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Report No. 12

31. Interest on Securities.-

In the present Act the expression "tax shall not be payable" has been used even in respect of deductions in computing the income under each head. The language has been criticised and has occasioned some confusion. In the scheme adopted by us deduction have been separately listed and the expression, "tax shall not be payable" is not used in regard to deductions.1

Section 8 provides that the tax should be payable in respect of interest "receivable" by assessee. As the word "receivable" has been interpreted by courts as meaning "received", we have adopted this interpretation and re-drafted the section accordingly.2

1. See clause 19, App I.

2. See clause 18, App I.

32. Income from property.-

The income assessable under section 9 is more, appropriately described as "Income from house property"; we have adopted this phraseology.

33. Profits and gains of business, profession or vocation.-

Section 10, which pertains to income from business covers about fourteen printed pages of the Income Tax Manual. The section is divided into thirteen sub-sections, and sub­section (2) has about fifteen clauses and a large number of provisos. In the absence of any marginal notes appended to the sub-section and the clauses, it has been found very difficult to find out whether any particular deduction is admissible in the case of business income or not, or to trace a provision relating to any particular topic. We have, therefore, divided the provisions pertaining to business, profession or vocation into a number of sections. The important changes are mentioned below.1

1. For other changes, see list of changes appended to this part of the Report.

34. One provision which has caused a good deal of hardship in practice is that regarding bad debts. The allowance for a bad debt under section 10(2)(xi) is conditional upon the Income-tax Officer, finding that the amount had become bad in the relevant accounting year, and this has been found to bear hardly on the assessee in many cases. An assessee may write off and claim a debt as a bad debt in a particular year, honestly thinking that it had become bad in that year; the Income-tax Officer may disallow the claim on the ground that the claim was premature and it really become bad in a subsequent year; on appeal, the appellate authorities may uphold the disallowance but on the ground that the debt had actually become bad in an earlier year.

By the time the claim is finally rejected, it may be too late for the assessee to claim the bad debt in any earlier or later year. To make the allowance depend upon the chance of the assessee's view as to the year in which the debt became bad coinciding with the Department's view of the matter, and to put the assessee in peril of completely losing the right to the allowance in the absence of such coincidence, is not a very satisfactory basis of allowance. We have therefore proposed an express provision1 in the Act that if a bad debt is disallowed as being claimed too late, the assessment for the year in which, according to the Income-tax officer, the debt became bad can be reopened and the allowance may be given for that year wherever possible.

We have also proposed a provision2 to meet the converse case of a bad debt being claimed prematurely.

1. See clause 162(6), App I.

2. See clause 36(6), and proviso, App I.

35. We have also enumerated in a separate section the topics covered by these sections.1

1. Clause 29, App I.

36. The proposed arrangement will make it convenient to find the provision pertaining to a deduction or a charge easily.

37. The provisions pertaining to insurance business have been placed in a Schedule, as at present.

38. Two changes that we have made in section 10(2)(vib), relating to development rebate, may be pointed out here.1 In the first place, we have slightly altered the provision so as to allow the rebate in respect of the year in which the machinery or plant is first put to use by the assessee, if the machinery or plant is not used in the year of acquisition. Under the existing provision, the deduction is allowed only in the year of acquisition or installation, and the position regarding cases where the machinery or plant is not "used" in the year of acquisition or installation is doubtful.

This, has now been made clear. In the second place, we have omitted sub-sections (2B) and (2C) of section 10, relating to deposits or profits by companies. The proposed omission of sub-sections (2B) and (2C) of section has been made in view of the fact that these sub-sections are not being enforced at present. The omission is relevant also for the purposes of clauses (vi), (via) and (vii) of sub-section (2) of section 10.

1. Vide clause 33, App I.

39. Capital gains.-

Section 12B has been criticised as containing the largest number of provisos. It has also been criticised on the ground that it is difficult to know, from the present language of the section, the deduction a person is entitled to on account of the cost of the asset. We have felt it necessary to coin an expression, viz., "Statutory cost"1 for this purpose. We have made provision for the determination of the statutory cost separately in respect of depreciable and non-depreciable assets.2 Provision has also been made for determining the statutory cost in relation to the mode of acquisition of the asset by the assessee by purchase, inheritance and other methods.

1. Vide clauses 19, 50, 51, App I.

2. Vide clauses 50 and 51, App I.

40. Income from other sources.-

The provisions pertaining to the computation of income from other sources have now been put after the provisions pertaining to the computation of all other incomes including capital gains. The section is thus a residuary section for computing the income from all sources for which no provision has been made earlier.

We would like to draw the attention of the Government to the fact that the present system of taxing dividends creates a good deal of difficulty. At present, companies are taxed at a very heavy rate under the annual Finance Act but section 18 (5) and 49B (1) of the Income-tax Act treat income-tax paid by companies as paid on behalf of the shareholders and allow the shareholders credit for the income-tax paid by the company. The tax to be so credited to the shareholder has to be arrived at after an elaborate computation under the process known as "grossing up" of dividends.

This process, dealt with in section 16(2) of the Income-tax Act, is a complex one. Moreover, difficult questions often arise in practice as to whether dividends are declared out of the taxable profits of the companies or not, since money has no ear-mark and it is not easy in practice to identify the fund out of which a dividend has been declared. This difficulty has been accentuated after the substitution of the present rule 14 of the Income-tax rules prescribing the new form of certificate to be furnished by the company to the shareholder along with the dividend warrant.

It would make the law much simpler and easier to administer if at least public companies are taxed at a very low rate and the shareholders are taxed at the normal rates without any credit being given to them for the tax paid by the companies. We have not made any changes on this point in the draft clauses in Appendix I, since any such change would affect the tax structure; but we feel that the Government should consider the simplification of the law on this point. The notes to the relevant draft clause may also be perused in this connection.

Income-Tax Act, 1922 Back

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