Report No. 12
Notes to clause 33
Existing section 10(2)(vib) has been incorporated here. An important change has been made with reference to the year in respect of which the development rebate is to be allowed. The existing section allows it only for the year of acquisition or installation; but it seems desirable to allow the rebate in the next year, if the ship or machinery is actually put to use in the next year.
The proviso to existing section 10(2)(vib) has been transferred to a separate clause relating to conditions for depreciation and development rebate1.
1. Vide draft clause 34(3).
The changes made by the Finance Act, 1958, have been given effect to.
Notes to clause 34
Sub-clause (1)- The provisos to section 10(2) (vi) and section 10(2)(vib) of the existing Act lay down that the deduction under these clauses is to be allowed only if the prescribed particulars are furnished. The draft embodies this requirement and extends it to deductions under existing section 10(2)(via) and 10(2)(vii) also, since these cases should stand on the same footing so far as the point under discussion is concerned.
Sub-clause (2)-Item (1)- Is new. It embodies a provision contained at present in the rules [vide rule 8, First and Second Provisos, Indian Income-tax Rules, 19221, as to depreciation for user for part of the year.1
1. See also last para of notes to clause 38.
Item (ii)- Incorporates the limitation contained in the last line of existing section 10(2) (via). If the deduction itself becomes obsolete, this might have to be deleted.1
1. See also notes to draft clause 32(1)(iii).
Item (iii)- Corresponds to existing section 10(2) (vi), proviso (c), under which the aggregate allowance for depreciation should not exceed the original cost. The existing section applies to the allowances under section 10(2) (vi) and 10(2) (via) only. The draft will cover section 10(2) (vii), also, since it could not have been the intention of the legislature to exclude that allowance from the rule that the aggregate of such allowances should not exceed the original cost.
Item (iv)- Where an asset is sold etc., in the previous year, the allowance under section 10(2)(vii) will be sufficient and there will be no need for an allowance under existing section 10(2)(vi) or 10(2)(via). The draft provision has therefore been added to avoid a double allowance. Since the draft was prepared, the Finance Act, 1958, has also incorporated this provision in the Act. But it would, seem that "furniture" should not be subject to the restriction embodied in this clause, since existing section 10(2) (vii) does not apply to furniture. The draft retains "furniture" in view of the Finance Act, but the matter requires to be considered.
Sub-clause (3)- A part of existing section 10(2) (vib), as amended by the Finance Act, 1958, has been incorporated here. The changes are mostly verbal and consequential; but an important point which requires to be mentioned is, that, the words "and if any such ship, machinery or plant is sold ", occurring in the latter half of the proviso to existing section 10(2)(vib) have, in the draft, been taken as applicable to all ships etc., in respect of which development rebate has been obtained, and not confined to the ships etc. to which clause (b) of that proviso applies. This wider interpretation seems in consonance with section 35(11) (as inserted by the Finance Act, 1958) which is applicable to all ships etc.
The provisions contained in existing section 10(2B) and (2C) have been omitted in the draft. It is understood that Government does not want to enforce these provisions for the future; in any case, the changes made in existing section 10(2){vib) render these provisions superfluous, at least so far as development rebate is concerned.
Notes to clause 35
Sub-clause (1)-Item (i) needs no comments. Items (ii) and (iii) represent section 10(2) (xiii), which has been broken up for clarity. Item (iv) corresponds to section 10(2)(xiv), relating to allowance for capital expenditure on scientific research. For simplicity, the broad principle for allowing such expenditure as a deduction, embodied in existing section 10(2)(xiv), first para, earlier portion, has been embodied here. The rest of the provisions of section 10(2)(xiv), and its provisos deal with (i) detailed conditions and provisions for deduction, or (ii) rules regarding profit on sale of the asset or (ii) interpretation. These have been dealt with separately.1
1. Vide draft clause 35(2) and draft clauses 41(3) and 42(5) respectively.
Sub-clause (2) - Item (i) & Explanation.- These correspond to the existing provisions in section 10(2)(xiv), first para and first proviso. An attempt has been made to simplify the expression and make it direct. No change has been made in the substance. As the allowance is granted in both cases (i.e., whether the expenditure was incurred before or after commencement of business), it will suffice to say so, without making separate elaborate provision for the two cases.
The draft Explanation states the first Proviso in a different form, which is positive.
Item (ii)- needs no comment, except that the affirmative provision in existing section 10(2) (xiv), 2nd Proviso (a) (ii), has been made to precede the negative provision in section 10(2)(xiv), 2nd Proviso, (a)(i). The deduction allowed under this item takes the place of the 1/5th in item (i). This is made clear in the draft.
Item (iii)- Language has been simplified. Item (iv)-Needs no comments.
Item (v)- Corresponds to the earlier portion of section 10(2)(xiv), 2nd Proviso (e). The latter portion has been transferred to the interpretation clause.1
1. Vide draft clause 42(1), Explanation I.
Sub-clause (3)- needs no comments. The contents of the Explanation to section 10(2) (xiv), have been transferred to the interpretation clause.1
1. Vide draft clause 42(5).
Sub-clause (4)- needs no comments.
Notes to clause 36
Sub-clause (1)- deals with deductions for insurance of stocks and stores.
Sub-clause (2)- Item (i)-needs no comments except that the wording in the existing section 10(2)(x), proviso, has been sought to be improved. The existing phrase, "the amount is of a reasonable amount" unnecessarily repeats the word "amount".
