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Report No. 12

Notes to clause 104


The existing provisions for exemptions, from super-tax say that super-tax "shall not be payable" in respect of the income in question; or that the income shall be exempt from super-tax. This appears like an exemption from tax, not an exclusion from total income. But it seems that, in the case of super-tax, the exemptions should be treated as cases of exclusions from total income [except in cases where section 17(3) expressly directs the exemption to be treated as a case of rebate].

Though section 16(1) says that "in computing the total income" the exempted incomes are to be included in the total income, and though section 56 would apply section 16 for super-tax also, still section 16 has to confined to cases dealt within section 17(3). The draft, therefore treats such exemptions as exclusions from total income. Drafting changes have, wherever necessary, been made to carry out this scheme.

[So far as the sections expressly referred to in existing section 17(3) are concerned, they have to be treated as cases of rebates.]

Clause 104

The words "profits and gains" have been replaced by the term "income" which is more precise. The provision is, obviously, applicable to all income and not only income from business. Other changes are consequential on this change and on the scheme adopted in the draft to treat exemptions from super-tax as exclusions from total income.

Notes to clause 105

The verbal changes made are consequential on the scheme adopted in the draft to treat exemptions from super-tax as exclusions from total income1.

1. See notes to draft clause 104.

Notes to clause 106

This clause does not need any comments, since the changes are only verbal and consequential.

Notes to clause 107

The changes are verbal and consequential.

Notes to clause 108


Existing section 56A, sub-section (1), item (ii) says that one of the conditions for availability of the exemption under the section is that the income of the Indian company (which pays the dividend) "would have been exempt under the operation of section 15C if the provisions of that section had been applicable thereto". It is not clear from these words how much of section 15C is to be read into section 56A. In the interest of clarity, it seems desirable to incorporate, in section 56A itself, whatever conditions are to be borrowed from section 15C.

The question, therefore, that arises next is, what part of section 15C should be repeated in section 56A. Section 15C requires the following conditions to be fulfilled:-

1. The profits must be derived from an industrial undertaking to which the section applies [sub-section (1)].

2. The profits should not exceed 6 per cent per annum on the capital employed in the undertaking [sub-section (1)].

3. The undertaking must not be formed by the splitting up or reconstruction of a business already in existence [sub-section (2), item (i)].

4. The undertaking must not be farmed by the transfer of a building etc. used in a business carried on before the 1st April, 1948 [sub-section (2), item (i)].

5. The undertaking must begin to manufacture articles in India within 13 years from the 1st April, 1948 or extended period when allowed by the Central Government [sub-section (2), item (ii)].

6. The undertaking must employ a certain number of workers [sub-section (2), item (iii)].

7. The exemption must not have been withdrawn by the Central Government [sub­section (2), item (iii) Proviso].

8. The exemption is applicable only to the assessment for the previous year in which manufacture commenced and for the four immediately succeeding assessment years [sub-section (6)].

Taking these conditions one by one, it seems that condition No. 1, is applicable for section 56A only to the extent to which it is introductory, as intended to draw attention to section 15C(2). (Section 56A does not require that only dividends attributable to profits derived from a particular undertaking should be exempt.) Condition No. 2 cannot be applied for section 56A, as the intention of section 56A is to confer an exemption in addition to that enjoyed by share-holders under section 15C(4). Condition No. 3 is applicable for section 56A, but since section 56A, sub-section (1), item (ii) speaks of "the Indian Company", the condition has to be translated in terms of the Indian Company.

Condition No. 4 is applicable, but the mention of the 1st April, 1948 is irrelevant for the purpose of section 56A, which seeks to give a permanent exemption. Condition No. 5, being of a temporary nature, cannot be applied for section 56A. Condition No. 6 is applicable. Regarding condition No. 7, the intention probably seems to be to disregard any such withdrawal of exemption and to apply section 56A to all companies otherwise governed by the applicable part of section 15C even if in a particular case the exemption under section 15C has been withdrawn. Condition No. 8, being of a temporary nature, cannot be applied to section 56A, which does not confine the exemption to a particular period.

In the draft, therefore, the ingredients of section 15C have been embodied only to the extent indicated in the discussion above.

As already stated, the applicable conditions of section 15C(2) have, in the draft, been treated as conditions to be fulfilled by the Indian Company and not by its industrial undertaking. Consequential changes have been made in language.

Sub-clause (1)-Item (i)- The cumbersome list of items has been removed to a separate sub-clause, thus simplifying the language of section 56A(1)(i).

Item (ii)- The general notes at the beginning above may be persued.

Sub-clause (2)- does not need any comments.

Sub-clause (3)- The commodities in question have been referred as "items"-a word used in the existing section 56A(2) at the end. No other comments are needed.

Notes to clause 109

No detailed comments are needed.

Notes to clause 110

Strictly speaking this exemption should in the case of super-tax be treated as an exclusion from total income, but in view of section 17(3) it had to be treated as a case of rebate1.

1. Cf. notes to draft clause 104.

Income-Tax Act, 1922 Back

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