Report No. 12
Notes to clause 50
The cost of an asset to be allowed for the purpose of computing capital gains can be described as made up of the following ingredients:-
(a) The basic. amount. This is (i) cost of acquisition or (ii) written down value or (iii) in certain special cases, the fair market value on a certain date.
(b) Addition for expenditure on improvement to the assets.
(c) Reduction for depreciation.
(d) Adjustment for profits assessed or losses deducted under section 10(2)(vii), 3rd and 4th provisos.
Items (c) and (d) are not applicable to non-depreciable assets.
The existing section mentions all these ingredients while dealing with the normal situations covered by section 12B(2)(ii) and 2nd proviso, but does not do so when dealing with certain special situations. In the draft, however, it has been considered desirable to make the provision for each situation elaborate and to state all the applicable ingredients.
The scheme adopted in the clause is to deal in separate sub-clauses with the mode of statutory cost according to the mode of acquisition. (The modes of acquisition have been classified in a preceding clause).1
1. See draft clause 49 and notes thereto.
Sub-clause (1)-Para, (a)- the words "cost of acquisition" have been substituted for the existing words "actual cost", as being more appropriate. Incidentally, the expression "actual cost" might give rise to the impression that the definition of that expression in section 10(5) is applicable here also.
As to the expression "cost of improvements" see the interpretation clause at the end of this group.
Para. (b)- The existing section creates a slight difficulty in understanding it, because it combines two things in one, namely, (1) where the capital asset became the property of the assessee before 1st January, 1954, and (2) where it became the property of the previous owner before the 1st January, 1954. The draft separates these two situations and deals with them separately for the sake of clarity.
The existing provision requires that the fair market value should be "proved" to the satisfaction of the Income-tax Officer. This requirement has been omitted, as it is implied in all proceedings before the Income-tax Officer.
Sub-clause .(2) and subsequent sub-clauses- do not need any detailed comments. The various ingredients constituting the statutory cost have been embodied,1 here.
1. See notes above "General".
Notes to clause 51
This relates to the determination of statutory cost of depreciable assets. The expression "adjusted" has been coined as a short expression to convey the profits assessed and losses deducted under existing section 10(2)(vii), 3rd and 4th provisos. It has been defined in the interpretation section pertaining to this group of sections.1
1. The elaborate provisions of section 12B(3), Proviso or provisions for improvements are regarded as inapplicable for depreciable assets.
We think, however, that it would be more convenient to adopt a simple formula for arriving at the actual cost instead of the elaborate provisions now contained. Either the market value on the date of acquisition if acquired before 1-1-1954 or the market value on 1-1-1954 at the option of the assessee may be adopted, whatever be the mode of acquisition. In other cases the market value on the date of acquisition may be taken. Adjustments may be made to arrive at the statutory cost.
Notes to clause 52
The verbal changes made are consequential on the provisions for arriving at the cost of the asset as re-drafted.
Notes to clause 53
This is new.
Where a capital asset is given in exchange, the consideration received by the assessee will itself be an asset (i.e., in kind and not in cash). Some rule for estimating the value of such consideration appears to be necessary. The draft clause takes the fair market value of the assest received by the assessee as the basis.
Paragraphs (a) and (b) are intended to deal with cases where the transaction is not a pure exchange of assets and the assessee receives or gives something (usually money) in addition to the thing received or given in exchange.
Notes to clause 54
This deals with the case where the consideration stated in the deed of sale etc. is low.
An important departure has been made from the existing provision. Existing section 12B(2), 1st proviso, applies to cases where the transaction is entered into with a person 'directly or indirectly' connected with the assessee. This does not appear to be necessary and has been omitted.
The draft clause has further, been limited to cases where the actual consideration is not correctly given in the deed. The power should not extend to cases where the consideration, though low, has been correctly recited in the deed.
Notes to clause 55
The question of transferring this to the chapter on "Exclusions from.Total Income" was considered, by us, but we thought it more appropriate to retain it here.
Notes to clause 56
No change of importance has been made in existing section 12B(4)(b).
Notes to clause 57
"Adjusted".-Existing section 12B(2), 2nd proviso says that in the case of depreciable assets, the cost of the assets (i.e. the written down value) has to be adjusted by losses deducted or profits assessed under existing section 10(2)(vii), 3rd and 4th provisos. Even in cases where the fair market value on a certain date is substituted, this deduction has to be made.
In order to avoid the necessity of repeating the words "diminished by losses and increased by profits" frequently, the substantive draft clauses1 for calculating the statutory cost use the short expression "adjusted", and the present clause seeks to define it.
1. Vide draft clause 50-51.
"Cost of improvement".-Existing section 12B(2)(ii) says that the actual cost of an asset shall include expenditure of a capital nature on additions or alterations to the asset. Even in cases where the actual cost is to be replaced by the fair market value as on a certain date, improvements subsequent to that date have be taken into account.
In order to avoid the necessary of repeating the lengthy expression "expenditure of a capital nature" etc., the substantive draft clauses use the short expression "cost of any improvements", and the present clause seeks to define it.
