Circular : No. 290 [F. No. 328/66/80-WT], dated 31-3-1981

Section 34A

Refunds

SECTION 34A l REFUND OF TAX

1424. Assessee becoming entitled to refund of tax paid as a result of exemption limit being raised from Rs. 1 lakh to Rs. 1.50 lakh by Finance (No. 2) Act, 1980 - Instructions for issue of refund without delay

1. The Finance (No. 2) Act, 1980 has amended the First Schedule to the Wealth-tax Act, 1957, raising the limit of maximum amount not liable to wealth-tax from Rs. 1,00,000 to Rs. 1,50,000. The new provision has come into force from April 1, 1980 in terms of section 1(2) of the Finance (No. 2) Act, 1980. Accordingly, the benefit of higher wealth-tax exemption limit is available to taxpayers from the current assessment year, viz., 1980-81.

2. It has been brought to the notice of the Board that a sizeable number of taxpayers have paid wealth-tax on self-assessment while filing returns of net wealth, ranging between Rs. 1,00,000 to Rs. 1,50,000 prior to the enactment of the Finance (No. 2) Bill, 1980. Such assessees may become entitled to refund of tax paid in view of the fact that the exemption limit has been raised from Rs. 1,00,000 to Rs. 1,50,000.

3. The Board desire that as soon as a request is made in the type of cases mentioned in para 2, the assessments should be taken up forthwith and refund, if due, issued without any delay.

4. The above should be brought to the notice of all the officers in your charge. 

 

Circular : No. 291 [F. No. 275/35/80-IT(B)], dated 4-2-1981.

1688. Exemption limit of taxable income raised from Rs. 10,000 to Rs. 12,000 by Finance (No. 2) Act, 1980 - Person paying salary to State Government employees permitted to make adjustment of tax deducted at source against tax deductible from salaries

1. I am directed to invite your attention to Boards Circular No. 278 [F. No.275/12/80-IT(B)], dated 26-8-1980 regarding deduction of income-tax from salaries during the financial year 1980-81.

2. You are aware that the exemption limit of taxable income has been raised from Rs. 10,000 to Rs. 12,000 by the Finance (No.2) Act, 1980. In the case of employees where estimated annual salary income exceeded Rs. 10,000 but did not exceed Rs. 12,000 income-tax was deducted at source before the enactment of the said Act and if they were to apply to the Income-tax Officer concerned for refund of such tax deducted at source after March 31,1981, it would cause hardship to such persons.

3. With a view to mitigate such hardship, it has been decided that the persons responsible for paying the income in respect of salaries should be permitted, as a special case, to make adjustments of the tax deducted at source, on behalf of this group of employees, against the tax deductible from salaries of employees with estimated annual salary incomes exceeding Rs. 12,000 and payable to the credit of the Central Government during the subsequent months of the current financial year. Such adjustments in respect of the state Government employees will be made in the following manner.

4. The person responsible for paying the salaries, should in the first instance, determine the amount of tax deducted and paid to the credit of the Central Government in the earlier months on account of the employees whose estimated annual salary income is likely to be below Rs. 12,000 (hereinafter referred to as surplus payment). After such determination, he should, for the months of adjustment, reduce the total of the tax deducted during the month and the progressive figures by the amount of surplus payment and intimate the net amount to the Accountant General for payment to the account of the Central Government. While sending the information he should also intimate the Accountant General the names of such employees in duplicate and the amount of tax deducted from the salary of each employee which has been refunded to them as surplus payment. The Accountant General will send one copy of the list received from the Treasury Officers/Pay and Accounts Officers to the respective Zonal Accounts Officers together with the cheque/draft to the amount of tax deducted at source for the month/months.

5. In such cases while giving certificates of tax deducted at source under section 203 in individual cases, the person responsible for payment should take due care to indicate therein the amount of tax deducted in excess as result of raising of the exemption limit and refunded to the employees concerned.

6. It may be added that if any adjustment referred to in para 3 is not made during the financial year 1980-81 in the case of any employee and the surplus payment refunded to him, it should not be made thereafter and such an employee may be advised to claim a refund from the Income-tax Officer concerned in the normal course.

7. These instructions would also apply, mutatis mutandis, to all the Central Government employees. In such cases the list showing the names of the employees referred to in pare 4 above should be sent to the Commissioner of Income-tax, Delhi, Central Revenue Building, Indraprastha Estate, New Delhi-110002, by the principal Accounts Officers.

 

Circular: No. 292 [F. No. 385/62/80-IT(B)], dated 5-2-1981.

 

Sections 190 to 230A

Collection and recovery of tax

General

 

Section 190 l Payment of tax by Deduction at Source

936. Challans for depositing tax deducted at source from incomes other than salary to the credit of Central Government - Counterfoils of each of the Challan Form Nos. 2 and 8 to be attached with statement/certificate of deduction of tax at source

1. The persons responsible for making payments of interest on securities, dividends, interest other than interest on securities, winnings from lotteries and crossword puzzles, winnings from horse races, payments to contractors and sub-contractors, insurance commission, and other sums are required, at the time of payment, to deduct income-tax at appropriate rates under sections 193, 194, 194A, 194B, 194BB, 194C, 194D and 195, respectively. The tax so deducted at source is required to be paid to the credit of the Central Government at RBI/SBI or a public sector bank authorised in this behalf, through a challan.

2. Two challan forms have been prescribed for payment of such tax deducted at source:

  (1)  Challan No. 2 (ITNS 39A) - For tax deducted at source on payments made to companies, and

  (2)  Challan No. 8 (ITNS 39) - For tax deducted at source on payments made to non-companies.

The challan forms have now been got printed with four counterfoils. The bank receiving the payment retains the first and second counterfoils for transmission to the Income-tax Department in the prescribed manner and returns the third and the fourth counterfoils to the taxpayer. Whereas the third counterfoil is to be retained by the taxpayer for his own record, the fourth counterfoil is meant to be attached by the taxpayer with the statement/certificate of the tax deducted at source in one of the forms prescribed in rule 37 of the Income-tax Rules.

3. However, in the Challan Form Nos. 2 and 8 which have been printed in 1977-78 (July 5, 1978) and 1979-80 (December 10, 1979), respectively, and are at present in supply for use by the taxpayers, it has been erroneously printed at the top of the fourth counterfoil that it would be attached with the Return of income. It is hereby clarified that the fourth counterfoil of each of the Challan Form Nos. 2 and 8 is meant for being attached with the statement/certificate of deduction of tax at source in one of the prescribed forms, viz., Form Nos. 25, 26, 26A, 26B, 26BB, 26C, 26D and 27, as may be applicable and not with Return of Income.

4. It is, however, possible that during the current year some payments of such TDS may have been made in the old challan forms which had only three counterfoils. In such cases it would not be necessary for the taxpayer to attach any counterfoil with the statement/certificate of tax deduction at source. However, as the new forms have now been printed and are in supply at all places, it is expected that all tax deducted at source (other than TDS from salary) which is paid to the credit of the Central Government after March 31, 1981 will be paid only through the revised challan forms which have four counterfoils and the fourth counterfoil of all challans will be attached with the relevant statement/certificate of tax deduction at source.

 

Circular : No. 293 [F. No. 200/140/80-IT(A-I)], dated 10-2-1981[`1] 1.

181. Pension received by erstwhile officials of United Nations - Whether exempt from tax in view of section 2 of UN (Privileges and Immunities) Act, 1947

1. Section 2 of the UN (Privileges and Immunities) Act, 1947, read with section 18, clause (b) of article V of the Schedule thereto, inter alia, grants exemption from taxation to salaries and emoluments paid by the United Nations to its officials. The question whether pension received by the erstwhile officials of the United Nations from it would be exempt from income-tax was considered by the Karnataka High Court in the case of CIT v. K. Ramaiah [1980] 126 ITR 638. The High Court held that since, under section 17 of the Income-tax Act, salary has been defined to include pension, if salary is exempted from tax, so shall be the pension. The Board have accepted the decision of the Karnataka High Court.

2. In view of the foregoing, apart from salary received by employees of the UNO or any person covered under the UN (Privileges and Immunities), Act, 1947, pension received by them from the UN will also be exempt from income-tax. Pending appeals on this point may be conceded and reference applications withdrawn.

 

Circular : No. 294 [F. No. 203/111/78-IT(A-II)], dated 27-2-1981.

 

288. Weighted deduction in respect of payment to scientific research association, etc., referred to in clause (ii) of sub-section (1) to be utilised for scientific research undertaken under a programme approved under sub-section (2A) - Whether, in a case where programme has already been approved, notified payments made by persons other than original sponsors can also qualify for weighted deduction or not

1. Section 35(2A) [prior to its amendment by the Finance Act, 1984], provides that where the assessee pays any sum to a scientific research association for university or college or other institution referred to in section 35(1)(ii) or to a public sector company to be utilised for scientific research undertaken under a programme approved in this behalf by the prescribed authority having regard to the social, economic and industrial needs of India, then, there shall be allowed a deduction of a sum equal to one and one-third times the sum so paid.

2. Notifications under section 35(2A) are issued by the Ministry of Finance on the basis of the recommendation of the prescribed authority, containing, inter alia, the details of the research programme, the name of the sponsors, the name of the institution conducting the research and the total estimated cost of the project of the research programme. A question has been raised as to whether, in a case where research programme has already been approved, notified payments made by persons other than the original sponsors mentioned in the notification to the research programme can also qualify for weighted deduction or not. The Board have been advised that the approval under section 35(2A) is of the research programme and not of the sponsors and, therefore, any person other than the original sponsors making payments to the approved research programme can also claim the benefit of weighted deduction provided the amount collected from all the sponsors does not exceed the cost of the particular programme approved by the prescribed authority. However, before allowing the weighted deduction, the ITO shall call for from the sponsor/contributor a certificate issued by the research association/institute certifying, inter alia, the amount actually paid by the sponsor/contributor to the research programme as approved and mentioned in the notification and also certifying that the total contribution received from all the sponsors/contributors do not exceed the cost of the programme as approved by the prescribed authority.

Judicial analysis

The above Circular was referred to in Dy. CIT v. Alarsin Marketing (P.) Ltd. 1995 Tax LR 309 (Bom. - Trib.), with the following observations:

6. In the alternative, Shri Patil suggested that even if recognition under section 35(1)(ii) was a pre-condition, at least at the time when the research programme was approved under section 35(2A) of the Act, the trust did have recognition under section 35(1)(ii) and the said recognition at the time of approving the programme was sufficient. In support of this contention, he further argued that the recognition under section 35(1)(ii) of the Act was given for a period of three years at a time whereas the duration of the approval under section 35(2A) of the Act depended on the nature of the programme undertaken by the institution. In further support of this contention, he drew strength from Boards Circular No. 294, dated 27-2-1981 wherein at para 2, the following has been
mentioned :

The Board have been advised that the approved under section 35(2A) is of the research programme and not of the sponsors and, therefore, any other person then the original sponsors making payment to the approved research programme can also claim the benefit of weighted deduction provided the amount collected from all the sponsors do not exceed the cost of the particular programme approved by the Prescribed Authority.

