Circular : No. 675, dated 3-1-1994.

610. Whether person, who receives payment for film which has been produced, directed or scripted by him, would be entitled to deduction under section 80RR

1. Section 80RR of the Income-tax Act, 1961 provides that an individual resident in India, being an author, playwright, artist, musician, actor or sportsman (including an athlete) who derives income in exercise of his profession from the Government of a foreign State or any person not resident in India shall be entitled to a deduction from his income of (i) 50% of such income, or (ii) 75% of such income as is brought into India in accordance with the Foreign Exchange Regulation Act, 1973 and rules made thereunder, whichever is higher.

2. By Circular No. 3l, dated 25-10-1969 the Board clarified that photographers and TV cameramen can be regarded as artists for the purposes of section 80RR of the Act. A question has been raised whether a person, who receives payment for a film which has been produced, directed or scripted by him, would be entitled to deduction under section 80RR of the Act. The Board has examined the matter and is of the view that a script writer can be regarded as playwright and similarly director can be treated as an artist for the purposes of section 80RR of the Act. However, a producer would not be entitled to deduction under section 80RR of the Act, because he does not fall under any of the categories mentioned in the said section.

Circular : No. 676, dated 14-1-1994.

Section 211 l Instalments of advance tax

1197. Whether, in case last day for payment of any instalment of advance tax is day on which receiving bank is closed, assessee can make payment on next immediately following working day, and in such cases mandatory interest leviable under sections 234B and 234C would not be charged

1. Representations have been received by the Board seeking waiver of interest chargeable under sections 234B and 234C of the Income-tax Act, 1961 for default in payment of instalments of advance tax by the due dates which are prescribed under section 211 of the Income-tax Act. In cases where the last date for making payment of such instalments (i.e., 15th September, 15th December and 15th March) happens to be a holiday and the assessee pays the due amount of advance tax on the next working day.

2. The matter has been carefully considered by the Board and it is felt that in such cases section 10 of the General Clauses Act, 1897 will be applicable. This section lays down that where any Act or proceeding is directed or allowed to be done or taken in any Court or office on a certain day or within a prescribed period, then, if the Court or office (in the present case the bank which is authorised to receive payment of advance tax from the assessee) is closed on that day or on the last day of the prescribed period, the Act or proceeding shall be considered as done or taken in due time after it is done or taken on the next day, afterwards, on which the Court or office (or the bank) is open. In view of this provision, it is hereby clarified that if the last day for payment of any instalments of advance tax is a day on which the receiving bank is closed, the assessee can make the payment on the next immediately following working day, and in such cases, the mandatory interest leviable under sections 234B and 234C of the Income-tax Act, 1961 would not be charged.

Circular : No. 677, dated 28-1-1994.

463. Whether benefit of ad hoc deduction for expenses @ 50 per cent of gross receipts of commission should be given to agents of those mutual funds which are notified by Central Government for purposes of section 10(23D) and who are not maintaining detailed accounts for expenses incurred by them and having gross commission of less than Rs. 60,000 for the year, including gross commission, as authorised agents of UTI and securities specified in Circular No. 594, dated 15-5-1991 and Circular No. 648, dated 30-3-1993

1. The Board in Circular No. 594, dated 27-2-1991 (Sl. No. 461) and corrigendum dated 15-5-1991 has granted, subject to conditions therein specified, benefit of ad hoc deduction for expenses @ 50 per cent of the gross receipts of commission, to the authorised agents of the Unit Trust of India and the agents of the Securities specified in the circular. The benefit of ad hoc deduction is available only where no detailed accounts are maintained and the gross commission received by the agents is less than Rs. 60,000.

2. The Board has received representations for grant of similar ad hoc deduction to agents of mutual funds.

3. The Board has considered these representations and has decided that the benefit of ad hoc deduction for expenses @ 50 per cent of the gross receipts of commission be given to the agents of those mutual funds which are notified by the Central Government for purposes of section 10(23D) of the Income-tax Act, 1961. The benefit of ad hoc deduction will only be available to agents not maintaining detailed accounts for the expenses incurred by them and having gross commission of less than Rs. 60,000 for the year, including gross commission as authorised agents of Unit Trust of India and agents of Securities specified in Boards Circular No. 594, dated 27-2-1991 and corrigendum dated 15-5-1991, as well as total commission from Life Insurance Corporation as specified in Boards Circular No. 648, dated 30-3-1993. (Sl. No. 462).