The existing provision, section 12B(2)(ii), last lines, specifically excludes expenditure deductible under other heads.
Notes to clause 58
F-Income from other sources.-This clause deals with income taxable under the residuary head "Income from other sources". Sub-clause (1) embodies the general principle, while sub-clause (2) lists sources, some specific items deserving special mention.
Sub-clause (1)- The language adopted is in conformity with that adopted in the draft for the other heads (e.g., Salaries). The words "which may be included in his total income" have been omitted, as unnecessary. Under existing sections 3 and 4, it is only income forming part of "total income" that is subject to tax. Therefore the words "which may be included in the total income" are to be read into each section dealing with a head of income, and need not be repeated in every section.
Sub-clause (2)- Item (i) needs no comments.
Items (ii) and (iii) are, in form, new; but sub-sections (3) and (4) of existing section 12 imply that such income is taxed under the residuary head. This implication has been made express in the draft.
Section 12(1B) is omitted, as it is not relevant for assessments to be made hereafter.
Notes to clause 59
Existing section 16(2) provides for two things:-
(1) The proposition contained in the earlier portion, providing that a dividend is deemed to be the income of the previous year in which it is paid, credited etc.
(2) The provision for grossing up of dividends contained in the latter part and proviso.
The proposition at No. (1) above has been embodied in a separate draft clause,1 being one of the clauses dealing with deemed incomes.
1. Vide draft clause.
The provision at No. (2) above forms the subject-matter of the present draft clause. Sub-clause (1)-is introductory in nature.
sub clause (1)- is introductory in nature.
Sub-clause (2)- The grossing up of dividends is a difficult procedure. The question of requiring companies to deduct tax from dividends can be considered, on the lines of sections 184-186 of the UK. Act and sections 43 and 49 of the Ceylon Act. The recommendations of the Taxation Enquiry Commission on the subject1 may also be seen.
1. T.E.C. Report, Vol. II. Ch. X, paras. 18-85, para, pp. 156-158.
On the assumption that the present provision is to be retained, sub-clause (2) attempts to state the rule regarding grossing up in the form of a formula. The existing section states the rule in an indirect manner; the wording "such amount as would, if income-tax etc. were deducted therefrom, be equal to the amount of the dividend" creates some difficulty in actual application, because it begins with an unknown. The draft formula, though appearing complex on account of symbols, is not so difficult to apply.
The draft expresses the meaning of the clause in the form of a simple mathematical formula. (The method of adopting such formula is not novel and is to be found in the South African Income-tax Act.)
The formula is explained below:-
If G is the amount as grossed up, D the amount of the net (i.e. actual) dividend, and R the rate of income-tax applicable to the company expressed as percentage, then, the existing rule is that-
Therefore the gross dividend is the actual dividend plus the increase so arrived at.
Sub-clause (3).-This is based on the existing proviso to section 16(2). The expression "sum" has been replaced in the draft by the expression "fund" which is more appropriate in the context.
Notes to clause 60
Deductions (pertaining to income from other sources) have been made the subject-matter of a separate clause, as has been done in the case of income under other heads, e.g. profits of business.
Item (i)- needs no comments.
Item (ii)- Existing sections 12(3) and 12(4) provide that where machinery etc. is let on hire, the assessee shall be "entitled to allowances" in accordance with the provisions of section 10(2), clauses (iv) to (vii). Now, these clauses of section 10(2) provide for two things:-
(1) Deductions for certain expenses, depreciation and loss on sale;
(2) Charging of tax on profits on sale, destruction etc. of assets [Section 10(2)(vii), 3rd and 4th provisos].
Logically, therefore, section 12(3) and 12(4) are to be construed as adopting not only the provisions for deductions but also those for profits, in the clauses referred to. "
The provisions for deductions are incorporated in the draft item under discussion. The words "so far as may be" have been added, since these provisions may not fit in word by word in respect of income from other sources. Other verbal changes are consequential on the scheme adopted in the draft for existing section 10(2)(iv) to (vi).
So much of section 10(2)(vii) as deals with the charging of tax on profits arising from sale etc. has been embodied in the separate draft clause to follow, entitled "Profits chargeable to tax".
Item (iii)- Instead of the present wording "solely for the purpose of "the words "wholly and exclusively" have been used, to secure uniformity with the language of existing section 10(2)(xv).
Notes to clause 61
Amounts not deductible have been dealt with separately in this clause.
Sub-clause (a)- Item (i) needs no comment. In items (ii) and (iii) minor verbal changes have been made on the lines of changes in the corresponding provisions for income under other heads, [e.g. see the draft for existing section 10(2)(iii), Proviso].
Sub-clause (b)- Section 12(5), in part, provides that the provisions of existing section 10(4A) apply to income from other sources as they apply to income from business. Since section 10(4A) relates to amounts disallowed as deductions, this part of section 12(5) finds a place here.
The rest of existing section 12(5) is incorporated in the clause, to follow, dealing with profits chargeable to tax.
Notes to clause 62
Sub-clause (1)- needs no comments.
Sub-clause (2)- See notes under draft clause entitled "Deductions".