Report No. 12
Notes to clause 39
No change has been made in existing section 32A.
Notes to clause 40
This clause collects together all amounts not deductible in computing the profits and gains of business etc. The scheme adopted is to proceed from the general to special. Thus, rules common to all assessees come first (para, (a)], while those applicable to particular kinds of assessees are placed after them.
Para (a)-Item (i)- An attempt has been made to simplify the language. The last 17 words of the existing section 10(2) (iii) Proviso, relating to interest paid to a partner have been omitted, as para (b) of present draft clause will cover it.
Item (ii)- needs no comments.
Items (iii) & (iv)- need no comments except that slight verbal changes have been made to secure clarity.
Para (b)- Needs no comments.
Para (c)- The words "expenditure or" have been added in item (ii) in order to make it clear that moneys actually spent (by a person having a substantial interest in a company) are also excluded from deductions.
Para (d)- embodies the last line of clauses (a) and (b) of the Explanation to existing section 8. The bar against double deduction of such amounts has been embodied in the draft for that section,1 but has been repeated here in order to make the list exhaustive.
1. Draft clause 20(ii).
Notes to clause 41
There are provisions scattered at various places in section 10, enacting that a certain amount shall be treated as a profit of business and taxed accordingly. An attempt has been made here to collect all of them together.
Sub-clause (1)- Needs no comments.
Sub-clause (2)- is an attempt to state in a simple form the propositions embodied in the second and the fourth provisos to section 10(2)(vii). The second proviso is confined to assets which are sold and bring profits, while the fourth proviso deals with assets which are discarded etc., and bring profits. The draft sub-clause (read with the draft Explanation 1) combines both these cases.
It must, of course, be noted that the existing fourth proviso is highly involved in language, and does not disclose easily the rule that is to be applied. But there can be no doubt that the true rule is this-that if the scrap value plus the amount of insurance moneys etc., exceeds the written down value, then the excess is taxed as a business profit to the extent to which the original cost is not exceeded.
The proviso as drafted is faithful, to this rule. Moreover, it avoids the ambiguity arising from the existing words "so much of the excess as does not exceed the difference between the original cost and the written down value less the scrap value". [The ambiguity arises by reason of the fact that the word "less" can be read either with (i) excess, or with (ii) difference, or with (iii) written down value,]
The following analysis of the fourth proviso is intended to show how each part of the proviso has been dealt with in the proposed draft.
|1. "Provided futher....exceeds the difference between the written down value and the scrap value 1. no amount shall be allowed under this clause."||The italicised words are unnecessary, since deduction is allowed 'only where the written down value is not exceeded. [See existing section 10(2)(vii), 3rd Proviso]|
|2. "and so much of the excess shall be deemed to be profits".||2. Incorporated in the present draft sub-clause (2).|
|3. "and so much of the excess as does not exceed the difference between the original cost and the written down value less the scrap value."||3. The true rule behind the italicised words has been incorporated in a simplified form in the present draft sub-clause (2), as already explained in the notes.|
The function of draft Explanation 1 has been explained above. Draft Explanations 2 and 3 do not need any comments.
Sub-clause (3)- needs no comments. The changes are only verbal. The words "whether during the continuance of the business" have been added in order to clarify the scope of the provision, on the lines of the existing section 10(2)(vii), 2nd Proviso.
Sub-clause (4)- The addition of the words "or part of debt" is consequential on the draft adopted for the main para of section 10(2) (xi). Other changes are verbal.