Report No. 12

Notes to clause 111

This clause states the rule in existing section 1(2)(aa) as read with the Proviso.

The exemption has, for purposes of super-tax, to be treated as a case of rebate [section 17(3)], though similar exemptions have been treated for super-tax, as exclusions from total income1."

1. Cf. notes to draft clause 104.

Notes to clause 112

The clause does not need any detailed comments. The words "in relation to" will indicate that the substance of the relief is the same, both in income-tax and in super-tax.

Notes to clause 113

General

Existing section 23A, even after its amendment by the Finance (No. 2) Act 1957, is lengthy and is difficult to follow. An attempt has been made to break up the section and distribute its provisions in several clauses. The scheme adopted is to begin with the operative provisions and then to take up provisions in the nature of interpretation.

Clause 113

This reproduces section 23A(1). Simplification of the provision has been sought to be achieved by splitting it up into two sub-sections, so that the main provision appears separate from the requirement imposing a duty on the Income-tax Officer to consider certain criteria.

The lengthy expression "total income as reduced by", which is followed by a list of the deductions, has been replaced by the shorter expression "distributable income" (defined separately)1. This has enabled the simplification of the various clauses of section 23A(2) also.

1. See draft clause 118.

The lengthy expression "a company whose business consists in the dealing in or holding of investments " has been replaced by "investment company" (defined separately)1, which has simplified the draft for Explanation 2, Clause (i) also.

1. See draft clause 119.

The changes made by the Finance Act, 1958, have been given effect to.

Section 23A, in effect, taxes undistributed profits and is thus aimed at a maximum distribution of profits. It is difficult to sustain, side by side with this section, the provision which has been included in recent, Finance Acts for taxing excessive distribution of profits. The provision in the Finance Act aims at encouraging the minimum distribution of profits and goes in with section 23A which encourages the maximum distribution.

Even the Finance (No. 2) Act 1957, First Schedule, paragraph D, second Proviso, clause (c), though it does not directly tax an excessive distribution, is subject to this criticism; because on that part of the dividends which exceeds 10 per cent of the paid up capital, there is an indirect tax expressed as a reduction of the rebate otherwise admissible. This indirect tax goes on increasing with the percentage of the dividend in relation to the capital. The higher the dividend, the lesser the rebate and, therefore, the higher the tax.

In other words, while the Finance Act provision acts as an incentive to smaller distribution, section 23A acts as an incentive to higher distribution of profits. It would be desirable to drop the system of taxing excessive distribution of profits introduced in recent Finance Acts, at least in relation to companies to which section 23A applies.

Notes to clause 114

The changes made are verbal and consequential on the shorter expressions "distributable income" and "investment company" adopted in the draft for section 23(1).

Notes to clause 115

No detailed comments are needed.

Notes to clause 116

The existing provision has been split up into sub-clauses (a) and (b) for simplicity.

Notes to clause 117

Sub-clause (1).- In paragraph (b) the negative words "'not a private company" have been replaced by the positive words "a public company". While the definition of public company in the Companies Act is itself a negative one, it seems unnecessary to repeat that negative concept in the provision under discussion.

In paragraph (b) item (iii), the existing words "less than six persons" have been replaced by "five or less persons" in order to help the understanding of the provision by removing the negative. It must, of course, be noted that the provision, even as redrafted, retains the negative words "at no time during the previous year ". The reason is, that the provision is intended to be satisfied in respect of each and every block of share capital; the position regarding holding of shares should be such that any five or less persons cannot have the control of any bunch of shares carrying more than 50 per cent of the total voting power.

The method of computing the number of persons has been included in a separate sub-clause for the sake of simplicity.

Sub-clause (2)- As already stated, the method of computing the number of persons has been separately included in this sub-clause. The provision has been split up into paragraphs (a) and (b), and an Explanation, for simplicity.

Notes to clause 118

The expression "distributable income" has been coined and used in the draft for the operative portion of section 23A, sub-section (1) and also in the draft for sub-section (2). The expression has been defined in this clause. The only change of substance made is the addition of sub-clause (c), whereunder amounts paid as donations and exempt from tax under existing section 15B will be excluded from the distributable income. This has already been the practice under a decision of the Central Government.

Notes to clause 119

This clause seeks to define "investment company", an expression used in the draft at several places as a short substitute for the lengthy expression "company whose business consists" etc.

Notes to clause 120

Though the existing definition of "'statutory percentage" is complex, the complexity is due to the complicated nature of the provision in substance. Improvements in form would not have reduced the complexity and have not, therefore, been attempted, except that in item (iv), in sub-clause (a), the words at present appearing at the end "whichever of those is greater" have, in the draft, been shifted above and expressed as "the greater of the following".