to confine the power to First Class Magistrates throughout India.

Existing Section 3. [Draft Clause 3(1)].-The present enumeration of the chargeable entities that is, "individual, Hindu undivided family" etc. has been replaced by the word "person". This will cover all entities having legal personality besides the entities enumerated in the General Clauses Act.

Existing Section 4(3)(i). [Draft Clauses 12(2), 12(3), 12(4)].-With reference to the exemption for income derived from property held under trust etc. for religious or charitable purposes, the following changes have been made:-

(i) it has been made clear that the exemption is available in the case of a business, held on trust, subject to the conditions given in the existing proviso (b);

(ii) it has also been made clear that the exemption is available to business carried on by institution not subject to trust.

Existing Section 4(3)(vi). [Draft Clause 11(15)].-With reference to the exemption for special allowances or benefits granted to an employee to meet expenses wholly and necessarily incurred in the performance of the duties of an office or employment, the words "wholly and necessarily" have been replaced by the words "wholly and exclusively". The requirement of necessity has been omitted.

Existing Section 4(3)(x) paras. (b) and (d). [Draft Clauses 11(7)(ii) and 11(7)(iv)].- The exemption for income received by a Consul General, Consul or Trade Commissioner etc. is at present available to Indian citizens also. A requirement that the person, so exempted should not be an Indian citizen has been added, on the lines of existing section 4(3)(x) (c) and (e).

Existing Section 4(3)(xi). [Omitted in draft].-The exemption in respect of salaries of members of Nepalese military forces serving with the armed forces of India or of members of Indian State Forces, has been omitted as obsolete.

Existing Section 4(3)(xiv). [Draft Clause 11(8)].-The exemption in respect of income received by an employee of foreign enterprise is at present available to Indian citizens. Under the draft it has been confined to foreigners.

Existing Section 4(3)(xiva). [Draft Clause 11(9) Explanation 1].-The exemption in respect of salaries received by foreigners for services rendered as technicians has been extended to services rendered before the actual commencement of the business.

Existing Section 4(3). [Draft Clauses 11(17) and 11(24)].-Certain exemptions enjoyed at present by virtue of notifications under section 60 have been added in the Act. These relate to scholarship, and income of Universities or other educational institutions not established for profit.

Existing Section 4A(a)(iii). [Draft Clause 6].-The condition for residence in the case of a person who has been in India within four preceding years, at present, requires the presence of that person in India "otherwise than by an occasional or casual visit". This condition has been made more specific, by requiring the person to be present for at least 30 days in the previous year concerned.

Existing Section 4A(a)(iv). [Draft Clause 6].-The existing provision authorising the Income-tax Officer to treat a person as a resident if he is satisfied that the person is likely to remain in India for not less than three years has been omitted.

Existing Section 4A. [Draft Clause 6].-A provision has been made to the effect that a person who is resident in respect of one source of income is to be treated as resident for all other sources.

Existing Section 5(6). [Draft Clause 131(3)(b)].-A new provision regarding transfer of cases from one Appellate Assistant Commissioner to another has been added.

Existing Section 5(7A). [Draft Clause 132(2)].-With reference to the power of the Board or the Commissioner to transfer cases from one Income-tax Officer to another, a provision has been added requiring opportunity to be given to the assessee before the transfer is ordered (except in special cases).

Existing Section 5A. (Omitted).-It is proposed to abolish the Appellate Tribunal. Appeals from the Appellate Assistant Commissioner will lie to the High Court.

Existing Section 7(1). [Draft Clause 17(1)].-Salary received from Foreign Government has been specifically made taxable under the head "Salary".

Existing Section 7(1). [Draft Clause 15(c)].-Specific provision has been made in respect of salaries paid in arrears.

Existing Section 7(2)(iii). [Draft Clause 16(iv)].-The allowance for expenses incurred by an employee in the performance of his duties has been redrafted by omitting the words "necessarily" from the requirement that the employee should be required to spend the amount "wholly, necessarily and exclusively" in the performance of his duties.

Existing Section 8. [Draft Clause 18].-Income assessable under the head "Interest on securities" is at present chargeable if it is "receivable". This has been replaced by a provision charging such interest when "received". The receipt basis has thus been substituted in place of the present provision.

Existing Section 8. [Draft Clause 21(ii)].-Sums expended for realising interest on tax-free securities have been disallowed as a deduction in computing the income chargeable under the head "Interest on securities".