4. The benefit of ad hoc deduction will not be available to agents who have earned gross commission as computed above of more than Rs. 60,000 from all the abovementioned sources put together during the year. The admissibility of expenditure claimed by such agents (with higher income) will be decided by the Assessing Officers as per the provisions of the Income-tax Act.

Circular : No. 678, dated 10-2-1994.

532. 100 per cent tax relief for donations made to Chief Ministers Earthquake Relief Fund, Maharashtra

In the wake of the unfortunate earthquake which caused wide-spread devastation in certain areas of Maharashtra in the month of September, 1993, the Government of India has issued a Press Note informing the general public that all donations made to the Chief Ministers Earthquake Relief Fund, Maharashtra, will qualify for 100% deduction, without any ceiling.

2. It was also stated in the Press Note that all donations made to the Chief Ministers Relief Fund for earthquake relief, prior to the setting up of the fund mentioned in para 1 above, would also qualify for 100% deduction.

3. The Board have been receiving queries from various quarters as to whether the Drawing and Disbursing Officers can allow 100% deduction of the aforesaid donations from salaries, under section 80G of the Income-tax Act, 1961, while computing the tax liability of the employees who make such donations. The Board have decided that the D.D.Os can do so in the case of all donors upon being satisfied about the amount donated and the evidence of its receipt by the Fund.

4. In cases where the employees of an organisation make donations to the aforesaid Fund(s) through their employers, that is, by deduction from their pay through the pay bill, it is quite possible that the amounts so deducted would be sent in lump sum to the fund and the fund would issue only one receipt for the same to the employer. In such cases the employer shall furnish to the Fund a list showing the names and designations of the donors, and the amount donated individually, alongwith the cheque for the lump sum donation and have the list countersigned by the Fund. Besides, allowing 100% deduction at his level, wherever permissible, the employer should issue a certificate to the concerned employees stating the amount of deduction made, the number and date of the pay bill, and the number and date of the cheque by which the lump sum amount including the donation made by the concerned employee(s) was paid to the Fund, so that the same could be filed by the concerned employees with their returns of income, if necessary.

5. There would be no upper ceiling for the purpose of deduction in respect of the amount donated to the funds mentioned in paras 1 and 2 above. It may, however, be noted that no deduction will be allowed if the sum donated is less than Rs. 250.

Circular : No. 679, dated 11-2-1994.

other Acts

Expenditure Tax Act, 1987

SECTION 2(10) l ROOM CHARGES

1469. Clarification on applicability of the Expenditure Tax Act, 1987

Clarification 1

1. The Board vide Circular No. 645, dated 15-3-1993 read with Circular No. 650, dated 31-5-1993 had clarified that luxury tax and such other taxes levied by the State Government will form part of the room charges for the determination of applicability of the Expenditure Tax Act to any particular hotel.

2. The Income-tax Appellate Tribunal has recently given a finding contrary to the above view of the Board. After examination of the whole issue afresh, it has been decided to accept the view of the Income-tax Appellate Tribunal holding against inclusion of the luxury tax as a part of the room charges under section 2(10) of the Expenditure Tax Act. The circulars of the Board referred above are accordingly being withdrawn with immediate effect.

CLARIFICATION 2

The Board, vide Circular No. 645, dated March 15, 1993 has clarified that luxury tax and such other taxes levied by the State Governments will form part of the room charges for the determination of applicability of the Expenditure-tax Act to any particular hotel.

Some doubts have been expressed about the meaning of such other taxes which are to be taken into account for computing the Room charges.

The phrase such other taxes would require to be construed ejusdem generis. Therefore, the phrase such other taxes would only mean any tax (by whatever name called) which is in the nature of luxury tax.

