FINANCE ACT, 1989 - CIRCULAR NO. 550, DATED 1-1-1990

DIRECT TAX (AMENDMENT) ACT, 1987 [AS AMENDED BY DIRECT TAX LAWS (AMENDMENT) ACT, 1989] - CIRCULAR NO. 516, DATED 15-6-1988; CIRCULAR NO. 545, DATED 24-9-1989 ; CIRCULAR NO. 549, DATED 31-10-1989 AND CIRCULAR NO. 551, DATED 23-1-1990

PART I

PART II

PART III

PART IV

Circular : No. 552, dated 9-2-1990.

SECTION 44BBB l SPECiaL PROVISIONS FOR COMPUTING PROFITS
AND GAINS OF FOREIGN COMPANIES engaged IN THE
BUSINESS OF civil construction, ETC., IN
CERTAIN TURNKEY POWER PROJECTS

416. Approval of Central Government of certain turnkey power projects

1. The provisions contained in section 44BBB of the Income-tax Act, 1961 refer to approval of certain turnkey power projects by the Central Government.

2. It is clarified that an approval issued by the Deptt. of Power in the Ministry of Energy shall be deemed to be the approval of the Central Government for the purposes of section 44BBB of the Income-tax Act.

Circular : No. 553, dated 13-2-1990.

BELGIUM

1578. Agreement for avoidance of double taxation and prevention of fiscal evasion with Belgium

Whereas the annexed Agreement between the Government of the Republic of India and the Government of the Kingdom of Belgium for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income has come into force on the first day of October, 1997, the thirtieth day after the receipt of later of notifications by both the Contracting States to each other of the completion of the procedures required for bringing into force of the said Agreement in accordance with paragraph 1 of Article 29 of the said Agreement;

Now, therefore, in exercise of the powers conferred under section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby directs that all the provisions of the said Agreement shall be given effect to in the Union of India.

Notification : No. GSR 632(E), dated 31-10-1997[`1] *, as amended by Notification No. SO 54(E), dated 19-1-2001.

ANNEXURE

agreement Between the Government of the Republic of India and the Government of the Kingdom of Belgium for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income

The Government of the Republic of India and the Government of the Kingdom of Belgium, Desiring to conclude an Agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, have agreed as follows :

CHAPTER I - SCOPE OF THE AGREEMENT

Article 1 : Personal scope - This Agreement shall apply to persons who are residents of one or both of the Contracting States.

Article 2 : Taxes covered - 1. This Agreement shall apply to all taxes imposed on total income or on elements of income including taxes on gains from the sale, exchange or transfer of movable or immovable property and taxes on the total amounts of wages or salaries paid by enterprises.

The term taxes shall not include any amount which is payable in respect of any default or omission in relation to the taxes to which the Agreement applies or which represents a penalty imposed relating to those taxes.

2. The existing taxes to which the Agreement shall apply are :

(a) in the case of India :

(i) the income-tax including any surcharge thereon; and

(ii) the surtax,

(hereinafter referred to as Indian tax);

(b) in the case of Belgium :

(i) the individual income-tax (Iimpot des personnes physiques; de personenbelasting);

(ii) the corporate income-tax (Iimpot des societes; de vennoot-schapsbelasting);

(iii) the income-tax on legal entities (Iimpot des personnes morales; de rechtspersonenbelasting);

(iv) the income-tax on non-residents (Iimpot des non-residents; de belasting der niet-verblijfhouders);

(v) the special levy assimilated to the individual income-tax (la cotisation speciale assimilee a Iimpot des personnes physiques; de met de personenbelasting gelijkgestelde bijzondere heffing),

including the prepayments, the surcharges on these taxes and prepayments, and the supplements to the individual income-tax,

(hereinafter referred to as Belgian tax).

3. The Agreement shall also apply to any identical or substantially similar tax which is imposed after the date of signature of the Agreement in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall, from time to time, notify to each other any significant changes which have been made in their respective taxation laws.

CHAPTER II - definitions

Article 3 : General definitions - 1. In this Agreement, unless the context otherwise requires :

(a) the term India means the territory of India and includes the territorial sea and airspace above it, as well as any other maritime zone in which India has sovereign rights, other rights and jurisdictions, according to the Indian law and in accordance with international law;

(b) the term Belgium means the Kingdom of Belgium; when used in a geographical sense, it means the national territory, the territorial sea and any other area in the sea within which Belgium, in accordance with international law, exercises sovereign rights or its jurisdiction;

(d) the term competent authority means :

- in the case of India, the Central Government in the Ministry of Finance (Department of Revenue) or their authorised representative, and

- in the case of Belgium, the Minister of Finance or his authorised representative;

(e) the term tax means Indian tax or Belgian tax as the context requires;

(f) the term person includes an individual, a company and any other entity which is treated, as a taxable unit under the tax laws in force in the Contracting State of which it is a resident;

(g) the term company means in the case of India any entity which is a company or which is treated as a company under the Indian tax law, and in the case of Belgium any entity which is a company or which is treated as a body corporate under the Belgian tax law;

(h) the terms enterprise of a Contracting State and enterprise of the other Contracting State mean respectively an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State;

(i) the term international traffic means any transport by a ship or aircraft operated by an enterprise of a Contracting State, except when the ship or aircraft is operated solely between places in the other Contracting State;

(j) the term national means :

(i) any individual possessing the nationality of a Contracting State;

(ii) any legal person, partnership and association deriving its status as such from the laws in force in a Contracting State.

As regards the application of the Agreement by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the law of that State concerning the taxes to which the Agreement applies.

Article 4 : Resident - 1. For the purposes of this Agreement, the term resident of a Contracting State means any person who, under the laws of that State, is resident of that State for the purposes of the taxes of that State to which the Agreement applies.

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his residential status for the purposes of the Agreement shall be determined in accordance with the following rules :

(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (hereinafter referred to as his centre of vital interests);

(b) if the Contracting State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either Contracting State, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;

(c) if he has an habitual abode in both Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national;

(d) if he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall determine the question by mutual agreement.

3. Where by reason of the provisions of paragraph 1, a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated.

Article 5 : Permanent establishment - 1. For the purposes of this Agreement, the term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

2. The term permanent establishment includes especially :

(a) a place of management;

(b) a branch;

(d) a factory;

(e) a workshop or a warehouse;

(f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;

(g) an installation or structure, used for the exploration or exploitation of natural resources;

(h) the provision of services or facilities in connection with or supply of plant and machinery on hire used or to be used in, the prospecting for, or extraction or production of mineral oils;

(i) a premises used as a sales outlet or for receiving or soliciting orders;

(j) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than six months, or where such project or supervisory activity, being incidental to the sale of machinery or equipment, continues for a period not exceeding six months and the charges payable for the project or supervisory activity exceed 10 per cent of the sale price of the machinery and equipment.

3. The term permanent establishment shall not be deemed to include :

(a) the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise;

(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display;

(c) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise;

(d) the maintenance of a fixed place of business solely for scientific research, for the enterprise.

4. Subject to the provisions of paragraph 5, a person acting in a Contracting State on behalf of an enterprise of the other Contracting State shall be deemed to have a permanent establishment of that enterprise in the first-mentioned State, if :

(a) he has and habitually exercises, in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for that enterprise; or

(b) he habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise belonging to the enterprise from which the person regularly delivers goods or merchandise on behalf of the enterprise; or

(c) he habitually secures orders in the first-mentioned Contracting State, exclusively or almost exclusively, for the enterprise itself, or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it.

5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise itself or on behalf of that enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph.

6. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in the other Contracting State (whether through a permanent establishment or otherwise) shall not of itself constitute either company a permanent establishment of the other.

CHAPTER III - taxation of income

Article 6 : Income from immovable property - 1. Income from immovable property may be taxed in the Contracting State in which such property is situated.

2. The term immovable property shall be defined in accordance with the law of the Contracting State in which the property in question is situated. The term shall in any case include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits sources and other natural resources. Ships and aircraft shall not be regarded as immovable property.

3. The provisions of paragraph 1 shall apply to income derived from the direct use, letting, or use in any other form of immovable property.

4. The provisions of paragraphs 1 and 3 shall also apply to the income from immovable property of an enterprise and to income from immovable property used for the performance of professional services.

Article 7 : Business profits - 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment; (b) sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment.

2. Where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall be attributed to such permanent establishment the profits which it might be expected to derive if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing at arms length with the enterprise of which it is a permanent establishment.

3. (a) In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, subject to the limitations of the taxation laws of that State :

Provided that where the law of the State in which the permanent establishment is situated imposes a restriction on the amount of the executive and general administrative expenses which may be allowed, and that restriction is relaxed or overridden by any Convention or Agreement between that State and a third State which is a member of the OECD which enters into force after the date of entry into force of this Agreement, the competent authority of that State shall notify the competent authority of the other Contracting State of the terms of the corresponding paragraph in the Convention or Agreement with that third State immediately after the entry into force of that Convention or Agreement and, if the competent authority of the other Contracting State so requests, the provisions of this sub-paragraph shall be amended by protocol to reflect such terms.

(b) However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charged (otherwise than towards reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices.

4. Insofar as it has been customary in a Contracting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph 2 or paragraph 3 shall preclude such Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles laid down in this Article.

5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the purpose of export to the enterprise of which it is the permanent establishment.

6. For the purposes of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.

7. Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article.

Article 8 : Shipping and air transport - 1. Income derived from the operation of ships or aircraft in international traffic by an enterprise of a Contracting State shall not be taxed in the other Contracting State.

2. For the purposes of this Article :

(a) interest on funds directly connected with the operation of ships or aircraft in international traffic shall be regarded as income from the operation of such ships or aircraft and the provisions of Article 11 shall not apply in relation to such interest; accordingly there will be no withholding tax on such income;

(b) income derived from the operation of ships or aircraft in international traffic shall mean income derived by an enterprise described in paragraph 1 from the transportation by sea or air respectively of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of ships or aircraft including :

(i) the sale of tickets for such transportation on behalf of other enterprises;

(ii) any other activity directly connected with such transportation;

(iii) the leasing of ships or aircraft on charter fully equipped, manned and supplied, or on a bare boat charter basis where the leasing is incidental to any activity directly connected with such transportation;

(c) income derived from the operation of ships in international traffic, includes income derived from the use, maintenance or rental of containers (including trailers and related equipment for the transport of containers) in connection with the transportation of goods or merchandise in international traffic, where the income is derived from an activity which is incidental to any activity directly connected with such transportation.

3. The provisions of this Article shall also apply to income from the participation in a pool, a joint business or an international operating agency.

Article 9 : Associated enterprises - Where

(a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or

(b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State,

and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

Article 10 : Dividends - 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.

2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends, is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed 15 per cent of the gross amount of the dividends.

This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.

3. The term dividends as used in this Article means income from shares, jouissance shares or jouissance rights, mining shares, founders shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident. This term means also income - even paid in the form of interest - derived from capital invested by the members of a company other than a company with share capital, which is a resident of Belgium.

4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

5. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividend paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the companys undistributed profits to a tax on the companys undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State.

Article 11 : Interest - 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State the tax so charged shall not exceed :

(a) 10 per cent of the gross amount of the interest, if such interest is paid on any loan of whatever kind granted by a bank; and

(b) 15 per cent of the gross amount of the interest in all other cases.

3. The term interest as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtors profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures, however, the term interest shall not include for the purpose of this Article interest regarded as dividends under the second sentence of paragraph 3 of Article 10.

4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply.

5. Interest shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.

6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State.

Article 12 : Royalties and fees for technical services - 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

[2[`2] 1. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and, according to the laws of that State, but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services.]

3. [(a[`3] 1) The term royalties as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plant, secret formula or process, or for information concerning industrial, commercial or scientific experience.]

(b) The term fees for technical services as used in this Article means payments of any kind to any person, other than payments to an employee of the person making the payments and to any individual for independent personal services mentioned in Article 14, in consideration for services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel.

4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which, or the contract under which, the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply.

5. Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to make the payments was incurred and the payments are borne by such permanent establishment or fixed base, then the royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.

6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services, having regard to the use, right, information or technical services for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the royalties or fees for technical services shall remain taxable according to the laws of each Contracting State.

Article 13 : Capital gains - 1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State.

2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such fixed base, may be taxed in that other State.

3. Gains from the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft shall be taxable only in the Contracting State of which the alienator is a resident.

4. Gains from the alienation of shares of the capital stock of a company, the property of which consists directly or indirectly principally of immovable property situated in a Contracting State may be taxed in that State.

5. Gains from the alienation of shares other than those mentioned in paragraph 4, forming part of a participation of at least 10 per cent of the capital stock of a company which is a resident of a Contracting State may be taxed in that State.

6. Gains from the alienation of any property other than that mentioned in paragraphs 1, 2, 3, 4 and 5 shall be taxable only in the Contracting State of which the alienator is a resident.

Article 14 : Independent personal services - 1. Income derived by an individual who is a resident of a Contracting State from the performance of professional services or other independent activities of a similar character shall be taxable only in that State except in the following circumstances when such income may also be taxed in the other Contracting State :

(a) if he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other State; or

(b) if his stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 183 days in the relevant previous year or taxable period, as the case may be; in that case, only so much of the income as is derived from his activities performed in that other State may be taxed in that other State.

2. The term professional services includes independent scientific, literary, artistic, educational or teaching activities, as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.

Article 15 : Dependent personal services - 1. Subject to the provisions of Articles 16, 17, 18, 19, 20 and 21, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.

2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State, if :

(a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the relevant previous year or taxable period, as the case may be;

(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and

(c) the remuneration is not deductible in computing the profits or income of a permanent establishment or a fixed base which the employer has in the other State.

3. Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic by an enterprise of a Contracting State may be taxed in that State.

Article 16 : Directors fees - 1. Directors fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors or a similar organ of a company which is a resident of the other Contracting State may be taxed in that other State. This provision shall also apply to payments derived in respect of the discharge of functions which under the laws of the Contracting State of which the company is a resident are treated as functions analogous to those stated hereinbefore.

2. Remuneration derived by a director referred to in paragraph 1 from the company in regard to the discharge of day-to-day functions of a managerial or technical nature and remuneration received by a resident of a Contracting State consequent to some personal activity as partner of a company, other than a company having a share capital which is a resident of the other Contracting State, may be taxed in accordance with the provisions of paragraph 1 of Article 15, as if such remuneration were derived in respect of an employment.

Article 17 : Income earned by entertainers and athletes - 1. Notwithstanding the provisions of Articles 14 and 15, income derived by a resident of a Contracting State as an entertainer such as a theatre, motion picture, radio or television artiste, or a musician, or as an athlete, from his personal activities as such exercised in the other Contracting State, may be taxed in that other State.

2. Where income in respect of personal activities exercised by an entertainer or athlete in his capacity as such accrues not to the entertainer or athlete himself but to another person, that income may, notwithstanding the provisions of Articles 7, 14 and 15, be taxed in the Contracting State in which the activities of the entertainer or athlete are exercised.

3. Notwithstanding the provisions of paragraph 1, income derived by an entertainer or an athlete who is a resident of a Contracting State from his personal activities as such exercised in the other Contracting State, shall be taxable only in the first-mentioned Contracting State, if the activities in the other Contracting State are supported wholly or substantially from the public funds of the first-mentioned Contracting State, including any of its political sub-divisions or local authorities.

4. Notwithstanding the provisions of paragraph 2 and of Articles 7, 14 and 15, where income in respect of personal activities exercised by an entertainer or an athlete in his capacity as such in a Contracting State accrues not to the entertainer or athlete himself but to another person, that income shall be taxable only in the other Contracting State, if that other person is a resident of that other Contracting State and is supported wholly or substantially from the public funds of that other State, including any of its political sub-divisions or local authorities.

Article 18 : Non-Government pensions and annuities - 1. Any pension, other than a pension referred to in Article 19, or any annuity derived by a resident of a Contracting State from sources within the other Contracting State shall be taxable only in the first-mentioned Contracting State.

2. Notwithstanding the provisions of paragraph 1, pensions paid and other payments made under a public scheme which is part of the social security system of a Contracting State or a political sub-division or a local authority thereof shall be taxable only in that State.

3. The term pension means a periodic payment made in consideration of past services, or by way of compensation for injuries received in the course of performance of services.

4. The term annuity means a stated sum payable periodically at stated times during life or during a specified or ascertainable period of time, under an obligation to make the payments in return for adequate and full consideration in money or moneys worth.

Article 19 : Remuneration and pensions in respect of Government service - 1. (a) Remuneration, other than a pension, paid by a Contracting State or a political sub-division or a local authority thereof to an individual in respect of services rendered to that State or sub-division or authority shall be taxable only in that State.

(b) However, such remuneration shall be taxable only in the other Contracting State if the services are rendered in that other State and the individual is a resident of that State who :

(i) is a national of that State; or

(ii) did not become a resident of that State solely for the purpose of rendering the services.

2. (a) Any pension paid by, or out of funds created by, a Contracting State or a political sub-division or a local authority thereof to an individual in respect of services rendered to that State or sub-division or authority shall be taxable only in that State.

(b) However, such pension shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that other State.

3. The provisions of Articles 15, 16 and 18 shall apply to remuneration and pensions in respect of services rendered in connection with a business carried on by a Contracting State or a political sub-division or a local authority thereof.

Article 20 : Teachers and researchers - 1. An individual who is a resident of a Contracting State and who, at the invitation of the Government of the other Contracting State or of a university or other recognised educational institution situated in that other Contracting State, visits such other Contracting State for the primary purpose of teaching or engaging in research, or both, at a university or other recognised educational institution shall not be subject to tax by that other Contracting State on his income from personal services for such teaching or research for a period not exceeding twenty-four months from the date of his arrival in that other Contracting State.

2. This article shall not apply to income from personal services for research if such research is undertaken primarily for the private benefit of a specific person or persons.

3. For the purposes of this Article and Article 21, an individual shall be deemed to be a resident of a Contracting State if he is a resident of that Contracting State in the year in which he visits the other Contracting State or in the year immediately preceding that year.

Article 21 : Payments received by students and apprentices - 1. An individual who is a resident of a Contracting State and visits the other Contracting State solely :

(a) as a student at a university, college or other recognised educational institution in that other Contracting State, or

(b) as a business apprentice, or

(c) for the purpose of study or research, as a recipient of a grant, allowance or award, from a governmental, religious, charitable, scientific or educational organisation,

shall be exempt from tax in that other Contracting State :

(i) on all remittances from abroad for the purposes of maintenance, education or training;

(ii) on the grant, allowance or award; and

(iii) in respect of the amount, representing remuneration for an employment in that other Contracting State, if such remuneration does not exceed 100,000 Belgian Francs or its equivalent in Indian Rupees, as the case may be, in any year.

2. An individual who is a resident of a Contracting State and who visits the other Contracting State for a period not exceeding one year as an employee of, or under contract with, an enterprise of the first-mentioned Contracting State or an organisation referred to in paragraph 1 for the primary purpose of acquiring technical, professional or business experience from a person other than such enterprise or organisation shall be exempt from tax in that other Contracting State in respect of the remuneration received from that enterprise or organisation for such period, if such remuneration does not exceed 1,20,000 Belgian Francs or its equivalent in Indian Rupees, as the case may be, in any year.

Article 22 : Other income - 1. Items of income of a resident of a Contracting State, wherever arising, not dealt within the foregoing Articles of this Agreement shall be taxable only in that State.

2. The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply.

3. Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a Contracting State not dealt with in the foregoing Articles of the Agreement and arising in the other Contracting State may also be taxed in that other State.

CHAPTER Iv - methods for elimination of double taxation

Article 23 : Elimination of double taxation - 1. The laws in force in either of the Contracting States will continue to govern the assessment and taxation of income in the respective Contracting States except where express provision to the contrary is made in this Agreement.

2. In the case of India, double taxation shall be avoided as follows :

(a) Where a resident of India derives income which, in accordance with the provisions of the Agreement, may be taxed in Belgium, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in Belgium whether directly or by deduction. Such deduction shall not, however, exceed that part of the income-tax (as computed before the deduction is given) which is attributable to the income which may be taxed in Belgium. Further, where such resident is a company by which surtax is payable in India, the deduction in respect of income-tax paid in Belgium shall be allowed in the first instance from income-tax payable by the company in India and as to the balance, if any, from surtax payable by it in India.

(b) Where a resident of India derives income which, in accordance with the provisions of the Agreement, shall be taxable only in Belgium, India may include this income in the tax base but shall allow as a deduction from the income-tax that part of the income-tax which is attributable to the income derived from Belgium.

3. In the case of Belgium, double taxation shall be avoided as follows :

(a) Where a resident of Belgium derives income which may be taxed in India in accordance with the provisions of the Agreement, other than those of paragraph 2 of Article 10, of paragraphs 2 and 6 of Article 11 and of paragraphs 2 and 6 of Article 12, Belgium shall exempt such income from tax but may, in calculating the amount of tax on the remaining income of that resident, apply the rate of tax which would have been applicable if such income had not been exempted.

(b) (i) Where a resident of Belgium derives items of his aggregate income for Belgian tax purposes which are dividends taxable in accordance with paragraph 2 of Article 10, and not exempt from Belgian tax according to sub-paragraph (c), interest taxable in accordance with paragraph 2 or 6 of Article 11, or royalties taxable in accordance with paragraph 2 or 6 of Article 12, the Indian tax levied on that income shall be allowed as a credit against Belgian tax relating to such income in accordance with the existing provisions of Belgian law regarding the deduction from Belgian tax of taxes paid abroad.

(ii) Where a resident of Belgium derives fees for technical services which have been taxed in India in accordance with paragraph 2 or 6 of Article 12, the provisions of Belgian tax law with respect to earned income derived from sources outside Belgium and subject to foreign tax shall apply.

(c) Where a company which is a resident of Belgium owns shares in a company which is a resident of India, the dividends which are paid to it by the latter company and which may be taxed in India in accordance with paragraph 2 of Article 10, shall be exempt from the corporate income-tax in Belgium under the conditions and limits provided for in Belgian law.

(d) Where in accordance with Belgian law, losses incurred by an enterprise carried on by a resident of Belgium in a permanent establishment situated in India have been effectively deducted from the profits of that enterprise for its taxation in Belgium, the exemption provided for in sub-paragraph (a) shall not apply in Belgium to the profits of other taxable periods attributable to that establishment to the extent that those profits have been exempted from tax in India by reason of compensation for the said losses.

(e) For the purposes of sub-paragraph (b)(i), the term Indian tax levied shall be deemed to include any amount which would have been payable as Indian tax under the laws of India and in accordance with the provisions of the Agreement for any year but for a deduction allowed in computing the taxable income or an exemption from or a reduction of tax granted for that year under :

(i) sections 10(4), 10(4B), 10(15)(iv) and 80L of the Income-tax Act, 1961 (43 of 1961), so far as they were in force on, and have not been modified since, the date of the signature of the Agreement, or have been modified only in minor respects so as not to affect their general character; or

(ii) any other provision which may be enacted after the Agreement enters into force granting a deduction in computing the taxable income or an exemption from or a reduction of tax and which the competent authorities of the Contracting States agree to be for the purposes of economic development of India, if it has not been modified thereafter or has been modified only in minor respects so as not to affect its general character; the competent authorities may in such a case decide as to the period for which the benefit of this clause shall apply.

CHAPTER v - special provisions

Article 24 : Non-discrimination - 1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances and under the same conditions are or may be taxed. This provision shall, notwithstanding the provisions of Article 1, also apply to persons who are not residents of one or both of the Contracting States.

2. Subject to the provisions of paragraph 3 of Article 7, the taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities in the same circumstances or under the same conditions.

3. The provisions of paragraph 2 shall not be construed as preventing :

(a) a Contracting State from charging the profits of a permanent establishment which an enterprise of the other Contracting State has in the first-mentioned State at a rate of tax which is higher than that imposed on the profits of a similar enterprise of the first-mentioned Contracting State;

(b) Belgium from imposing the movable property prepayment on dividends paid to a permanent establishment in Belgium of a company which is a resident of India.

4. Nothing contained in this Article shall be construed as obliging a Contracting State to grant to persons not resident in that State any personal allowances, reliefs or reductions for tax purposes which are by law available only to persons who are so resident.

5. Enterprises of a Contracting State, the capital of which is wholly or partly-owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirement to which other similar enterprises of that first-mentioned State are or may be subjected in the same circumstances and under the same conditions.