In other words, he argued that the stress of the legislation is on the programme to be carried out and not on who sponsors the same or where it is carried out. This is so because while approving the programme care is taken to see that the requisite facilities and infrastructure exist to undertake the proposed programme.

7. We have heard the rival submissions and come to the conclusion that the assessee should succeed. . . . (pp. 310-311)

 

Circular : No. 295 [F.No. 275/56/79-IT (B)], dated 6-3-1981.

1109. Decision of the Supreme Court in Brij Bhushans case - Whether permits, in respect of composite works contract, deduction of tax at source at 2 per cent on net payment (after excluding cost of materials supplied by Government) - Whether para 1(5) of Circular No. 86, dated 29-5-1972[`2] 1 requires modification

1. Pursuant to the decision of the Supreme Court in Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524, several representations were received seeking modification of para 1(5) of Boards Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-19721 to permit, in respect of composite works contract, e.g., work and labour, tax deduction at 2 per cent under section 194C on the net payment, i.e., after excluding the cost of materials supplied by the Government or any other specified person.

2. In para 1(5) of the Boards said circular, it was inter alia, explained that the question of the tax deduction under section 194C with reference to the gross payment due to the contractor or the net payment was essentially to be decided in the light of the terms of the particular contract and the conduct of the parties thereto. It was also stated that where the contractor had undertaken to construct a building or a dam, e.g., a composite works contract, and the Government or the other specified person had undertaken to supply all or any of the materials necessary for the work at stipulated price, the deduction would have to be related to the gross payment without excluding the cost of the materials.

3. The decision of the Supreme Court in Brij Bhushan Lals case (supra) is on the manner of computing the income and is not on the interpretation of section 194C. The point at issue has been dealt with by the Patna High Court in Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. On page 449 of the report, while referring to Brij Bhushan Lals case (supra), their Lordships of the Patna High Court observed as under :

...In this case [Brij Bhushan Lals case] the question that fell for consideration was whether in the execution of a work the cost of materials supplied by the Government for executing the work, could be taken into consideration, while estimating the profits of a contractor. In the facts of that case, it was held that in cases of lump sum contracts where in substance and in reality stores and materials supplied to the contractor by the department were fixed or incorporated into the work, the cost of such stores and materials could not be included in the turnover of the contractor as there was not even a theoretical possibility of any profit being made by the contractor from such stores or materials. This case has no bearing on the facts of the case before us, because under section 194C(1) deduction has not to be made from profits made by the contractor, but from the total payment made to the contractor for doing any work.

4. In view of the foregoing para 1(5) of the Boards circular referred to in para 1 above, does not require any modification and tax would continue to be deducted at source at 2 per cent on gross payments, i.e., including cost of material supplied by the Government or any other specified person.

 

Circular : No. 296 [F. No. 220/3/81-ITA-II]

795. Supply of return and challan forms to assessee

With a view to enabling the tax-payers existing on the registers of the Income-tax Department to file the return of income in time and to avoid inconvenience in approaching the Income-tax Offices for getting the return forms, it has been decided by the Board that from the financial year 1981-82, 2 copies of blank income-tax return forms will be despatched by the concerned Income-tax Officers through ordinary post to all the tax-payers existing on the registers of the Department. While sending the return forms, the Income-tax Officer will also send along with it challan forms for payment of sell-assessment tax and 2 copies of the statements of advance tax to be made under section 209A of the Income-tax Act, 1961.

2. It has further been decided that two copies of the wealth-tax return form should also be sent to all those who are existing wealth-tax assessees on the registers of the Department along with the income-tax return forms.

3. This arrangement is in addition to existing arrangement of supply of return forms across the counters of the Income-tax Offices and through selected post offices. While mailing the return forms in bulk to the taxpayers, notices under section 139(2) or 141(2) are not expected to be issued. However, in cases where returns are not received by the due date, notice under section 139(2)/141(2) of the I.T. Act/W.T. Act along with the return forms, will be sent separately through Registered Post or notice servers.

4. A compliance report may be sent by 31st May every year by the Commissioner to the Board to the effect that return forms etc., have been supplied to all the assessees in his charge.

Necessary instructions may be issued to all the officers working in your charge urgently.

Circular : No. 296 [F. No. 220/3/81-ITA-II], dated 31-3-1981. [Source : 115th Report of Public Accounts Committee (1982-83) (Seventh Lok Sabha), p. 34].

 

Circular : No. 297

 

Sections 139 to 156

Procedure for assessment

Section 139 [`3] [`1]l Return of income[`4] [`2]

794. Sending blank return forms by post to all taxpayers existing on registers of department - Instructions in Circular Nos. 296 and 297 withdrawn

1. Reference is invited to Boards Circular No. 296 [F. No. 220/3/81-IT (A-II)], dated 31-3-1981 as amended by its Circular No. 297 [F. No. 220/3/81-IT (A-II)], dated 10-4-1981 [Annex I and Annex II] in which it was desired that two copies of return forms should be sent by the department on its own to all assessees on the register of the department having income above taxable limit.

2. This matter has been discussed in the Commissioners Conference, 1981 and it was pointed out that in addition to supply of return forms across the counters in the Income-tax Offices and their distribution through selected post offices, the return forms are taken in bulk by the income-tax practitioners for their clients. It was also pointed out that sending of return forms to all the assessees on its own may involve a lot of labour and money which in many cases may amount to duplication as well. Further, there is likelihood of sending wrong forms also to the assessees. An income-tax practitioners association has also suggested that the instructions referred to in para 1 should be modified. The matter has therefore, been reconsidered and it is decided to revert to the old practice. It is also decided that return forms may be sent to the head of the department or the Public Relations Officer of an organisation in bulk for supply to the employees of the department/organisation in the case of salaried taxpayers. It is also decided to have the forms supplied expeditiously to any assessee by post on a request having been made in this behalf.

3. This circular supersedes the directions contained in Circular Nos. 296 and 297 referred to above.

Circular : No. 307 [F. No. 220/3/81/(A-II)], dated 23-6-1981.

Annex I - Circular No. 296, Dated 31-3-1981
Referred to in Clarification

1. With a view to enabling the taxpayers existing on the registers of the Income-tax Department to file the return of income in time and to avoid inconvenience in approaching the income-tax officers for getting the return forms, it has been decided by the Board that from the financial year 1981-82, two copies of blank income-tax return forms will be despatched by the concerned ITOs through ordinary post to all the taxpayers existing on the registers of the Department. While sending the return forms, the ITO will also send along with it challan forms for payment of self-assessment tax and two copies of the statements of advance tax to be made under section 209A of the Income-tax Act.

2. It has further been decided that two copies of the wealth-tax return form should also be sent to all those who are existing wealth-tax assessees on the registers of the Department along with the income-tax return forms.

3. This arrangement is in addition to existing arrangement of supply of return forms across the counters in the Income-tax Offices and through selected post offices. While mailing the return forms in bulk to the taxpayers, notices under section 139(2) or 14(2) are not expected to be issued. However, in cases where returns are not received by the due date, notices under section 139(2)/14(2) of the Income-tax Act/Wealth-tax Act, along with the return forms, will be sent separately through registered post or notice servers.

4. A compliance report may be sent by May 31 every year by the Commissioner to the Board to the effect that return forms, etc., have been supplied to all the assessees in his charge.

ANNEX II - CIRCULAR NO. 297, DATED 10-4-1981
REFERRED TO IN CLARIFICATION

Reference is invited to Boards Circular No. 296, dated 31-3-1981 by which the Commissioners were asked to direct the ITOs to send two copies of return forms, etc., to the assessees existing on the register of the Department by ordinary post. This direction is modified to the extent that return forms etc., should be sent only to those assessees whose income according to the latest return/assessment on the file is above the taxable limit applicable to the assessment year 1981-82 or later years, and also to assessees claiming refund under section 237.

 

Circular : No. 298 [F. No. 275/3/81-IT(B)], dated 15-4-1981.

 

Financial year 1981-82

1686. Instructions for deduction of tax at source from salary during financial year 1981-82 at the rates specified in Part III of First Schedule to Finance Bill, 1981

1. I am directed to invite a reference to this Ministrys Circular No. 278 [F. No. 275/12/80-IT(B)], dated 26-8-1980 wherein the rates at which income-tax deduction during the financial year 1980-81, from the payments of income chargeable under the head Salaries under section 192, were intimated.

2. In the Finance Bill, 1981, some modifications in the exemption limit, etc., have been made. An extract of Sub-Paragraph 1 of Paragraph A of Part III of the First Schedule to the Finance Bill, 1981, is at Annex I.

3. The substance of the main provisions in the law insofar as they relate to income chargeable under the head Salaries, on which tax is to be deducted at source during the financial year 1981-82 is given hereunder :

(1) No tax will be deductible at source in any case unless the estimated salary income for the financial year exceeds Rs. 15,000. Some typical examples of calculations are at Annex II.

(2) The value of perquisites by way of free or concessional residential accommodation, or motor cars provided by employers to their employees, shall be determined under rule 3 of the Income-tax Rules. Further, the value of other benefits or amenities provided free of cost or at concessional rates to the employees, like supply of gas, electric energy, water for household consumption, educational facilities, etc., should also be taken into account for the purpose of computing the estimated salary income of the employees during the current financial year. [Example II at Annex II illustrates computation of some such perquisites.]

(3) The amount on account of the encashment of leave due to an employee on retirement is includible as salary in the relevant financial year in which the payment is made for the purpose of deduction of tax at source. [It is, however, liable to tax in the hands of the employee on accrual basis in the assessment year relevant to the financial year in which he retires from service in view of section 15(a).]

(4) The amount repaid to an employee from the Additional Dearness Allowance Deposit Account under the provisions of the Additional Emoluments (Compulsory Deposit) Act, 1974, shall be liable to be included in his total income of the previous year in which it is repaid, as already explained in this Ministrys Circular No. 182 [F.No. 275/12/75-ITJ], dated 28-10-1975. The amount repaid will include an element of interest also. While the repayment of the principal sum will be regarded as salary paid during the relevant financial year and assessed to tax accordingly, the interest element will qualify for deduction in accordance with section 80L of the Act.

(5) The amount of deposit made by a taxpayer under the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974, is not allowable to be as deduction in computing his taxable income. Accordingly, such deposit has to be ignored for the purpose of determining the amount of income-tax deductible at source.