Existing Section 8. [Draft Clause 21(iii)].-Interest paid on moneys borrowed for the purpose of investment in tax-free securities has been made inadmissible as a deduction in computing income under the head "Interest on securities".

Existing Section 8. [Draft Clause 101].-Reasonable sums spent on realising interest on tax-free securities are proposed to be allowed to be deducted, for the purpose of super-tax, in computing income chargeable under the head "Interest on Securities". If money has been borrowed for investment in such securities, then interest paid on the money so borrowed is also proposed to be allowed to be similarly deducted.

Existing Section 9(1). [Draft Clause 23(2)].-Rules for furnishing guidance to the Income-tax Officer in determining the annual value of tenanted property have been added.

Existing Section 9. [Draft Clause 24(xii)].-Irrecoverable rent has bean made an admissible deduction for computing income chargeable under the head "Income from property". (At present the deduction is admissible by virtue of a notification only).

Existing Section 10(2)(vib). [Draft Clause 33, main Para.].-The provision relating to development rebate has been changed as regards the year in respect of which the rebate is to be allowed. The existing section allows the rebate only for the year of acquisition or installation; under the provision as proposed, it will be available in the next year, if the ship or machinery is actually put to use for the first time in the next year.

Existing Section 10(2)(xi). [Draft Clause 36(6), 2nd Proviso].-If the bad debts written off in an earlier accounting year are not allowed by the Income-tax Officer for that year, they will be allowable for a subsequent accounting year, if the Income-tax Officer is then satisfied about the irrecoverability of the debt. (As to the converse case, see below under existing section 35.)

Existing Sections 10(2B) and (2c). (Omitted in the draft).-The provisions for deposit of profits by companies have been omitted.

Existing Section 10(2). [Draft Clause 36(2)60].-A new provision has been added whereunder in computing income from business, profession or vocation, bonus paid in pursuance of the award of an Industrial Tribunal will be allowed as a deduction, even if the amount of the bonus is not reasonable.

Existing Section 10(2). [Draft Clause 36(4)(b)].-A new provision has been added whereunder contributions made by an employer to funds established for the benefit of his employees have been listed as admissible deductions for computing income from business etc., even if the fund is not a recognised provident fund or an approved superannuation fund, under certain conditions.

Existing Section 10. [Draft Clause 43].-A new provision has been added to the effect that buildings constructed by an employer for the residences of his employees should be treated as buildings used for the purpose of the employer's business, if the occupation by the employees of the buildings is subservient to and necessary for the purpose of the employees' duties.

Existing Section 12B. [Draft Clause 53].-A new provision has been added laying down rules for estimating the value of the consideration received in a transaction of exchange. (This is with reference to charging of tax under 'Capital gains'.)

Existing Section 128(2), 1st Proviso. [Draft Clause 54].-The scope of the existing provision, relating to power of the Income-tax Officer to treat the fair market value of a capital asset as the value of the consideration for which the sale etc. of the asset is made (where the sale is effected with the object of avoidance etc. of the liability of the assessee to tax under capital gains), has been narrowed down by confining the power to a case where the actual consideration is not correctly recited in the deed of sale etc. On the other hand, the scope has been widened by deleting the requirement that the transaction must have been entered into with a person directly or indirectly connected with the assessee.

Existing Section 13. [Draft Clause 150(1)].-It has been made clear that where the accounts of the assessee are not correct and complete, the assessment will be a best judgment under section 23(4). The power to compute the income "upon such basis and in such manner as the Income-tax Officer may determine" (existing section 13, Proviso) will be confined to a case where the accounts are correct and complete.

Existing Section 16(1)(b). [Draft Clause 69(31].-A new provision has been added wherein interest paid by an assessee on money borrowed for investing his capital in a firm has been listed as an admissible deduction in computing his income comprising his share in the firm's profits.

Existing Section 16(1)(c). [Draft Clause 64].-It has been made clear that section 16(1)(c), 3rd Proviso, which removes from the scope of the section income arising by virtue of a settlement etc. which is not revokable for a period of more than six years etc., does not apply in a case where the assets remain the property of the settlor etc. In other words, where there is no transfer of the corpus, the proviso will have no application.

Existing Section 16(3)(b). [Draft Clause 67(v)].-The existing provision, whereunder income arising from assets transferred to any person etc. for the benefit of a minor child of the assessee is regarded as the assessee's income in certain cases, has been modified so as to exclude cases where the minor child is a married daughter.