6. In this Article, the term taxation means taxes of every kind as specified in this Agreement.

Article 25 : Mutual agreement procedure - 1. Where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Agreement, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of the Contracting State of which he is a resident or, if his case comes under paragraph 1 of Article 24, to that of the Contracting State of which he is a national. The case must be presented within two years from the first notification of the action resulting in taxation not in accordance with the provisions of the Agreement.

2. The competent authority shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation which is not in accordance with the Agreement :

Provided that the case has been presented within the time period specified in paragraph 1, any agreement reached shall be implemented notwithstanding any time-limits in the domestic laws of the Contracting States.

3. The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Agreement.

4. The competent authorities of the Contracting States may communicate with each other directly for the purpose of giving effect to the provisions of the Agreement. When it seems advisable in order to reach agreement to have an oral exchange of opinions, such exchange may take place through a Commission consisting of representatives of the competent authorities of the Contracting States.

Article 26 : Exchange of information - 1. The competent authorities of the Contracting States shall exchange such information as is necessary for carrying out the provisions of this Agreement or of the domestic laws of the Contracting States concerning taxes covered by the Agreement, insofar as the taxation thereunder is not contrary to the Agreement, in particular for the prevention of fraud or evasion of such taxes. The exchange of information is not restricted by Article 1. Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State. However, if the information is originally regarded as secret in the transmitting State, it shall be disclosed only to persons or authorities (including Courts and administrative bodies) involved in the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes which are the subject of the Agreement. Such persons or authorities shall use the information only for such purposes but may disclose the information in public court proceedings or in judicial decisions. The competent authorities shall, through consultation, develop appropriate conditions, methods and techniques concerning the matters in respect of which such exchanges of information shall be made, including, where appropriate, exchanges of information regarding tax avoidance.

2. Information may be exchanged either spontaneously, on a routine basis or on request with reference to particular cases or both. The competent authorities of the Contracting States shall agree from time to time on the list of the information which shall be furnished on a routine basis.

3. In no case shall the provisions of paragraph 1 be construed so as to impose on a Contracting State the obligation :

(a) to carry out administrative measures at variance with the laws or administrative practice of that or of the other Contracting State;

(b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;

(c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information the disclosure of which would be contrary to public policy.

Article 27 : Aid and assistance in recovery - 1. The Contracting States shall lend aid and assistance to each other in order to notify and recover the taxes mentioned in Article 2.

2. The interest due for delay or default in the payment of taxes shall be treated as tax for the purposes of this Article.

3. On the request of the competent authority of a Contracting State, the competent authority of the other Contracting State shall secure, in accordance with the legal provisions and regulations applicable to the notification and recovery of its taxes, the notification and the recovery of taxes referred to in paragraph 1 which are due in the first-mentioned State. Such taxes shall not be considered as preferential claims in the requested State and that State shall not be obliged to apply any means of enforcement which are not authorised by the legal provisions and regulations of the requesting State.

4. Questions concerning any period of limitation of a tax claim shall, notwithstanding the provisions of paragraph 3, be governed solely by the laws of the applicant State.

5. Requests referred to in paragraph 3 shall be supported by an official copy of the instrument permitting the execution, accompanied where appropriate, by an official copy of any final administrative or judicial decision.

6. With regard to taxes which are open to appeal, the competent authority of a Contracting State may, in order to safeguard its rights, request the competent authority of the other Contracting State to take the protective measures provided for in the legislation of that other State; the provisions of paragraphs 1 to 4 shall apply mutatis mutandis to such measures.

7. The Contracting State in which tax is recovered in pursuance of the preceding paragraphs shall immediately thereafter remit the amount so recovered to the other Contracting State.

8. The provisions of paragraph 1 of Article 26 shall also apply to any information which, by virtue of this Article, is supplied to the competent authority of a Contracting State.

Article 28 : Diplomatic and consular officials - Nothing in this Agreement shall affect the fiscal privileges of diplomatic or consular officials under the general rules of international law or under the provisions of special agreements.

CHAPTER vi - final provisions

Article 29 : Entry into force - 1. The Contracting States shall notify each other in writing through diplomatic channels that the procedures required by their respective laws for the bringing into force of this Agreement have been completed. The Agreement shall enter into force on the thirtieth day after the receipt of the later of these notifications and shall thereupon have effect :

(a) in India, in respect of income arising in any previous year beginning on or after the first day of April next following the calendar year in which the Agreement enters into force;

(b) in Belgium :

(i) in respect of all tax due at source on income credited or payable on or after the first day of January of the calendar year next following the calendar year in which the Agreement enters into force;

(ii) in respect of all tax other than tax due at source on income derived during any taxable period ending on or after the thirty-first day of December of the calendar year next following the calendar year in which the Agreement enters into force.

2. The Agreement between the Government of India and the Government of Belgium for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, and the Protocol thereto, signed on 7th February, 1974 and the Supplementary Protocol modifying the said Agreement and Protocol signed on 20th October, 1984, shall terminate and cease to have effect in respect of the taxes on income to which the present Agreement applies in accordance with the provisions of paragraph 1 of this Article.

Article 30 : Termination - This Agreement shall remain in force indefinitely. However, either of the Contracting State may, on or before the thirtieth day of June in any calendar year beginning after the expiration of a period of five years from the date of its entry into force, give the other Contracting State through dispomatic channels, written notice of termination and, in such event, the Agreement shall cease to have effect :

(a) in India, in respect of income arising in any previous year beginning on or after the first day of April next following the calendar year in which the notice of termination is given;

(b) in Belgium:

(i) in respect of all tax due at source on income credited or payable on or after the first day of January of the calendar year next following the calendar year in which the notice of termination is given;

IN WITNESS WHEREOF the undersigned, being duly authorised thereto, have signed the present Agreement.

DONE in duplicate at Brussels, this 26th day of April one thousand nine hundred and ninety-three, in the Hindi, English, French and Dutch languages, all four texts being equally authentic. In case of divergence of interpretation, the English text shall prevail.

PROTOCOL

The Government of the Republic of India and the Government of the Kingdom of Belgium,

Having entered into an Agreement for the avoidance of double taxation and the prevention of fiscal with respect to taxes on income,

Have agreed, at the time of signing the said Agreement, on the following provisions which shall constitute an integral part thereof :

1. Ad Articles 5, 7 and 12

If under any Convention or Agreement between India and a third State being a member of the OECD which enters into force after 1st January, 1990, India limits its taxation on royalties or fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in the present Agreement on the said items of income, the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under the present Agreement with effect from the date from which the present Agreement or the said Convention or Agreement is effective, whichever date is later.

2. Ad Article 7

(a) In the determination of the profits of a permanent establishment in Belgium of an enterprise which is a resident of India, Belgium shall allow as deductions, notwithstanding the provisions of the first sentence of sub-paragraph (a) of paragraph 3 of Article 7, executive and general administrative expenses incurred whether in Belgium or elsewhere insofar as they are reasonably allowable to that permanent establishment.

(b) Where the law of the Contracting State in which a permanent establishment is situated imposes in accordance with the provisions of the first sentence of sub-paragraph (a) of paragraph 3 of Article 7, a restriction on the amount of the executive and general administrative expenses which may be allowed as deductions in determining the profits of such permanent establishment, it is understood that in determining the profits of such permanent establishment the deduction in respect of such executive and general administrative expenses in no case shall be less than what is allowable as on the date of signature of the present Agreement under the law of that Contracting State.

3. Ad Article 23

For the purposes of sub-paragraph (a) of paragraph 2 and sub-paragraph (b) of paragraph 3 of Article 23, it is understood that if, after the date of signature of the Agreement, the law of a Contracting State is amended with regard to the allowance of tax credit or the reduction of tax, the competent authority of that State shall inform the competent authority of the other Contracting State of the amendments so made and, if the competent authority of that other Contracting State so requests, the competent authorities of both States shall consult each other with a view to amend the Agreement, if necessary.

IN WITNESS WHEREOF the undersigned, being duly authorised thereto, have signed the present Protocol.

DONE in duplicate at Brussels, this 26th day of April, one thousand nine hundred and ninety-three, in the Hindi, English, French and Dutch languages, all four texts being equally authentic. In case of divergence of interpretation, the English text shall prevail.

DIRECT TAX LAWS (SECOND AMENDMENT) ACT, 1989 - CIRCULAR NO. 554, DATED 13-2-1990

CIRCULAR NO. 555.

Companies (Surcharge on
Income-tax) Act, 1971

COMPANIES (SURCHARGE ON INCOME-TAX) ACT

1573. Surcharge on advance tax payable by companies during the financial year 1971-72

The Act provides for the levy of a surcharge at the rate of 2.5 per cent on advance tax payable under the Income-tax Act by all companies during the financial year 1971-72. The amount of the surcharge is required to be paid by companies on their own motion, without the requirement of the service of any notice of demand by the Income-tax Officer, on or before 15-3-1972. The surcharge paid will be treated as payment of income-tax in respect of the income assessable for the assessment year 1972-73 and credit therefor will be given for the purpose of self-assessment under section 140A, provisional assessment under section 141A and regular assessment for that assessment year. In case of failure to make the payment on or before the due date, the company will be deemed to be an assessee in default and will be liable to pay simple interest at the rate of 9 per cent per annum. The provisions of the Income-tax Act relating to imposition of penalty for default in payment of tax and recovery of taxes will apply with necessary modifications.

It is necessary to note that although the surcharge is levied at the rate of 2.5 per cent on the income-tax payable in advance, it is a distinct and separate levy and is not to be regarded as a part of the advance tax payable by the company in accordance with the provisions of sections 208 to 219 of the Income-tax Act. Hence, the amount required to be paid by way of surcharge will not be taken into account for the purposes of applying the provisions of section 214 [interest payable by Government], sections 215 to 217 [interest payable by assessees in certain circumstances] and section 273 [penalty for furnishing false estimate of, or failure to pay, advance tax].

Source : Circular No. 77, dated 8-8-1972.

Circular: No. 556, dated 23-2-1990.

1277. Clarification regarding applicability of section 269T to amounts kept by agriculturists out of sale proceeds with commission agents

1. Section 269T of the Income-tax Act provides that no company, co-operative society or firm shall repay to any person any deposit otherwise than by any account payee cheque or account payee bank draft where the amount of deposit and interest thereon, if any, is Rs. 10,000 or more.

2. The Direct Tax Laws (Amendment) Act, 1987 has amended the definition of deposit for the purpose of section 269T of the Income-tax Act. Under the amended definition, the said term has been defined to mean any deposit of money which is repayable after notice or repayable after a period and, in case of a person other than a company, includes deposit of any nature.

(The italicised portion has been added by the said Amendment Act.)

3. A number of references have been received by the Board seeking clarification whether the sale proceeds of agricultural commodities, left over by the agriculturists with their Kachcha Arhatiyas, would also come within the ambit of deposit of any nature necessitating its payment by an account payee cheque as provided under section 269T of the Act.

4. The Board is of opinion that where a Kachcha Arhatiya sells goods belonging to an agriculturist, the sale proceeds thereof which remain with him cannot be regarded as a deposit made by the agriculturists with the Kachcha Arhatiya. Further, whether the Kachcha Arhatiya remits only a part of the sale proceeds to the agriculturist, the unremitted part of the sale proceeds would also not assume the character of a deposit. Therefore, the repayment of such sale proceeds does not fall within the purview of section 269T of the Act.

5. However, such unremitted sale proceeds would assume the character of a deposit if the amount is retained by the Kachcha Arhatiya in pursuance of a direction in this regard by the agriculturist, irrespective of whether the amount is retained in the same account or transferred to different accounts and irrespective of whether the directions are to call it a deposit or just to retain the same for future payment. The repayment in such cases will be covered under section 269T of the Act.

Judicial analysis

n The above circular was relied upon in Harpal Singh Jaswant Singh v. ITO [1995] 126 Taxation 12 (Trib.), and it was held that the provisions of sections 269SS and 269T were not attracted to the facts of the case. (pp. 20-21)

Circular : No. 557, dated 19-3-1990.

125. Clarifications regarding Form Nos. 55 and 56 for grant of exemption

The Board have received a number of representations seeking clarifications in respect of various columns of Form No. 56 prescribed for grant of exemption under section 10(23C)(iv) and (v). The clarifications are as under :

Question (a) : Column 10 requires the total income of the institution to be furnished. Will it include the notional income which cannot be applied or invested in the manner laid down in clause (a) of the third proviso to section 10(23C)(iv) and (v) ?

Answer : Total income includes National income may be shown separately in column 10 so that when the application of income is to be considered in column 11 of the form, the same can be considered in respect of actual income only and not in respect of notional income.

Question (b) : Column 11 refers to the amount of income deemed to have been utilised for the objects of the trust but section 10(23C) does not refer to any deemed utilisation of income. Does it imply that the provisions of section 11 will be applied while examining the claim for exemption under section 10(23C)(iv) and (v) ?

Answer : No. The term deemed to have been utilised has been used to cover income of the type mentioned in Explanation 2 to sub-section (1) and in sub-section (1A) to section 11, so that such income may be excluded for determining compliance with the condition regarding application/accumulation of income to the objects of the trusts/institutions.

Question (c): In columns 16 and 17, information is required in respect of assets purchased from interested persons, or in respect of utilisation or application of income or property of the institution/trust for the benefit of any interested person. Does it imply that provisions of sections 11 and 13 relating to interested person will be applicable to the institutions seeking exemption under section 10(23C)(iv) and (v)?

Answer : In the amended Form No. 56, columns 16 and 17 seek information in respect of transactions contemplated in sub-section (2) and sub-section (3) of section 13 of the Income-tax Act. This does not imply that the provisions of section 11 and section 13 will be applied. It will only enable the prescribed authority, i.e., DGIT(E), to know broadly that the institution/trust is working genuinely towards its objects.

Question (d) : The information asked for in column 18 is beyond the scope of section 10(23C)(iv) and (v) as the provisions of section 11(3) are not applicable to section 10(23C)(iv) and (v). Has it not made column 18 redundant?

Answer : The provisions of section 11(3) are not applicable to section 10 (23C)(iv) and (v). The information is being sought to know that there has been no violation of the conditions mentioned in the third proviso to sub-clause (v) of section 10(23C).

2. The clarifications given above will also apply mutatis mutandis to Form No. 55 for grant of exemption under section 10(23C) of the Income-tax Act, 1961.

Circular : No. 558, dated 28-3-1990.

1116. Clarification regarding hire charges paid to bus owners from the hire of buses

1. According to the provisions of section 194C any person responsible for paying any sum of any resident for carrying out any work in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The bodies are :

(a) the Central Government or any State Government; or

(b) any local authority; or

(d) any company ; or

(e) any co-operative society.

Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.

2. A question has arisen whether the provisions of section 194C are applicable to the payments made by a State Road Transport Corporation to private bus owners from whom buses are hired for plying on specified routes. Placing reliance on the answer given to question No. 5 in Boards Circular No. 98, dated 26-9-1972, wherein it was clarified that a transport contract cannot ordinarily be regarded as a works contract, it has been argued that a hire contract entered into by a bus owner with the State Road Transport Corporation cannot be regarded as a contract for carrying out any work and as such no deduction in respect of income-tax is required to be made from the payments made under the contract.

3. The matter has been examined in consultation with the Ministry of Law. The Board have been advised that the applicability of provisions of section 194C will have to be examined with reference to the terms and conditions of each contract. In a case where the Board had occasion to examine this issue, the terms and conditions governing the contract between the owner of the buses and the State Road Transport Corporation were, inter alia, as follows :

(i) The owner of the bus shall give his bus on hire to the corporation for plying on notified routes.

(ii) The owner shall provide a driver, with a valid licence and P.S. Badge for the vehicle supplied by him, who shall follow the instructions of the authorised officials of the Corporation.

(iii) The owner shall make available the bus for 14 hours a day and complete the schedules given to him for the day.

(iv) The owner shall keep the bus road-worthy in terms of Chapter V of the Motor Vehicles Act, 1939 and rules made thereunder from time to time by carrying out necessary maintenance and repairs.

(v) The Corporation shall provide a conductor for the operation of services with necessary equipment for issuing tickets to the passengers as well as luggage.

(vi) The owner shall submit his claim twice in a month, once for the period from 1st to 15th and the other for the remaining part of the month, accompanied by a certificate issued by the Traffic Supervisor of the depot with regard to the distance operated during the respective periods.

(vii) The corporation shall pay the owner at the rate of Rs. .....as fixed cost per day in addition to Rs. .....per km. operated as variable cost, etc., etc.

On the basis of these terms and conditions, the Board have been advised that although the contract may appear to be a single hire contract, it is actually a service contract (for carrying out any work) entered into between the State Road Transport Corporation and the owner of the bus for plying certain buses on certain routes and subject to certain conditions. In such cases, the provisions of section 194C are applicable and tax will have to be deducted at source from the payments made to the private bus owners. It may, therefore, be kept in mind that the applicability of provisions of section 194C in such cases may be considered on merits in the light of the aforesaid observations, and to this extent the clarification given in question No. 5 in Boards Circular No. 98, dated 26-9-1972 stand modified.

DIRECT TAX LAW (AMENDMENT) ACT, 1989 - CIRCULAR NO. 559, DATED 4-5-1990

Circular : No. 560, dated 18-5-1990.

441. Clarification regarding tax exemption under section 54E on sale of capital assets converted into stock-in-trade

1. Section 2(47) of the Income-tax Act provides that any conversion of capital assets into stock-in-trade, shall be regarded as a transfer. This transfer arises in the year in which such conversion takes place and, accordingly, capital gain would normally arise in that very year. However, section 45(2) of the Act postpones the assessment of such capital gains to the year in which the stock-in-trade is actually sold or otherwise transferred by the assessee.

2. In order to qualify for deduction under section 54E of the Act, the investment in specified assets is required to be made within six months from the date of transfer. A question has arisen as to whether the date of transfer, as referred to in section 54E of the Act, is the date of conversion of capital asset into stock-in-trade or the date on which the stock-in-trade is sold or otherwise transferred by the assessee.

3. The Board have considered the matter in consultation with Ministry of Law. The Board is advised that for purposes of section 54E of the Act, the date of transfer in such cases is the date on which the capital asset is converted by the assessee into stock-in-trade, and not the date on which such stock-in-trade is sold or otherwise transferred by the assessee.

Circular : No. 561, dated 22-5-1990.

407. Compulsory audit - Tax audit in case of companies have accounting year other than financial year

1. The Board have received representations regarding difficulties faced in complying with the provisions of section 44AB of the Income-tax Act in case of companies which follow an accounting period other than financial year.

2. Section 3 of the Income-tax Act, inter alia, provides that with effect from 1st April, 1989, previous year for the purposes of that Act means financial year immediately preceding the assessment year. In spite of the introduction of a uniform previous year for purposes of income-tax, some companies may adopt an accounting period other than the financial year, say the calendar year, under the Companies Act for other purposes.

3. In such cases, a question has arisen as to whether, under section 44AB of the Income-tax Act, the tax auditor can audit and certify the accounts for the period for which accounts have been maintained under the Companies Act (i.e., in this case the calendar year) or whether the tax auditor will have to certify the accounts for the relevant financial year which is the uniform accounting year for tax purposes.

4. The Board have considered the matter and are of opinion that as the income of the previous year is chargeable to tax and, for the purpose of Income-tax Act, the previous year is the financial year, the tax auditor would have to carry out the audit under section 44AB in respect of the period covered by the previous year, i.e., the relevant financial year. The proviso to the aforesaid section 44AB, therefore covers only the cases where the accounts are audited under any other law in respect of the financial year. Where the accounting year is different from the financial year, the proviso to section 44AB will not apply. Consequently, the tax auditors would have to carry out the tax audit in respect of the period covered by the relevant financial year and submit his report in Form 3CB as required in rule 6G(1)(b) of the Income-tax Rules.

Circular : No. 562, dated 23-5-1990.

551. Whether receipts of sale proceeds in respect of protocol exports eligible for deduction

1. Section 80HHC of the Income-tax Act provides for a deduction in the computation of taxable income with reference to the export turnover of certain goods or merchandise out of India in cases where the sale proceeds are receivable in convertible foreign exchange.

2. Representations have been received that exporters engaged in making protocol exports, i.e., exports under Government to Government credits, should be eligible for claiming deduction under section 80HHC of the Income-tax Act. Under protocol exports, the realisation of sale proceeds in the hands of exporter is from the Government of India and the mode of payment is in Indian currency. Bills sent to foreign parties are settled between the Government of India and the other Government in accordance with the bilateral agreement by adjustment against the credit allowed, which is realised in foreign exchange later.

3. The Central Board of Direct Taxes have examined the matter in consultation with the Ministry of Commerce and after examining all the aspects of protocol exports, clarify that the assessee exporting goods or merchandise under Government to Government credits are also eligible for claiming deduction under section 80HHC of the Income-tax Act irrespective of the fact that the sale proceeds of such exports are realised in their hands in Indian currency.

Circular : No. 563, dated 23-5-1990.

SECTION 80HHB l DEDUCTIONS IN RESPECT OF PROFITS AND GAINS FROM PROJECTS OUTSIDE INDIA

544. Whether the consideration for execution of foreign projects received in non-convertible rupees from bilateral account countries would be covered by the expression convertible foreign exchange

1. Section 80HHB of the Income-tax Act provides for a deduction in the computation of taxable income of certain assessees from the profits and gains derived from the business of execution of a foreign project or execution of any work forming part of any foreign project undertaken by any other person subject to certain conditions. One of the conditions is that the consideration for the execution of such project or, as the case may be, of such work is payable in convertible foreign exchange.

2. Doubts have been raised as to whether the consideration for execution of foreign projects received in non-convertible rupees from bilateral account countries (e.g., Russian roubles) would be covered by the expression convertible foreign exchange. It is clarified that for the purposes of section 80HHB, the receipt of such consideration will be treated at par with consideration received in any other convertible foreign exchange.

Circular : No. 564, dated 5-7-1990.

552. Clarifications regarding calculation of deductions

1. Under the provisions of section 80HHC of the Income-tax Act, 100 per cent deduction is allowed to exporters in respect of profits derived from export of goods or merchandise. As a measure to provide incentive to supporting manufacturers selling goods or merchandise to an Export House/Trading House for export, the benefit of deduction under section 80HHC was extended with effect from 1-4-1989 to such supporting manufacturers.

2. The essential ingredients of section 80HHC are as follows :

(i) the assessee should be an Indian company or a person (other than a company) resident in India;

(ii) he should be engaged in the business of export out of India of any goods or merchandise (other than mineral oils, minerals and ores);

(iii) the deduction is also available to a supporting manufacturer who has sold his goods or merchandise to an Export House/Trading House provided the Export House/Trading House has issued a disclaimer certificate in respect of the export turnover in Form No. 10CCAB. The term supporting manufacturer shall, with effect from assessment year 1991-92, include a processor of goods. Thus, a seafood processor, for example, or any other processing unit exporting goods or merchandise through an Export House/Trading House, will now be eligible to claim deduction under section 80HHC on the condition that he obtains a disclaimer certificate from the Export House/Trading House;

(iv) under the existing provisions, deduction under section 80HHC is allowed if the sale proceeds are receivable in convertible foreign exchange. With effect from assessment year 1991-92, the deduction under this section shall be allowed only if the sale proceeds are received in or brought into India within a period of six months from the end of the relevant previous year. However, in case of genuine hardship, the Chief Commissioner or the Commissioner may allow further time for the remittance of foreign exchange if he is satisfied that the assessee was unable to bring the foreign exchange within the period of six months for reasons beyond his control. While allowing further period in this regard, the Chief Commissioner or Commissioner shall record reasons for the same in writing; and

(v) the deduction shall be of the profits derived by the assessee from the export of goods or merchandise. What constitutes profits derived from the export of goods or merchandise out of India has been defined in sub-section (3) of section 80HHC. This sub-section (3) lays down that the profits derived from export of goods or merchandise shall be the amount which bears to the profits of the assessee (as computed under the head Profits and gains of business or profession) the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.

3. Several doubts have been expressed about how the deduction under section 80HHC is to be allowed. Representations received by the Board show that there is lack of uniformity amongst assessing authorities in respect of allowing the aforesaid deduction.

4. Sub-section (3) of section 80HHC statutorily fixes the quantum of deduction on the basis of a proportion of the profits of business under the head Profits and gains of business or profession irrespective of what could strictly be described as profits derived from the export of goods or merchandise out of India. The deduction is computed in the following manner :

Profit of the business	Export turnover
	Total turnover

5. The Finance Act, 1990, has amended section 28 by inserting therein, clauses (iiia), (iiib) and (iiic) with retrospective effect with a view to ensuring that cash compensatory support (CCS), duty drawback (DDK) and profit on sale of import entitlement licences (I/L) shall be taxable under the head Profits and gains of business or profession. In view of this amendment, it is clarified that the three export incentives shall have to be included in the profits of the business or computing the deduction under section 80HHC.

