Report No. 12
Notes to clause 42
This clause groups together all provisions in the nature of the definition or interpretation, relevant to profits and gains of business etc.
Sub-clause (1)-First para-needs no comments. Explanation 1-needs no comments.
Explanation 2.- Existing section 10(5) (c) provides that in the case of an asset acquired by the assessee by gift or inheritance, its written down value shall be the written down value in the case of the previous owner or the market value (whichever is less). The provision thus appears as a part of the definition of "written down value"; but it would be more appropriate to place it as a part of the definition of actual cost. What is intended is the fixation of a notional figure of actual cost and not a notional figure of written down value as such. The written down value of an asset is an amount that is constantly diminishing, and cannot be frozen at the figure of written down value of the previous owner, as the existing section purports to do. The real object is to invent an "actual cost" (because a person acquiring property by gift and not paying anything for it does not, actually, incur any cost).
The provision has therefore been placed as an Explanation under the definition of actual cost, with suitable verbal changes.
Explanation 3.-The only change made in existing section 10(5)(a), 1st Proviso, is to add, after the word 'business', the words 'profession or vocation' to make the provision comprehensive. [Cf existing section 10(5)(a), 2nd Proviso].
Explanation 4.- Existing section 10(5)(a), 2nd Proviso, has been transferred to the definition of actual cost, since it pertains to that topic. A few verbal changes have been made to simplify the language.
Explanation 5.- This is based on section 128(1), 2nd Proviso.
Sub-clauses (2) and (3)- need no comments, except that it is made clear that ships are included in "plant".
Sub-clause (4)- is new. The word "received" has been sought to be defined on the lines of the existing definition of "paid" in section 10(5), first para, so as to cover not only cash receipts, but also receipts according to the method of accounting. The definition is, of course, confined to the provisions dealing with profits from business [e.g., section 10(2A)].
Sub-clause (5)- Corresponds to existing section 10(2) (xiv), Explanation.
The only change made is in item (iii)(b), where, at the end, the words "business of that class" have been changed into "all businesses of that class", on the lines of para (a) of the same item.
Sub-clause (6)- needs no comments.
Sub-clause (7), Para (a)- The provisos to existing section 10(5)(a) have been shifted to the definition of "actual .cost", for the reasons given above in the notes relating to draft sub-clause (1), Explanations 3 and 4.
Para (b) and Proviso- need no comments.
Explanation 1.-Corresponds to the second proviso to section 10(5)(b). The form has been changed. The existing provision says that in cases of succession to business, the ,actual cost referred to in the main part (definition of "written down value") shall be the cost to the predecessor in business. The effect of this is, that written down value that would have been adopted in the case of the predecessor in business will be regarded as the written down value of the asset even in the hands of the successor. This effect has been sought to be brought about more directly in the provision as drafted.
Explanation 2.-is based on section 12B(1), 2nd proviso.
Clause (c)- of the existing definition of written down value has been shifted to the definition of "actual cost"-See notes above relating to draft sub-clause (1), Explanation 3.
Explanation 3.-embodies existing section 10(5), Explanation, 'latter half, without any change.
Notes to clause 43
This is a new clause. There is some doubt as to whether the residences constructed for employees are buildings used for the purposes of the business or not. The administrative instructions appearing on page 447 of the Income-tax Manual, 10th Edition, are as follows:-
'Buildings belonging to the owner of a business and used by him in order to house his employees are buildings used for the purpose of business where the occupation by the employees of property owned by the employer who carried on a business is subservient to and necessary for the performance of their duties. In any other event such buildings would be chargeable under section 9 irrespective of the fact whether any rent is paid by the employees or not."
The instructions, which appear to be in accordance with the strict legal position, are sought to be codified by this clause.
Notes to clause 44
The provisions regarding insurance business, contained in the existing Schedule, have been placed in the draft First Schedule, but Rule 9 of the existing Schedule has been placed here in view of its importance. [For a definition of "mutual insurance company", see the South African Income-tax Act, 1941, First Schedule, para 2(d).]
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