(6) Under section 16 of the Act, the taxable salary is to be computed after providing for standard deduction. The standard deduction is to be allowed of an amount equal to 20 per cent of the salary, subject to a maximum of Rs. 5,000 for this purpose, the term salary will include fees, commission, perquisites or profits in lieu of or in addition to salary, but will not include any payments received by the employees which are specifically exempt from tax under clauses (10), (10A), (10B), (11), (12) and (13A) of section 10. Thus, house rent allowance to the extent exempt under section 10(13A), will not be taken into account for the purposes of computing the amount of the standard deduction. It is to be noted that standard deduction on the above basis is to be allowed irrespective of whether any expenditure incidental to employment is actually incurred by the employee or not. This deduction will be available also to persons drawing pension during the current financial year at the same rates and subject to the same ceiling as the employees in actual service. Further, the standard deduction will be limited to Rs.1,000 only in cases where the employee is provided with any motor car, motorcycle, scooter or other moped by his employer (for use otherwise than wholly and exclusively in the performance of his duties), or where he is allowed the use of any one or more motor cars (otherwise than wholly and exclusively in the performance of his duties) out of a pool of motor cars owned or hired by the employer at any time during the financial year. In this connection it may be noted that the use of a motor car by the employee for the purposes of going from his residence to the place where the duties of his employment are to be performed, or from such place back to his residence will not be regarded as use of the motor car in the performance of his duties.

(7)(a) Under section 80C while computing the taxable income, the disbursing officers should allow a deduction of the whole of the first Rs. 5,000; 50 per cent of the next Rs. 5,000 and 40 per cent of the balance of the qualifying amount of payments towards life insurance premia, contributions to provident fund (including contribution to Public Provident Fund constituted under the Public Provident Fund Act, 1968), contributions for participation in the Unit-linked Insurance Plan, 1971, made under section 19(1)(cc) of the Unit Trust of India Act, 1963, and deposits in a 10-year account or 15-year account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959. The qualifying amount of payments of all these items will be limited to 30 per cent of the estimated salary (after allowance of standard deduction referred to in item 6 above), or Rs. 30,000, whichever is less.

(b) In respect of contributions to recognised provident funds there is another monetary ceiling limit laid down in clause (d) of sub-section (2) of section 80C, in that the employees own contribution to his individual account in that fund will not exceed one-fifth of his salary during the financial year or Rs. 10,000, whichever is less. Salary for this purpose would include dearness allowance, if the terms of employment so provide, but will exclude all other allowances or perquisites. The expression recognised provident fund has been defined in section 2(38), to mean a provident fund which has been and continues to be recognised by the Commissioner in accordance with the rules contained in Part A of the Fourth Schedule to the Act, and includes a provident fund established under a scheme framed under the Employees Provident Funds Act, 1952".

(c) The additional monetary ceiling of one-fifth of salary or Rs. 10,000, whichever is less, will not be applicable to the contributions to the provident funds referred to in sub-clauses (iii) and (iv) of clause (a) of sub-section (2) of section 80C. Such provident funds are :

   (i) Government Provident Fund and Railway Provident Fund;

  (ii) provident funds established by such local authorities and institutions as are mentioned in the Schedule to the Provident Funds Act, 1925, and those notified by the Government from time to time under section 8(3) of that Act; and

(iii) any provident fund set up by the Central Government and notified by it in the Official Gazette - Public Provident Fund set up under the Public Provident Fund Act, 1968, is an example of such a fund.

(8) Under section 10(13A), any special allowance specifically granted to an assessee by his employer to meet expenditure actually incurred on payment of rent (by whichever name called), in respect of residential accommodation occupied by the assessee, is exempt from income-tax to the extent (not exceeding Rs. 400 per month) as may be prescribed having regard to the area or place in which such accommodation is situated and other relevant considerations. Rule 2A of the Income-tax Rules prescribes the limits in respect of the amount which is not to be included in the total income of the assessee for the purpose of section 10(13A). It has to be noted that only the expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee, subject to the limits laid down in rule 2A, qualifies for exemption from income-tax. Thus, house rent allowance granted to an employee who is residing in a house/flat owned by him is not exempt from income-tax. The disbursing authorities should satisfy themselves in this regard by insisting on production of evidence of actual payment of rent before excluding the house rent allowance from the taxable income of the employee.

However, the Honble Punjab and Haryana High Court has held in the case of CIT v. Justice S.C. Mittal [1980] 121 ITR 503, that even in the case of an assessee occupying his own house, the house rent allowance received from the employer is not liable to tax subject to the limitations imposed under section 10(13A) and rule 2A. That judgment has not been accepted by this Ministry and a special leave petition to the Honble Supreme Court has been filed. The disbursing authorities are, however, required to allow exemption in respect of house rent allowance granted to every employee assessable/assessed to income-tax under the jurisdiction of the Honble Punjab and Haryana High Court, and who is residing in the house/flat owned by him subject to the limits laid down in rule 2A. The actual rent paid for the purpose of the said rule would be deemed to be the annual letting value of the house/flat for which production of evidence in the form of a document showing the annual letting value fixed by the Municipal authority, etc., may be insisted upon before granting the exemption. In the annual salary return asterisk (*) against the name of each such employee may be given together with the following remark at the end of the return :

*Admissible exemption of HRA allowed in view of judgment in Justice S. C. Mittals case.

(9) No deduction should be made from the salary income in respect of any donations for charitable purpose. The tax relief on such donations as admissible under section 80G, will have to be claimed by the taxpayer separately at the time of the finalisation of the assessment. However, in cases where contributions to the National Defence Fund, the Jawaharlal Nehru Memorial Fund, the Prime Ministers Drought Relief Fund, or the Prime Ministers National Relief Fund are made, 50 per cent of such contributions may be deducted in computing the taxable income of the employee. Deduction will not be admissible where the aggregate of all contributions for the year is less than Rs. 250.

(10) Under section 80GG, an assessee is entitled to a deduction in respect of house rent paid by him for his own residence at the places specified under rule 11B of the Income-tax Rules. Such deduction is permissible subject to the following conditions :

  (a) the assessee has not been in receipt of any house rent allowance specifically granted to him which qualifies for exemption under section 10(13A);

  (b) he will be entitled to a deduction in respect of house rent paid by him in excess of 10 per cent of his total income, subject to a ceiling of 15 per cent thereof, or Rs. 300 per month, whichever is less; the total income for working out these percentages will be computed before making any deduction under section 80GG;

  (c) the assessee does not own any house property himself anywhere, nor his spouse, minor child, or the HUF of which he is a member, owns any house property anywhere;

  (d) the accommodation occupied by him for the purpose of his own residence is situated in any of the following places, namely :

   (i) Agra, Ahmedabad, Allahabad, Amritsar, Bangalore, Bhopal, Calcutta, Coimbatore, Delhi, Faridabad, Gwalior (Lashkar), Hyderabad, Indore, Jabalpur, Jaipur, Kanpur, Lucknow, Ludhiana City, Madras, Madurai, Nagpur, Patna, Pune (Poona), Srinagar, Surat, Vadodara (Baroda) or Varanasi (Banaras) or the urban agglomeration of each of such places; and

  (ii) Bombay, Calicut, Cochin, Ghaziabad, Hubli-Dharwar, Madras, Sholapur, Trivandrum or Vishakhapatnam.

        Explanation : Urban agglomeration, in relation to a place, means the area for the time being included in the urban agglomeration of such place for the purpose of grant of house rent allowance by the Central Government to its employees under the orders issued by it from time to time in this regard.

The disbursing authorities should satisfy themselves that all the conditions mentioned above are satisfied before such deduction is allowed by them to the assessee.They should also satisfy themselves in this regard by insisting on production of evidence of actual payment of rent.

(11) Section 10(14) provides for exemption from income-tax of any special allowance or benefit, not being in the nature of an entertainment allowance or other perquisite within the meaning of clause (2) of section 17, specially granted to the employee to meet the expenses actually incurred wholly, necessarily and exclusively in the performance of the duties of an office or employment of profit. In view of this provision, the disbursing authorities have been authorised, vide the Boards Circular No.196 [F. No. 275/29/76-ITJ], dated 31-3-1976, not to deduct tax at source from conveyance allowance granted to an employee, to the extent it is exempt under the said section. It has been stated therein that the employee in receipt of conveyance allowance would have to furnish the necessary certificate before the disbursing authority in support of the fact that the conveyance allowance is only a reimbursement of expenses laid out wholly, necessarily and exclusively in the performance of duties of an office or employment of profit. This satisfaction of the disbursing authorities would still be liable for scrutiny by the Income-tax Officer during regular assessment proceedings before him. The disbursing authority is also required to endorse a certificate in terms of section 10(14), on the tax deduction certificate issued under section 203. In this connection, attention is invited to the Explanation to clause (14) of section 10 which clarifies that any allowance granted to the assessee to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides, shall not be regarded for purposes of that clause, as a special allowance granted to meet expenses wholly, necessarily and exclusively incurred in the performance of such duties. This may be kept in view while deciding whether any expenditure from the special allowance has been actually incurred, and if so, the extent to which it has been incurred to meet the expenses wholly, necessarily and exclusively in the performance of duties of an office or employment of profit.

(12) Section 80RRA provides that where the gross total income of an individual who is a citizen of India, includes any remuneration received by him in foreign currency from any employer (i.e., a foreign employer or an Indian concern) for any services rendered by him outside India, 50 per cent of such remuneration will be deducted in computing the taxable income. It also provides that where the assessee renders continuous service abroad for more than 36 months, the remuneration received by him for any period of service after the expiry of the said 36 months will not qualify for any deduction. In the case of employees of the Central Government or any State Government, or person who was, immediately before taking up service outside India, in the employment of the Central Government or any State Government the deduction will be allowed only if the service of the employee is sponsored by the Central Government. In the case of other individuals the deduction will be allowed only if the individual is a technician and the terms and conditions of his service outside India are approved for the purposes of the said section by the Central Government or the prescribed authority. It is pertinent to note that the deduction is to be allowed with reference to the remuneration received by the individual in foreign currency. Thus, if a part of the remuneration is paid to the Indian technician, etc., in Indian currency, the amount paid in Indian currency will not be taken into account for the purposes of the deduction under section 80RRA.

The expression foreign employer has been defined under Explanation (b) to section 80RRA to mean

   (i) the Government of a foreign State; or

  (ii) a foreign enterprise; or

(iii) any association or body established outside India.

Where the continuous service outside India exceeds 36 months, the deduction admissible under section 80RRA may be limited to a period of 36 months. In allowing the deduction, documentary evidence should be obtained on the following points :

   (i) in the case of an individual who is in the employment of the Central Government or any State Government, the fact of his service having been sponsored by the Central Government; and

  (ii) in the case of any other individual being a technician, in the fact of the terms and conditions of his service outside India having been approved in this behalf by the Central Government (Ministry of Finance, Department of RevenueForeign Tax Division, New Delhi).

(13) Under section 80U in the case of every resident individual who is blind or suffers from permanent physical disability, which substantially reduces his capacity to be engaged in gainful employment, a deduction of Rs. 10,000 from the total income is allowable by the employer subject to the production of a certificate from the Income-tax Officer in favour of the employer as laid down in this Ministrys Circular No.272, dated 27-5-1980. The certificate once issued will continue to be in force till it is withdrawn by the Income-tax Officer.