6. The term export turnover under the existing provisions, means the sale proceeds (excluding freight and insurance) receivable by the assessee in convertible foreign exchange. In other words, the FOB value of export. The Finance Act, 1990 has restricted the definition of the term export turnover to mean FOB sale proceeds actually received by the assessee in convertible foreign exchange within six months of the end of the previous year or within such further period as the Chief Commssioner/Commissioner may allow in this regard.

7. Total turnover was not defined earlier. There has been lack of uniformity amongst the assessing authorities and many assessing authorities are trading export incentives to be a part of the total turnover. The Finance Act, 1990 has, therefore, clarified the position by inserting a definition for the term total turnover to the Explanation below section 80HHC. According to this definition, total turnover shall exclude cash compensatory support, duty drawback and profit on sale of import entitlement licences.

8. To sum up the deduction shall be allowed in the following manner :

Profit of the business

(including export incentives)

Export turnover (sale proceeds actually received in foreign exchange)

Total turnover (excluding incentives)

9. Thus, in the case of an assessee who is doing export business exclusively, export turnover and total turnover would be identical, if the entire sale proceeds are brought into India in convertible foreign exchange within the prescribed time limit. In that case, the entire profit under the head Profits and gains of business or profession (which will include the three export incentives) will be deductible under section 80HHC. However, in order to arrive at the amount deductible under section 80HHC in the case of an assessee doing export business as well as some other domestic business, the fraction of export turnover to total turnover will be applied to his profits computed under the head Profits and gains of business or profession (which again will include the three export incentives). The operation of section 80HHC read with section 28, as amended by the Finance Act, 1990, can be illustrated by way of the following examples :

	Case I		Case II		Case III		Case IV
	Exclusively export business		2/3 export 1/3 domestic sale		1/2 export 1/2 domestic sale		1/3 export 2/3 domestic sale
	(Figures in lakhs of rupees)
(i) Turnover
(a) FOB exports	100		100		100		100
(b) Domestic rate	-		50		100		200
(c) Total turnover	100		150		200		300
(ii) Business profits before incentives (assumed figures)	10		15		20		30
(iii) CCS, DDK, I/L	10		10		10		10
Total profits of the business	20		25		30		40
(iv) Deduction u/s80HHC if entire export proceeds, i.e., Rs. 100 lakhs is brought into India within the stipulated period	20.00		25	100	30	100	40	100
				150		200		300
			=16.67		=15.00		=13.33
(v) Deduction u/s 80HHC if only 50% of the export proceeds, i.e. Rs. 50 lakhs is brought into India	25	50	25	50	30	50	40	50
		100		150		200		300
	= 10.00		= 8.33		= 7.50		= 6.67

judicial analysis

Explained in - In Ashwini Kumar Consultants (P.) Ltd. v. Dy. CIT [1993] 147 ITD 1 (Delhi - Trib.), it was observed that circular as issued by CBDT, refers to the term total tumoveras total of export saleand domestic sale. In para 9 of the above circular, it has been clearly stated that, in case of exclusive export of goods or merchandise, export turnover and total turnover would be identical, making it all the more clear that the reference in this section was always to the sale value of goods or merchandise.

Thus, the CBDTs Circular No. 564 was of no assistance to the assessee because the assessee had no domestic sale of goods or merchandise and hence, clause (b) of sub-section (3) could never be made applicable to it. This conclusion was based on the proposition of reasonable interpretation of the section. In every situation of export business of goods or merchandise and domestic business of goods or merchandise, it would be necessary to carry out the evaluation of the profits from the export business primarily under clause (a) and then compare it with the amount of export profits arrived by applying the formula in clause (b) as, otherwise, it might lead to a ridiculous result of deduction being allowed from out of profits of domestic trade, rather than from the profits derived from the export of goods or merchandise.

Explained in - In International Research Park Laboratories Ltd. v. Asstt. CIT [1994] 50 ITD 37 (SB), the Tribunal held that the Boards Circular No. 564, dated 5-7-1990 states how the deduction under section 80HHC is to be computed. The said circular clearly shows that where there are profits on export of goods or merchandise out of India or not, the entire profit of the business has to be ascertained and then apportioned in the manner in which the export turnover bears to the total turnover. This circular leaves no doubt both by the clarification and examples given in para 9 that what was contemplated and intended was not the profit relatable to the export of goods exclusively pertaining to those goods but the profit of the entire business including export turnover and domestic turnover, irrespective of the source from which the domestic turnover was derived provided it is in respect of profits and gains of business. The legislative mandate is therefore to compute the profit of the entire business and not to segregate exports or compute the profits of export separately and if they are identifiable adopt them to the entire exclusion of the operation of the provisions of clause (b) of sub-section (3). Therefore, it cannot be said that clause (b) of sub-section (3) applies only when the same nature of goods are dealt in both in exports and locally.

Explained in - The above circular was explained in Tayub Mohamed Hajee Moosa & Co. v. First ITO [1991] 40 TTJ (Mad.) 217, with the following observations :

. . . The CBDT in its Circular No. 564, dated 5th July, 1990 (supra) clarified that the cash compensatory support, duty drawback and profit on sale of import entitlement licences shall have to be included in the profits of the business for computing the deduction under section 80HHC. When similar words were used in section 80HH also, we fail to see the reason why the said CBDTs Circular cannot be applied here in the assessees case for purposes of section 80HH also. It is true that the High Courts of Karnataka, Kerala and Bombay have taken a different view in the matter. However, we are bound by the decision of the Honble Madras High Court, namely, the jurisdictional High Court. Hence, respectfully following the said decision in the case of Wheel & Rim Co. of India Ltd. (supra) and applying the said Circular of the CBDT, we hold that the Commissioner is not justified in holding that the assessee is not entitled to deduction under section 80HH of the IT Act, 1961 in respect of the impugned four items . . . (p. 221)

referred to in - The above circular was referred to in Asstt. CIT v. Doshi Exports [1993] 45 ITD 417 (Bom.), with the following observations :

. . . Clause (a) of sub-section (3) of section 80HHC provides that the profit derived from export of goods would be the profit as computed under the head Profits and gains of business or profession. The entire business income is deemed as profit derived from export of goods. Could it be said that, the service charges which are admittedly in the nature of business profits are to be excluded ?

In my opinion, the answer is in the negative. It may also be useful to refer to the Boards Circular No. 564, dated 5th July, 1990, wherein in paragraph 4, it is stated that sub-section (3), of section 80HHC statutorily fixes the quantum of deduction on the basis of a proportion of the profits of business under the head Profits and gains of business of profession irrespective of what could strictly be described as profits derived from the export of goods or merchandise out of India. Deduction to a person falling under clause (a), of section 80HHC(3) would be the amount of profits computed under the head Profits and gains of a business or profession. On the other hand, the deduction to a person falling under clause (b) thereof is to be computed in the following manner :

Profit of the business	Export turnover
	Total turnover

10. In these circumstances, in my opinion, the Assessing Officer was not justified in reducing the amount of service charges from the profits of the assessee in arriving at the deduction of the profit derived from the export of goods or merchandise out of India. It is the amount which bears to the profits of the business the same proportion as the export turnover of the assessee in respect of which goods bears to the total turnover of the business carried on by the assessee . . . . (p. 423)

Circular : No. 565, dated 11-7-1990.

Section 206C l Profits And Gains From Business of Trading In Alcoholic liquor, Forest Produce, etc.

1189. Instructions regarding deduction of tax at source on profits and gains from the business of trading in alcoholic liquor, forest produce, etc.

Clarification I

1. Considerable difficulty has been felt in the past in assessing income of persons who take contracts for sale of liquor, forest produce, etc. It has been the Departments experience that for taking such contracts, firms or associations of persons are specifically constituted and very often no trace is left of them or their members after the contract has been executed. Persons have also been found to have taken contracts in benami names by floating undertakings or associations for short periods. Since tax is payable in the assessment years on the incomes of the previous years, the time by which the incomes from such sources become assessable, such persons become untraceable. Moreover, at the time of assessment years in these cases, either the accounts are not available or they are mostly incorrect or incomplete. Thus, even if assessments could be made on ex parte basis, it becomes almost impossible to collect the tax found due, either because it becomes difficult to establish the identity of the persons and trace them or because of the fact the persons in whose names contracts were taken are men of no means. With a view to combating large scale tax evasion by persons deriving incomes from such business, the Finance Act, 1988 has inserted a new section 44AC to provide for determination of income in such cases. Further, with a view to facilitating collection of taxes from such assessees, the Finance Act, 1988 has inserted a new section 206C to provide for collection of such tax at source.

2. Sections 44AC and 206C are reproduced below :

(1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in case of an assessee, being a person other than a public sector company (hereafter in this section referred to as the buyer), obtaining in any sale by way of auction, tender, or any other mode, conducted by any other person or his agent (hereafter in this section referred to as the seller),

(a) any goods in the nature of alcoholic liquor for human consumption (other than Indian-made foreign liquor a sum equal to forty per cent of the amount paid or payable by the buyer as the purchase price in respect of such goods shall be deemed to be the profits and gains of the buyer from the business of trading in such goods chargeable to tax under the head Profits and gains of business or profession;

(b) the right to receive any goods of the nature specified in column (2) of the Table below, or such goods as the case may be, a sum equal to the percentage, specified in the corresponding entry in column (3) of the said Table of the amount paid or payable by the buyer in respect of the sale of such right or as the purchase price in respect of such goods shall be deemed to be the profits and gains of the buyer from the business of trading in such goods chargeable to tax under the head Profits and gains of business or profession.

Table

Sl. No.	Nature of goods	Percentage
(1)	(2)	(3)
(i)	Timber obtained under a forest lease	Thirty-five per cent
(ii)	Timber obtained by any mode other	Fifteen per cent
	than under a forest lease
(iii)	Any other forest produce not being timber	Thirty-five per cent

(2) For the removal of doubts, it is hereby declared that the provisions of sub-section (1) shall not apply to a buyer (other than a buyer who obtains any goods from any seller which is a public sector company) in the further sale of any goods obtained under or in pursuance of the sale under sub-section (1).

(3) In a case where the business carried on by the assessee does not consist exclusively of trading in goods to which this section applies and where separate accounts are not maintained or are not available, the amount of expenses attributable to such other business shall be an amount which bears to the total expenses of the business carried on by the assessee the same proportion as the turnover of such other business bears to the total turnover of the business carried on by the assessee.

Explanation : For the purposes of this section, Seller means the Central Government, a State Government or any local authority or corporation or authority established by or under a Central, State or Provincial Act, or any company or firm.

The provisions of this section will apply only to an assessee being a person other than a public sector company, referred to as buyer of any goods in the nature of alcoholic liquor for human consumption (other than Indian-made foreign liquor) or such goods as are mentioned in clause (b) of sub-section (1) of section 44AC, at the point of first sale. The provisions of this section shall not apply to any buyer in the second or subsequent sale of such goods. This amendment will take effect from 1st April, 1989 and will accordingly apply to assessment year 1989-90 and subsequent years :

(1) Every person, being a seller referred to in section 44AC, shall, at the time of debiting of the amount payable by the buyer referred to in that section to the account of the buyer or at the time of receipt of such amount from the said buyer in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, collect from the buyer of any goods of the nature specified in column (2) of the Table below, a sum equal to the percentage, specified in the corresponding entry in column (3) of the said Table, of such amount as income-tax on income comprised therein :

Table

Sl. No.	Nature of goods	Percentage
(1)	(2)	(3)
(i)	Alcoholic liquor for human consumption (other	Fifteen per cent
	than Indian-made foreign liquor)
(ii)	Timber obtained under a forest lease	Fifteen per cent
(iii)	Timber obtained by any mode other than under	Ten per cent
	a forest lease
(iv)	Any other forest produce not being timber	Fifteen per cent.

Provided that where the Assessing Officer, on an application made by the buyer, gives a certificate in the prescribed form that to the best of his belief any of the goods referred to in the aforesaid table are to be utilised for the purposes of manufacturing, processing or producing articles or things and not for trading purposes, the provisions of this sub-section shall not apply so long as the certificate is in force.

(2) The power to recover tax by collection under sub-section (1) shall be without prejudice to any other mode of recovery.

(3) Any person collecting any amount under sub-section (1) shall pay within seven days the amount so collected to the credit of the Central Government or as the Board directs.

(4) Any amount collected in accordance with the provisions of this section and paid under sub-section (3) shall be deemed as payment of tax on behalf of the person from whom the amount has been collected and credit shall be given to him for the amount so collected on the production of the certificate furnished under sub-section (5) in the assessment made under this Act for the assessment year for which such income is assessable.

(5) Every person collecting tax in accordance with the provisions of this section shall, within ten days from the date of debit or receipt of the amount, furnish to the buyer to whose account such amount is debited or from whom such payment is received, a certificate to the effect that tax has been collected, and specifying the sum so collected, the rate at which the tax has been collected and such other particulars as may be prescribed.

(6) Any person responsible for collecting the tax who fails to collect the tax in accordance with the provisions of this section, shall notwithstanding such failure, be liable to pay the tax to the credit of the Central Government in accordance with the provisions of sub-section (3).

(7) Without prejudice to the provisions of sub-section (6), if the seller does not collect the tax or after collecting the tax fails to pay it as required under this section, he shall be liable to pay simple interest at the rate of two per cent per month or part thereof on the amount of such tax from the date on which such tax was collectable to the date on which the tax was actually paid.

(8) Where the tax has not been paid as aforesaid, after it is collected, the amount of tax together with the amount of simple interest thereon referred to in sub-section (7) shall be charged upon all the assets of the seller.

It may be noted that the sum collected at source in accordance with the provisions of section 206C should be increased by a surcharge for the purpose of the Union calculated on the income-tax at the rates in force. Tax is required to be collected from the buyer either at the time of debiting the said amount to the account of the buyer or at the time of receipt of that amount from the buyer, whichever is earlier. This mode of recovery of tax shall be without prejudice to any other mode of recovery. The tax so collected by the seller shall be paid to the credit of the Central Government or as the Board directs within 7 days from the date of collection. It will be treated as tax paid on behalf of the person from whom the tax had been collected and credit shall be given for such amount in the assessment made under the Income-tax Act on production of a certificate. This section also provides that if a seller does not collect or after collecting fails to pay the tax, he shall be deemed to be an assessee in default in respect of the tax and the amount of tax together with the amount of simple interest calculated at the rate of 2 per cent per month or part thereof shall be a charge upon the assets of the seller. It may be noted that failure to pay the tax collected at source will attract the penal provisions of section 276B according to which such a person will be punishable with rigorous imprisonment, for a term between 3 months and 7 years and with fine.

This amendment will be effective from 1st June, 1988.

The Board by Notification No. SO 557(E), dated 9th June, 1988 has made necessary amendments in the Income-tax Rules, 1962 in this regard. It may be noted that failure to pay tax collected at source, a new challan form has been devised.[`4] *

Circular : No. 525, dated 24-11-1988.

Clarification II

1. Attention is invited to this Departments Circular No. 525, dated 24-11-1988 wherein the rates at which collection of income-tax have to be made at source during the financial year 1988-89 in respect of profits and gains from the business of trading in alcoholic liquor (other than Indian-made foreign liquor), timber and other forest produce were communicated.

2. Subsequent to the issue of the aforesaid circular, the Direct Tax Laws (Amendment) Act, 1989 substituted the words Ten per cent by words Five per cent occurring in column 3 against item (iii) of the table below sub-section (1) of section 206C of the Income-tax Act, thereby providing that in respect of the timber obtained by any mode other than forest lease, income-tax shall be collected at the rate of 5 per cent of the purchase price payable by the buyer. The said amendment has come into effect from 1-6-1988. The Direct Tax Laws (Amendment) Act has also inserted a new sub-section (5A) in section 206C to provide that every person collecting tax in accordance with the provisions of section 206C shall prepare half-yearly returns for the period ending on the 30th September and 31st March in each financial year and deliver or cause to be delivered to the prescribed income-tax authority such returns in such form and verified in such manner and setting forth such particulars as may be prescribed in the rules. It may also be added that the Direct Tax Laws (Amendment) Act has inserted a proviso to clause (a) of sub-section (1) of section 44AC of the Income-tax Act which provides that clause (a) relating to determination of profits in the trading of goods, in the nature of alcoholic liquor for human consumption (other than Indian-made foreign liquor) at 40 per cent of the purchase price, shall not apply where the goods are not obtained by way of auction and where the sale price of such goods as sold by the buyer is fixed by or under any State Act. In such cases, tax will not be required to be collected under section 206C.

3. Subject to the amendments/modifications mentioned in para 2 above, the instructions contained in the Departments Circular No. 525, dated 24-11-1988 will be applicable during the current financial year also i.e., 1989-90. It may be noted that as per the provisions of the Finance Act, 1989 in cases in which tax has to be collected under section 206C, the collection shall be made at the rates specified in that section, i.e., at the rate of 15 per cent of the amount payable by the buyer (at the rate of 5 per cent in the case of timber obtained by any mode other than forest lease), and it shall be further increased by surcharge for the purpose of the Union calculated at the rate of 8 per cent of such collection.

4. It may also be mentioned that the tax so collected is to be paid within seven days to the credit of the Central Government, as provided in sub-section (3) of section 206C. Failure to do so attracts prosecution under section 276BB of the Income-tax Act. Failure to collect the tax from the buyers of the goods mentioned in sections 44AC and 206C makes the seller of the goods responsible for paying the tax to the Central Government in terms of sub-section (6) of section 206C.

Circular : No. 535, dated 26-6-1989.

Clarification III

1. Attention is invited to this Departments Circular No. 525, dated 24-11-1988 and No. 535, dated 26-6-1989, wherein the provisions relating to collection of income-tax at source under section 206C of the Income-tax Act in respect of profits and gains from the business of trading in alcoholic liquor, forest produce, etc. were communicated.

2. According to sub-section (5A) of section 206C, every person collecting tax in accordance with the provisions of the said section shall prepare half-yearly returns for the period ending on 30th September and 31st March in each financial year and deliver or cause to be delivered to the prescribed income-tax authority, the said returns in such form and verified in such manner and setting forth such particulars and within such time as may be prescribed. A new rule 37E prescribing the half-yearly returns regarding tax collected at source u/s 206C(5A) and another rule 37F prescribing the income-tax authorities to whom these half-yearly returns are to be furnished, have been inserted by the Income-tax Rules, 1962, vide Notification No. S.O. 149(E), dated 19-2-1990. These half-yearly returns are to be filed within one month from the end of the period to which the returns relate.

Clarification IV

1. Reference is invited to Boards Circular No. 565, dated 11-7-1990 regarding collection of income-tax at source under section 206C of the Income-tax Act in respect of profits and gains from the business of trading in alcoholic liquor, forest produce etc., as also to earlier Circulars referred to in paragraph 1 of Circular No. 565.

2. As a result of different systems prevailing in different States, the term purchase price, used in section 44AC of the Income-tax Act was being understood in different ways. In order to clarify this point, the Finance Act, 1990 has amended the said section to provide that the purchase price would mean any amount (by whatever name called) paid or payable by the buyer to obtain the goods referred to in that section, except the bid amount in an auction. Accordingly, the excise duty paid or payable by the buyer will also form part of the purchase price for the purposes of section 44AC. On the same analogy, the Nirgam Mulya or Issue Price which is paid by a buyer in the State of Uttar Pradesh will also form part of the purchase price. Thus, income-tax will have to be collected at source under the provisions of section 206C by all persons referred to in section 44AC of the Income-tax Act, 1961 (e.g. Central Government, State Government, local authority, corporations, etc.) at the specified rates, with reference to the purchase price including the excise duty, etc.

3. The above amendment has come into force with effect from the assessment year 1991-92 and, therefore, will be applicable to the collections under section 206C made during the financial year 1990-91.

4. The Finance Act, 1990 has further amended section 44AC so as to include a co-operative society also within the meaning of the term seller as defined therein. The said amendment has also come into effect from assessment year 1991-92 and will, accordingly, apply to collections made under section 206C during the financial year 1990-91.

Circular : No. 585, dated 27-11-1990.

Judicial analysis

Explained in - The above circular was explained in Badhar Khan Pukhraj v. Deputy Commissioner (Asstt.) [1993] 112 Taxation 74 (Trib.), in the following words :

17. The above circular clearly shows that since the provisions of section 44AC were being understood in different ways, a necessity of clarifying the position was felt. In view of this state of affairs regarding the scope and application of section 44AC it would not be unreasonable to hold that a substantial point of dispute was there, involved in the assessment in this case, and that the nature of such dispute went beyond the scope of adjustment contemplated under section 143(1) and which could have been made by rectifying an arithmetical error in the return. In that sense of the matter there existed mistake apparent from record in the intimation sent by the DC (Asstt.) under section 143(1) after making adjustments. In fact, the existence of such a mistake or error apparent from record was appreciated in his second order dated 2-1-1992 by the Assessing Officer himself when he corrected or rectified the mistake regarding inclusion of cost price of Rum in the computation of purchase price. We are thus satisfied that the order under appeal which has the effect of upholding the legality and validity of intimation sent under section 143(1) is not correct in law and is required to be vacated. We hold accordingly and direct that the addition of Rs. 1,05,39,059 made by the DC (Asstt.) by way of making adjustments be cancelled. (pp. 80-81)

Clarification V

1. Attention is invited to the Boards Circular No. 565, dated 11-7-1990 regarding collection of income-tax at source under section 206C of the Income-tax Act, in respect of profits and gains from the business of trading in alcoholic liquor, forest produce, etc. and filing of half-yearly returns in this regard.

2. The Finance (No. 2) Act, 1991 does not make any change in the rates of tax applicable for the collection of tax at source under section 206C for the financial year 1991-92. These rates and other relevant provisions are enumerated below.

3. Sub-section (1) of section 206C lays down that every person, being a seller referred to in section 44AC shall, at the time of debiting of the amount payable by the buyer to the account of the buyer or at time of receipt of such amount from the said buyer in cash or by issue of cheque or draft or by any other mode, whichever is earlier, collect from the buyer of the goods of the nature specified below, a sum equal to the percentage, as mentioned against each, of such amount as income-tax on the income comprised therein :

(i)	Alcoholic liquor for human consumption (other than Indian-made foreign liquor)	15%
(ii)	Timber obtained under a forest lease	15%
(iii)	Timber obtained by any mode other than under a forest lease	5%
(iv)	Any other forest produce not being timber	15%

Further, according to the provisions of the Finance (No.2) Act, 1991, the amount of tax collectible at source at the aforesaid rates shall be increased by a surcharge at the rate of 15 per cent where the buyer is a domestic company and 12 per cent in respect of other buyers.

4. It may be clarified that seller for the aforesaid purpose means the Central Government or a State Government or any local authority or corporation or authority established by or under a Central, State or Provincial Act, or any company or firm or co-operative society. It is also clarified that the provisions of section 44AC, and, consequently, those of section 206C will apply only to an assessee being a person (as defined in the Act) other than a public sector company, referred to as buyer of any goods, in the preceding paragraph, at the point of first sale and not in the case of second or subsequent sale of such goods.

5. It is further clarified that in the case of goods of the nature of alcoholic liquor for human consumption (other than Indian-made foreign liquor), the aforesaid provisions shall not apply to a buyer where such goods are not obtained by him by way of auction and where the sale price of such goods to be sold (further) by the buyer is fixed by or under any State Act.

6. It is also clarified that where the Assessing Officer, on an application made by the buyer, gives a certificate in the prescribed form that to the best of his belief, any of the goods referred to above are to be utilised for the purpose of manufacturing, processing or producing articles or things and not for trading purposes, the provisions of sub-section (1) of section 206C shall not apply so long as the certificate remains in force. Reference in this regard may be made to rule 37C of the Income-tax Rules, 1962 and Form No. 27C prescribed thereunder.

7. The responsibilities, obligations, etc., under the Income-tax Act of the person collecting tax at source under section 206C, are as follows :

(a) According to the provisions of sub-section (3) of section 206C, any person collecting any amount, as aforesaid, shall pay within seven days the amount so collect to the credit of the Central Government or as the Board directs.

(b) According to the provisions of sub-section (5) of section 206C, every person collecting tax as aforesaid shall within ten days from the date of debit, or receipt of the amount, furnish to the buyer to whose account such amount is debited, or, from whom such payment is received, a certificate to the effect that tax has been collected, specifying the sum so collected and the rate at which the tax has been collected and such other particulars as may be prescribed. On production of this certificate by the buyer, credit shall be given to him for the amount so collected in the assessment made under the Act for the assessment year for which such income is assessable. Reference in this regard may be made to rule 37D of the Income-tax Rules, 1962 and Form No. 27D prescribed thereunder.