Circular : No. 650, dated 31-5-1993.

CLARIFICATION 3

1. Provisions of the Expenditure-tax Act apply in relation to any chargeable expenditure incurred in a hotel wherein the room charges for any unit of residential accommodation at the time of incurring of such expenditure are Rs. 1,200 or more per day per individual. (Up to 1-6-1992, the Act was applicable to chargeable expenditure incurred in a hotel having room charges at Rs. 400 or more per day per individual).

2. The computation of room charges is used for the determination of applicability of the Expenditure-tax Act to any particular hotel.

3. The Board has received several petitions from Hotel Associations requesting for a clarification whether luxury tax charged by State Governments is to be included in the computation of room charges within the meaning of section 2(10) of the Expenditure-tax Act.

4. It is clarified that luxury tax and such other taxes levied by the State Governments will form part of the room charges as the customer is required to pay these taxes to the hotel.

5. To illustrate, if a hotel is charging room rent @ Rs. 1,150 per day per individual and luxury tax @ 7 per cent of the room rent, the room charges as per section 2(10) of the Expenditure-tax Act will exceed Rs. 1,200 per day per individual, making the hotel liable to collect and pay the expenditure-tax.

6. Although the luxury tax forms part of the room charges, it will not be considered as a part of the chargeable expenditure for the purpose of section 5 of the Expenditure-tax Act.

Circular : No. 645, dated 15-3-1993.

Judicial Analysis

Explained in - In Hotel Jagadeswari (P.) Ltd. v. Asstt. CIT [1993] 47 ITD 454 (Delhi - Trib.), it was observed that this clarification, in our opinion, is not a proper understanding of the expression room charges. A circular issued by the Board does not bind the Tribunal while the circular can only confer benefits on the assessees even by departing from the strict tenor of the statutory provision by mitigating the rigour of the law. It cannot impose an additional burden on the taxpayer. This shows that if the circular goes against the tenor of the statute and impose a higher burden on the taxpayer than what the Act itself envisages, then such a circular can be departed from by the Tribunal not only because the circular travelled beyond the scope of the Act but such circulars are not even binding, inasmuch as, it is the function of the Tribunal as well as of the High Courts, to interpret the law. In that process of interpretation these circulars can only constitute an external aid to construction. Thus the circular No. 645, dated 15-3-1993 issued by the Board has placed a higher burden on the taxpayer than what the Act envisages. Further more this circular was issued by way of clarification sometime on 15-3-1993. If this is a circular issued within the meaning of section 31 of the Expenditure Tax Act with a view to remove difficulties, then such circular shall not be made after the expiry of the period of two years from the commencement of the Act. The Expenditure Tax Act came into force on 1-11-1987. The circular ought to have been issued within a period of two years. We do not know whether the circular issued after the expiry of two years by way of clarifications can have a legally binding effect. In our view this clarification is beyond the power of the Board, inasmuch as, section 31 of the Expenditure Tax Act provided for the power of the Board to make rules subject to the control of the Central Government by issuing a notification in the Official Gazette. Clause (a) of sub-section (2) of section 31 provided that rules can be made for the manner in which the room rent may be determined under sub-clause (a) of sub-section (1) of section 3 in case where the composite charges are payable in respect of residential accommodation and food. Rules in this regard are already made in rule 3 of the Expenditure Tax Rules, as we have already noticed above. Therefore there is no need for making a rule by way of clarification again for the manner in which the room charges are to be determined. If the clarification is regarded as a notification, it travels beyond the scope of its power. If it is considered as a clarification, then the interpretation placed by the Board does not, in our view, accord with the meaning of the words other services, which it must receive in the context in which it is used in section 2(10). For the purposes of arriving at the room charges, the luxury tax is totally to be left out of account and so also any other tax imposed, which are all to be eliminated for computing the chargeable expenditure as provided for in section 5 of the Expenditure Tax Act.

Circular: No. 680, dated 21-2-1994.