Existing Section 18(3A)(3B). [Draft Clauses 201(b) and 204(1)(b).-It has been made clear that the rate applicable for deduction of super-tax is one in force for a company which has not made the arrangements for deduction of super-tax referred to in section 18(3D).

Existing Section 18(7). [Draft Clause 209].-A new provision has been made imposing a first charge upon the assets of a person who, after deducting tax under the Act, fails to pay it into the Government Treasury.

Existing Sections 18(7) and 7(1), 2nd Proviso. [Draft Clause 213].-A general provision has been made to the effect that where tax is deductible at source, the assessee shall not be called upon to pay the tax himself unless he has received the income without such deduction. (The existing provision is confined to salary.)

Existing Section 18A(1). [Draft Clause 215(3)].-A provision has been added to the effect that advance payment of tax will not apply in respect of income-tax on dividends.

Existing Section 18A(4), proviso. (Draft Clause 221).-The rate of interest to be paid by an assessee who does not pay advance tax on commission receipt within fifteen days of the date on which the income is received, has been reduced from 6 per cent. to 4 per cent.

Existing Section 18A(6). [Draft Clause 223(1)].-Interest payable by an assessee in a case where the tax estimated by him falls short of 80 per cent. of the tax regularly assessed, is made to run not from the 1st day of January of the year of payment but from the 1st day of April of the next financial year.

Existing Section 18A(7). [Draft Clause 224].-The rate of interest payable by an assessee in cases of under-estimate of advance tax has been reduced from 6 per cent. to 4 per cent.

Existing Section 22(1). [Draft Clause 143(1)(a)].-Instead of the general notice requiring all persons to submit a return of income, a provision has been made for the compulsory submission of the return by every person who is assessable in respect of his income or in respect of any other person's income. The return will have to be submitted by the 30th June, each year.

Existing Section 22(1). [Draft Clause 143(1)(b)].-A provision has been added to the effect where a return of income is sent to an Income-tax Officer who has no jurisdiction over the assessee, he shall forward it to the Income-tax Officer having such jurisdiction.

Existing Section 23. [Draft Clause 146(2)].-A new provision has been added clarifying the power of the Income-tax Officer to make such inquiries as he may think necessary for the purpose of assessment.

Existing Section 23. [Draft Clause 146(3)].-A new provision has been added requiring the Income-tax Officer to give the assessee an opportunity of rebutting any material which is proposed to be used for the purpose of assessment. (An exception has however been made for "best judgment" assessment.)

Existing Section 23. [Draft Clause 147(g)].-The power of the Income-tax Officer to take into account material gathered by him (in addition to the evidence produced in the case) for the purposes of assessment, has been clarified.

Existing Section 23(4). [Draft Clause 148(1)].-It has been made clear that a "best judgment" assessment is to be made after consideration of the material which the Income-tax Officer has gathered.

Existing Section 23. [Draft Clause 149].-An indication of the material which the Income-tax Officer may use in an assessment under section 23(3) or 23(4), has been given.

Existing Section 24(1). [Draft Clause 72].-A specific provision has been added laying down the right of set off of loss from one business against profits in any other business.

Existing Section 24(1). [Draft Clause 73(1) and 75].-The provision relating to set off of losses has been modified in respect of set off against capital gains. A loss sustained under any head other than capital gains cannot be set off against capital gains, under the provision as proposed.-

Existing Section 24A. [Draft Clause 184(6)].-In respect of the assessment of a person about to leave India, it has been provided that the period of notice to be given by the Income-tax Officer may be shortened even in respect of the assessments for earlier previous years.

Existing Section 24A. [Draft Clause 184(7)].-For the assessment of a person about to leave India, a time limit of three months has been provided for completing the assessment, where the assessment is made under the special procedure given in existing section 24A.

Existing Section 25A. [Draft Clause 181(4)].-The section relating to partition of a Hindu undivided family has been made applicable in respect of partial partition also.

Existing Section 25A. [Draft Clause 181(7)].-A new provision has been added laying down which Income-tax Officer is entitled to assess a Hindu family after its partition.

Existing Section 25A. [Draft Clause 181(8)].-The provision relating to assessment after partition has been extended to penalties and other sums.

Existing Section 25A. [Draft Clause 181, Expin.].-A definition of partition has been added.

Existing Section 26A. [Draft Clause 191(4)].-It has been made clear that an application for the registration of a firm may be made even alter the dissolution of the firm.