If a person fails to issue the certificate of tax collected at source by him, as aforesaid, he shall be liable to pay by way of penalty under section 272A, a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues.

(c) If any person responsible for collecting tax under the provisions of section 206C fails to collect the tax, he shall still be liable in terms of sub-section (6) of section 206C to pay the tax to the credit of the Central Government within the period of seven days referred to in sub-para (a) above.

(d) If the seller fails to collect the tax, or, after collecting the tax, fails to pay it to the credit of the Central Government he shall be liable in terms of sub-section (7) of section 206C to pay simple interest @ 2% per month or part thereof on the amount of such tax from the date on which such tax was collectible to the date on which such tax was actually paid. Further, section 276BB lays down that if a person fails to pay to the credit of the Central Government the tax collected by him as required under the provisions of section 206C, he shall be punishable with rigorous imprisonment for a term which shall be between 3 months and 7 years and with fine.

8. Sub-section (5A) of section 206C lays down that every person collecting tax in accordance with the provisions of the said section shall prepare half-yearly returns for the period ending on 30th September and 31st March in each financial year, and, deliver or cause to be delivered to the designated/concerned Assessing Officer the said returns. Under rule 37E of the Income-tax Rules, 1962, these returns are to be furnished in Form No. 27EA, 27EB, 27EC or 27ED relating respectively to alcoholic liquor for human consumption, timber obtained under a forest lease, timber obtained by any mode other than under a forest lease, or, any other forest produce not being timber, as the case may be, within a period of 1 month from the end of the half-yearly period to which the return relates.

If a person fails to furnish the aforesaid returns in time, he shall be liable to pay by way of penalty, under section 272A, a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the default continues. However, the penalty shall not exceed the amount of tax which was collectible at source.

9.These instructions are not exhaustive and are issued only with a view to helping the persons responsible for making collection of tax at source under section 206C. Wherever, there is any doubt, a reference may be made to the relevant provisions of the Income-tax Act, 1961, and the Finance (No. 2 ) Act, 1991. In case any assistance is required, the Assessing Officer concerned or local Public Relations Officer of the Income-tax Department may be approached.

Circular : No. 620, dated 6-12-1991.

Clarification vi

1. Attention is invited to the Boards Circular No. 620, dated 6-12-1991 regarding collection of income-tax at source under section 206C of the Income-tax Act, in respect of profits and gains from the business of trading in alcoholic liquor, forest produce, etc., during the financial year 1991-92.

2. The Finance Act, 1992 does not make any change in the rates of tax applicable for the collection of tax at source under section 206C for the financial year 1992-93. However, section 44AC, which was hitherto interlinked with section 206C, has been deleted by the Finance Act, 1992. Simultaneously, certain amendments consequential to the deletion of section 44AC have been made in section 206C.

3.1 Sub-section (1) of the amended section 206C enjoins that every person, being a seller shall, at the time of debiting of the amount payable by the buyer, to the account of the buyer or at the time of receipt of such amount from the said buyer in cash or by the issue of a cheque or draft or by any other mode,whichever is earlier, collect from the buyer of any goods of the nature specified in column (2) of the Table below, a sum equal to the percentage specified in the corresponding entry in column (3) of the said Table, of such amount as income-tax :

Table

Sl. No.	Nature of goods	Percentage
(1)	(2)	(3)
(i)	Alcoholic liquor for human consumption	Fifteen per cent
	(other than Indian-made foreign liquor)
(ii)	Timber obtained under a forest lease	Fifteen per cent
(iii)	Timber obtained by any mode other than	Five per cent
	under a forest lease
(iv)	Any other forest produce not being timber	Fifteen per cent

3.2 The term buyer in section 206C is defined to mean a person who obtains in any sale, by way of auction, tender or any other mode, goods of the nature specified in the Table referred above or the right to receive any such goods but does not include :

(i) a public sector company,

(ii) a buyer in the further sale of such goods obtained in pursuance of such sale, or

(iii) a buyer where the goods are not obtained by him by way of auction and where the sale price of such goods to be sold by the buyer is fixed by or under any State Act.

3.3 The term seller means the Central Government, a State Government or any local authority or corporation or authority established by or under a Central, State or Provincial Act, or any company or firm or co-operative society.

4. The amount of tax collectible at source at the rates referred to in paragraph 3.1 shall be increased by a surcharge at the rate of 15 per cent where the buyer is a domestic company and at the rate of 12 per cent in respect of other buyers.

5. It is clarified that the provisions of sub-section (1) of section 206C in relation to a buyer will not apply to a public sector company, and, to any other buyer who obtains the said goods at a second or subsequent sale of such goods. Thus, these provisions will aply only at the point of the first sale of such goods.

6. It is also clarified that where the Assessing Officer, on an application made by the buyer, gives a certificate in the prescribed form that, to the best of his belief, any of the goods referred to in the Table in paragraph 3.1 are to be utilised for the purpose of manufacturing, processing or producing articles or things and not for trading purposes, the provisions of sub-section (1) of section 206C shall not apply so long as the certificate remains in force. Reference in this regard may be made to rule 37C of the Income-tax Rules, 1962, and Form No. 27C prescribed thereunder.

7. The responsibilities, obligations, etc., under the Income-tax Act of the person collecting tax at source under section 206C, are as follows :

(a) Any person collecting any amount under section 206C (1) shall pay within seven days the amount so collected to the credit of the Central Government or as the Board directs.

(b) Every person collecting tax shall from the date of debit or within ten days of receipt of the amount, furnish to the buyer to whose account such amount is debited, or, from whom such payment is received, a certificate to the effect that tax has been collected, specifying the sum so collected and the rate at which the tax has been collected and such other particulars as may be prescribed. On production of this certificate by the buyer, credit shall be given to him for the amount so collected in the assessment made under the Act for the assessment year for which such income is assessable. Reference in this regard may be made to rule 37D of the Income-tax Rules, 1962 and Form No. 27D prescribed thereunder. If a person fails to issue the certificate of tax collected at source by him he shall be liable to pay by way of penalty, under section 272A, a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues.

(c) If any person responsible for collecting tax fails to collect the tax, he shall still be liable to pay in terms of sub-section (6) of section 206C, the tax to the credit of the Central Government within the period of seven days referred to in sub-para (a) above.

(d) If the seller fails to collect the tax, or, after collecting the tax, fails to pay it to the credit of the Central Government, he shall be liable in terms of sub-section (7) of section 206C to pay simple interest @ 2 per cent per month or part thereof, on the amount of such tax from the date on which such tax was collectible to the date on which such tax was actually paid. Further, section 276BB lays down that if a person fails to pay to the credit of the Central Government the tax collected by him as required under the provisions of section 206C, he shall be punishable with rigorous imprisonment for a term which shall not be less than 3 months and which may extend up to 7 years and with fine.

(e) Every person collecting tax shall prepare half-yearly returns for the period ending on 30th September and 31st March in each financial year, and, deliver or cause to be delivered to the designated/concerned Assessing Officer the said returns. Under rule 37E of the Income-tax Rules, 1962, these returns are to be furnished in Form No. 27EA, 27EB, 27EC or 27ED relating respectively to alcoholic liquor for human consumption, timber obtained under a forest lease, timber obtained by any mode other than under a forest lease, or, any other forest produce not being timber, as the case may be, within a period of one month from the end of the half-yearly period to which the return relates.

(f) If a person fails to furnish the half-yearly returns in time, he shall be liable to pay by way of penalty, under section 272A, a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for each day during which the default continues. However, the penalty shall not exceed the amount of tax which was collectible at source.

8. These instructions are not exhaustive and are issued only with a view to helping the persons responsible for collecting tax at source under section 206C. Wherever, there is any doubt, a reference may be made to the relevant provisions of the Income-tax Act, 1961, and the Finance Act, 1992. In case any assistance is required, the Assessing Officer concerned or local Public Relations Officer of the Income-tax Department may be approached.

Circular : No. 634, dated 20-8-1992.

Clarification VII

1. Attention is invited to the Boards Circular No. 634, dated 20-8-1992 regarding collection of income-tax at source under section 206C of the Income-tax Act, in respect of profits and gains from the business of trading in alcoholic liquor, forest produce, etc., during the financial year 1992-93.

2. The Finance Act, 1993 does not make any change in the rates of tax applicable for the collection of tax at source under section 206C for the financial year 1993-94.

3.1 Sub-section (1) of section 206C enjoins that every person, being a seller shall at the time of debiting of the amount payable by the buyer, to the account of the buyer, or, at the time of receipt of such amount from the said buyer in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, collect from the buyer of any goods of the nature specified in column (2) of the Table below, a sum equal to the percentage specified in the corresponding entry in column (3) of the Table, of such amount as income-tax :

Table

Sl. No.	Nature of goods	Percentage
(1)	(2)	(3)
(i)	Alcoholic liquor for human consumption	Fifteen per cent
	(other than Indian-made foreign liquor)
(ii)	Timber obtained under a forest lease	Fifteen per cent
(iii)	Timber obtained by any mode other than	Five per cent
	under a forest lease
(iv)	Any other forest produce not being timber	Fifteen per cent

(i) a public sector company,

(ii) a buyer in the future sale of such goods obtained in pursuance of such sale, or

(iii) a buyer where the goods are not obtained by him by way of auction and where the sale price of such goods to be sold by the buyer is fixed by or under any State Act.

4.The amount of tax collectible at source at the rates referred to in paragraph 3.1 shall be increased by a surcharge at the rate of 15 per cent where the buyer is a domestic company and at the rate of 12 per cent in respect of other buyers.

5. It may be noted that the provisions of sub-section (1) of section 206C in relation to a buyer will not apply to a public sector company, and, to any other buyer who obtains the said goods at a second or subsequent sale of such goods. Thus, these provisions will apply only at the point of the first sale of such goods.

7. The responsibilities, obligations, etc., under the Income-tax Act, of the person collecting tax at source under section 206C, are as follows :

(a) Any person collecting any amount under section 206C (1) shall pay within seven days the amount so collected to the credit of the Central Government, or, as the Board directs.

(b) Every person collecting tax shall, within ten days from the date of debit, or, receipt of the amount, furnish to the buyer to whose account such amount is debited, or, from whom such payment is received, a certificate to the effect that the tax has been collected, specifying the amount of tax and the rate at which it has been collected, and, such other particulars as may be prescribed. This certificate has to be issued in Form No. 27D prescribed under rule 37D of the Income-tax Rules, 1962. On production of this certificate by the buyer, credit shall be given to him for the amount so collected, in the assessment made under the Act for the assessment year for which such income is assessable. If a person fails to issue the certificate of tax collected at source by him, he shall be liable to pay, by way of penalty, under section 272A(2), a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues.

(c) If any person responsible for collecting tax fails to collect the tax, he shall himself be liable to pay, in terms of sub-section (6) of section 206C, the tax to the credit of the Central Government within the period of seven days referred to in sub-para (a) above.

(d) If the seller fails to collect the tax, or, after collecting the tax, fails to pay it to the credit of the Central Government, he shall be liable in terms of sub-section (7) of section 206C to pay simple interest @ 2 per cent per month or part thereof, on the amount of such tax from the date on which such tax was collectible to the date on which such tax is actually paid. Further, section 276BB lays down that if a person fails to pay to the credit of the Central Government the tax collected by him as required under the provisions of section 206C, he shall be punishable with rigorous imprisonment for a term which shall be not less than three months but which may extend up to 7 years, and with fine.

(e) Every person collecting tax shall prepare half-yearly returns for the period ending on 30th September and 31st March in each financial year, and, deliver or cause to be delivered to the designated/concerned Assessing Officer, the said returns. Under Rule 37E of the Income-tax Rules, 1962, these returns are to be furnished in Form No. 27EA, 27EB, 27EC or 27ED relating respectively to alcoholic liquor for human consumption, timber obtained under a forest lease, timber obtained by any mode other than under a forest lease, or, any other forest produce not being timber, as the case may be, within a period of one month from the end of the half-yearly period to which the return relates.

(f) If a person fails to furnish the half-yearly returns in time, he shall be liable to pay by way of penalty, under section 272A (2) a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for each day during which the default continues. However, the penalty shall not exceed the amount of tax which was collectible at source.

8. These instructions are not exhaustive and are issued only with a view to helping the persons responsible for collecting tax at source under section 206C. Whenever there is any doubt, reference may be made to the relevant provisions of the Income-tax Act, 1961, and Income-tax Rules, 1962. In case any assistance is required, the Assessing Officer concerned or the local Public Relations Officer of the Income-tax Department may be contacted.

Circular :No. 660, dated 15-9-1993.

Judicial analysis

Explained in - In Satya Pal Amrik Singh & Co. v. Union of India [1997] 228 ITR 653 (Punj. & Har.), the Court referred to paragraph 5 of the above circular, and observed :

. . . Vide circular dated September 15, 1993, the Central Board of Direct Taxes has clarified that section 206C(1) of the Act in relation to the buyer will not apply to public sector undertakings/companies and to any other buyer who obtains goods at a subsequent sale of such goods and the provisions of section 206C will apply only at the time of first sale. Admittedly, CITCO is a public sector undertaking and, therefore, the provisions of section 206C are not attracted in its case. If this position of CITCO is taken into consideration in the light of our finding that the sale of liquor by CITCO to L-14 licensees falls within the expression subsequent sale as used in paragraph 5 of the circular issued by the Central Board of Direct Taxes, there can be no escape from the conclusion that the deduction of tax at source from the petitioners is illegal and without jurisdiction. As a logical corollary, it has to be held that the provisions of section 206C as amended by the Finance Act, 1992, are not available to the Income-tax Department to compel CITCO to deduct income-tax at source from the petitioners. (p. 663)

Circular : No. 566, dated 17-7-1990.

168. Clarification regarding investment in Kisan Vikas Patra and Indira Vikas Patra

1. Sub-section (5) of section 11 of the Income-tax Act, 1961 specifies the forms and modes of investment or deposit or surplus money by public charitable or religious trusts and institutions as referred to in section 11(2)(b) of the Act. Clause (i) of the said sub-section (5) specifies one of the forms of investment as investment in savings certificates as defined in clause (c) of section 2 of the Government Savings Certificates Act, 1959, and any other securities or certificates issued by the Central Government under the Small Savings Scheme.

2. Representations have been received seeking clarification whether investments in Indira Vikas Patra and Kisan Vikas Patra are covered by the form or mode of investment specified in the aforesaid clause (i) of sub-section (5) of section 11.

3. Section 2(c) of the Government Savings Certificates Act, 1959, defines savings certificates as certificates to which that Act applies. Section 12 of the said Act empowers the Central Government to make rules to carry out the purposes of that Act. The Indira Vikas Patra Rules, 1986, and the Kisan Vikas Patra Rules, 1988, have been notified by the Central Government in exercise of the powers conferred by the aforesaid section 12 of the Government Savings Certificates Act, 1959. Thus, both these Patras are savings certificates to which the aforesaid Government Savings Certificates Act, 1959 applies. These are, therefore, covered by section 11(5)(i) of the Income-tax Act read with section 2(c) of the Government Savings Certificates Act.

4. It is, therefore, clarified that the investments in Indira Vikas Patra and Kisan Vikas Patra are in accordance with the norms and modes specified in section 11(5) of the Income-tax Act.

Circular : No. 567, dated 19-7-1990.

584. Admissibility of deduction in respect of income from units of the Unit Trust of India

1. The second proviso to sub-section (1) of section 80L of the Income-tax Act, 1961 was amended by the Finance Act, 1988, to provide that in computing the total income, any income by way of interest on deposits under the notified National Deposit Scheme or dividend received from any Indian company, in the aggregate and to the extent such income has not been allowed as a deduction under sub-section (1) or under the first proviso to sub-section (1), shall be further allowed as a deduction, subject to overall ceiling of Rs. 3,000.

2. References have been received from the public seeking clarification as to whether the income received in respect of units of the Unit Trust of India is dividend received from an Indian company, for the purposes of the second proviso to sub-section (1) of section 80L of the Income-tax Act, 1961, or not.

3. The income received in respect of the units of the Unit Trust of India is dividend received from an Indian company by virtue of the provisions of sub-section (3) of section 32 of the Unit Trust of India Act, 1963. Accordingly, the Board have decided that the deduction under the second proviso to sub-section (1) of section 80L of the Income-tax Act, 1961 in respect of dividend received from an Indian company will also be admissible in respect of income received from units of the Unit Trust of India, referred to in clause (v) of sub-section (1) of section 80L of the Income-tax Act, 1961.

Circular: No. 568, dates 27-7-1990

FINANCIAL YEAR 1990-91

1677. Instructions for deduction of tax at source from salary - Rates of tax for the financial year 1990-91

1. Reference is invited to Boards Circular No. 537, dated 12th July, 1989 wherein the rates of income-tax deduction during the year 1989-90 from payment of income chargeable under the head Salaries under section 192 of the Income-tax Act, 1961 were intimated.

2. Sub-section (1) of section 192 provides that the person responsible for paying any income chargeable under the head Salaries shall, at the time of making payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee for that financial year. The provisions of sub-section (3) of the said section are intended for making adjustment for excess or shortfall of inadvertent nature and/or due to unforeseen circumstances. The aggregate tax thus calculated on the estimated income divided by 12 and rounded off to the nearest rupee is required to be deducted from the monthly salary.

3. The Finance Act, 1990 has raised the exemption limit for individuals from Rs. 18,000 to Rs. 22,000. Further, the lowest rate of tax of 20 per cent has been extended from the previous limit of Rs. 25,000 to Rs. 30,000. An extract of sub-paragraph (1) of paragraph A of Part III of the First Schedule to the Finance Act, 1990 giving the tax rates applicable is at Annexure I. Some of the other important changes brought out by the Finance Act, 1990 are :

(i) Introduction of a new system of tax rebate on the gross amount of savings under section 88 by replacing the earlier provisions of section 80C relating to tax incentives for promoting savings. Under the new system, a person contributing to provident fund, life insurance, National Savings Certificates, etc., as earlier, will now be entitled to a tax rebate calculated at the rate of 20 per cent the amount of such savings, etc. The maximum rebate allowance will be Rs. 10,000. However, in the case of authors, playwrights, artists, musicians, actors, sportsmen (including athletes), the maximum tax rebate allowable will be Rs. 14,000.

(ii) Substitution of old section 80CC by a new section 88A to provide for a tax rebate calculated at the rate of 20 per cent of the investment in the eligible issue of capital or units. The maximum amount of investment eligible for tax rebate under section 88A is Rs. 25,000.

(iii) Increase of the limit prescribed under section 80CCA regarding deduction in respect of deposits under the National Savings Scheme, etc., from Rs. 30,000 to Rs. 40,000.

(iv) Insertion of a new section 80CCB relating to deduction in respect of investments made in the units of any plan, framed in accordance with Equity Linked Savings Scheme, of the Mutual Funds specified under section 10(23D) or of the Unit Trust of India. Under this section, the deduction shall be allowed on so much of the amount invested as does not exceed Rs. 10,000. On re-purchase of the units by the Mutual Fund or Unit Trust or on the termination of the plan, however, the amount returned to the assessee shall be deemed to be his income for the previous year in which the amount is returned.

(v) Insertion of a new section 80DD in the Income-tax Act, relating to deduction in respect of expenditure incurred on medical treatment, training and rehabilitation of a handicapped dependent relative. A sum of Rs. 6,000 will be allowed as deduction under this section, and this will be available to those assessees whose total income before the allowance of this deduction does not exceed Rs. 1,00,000 in a year.

(vi) Surcharge on income-tax @ 8 per cent will be applicable in the case of all persons having a total income exceeding Rs. 75,000 against the earlier limit of Rs. 50,000.

4. The substance of the main provisions of 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 1990-91 is given hereunder and in the succeeding paragraphs:

(i) No tax will be deducted at source in any case unless the estimated salary income for the financial year exceeds Rs. 22,000. Some typical examples of calculations are at Annexure II.

(ii) Salary includes wages, fees, commissions, perquisites, profits in lieu of or in addition to salary, advance of salary, annuity or pension, gratuity, payments in respect of encashment of leave, etc. It also includes the annual accretion to the employees account in a recognised provident fund to the extent to which it is chargeable to tax under rule 6 of Part A of the Fourth Schedule of the Income-tax Act. Other items included in salary, profits in lieu of salary and perquisites are described in section 17 of the Income-tax Act.

(iii) The value of perquisites by way of free or confessional residential accommodation, or motor car provided by employers to their employees shall be determined under rule 3 of the Income-tax Rules, 1962. It is, however, clarified that the use of any vehicle provided by a company or an employer for journey by the assessee from his residence to his office or other place of work or from such office or place to his residence shall not be regarded as a benefit or amenity granted or provided to him free of cost or at concessional rate for the purpose.

(iv) 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 III at Annexure II illustrates computation of some such perquisites). The valuation has to be done in accordance with rule 3 of the Income-tax Rules.

(v) The value of any benefit or amenity granted or provided free of cost or at a concessional rate by an employer to an employee (not being a Director of the company or a person who has substantial interest in the company) is not regarded as perquisite received by the employee unless the employees income under the head Salaries exclusive of the value of any benefit or amenity not provided for by way of monetary payment exceeds Rs. 24,000.

(vi) In cases where salary is received from more than one employer, the aggregate salary from these employers will have to be taken into account for the purpose.

Exemptions/deductions in computing total income

5. The exemptions/deductions which can be taken into account for computing the total income of an employee are discussed hereunder :

(i) According to clause (5) of section 10, the value of any travel concession or assistance received by or due to an employee,

(1) from his employer for himself and his family in connection with his proceeding on leave to any place in India;

(2) from his employer or former employer for himself and his family in connection with his proceeding to any place in India after retirement from service or after the termination of his service,

is exempt, subject to the conditions prescribed in rule 2B of the Income-tax Rules, 1962, as amended by the Income-tax (Fifth Amendment) Rules, 1990. It may be noted that the amount exempt under the clause shall in no case exceed the amount of expenses actually incurred for the purpose of such travel. For the purpose of this clause, family in relation to an individual means

(1) the spouse and children of the individual; and

(2) the parents, brothers and sisters of the individual or any of them, wholly or mainly dependent on the individual.

(ii) (a) Clause (10) of section 10 provides exemption of death-cum-retirement gratuity from inclusion in computing total income. The Government have by Notification No. 7534 [F.No. 178/131/87-IT-A(I)], dated 18-9-1987 raised the limit of Rs. 36,000 mentioned in sub-clause (iii) of clause (10) of section 10 of the Income-tax Act to Rs. 1,00,000 for all the three purposes for which the said limit has been mentioned in the provisions of the said clause, in relation to the employees who retire or become in capacitated or die on or after 1st January, 1986 or whose employment is terminated on or after the said date.

Vide Notification No. GSR 405 [F. No. 142/7/88-TPL], dated 28-4-1988, the enhanced limit of Rs. 1,00,000 will be applicable for all the three purposes mentioned in the said clause in relation to the employees mentioned therein who retire or become incapacitated prior to such retirement or die on or after the 1st day of April, 1988 or whose employment is terminated on or after the said date.

(b) Sub-clause (i) of clause (10AA) of section 10 provides for exemption of any payment received by an employee of the Central Government or a State Government as cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement or superannuation or otherwise.

(c) In the case of other employees, the exemption under section 10(10AA) will be determined with reference to the leave, to his credit at the time of retirement or superannuation or otherwise subject to a maximum of eight months leave. This exemption will be limited to the amount payable for such unutilised leave on the basis of the average salary of the employee for eight months, subject to the limit to be prescribed by the Central Government. Where the cash equivalent of unutilised earned leave is received by an employee from two or more employers in the same year, the maximum amount exempt from tax shall not exceed the limit so specified. The limit has now been specified in the Government of India Notification No. SO 553(E)[F.No. 142/11/88-TPL], dated 8-6-1988. According to the said notification, the maximum limit in respect of employees whose retirement takes place from 1st January, 1988 onwards is Rs. 79,920.

(iii) Under section 10(10B), the retrenchment compensation received by a workman is exempt from income-tax subject to certain limits. The maximum amount of retrenchment compensation exempt is the sum calculated on the basis provided in section 25F(b) of the Industrial Disputes Act, 1947 or any amount not less than Rs. 50,000 as the Central Government may by notification specify in the Official Gazette, whichever is less. These limits shall not apply in the case where the compensation is paid under any Scheme which is approved in this behalf by the Central Government, having regard to the need for extending special protection to the workman in the undertaking to which the Scheme applies and other relevant circumstances.