Sections 115j & 115JA

Special provisions relating to companies

Section 115J l Special provisions
relating to certain companies

742. Effect of Explanation (iii) to section 115J - Clarification

1. Clause (iii) of the Explanation to section 115J, which was inserted by the Direct Tax Laws (Amendment) Act, 1989 with effect from assessment year 1989-90, provides for a deduction from the book profits attributable to a business, the profits from which are eligible for deduction under section 80HHC or 80HHD. It also provides that the amount of deduction shall be computed in the manner specified in sub-section (3) or (3A) of section 80HHC or sub-section (3) of section 80HHD. Certain doubts have been expressed as to whether the amount quantified under section 80HHC(3) or (3A) or section 80HHD(3) itself should be deducted under Explanation (iii) to section 115J or whether only the manner of computation specified in those sections should be followed to quantify the amount of deduction.

2. It may be noted that while deductions under sections 80HHC and 80HHD are related to the profits computed under the head Profits and gains of business or profession section 115J is concerned only with book profits. While explaining the scope of Explanation (iii) to section 115J, it was stated in para 9.2 of Boards Circular No. 559, dated 4-5-1990 that the intention behind introduction of the said Explanation was to ensure that the provisions of section 115J, which provided for a tax on the book profits, did not take away the 100 per cent exemption which was to be allowed in respect of export profits and the profits from tourism-related industry. It was also stated therein that the intention was that 100 per cent of such profits should be exempt in such cases. In para 9.3(a) of the same circular, it was elaborated that for the purposes of the subject explanation, the net profit to be excluded shall be computed in the same manner as provided for in section 80HHC(3) or (3A) or section 80HHD(3). Further the Explanation (iii) under section 115J itself clearly lays down that the amount, as arrived at after adjusting the net profit as shown in the P&L Account for the relevant previous year by the adjustments referred to in clauses (a) to (f), (i) and (ii) of the said Explanation should be allowed as deduction, computing the deduction however in the manner specified under section 80HHC(3) or (3A) or 80HHD(3). It is, therefore, clear that it is only the manner of computation specified in section 80HHC(3) or (3A) or 80HHD, and not the amounts themselves, that should be imported into Explanation (iii) under section 115J.

3. Accordingly, the deduction contemplated under Explanation (iii) to section 115J should be computed according to the following steps:

(i) it should be first decided whether the assessee carries on a business, the profits from which are eligible for deduction under section 80HHC or 80HHD;

(ii) if so, the net profit, shown in the P&L Account of the relevant previous year should be adjusted as per clauses (a) to (f) and (i) and (ii) of the said Explanation;

(iii) if the business exclusively consists of the types of business which are eligible for deduction under section 80HHC/80HHD the whole of such amount arrived at as per (ii) above should be allowed as deduction; and

(iv) if not, the proportion of the export turnover of the total turnover of the business carried on by the assessee as required under section 80HHC(3)(b) or, the proportion of the turnover in respect of the sales made to export house or trading house to the total turnover of the business carried on by the assessee as required under section 80HHC(3A)(b) or, as the case may be, the proportion of the receipts specified in section 80HHD(2) to the total receipts of the business carried on by the assessee should be determined and the said proportion should be applied to the amount arrived at (ii) above to determine the quantum of deduction under section 115J.

Judicial Analysis

Explained in : CIT v. GTN Textiles Ltd. [2001] 115 Taxman 55 (Ker.) in following words :

These Circulars are not against the section and they can be looked into. According to us, the Circulars are also in tune with the interpretation given by us to section 115J. (p. 62)

Circular : No. 681, dated 8-3-1994.

SECTION 194C l PAYMENTS TO CONTRACTORS AND SUB-CONTRACTORS

1107. Applicability of section 194C to service contracts - Clarification regarding Supreme Court judgment in Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/201 ITR 435[`1] 1

1. Sub-section (1) of section 194C of the Income-tax Act, 1961 lays down that any person responsible for paying any sum to any resident (hereafter referred to as contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies mentioned therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash or by issue of a cheque or draft by any other mode, whichever is earlier, deduct an amount equal to 2% of such sum as income-tax on the income comprised therein.