Existing Section 26A. [Draft Clause 191(4)].-The provision (at present contained in the rules) relating to the time within which a firm should be registered has been modified. It has been provided that the application should ordinarily be made before the expiry of the previous year in respect of which registration is being sought.

Existing Section 26A. [Draft Clause 191(1)].-The provision requiring that the individual shares of the partners should be "specified in the partnership deed" has been altered, so as to allow registration where the shares, though not specified in the instrument, can be ascertained from that instrument or from the partnership deeds of any connected firms.

Existing Section 26A. [Draft Clause 191(7)].-The provision (at present contained in the rules) relating to renewal every year of the registration of a firm has been modified. So long as there is no change in the constitution of the firm or the shares of the partners, a formal application for renewal will not be necessary and it would suffice if the firm files a declaration, with the return of the income, to the effect that there has been no change as aforesaid.

Existing Section 26A. [Draft Clause 192(2)].-A provision prohibiting the Income-tax Officer from rejecting an application for registration of a firm on technical grounds has been added.

Existing Section 26A. [Draft Clause 192(4)].-A time-limit has been provided within which an application for registration of a firm must be disposed of by the Income-tax Officer.

Existing Section 26A. [Draft Clause 193(1)].-It has been made clear that the only ground on which the registration of a firm can be cancelled is misrepresentation. It has also been provided that the firm must have an opportunity of being heard before cancellation, and that cancellation can be ordered only with the previous approval of the Inspecting Assistant Commissioner.

Existing Section 26A. [Draft Clause 193(5)].-A time limit has been laid down within which Registration of a firm can be cancelled.

Existing Section 30(1). [Draft Clause 254].-It has been made clear that an objection as to the status under which the assessee is assessed can be raised by way of appeal.

A new provision authorising appeals in respect of orders passed under existing Section 35 (rectification of mistakes etc.) has been added.

Various orders relating to interest passed under section 18A (advance payment of tax) have been made appealable in appropriate cases.

The following orders have been made appealable:-

(1) An order passed by the Income-tax Officer on an assessee's application for withdrawal or cancellation of a recovery certificate issued to the Collector;

(2) An order passed by the Income-tax Officer refusing an assessee's request to treat him as not in default in view of an appeal.

Existing Section 3]. [Draft Clause 259. Expl.].-It has been made clear that an Appellate Assistant Commissioner, in disposing of an appeal is not confined to the grounds raised by the appellant in the appeal and may redetermine any matter which fell to be decided by the Income-tax Officer in the course of the proceedings which led to the order in appeal.

Existing Section 33. [Draft Clause 260(1)].-Appeal to the Appellate Tribunal is replaced by appeal to the High Court, and the Tribunal is to be abolished.

Existing Section 33. [Draft Clause 260(1)].-It has been made clear that an order passed by the Appellate Assistant Commissioner rejecting or refusing an appeal without a decision on merits is appealable.

Existing Section 34(1), 1st Proviso, item (ii). [Draft Clause 155(1)(a)].-The power to reopen an assessment any time, where the income that has escaped assessment in the past amounts to one lakh of rupees or more, has been modified.,

Only the incomes for the sixteen assessment years prior to the year in which a notice under section 34 is issued will, it is proposed, be taken into account in arriving at the figure of one lakh of rupees or more. It has, however, been added that where the income which escaped assessment in a single assessment year is at least fifty thousand rupees, the assessment for that year can be reopened at anytime.

Existing Section 34(3). [Draft Clause 160(1)(b)].-A new provision has been added prescribing a time-limit of four years for the completion of an assessment in the case of a notice under section 28(3) read with 28(1)(c) (penalty for concealment of income etc.).

Existing Section 34(3). [Draft Clause 160(1)(c)].-It is proposed to allow the Department a period of at least one year for the completion of an assessment in a case where an assessee files a return or revised return under section 22(3).

Existing Section 34(3). [Draft Clause 160(2)].-A new provision has been added prescribing a time-limit of four years for the completion of an assessment under section 34(1) (a) (i.e., assessment for income which escaped assessment by reason of the assessee's omission or failure to disclose the material facts). The time-limit will be counted from the end of the financial year in which the notice was issued.

Existing Section 34(3). [Draft Clause 160, Expin. 1].-A provision has been added to the effect that while computing the period of limitation laid down by the Act for the completion of assessments, any period during which assessment proceedings were stayed by an order of a court will be excluded.

Existing Section 35. [Draft Clause 162(2)].-A new provision has been added empowering the revision of the assessment of a member of an association in a case where the assessment of the association itself is revised.