It may be added that a number of public sector undertakings have formulated voluntary retirement schemes for their employees. Any payment received by an employee, whether a workman or executive of a public sector company at the time of his voluntary retirement in accordance with any scheme which the Central Government may approve having regard to the economic viability of the public sector undertaking/company and other relevant circumstances will be exempt under section 10(10C) of the Income-tax Act.

(iv) Under section 10(13A) of the Income-tax Act, 1961 any special allowance specifically granted to an assessee by his employer to meet expenditure incurred on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee is exempt from income-tax to the extent as may be prescribed, having regard to the area or place in which such accommodation is situated and other relevant considerations. According to rule 2A of the Income-tax Rules, 1962, the quantum of exemption allowable on account of grant of special allowance to meet expenditure on payment of rent shall be :

(a) The actual amount of such allowance received by an employee in respect of the relevant period; or

(b) The actual expenditure incurred in payment of rent in excess of 1/10 of the salary due for the relevant period; or

(c) Where such accommodation is situated in Bombay, Calcutta, Delhi or Madras, 50 per cent of the salary due to the employee for the relevant period; or

(d) Where such accommodation is situated in any other place, 40 per cent of the salary due to the employee for the relevant period,

whichever is the least.

For this purpose Salary includes dearness allowance, i.e., if the terms of employment so provide, but excludes all other allowances and perquisites.

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 or any portion thereof from the total income of the employee.

Though incurring actual expenditure on payment of rent is a prerequisite for claiming deduction under section 10(13A), it has been decided as an administrative measure that all employees drawing a gross salary (including all allowances) upto Rs. 3,500 per month will be exempted from the requirement of production of rent receipt. It may, however, be noted that the exemption from the requirement of production of rent receipt is only for the purpose of tax deduction at source and in the regular assessment of the employee, the Assessing Officer will be free to make such enquiry as he deems fit for the purpose of satisfying himself that the employee has incurred actual expenditure on payment of rent.

(v) Clause (14) of section 10 provides for exemption of the following allowances :

(i) Any special allowance or benefit granted to an employee to meet the expenses incurred in the performance of his duties, which the Central Government may specify by notification in the Official Gazette.

(ii) Any allowance granted to an assessee either to meet his personal expenses at the place of his posting or at the place he ordinarily resides or to compensate him for the increased cost of living, which the Central Government may specify by notification in the Official Gazette.

The Direct Tax Laws (Second Amendment) Act, 1989 has inserted the following proviso to the aforesaid clause :

Provided that nothing in sub-clause (ii) shall apply to any allowance in the nature of personal allowance granted to the assessee to remunerate or compensate him for performing duties of a special nature relating to his office or employment unless such allowance is related to the place of his posting or residence.

By Notification No. SO 143(E), dated 21-2-1989, SO 144(E), dated 21-2-1989 [as amended by Notification No. SO 259(E), dated 27-3-1990], GSR 606(E), dated 9-6-1989 and SO 267(E), dated 29-3-1990, the Central Government have specified the following allowances as exempt from tax to the extent and subject to the conditions indicated therein :

(a) Any allowance granted to meet cost of travel on tour or on transfer including any allowance granted to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty;

(b) Any special compensatory allowance in the nature of border area allowance or remote area allowance or difficult area allowance or disturbed area allowance;

(d) Any allowance granted to an employee working in a transport system to meet his personal expenses during his duty performed in the course of running of such transport from one place to another;

(e) Children Education Allowance;

(f) Any allowance granted to an employee to meet the hostel expenditure of his child; and

(g) Any allowance granted to meet the expenditure incurred on conveyance, performance of duties of an office or employment of profit.

(h) Any special compensatory allowance in the nature of Composite Hill Compensatory Allowance or High Altitude Allowance or Uncongenial Climate Allowance or Snowbound Area Allowance or Avalanche Allowance.

(i) Any allowance granted to meet the expenditure incurred on a helper where such a helper is engaged for the performance of duties of an office or employment of profit; any allowance granted for encouraging academic research and any other professional pursuit; any allowance granted to meet the expenses incurred on the purchase or maintenance of uniform for wear during the performance of the duties of an office or employment of profit.

It may be noted that Dearness Allowance and City Compensatory Allowance granted to an employee are not covered by the aforesaid notifications; these allowances will clearly be part of income and will have to be taken into account in the computation of income for the purpose of deduction of tax at source.

(vi) Under section 10(15)(iv)(i) of the Income-tax Act as amended by the Finance Act, 1990, interest payable by the Government on deposits made by an employee of the Central Government or State Government or a public sector company from out of his retirement benefits, in accordance with such scheme framed in this behalf by the Central Government and notified in the Official Gazette is exempt from income-tax. By Notification No. F. 2/14/89-NS-II, dated 7-6-1989 as amended by Notification No. 2/14/89-NS-II, dated 12-10-1989, the Central Government has notified a Scheme called Deposit Scheme for Retiring Government Employees, 1989, for the purpose of the said clause.

(vii) (a) Under section 16 of the Income-tax Act, the taxable salary is to be computed after making standard deduction of a sum equal to 33¹/₃ per cent of the salary of Rs. 12,000, whichever is less. For this purpose the term Salary will include fees, commissions, perquisites or profits in lieu of or in addition to salary, but will include any payment received by the employees which are specifically exempt from tax under clauses (10), (10A), (10AA), (10B), (10C), (11), (12) and (13A) of section 10 of the Act. Thus, house rent allowance to the extent exempt under section 10(13A) of the Act will not be taken into account for the purpose of computing the amount of the standard deduction.

This deduction will be available also to persons drawing pension during the current financial year at the same rate and subject to the same ceiling as to the employees in actual service.

It may be noted that the standard deduction in full will be admissible even to those employees who are entitled to conveyance facilities.

(b) The tax on employment within the meaning of clause (2) of article 276 of the Constitution of India, leviable by or under any law shall also be allowed as a deduction in computing the income of the salaried taxpayers under the head Salaries.

(c) A limited deduction is also allowed under clause (ii) of section 16 in respect of entertainment allowance. In the case of Government employees, this deduction is limited to one-fifth of the employees salary (exclusive of any allowance, benefit or other perquisite) or five thousand rupees, whichever is less. In the case of other employees deduction will be allowable only if the conditions laid down in the aforesaid clause are fulfilled.

(viii) Under section 80CCA of the Income-tax Act, as amended by the Finance Act, 1990, 100 per cent deduction will be allowed to an individual, a Hindu undivided family, and certain categories of persons or bodies of individuals, subject to a ceiling of Rs. 40,000 in respect of :

(1) any amount deposited under the National Savings Scheme; and

(2) any amount paid to effect or keep in force a contract for such annuity plan of the LIC, as the Central Government may specify by notification. By Notification No. GSR 903(E), dated 6-9-1988, the Central Government have specified Jeevan Dhara and Jeevan Akshay plans of the Life Insurance Corporation of India for the purpose of section 80CCA.

It may be noted that the aforesaid deduction will be allowed only in respect of deposits/payments made out of the employees income chargeable to tax. Also, such deposits/payments made upto 31st March of the financial year will qualify for deduction.

It should also be noted that where any amount standing to the credit of the employee under the National Savings Scheme in respect of which deduction has already been claimed under section 80CCA, together with interest accrued thereon, is withdrawn in any previous year, or where any amount is received on account of the surrender of the policy or as annuity or bonus in accordance with the deferred annuity plan of the LIC, in any previous year, the whole of such amount shall be deemed to be the income of the employee of that previous year in which such withdrawal is made or such amount is received and shall be chargeable to tax as the income of the previous year.

The Drawing and Disbursing Officers should satisfy themselves about the actual deposits or payments made by the employees by calling for such particulars/information as they deem necessary before allowing the deduction. Similarly the DDOs should ascertain from the employees about the withdrawals made by them from the NSS or the amount received on account of the annuity Plans of the LIC, and the said amount shall be included in the computation of the employees income and charged to tax accordingly. For this purpose, the DDOs should call for such proof/particulars/information as they deem necessary.

(ix) The Finance Act, 1990 has inserted a new section 80CCB relating to deduction in respect of investment made in accordance with Equity Linked Savings Scheme to be notified by Central Government. Under the new provision, the deduction shall be allowed in the case of an assessee, being an individual, a Hindu undivided family and certain categories of association of persons or bodies of individuals, in relation to the investment made in the units of any plan framed in accordance with Equity Linked Savings Scheme of the Mutual Funds specified under section 10(23D) of the Income-tax Act or of the Unit Trust of India. The deduction shall be allowed on so much of the amount invested as does not exceed Rs. 10,000. When any amount in respect of which deduction has been allowed is returned to the assessee either by way of repurchase of the Units by the Funds or Trust or on the termination of the Plan, it shall be deemed to be his income of the previous year in which the amount is returned. Further, where a Hindu undivided family has affected a partition or an association of persons is dissolved after deduction has been allowed to it, such amount on its return shall be deemed to be the income of the recipient.

The Drawing and Disbursing Officers should satisfy themselves about the fact of investment made by the employees by calling for such information/particulars as they may deem necessary before allowing the deduction. Similarly, the DDOs should ascertain from the employees about the return of the investment either by way of repurchase of the Units by the Fund, etc., or on the termination of the Plan. In the case of such repurchase, etc., the amount returned should be included in the computation of the employees income and charged to tax accordingly.

(x) Under section 80D introduced w.e.f. 1-4-1987, in the case of the following categories of persons, a deduction can be allowed for a sum not exceeding Rs. 3,000 per annum to the extent payment is made by cheque out of their income chargeable to tax to keep in force in insurance on the health of the categories of persons mentioned below provided that such insurance is in accordance with the Scheme framed by the General Insurance Corporation of India as approved by the Central Government, popularly known as Mediclaim. The categories of persons are :

(a) where the assessee is an individual, any sum paid to effect or to keep in force an insurance on the health of the assessee or on the health of the wife or husband, dependent parents or dependent children of the assessee;

(b) where the assessee is a Hindu undivided family, any sum paid to effect or to keep in force an insurance on the health of any member of the family ;

(c) where the assessee is an association of persons or a body of individuals consisting in either case, only of husband and wife governed by the system of community of property in force in the State of Goa and the Union territories of Dadra and Nagar Haveli and Daman and Diu, any sum paid to effect or to keep in force an insurance on the health of any member of such an association or body or on the health of the dependent children of the members of such an association or body.

(xi) The Finance Act, 1990 has inserted a new section 80DD relating to deduction in respect of expenditure incurred on the handicapped dependent relatives. According to the provision of this section, deduction of a sum of Rs. 6,000 shall be allowed in the case of resident individuals who incur expenditure on the medical treatment (including nursing), training and rehabilitation of a person suffering from a permanent physical disability (including blindness) or mental retardation, specified in the rules to be made in this behalf by the Board. The deduction will be available only to those assessees whose total income before the allowance of this deduction does not exceed Rs. 1,00,000 in a year. The deduction will be allowed if the person suffering from permanent physical disability or mental retardation is a relative of the individual. Further, the permanent physical disability or mental retardation of the dependent relative has to be certified by a physician, surgeon, oculist or a psychiatrist, as the case may be, working in a Government hospital or a Government dispensary including a Departmental dispensary or a hospital maintained by a local authority as per Explanation thereto. Further, the amount of deduction will be reduced by the amount of income, if any, of the handicapped dependent relative.

The Drawing and Disbursing Officers should, therefore, call for such particulars/certificates/information as they may deem necessary from the employee to verify the genuineness of the claim before allowing the deduction.

(xii) No deduction should be made from the salary income in respect of any donations for charitable purposes. The tax relief on such donations as admissible under section 80G of the Act will have to be claimed by the taxpayer separately at the time of finalisation of the assessment. However, in cases where contributions to the National Defence Fund, Jawaharlal Nehru Memorial Fund, the Prime Ministers Drought Relief Fund, the National Childrens Fund, or the Indira Gandhi Memorial Trust are made, 50 per cent of such contributions may be deducted in computing the total income of the employee. The donation to the Prime Ministers National Relief Fund and the Prime Ministers Armenia Earthquake Relief Fund will be eligible for hundred per cent deduction. Thus, deduction in this respect may be allowed while computing the total income for the purpose of deduction of income-tax at source for the financial year 1990-91. Deduction will not be admissible where the aggregate of all contributions for the year is less than Rs. 250.

(xiii) Under section 80GG of the Act, 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, 1962. Such deduction is permissible subject to the following conditions:

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

(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 25 per cent thereof or Rs. 1,000 per month, whichever is less. The total income for working out these percentages will be computed before making any deductions under section 80GG;

(i) any residential accommodation himself or by his spouse or minor child or where such assessee is a member of a Hindu undivided family, by such family, at the place where he ordinarily resides or performs duties of his office or carries on his business or profession; or

(ii) at any other place, any residential accommodation being accommodation in the occupation of the assessee, the value of which is to be determined under sub-clause (i) of clause (a), or as the case may be, clause (b) of sub-section (2) of section 23;

(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, Madurai, Nagpur, Patna, Pune, Srinagar, Surat, Vadodara (Baroda) or Varanasi (Banaras) or the urban agglomeration of each of such places; or

(ii) Bombay, Calicut, Cochin, Ghaziabad, Hubli-Dharwar, Madras, Solapur, Trivandrum or Vishakapatnam.

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 assessees. They should also satisfy themselves in this regard by insisting on production of evidence of actual payment of rent.

(xiv) Section 80RRA as amended by Finance Act, 1990 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, an amount equal to the following shall be allowed as deduction in computing the total income of the individual :

(i) fifty per cent of the remuneration; or

(ii) seventy-five per cent of such remuneration as is brought into India, by, or on behalf of, the assessee in accordance with the Foreign Exchange Regulation Act, 1973, and any rules made thereunder,

whichever is higher.

In the case of an employee of Central Government or any State Government, or a 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 any other individual, the deduction will be allowed only if he is a technician and the terms and conditions of his service outside India are approved for the purpose 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 for services rendered outside India. Thus, if the remuneration is paid to the Indian technician, etc., partly in Indian currency and partly in foreign currency, the amount paid in Indian currency, will not be taken into account for the purpose of deduction under section 80RRA. Likewise, if a part of the remuneration, although paid in foreign currency relates to services rendered in India, then such part of the remuneration will also not qualify for deduction under section 80RRA. The expression foreign employer has been defined in 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. While allowing the deduction under this section, documentary evidence should be obtained on the following points:

(a) 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;

(b) In the case of any other individual being a technician, 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 Revenue, Foreign Tax Division, New Delhi). (It should also be ensured that the deduction is allowed with reference to the remuneration received in foreign currency in respect of the period of service outside India).

(xv) Under section 80U, in computing the total income of a resident individual who is totally blind or suffers from any of the permanent physical disabilities or is subject to mental retardation to the extent specified by the Board, a deduction of Rs. 15,000 is allowed. The Board has by Notification SO 529(E), dated 17-7-1985 specified the physical disabilities which will be reckoned as permanent physical disabilities for purposes of deduction under this section. According to the said Notification, a permanent physical disability shall be regarded as a permanent physical disability for the purpose of clause (ii) of sub-section (1) of section 80U, if it falls in any one of the categories specified below, namely:

(a) permanent physical disability of more than 50 per cent in one limb; or

(b) permanent physical disability of more than 60 per cent in two or more limbs;

(d) permanent and total loss of voice.

The deduction of Rs. 15,000 from the total income can be allowed by the employer on the basis of a certificate from a Registered Medical Practitioner as to the employees total blindness or permanent physical disability. In the case of employees suffering from mental retardation, the certificate as to the mental retardation should be from a psychiatrist working in a Government hospital.

6. The total income on account of salary income thus computed is liable to income-tax during the financial year 1990-91 at the rates of tax prescribed in Part III (paragraph A, sub-paragraph I) of the First Schedule to the Finance Act, 1990 - vide Annexure-I. After having worked out the tax liability on the total income, the tax rebates provided for in sections 88 and 88A as explained in paras 7 & 8 below should be allowed as a deduction from the tax on total income. It may, however, be noted that the aggregate of the deductions under section 88 or section 88A shall not, in any case, exceed the amount of income-tax [as computed before allowing the deduction under Chapter VIII of the Income-tax Act] of the total income of the assessee with which he is chargeable for any assessment year. The balance amount is the tax payable by the assessee. However, in the case of every person having a total income exceeding Rs. 75,000, the amount of income-tax thus computed, as reduced by the rebate of income-tax calculated under Chapter VIII-A, shall be increased by a surcharge, for the purpose of the union, calculated @ 8 per cent of such income-tax. The surcharge, however, shall not be payable by a non-resident.

It may be noted that the total income computed in accordance with the provisions of the Act should be rounded off to the nearest multiple of ten rupees by ignoring the fraction which is less than five rupees and increasing the fraction which amounts to five rupees or more, to ten rupees. The net amount of tax deductible should similarly be rounded off to the nearest rupee.

7. According to section 88, an assessee will be entitled to a deduction of 20 per cent of the amount invested or deposited in the following items during the previous year from the income-tax payable by him on his total income :

(i) Payment of insurance premium to effect or to keep in force an insurance on the life of the individual, the wife or husband or any child of the individual. It may be noted that any premium or other payments made on a policy which is not in excess of 10 per cent of the actual capital sum assured, will alone qualify for deduction.

(ii) Any payment made to effect or to keep in force a contract for a deferred annuity, not being an annuity plan has been referred to in section 80CCA(1)(ii), on the life of the individual, the wife or husband or any child of the individual :

Provided that such contract does not contain a provision for the exercise by the insured of an option to receive a cash payment in lieu of the payment of the annuity.

(iii) Any sum deducted from the salary payable by or on behalf of the Government to any individual, being a sum deducted in accordance with the conditions of his service for the purpose of securing to him a deferred annuity or making provision for his wife or children, insofar as the sum deducted does not exceed 1/5th of the salary.

(iv) Any contribution made :

(a) by an individual to any provident fund to which the Provident Funds Act, 1925 applies ;

(b) to any provident fund set up by the Central Government, and notified by it in this behalf in the Official Gazette, where such contribution is to an account standing in the name of an individual, or a minor of whom he is the guardian;

(d) by an employee to an approved superannuation fund;

It may be noted that contribution to any fund shall not include any sums in repayment of loan.

(v) Any deposit in a ten-year account or a fifteen-year account under the Post Office Savings Bank (Cumulative Time Deposit) Rules, 1959, as amended from time to time where such sums are deposited in an account standing in the name of an individual, or a minor of whom he is the guardian.

(vi) Any subscription :

(a) to any such security of the Central Government as the Central Government, may, by notification in the Official Gazette, specify in this behalf ;

(b) to any such savings certificate as defined under section 2(c) of the Government Savings Certificate Act, 1959, as the Government may, by notification in the Official Gazette, specify in this behalf. Interest on NSC (VI Issue) which is deemed investment also qualifies for deduction.

(vii) Any sum paid as contribution :

(a) for participation in the Unit Linked Insurance Plan, 1971 of the Unit Trust of India;

(b) for participation in any Unit-Linked Insurance Plan of the LIC Mutual Fund notified by the Central Government under clause (23D) of section 10.

(viii) Any subscription made to any such deposit scheme of the National Housing Bank as the Central Government, may, by notification in the Official Gazette, specify in this behalf.

(ix) Any sums paid by an assessee for the purpose of purchase or construction of a residential house property, construction of which is completed after 31st day of March, 1987 and the income from which is chargeable to tax under the head Income from house property (or which would, if it has not been used for the assessees own residence, have been chargeable to tax under that head) where such payments are made towards or by way of any instalment or part payment of the amount due under any self-financing or other scheme of any development authority, housing board, etc. The deduction will also be allowable in respect of re-payment of loans borrowed by an assessee from the Government, or any bank or Life Insurance Corporation, or National Housing Bank, or certain other categories of institutions engaged in the business of providing long-term finance for construction or purchase of houses in India. Any repayment of loan borrowed from the employer will also be covered, if the employer happens to be a public company, public sector company or a university established by law or a college affiliated to such university, or a local authority. The stamp duty, registration fee and other expenses incurred for the purpose of transfer shall also be covered. Payment towards the cost of house property, however, will not include, admission fee or cost of share or initial deposit or the cost of the land (except where the consideration for the purchase of house property is a composite amount and the cost of land cannot be separately ascertained) or the cost of any addition or alternation to or renovation or repair of the house property which is carried out after the issue of the completion certificate by competent authority, or after the occupation of the house by the assessee or after it has been let out. Payments towards any expenditure in respect of which the deduction is allowable under the provisions of section 24 of the Income-tax Act will also not be included in payments towards the cost of purchase or construction of a house property. Where the house property in respect of which deduction has been allowed under these provisions is transferred by the taxpayer at any time before the expiry of five years from the end of the financial year in which possession of such property is obtained by him or he receives back, by way of refund or otherwise, any sum specified in section 88(2)(xv), no deduction under these provisions shall be allowed in respect of such sums paid in such previous year in which the transfer is made and the aggregate amount of deduction of income-tax so allowed in the earlier years shall be added to the tax on the total income of the assessee with which he is chargeable for such assessment year. It may be noted that the amount which will qualify for tax rebate in respect of this item will not exceed Rs. 10,000. In respect of repayment of loans taken for the purchase or construction of a new residential house property the construction of which does not get completed by the end of the financial year 1990-91, not tax rebate in respect of these items shall be admissible to the employees in the assessment of the income for the assessment year 1991-92.

It may also be noted that repayment of loans made in respect of houses/flats the construction of which had been completed before 31-3-1987 will not qualify for tax rebate.

Subject to the limits mentioned for various items, the entitlement to tax rebate will be calculated @ 20% of the total amount of the aforesaid savings, etc. The maximum tax rebate allowable will be Rs. 10,000 generally, and Rs. 14,000 in the case of authors, playwrights, artists, musicians, actors, sportsmen and athletes.

The Drawing and Disbursing Officers should satisfy themselves about the actual deposits/subscriptions/payments made by the employees by calling for such particulars/information as they deem necessary before allowing the aforesaid rebate. It may also be mentioned that the payment towards items qualifying for the tax rebate should be made out of employees income chargeable to tax.

8. According to the newly inserted section 88A, which has replaced the earlier section 80CC, a tax rebate calculated @ 20% of the investment in the eligible issue of capital or units specified in the new section will be allowed as deduction from the amount of income-tax (as computed before allowing the deduction under Chapter VIII of the Income-tax Act) on his total income with which he is chargeable for any assessment year. The maximum amount of investment eligible for such tax rebate is Rs. 25,000. The said section further provides :

(1) That the funds mobilized under the scheme of the Mutual Fund or of the Unit Trust of India must be invested in the eligible issue of capital within six months from the close of the subscription to the scheme. Further, pending investment in the eligible issue of capital, the Mutual Funds or the Unit Trust of India would be allowed to invest the funds in such Government securities as may be approved by the Board in this behalf.

(2) That the tax concession under the new section 88A will not be available to any scheme floated by any Mutual Fund or the Unit Trust of India, the subscription to which closes after the 30th September, 1990.

For the purpose of this section eligible issue of capital means an issue of equity shares which satisfies the following conditions, namely:

(a) The issue is made by a public company formed and registered in India and the issue is wholly and is exclusively for the purpose of carrying on the business of:

(i) construction, manufacture or production of any article or a thing not being an article or a thing specified in the list in the Eleventh Schedule; or

(ii) providing a long-term finance for construction or purchase of houses in India for residential purpose, provided that in the case of a public company carrying on such activities, such company is approved by the Central Government for the purpose of the said section; or

(iii) a hospital;

(iv) a hotel approved by the prescribed authority;

(v) operation of ships;

(b) The issue is an issue of capital made by the company for the first time. However, this will not apply in the case of issue of equity shares made by a public company formed and registered in India with the main objective of carrying on the business of operation of ships.

(c) The shares forming a part of the issue are offered for subscription to the public and such offer for subscription is made by the company before the first day of April, 1991.

(d) Such other conditions as may be prescribed, etc., etc.

While allowing the tax rebate under section 88A, the Drawing and Disbursing Officers should satisfy themselves that the conditions mentioned in section 88A of the Income-tax Act are fulfilled.

Miscellaneous

9. The scope of deduction of tax at source from Salaries was modified by the Finance Act, 1987 by the insertion of sub-sections (2), (2A) and (2B) in section 192 of the Income-tax Act. The salient features of these provisions as modified by the Finance Act, 1989 are given below :

(a) sub-section (2) of section 192 deals with situations where an individual is working under more than one employer or has changed from one employer to another. It provides for deduction of tax at source by such employer (as the taxpayer may choose) from the aggregate salary of the employee who is or has been in receipt of salary from more than one employer. The employee is now required to furnish to the present/chosen employer details of the income under the head Salary due or received from the former/other employer and also tax deducted at source therefrom, in writing and duly verified by him and by the former/other employer. The present employer will be required to deduct tax at source on the aggregate amount of salary (including salary received from the former or other employer).