(14) The total income computed in accordance with the provisions of the Act should be rounded off to the nearest multiple of Rs. 10 by ignoring the fraction which is less than Rs. 5 and increasing the fraction which amounts to Rs. 5 or more to Rs. 10. The net amount of tax deductible should be similarly rounded off to the nearest rupee.

(15) Attention is also invited to section 276B, where it is provided that if a person without reasonable cause or excuse fails to deduct, or after deducting fails to pay the tax as required under the provisions of Chapter XVII-B of the Act, he shall be punishable

   (i) in a case where the amount of tax which he has failed to deduct or pay exceeds Rs. 1 lakh, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine; and

  (ii) in any other case, with rigorous imprisonment for a term which shall not be less than three months but which may extend to three years and with fine.

4. While making the payment of tax deducted at source to the credit of the Central Government, it may kindly be ensured that the correct amount of income-tax and surcharge is recorded in the relevant challan. It may also be ensured that the right type of challan is used. New colour band challans are being introduced with separate numbers. The relevant challan for making payment of tax deducted at source from salaries is No. 9 with blue colour band. Along with this colour band challan, old challan forms will also continue to be used. The old challan form number is ITNS 39. Wherever the amount of tax deducted at source is credited to the Central Government through book adjustment, care should be taken to ensure that the correct amount of income-tax and surcharge is reflected therein.

5. For the information of employees, the rates of compulsory deposit to be made during the financial year 1981-82 under the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974, are given at Annex III. The deposit has to be made by a person whose current income during the financial year exceeds Rs. 15,000. The last date for making the deposit in the case of a person who is not required to pay advance tax under the Act is March 31 of the financial year in which the deposit is to be made and the deposit can be made in one or more instalments of his choice at any time during the financial year. A person who is required to pay advance tax, is liable to make the deposit (in one sum or in instalments of his choice) on or before the date on which the last instalment of advance tax is payable by him.

6. These instructions are not exhaustive and are issued only with a view to helping the employers to understand the various relevant provisions. Wherever there is a difference of opinion, a reference should always be made to the provisions of the Income-tax Act, and the relevant Finance Act through which the changes in the tax structure are made.

 

Annex I - extracts from part III of first schedule to
finance act, 1981

Paragraph A

Sub-Paragraph I

In the case of every individual or Hindu undivided family or unregistered firm or other association of persons or body of individuals, whether incorporated or not, or every artificial juridical person referred to in sub-clause (vii) of caluse (31) of section 2 of the Income-tax Act, not being a case to which Sub-Paragraph II of this Paragraph or any other Paragraph of this Part applies :

Rates of Income-tax

(1)

where the total income does not exceed Rs. 15,000

Nil;

(2)

where the total income exceeds Rs. 15,000 but does not exceed Rs. 25,000

30 per cent of the amount by which the total income exceeds Rs. 15,000;

(3)

where the total income exceeds Rs. 25,000 but does not exceed Rs. 30,000

Rs. 3,000 plus 34 per cent of the amount by which the total income exceeds Rs. 25,000;

(4)

where the total income exceeds Rs. 30,000 but does not exceed Rs. 50,000

Rs. 4,700 plus 40 per cent of the amount by which the total income exceeds Rs. 30,000;

(5)

where the total income exceeds Rs. 50,000 but does not exceed Rs. 70,000

Rs. 12,700 plus 50 per cent of the amount by which the total income exceeds Rs. 50,000;

(6)

where the total income exceeds Rs. 70,000 but does not exceed Rs. 1,00,000

Rs. 22,700 plus 55 per cent of the amount by which the total income exceeds Rs. 70,000;

(7)

where the total income exceeds Rs. 1,00,000

Rs. 39,200 plus 60 per cent of the amount by which the total income exceeds Rs. 1,00,000.

 

Surcharge on income-tax

The amount of income-tax computed in accordance with the preceding provisions of this Sub-Paragraph shall be increased by a surcharge for purposes of the Union calculated at the rate of ten per cent of such income-tax.

Annex II - typical examples of income-tax calculation

Example I

 

 

Rs.

Rs.

1.

Total salary income

 

25,000

2.

Contribution to Government Provident Fund

3,000

 

3.

Payments towards Life Insurance Premia (LIP)

1,000

 

4.

Contribution for participation in Unit-linked Insurance Plan, 1971, made under section 19(1)(cc) of the Unit Trust of India Act, 1963

500

 

5.

Deposit in a 10-year account or 15-year account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959

500

 

 

 

5,000

 

6.

Total salary income

 

25,000

7.

Deduct : Amount of standard deduction under section 16(i) of the Income-tax Act at 20 per cent of the amount

 

5,000

8.

Gross total income (67)

 

20,000

9.

Deduct : Amount on account of contribution towards GPF, LIP, Unit-linked Insurance Plan and deposit in 10-year account or 15-year account under the Post Office Savings Bank (CTD) Rules

 

 

 

Total amount paid Rs. 5,000

 

5,000

10.

Taxable income

 

15,000

11.

Total tax payable

 

Nil

Example II

[Illustrating calculation of limits under section 80C and valuation of some perquisites and limits of deduction under section 80C of the Income-tax
Act in case of an employee of a private company posted at Bombay]

 

 

Rs.

1.

Salary including dearness allowance

48,000

2.

Bonus

9,600

3.

Contribution to RPF

11,000

4.

LIP

10,000

5.

Free gas, electricity, water, etc. (actual bills paid by the company)

2,400

6.

Furniture at cost (including television set, radio set, refrigerator, other household appliances and an air-conditioner) belonging to the company

40,000

7.

(i) Furnished flat provided to the employee for which actual rent paid by the company (actual rent assumed to be equal to the fair rental value)

24,000

 

(ii) Rent recovered from the employee

12,000

Computation of total income

1.

Salary

 

48,000

2.

Bonus

 

9,600

 

 

 

57,600

3.

Valuation of perquisites :

 

 

 

Furnished flat at concessional rent u/s 17(2) read with clauses (a) and (b) of rule 3 of the Income-tax Rules

 

 

 

Fair Rental Value (FRV) (assumed to be equal to actual rent) Rs. 24,000: 10 per cent of salary including bonus

5,760

 

 

Add : Excess of FRV over 30 per cent of salary including bonus of Rs. 57,600 (i.e., Rs. 24,000Rs. 17,280)

6,720

 

 

Add : Perquisite value of the furniture (10 per cent of cost, i.e., Rs. 4,000)

4,000

 

 

 

16,480

 

 

Less : Rent paid by the employee

12,000

4,480

 

 

 

62,080

4.

Free gas, electricity, etc.

 

2,400

 

 

 

64,480

5.

Less : Standard deduction under section 16(i) at 20 per cent of the amount subject to a maximum of Rs. 5,000

 

5,000

6.

Gross total income(45)

 

59,480

7.

Less: Deduction under section 80C:

 

 

 

- PF paid Rs. 11,000 but restricted to one-fifth of salary of Rs. 48,000 (excluding bonus or Rs. 10,000, whichever is less

9,600

 

 

- LIP contribution

10,000

 

 

 

19,600

 

 

- The total of PF and LIP of Rs. 19,600 is to be further restricted to 30 per cent of the gross total income (i.e., 30 per cent of Rs. 59,480) or Rs. 30,000 whichever is less, i.e., Rs. 17,844

 

 

 

Deduction admissible on Rs. 17,844;

 

 

 

- first Rs. 5,000 (100 per cent)

5,000

 

 

- next Rs. 5,000 (50 per cent)

2,500

 

 

- of the balance of Rs. 7,844 (40 per cent)

3,138

10,638

8.

Taxable income

 

48,842

 

(Rounded off under section 288A)

 

48,840

9.

Tax payable thereon (Rs. 4,700+40 per cent of excess over Rs. 30,000)

 

12,236

10.

Surcharge at 10 per cent of income-tax payable

 

1,224

11.

Total tax payable

 

13,460

 

Notes :

1. In the case of a Government servant the value of perquisite of unfurnished accommodation provided free is derermined in accordance with the rules framed by the Government for allotment of residence to its employees. For determining the perquisite value of free furniture, it is taken, as in other cases, at 10 per cent per annum of the original cost of the furniture, or if it is hired from a third party, the actual hire charges payable.

2.Where the unfurnished accommodation is provided to its employees by the Reserve Bank of India or any other public sector body specified in sub-clause (2) of clause (a) of rule 3 of the Income-tax Rules, say a nationalised bank, State Trading Corporation, etc., it is taken as 10 per cent of the salary due to the employees and where the accommodation is furnished, as in other cases, an additional 10 per cent of the original cost of furniture, or if it is hired from a third party, the actual hire charges payable therefor.

3. In the example given above, the actual rent has been assumed to be equal to the fair rental value. Fair rental value can, however, be different from the actual rent. It is defined in Explanation 2 below clause (a) of rule 3 to mean, in the case of an accommodation which is unfurnished, the rent which a similar accommodation would realise in the same locality or the municipal valuation in respect of the accommodation, whichever is higher.

4. In case the accommodation is situated in Bombay, Calcutta, Delhi and Madras, the excess of 30 per cent of salary over fair rental value, as against 20 per cent in other cases, is required to be added in determining the value of perquisite in view of the Boards Circular No. 130, dated 16-3-1974.

Example III

[Illustrating limits of deduction under section 80C ]

 

 

Rs.

Rs.

1.

Total salary income (including Rs. 2,400 as conveyance allowance at Rs. 200 p.m. received from the employer)

 

30,000

2.

Contribution to RPF

9,500

 

3.

Payments towards LIP

1,000

 

4.

Contribution for participation in Unit-linked insurance plan, made under section 19(1)(cc) of the Unit Trust of India Act, 1963

1,500

 

5.

Deposit in a 10-year account or 15-year account under the Post Office Savings Bank (CTD) Rules

1,000

 

6.

Total salary income

 

30,000

7.

Deduct : Amount of standard deduction under section 16(i) at 20 per cent of the amount subject to a maximum of Rs. 5,000

 

5,000

8.

Gross total income (67)

 

25,000

9.

Deduction under section 80C :

 

 

 

- Contribution of Rs. 9,500 to PF under section 80C (2)(d) restricted to one-fifth of salary of Rs. 30,000 or Rs. 10,000, whichever is less

6,000

 

 

- LIP

1,000

 

 

- Contribution to participation in Unit-linked-insurance plan, made under section 19(1)(cc) of the UTI Act

1,500

 

 

- Deposit in a 10-year account or 15-year account under the Post Office Savings Bank (CTD) Rules

 

1,000

 

 

 

9,500

 

- Restricted to 30 per cent of the gross total income or Rs. 30,000, whichever is less (i.e., 30 per cent of Rs. 25,000)

7,500

 

 

- Deduction admissible on Rs. 7,500 on the

 

 

 

- first Rs. 5,000(100 per cent)

5,000

 

 

- next Rs. 2,500(50 per cent)

1,250

6,250

10.