2. Sub-section (2) of section 194C of the Income-tax Act, 1961 lays down that when a contractor makes payment of any sum to a resident sub-contractor in pursuance of a contract made with him for carrying out the whole or any part of the work undertaken by the contractor, or, for supplying any labour, the contractor shall deduct an amount equal to 1% of such sum as income-tax on the income comprised therein.

3. Section 194C was introduced with effect from 1st April, 1972. Shortly after its introduction, the Board issued Circular No. 86, dated 29-5-1972, No. 93, dated 26-9-1972 and No. 108, dated 20-3-1973 in this regard.

4. Some of the issues raised in the above mentioned circulars need to be reviewed in the light of the judgment dated March 23, 1993, delivered by the Supreme Court of India in Civil Appeal No. 2860 (NT) of 1979 - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435.

5. The Supreme Court has held that ...there is nothing in the sub-section which could make us hold that the contract to carry out a work or the contract to supply labour to carry out a work should be confined to works contract.... . Their Lordships have further held that Any work means any work and not a works contract, which has a special connotation in the tax law.... Work envisaged in the sub-section, therefore, has a wide import and covers any work which one or the other of the organisations specified in the sub-section can get carried out through a contractor under a contract and further it includes obtaining by any of such organisations supply of labour under a contract with a contractor for carrying out its work which would have fallen outside the work but for its specific inclusion in the sub-section.

6. It may be pointed out that this appeal before the Supreme Court was by virtue of a Special Leave Petition against the judgment in Writ Petition No. 2909/1978 of the Patna High Court in the case of Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. The Patna High Court, while dismissing the writ petition of the aforesaid company, observed that In a very broad sense, a work done by one person is service rendered to another and indeed one of the dictionary meanings of the word service is work.

7. The conclusion flowing from the aforesaid judgments of the Supreme Court and the Patna High Court is that the provisions of section 194C would apply to all types of contracts, including transport contracts, labour contracts, service contracts etc. In the light of these judgments, the Board have decided to withdraw their above-mentioned Circular Nos. 86 and 93 and para 11 of Circular No. 108 and issue the following guidelines in regard to the applicability of the provisions of section 194C :

(i) The provisions of section 194C shall apply to all types of contracts for carrying out any work including transport contracts, service contracts, advertisement contracts, broadcasting contracts, telecasting contracts, labour contracts, material contracts and works contracts.

(ii) No deduction at source under section 194C shall be required to be made if the consideration for the contract does not exceed the prescribed amount which at present is Rs. 10,000 (ten thousand only).

(iii) The provisions of section 194C would not apply in relation to payments made for hiring or renting of equipments, etc.

(iv) The provisions of section 194C would not apply in relation to payments made to banks for discounting bills, collecting/receiving payments through cheques/drafts, opening and negotiating Letters of Credit and transactions in negotiable instruments.

(v) Service contracts would be covered by the provisions of this section since service means doing any work as explained above.

(vi) The provisions of this section will not cover contracts for sale of goods

(a) Since contracts for the construction, repair, renovation or alteration of buildings or dams or laying of roads or airfields or railway lines or erection or installation of plant and machinery are in the nature of contracts for work and labour, income-tax will have to be deducted from payments made in respect of such contracts. Similarly, contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of this section. The same position will obtain in respect of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor.

(b) Where, however, the contractor undertakes to supply any article or thing fabricated according to the specifications given by Government or any other specified person and the property in such article or thing passes to the Government or such person only after such article or thing is delivered, the contract will be a contract for sale and as such outside the purview of this section.

(c) In State of Himachal Pradesh v. Associated Hostels of India Ltd. [1972] 29 STC 474, the Supreme Court observed that where the principal objective of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, contract is of work and labour. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of skill and labour as compared with the value of the materials is conclusive although such matters may be taken into consideration in determining in the circumstances of a particular case, whether the contract is, in substance, one of work and labour or one for the sale of a chattel. A building contract or a contract under which a movable is fixed to another chattel or on the land where the intention plainly is not to sell the article but to improve the land or the chattel and the consideration is not for the transfer of the chattel, but for the labour and work done and the material furnished, the contract will be one of work and labour. In case of doubt whether a particular contract is a contract for work and labour or for sale, the matter should be decided in the light of the principles laid down by the Supreme Court in the above mentioned case.