(b) Sub-section (2A) of section 192 provides that in respect of salary payment of employees of Government, company, co-operative society, local authority, university, institution, association or body, deduction of tax at source may be made after allowing relief under section 89(1). Retired Government servants can also avail of this facility of section 89(1) relief through their DDOs/disbursing banks.

(c) Sub-section (2B) enables a taxpayer to furnish particulars of income other than salaries to his employer who shall deduct out of the salary payment, the tax due on the total income subject to the condition that the total amount of tax deducted shall not be less than the amount deductible from income from salaries only.

To meet the requirements of these provisions the Central Government have notified necessary amendments in the Income-tax Rules, 1962 vide Notification No. SO 963(E), dated 29-10-1987. Detailed instructions in this regard were issued by the Department vide Circular No. 504 [F. No. 275/138/87-IT(B)], dated 8-2-1988.

10. (a) According to the provisions of section 203 of the income-tax, every person responsible for deducting tax at source is required to furnish a certificate to the effect that tax has been deducted and to specify therein, inter alia, the amount deducted and other particulars that may be prescribed. The certificate has to be furnished within the prescribed period of one month to the person to whose account credit is given or to whom payment is made or the cheque or warrant is issued, as the case may be. By Notification No. SO 937(E), dated 20-10-1988, old rule 31 of the Income-tax Rules, 1962 has been substituted by a new rule which provides for a unified form of certificate to be issued in Form No. 16. Detailed instructions regarding the issue of certificates for tax deducted at source have been issued in Boards Circular No. 529 [F.No. 275/3/89-IT(B)], dated 13-2-1989. If a person fails to furnish a certificate as required by section 203, he shall, on an order passed by any income-tax authority under section 272A of the Income-tax Act, pay, by way of penalty, a sum which shall not be less than Rs. 100, but which may extend to Rs. 200 for every day during which the failure continues.

(b) According to the provisions of section 203A of the Income-tax Act, it is obligatory for all persons responsible for deducting tax at source to quote the Tax-deduction Account Number (TAN) in the Challans, TDS Certificates, periodical returns, etc. Detailed instructions in this regard are available in this Departments Circular No. 497 [F.No. 275/118/87-IT(B)], dated 9-10-1987. If a person fails to comply with the provisions of section 203A, he shall on an order passed by the Assessing Officer under section 272BB pay, by way of penalty, a sum which may extend to Rs. 5,000.

(c) According to the provisions of section 206 of the Income-tax Act, read with rules 36A and 37 of the Income-tax Rules, the prescribed person in the case of every office of Government, the principal officer in the case of every company, the prescribed person in the case of every local authority or other public body or association, every private employer and every other person responsible for deducting tax under the provisions of Chapter XVII of the Income-tax Act, shall prepare, within the prescribed time after the end of each financial year, and deliver or cause to be delivered by the 30th April following the financial year to the designated Income-tax Officer the annual return of deduction of tax under section 192 from Salaries in Form No. 24 prescribed under rule 37 of the Income-tax Rules. It may be noted that the third copy of the TDS Certificate issued to the employees should be enclosed with the annual return. If a person fails to furnish in due time the annual return, he shall, on an order passed by the Income-tax Authority, pay, by way of penalty, a sum which shall not be less than one hundred rupees, but which may extend to two hundred rupees for every day during which the failure continues.

(d) According to the provisions of section 200 of the Income-tax Act, any person deducting any sum in accordance with provisions of section 192 shall pay, within the prescribed time the sum so deducted to the credit of the Central Government. If he fails to deduct tax at source or after deducting fails to pay the tax to the credit of the Central Government he shall be liable to action in accordance with the provisions of section 201. In this connection attention is also invited to the provisions of section 276B of the Income-tax Act, according to which if a person fails to pay to the credit of the Central Government the tax deducted at source by him he shall be punishable with rigorous imprisonment for a term which shall be between 3 months and 7 years and with fine.

11. 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 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 salaries is No. 9 with Blue Colour Band. Where 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 is reflected therein.

12. 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.

Judicial Analysis

In Rajasthan State Electricity Board v. ITO [1994] 48 ITD 100 (Jp. - Trib.), it was observed that in Circular No. 568, dated 27-7-1990, whereas the CBDT has required of disbursing authorities to satisfy themselves by insisting on production of evidence of making actual payment/expenditure, exemption in respect of which was claimed under sections 10(13A), 80CCA, 80CCB, 80DD, 80GG and 80RR, no such insistence is stressed in respect of a claim for exemption under section 10(14)(i).

ANNEXURE I

EXTRACT FROM THE FINANCE ACT, 1990 PART III OF THE FIRST SCHEDULE

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 clause (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. 22,000	Nil;
(2)	where the total income exceeds Rs. 22,000 but does not exceed Rs. 30,000	20 per cent of the amount by which the total income exceeds Rs. 22,000;
(3)	where the total income exceeds Rs. 30,000 but does not exceed Rs. 50,000	Rs. 1,600 plus 30 per cent of the amount by which the total income exceeds Rs. 30,000;
(4)	where the total income exceeds Rs. 50,000 but does not exceed Rs. 1,00,000	Rs. 7,600 plus 40 per cent of the amount bywhich the total income exceeds Rs. 50,000;
(5)	where the total income exceeds Rs. 1,00,000	Rs. 27,600 plus 50 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

(i) in the case of every individual, Hindu undivided family or association of persons or body of individuals referred to in sections 88 and 88A having a total income exceeding seventy-five thousand rupees, be reduced by the amount of rebate of income-tax calculated under Chapter VIII-A, and the income-tax as so reduced,

(ii) in the case of every person, other than those mentioned in item (i) having a total income exceeding seventy-five thousand rupees,

be increased by a surcharge for purposes of the Union calculated at the rate of eight per cent of such income-tax:

Provided that no such surcharge shall be payable by a non-resident.

Typical Examples of Income-tax Calculations

Example I

		Rs.	Rs.
1.	Total Salary Income (including allowances)		64,500
2.	Deposits under National Savings Scheme	19,400	19,400
3.	Contribution to Government provident fund	8,630
4.	Payment towards life insurance premia	1,000
5.	Contribution for participation in the Unit- linked Insurance Plan, 1971, made under section 19(1)(cc) of the Unit Trust of India Act, 1963	300	12,650
6.	Deposits in a 10-year account or 15-year account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959	500
7.	C.G.E.I.S.	720
8.	Subscription to National Savings Certificates VIII issue.	1,500

Computation of total income

1.	Gross total salary income	64,500
2.	Deduct :
	Amount of standard deduction under section 16(i) of the Income-tax Act, 1961. 33 1/3% of amount subject to maximum of Rs. 12,000		(-)12,000
3.	Gross total income (1 minus 2)		52,500
4.	Deduct :
	Under section 80CCADeposit under NSS		(-)19,400
5.	Total income		33,100
6.	Tax on total income (Rs. 1,600 plus 30% of Rs. 3,100)		2,530
7.	Deduct rebate on savings, etc., at 20% under section 88 on account of contribution/payment towards G.P.F., Life insurance premia, Unit-linked plan and deposit in 10-year account or 15-year insurance account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959, CGEIS, National Savings Certificate totalling Rs. 12,650		(-)2,530
8.	Tax payable		Nil

Example I

(Illustrating calculation of house rent allowance under section 10(13A) in respect of residential accommodation situated in Delhi)

		Rs.	Rs.
1.	Salary (excluding allowances)		48,000
2.	Dearness allowance		15,960
3.	House rent allowance received		9,600
4.	City compensatory allowance received		1,200
5.	Actual rent paid		16,800
6.	Deposits under the National Savings Scheme		15,000
7.	Contribution to General Provident Fund, etc.	6,800
8.	L.I.P.	3,000
9.	Deposits in a 10-year account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959	1,000	10,800

Computation of total income

1.	Salary (including dearness allowance)		63,960
2.	House rent allowance received		9,600
3.	City compensatory allowance received		1,200
	Total salary income		74,760
4.	Less : Allowance under section 10(13A) Actual rent paid	16,800
	Less : 10% of salary	6,396
		10,404
	(Actual amount of house rent allowance received or expenditure on rent in excess of 10% of the salary or 50% of salary, whichever is the least)		(-)9,600
			65,160
5.	Standard deduction under section 16(i) at 33 ¹/₃% subject to a maximum of Rs. 12,000		(-)12,000
6	Gross total income		53,160
7.	Less : Deduction under section 80CCA (Deposits under NSS)		15,000
8.	Total income		38,160
9.	Tax on total income (Rs. 1,600 plus 30% of Rs. 8,160)		4,048
10.	Deduct tax rebate on savings under section 88
	(GPF, CTD, LIP, etc., Rs. 10,800 at 20%)		(-)2,160
11.	Tax payable		1,888
	(Rate at which monthly deduction is required to be made works out to Rs. 157 for 11 months and Rs. 161 for the last month.)

Example III

(Illustrating calculations and valuation of some perquisites in case of an employee of a private company posted at Bombay)

		Rs	.	Rs.
1.	Salary including dearness allowance			65,000
2.	Bonus			10,000
3.	Free gas, electricity, water, etc., (actual bill paid by the company)			3,000
4.	Furniture at cost (including television set, radio set, refrigerator, other household appliances and air-conditioner) belonging to the company			40,000
5.	(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)			46,000
	(ii) Rent recovered from the employee			12,000
6.	Deposits under the National Savings Scheme			15,000
7.	Contribution to the Recognised Provident Fund	11,000
8.	L.I.P.	10,000
9.	Subscription to National Savings Certificates VIII Issue	5,000		26,620
10.	Interest accrued on investment in N.S.C. VI Issue	620

Computation of total income

1.	Salary	65,000	75,000
2.	Bonus	10,000
3.	Valuation of perquisites :
	(a) Furnished flat at concessional rent under section 17(2), read with clauses (a) and (b) of rule 3 of the Income-tax Rules, 1962. Fair Rental Value (FRV) (assumed to be equal to actual rent Rs. 46,000) 10% of salary including bonus	7,500
	Add: Excess of FRV over 60% of salary including bonus of Rs. 75,000 (i.e., Rs. 46,000 minus Rs. 45,000)	1,000
	Add : Perquisite of the furniture (10% of cost, i.e., Rs. 40,000)	4,000
		12,500
	Less : Rent paid by the employee	12,000	500
			75,500
4.	Free gas, electricity, etc.		3,000
			78,500
5.	Less : Standard deduction under section 16(i) 33¹/₃% subject to maximum of Rs. 12,000		(-)12,000
6.	Gross total income		66,500
7.	Less : Deduction under section 80CCA (NSS)		(-)15,000
8.	Total income		51,500
9.	Tax on total income (Rs. 7,600 plus 40% of Rs. 1,500)		8,200
10.	Deduct : Tax rebate on savings (PF, LIP, NSC including interest on NSC VI Issue) at 20% of Rs. 26,620		(-)5,324
11.	Tax payable		2,876
	(Average monthly deduction comes to Rs. 239 for 11 months and Rs. 247 in the last month)

Notes :

(i) In the cases of Government servants, the value of perquisites of unfurnished accommodation provided free is determined 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 annum of the original cost of the furniture, or if it is hired from a third party, the actual hire charges payable.

(ii) Where unfurnished accommodation is provided to its employees by the Reserve Bank of India of 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% of the salary due to the employee and where the accommodation is furnished as in other cases, an additional 10% of the original cost of furniture, or if it is hired from a third party, the actual hire charges payable therefore.

(iii) In the example 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.

(iv) In case the accommodation is situated in Bombay, Calcutta, Delhi and Madras, the excess over 60% of salary over fair rental value, as against 50% in other cases, is required to be added in determining the value of perquisites in view of the Boards Circular No. 374, dated 14-12-1983.

Example III

(Example of income - tax and surcharge calculation in the case of an employee posted in Delhi and repaying House Building Loan)

		Rs.	Rs.
1.	Total salary (including dearness allowance)		1,20,000
2.	House rent allowance		12,000
3.	City compensatory allowance		1,200
4.	Deposits under the National Savings Scheme		30,000
5.	Contribution to GPF, payment of LIC premium, etc.		16,500
6.	Actual rent paid		25,200
7.	Refund of loan taken for the construction of house which has been completed after 31-3-1987 but before 31-3-1991		12,000
	Computation of total income
1.	Salary (including dearness allowance and city compensatory allowance)		1,21,200
2.	House rent allowance received		12,000
			1,33,200
3.	Less : Allowance under section 10(13A) Actual rent paid	25,200
	Less : 10% of salary	(-)12,000
		13,200
	(Actual amount of HRA received or expenditure on rent in excess of one-tenth of the salary or 50% of salary, whichever is the least) Rs. 12,000		(-) 12,000
			1,21,200
4.	Less : Standard deduction under section 16(i) at 33¹/₃% subject of a maximum of Rs. 12,000		(-)12,000
5.	Gross total income		1,09,200
6.	Less : Deduction under section 80CCA (Deposits under NSS)		(-)30,000
7.	Total income		79,200
8.	Tax on total income (Rs. 7,600 plus 40% of Rs. 29,200)		19,280
9.	Deduct tax rebate on savings under section 88, GPF, etc.	16,500
	Refund on Housing Bank Loan limited toRs. 10,000 at 20% of Rs. 26,560	10,000	(-)5,300
		26,500
10.	Tax payable
	Income tax - Rs. 19,280 minus Rs. 5,300		13,980
	Surcharge on Rs. 13,980		1,118
	Total		15,098
	(Average monthly deduction comes to Rs. 1,258 for 11 months and Rs. 1,260 in the last month)

Circular : No. 569, dated 27-7-1990.

Financial year 1990-91

1738. Instructions for deduction of tax at source from winnings from lottery, crossword puzzles or horse races - Rates of tax applicable during the financial year 1990-91

1. Reference is invited to this departments Circular No. 536, dated 6-7-1989 on the above subject wherein the rates at which deduction of tax under sections 194B and 194BB to be made during the financial year 1989-90, from winnings from lotteries or crossword puzzles or horse races were communicated.

2. The Finance Act, 1990 does not propose any change in the rates of tax and surcharge applicable in the matter of deduction of tax at source under sections 194B and 194BB of the Income-tax Act, 1961.

3. The aforesaid Circular explains the rate of tax and surcharge applicable in the matter of deduction of tax at source under sections 194B and 194BB in the case of winnings from lotteries, crossword puzzles and horse races. It also explains the duties devolving upon the persons responsible for paying any income of the nature of winnings from lotteries, crossword puzzles and horse races to deduct tax on the amount and also the liability to which such persons will be exposed in the case of failure to pay tax so deducted to the credit of the Central Government within the stipulated time, failure to furnish the annual return, etc. The instructions contained in the aforesaid Circular will be applicable during the current financial year also.

Circular: No. 570, dated 27-7-1990.

Financial Year 1990-91

1770. Instructions for deduction of tax at source from insurance commission - Rate of tax applicable during the financial year 1990-91

1. Reference is invited to this Departments Circular No. 540, dated 24-7-1989 wherein the rates at which the deduction of income-tax was to be made during the financial year 1989-90 from payment of income by way of insurance commission under section 194D of the Income-tax Act, 1961 were intimated to you. There is no change in the rates of tax for the financial year 1990-91. For the sake of convenience, the rates for deduction of tax at source under section 194D of the Income-tax Act, 1961 during the financial year 1990-91 are indicated below:

	Income-tax
(i) In the case of a person (other than a company) who is a resident in India	10%
(ii) In the case of a domestic company	21.5%

2. The provisions of section 194D of the Income-tax Act, 1961 apply only in relation to income by way of insurance commission paid to a resident. However, under the provisions of section 195 of the Income-tax Act, income-tax is required to be deducted from payments (including payment by way of insurance commission) made to a non-corporate non-resident or to a foreign company. In the case of a person other than a company, who is not a resident in India, the rate of deduction of tax at source [as specified in items 1(b)(i)(E) and 1(b)(ii)(D) of Part II of the First Schedule to the Finance Act, 1990] is 30 per cent of the income by way of insurance commission or the rate prescribed in Sub-Paragraph 1 of Paragraph A of Part III of the said Schedule (extracts given in Annexure I), if such income had been the total income of such person, whichever is higher. In the case of a company which is not a domestic company, tax on insurance commission is to be deducted at the rate of 65 per cent.

3. It may be noted that the amount of tax deducted as per the rates given above shall be increased by a surcharge for the purposes of the Union @ 8 per cent of such income-tax in the case of a resident Indian and by a surcharge of 8 per cent of such income-tax in the case of a domestic company.

4. Further, according to the provisions of section 194D, any person paying to a resident any income by way of remuneration or reward, whether by way of commission or otherwise for soliciting or procuring insurance business (including business relating to the continuance, renewal or revival of insurance policies) shall, at the time of actual payment or at the time of credit of such income, whichever is earlier, deduct income-tax at the rates in force. However, no such deduction shall be made under this section in a case where the amount of such income or the aggregate amount of such income during the financial year does not exceed Rs. 5,000.

5. It may be noted that the exemption of Rs. 5,000 mentioned in para 4 above will not be applicable to such payments made to non-residents. In the case of payments to non-residents where any such sum is credited to any account, whether called suspense account or by any other name, in the books of account of the person liable to pay such income to a non-resident, shall be deemed to be credit of such income to the account of the payee and tax shall be deducted therefrom. In a case where the person responsible for paying any such income to a non-resident considers that the whole of such income would not be income chargeable to tax in the case of the recipient, he may make an application to the concerned Assessing Officer to determine the income chargeable to tax, and upon such determination, tax shall be deducted accordingly. A non-resident who is entitled to receive any such sum on which income-tax has to be deducted under section 195 may also make an application in the prescribed form to the concerned Assessing Officer for the grant of a certificate authorising him to receive such sum without deduction of tax, and where any such certificate is granted the persons responsible for paying such sum shall make payment to the non-resident without deduction of tax so long as the certificate is in force.

6. (a) According to the provisions of section 203 of the Income-tax Act, every person responsible for deducting tax at source is required to furnish a certificate in Form No. 16 prescribed under rule 31 of the Income-tax Rules, 1962 to the effect that tax has been deducted and to specify therein, inter alia, the amount deducted and other particulars that have been prescribed. The certificate has to be furnished within the prescribed period of one month to the person to whose account credit is given or to whom payment is made or the cheque or warrant is issued, as the case may be. Detailed instructions regarding the issue of certificates for tax deducted at source have been issued in Boards Circular No. 529 [F.No. 275/3/89-IT(B)] dated 13-2-1989.

If a person fails to furnish a certificate as required by section 203, he shall, on an order passed by the income-tax authority under section 272A of the Income-tax Act, pay, by way of penalty a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues.

(b) According to the provisions of section 203A of the Income-tax Act, it is obligatory for all persons responsible for deducting tax at source to quote the Tax-deduction Account Number (TAN) in the challans, TDS certificates, periodical returns, etc. Detailed instructions in this regard are available in this Departments Circular No. 497 [F.No. 275/118/87-IT(B)], dated 9-10-1987. If a person fails to comply with the provisions of section 203A, he shall on an order passed by the Assessing Officer under section 272BB pay, by way of penalty, a sum which may extend to Rs. 5,000.

(c) According to the provisions of section 206 of the Income-tax Act, read with rules 36A and 37 of the Income-tax Rules, the prescribed person in the case of every office of Government, the principal officer in the case of every company, the prescribed person in the case of every local authority or other public body or association, every private employer and every other person responsible for deducting tax under the provisions of Chapter XVII of the Income-tax Act shall prepare, within the prescribed time after the end of each financial year, and deliver or cause to be delivered by the 30th June following the financial year to the designated income-tax authority the annual return of deduction of tax under section 194D from Insurance Commission in Form No. 26D prescribed under rule 37 of the Income-tax Rules. It may be noted that the third copy of the TDS certificate issued to the assessees should be enclosed with the Annual Return. The person making the deduction of tax from such payments to a non-resident is required to send a statement in Form No. 27 to the designated Assessing Officer within 14 days of the date of deduction.

If a person fails to furnish in due time the annual return, he shall, on an order passed by the income-tax authority, pay, by way of penalty a sum which shall not be less than one hundred rupees, but which may extend to two hundred rupees for every day during which the failure continues.

(d) According to the provisions of section 200 of the Income-tax Act, any person deducting any sum in accordance with the provisions of section 194D or section 195 shall pay, within the prescribed time, the sum so deducted to the credit of the Central Government. If he fails to deduct tax at source or after deducting fails to pay the tax to the credit of the Government, he shall be liable to action in accordance with the provisions of section 201. In this connection, attention is also invited to the provisions of section 276B of the Income-tax Act, according to which if a person fails to pay to the credit of the Central Government the tax deducted at source by him, he shall be punishable with rigorous imprisonment for a term which shall be between 3 months and 7 years and with fine.

7. These instructions are not exhaustive and are issued only with a view to helping the persons responsible for making deduction of tax at source under these sections. Wherever there is difference of opinion, a reference should always be made to the provisions of the Income-tax Act, 1961, and the relevant Finance Act through which the changes in law are made. In case any assistance is required, the Assessing Officer concerned or the Local Public Relations Officer of the Income-tax Department may be approached for the same, who will, if necessary, obtain orders of the higher authority in the matter.

ANNEXURE I

EXTRACT FROM THE FINANCE ACT, 1990, PART III OF THE
FIRST SCHEDULE

Paragraph A, Sub-Paragraph I

Rates of income-tax

(1)	where the total income does not exceed Rs. 22,000	Nil;
(2)	where the total income exceeds Rs. 22,000 but does not exceed Rs. 30,000	20 per cent of the amount by which the total income exceeds Rs. 22,000;
(3)	where the total income exceeds Rs. 30,000 but does not exceed exceeds Rs. 50,000;	Rs. 1,600 plus 30 per cent of the amount by which the total income Rs. 30,000
(4)	where the total income exceeds Rs. 50,000 but does not exceed Rs. 1,00,000	Rs. 7,600 plus 40 per cent of the amount by which the total income exceeds Rs. 50,000;
(5)	where the total income exceeds Rs. 1,00,000	Rs. 27,600 plus 50 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

(ii) in the case of every person, other than those mentioned in item (i) having a total income exceeding seventy-five thousand rupees,

be increased by a surcharge for purposes of the Union calculated at the rate of eight per cent of such income-tax :

Provided that no such surcharge shall be payable by a non-resident.

Circular : No. 571, dated 1-8-1990.

553. Clarification regarding calculation of deductions

1. Attention is invited to Circular No. 564 dated 5-7-1990 (Sl. No. 552) explaining the deduction admissible under section 80HHC of the Income-tax Act, 1961 in respect of export profits.

2. In paragraph 5 of the aforesaid circular, it has been stated that the Finance Act, 1990 has amended section 28 of the Income-tax Act by inserting therein clauses (iiia), (iiib) and (iiic) with retrospective effect with a view to ensuring that cash compensatory support (CCS), duty drawback (DDK) and profit on sale of import entitlement licences (I/L) shall be taxable under the head Profits and gains of business or profession and that in view of this amendment, the export incentives would have to be included in the profits of the business for computing the deduction under section 80HHC.

3. These export incentives have also been included in the definition of income contained in section 2(24) of the Income-tax Act. The amendments to section 28 as well as to section 2(24) of the Income-tax Act have been made with retrospective effect from the dates from which these incentives were made available to the exporters. Thus, CCS has been included in income and in the list of incomes chargeable to tax under the head Profits and gains of business or profession with effect from 1-4-1967. The duty drawback has been so included with effect from 1-4-1972. The profits on sale of import entitlement licences have been included with effect from 1-4-1962, the date from which the Income-tax Act, 1961 came into force.

4. The Departments view all along has been that these export incentives are revenue receipts and hence taxable.

5. The amendments made in this regard by the Finance Act, 1990 are, therefore, clarificatory in nature and have been made to put to an end to litigation which might arise regarding the taxability of these incentives.

6. In paragraph 7 of Circular No. 564 dated 5-7-1990, it has been stated that there has been lack of uniformity amongst the assessing authorities as regards the question whether export incentives form part of the total turnover and, therefore, the Finance Act, 1990 has clarified the position by inserting a definition of the term total turnover in the Explanation below section 80HHC. According to this definition, total turnover would exclude cash compensatory support, duty drawback and profit on sale of import entitlement licences.