Taxable income (89)

 

18,750

11.

Income-tax payable at Rs. 18,750

 

1,125

12.

Surcharge on income-tax at 10 per cent

 

112.50

13.

Total tax payable (1+12)

 

1,237.50

14.

Rounded off (under section 288B)

 

1,238.00

 

Annex III - rates of compulsory deposit

(1)

where the current income exceeds Rs. 15,000 but does not exceed Rs. 25,000

4.5 per cent of the current income;

(2)

where the current income exceeds Rs. 25,000 but does not exceed Rs. 35,000

Rs. 1,125 plus 11 per cent of the amount by which the current income exceeds Rs. 25,000;

(3)

where the current income exceeds Rs. 35,000 but does not exceed Rs. 70,000

Rs. 2,225 plus 12.5 per cent of the amount by which the total income exceeds Rs. 35,000;

(4)

where the total income exceeds Rs. 70,000

Rs. 6,600 plus 15 per cent of the amount by which the total income exceeds Rs. 70,000 :

 

Provided that

  (a) where the current income exceeds Rs. 15,000 but does not exceed Rs. 15,710 the compulsory deposit shall in no case exceed the amount by which the current income exceeds Rs. 15,000 ;

  (b) where the amount of compulsory deposit calculated in accordance with the foregoing provisions is less than Rs. 100, it shall not be necessary for the taxpayer concerned to make such deposit.

 

Circular : No. 299 [F. No. 275/10/81/-IT(B)], dated 24-4-1981.

FINANCIAL YEAR 1981-82

1723. Instructions for deduction of tax at source from interest on securities during financial year 1981-82 at the rates specified in Part III of First Schedule to Finance Bill, 1981

1. I am directed to invite a reference to this Departments Circular No. 275, dated 16-7-1980 and to enclose a copy of the draft circular letter setting out the rates at which income-tax and surcharge should be deducted from interest on Government securities after March 31, 1981, as prescribed in the Finance Bill, 1981.

2. A circular on the basis of this draft may please be issued immediately to all Treasury Officers and Sub-Treasury Officers under your control individually.

DRAFT CIRCULAR REFERRED TO IN INSTRUCTIONS

1. I am to invite your attention to this Office Letter No. ...... regarding deduction of income-tax and surcharge from interest on Government securities during the financial year 1980-81.

2. According to the Finance Bill, 1981, except in the case of interest on securities payable to the Life Insurance Corporation of India which is exempt from deduction of income-tax, income-tax is to be deducted during the financial year 1981-82 from the entire amount of interest on securities at the following rates, namely :

 

 

 

Rate of

Rate of

 

 

 

Income-tax

Surcharge

I.

In the case of a person other than a company :

 

 

 

(i)

where the person is resident in India on income by way of interest payable on any security (excluding interest payable on a tax-free security)

10 per cent

Nil

 

(ii)

where the person is not resident in India

 

 

 

(a)

on interest on securities(excluding interest payable a on tax-free security)

income-tax at 30 per cent and surcharge at 3 per cent of the amount of the interest,

 

 

 

or

 

 

 

income-tax and surcharge on income-tax in respect of the interest at the rates prescribed in Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Finance Act, 1981, if such interest income had been the total income, whichever is higher

 

(b)

on interest payable on a tax-free security

15 per cent

1.5 per cent

II.

In the case of a company

 

 

 

(i)

where the company is a domestic company on interest on securities (excluding interest payable on a tax-free security)

21.5 per cent

0.5 per cent

 

(ii)

where the company is not a domestic company

 

 

 

(a)

on interest payable on a tax-free security

 

 

 

 

 

44 per cent

1.1 per cent

 

(b)

on interest on other securities

70 per cent

1.75 per cent

 

 

 

 

 

 

 

 

3. The term domestic company means an Indian company or any other company which, in respect of its income liable to income-tax under the Act, for the assessment year commencing on April 1, 1981 has made the prescribed arrangements for the declaration and payment within India of the dividends (including dividends on preference shares) payable out of such income in accordance with the provisions of section 194.

4. In making payment or crediting interest on Government securities after April 1, 1981, you are requested to deduct income-tax at the rates specified above, except in cases where an exemption or abatement certificate granted by an Income-tax Officer under sub-section (1) of section 197 is produced. The following should be followed in this connection :

(1) Exemption or abatement certificates issued before April 1, 1981 authorising deduction of tax at a particular rate expressed as percentage of the amount of interest should be accepted and acted upon, if operative for the financial year ending on March 31, 1982.

(2) Where a certificate is issued by the Income-tax Officer on or after April 1, 1981, authorising deduction of tax at specified rate in respect of any person, income-tax should be deducted at the rates specified therein.

(3) No tax should be deducted in cases in which, from a certificate issued by the Income-tax Officer or otherwise, you are satisfied that the payee is a person exempt from income-tax under sections 10 to 13A.

(4) No tax should be deducted from interest payable on 7-year National Savings Certificate (IV Issue).

(5) No tax should be deducted from any interest payable on National Development Bonds.

(6) No tax should be deducted from any interest payable on any other security on the Central or State Government where the security is held by a resident individual, and the holder makes a declaration in writing before the person responsible for making the payment to the effect that

  (a)  he has not previously been assessed under the 1961 Act or under the 1922 Act ;

  (b)  his total income of previous year in which the interest is due is not likely to exceed the minimum amount not chargeable to income-tax ; and

  (c)  the total nominal value of the securities held by him (including such securities, if any, as are held on his behalf by any other person) did not exceed Rs. 2,500 at any time during the said previous year.

(7) No tax should be deducted from any sum payable in respect of any securities owned by a corporation established by or under a Central Act which under any law for the time being in force is exempt from income-tax on its income.

(8) Under section 288B, fractions of one rupee contained in the amount of tax will have to be rounded off to the nearest rupee by ignoring amounts less than 50 paise and increasing amounts of 50 paise or more to one rupee. Hence, the amount of tax to be deducted at source should be rounded off to the nearest rupee in accordance with the aforesaid provisions of the Act.

(9) In case of doubt, the Income-tax Officer should be consulted before making the deduction from interest on Government securities. It may be added that the above enunciated list of securities on which no tax shall be deducted is not exhaustive but is only illustrative.

 

Circular: No. 300

Financial year 1982-83

1778. Instructions for deduction of tax at source from insurance commission during financial year 1982-83 at the rates specified in Part II of First Schedule to Finance Bill, 1982

1. I am directed to invite a reference to the Boards Circular No. 300 [F. No. 275/5/81-IT(B)], dated 27-4-1981 wherein the rates at which the deduction of income-tax was to be made during the financial year 1981-82 from payments of income by way of insurance commission under section 194D were intimated.

2. The Finance Bill, 1982 does not propose any change in the rates at which the deduction of income-tax is to be made during the financial year 1982-83 in Part II of the First Schedule to the said Bill from such income. However, some changes have been proposed in Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the said Bill. A copy of the proposed Sub-Paragraph I[`5] 1 is annexed. The deduction of tax may, therefore, continue to be made at the rates intimated in the circular referred to in para 1 above subject to the rates proposed to be prescribed in the annexed Sub-Paragraph, wherever the same are applicable.

3. These instructions may please be brought to the notice of all concerned. In case of any doubt the Income-tax Officer concerned and/or Public Relations Officer may be consulted.

Circular: No. 340 [F. No. 275/20/82-IT(B)], dated 6-5-1982.

 

Circular: No. 301 [F. No. 275/11/81-IT(B)], dated 29-4-1981.

FINANCIAL YEAR 1981-82

1763. Instructions for deduction of tax at source from winnings from horse races during financial year 1981-82 at the rates specified in Part II of First Schedule to Finance Act, 1981

1. I am directed to invite a reference to this Departments Circular No. 280 [F. No. 275/19/80-IT(B)], dated 20-9-1980, on the above subject, wherein the rates at which deduction of tax under section 194BB to be made during the year 1980-81 from winnings from horse races were communicated.

2. The Finance Bill, 1981 proposes the rates for deduction of tax at source for the financial year 1981-82 as specified in Part II of the First Schedule to the said Act. They are as below :

Rates of income-tax including surcharge

I. In the case of a person other than a company

 

(a) where the person is resident

33 per cent (IT 30 per cent + SC 3 per cent);

(b) where the person is not resident

33 per cent (IT 30 per cent + SC 3 per cent);

 

or

 

income-tax and surcharge on income-tax in respect of the income at the rates prescribed in Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Finance Bill, 1981, if such income had been the total income,

 

whichever is higher.

II. In the case of a company

 

(a) where the company is a domestic company

22 per cent (IT 21.5 per cent + SC 0.5 per cent);

(b) where the company is not a domestic company

71.75 per cent (IT 70 per cent + SC 1.75 per cent).

3. The tax deducted should be paid to the credit of the Central Government by remitting it into the office of the Reserve Bank of India or State Bank of India or any other authorised public sector bank within one week from the last day of the month in which the deduction is made. While making the payment of tax deducted at source to the credit of the Central Government, it may please be ensured that the correct amount of income-tax and surcharge is recorded in the relevant challan. It may also be ensured that the right type of challan is used. The relevant challan for making payment of tax deducted at source from payments by way of winnings from horse races made to company-assessees is No. 2 with Red Colour Band and in respect of payments made to non-company-assessees is No. 8 with Blue Colour Band.

4. Attention is also invited to section 276B wherein it is provided that if a person without reasonable cause or excuse fails to deduct, or after deducting fails to pay the tax as required under the provisions of Chapter XVII-B, he shall be punishable

   (i)  in a case where the amount of tax which he has failed to deduct or pay exceeds one hundred thousand rupees, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine; and

  (ii)  in any other case, with rigorous imprisonment for a term which shall not be less than three months but which may extend to three years and with fine.

5. These instructions are not exhaustive and are issued only with a view to helping the persons responsible for making deductions of tax under this section. Whenever there is a difference of opinion, a reference should always be made to the provisions of the Income-tax Act, and the relevant Finance Act through which the changes in the tax structure are made.

6. In case any assistance is required, the Income-tax Officer concerned or the local Public Relations Officer of the Income-tax Department may be approached for the same, who will, if necessary, obtain the orders of higher authorities in the matter.

 

Circular : No. 302 [F. No. 331/2/78-GT], dated 2-5-1981.

Section 5 l Exempted gifts

1443. Whether gifts by way of remittance of foreign currency or other foreign exchange made by non-resident donors to residents in India are not taxable on the ground that they fall within clause (ii)(a) of sub-section (1)

1. The Board have had occasion to consider the question of taxability or otherwise of gifts by way of remittance of foreign currency or other foreign exchange made by non-resident donors to residents in India.

