Report No. 12
Changes Recommended In The Income-Tax Act But Not Embodied In Appendix I Besides the changes already embodied in the draft proposals in Appendix I, the following changes are recommended in the Act, (These have not been embodied in the draft proposals in Appendix I).
The reasons in support of these changes have been stated below, or, in the body of the report or the notes to the relevant draft clauses:-
(1) Existing Section 4(1)(b)(iii).-The provisions for taxing the income of a resident which accrued outside India in past years and is brought into India in the accounting year, should be deleted.1
(2) Existing Section 4(1), 2nd Proviso 4B, sections 42(2) and 44D.-The category "not ordinarily resident may be totally deleted.2
If the provisions relating to persons not ordinarily resident are retained, some clarification of the existing definition is necessary, so as to settle the conflict of decisions mentioned in the body of the report.3
(3) Existing Section 4(1), Expl. 4.-The provision relating to income which accrued in a Part B State or a merged territory before the extension of the Income-tax Act thereto and which is brought into any other part of India thereafter, should be omitted, as absolute.4
(4) Existing Section 4(1)(i).-The existing words "subject to the provisions of clause (c) of sub-section (1) of section 16", contained in existing section 4(3) (i), opening line, should be deleted.5
(5) Existing Section 5(8).-Whether the provision authorising the Director of Inspection, the Commissioner etc. to issue instructions to subordinate officers should be retained, may be considered.6
(6) Existing Section 7(1), 1st Proviso.-The limit of one-fifth of the salary laid down at present in respect of rebate or sums deducted from salary for deferred amunities etc.. should be raised to one-fourth, on the lines of section 15(3) as amended by the Finance (No. 2) Act, 1957.7
(7) Existing Section 7(2)(iii).-In existing section 7(2) (iii), the words "wholly, necessarily and exclusively in the performance of his duties" may be replaced by suitable words connoting expenses reasonably incurred in the performance of duties.8
(8) Existing Section 9(2), 3rd Proviso.-The deduction of one-half of the taxes levied by a local authority is at present allowed only in respect of property occupied by a tenant. No such deduction is allowed where the property is occupied by the owner himself. There is, however, no reason why this deduction should not be available in the case of property occupied by the owner. There is no apparent justification for making a distinction between the two classes of properties.9
(9) Existing Section 10(2)(vi).-Certain special statutes lay down the rates of depreciation for undertakings governed by those statutes. It has been suggested that the rates of depreciation allowed by such statutes for the purposes of those statutes should be made applicable for purposes of income-tax also, in relation to those undertakings. If the same rates are adopted, the assessees owning such undertakings would be saved a lot of trouble and duplication of labour.
This question requires consideration by the Government.10
(10) Existing Sections 12(3) and 12(4).-Where machinery, plant or furniture is let on hire and the income from hire is assessed under head "Income from other sources", the Act allows the assessee certain deductions on the lines of income from business. The list of deductions so allowed, as given in existing sections 12(3) and 12(4), does not mention the deductions referred to in existing sections 10(2) (via) and 10(2) (vib) i.e., the additional depreciation allowed for new building, machinery etc. and the development rebate allowed for new machinery etc. These should be added in sections 12(3) and 12(4) as they stand on the same footing as normal depreciation.11
(11) Existing Section 12AA.-The question of making a provision for the spread over of income in the case of patents on the lines of existing section 12AA should be considered :12
(12) Existing Sections 12B(2) and 12B(3).-The method of calculating the cost of acquisition of an asset in the case of capital gains, may be simplified by substituting the fair market value or the actual cost, in place of the present complicated provisions.13
(13) Existing Section 15B.-The Income-tax Officer (or, preferably, the Inspecting Assistant Commissioner should issue a certificate to an institution qualifying under existing section 15B, so that assessees making donations to such institution need not prove, in each individual case, that the institution falls, within the section.14
(14) Existing Section 16(2).-The provision for grossing up of dividends should be simplified.15
The question of requiring companies to deduct tax from dividends may be considered16
(15) Existing Section 16(2).-Regarding grossing up of dividends, it is further recommended that where a dividend is declared out of profits taxed in earlier years, and there are no taxable profits of the company in the year of declaration of the dividend, the grossing up should be allowed at the rate which would have been applicable to the company in the year of declaration if the company had got any taxable income. This would clarify the position.17
(16) Existing Section 16(3).-Under existing section 16(3), the income arising to a wife from her membership of a firm in which her husband is a partner, is included in the total income of the husband. In modern times, however, a large number of partnerships have come into existence, in which the wife contributes substantial capital, or renders active assistance by virtue of her professional qualifications. It is recommended that the provision in question should not apply to professional partnerships in such cases. (The case of a wife working in partnership with her husband as a doctor or lawyer may be cited as a typical example.)