7. The amendment referred to above has been made with effect from 1-4-1991. Since the amendment only clarifies the legislative intention as it always existed, the position as regards the past years would be the same as that after coming into force of the amendment. In other words, the meaning of the term total turnover for the assessment year 1990-91 and earlier years, when the law did not contain any definition of that term, would be the same as now given in clause (bb) of the Explanation below section 80HHC.

493. Whether deduction is available in respect of premia paid on the life insurance policies on the lives of adult children, irrespective of their status; for example, premia paid on a policy on the life of a married daughter

1. Section 80C of the Income-tax Act allows, inter alia, deductions while computing the total income of an assessee of any sums paid in the previous year by the assessee individual out of his income chargeable to tax, to effect or to keep in force an insurance on the life of the assessee or on the life of the wife, or husband, or any child of the assessee. Representations have been received by the Board regarding the availability of relief under this section in respect of premia paid on the life insurance policies on the lives of adult children, irrespective of their status; for example, premia paid on a policy on the life of a married daughter.

2. It is hereby clarified that relief under the said sections is available in respect of such cases also. This relief will continue to be available under the new section, introduced by the Finance Act, 1990, as the language of the new section is in pari materia with that of section 80C of the Act.

Circular : No. 575, dated 31-8-1990.

545. Whether convertible foreign exchange does not include remittances from Nepal and Bhutan

1. One of the conditions for allowing deduction under section 80HHB is that the consideration for the execution of a foreign project/work is payable in convertible foreign exchange and at least 50 per cent of the profits and gains derived from the business of execution of foreign project/work is brought into India in convertible foreign exchange within a specified time. Likewise, deduction under section 80HHC is allowed to an exporter only if the sale proceeds are received in or brought into India in convertible foreign exchange. Similarly, one of the conditions for allowing deduction under section 80-O is that the royalty, commission, fees etc., should be brought into India in convertible foreign exchange.

2. The Central Board of Direct Taxes have, from time to time, issued Circulars/Instructions/Press Notes regarding the treatment of the amounts received in non-convertible rupees from bilateral account countries for the purpose of deduction under sections 80HHB, 80HHC and 80-O of the Income-tax Act.

3. With a view to removing any doubts in this regard, it is reiterated that the expression convertible foreign exchange in the abovementioned provisions of the Income-tax Act, also includes the amounts received in non-convertible rupees from bilateral account countries and receipts in Indian rupees under Government to Government credit. However, it does not include remittances from Nepal and Bhutan.

Circular : No. 576, dated 31-8-1990.

SECTION 80 l LOSS - SUBMISSION OF RETURN FOR

487. Effect of order passed by Board for Industrial and Financial Reconstruction under scheme for rehabilitation of sick units on determination of losses

1. The Board had issued two circulars, Circular No. 523, dated October 5, 1988 (Annex I) and Circular No. 576, dated August 31, 1990 (Annex II) in connection with the procedure to be followed in respect of grant of consent by the Central Government in cases involving financial assistance to be given under Direct Tax Laws for rehabilitating sick industries under Sick Industrial Companies (Special Provisions) Act, 1985 (SICA).

2. While issuing the two circulars, the provisions of section 19(2) of SICA were not considered. According to section 19(2), all parties concerned with giving financial assistance for the rehabilitation scheme should give their consent.

3. The Board had withdrawn with immediate effect the above Circular Nos. 523 and 576 vide its letter of even numbers dated 30-12-1993. The said letter to AAIFR and BIFR clarified that each case of fiscal concession of financial assistance under Direct Tax Laws will now be considered in each individual case on merits for the purpose of consent as contemplated in section 19(2) of SICA, 1985 and consent or denial of consent will be conveyed to BIFR by the Central Government. The modal agency for coordination between the Board for Industrial and Financial Reconstruction (BIFR) and, Central Board of Direct Taxes and Appellate Authority for Industrial and Financial Reconstruction (AAIFR) and Central Board of Direct Taxes will be the Director General of Income-tax (Admn.), 7th Floor, Mayur Bhawan, New Delhi-110 001. Cases already decided in accordance with the Circular Nos. 523 and 576 were however, not required to be reopened.

Circular : No. 683, dated 8-6-1994.

ANNEX I

1. Attention is invited to Circular No. 523, dated 5th October, 1988 wherein it was pointed out that if the Board for Industrial and Financial Reconstruction (BIFR) sanction a scheme under section 17(3) of the Sick Industrial Companies (Special Provisions) Act, 1985, specifically excluding or limiting the application of sections 41(1), 79 and 115J of the Income-tax Act, 1961 in respect of specified assessment years, then the Assessing Officer will have to take due cognizance of this order and give effect to the same.

2. The Central Board of Direct Taxes have since examined the question regarding carry forward and set-off of loss in the case of a sick company, where the return of loss has been filed beyond the time allowed under section 139(3). Under the existing provisions of section 80, no loss is allowed to be carried forward or set-off unless the return of loss has been filed in accordance with the provisions of section 139(3). CBDT have been advised that if a sick company fails to file the return of loss within the stipulated time specified in section 139(3), and a scheme made pursuant to an order under section 17(3) of the Sick Industrial Companies (Special Provisions) Act, 1985 is sanctioned by the BIFR under section 18 of that Act, specifying a particular tax treatment for the carry forward and set-off of loss incurred by the sick company, the said scheme will have overriding effect over the provisions of section 80 of the Income-tax Act. In such a situation, the Assessing Officer will have to take cognizance of the scheme and give effect to the carry forward and set-off of loss as provided for under the scheme.

3. It is, however, clarified that BIFR have no authority to pass orders under section l7(2) of the Sick Industrial Companies (Special Provisions) Act authorising a sick company to file its return late or directing the Assessing Officer to allow carry forward of such loss. However, BIFR have the authority to direct any operating agency to prepare a scheme under section 18 of the said Act. Such a scheme will automatically take into consideration the losses suffered by the sick company and may also lay down that carry forward of loss etc. should be allowed regardless of the fact that the return of income has not been filed within the time allowed under section 139(3). Once the scheme is sanctioned by BIFR, it will have overriding effect over the provisions of the Income-tax Act, 1961 in regard to the matters covered in Circular No. 523 of 5th October, 1988 and in this Circular.

ANNEX II

1. The Sick Industrial Companies (Special Provisions) Act, 1985 was passed by the Parliament and received the assent of the President on 8-1-1986. The Act was introduced with a view to securing timely detection of sick units and speedy determination by the Board for Industrial and Financial Reconstruction (BIFR) of remedial and other measures required to be taken for their rehabilitation.

2. Under section 17(3) of the Sick Industrial Companies (Special Provisions) Act, 1985, in cases where it is not practicable for a sick industrial company to make its net worth positive within a reasonable time, the BIFR is empowered to sanction a scheme providing for such remedial measures in relation to the said sick company for its rehabilitation. Section 32(1) of this Act reads as follows :

The provisions of this Act and of any rules or schemes made thereunder shall have effect notwithstanding anything inconsistent therewith in any other law except the provisions of the Foreign Exchange Regulation Act, 1973, and the Urban Land (Ceiling and Regulation) Act, 1976, for the time being in force or in the Memorandum or Articles of Association of an Industrial company or in any other instrument having effect by virtue of any law other than this Act.

The Central Board of Direct Taxes have been advised that if a scheme is sanctioned in pursuance of section 17(3) of the Act, it will have an overriding effect over the provisions of the Income-tax Act by virtue of section 32 of the Act.

3. Consequently, if the BIFR sanctions a scheme under section 17(3) of the Act specifically excluding or limiting the application of sections 41(1), 79 and 115J or of any one or more of these sections of the Income-tax Act, 1961 in respect of assessment years which are also specified, then the Assessing Officer will have to take due cognizance of this order and give effect to the same. Such a situation may arise in the case of a sick industrial company which has debited its account in respect of its interest liability in a particular assessment year. Subsequently, if in a scheme sanctioned by the BIFR, banks are directed to either waive or reduce the interest liability, this remission will become chargeable to tax under section 41(1) of the Income-tax Act in the year of reduction or waiver by the banks. It is possible that for speedier rehabilitation, the BIFR in its scheme provides that section 41(1) would not apply in the case of the sick company. The Assessing Officer, in these circumstances, will not subject to tax the remission or cessation of interest liability under section 41(1).

4. It may, however, be clarified that section 32(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 refers only to the Provisions of this Act, and of any rules or scheme made thereunder and not to orders passed under section 17(2). Therefore, orders passed by BIFR under section 17(2) will not have the effect of overriding the provisions of the Income-tax Act.

Circular : No. 523, dated 5-10-1988.

Note : In CIT v. Bangabasi Theatres (P.) Ltd. [1993] 71 Taxman 408 (Cal.), it was observed that it has been laid down in Instruction No. 1807, dated 14-5-1985 that the department accepted the decision in the Presidency Medical Centre (P.) Ltd. v. CIT [1977] 108 ITR 838 (Cal.) prior to assessment year 1984-85.

Circular : No. 577, dated 4-9-1990.

SECTION 167b l ASSESSMENT WHERE SHARE OF
BENEFICIARIES UNKNOWN

912. Whether section 167B would also apply to income under a trust declared by any person at will, where such trust is only trust so declared by him

1. A question has been raised whether the provisions of section 167B of the Income-tax Act, 1961, which generally provide for charging of tax at the maximum marginal rate on the total income of an association of persons where the individual shares of members in the income of such association are indeterminate or unknown, would also apply to income under a trust declared by any person by will where such trust is the only trust declared by him. Such trusts, it would be noticed, are referred to at item No. (ii) in the first proviso to section 164(1) of the Act.

2. This matter has been examined in the Board. There was never an intention to subject the income of the aforesaid trusts to income-tax at the maximum marginal rate. It is also well-settled that where a specific provision has been made in the law in relation to any matter and where that provision is beneficial to the taxpayer, that matter is to be governed by that special provision and not by any other general provision relating to that subject. Therefore, the income of a trust declared by any person by will, where such trust is the only trust so declared by him, will continue to be charged to tax in the manner prescribed in the first proviso to section 164(1), as hitherto.

3. Similarly, other cases covered by the first proviso to section 164(1) and the first proviso to section 164(3) would also not attract the provisions of section 167B. Accordingly, tax will be payable in such cases at the rate ordinarily applicable to the total income of an association of persons and not at the maximum marginal rate.

Circular : No. 578, dated 12-9-1990.

295. Effect of withdrawal of tax concession under section 35C in a case where expenditure has been incurred by sugar factory on cane development programmes and same was found eligible for deduction under section 37(1)

1. Under the provisions of section 35C of the Income-tax Act, 1961, a company or a co-operative society, which uses any product of agriculture, animal husbandry or dairy or poultry farming as raw material or processes such products, was eligible for a deduction of the amount of expenditure incurred, whether directly or through an approved association or body, for the provision of agricultural inputs and extension services to cultivators, growers or producers of such products.

2. This deduction was withdrawn by the Finance Act, 1984, in respect of expenditure incurred on or after 1-3-1984.

3. Section 37(1) of the Income-tax Act, 1961, however, provides that any expenditure, not being in the nature of capital expenditure or personal expenses of the taxpayers, laid out or expended wholly and exclusively for the purposes of his business, is to be allowed as deduction in computing the income chargeable under the head Profits and gains of business or profession. Hence, any expenditure incurred by a sugar factory on cane development programmes would be eligible for deduction in computing the taxable profits if, having regard to the facts and circumstances of the case, the Assessing Officer is satisfied that the conditions laid down in section 37(1) of the Act are fulfilled. The withdrawal of the tax concession under section 35C would not affect this position.

Circular : No. 579, dated 14-9-1990.

Financial year 1990-91

1713. Instructions for deduction of tax at source from interest on securities - Rates of tax applicable during financial year 1990-91

1. Reference is invited to this Departments Circular No. 543, dated 31-8-1989 on the above subject wherein a request was made for issuing necessary instructions to all the Treasury Officers, etc., for making deduction of income-tax at source from the payment of interest on Government securities for the financial year 1989-90.

2. There is no change in the basic rates of tax and surcharge for the financial year 1990-91 insofar as they relate to deduction of tax at source from payment of interest on Government securities.

It may however, be noted that :

(a) tax will be deducted at source u/s 193 either at the time of credit to the account of the payee or at the time of payment thereof, whichever is earlier. For this purpose credit to any suspense account or any other account, by whatever name called, shall be deemed to be a credit of such income to the account of the payee ;

(b) tax will not be deducted at source from any interest payable to a resident individual on debentures issued by a company in which the public are substantially interested, if the interest is paid by the company by an account payee cheque and the amount of such interest, or, as the case may be, the aggregate amount of such interest paid or likely to be paid during the financial year by the company to such an individual does not exceed Rs. 2,500.

3. In this connection, attention is invited to the provisions of sections 200, 203, 203A and 206 of the Income-tax Act, the sum and substance of which is as under :

(a) According to the provisions of section 203 of the Income-tax Act, every person responsible for deducting tax at source is required to furnish a certificate to the effect that tax has been deducted and to specify therein, inter alia, the amount deducted and other particulars that may be prescribed. The certificate has to be furnished within the prescribed period of one month to the person to whose account credit is given or to whom payment is made or the cheque or warrant is issued, as the case may be. By Notification No. SO 937(E), dated 20-10-1988, rule 31 of the Income-tax Rules, 1962 was substituted by a new rule which provides for a unified form of certificates to be issued in Form No. 16. Detailed instructions regarding the issue of certificates for tax deducted at source have been issued in Boards Circular No. 529 [F.No. 275/3/89-IT(B)] dated 13-2-1989. If a person fails to furnish a certificate as required by section 203B, he shall on an order passed by the income-tax authority, under section 272A of the Income-tax Act, pay, by way of penalty, a sum which shall not be less than Rs. 100, but which may extend to Rs. 200 for every day during which the failure continues.

(b) According to the provisions of section 203A of the Income-tax Act, it is obligatory on all persons responsible for deducting tax at source to quote the tax deduction account number (TAN) in the Challans, TDS Certificates, periodical returns etc. Detailed instructions in this regard are available in this Departments Circular No. 497 [F. No. 275/118/87-IT(B)] dated 9-10-1987. If a person fails to comply with the provisions of section 203A, he shall on an order passed by the Assessing Officer under section 272BB, pay, by way of penalty, a sum which may extend to Rs. 5,000.

(c) According to the provisions of section 206 of the Income-tax Act, read with rules 36A and 37 of the Income-tax Rules, the prescribed person in the case of every office of Government, the principal officer in the case of every company, the prescribed person in the case of every local authority or other public body or association, every private employer and every other person responsible for deducting tax under the provisions of Chapter XVII of the Income-tax Act, shall prepare, within the prescribed time after the end of each financial year, and deliver or cause to be delivered by 31st May [since amended as 30th June, vide Notification No. 466(E) dated 8-6-1990] following the financial year, to the prescribed income-tax authority, the annual return of deduction of tax under section 193 from interest on securities in Form No. 25 prescribed under rule 37 of the Income-tax Rules. It may be noted that the third copy of the TDS Certificate issued to the assessee should be enclosed with the annual return.

If a person fails to furnish in due time the annual return, he shall, on an order passed by the income-tax authority, under section 272A, pay, by way of penalty, a sum which shall not be less than Rs. 100, but which may extend to Rs. 200 per day for which the failure continues.

(d) According to the provisions of section 200 of the Income-tax Act, any person deducting any sum in accordance with the provisions of section 193 shall pay, within the prescribed time, the sum so deducted to the account credit of the Central Government. If he fails to deduct tax at source, or, after deducting, fails to pay tax to the credit of the Government, he shall be liable to action in accordance with the provisions of sections 201 and 221. Further, penalty under section 271C shall also be leviable for failure to deduct tax at source which will be equal to the amount of tax not deducted. In this connection, attention is also invited to the provisions of section 276B of the Income-tax Act, according to which if a person fails to pay to the credit of the Central Government the tax deducted at source by him, he shall be punishable with rigorous imprisonment for a term which shall not be less than 3 months but which may extend to 7 years and with fine.

4. A copy of the draft circular setting out the rates at which income-tax should be deducted from such payments during the financial year 1990-91 is enclosed. On the basis of this draft, a circular may be issued to all the Treasury Officers, Sub-Treasury Officers, banks, etc., under the control of the Accountants-General, Reserve Bank of India, etc., with a view to ensuring that the provisions of the Income-tax Act are strictly adhered to by the tax deductors.

DRAFT CIRCULAR TO ALL TREASURY OFFICERS, ETC.

1. I am to invite your attention to this office letter regarding deduction of income-tax from interest on Government securities during the financial year 1989-90.

2. According to the provisions of section 193 of the Income-tax Act, 1961, the person responsible for paying any income by way of interest on securities shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax at the rates in force on the amount of interest payable. For this purpose, credit to any suspense account or any other account by whatever name called shall be deemed to be credit of such income to the account of the payee.

3. Income-tax is to be deducted during the financial year 1990-91, from the entire amount of interest on securities at the following rates :

I.	In the case of a person other than a company :	Rates of income-tax
	(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
	(ii) Where the person is not resident in India
	1. In the case of a non-resident Indian
	A. On investment income and long- term capital gains	20 per cent
	B. On income by way of interest payable on a tax-free security	15 per cent
	C. On the whole of the other	Income-tax at 30 per cent of the amount of the income
		or
		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 Act, 1990 (Copy at Annexure I), if such income had been the total income, whichever is higher.
	2. In the case of any other person,
	A. On the income by way of interest on a tax-free security	15 per cent
	B. On the whole of other income (excluding interest payable on a tax-free security)	[As against 1(c) above]
II.	In the case of a company;
	(i) Where the company is a domestic company - on income by way of interest on securities (excluding interest payable on a tax-free security)	21.5 per cent
	(ii) Where the company is not a domestic company
	A. On interest payable on a tax-free security	44 per cent
	B. On interest on other securities	65 per cent.

Surcharge on income-tax

The amount of tax deducted as per the rates given above shall be increased :

(i) by a surcharge for the purposes of the Union @ 8 per cent of such income-tax in the case of resident person; and

(ii) by a surcharge @ 8 per cent of such income-tax in the case of a domestic company.

4. The term domestic company means an Indian company or any other company which, in respect of its income liable to tax under the Income-tax Act, 1961, 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.

5. In making payment or crediting interest on Government securities from the 1st April, 1990, you are requested to deduct income-tax at the rates specified above, except in cases where an exemption or abetment certificate granted by an Income-tax Officer/ Assessing Officer under sub-section (1) of section 197 of the Income-tax Act, 1961, is produced. In this connection, the following points should be kept in view :

(i) exemption or abetment certificates issued before the 1st April, 1990, authorising deduction of tax at a particular rate expressed as a percentage of the amount of interest should be accepted and acted upon, if operative for the financial year ending on 31st March, 1991;

(ii) where a certificate is issued by the Income-tax Officer/Assessing Officer on or after 1st April, 1990, authorising deduction of tax at a specified rate in respect of any person, income-tax should be deducted at the rates specified therein;

(iii) no tax should be deducted in cases in which, from a certificate issued by the Income-tax Officer/Assessing Officer or otherwise, you are satisfied that the payee is a person exempt from payment of income-tax under sections 10 to 13A of the Income-tax Act, 1961 ;

(iv) no tax should be deducted from interest payable on 7-year National Savings Certificates (IV Issue), National Development Bonds, etc., which have been specifically exempted from the requirement of tax deduction at source under the proviso to section 193 or of the interest payable on such debentures/securities/bonds as have been specified by the Central Government by notification in the Official Gazette under the proviso to section 193;

(v) no tax should be deducted from any interest payable on any other security of the Central or State Government where the security is held by a resident individual, and the holder makes a declaration in writing in duplicate in the prescribed form and verified in the prescribed manner as provided in section 197A(1) of the Income-tax Act. A copy of declaration form prescribed under the provisions of section 197A of the Income-tax Act is at Annexure II. A copy of such declaration should be forwarded by you on or before the seventh day of the month next following the month in which the declaration is furnished to you to the Chief Commissioner/Commissioner of Income-tax concerned, as provided in rule 29C of the Income-tax Rules, 1962;

(vi) no tax should be deducted from any sum payable in respect of any security 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. Payments made to Life Insurance Corporation and Unit Trust of India are exempt from the requirement of TDS by their respective Act;

(vii) under section 288B of the Income-tax Act, 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 fifty paise and increasing amounts of fifty 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.

6. Attention is invited in this connection to provisions of sections 200, 203, 203A and 206 of the Income-tax Act. The sum and substance of which are as under :

(a) According to the provisions of section 203 of the Income-tax Act, every person responsible for deducting tax at source is required to furnish a certificate to the effect that tax has been deducted and to specify therein, inter alia, the amount deducted and other particulars that may be prescribed. The certificate has to be furnished within the prescribed period of one month to the person to whose account credit is given or to whom payment is made or the cheque or warrant is issued, as the case may be. By Notification No. SO 937(E), dated 20-10-1988, old rule 31 of the Income-tax Rules, 1962 was substituted by a new rule which provides for a united form of certificate to be issued in Form No. 16. Detailed instructions regarding the issue of certificates for tax deducted at source have been issued in Boards Circular No. 529 [F.No. 275/389-IT(B)] dated 13-2-1989.

If a person fails to furnish a certificate as required by section 203, he shall, on an order passed by the income-tax authority under section 272A of the Income-tax Act, pay by way of penalty, a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues.

(b) According to the provisions of section 203A of the Income-tax Act, it is obligatory for all persons responsible for deducting tax at source to quote the tax deduction account number (TAN) in the challans, TDS certificates, periodical returns etc. Detailed instructions in this regard are available in this Departments Circular No. 497 [F.No. 275/118/87-IT(B)], dated 9-10-1987. If a person fails to comply with the provisions of section 203A, he shall, on an order passed by the Assessing Officer under section 272BB, pay, by way of penalty, a sum which may extend to Rs. 5,000.

(c) According to the provisions of section 206 of the Income-tax Act, read with rules 36A and 37 of the Income-tax Rules, the prescribed person in the case of every office of Government, the principal officer in the case of every company, the prescribed person in the case of every local authority or other public body or association, every private employer and every other person responsible for deducting tax under the provisions of Chapter XVII of the Income-tax Act shall prepare, within the prescribed time after the end of each financial year, and deliver or cause to be delivered by the 31st May (since amended as 30th June, vide Notification No. SO 466(E), dated 8-6-1990) following the financial year to the designated Income-tax Officer the annual return of deduction of tax under section 193 from Interest on securities in Form No. 25 prescribed under rule 37 of the Income-tax Rules. It may be noted that the third copy of the TDS certificates issued to the assessee should be enclosed with the annual return.

If a person fails to furnish in due time the annual return, he shall, on an order passed by the income-tax authority under section 272A pay, by way of penalty, a sum which shall not be less than one hundred rupees, but which may extend to two hundred rupees for every day during which the failure continues.

(d) According to the provisions of section 200 of the Income-tax Act, any person deducting any sum in accordance with the provisions of section 193 shall pay, within the prescribed time, the sum so deducted to the credit of the Central Government. If he fails to deduct tax at source or after deducting fails to pay the tax to the credit of the Government, he shall be liable to action in accordance with the provisions of sections 201 and 221. Further, penalty under section 271C shall also be leviable for failure to deduct tax at source which will be equal to the amount of tax not deducted. In this connection, attention is also invited to the provisions of section 276B of the Income-tax Act, according to which if a person fails to pay to the credit of the Central Government the tax deducted at source by him, he shall be punishable with rigorous imprisonment for a term which shall not be less than 3 months but which may extend to 7 years and with fine.

7. In case of any doubt, the Assessing Officer or the local Public Relations Officer of the Income-tax Department should be consulted before making deduction from interest on Government securities.

Annexure I

EXTRACT FROM THE FINANCE ACT, 1990, PART III OF THE FIRST SCHEDULE

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 clause (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	Nil;
	exceed Rs. 22,000
(2)	Where the total income exceeds	20 per cent of the amount by which the
	Rs. 22,000 but does not exceed	total income exceeds Rs. 22,000;
	Rs. 30,000
(3)	Where the total income exceeds	Rs. 1,600 plus 30 per cent of the amount by
	Rs. 30,000 but does not exceed	which the total income exceeds Rs. 30,000;
	Rs. 50,000
(4)	Where the total income exceeds	Rs. 7,600 plus 40 per cent of the amount by
	Rs. 50,000 but does not exceed	which the total income exceeds Rs. 50,000;
	Rs. 1,00,000
(5)	Where the total income exceeds	Rs. 27,600 plus 50 per cent of the amount by
	Rs. 1,00,000	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

(ii) in the case of every person, other than those mentioned in item (i) having a total income exceeding seventy-five thousand rupees,

be increased by a surcharge for purposes of the Union calculated at the rate of eight per cent of such income-tax:

Provided that no such surcharge shall be payable by a non-resident.