2. The question has to be decided in the light of section 5(1)(ii)(a) of the Gift-tax Act which reads :

5. (1) Gift-tax shall not be charged under this Act in respect of gifts made by any person

(i)

**

**

**

  (ii)  of movable property situate outside the territories unless the person

  (a)  being an individual, is a citizen of India and is ordinarily resident in the said territories.

3. In view of the provisions of section 5(1)(ii)(a), what is relevant for the purpose of assessability is the location of the property gifted, at the time of the gift.

4. If a non-resident donor makes a gift in foreign exchange or foreign currency to a person in India and the bank draft or cheque or the currency is received by or on behalf of the donee outside India, there will obviously be no liability to gift-tax in respect of such a gift. That is because the subject-matter of the gift in such cases will be property situated outside India. Again, where the property in such foreign currency or foreign exchange is delivered to the donee in India, that is, where the cheque or draft is sent by the donor to the donee in India on his own by post or otherwise, the gift, undoubtedly, would attract liability to gift-tax. This is because in such a case the post office or the agency through which the gift is sent acts as an agent of the donor and the subject-matter of the gift will be property situated in India.

5. The situation which requires some clarification, however, is where a non-resident donor makes a gift in foreign exchange or foreign currency to a person in India and the bank draft or cheque representing the gift is sent by the donor by post to the address of the donee in India at the request of the donee. The Board clarify that there will be no liability to gift-tax in respect of these transactions. That is because in such a case the gift can be said to have been received by the bank/post office as an agent of the donee outside India. This inference is based on the decision in the case of Rajkumar Mills Ltd. v. CIT [1976] 103 ITR 92, 99, 100 wherein their Lordships of the Bombay High Court on a review of the relevant principles laid down by the Supreme Court quoted as under :

If the cheque is sent by post, the receipt would be at the place where the cheque is posted provided the mode of sending it by post is adopted at the express or implied request of the addressee, in such cases the post office being the agent of the addressee; otherwise, the receipt would be at the place where the cheque is delivered by the post office to the addressee.

6. The above should be brought to the notice of all the field officers working in your charge.

 

Circular : No. 303

FINANCIAL YEAR 1982-83

1746. Instructions for deduction of tax at source from winnings from lottery or crossword puzzle during financial year 1982-83 at the rates specified in Part II of First Schedule to Finance Bill, 1982

1. I am directed to invite a reference to the Boards Circular No. 303 [F. No. 275/6/81-IT(B)], dated 12-5-1981, wherein you were requested to issue necessary instructions for making deduction of income-tax at source from winnings from lottery or crossword puzzle at the rates given in Part II of the First Schedule to the Finance Bill, 1981.

2.The Finance Bill, 1982 does not propose any change in the rates of deduction of tax at source from such income for the financial year 1982-83 in Part II of the First Schedule thereof. However, some changes have been proposed in Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the said Financial Bill, a copy of which is annexed. [`6] 1 The tax should, therefore, continue to be deducted at source during the financial year 1982-83, at the rates intimated in the Boards Circular referred to in para 1 above except where the rates prescribed in Sub-Paragraph I of Part III of the First Schedule are applicable. The deduction of tax should be made in accordance with the annexed Sub-Paragraph I [`7] 1, wherever it is applicable.

3. These instructions are issued only with a view to helping the persons responsible for making deductions of tax under the provisions of the Income-tax Act. The Finance Act of the relevant year through which the changes in the tax structure are made should always be referred to for any difference of opinion.

Circular : No. 338 [F.No. 275/17/82-IT(B)], dated 4-5-1982.

 

Circular : No. 304 [F. No. 331/12/80-GT], dated 2-6-1981.

1447. Whether gifts in kind are eligible for exemption under clause (v) of sub-section (1)

1. Attention is invited to Circular No. 284, dated 13-10-1980 issued by the Board from F. No. 340/9/80-GT [Annex] on the above subject.

2. On reconsideration of the matter, Circular, dated 13-10-1980 stands withdrawn. In other words, exemption under section 5(1)(v) is not confined to donations in cash/money only but is applicable to all types of properties, movable or immovable.

ANNEX - CIRCULAR NO. 284, DATED 13-10-1980 REFERRED TO IN CLARIFICATION

1. The question as to whether gifts in kind made by any person would be eligible for exemption under section 5(1)(v) has been considered by the Board in consultation with the Ministry of Law.

2. The Board have been advised that a gift other than a sum of money would not be eligible for such exemption in view of the Explanation 5 to section 80G of the Income-tax Act inserted by the Finance Act, 1976, with effect from April 1, 1976.

3. Explanation 5 to section 80G of the Income-tax Act provides : For removal of doubts, it is hereby declared that no deduction shall be allowed under this section in respect of any donation unless such donation is of a sum of money. Under section 5(1)(v) gift-tax shall not be charged in respect of gifts made to any institution or fund established or deemed to be established for a charitable purpose to which the provision of section 80G of the Income-tax Act, 1961 apply. Since the provisions of section 80G would be applicable only in respect of the donation or gifts which would be a sum of money as per Explanation 5 thereof, it follows that exemption, under section 5(1)(v) of the Gift-tax Act, would also be restricted to such gifts.

 

Circular : No. 305 [F. No. 202/56/79-IT(A-II)], dated 12-6-1981.

SECTION 32A [`8] 1l INVESTMENT ALLOWANCE

252-253. Reserve required to be created in respect of claim for investment allowance - Circular No. 259, dated 11-7-1979 to be followed while considering adequacy of reserve

1. Attention is invited to the Boards Circular No. 259, dated 11-7-1979 [Sl. No. 274, p. 1.617 post] regarding the creation of statutory reserve under section 34(3)(a) in connection with the claim of development rebate under section 33. It was stated in the circular referred to above that the condition for creation of the requisite reserve would stand satisfied if the sum total of the reserves created either in the year of installation or use or in the subsequent year or years is equal to the requisite amount of 75 per cent of the actual allowance of development rebate in any subsequent year or years.

2. The Board have since received representations that similar instructions may be issued in regard to the reserve required to be created in respect of claims of investment allowance under section 32A which has been substituted for development rebate allowance with effect from April 1, 1976.

3. Investment allowance is admissible in accordance with the provisions of section 32A in respect of the year of installation of the machinery or plant or in the immediately succeeding year if the machinery or plant is put to use in that year. The allowance is, however, granted subject to the creation of a reserve equal to 75 per cent of the amount actually to be allowed which should be debited to the profit and loss account of that year. It has further been provided in section 32A(3) that only so much of the investment allowance is to be allowed in any year as is sufficient to reduce the total income to nil and the balance of investment allowance has to be carried forward to the following assessment year and so on up to eight assessment years. Thus, insofar as the above matters are concerned, the provisions relating to the grant of investment allowance are in pari materia with the provisions governing the grant of development rebate. In view of the legal position stated above, it has been decided by the Board that the contents of Circular No. 259, dated 11-7-1979 referred to above may be followed while considering the adequacy of the reserves created in respect of the grant of investment allowance also.

4. Attention is also invited to the provisions of sub-section (9) of section 32A which is reproduced below and which is quite relevant for the purposes of determining the amount of reserve to be created as it gives the assessee an option to create reserve for the full amount admissible under section 32A :

(9) For the removal of doubts, it is hereby declared that the deductions under sub-section (1) shall not be denied by reason only that the amount debited to the profit and loss account of the relevant previous year and credited to the investment allowance reserve account exceeds the amount of the profit of such previous year (as arrived at without making the debit aforesaid) in accordance with the profit and loss account.

 

Circular: No. 306 [F. No. 385/7/81-IT(B)], dated 19-6-1981.

Section 191 l Direct Payment

938. Payment of direct taxes, other than tax deducted at source, to be made at the place where taxpayer is assessed to tax

Clarification 1

1. Instances of delay in giving credit to the taxpayers for the payment of direct taxes have been brought to the notice of the Board where such payments are made at a place other than the place of assessment of the taxpayer. The delay is generally due to the time taken in the departmental copy of the receipted challan reaching the Income-tax Officer concerned.

2. In order to avoid such delays it is suggested that, as far as possible, payment of direct taxes, other than of tax deducted at source, should be made at the place where the taxpayer is assessed to tax. The departmental copy of the challan will then reach the Income-tax Officer concerned quickly and the Department will be able to give credit to the taxpayer for his tax payment expeditiously.

3. As regards the tax deducted at source the payment should be made at the place of the income-tax office where the person responsible for deduction and payment of tax is required to file the annual/periodical statements of tax deducted at source as prescribed under the Income-tax Rules.

4. As mentioned in paragraph 2 above, payment of direct taxes other than of tax deducted at source should be made at the place where the taxpayer is assessed to tax. The volume of payments on account of direct taxes is very much larger in the metropolitan cities, viz., Delhi, Greater Bombay, Madras, Calcutta, Hyderabad, Bangalore, Ahmedabad and Kanpur. In these cities, therefore, offices of the Reserve Bank, all branches of State Bank of India and all branches of 2 to 3 other selected public sector banks which were in existence on 1-4-1976, provide the facilities for acceptance of payments of direct taxes either in the form of cash or by cheques/drafts. A list showing the names of banks and the number of branches which have been authorised for the purpose in these cities is enclosed for information of your members. Likewise, in other important and bigger centres, in addition to branches of the State Bank of India, branches of two other selected public sector banks accept payments of direct taxes and the income-tax offices do guide the assessees in this regard.

5[`9] 1. An important point which the Board would like to stress is that while payment by a local cheque or draft can be made at any of the branches of banks authorised for the purpose, the assessees are advised that if they have an account in any branch of an authorised bank they should tender cheques at the said branch of the authorised bank. This arrangement will enable them to get the receipted copies of challans without any delay and will also save manpower, etc., by eliminating the Clearing House Operations in respect of such cheques. Another advantage of this procedure will be that if any payment made by the taxpayer is misclassified, the mistake can be immediately corrected.

Annex-Statement Showing The Details of Authorised Public Sector Banks at Metropolitan Cities where the Reserve Bank of India (RBI) is the Focal Point Bank

Focal point bank

Nominated public sector banks

No. of all authorized branches on 1-4-1976

1

          2

3

1. RBI New Delhi

1. State Bank of India

108

 

2. Punjab National Bank

78

 

3. Bank of India

34

 

4. Syndicate Bank

41

 

 

261

2. RBI Bombay

1. State Bank of India

67

 

2. Bank of Baroda

60

 

3. Bank of India

67

 

4. Central Bank of India

57

 

 

251

3. RBI Madras

1. State Bank of India

47

 

2. Indian Bank

64

 

3. Indian Overseas Bank

43

 

 

154

4. RBI Calcutta

1. State Bank of India

105

 

2. United Bank of India

124

 

3. United Commercial Bank of India

49

 

4. Punjab National Bank

28

 

 

306

5. RBI Hyderabad

1. State Bank of India

31

 

2. Syndicate Bank

26

 

3. State Bank of Hyderabad

48

 

 

105

6. RBI Bangalore

1. State Bank of India

26

 

2. Canara Bank

61

 

3. Syndicate Bank

43

 

4. State Bank of Mysore

49

 

 

179

7. RBI Ahmedabad

1. State Bank of India

54

 

2. Bank of India

29

 

3. Bank of Baroda

37

 

 

120

8. RBI Kanpur

1. State Bank of India

52

 

2. Bank of India

4

 

3. Punjab National Bank

17

 

 

73

 

 

 

 

Clarification 2

1. In para 5 of Boards Circular No. 306, dated 19-6-1981 the assessees were advised that if they had account in any branch of the authorised bank, they should tender cheques at the said branch of the authorised bank. This arrangement was suggested in the interest of taxpayers themselves. Further, they are advised that in case they do not have any account in any branch of the authorised bank at the place where they are being assessed, they might consider opening an account in any branch of the said banks so that the payment of taxes and encashment of refund of taxes, etc., can be routed through that account. The advantage of this procedure would be that they would get expeditious credit for tax payments made in the books of the Income-tax Department and the possibility of any payment or challan being lost in transit would be eliminated.