Item (ii)- This is new and has been added to help an assessee to get a deduction where bonus is paid in pursuance of any award of an industrial or other tribunal even if the amount is not reasonable, that is to say, even if the conditions in the existing section 10(2)(x), proviso, are not satisfied.
Sub-clause (3)- corresponds to existing section 10(2) (iii). The proviso has been transferred to the clause on amounts not deductible1, in order to simplify the sub-clause and make the arrangement logical.
1. Draft clause 40(a)(i).
Sub-clause (4)- Section 58R, first para, which pertains to the deduction of the contribution of an employer to an approved superannuation fund, should really find a reference amongst deductions, and has therefore been referred to here.
Sub-clause (5)- needs no comments.
Sub-clause (6)- corresponds to existing section 10(2) (xi) for bad debts. The changes made are explained below:-
Opening lines- Instead of the words "bad and doubtful debts" the words "debts or parts thereof that are established to have become bad debts" have been used. The word "doubtful" is unnecessary and does not add anything to what is conveyed by "bad".
Item (i)- A condition has been added that the debt must have been taken into account in computing the income for an earlier year. This follows section 11(1)(e) of the Canadian Income-tax Act and section 63(1)(a) of the Australian Income-tax Act.
Item (ii).- The requirement expressed by the words "not exceeding the amount actually written off" etc., appearing at the end of existing section 10(2) (xi), first para, has been given here the shape of a condition.
First Proviso- This embodies the latter half of the existing proviso. [The earlier half of the existing proviso deals with "profit", not "deduction", and is therefore transferred to a separate clause1.]
1. Draft clause 41(4).
Second Proviso- is intended to meet a case like this:-
A debt is written off in the accounting year 1957-58. At the time of the assessment for that year, the Income-tax Officer does not allow it as a deduction, on the ground that it is not yet established to have become a bad debt. But when the assessment for a subsequent accounting year, say 1958-59, takes place, the Income-tax Officer has no doubt left as to its irrecoverability then. The debt will be treated as a bad debt for the account year 1958-59, and the mere fact that it was written off in an earlier year should not bar the grant of a deduction.
This result could have been brought about by suitable words in draft item (ii) also (e.g., by adding "or earlier previous year" there). But a proviso has been preferred in order to avoid obscurity.
Notes to clause 37
This embodies section 10(2)(xv).
The existing section uses the words "not being an allowance of the nature described" elsewhere; the word "allowance" has, in the draft, been replaced by the word "expenditure" which is more appropriate in the context.
Notes to clause 38
Sub-clause (1)- The limitation contained in existing section 10(2), Proviso, regarding deduction for rent where a part of the premises is used as a dwelling house, has been incorporated here in para (a). Similar limitation regarding deduction for repairs, contained in existing section 10(2)(ii), Proviso, has been embodied in para (b).
In draft para (a), the annual value of the part used for the business has been mentioned, in preference to the annual value of the part used as a dwelling house mentioned in the existing section, as the former seems to be a more direct way of stating the rule.
The words "as the Income-tax Officer may determine" do not occur in the existing section 10(2) (ii), proviso, but have been added in draft para (b) to make the matter clear and to have uniformity [Cf existing section 10(2)(i), Proviso].
See also notes below under sub-clause (2).
Sub-clause (2)- Existing section 10(2) (ix), provides for deduction for land revenue, etc. and says that the deduction is for that "part" of the premises which is used for the business. The provision for deduction has already been dealt within the draft clause on deductions. The present draft sub-clause deals with the limitation regarding "part".
The provision has been made more elaborate, on the lines of existing section 10(2)(i), Proviso (See notes to sub-clause (1) above).
[Logically speaking, draft sub-clause (1), for section 10(2) (i) and (ii) Proviso (for deduction for rents and repairs where a part of the premises is used as residence) should also be framed on the same lines as draft sub-clause (2). The existing provision on these points is confined to cases where a part is used as a "dwelling house". It does not deal with a case where the part is used not as a dwelling house but for some other purpose not connected with the business. However, no change has been made in this respect in draft sub-clause (1), in order to avoid any alteration in tax liability.]
Sub-clause (3)- corresponds to existing section 10(3). The word "wholly" has been replaced by the word "exclusively". It has been held1 that the words "not wholly mean that the building is not used exclusively for the purposes of the business, but for other purposes also. (These words, the court held, have nothing to do with the period of user during the previous year.) The draft gives effect to this decision.
1. C.I.T. v. Dalmia Cement Ltd., (1945) 13 ITR 415.
The section has also been made more elaborate: by providing that the Income-tax Officer is to determine the amount with reference to the extent to which the user was for the purpose of the business.
It must have been noticed that the Act does not deal with all cases of partial user in the context of deductions.
User may be partial in point of-
(i) Space, i.e., only a part of the building is used for the business;
(ii) purpose, i.e., only some of the purposes of the user are business purposes; or
(iii) duration, i.e., the building is used only for a part of the previous year.
(Moreover, there may be partiality both in point of space and time, time and duration, and so on.)
The Act deals with (i) and (ii) only, and that too only for certain kinds of deductions. It does not deal in so many words with (iii). The draft also does not go beyond the Act, except that an earlier clause1 embodies a provision contained in the rules regarding user which is partial in point of duration.
1. See draft clause 34(2)(i).
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