(vii) The provisions of this section would apply in relation to payments made to persons who arrange advertisement, broadcasting, telecasting, etc.

(viii) The provisions are wide enough to cover not only written contracts but also oral contracts.

(ix) Where the total payment under the contract is likely to exceed Rs. 10,000 for the entire period during which the contract will remain in force, income-tax will have to be deducted at source. In a case where, at the time when the contract was entered into, it was expected that the total payment thereunder would not exceed Rs. 10,000 but later on it is found that the payment exceeds that amount, deduction should be made in respect of earlier payments as well.

(x) The percentage deduction prescribed in law is with reference to the amount of payment and not income comprised in the payment. The person responsible for making payment, therefore, is not required to estimate the income comprised in the payment.

(xi) In a case where advance payments are made during the execution of a contract and such payments are to be adjusted at the time of final settlement of accounts, tax will have to be deducted at the time of making advance payments if the total payment is likely to exceed Rs. 10,000.

(xii) Where any contractor is the recipient of any amount under a contract but the income of the recipient is not subject to income-tax, such contractor may obtain a certificate from his Assessing Officer under section 194C(4) for receiving payment without deduction of tax at source.

(xiii) Every contractor, other than an individual or HUF, who is responsible for paying any sum to any sub-contractor (who is resident in India), in pursuance of a contract with such sub-contractor for carrying out or for the supply of labour for carrying out, wholly or in part, of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor had undertaken to supply, will be required to deduct income-tax at the rate of 1% of such sum.

8. It may be noted that

(i) The term service contracts would include services rendered by such persons as lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. However, services rendered for which payment is in the nature of salaries which is chargeable under the head of income A. Salaries in Chapter IV of the Income-tax Act, 1961 shall not be covered by section 194C.

(ii) The term transport contracts would, in addition to contracts for transportation and loading/unloading of goods, also cover contracts for plying of buses, ferries, etc., along with staff (e.g., driver, conductor, cleaner, etc.). Reference in this regard is also invited to Boards Circular No. 558, dated the 28th March, 1990.

(iii) The term materials contracts in the context of section 194C would mean contracts for supply of materials where the principal contract is for work and labour and not a contract for sale of materials.

9. Boards Circular No. 86, dated 29-5-1972 and No. 93, dated 26-9-1972 and para 11 of Circular No. 108, dated 20-3-1973 are hereby withdrawn. Boards Circular No. 558, dated 28-3-1990 is reiterated.

10. It is clarified that this circular explaining the provisions of section 194C will apply with effect from 1st of April, 1994. Tax deductions made in accordance with Circular Nos. 86, 93 and 108 up to 31st March, 1994 will be regarded as compliance of the provisions of section 194C.

Judicial analysis

n Any work occurring in section 194C means any work and not a works contract and, therefore, a person who credits to account of or pays to a contractor any sum payable by any of organisations specified in section 194C(1) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between contractor and specified organisation, is liable to deduct two per cent of such sum as income-tax as required under that sub-section - Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/207 ITR 435 (SC).

n Expression any work used in section 194C means works contracts and contracts for work i.e., labour contracts, but not service contracts or transport contracts - Bombay Goods Transport Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).

n Provisions of section 194C are not confined to activities of carrying out works contracts only, but apply to contract of carrying out other work also - All Gujarat Federation of Tax Consultants v. CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.)

n Before a person can be called a contractor within the meaning of section 194C, his status must have nexus in its characteristic as carrying out work for another person as a contractor in the ordinary sense and not merely carrying on activities of his own business or profession in the ordinary course - All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).

n Section 194C is applicable only to payments made to any person for any work and not the payments made as fee for services rendered or the commission paid to commission agents or brokers, and, therefore, Circular Nos. 661 and 681, dated 8-10-1993 and 8-3-1994, respectively, directing the authorities under the Act to give effect to the provisions of section 194C as against commission agents, brokers, lawyers, chartered accountants, etc., are not within the scope of section 194C - S.R.F. Finance Ltd. v. CBDT [1994] 76 Taxman 432 (Delhi).