ANNEXURE II

FORM NO. 15F

[See rule 29C(1)]

Declaration under section 197A(1) of the Income-tax Act, 1961, to be made by an individual claiming receipt of interest on securities without deduction of tax

I.................................................... son/daughter/wife of................................ resident of ................................do hereby declare

1. that the securities, particulars of which are given below, stand in my name and are beneficially owned by me, and the interest therefrom is not includible in the total income of any other person under sections 60 to 64 of the Income-tax Act, 1961:

Description of

securities

Number of

Securities

Dates of

securities

Amount of

securities

Date(s) on which the

Securities were acquired
by the declarant

2. that my present occupation is ...........................

3. that my estimated total income including the interest on securities referred to in Paragraph I above, computed in accordance with the provisions of the Income-tax Act, 1961 for the previous year ending on...............relevant to the assessment year 19...19....will be less than the minimum liable to income-tax;

4. *that I have not been assessed to income-tax at any time in the past but I fall within the jurisdiction of the Chief Commissioner or Commissioner of Income-tax..............................

that I was last assessed to income-tax for assessment year 19......19........... by the Assessing Officer............ Circle/Ward/District and the permanent account number allotted to me is...........

5. that I am resident in India within the meaning of section 6 of the Income-tax Act, 1961.

......................................................

Signature of the declarant

Verification

I...................................................... do hereby declare that, to the best of my knowledge and belief, what is stated above is correct, complete and is truly stated.

Verified today, the......................................day of........................19.......

	...............................
Place.........................	Signature of Declarant

Notes :

1. Give complete postal address.

2. The declaration should be furnished in duplicate.

3. *Delete whichever is not applicable.

4. Before signing the verification, the declarant should satisfy himself that the information furnished in the declaration is true, correct and complete in all respects. Any person making a false statement in the declaration shall be liable to prosecution under section 277 of the Income-tax Act, 1961, and, on conviction be punishable

(i) in a case where tax sought to be evaded exceeds one lakh rupees, with rigorous imprisonment which shall not be less than six months but which may extend to seven years and with fine;

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

(FOR USE BY THE PERSON TO WHOM THE DECLARATION IS FURNISHED)

1. Name and address of the person responsible for paying the interest on securities mentioned in Paragraph 1 of the declaration.

2. Date on which the declaration was furnished by the declarant.

3. Period for which interest is paid.

4. Amount of interest.

5. Date on which interest is paid.

Forwarded to the Chief Commissioner or Commissioner of Income-tax....................

	.................................
	Signature of the person
Place........	responsible for paying
Date.........	interest on securities.

Circular : No. 580, dated 14-9-1990.

134. Where donations in kind are not in form of jewellery, furniture or any other notified article

1. Under section 10(23C)(iv) and (v) of the Income-tax Act, income received by certain charitable and religious funds, trusts and institutions is exempt from tax if the conditions specified for this purpose are satisfied. One such condition, as laid down in the third proviso to section 10(23C), is that the fund, trust or institution applies its income, or accumulates it for application, wholly and exclusively to the object for which it is established and it does not invest or deposit its funds (other than voluntary contributions received and maintained in the form of jewellery, furniture or any other article as the Board may, by notification in the Official Gazette specify) for any period during the previous year otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11 of the Income-tax Act.

2. References have been received from various trusts and institutions pointing out that certain funds, trusts and institutions running hospitals, creches, orphanages, schools, etc., and enjoying exemption under section 10(23C)(iv) or (v), of the Income-tax Act, often receive donations in kind from various sources for application towards their charitable purposes. These contributions may be in the shape of books, clothes for the poor, grains to feed the poor, drugs, hospital equipment, etc. It has been pointed out that all these are used as such for the purposes of the fund, trust or institution.

3. A doubt has, however, been raised as to whether the fund, trust or institution would be eligible for the tax exemption under section 10(23C)(iv) or (v) of the Act even if the donations-in-kind are not in the form of jewellery, furniture or any other article notified by the Board for the purposes of these provisions.

4. Since the donations-in-kind, of the nature referred to above, received by a fund, trust or institution, would be income within the meaning of section 2(24) of the Income-tax Act, it is clarified that use of these towards objects for which the fund, trust or institution is established would be regarded as application of income of the fund, trust or institution within the meaning of clause (a) of the third proviso to section 10(23C). Accordingly, the fund, trust or institution would be eligible for the tax exemption if the other conditions specified in section 10(23C)(iv) of the Income-tax Act are satisfied.

Circular : No. 581, dated 28-9-1990.

SECTION 43B l DEDUCTION TO BE allowed
ONLY ON ACTUAL PAYMENT

396. Where sums referred to in first proviso to section 43B had in fact been paid on or before due dates mentioned therein, but evidence therefor had been omitted to be furnished along with return, Assessing Officer can entertain applications under section 154 for rectification of intimations under section 143(1)(a) or order under section 143(3), as the case may be, and decide same on merits

1. Attention is invited to Boards Circular No. 581, dated 28-9-1990 [Clarification 1], wherein it was, inter alia, stated that where a deduction claimed is disallowed as, prima facie, inadmissible for want of evidence in support thereof under section 143(1)(a), it cannot be subsequently allowed by a rectification order under section 154 even if the assessee later on furnishes evidence in support thereof. This clarification was made especially with reference to the requirement of furnishing of evidence of payment of tax-duty, etc., along with the return, contained in section 43B.

2. The Board have reconsidered the matter and are of the opinion that where the sums referred to in the first proviso under section 43B had in fact been paid on or before the due dates mentioned therein, but the evidence therefor had been omitted to be furnished along with the return, the Assessing Officers can entertain applications under section 154 for rectification of the intimations under section 143(1)(a) or orders under section 143(3), as the case may be, and decide the same on merits.

3. Circular No. 581, dated 28-9-1990 stands modified to the above extent.

Circular : No. 669, dated 25-10-1993.

CLARIFICATION 1

1. Instances have come to the notice of the Board where deduction claimed under section 43B of the Income-tax Act was disallowed as prima facie inadmissible, under section 143(1)(a), as the assessee had not furnished evidence of payment of tax, duty, etc., along with the return. However, later on, the deduction claimed was allowed under section 154 as the assessees subsequently furnished such evidence.

2. The aforesaid action of allowing the deduction subsequently under section 154 is not in accordance with law. Furnishing of evidence of payment of any sum by way of tax, duty, etc., along with the return is a necessary requirement for allowance of deduction of that sum under section 43B. The sums disallowed as prima facie inadmissible under section 143(1)(a), in the absence of requisite evidence of the payment, cannot be subsequently allowed under section 154. This is because the scope of the powers to make prima facie adjustments under section 143(1)(a) is somewhat co-terminus with the power to rectify a mistake apparent from the record under section 154.

3. Similarly, filing of evidence in support of an exemption/deduction at the time of furnishing the Return of Income has been prescribed as a necessary condition in certain other sections of the Income-tax Act, such as sections 32AB(5), 33AB(2), 35D(4), 35E(6), 54(2), 54B(2), 54D(2), 54F(4), 54G(2), 80HH(5), 80HHA(4), 80HHB(3), 80HHC(4), 80HHD(6), 80-I(7), etc. In such cases also, where the exemption/deduction claimed is disallowed as prima facie inadmissible for want of evidence in support thereof under section 143(1)(a), it cannot be subsequently allowed by a rectification order under section 154 if the assessee later on furnishes evidence in support thereof.

4. Such a view is also necessary from administrative angle as, if the department condones such lapses in the initial stages, a tendency may develop amongst the taxpayers not to file relevant evidence at the time of filing the return and then make a claim by putting is an application under section 154. This tendency would unnecessarily increase infructuous work for the department. Hence, strict view which is in accordance with the legal provisions is necessary in such cases.

Circular : No. 582, dated 23-10-1990.

408. Clarification regarding penalty under section 271B for failure to comply with provisions of section 44AB for assessment year 1985-86

1. The Board had vide Circular No. 422, dated 19-6-1985 (see Clarification 2) decided that the penalty proceedings under section 271B of the Income-tax Act, 1961, for failure to comply with the provisions of section 44AB should not be initiated for assessment year 1985-86, in cases where :

(i) the Audit Report prescribed under section 44AB read with rule 6G has been obtained by 30th September, 1985; and

(ii) the self-assessment tax under section 140A of the Act has been paid within the normal period prescribed under section 139(1) of the Act for filing return of income.

Subsequently, on receipt of representations, the matter was reconsidered and Circular No. 582 was issued on 23-10-1990 clarifying that no penalty would be imposed for the assessment year 1985-86 under section 271B in cases where the audit report prescribed under section 44AB read with rule 6G had been obtained by 30th September, 1985.

2. The matter has been reconsidered by the Board in consultation with the Ministry of Law and it has been decided to withdraw the Circular No. 582, dated 23-10-1990. [Clarification 1].

Circular : No. 628, dated 6-3-1992.

CLARIFICATION 1

1. Vide Circular No. 422, dated 19th June, 1985 (Clarification 2), the Board had directed that the penalty proceedings under section 271B of the Income-tax Act, leviable for non-compliance of the provisions of section 44AB of the Act, should not be initiated for the assessment year 1985-86 in cases where :

(i) the audit report prescribed under section 44AB, read with rule 6G has been obtained by 30th September, 1985; and

(ii) the self-assessment tax under section 140A of the Act has been paid within the normal period prescribed under section 139(1) of the Act for filing return of income.

2. Representations were subsequently received requesting the Board to clarify whether the conditions mentioned at (i) & (ii) above were cumulative or independent. The Revenue Audit has also raised objections that penalty under section 271B should have been levied in cases where self-assessment tax was not paid within the normal period prescribed under section 139(1) of the Act, but was paid within the extended period, i.e., 30th September, 1985.

3. Penalty under section 271 B of the Act is leviable only for non-compliance with the provisions of section 44AB of the Act and not for delay in payment of self-assessment tax. Therefore, there seems to be an obvious anomaly in the said Circular No. 422 insofar as it linked imposition of penalty under section 271B with the payment of self-assessment tax.

4. It is, therefore, clarified that no penalty will be imposed for the assessment year 1985-86 under section 271B in cases where the audit report prescribed under section 44AB, read with rule 6G, has been obtained by 30th September, 1985. This clarification applies only to assessment year 1985-86, being the first year of operation of section 44AB of the Act.

JUDICIAL ANALYSIS

Explained in - In Auto Square v. ITO [1992] 43 ITD 259 (Pat.-Trib.), it was observed as under :

The circular obviously shows that the revenue itself has delinked the payment of self-assessment tax, a natural consequence of filing return under section 139(1), from purview of audit report under section 44AB (sic). I have emphasised the word only in the Circular of the CBDT, which manifests the view of the CBDT in these matters. In my view as the assessee had obtained the audit report before the prescribed date of section 44AB and had filed it with the return, which was accepted, no penalty under section 271B should be levied.

clarification 2

1. Section 44AB lays down that every person carrying on business, whose sales, turnover or gross receipts exceed rupees forty lakhs or carrying on a profession, whose gross receipts exceed rupees ten lakhs, shall get his accounts of such previous year audited before the specified date and obtain before that date the report of such audit in the prescribed form.

2. Under Explanation of this section, specified date means the date of the expiry of four months from the end of the previous year, or where there are more than one previous year, from the end of the previous year which expired last before the commencement of the assessment year or 30th day of June of the assessment year, whichever is later.

3. Rule 6G of the Income-tax Rules, 1962 inserted by the Income-tax (Amendment) Rules, 1985 with effect from 1-4-1985, prescribes the manner and Forms in which the audit report required under section 44AB is to be submitted. These rules were notified on 31-1-1985.

4. A number of representations have been received from assessees and various trade associations expressing their difficulties in getting the accounts audited by the specified date this year. The matter has accordingly been considered by the Board. This being the first year of the operation of the section and considering that the relevant rule was notified only on 31-1-1985, the Board has decided that the penalty proceedings under section 271B for failure to comply with the provisions of section 44AB should not be initiated for the assessment year 1985-86, in cases where :

(i) the audit report prescribed under section 44AB read with rule 6G has been obtained by 30-9-1985; and

(ii) the self-assessment tax under section 140A has been paid within the normal period prescribed under section 139(1) for filing return of income.

Circular : No. 422 [F. No. 201/156/85-IT(A-II)], dated 19-6-1985.

Note : The above circular was referred to in ITO v. Arun Kumar Bhuwalka [1992] 40 ITD 373 (Cal.) 377.

120. Clarification regarding jurisdiction over assessment of trusts, funds, association and institutions claiming exemption under clauses (21), (22), (22A), (23), (23A) and (23C) of section 10, section 11 and section 12

1. The Central Board of Direct Taxes had issued a Notification SO No. 829(E), dated 17-10-1989 under section 120 of the Income-tax Act, 1961. Under the said notification, Directors of Income-tax (Exemptions) at Delhi, Bombay, Madras and Calcutta were assigned the functions of a Commissioner of Income-tax in respect of persons claiming exemptions under clauses (21), (22), (22A), (23), (23A) and (23C) of section 10, section 11 and section 12 of the Income-tax Act, 1961 and assessed or assessable by an income-tax authority having headquarters at Delhi, Bombay, Madras and Calcutta, respectively. A question has been raised as to whether applications for registration under section 12A(a) are to be made to the Directors of Income-tax (Exemptions) at the said four metropolitan cities or whether these should continue to be made to the respective Chief Commissioner/Commissioner of Income-tax.

2. It is clarified that under the Notification SO No. 829(E), dated 17-10-1989, the respective Directors of Income-tax (Exemptions) at Delhi, Bombay, Madras and Calcutta have been assigned all the functions of a Commissioner of Income-tax in respect of the specified class of cases. Accordingly, wherever an application under any provision in the Income-tax Act including application for registration under section 12A(1), is to be made to the Commissioner of Income-tax, it should be made to the respective Director of Income-tax (Exemptions). This will only apply to cases where the assessee concerned is a person claiming exemption under any of the provisions mentioned above and was assessed for assessable by any income-tax authority having headquarters at four metropolitan cities of Delhi, Bombay, Calcutta and Madras.

Circular : No. 585, dated 27-11-1990.

Section 206C l Profits And Gains From Business of Trading In Alcoholic liquor, Forest Produce, etc.

1189. Instructions regarding deduction of tax at source on profits and gains from the business of trading in alcoholic liquor, forest produce, etc.

Clarification I

2. Sections 44AC and 206C are reproduced below :

Table

Sl. No.	Nature of goods	Percentage
(1)	(2)	(3)
(i)	Timber obtained under a forest lease	Thirty-five per cent
(ii)	Timber obtained by any mode other	Fifteen per cent
	than under a forest lease
(iii)	Any other forest produce not being timber	Thirty-five per cent

Table

Sl. No.	Nature of goods	Percentage
(1)	(2)	(3)
(i)	Alcoholic liquor for human consumption (other	Fifteen per cent
	than Indian-made foreign liquor)
(ii)	Timber obtained under a forest lease	Fifteen per cent
(iii)	Timber obtained by any mode other than under	Ten per cent
	a forest lease
(iv)	Any other forest produce not being timber	Fifteen per cent.

(2) The power to recover tax by collection under sub-section (1) shall be without prejudice to any other mode of recovery.

(3) Any person collecting any amount under sub-section (1) shall pay within seven days the amount so collected to the credit of the Central Government or as the Board directs.

This amendment will be effective from 1st June, 1988.

Circular : No. 525, dated 24-11-1988.

Clarification II

Circular : No. 535, dated 26-6-1989.

Clarification III

Circular : No. 565, dated 11-7-1990.

Clarification IV

Judicial analysis

Explained in - The above circular was explained in Badhar Khan Pukhraj v. Deputy Commissioner (Asstt.) [1993] 112 Taxation 74 (Trib.), in the following words :

Clarification V

(i)	Alcoholic liquor for human consumption (other than Indian-made foreign liquor)	15%
(ii)	Timber obtained under a forest lease	15%
(iii)	Timber obtained by any mode other than under a forest lease	5%
(iv)	Any other forest produce not being timber	15%

7. The responsibilities, obligations, etc., under the Income-tax Act of the person collecting tax at source under section 206C, are as follows :

Circular : No. 620, dated 6-12-1991.

Clarification vi

Table

Sl. No.	Nature of goods	Percentage
(1)	(2)	(3)
(i)	Alcoholic liquor for human consumption	Fifteen per cent
	(other than Indian-made foreign liquor)
(ii)	Timber obtained under a forest lease	Fifteen per cent
(iii)	Timber obtained by any mode other than	Five per cent
	under a forest lease
(iv)	Any other forest produce not being timber	Fifteen per cent

(i) a public sector company,

(ii) a buyer in the further sale of such goods obtained in pursuance of such sale, or

(iii) a buyer where the goods are not obtained by him by way of auction and where the sale price of such goods to be sold by the buyer is fixed by or under any State Act.

7. The responsibilities, obligations, etc., under the Income-tax Act of the person collecting tax at source under section 206C, are as follows :

(a) Any person collecting any amount under section 206C (1) shall pay within seven days the amount so collected to the credit of the Central Government or as the Board directs.

Circular : No. 634, dated 20-8-1992.

Clarification VII

2. The Finance Act, 1993 does not make any change in the rates of tax applicable for the collection of tax at source under section 206C for the financial year 1993-94.

Table

Sl. No.	Nature of goods	Percentage
(1)	(2)	(3)
(i)	Alcoholic liquor for human consumption	Fifteen per cent
	(other than Indian-made foreign liquor)
(ii)	Timber obtained under a forest lease	Fifteen per cent
(iii)	Timber obtained by any mode other than	Five per cent
	under a forest lease
(iv)	Any other forest produce not being timber	Fifteen per cent

(i) a public sector company,

(ii) a buyer in the future sale of such goods obtained in pursuance of such sale, or

(iii) a buyer where the goods are not obtained by him by way of auction and where the sale price of such goods to be sold by the buyer is fixed by or under any State Act.

4.The amount of tax collectible at source at the rates referred to in paragraph 3.1 shall be increased by a surcharge at the rate of 15 per cent where the buyer is a domestic company and at the rate of 12 per cent in respect of other buyers.

7. The responsibilities, obligations, etc., under the Income-tax Act, of the person collecting tax at source under section 206C, are as follows :

(a) Any person collecting any amount under section 206C (1) shall pay within seven days the amount so collected to the credit of the Central Government, or, as the Board directs.

(d) If the seller fails to collect the tax, or, after collecting the tax, fails to pay it to the credit of the Central Government, he shall be liable in terms of sub-section (7) of section 206C to pay simple interest @ 2 per cent per month or part thereof, on the amount of such tax from the date on which such tax was collectible to the date on which such tax is actually paid. Further, section 276BB lays down that if a person fails to pay to the credit of the Central Government the tax collected by him as required under the provisions of section 206C, he shall be punishable with rigorous imprisonment for a term which shall be not less than three months but which may extend up to 7 years, and with fine.

(e) Every person collecting tax shall prepare half-yearly returns for the period ending on 30th September and 31st March in each financial year, and, deliver or cause to be delivered to the designated/concerned Assessing Officer, the said returns. Under Rule 37E of the Income-tax Rules, 1962, these returns are to be furnished in Form No. 27EA, 27EB, 27EC or 27ED relating respectively to alcoholic liquor for human consumption, timber obtained under a forest lease, timber obtained by any mode other than under a forest lease, or, any other forest produce not being timber, as the case may be, within a period of one month from the end of the half-yearly period to which the return relates.

Circular :No. 660, dated 15-9-1993.

Judicial analysis

Explained in - In Satya Pal Amrik Singh & Co. v. Union of India [1997] 228 ITR 653 (Punj. & Har.), the Court referred to paragraph 5 of the above circular, and observed :

Circular: No. 586, dated 28-11-1990.

952. Clarification regarding liability to income-tax in India and deduction of tax at source of members of the crew of foreign going Indian ship

1. A person resident in India in any year is liable to pay tax in India on his global income. A non-resident, on the other hand, is charged to tax in India only on income which is received or is deemed to be received in India or which accrues or arises or is deemed to accrue or arise to him in India. Thus, in the case of a non-resident, income which accrues or arises outside India and is also received outside India is not subjected to tax in India.

2. After the amendment made in section 6 of the Income-tax Act, 1961 by the Finance Act, 1990, w.e.f. 1-4-1990, an Indian citizen who is a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 is regarded as a resident in India only if he is in India for 182 days or more during the relevant year irrespective of the extent of his stay in India in earlier years. For this purpose, it is necessary to note that the term India as defined in section 2(25A) of the Income-tax Act, 1961 does not extend to Indian ships operating beyond Indian territorial waters. However, if he is outside India and comes on a visit to India in any year, and leaves India otherwise than as a member of the crew of an Indian ship he will be regarded as a resident in India if his stay in India during that year is for 150 days or more if during the 4 years preceding that year he has been in India for 365 days or more.

3. Thus, generally, Indian members of the crew of a foreign-going Indian ship would be non-resident in India if they are on board such ship outside the territorial waters of India for 182 days or more during any year. Accordingly, such seamen will be charged to tax in India only in respect of earnings received in India or the earnings for the period when they are working within the Indian waters on coastal ships, etc.

4. Under section 192 of the Income-tax Act, persons responsible for paying salary and other incomes chargeable under Income-tax Act under the head Salaries are required to deduct income-tax from such income at the time of payment. For this purpose, the amount of tax to be deducted is computed at the average rate of income-tax arrived at by applying the rates in force for the financial year in which the payment is made on the estimated income of the person to whom salary is paid. Since, as explained above, in the case of members of crew of foreign-going Indian ships, who are not likely to be in India for a period or periods exceeding 182 days in a year, income which accrues or arises outside India and is also received outside India is not liable to tax in India, the shipping companies and other persons responsible for paying salary to such members of crew may take these factors into account while computing the amount to be deducted as tax and deduct only so much of tax as would be chargeable on the estimated income liable to tax in India. If the shipping company or other person responsible for paying to such members of crew subsequently finds that any person who was earlier considered as not likely to be resident in India and deduction of tax at source was made on that basis is now likely to be resident in India, the shipping company or the other person responsible for making the payment, may increase the deduction so as to adjust any deficiency arising out of an earlier short deduction or non-deduction during the same financial year.

Circular : No. 587, dated 11-12-1990.

479. Whether, where in respect of an assessment year, there is income under a head, the loss, if any, under any other head for that assessment year should first be set-off against it before the carried forward losses under the former head can be set-off against such income

1. The question whether the provisions of section 71 of the Income-tax Act, providing for set-off of loss from one head against income from another in an assessment year, take precedence over the provisions of section 72 (carry forward and set-off of business losses) and section 74 (carry forward and set-off of losses under the head Capital gains has been considered in consultation with Ministry of Law.

2. The Board are advised that effect has first to be given to the provisions of section 71, i.e., where in respect of an assessment year, there is income under a head, the loss, if any, under any other head for that assessment year should first be set-off against it before the carried forward losses under the former head can be set-off against such income. This position is, however, subject to the exceptions provided in Chapter VI of the Income-tax Act which prohibit inter-head adjustments with regard to certain losses, such as speculation loss or the loss incurred in the activity of owning and maintaining race horses.

3. The view contained in paragraph 2 is reflected in the income-tax return Form No. 1 (for companies other than those claiming exemption under section 11 of the Income-tax Act) notified on 21st November, 1990. However, the format of the income-tax return Form No. 2 (for assessees, other than companies and those claiming exemption under section 11, whose total income includes Profits and gains of business or profession) and income-tax return Form No. 3 (for assessees, other than companies and those deriving income from property held for charitable and religious purposes claiming exemption under section 11, whose total income does not include Profits and gains of business or profession), notified on 26-4-1990, was based on the view that carry forward losses have to be set-off in the succeeding assessment years under the respective heads of income before giving effect to the provisions of section 71. In view of the opinion now given by the Ministry of Law, the method of computation of income incorporated in Form No. 1 would hold good for all the assessees.

Case I

Case II

Case III

Case IV

Nature of goods

Percentage

Percentage

Percentage

Percentage

Judicial Analysis

Paragraph A, Sub-Paragraph-I

Computation of total income

Income-tax

Description of

Number of

Dates of

Amount of

Date(s) on which the

Signature of Declarant

Nature of goods

Percentage

Percentage

Percentage

Percentage