It may be noted that the provision in question was enacted at a time when women had no resources of their own and had not joined the learned professions. With the changes in economic and social conditions that have taken place in modern times, the provision must be modified. This will also be in accordance with the spirit of article 15 of the Constitution, since it will place husbands and wives on an equal footing.18
(17) Existing Sections 17(6) and 17(7).-Capital gains should be completely excluded from the total income of the assessee for the purposes of supertax.19
(18) Existing Section 18A(5), and its 2nd Proviso.-The correct construction of existing section 18A (5) and its second Proviso should be examined, with reference to the alternative draft given in the notes.20
(19) Existing Section 22(2A).-A separate form of return should be prescribed for losses incurred by an assessee, which the assessee wishes to carry forward.21
(20) Existing Section 23(5) a (i).-The existing provision regarding assessment of registered firms, resulting in double taxation of the same income to some extent, should be deleted.22
The provisions for registration of firms should not be administered in a hyper technical manner.23
(21) Existing Section 23A.-The present anomalous position regarding assessment of companies in respect of distributed and undistributed profits should be removed. The anomaly arises from the fact that existing section 23A of the Income-tax Act encourages the maximum distribution of profits, while the provision in the Finance Act aims at the minimum distribution of profits.24
(22) Existing Section 23A(1).-It is further recommended that a provision should be added to the effect that in passing an order under existing section 23A(1), the Income-tax Officers should also take into account the current business requirements of the company. He should not pass an order under the section if he is satisfied that having regard to current business requirements, the declaration of a larger dividend would have been unreasonable.25
(23) Existing Section 23B(1).-An assessee should, along with his return of income, pay tax on the basis of his return. An order of provisional assessment by the Income-tax Officer should not be necessary. Such a system of voluntary payment of tax by the assessee will save considerable time of the Department.26
(24) Existing Sections 25(3) and 25(4).-It should be considered whether it is necessary to retain the concessions allowed by existing sections 25(3) and 25(4), relating to discontinuance of or succession to a business assessed under the 1918 Act. The lapse of time since the 1918 Act would seem to render this provision unnecessary.27
(25) Existing Section 31.-Appeals against assessments of income-tax in excess of rupees one lakh should be heard by the Commissioner and not by the Appellate Assistant Commissioner as at present.- Other appeals should be heard by senior officers whose scale of pay is attractive.28
(26) Existing Section 34(1), 1st proviso (ii).-It is recommended that a notice under section 34 should not be issued in any case after the expiry of sixteen years from the end of the assessment year in which the income was first assessable.29
(27) Existing Section 40(1).-Existing section 40(1) should not make a mention of trustees. It should be confined to guardians of minors and committees and managers of lunatics and idiots.30
1. Vide para. 22 of the body of this Report; this related to draft clause 4(1)(d).
2. Vide para. 22 of the body of this Report, and para. (1) of notes to draft clause 6 and also para. (3) of notes to draft clause 4.
3. See para. 22 of the body of this Report.
4. Vide para. 22 of the body of this Report and noted to draft clause 4, para. (11), second sub-para.
5. Vide noted to draft clause 12, para. 9(b).
6. Vide the second para. of noted to draft clause 130.
7. Vide the second para. of the notes to draft clause 88(1)(c).
8. Vide notes to draft clause 16(iv), in para. 6 of the notes to draft clauses 15 to 17.
9. This relates to draft clause 24(1)(i).
10. This relates to draft clause 32(1)(i) and (ii).
11. This relates to draft clause 60(ii).
12. Vide notes to draft clause 187, last para.
13. Vide notes to draft clause 51.
14. Vide the last para. of notes to draft clause 89.
15. Vide para. 40 of the body of this Report and also notes to draft clause 59(2).
16. Vide notes to draft clause 59(2).
17. This relates to draft clause 67(i).
18. This relate to draft clause 67 (i).
19. Vide notes to draft clause 125, last para.
20. Vide notes to draft clause 222(1).
21. This relates to draft clause 143(3).
22. Vide para. 65 of the body of this Report and notes to draft clause 189(3).
23. Vide para. 65 of the body of this Report. This relates mainly to draft clause 189 and 190.
24. Vide the last three paras. of the notes to draft clause 113.
25. Vide para. 54 of the body of this Report. This relates to draft clause 113(2).
26. This relates to draft clause 145.
27. Vide the last para. of notes to clause 91.
28. See para. 102 above.
29. Vide para. 62(7) above.
30. Vide notes to draft clause 169(1) (ii).
M.C. Setalvad Chairman
M.C. Chagla, Member
K.N. Wanchoo, Member
P. Satyanarayana Rao, Member
N.C. Sen Gupta,1* Member
V.K.T. Chari,* Member
D. Narasa Raju,* Member
S.M. Sikri,* Member
G.S. Pathak,* Member
G.N. Joshi, Member
N.A. Palkhivala. Member
1. Dr. Sen Gupta has signed the report, subject to the Note appended at the end.
*. Besides Dr. Sen Gupta and Shri Narasa Raju and Pathak, who are mentioned in the forwarding letter, Shri Cheri and Shri Sikri have also authorised the Chairman the sing the report on their behalf.
Durga Das Basu,
Joint Secre taries
Dated: 26th September, 1958.