2. The procedure suggested above should not be construed as an imposition on the taxpayers and it is reiterated that they are free not to use the procedure suggested if they so desire. However, the adoption of the procedure would be in their own interest.

Letter: F.No. 385/37/-81-IT(B), dated 3-10-1981.

 

Circular : No. 307 [F. No. 220/3/81/(A-II)], dated 23-6-1981.

 

Sections 139 to 156

Procedure for assessment

Section 139 [`10] [`1]l Return of income[`11] [`2]

794. Sending blank return forms by post to all taxpayers existing on registers of department - Instructions in Circular Nos. 296 and 297 withdrawn

1. Reference is invited to Boards Circular No. 296 [F. No. 220/3/81-IT (A-II)], dated 31-3-1981 as amended by its Circular No. 297 [F. No. 220/3/81-IT (A-II)], dated 10-4-1981 [Annex I and Annex II] in which it was desired that two copies of return forms should be sent by the department on its own to all assessees on the register of the department having income above taxable limit.

2. This matter has been discussed in the Commissioners Conference, 1981 and it was pointed out that in addition to supply of return forms across the counters in the Income-tax Offices and their distribution through selected post offices, the return forms are taken in bulk by the income-tax practitioners for their clients. It was also pointed out that sending of return forms to all the assessees on its own may involve a lot of labour and money which in many cases may amount to duplication as well. Further, there is likelihood of sending wrong forms also to the assessees. An income-tax practitioners association has also suggested that the instructions referred to in para 1 should be modified. The matter has therefore, been reconsidered and it is decided to revert to the old practice. It is also decided that return forms may be sent to the head of the department or the Public Relations Officer of an organisation in bulk for supply to the employees of the department/organisation in the case of salaried taxpayers. It is also decided to have the forms supplied expeditiously to any assessee by post on a request having been made in this behalf.

3. This circular supersedes the directions contained in Circular Nos. 296 and 297 referred to above.

Annex I - Circular No. 296, Dated 31-3-1981
Referred to in Clarification

1. With a view to enabling the taxpayers existing on the registers of the Income-tax Department to file the return of income in time and to avoid inconvenience in approaching the income-tax officers for getting the return forms, it has been decided by the Board that from the financial year 1981-82, two copies of blank income-tax return forms will be despatched by the concerned ITOs through ordinary post to all the taxpayers existing on the registers of the Department. While sending the return forms, the ITO will also send along with it challan forms for payment of self-assessment tax and two copies of the statements of advance tax to be made under section 209A of the Income-tax Act.

2. It has further been decided that two copies of the wealth-tax return form should also be sent to all those who are existing wealth-tax assessees on the registers of the Department along with the income-tax return forms.

3. This arrangement is in addition to existing arrangement of supply of return forms across the counters in the Income-tax Offices and through selected post offices. While mailing the return forms in bulk to the taxpayers, notices under section 139(2) or 14(2) are not expected to be issued. However, in cases where returns are not received by the due date, notices under section 139(2)/14(2) of the Income-tax Act/Wealth-tax Act, along with the return forms, will be sent separately through registered post or notice servers.

4. A compliance report may be sent by May 31 every year by the Commissioner to the Board to the effect that return forms, etc., have been supplied to all the assessees in his charge.

ANNEX II - CIRCULAR NO. 297, DATED 10-4-1981
REFERRED TO IN CLARIFICATION

Reference is invited to Boards Circular No. 296, dated 31-3-1981 by which the Commissioners were asked to direct the ITOs to send two copies of return forms, etc., to the assessees existing on the register of the Department by ordinary post. This direction is modified to the extent that return forms etc., should be sent only to those assessees whose income according to the latest return/assessment on the file is above the taxable limit applicable to the assessment year 1981-82 or later years, and also to assessees claiming refund under section 237.

 

FINANCE ACT, 1981 - CIRCULAR NO. 308, DATED 29-6-1981

 

Circular : No. 309 [F. No. 200/125/79-IT(A-I)], dated 3-7-1981.

183. Cash equivalent of leave salary payable to legal heirs on the death of Government/non-Govemment employees - Whether taxable under the head Salaries

clarification 1

1. In terms of para 1(iv) of O.M. No. 16(2)-E-IV(A)/73, dated 9-1-1974 issued by the Ministry of Finance, Department of Expenditure, the family of a Government servant, who dies in harness, is entitled to receive the cash equivalent of the leave salary that the deceased Government employee would have got if he had gone on earned leave. The amount is payable on the date immediately following the date of death, subject to a maximum leave salary for 120 days and subject to the reduction envisaged in rule 40(7)(a) of the Central Civil Service (Leave) Rules, 1972. The question whether the amount received by the family in these circumstances is taxable has been considered.

2. The Board have been advised that this receipt in the hands of the family is not in the nature of one from an employer to an employee. The deceased had no right or interest in this receipt. This payment is only by way of financial benefit to the family of the deceased Government servant, which would not have been due or paid had the Government servant been alive. In view thereof the amount will not be liable to income-tax.

clarification 2

The leave salary paid to the legal heirs of the deceased employee in respect of privilege leave standing to the credit of such employee at the time of his/her death is not taxable as salary.

For being taxable as salary, the payment must be due from an employer to the assessee. If the deceased officer is regarded as the assessee in respect of the proposed payment, then the amount was not due to the assessee. Firstly, this is not a payment which was due to be paid to him after his death as a matter of contractual right. Secondly, even before his death, the payment was not due to him unless and until the leave was actually taken by him.

If the legal representative of the deceased is to be taken to be the assessee, then the amount/proposed to be paid is certainly not due to him. It is an ex gratia payment on compassionate grounds in the nature of gift. Thus, the payment is not in the nature of salary.

Letter : No. 35/1/65-IT(B), dated 5-11-1965.

Judicial analysis

Referred to in - The above letter was referred to in ACED v. Durga Devi Lara [1984] Taxation 75(6)-118 (Hyd. - Trib.). This was a case under the Estate Duty Act, and the question involved was whether salary equivalent of leave not availed by the deceased which was paid to the legal heirs was property passing on death under section 5 of that Act. The Tribunal observed :

The categorical statements are that the amount was not due to the deceased unless he took leave which he had not taken in the present case. It was also not a payment which was due to be paid after his death as a matter of contractual right. Therefore, the deceased was not possessed of any property. This is a case where property, viz., monetary equivalent of leave salary, was not in existence at a time before the death of the deceased. This being so, the question of any property passing on his death did not arise. In the Boards circular it is also categorically stated that the payment was an ex gratia payment on compassionate grounds in the nature of a gift to the legal heirs. The learned departmental representative sought to submit that the amount may be ex gratia as far as the legal heirs were concerned but it did not imply that it partook of the same nature as far as the deceased was concerned. If the amount was due to the deceased, it could never be an ex gratia payment to the legal heirs, but it would be a legitimate due. So if the payment is ex gratia to the legal heirs, certainly it was not an amount due to the deceased.

Having come to the conclusion that there was no property of the deceased prior to his death, the question of any property passing on his death, albeit a moment after his death, insofar as leave salary in respect of leave not taken is concerned, did not arise. . . .. (pp. 120-121)

 

Circular : No. 310 [F No. 164/15/80-IT(A-I)], dated 29-7-1981.

6. Agricultural income derived from manufacture and sale of tea - Decision of Supreme Court in CST v. D.S. Bist & Sons - Effect thereof on rule 8 of Income-tax Rules

1. Section 2(1) defines agricultural income, inter alia, to mean any rent or revenue derived from land which is situated in India and is used for agricultural purposes. Further any income derived from such land by the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by him to render the produce raised or received by him fit to be taken to market is also agricultural income.

2. The Boards attention has been drawn to the decision of the Supreme Court in CST v. D. S. Bist & Sons AIR 1980 SC 169. The question before the Supreme Court turned on the interpretation of section 3 of the U.P. Sales Tax Act, 1948. The short facts of the case were that the assessee owned some tea gardens in the State of U.P. The tea leaves grown by him in his garden were sold in the market after being processed and packed. It was contended on his behalf before the sales tax authorities that the tea leaves sold by him were agricultural produce grown by himself and, therefore, the sales were not exigible to sales tax. It was common ground that tea leaves had been put through the process of withering, crushing, roasting and fermentation before being packed and sold by the assessee. The Supreme Court held that the tea leaves did not cease to be an agricultural produce merely because of the performance by the assessee of the processes outlined above.

3. Reference has been received in this connection on the effect of the decision on rule 8 of the Income-tax Rules under which income derived from sale of tea grown and manufactured by the seller in India is to be computed as if it was income derived from business and 40 per cent of such income to be deemed as income liable to income-tax.

4. The Board have been advised that the Supreme Courts decision in this case deals only with the question whether tea manufactured and sold is agricultural produce for the purposes of law relating to sales tax in force in U.P. This case has no bearing on the question as to what constitutes agricultural income or upon the power of Parliament to levy income-tax on tea plantations and tea companies.

5. In this connection, it may be noted that the power of the State Legislature to levy agricultural income-tax is derived from entry 46 of List II of the Seventh Schedule to the Constitution which refers to Taxes on agricultural income. The term agricultural income has been defined in article 366(1) of the Constitution as meaning agricultural income defined for the purposes of the enactments relating to Indian income-tax. The legislative competence of the State Legislature is thus restricted by the definition of agricultural income and it is not open to the State Legislature to enlarge the definition of agricultural income so as to bring within its scope what would not be agricultural income for the purposes of the Income-tax Act. This position has been recognised all along and is supported by the Supreme Courts ruling in Karimtharuvi Tea Estates Ltd v. State of Kerala [1963] 48 ITR 83 and Anglo-American Direct Tea Trading Co. Ltd. v. CAIT [1968] 69 ITR 667. Both these decisions are authority for the proposition that what is agricultural income insofar as tea estates are concerned has to be computed strictly in accordance with the scheme of the Income-tax Act. Rule 8 makes 40 per cent of the income derived from the sale of tea grown and manufactured by the seller in India liable to tax under the Income-tax Act. This is on the basis that this is not agricultural income and it is only the balance of 60 per cent which is agricultural income for the purposes of the Income-tax Act and also for the purposes of entry 46 of the State List.

6. In view of the foregoing, the income from tea grown and sold in India will continue to be computed in terms of rule 8.

 

Circular : No. 311 [F. No. 200/50/77-IT(A-I)], dated 24-8-1981.

193. Rule 3(a)(iii) of Income-tax Rules - Valuation of perquisite represented by free boarding and lodging in the case of hotel employees

1. Attention is invited to Boards Circular, dated 2-3-1960 issued from F. No. 35/24/59-IT(A-I) on the above subject. A copy of this circular is enclosed for ready reference [printed here as Annex].

2. Rule 3 of the Income-tax Rules, 1962 lays down the mode of valuation of perquisites. The provisions of rule 3(a)(iii) would apply for valuation of rent-free residential accommodation provided by an employer to an employee. The valuation of perquisites in the form of free food will have to be determined in terms of rule 3(g).

3. In view of the specific provision contained in the rules as mentioned hereinabove, the Circular of 1960 stands superseded.

ANNEX - CIRCULAR DATED 2-3-1960 REFERRED TO IN CLARIFICATION

1. The Board observe that no uniform practice is being followed in all the Commissioners charges for the valuation of perquisites by way of free boarding and lodging in the case of hotel employees who are obliged to live in the hotel premises and who are provided free boarding. It has now been decided that the value of such perquisites should be determined as under :

Lodging - 12 per cent or 10 per cent of the salary (according as the accommodation provided is furnished or unfurnished) or the usual rent of the accommodation, whichever is less.

Boarding - The hotels actual cost (including overheads) of the food supplied to the employees.

2. The above formula is to be applied only to bona fide employees and not to directors who have a substantial interest in the hotel company.

 

Circular : No. 312 [F. No. 200/187/81-IT(A-I)], dated 31-8-1981.

184. Amount received on encashment of leave salary due to employee either in service or at the time of retirement - Whether taxable as part of salary income[`12] 1

1. A large number of references have been received by the Board on the decision of the Income-tax Appellate Tribunal, Madras Bench, in the case of N.B. Tendolkar v. ITO [1980] 4 Taxman 129. In this decision the Tribunal has held that the amount received by an assessee on encashment of leave due to him is not taxable.

2. The Income-tax Department has not accepted the aforesaid decision of the Tribunal and is in reference before the Madras High Court. The stand of the department is that the amounts received on encashment of leave salary due to an employee either in service or at the time of his retirement are taxable as part of salary income.

3. All Income-tax Officers working in your charge and in particular the Income-tax Officers assessing salary cases may be apprised of this stand taken by the department.

 

HOTEL-RECEIPTS TAX ACT, 1980 - CIRCULAR NO. 313, DATED 4-9-1981

 

Circular : No. 314 [F. No. 202/20/79-IT(A-II)], dated 17-9-1981.

255. Investment allowance on new machinery or plant installed in small scale industrial undertaking - Computation of aggregate value for the purposes of ascertaining small-scale industrial undertakings in terms of Explanation (2) to sub-section (2)

1. Section 32A was introduced by the Finance Act, 1976 to allow investment allowance, inter alia, in respect of new machinery or plant installed after the31st March, 1976 in a small-scale industrial undertaking for the purpose of business of manufacture or production of any article or thing.

2. The term small-scale industrial undertaking has been defined in Explanation (2) to section 32A(2) as an industrial undertaking, the aggregate value of whose machinery and plant (other than tools, jigs, dies and moulds) installed as on the last day of the previous year does not exceed Rs. 10 lakhs (in cases where the previous year ends after 31-7-1980Rs. 20 lakhs). A question has been raised whether the term machinery and plant, used in this Explanation includes all machinery and plant to arrive at the monetary ceiling or whether the ceiling should be determined according to the norms laid down by the Department of Industries in this regard. According to the Department of Industries, the cost of generating sets and of extra transformers, etc., which have to be installed by the assessee as required by the State Electricity Boards will be excluded.

3. The question has been considered in consultation with the Ministry of Law. There is no express or implied legislative intendment disclosed in Explanation (2) to section 32A(2) read with section 43(3) of the Income-tax Act, which would permit exclusion of any items other than tools, jigs, dies and moulds from the value of plant and machinery. The norms laid down by the Department of Industries, unless legally incorporated in the Income-tax Act, cannot be invoked for the purpose of excluding additional items like generating sets, transformers, etc. All items of plant and machinery as on the last day of the relevant previous year other than tools, jigs, dies and moulds are, therefore, to be taken into consideration and their aggregate value will be computed for the purpose of ascertaining whether the assessee is a small-scale industrial undertaking.

4.  The above clarification will apply, mutatis mutandis, in the case of initial depreciation under section 32(1)(vi). However, the definition of small-scale industrial undertaking for the purpose of initial depreciation given in Explanation (3) to section 32(1)(vi) is slightly different from that given for the purpose of investment allowance inasmuch as the cost of tools, jigs, dies and moulds is not to be excluded in arriving at the monetary ceiling of the value of plant and machinery.

 

Circular : No. 315 [F. No. 202/89/79-IT(A-II)], dated 24-9-1981.

240. Motor vans - Rate of depreciation prescribed in Part I of Appendix I to Income-tax Rules

1. The Board had an occasion to consider the rate at which depreciation should be allowed in respect of Motor vans as no specific rate has been provided for them under Appendix I to the Income-tax Rules, 1962.

2. The Board consider that as Motor vans are more akin to Motor lorries and Motor buses than to Motor cars, depreciation on Motor vans may be allowed at the rate applicable to Motor lorries and Motor buses which is 30 per cent as per item No. III (ii)-D(9) of Appendix I.

Judicial analysis

Relied on in - The above circular was relied on in D.S. Construction (P.) Ltd. v. ITO [1987] 29 TTJ (Delhi-Trib.) 22, with the following observations :

4. Having considered the facts of the case we are of the view that as far as the case of motor vans is considered it would not be fair not to act on the distinction between the motor vans and the motor cars made by CBDT in the above noted circular. . . . (p. 23)

See also ITO v. Kohinoor Flour Mills Ltd. [1991] 94 CTR (Ahd. - Trib.) 186.

 

Circular : No. 316 [F. No. 201/62/78-IT (A-II)], dated 30-9-1981.

329. Civil defence measures - Expenditure thereon whether allowable as business deduction only during emergency

1. Attention is invited to Boards Circular Letter No. 10/22/65-IT(A-I), dated 24-5-1965 [Annex] on the subject, wherein it was conveyed that expenditure on certain specified civil defence measures incurred by business concerns during emergency should be treated as revenue expenditure and allowed.

2. It has been represented now that benefit of deduction, etc., allowed in the above circular should not be confined to expenditure on civil defence measures incurred during emergency only as even where there is no emergency, it is necessary to plan and implement the said civil defence measures so that they are available in an emergency.

3. In view of the position explained above, it has been decided that expenditure incurred by business concerns on civil defence measures as specified in the Boards circular referred to above, even when there is no emergency, would be allowable to the extent found reasonable, in the manner indicated in the said circular.

ANNEX - LETTER DATED 24-5-1965 REFERRED TO IN CLARIfiCATION

1. I am directed to say that during the course of emergency, business concerns are required to take the following civil defence measures as part of the civil defence plan in respect of their property :

1. Raise, train the following civil defence services at the scale laid down in the Home Ministrys hand books: Messenger service, casualty service, rescue service, etc.

2. Purchase of civil defence equipment, stirrup pump, helmets, sirens, etc., as per prescribed scale.

3. (a) Fire-fighting system is to be brought to the required standard to cope up with likely effect of air raids.

(b) A warning system is to be laid to receive air raid warning from the nearest civil defence control centre and disseminate the same to the workers.

4. In addition, some special civil defence measures relating to water supply system, piping system, concealment from glow, etc., are also to be adopted.

2. The question relating to the treatment to be accorded to expenditure incurred on these civil defence measures by the business concerns for the purpose of income-tax has been under consideration for quite some time. It has been now decided that all expenses on civil defence measures may be allowed as revenue expenditure unless any portion thereof is of an enduring nature whose usefulness may be extended beyond the period of emergency in which case depreciation admissible as per rules can be allowed.

 

Circular : No. 317 [F. No. 180/160/81-IT(A-I)], dated 19-12-1981.

176.     Pending amendment to modify mode of investment under section 13(5), Commissioners authorised to issue/renew recognition under section 80G if holding of assets in immovable property by applicant trust alone is under consideration

1. Under section 13(1)(d) any charitable or religious trust/institution can claim exemption under section 11 for and from any assessment year relevant to a previous year beginning on or after April 1, 1981, only if the assets of the trust/institution are invested in the manner prescribed in section 13(5).

2. In response to representations made on the subject, the Finance Minister made a statement in Lok Sabha on March 31, 1981 to the effect that the mode of investment prescribed by section 13(5) is to be modified so as to permit charitable or religious trusts/institutions to invest trust funds in immovable properties as well. An assurance has been given that a suitable amendment to the Income-tax Act will be sponsored at an early date and that it shall be made effective from April 1, 1981. Pending the amendment, in consonance with the Governments declared policy, the Commissioners of Income-tax can issue/ renew recognition certificates under section 80G if the only reason for consideration in the matter is the holding of assets in the shape of immovable properties by the applicant trust/institution.

 

SPECIAL BEARER BONDS (IMMUNITIES AND EXEMPTIONS) ACT, 1981 - CIRCULAR NO. 318, DATED 1-1-1982

 


 [`1]1. Cited in CIT v. P.L. Nanda [1984] 17 Taxman 223 (Delhi).

 [`2]1. Now withdrawn by Circular No. 681, dated 8-3-1994.

 [`3] 1. Section 139 was altered materially by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989.

 [`4] 2 .See Sl. Nos. 746 to 773 under section 119 for Extension of dates of filing return of income.

 [`5]1. Not annexed here.

 [`6]       1.    Annex not printed here.

 [`7]       1.    Annex not printed here.

 [`8]1. No investment allowance is available in respect of plant and machinery installed after 31-3-1990 (see Sl. No. 262, p. 1.597).

 [`9]1. Letter dated 3-10-1981, printed on p. 2201 post as Clarification 2, clarifies that procedure suggested in para 5 is only optional.

 [`10] 1. Section 139 was altered materially by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989.

 [`11] 2 .See Sl. Nos. 746 to 773 under section 119 for Extension of dates of filing return of income.

 [`12]1. The view held by the department has been placed on legal footing by the Taxation Laws (Amendment) Act, 1984, with retrospective effect from 1-4-1978, by inserting a new sub-clause (va) in clause (1) of section 17.