In the result, the two impugned Circulars No. 661, dated 8-10-1993 and No. 681, dated 8-3-1994 were quashed to the extent the said circulars govern the payments to the commission agents and brokers for the services rendered by them; further, it was declared that section 194C does not operate on such payments and the respondents were restrained from enforcing them.

Per Court - It should be borne in mind that a Judge while writing his judgment would be focussing his attention on the immediate problem before him. The Court is concerned with the particular facts of the case. The law to be applied to these facts has to be identified and in some cases elaborated. Court may not envisage the possible constructions that are likely to be placed in future, on each and every sentence found in the judgment. Each sentence, normally, has a connection to the sentence preceding it and that idea contained in it normally emanates from the earlier process of consideration which leads to the next step. A sentence may reflect a particular reasoning. Every reason is a link to the ultimate conclusion, linking the thought process to each other, from its commencement to the end. Therefore, to lift a sentence from a judgment, as if it is an independent provision in a statute and emphasise it as declaring the law, will result in unanticipated and unexpected consequences.

Doctrine of contemporanea expositio is not confined strictly to the interpretation of ancient statutes. There are several instances in which the Supreme Court applied the doctrine to interpret the recent fiscal legislations.

Note : SLP rejected [Source : [1995] 212 ITR 375 (St.)]

n Section 194C is inapplicable to payments of fees for professional services, thus Circular No. 681 issued by CBDT on 8-3-1994 requiring deduction of tax at source under section 194C in respect of payments of fees for professional services is illegal, based on an erroneous reading of observations of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435, in regard to true meaning and import of word work appearing in section 194C(1) - Chamber of Income-tax Consultants v. CBDT [1994] 75 Taxman 669/209 ITR 660 (Bom.).

n Circular No. 681, dated 8-3-1994 to the extent it purports to govern profession of advocates, architects and chartered accountants is ultra vires the provisions of section 194C - High Court Bar Association v. CBDT [1995] 81 Taxman 324 (Delhi).

n Circular No. 681, dated 8-3-1994, issued by the CBDT is being violative of articles 14 and 265 of the Constitution of India and opposed to section 194C of the Act, insofar as it requires deduction at source from payments made by way of professional fees to advocates, solicitors, chartered accountants, tax practitioners, etc., for the services rendered by them - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.)

When a client engages an advocate, prima facie relationship of advocate and client is not one of contract falling within ambit of section 194C - Andhra Pradesh Tax Bar Association v. CBDT [1994] 118 CTR (AP) 281.

n Engagement for professional service or services simpliciter which do not involve contract for carrying out any work itself, or contract for labour for carrying out such services, are not within the purview of section 194C - All Gujarat Federation of Tax Consultants v. CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.).

n Circular No. 681, dated 8-3-1994 of CBDT to the extent it purports to rope in profession of architects within the ambit of section 194C, is invalid - Indian Institute of Architects v. CBDT [1995] 81 Taxman 309 (Delhi).

n CBDT Circular No. 681 to the extent it purports to extend provisions of section 194C to activities of persons conducting tours and arranging hotel accommodation for tourists, is ultra vires and unenforceable - Indian Association of Tour Operators v. CBDT [1995] 81 Taxman 340 (Delhi).

n Circular No. 681, dated 8-3-1994 of CBDT is illegal and without jurisdiction insofar as it purports to make provisions of section 194C applicable to payments made to advertising agencies for professional services rendered by them; therefore, requirements of section 194C would not apply to payments made to advertising agents rendering professional services - Advertising Agency Association of India v. CBDT [1994] 76 Taxman 352/210 ITR 152 (Bom.).

n Payment made to advertising agencies or agents for rendering professional services are not covered by section 194C - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.).

n Contracts for advertising, contract of goods, transport simpliciter, persons engaged in the business of broker as commission agent without carrying out any work for their principal, or professionals redering professional services by charging fees in the course of their profession, are not emenable to the provisions of section 194C - All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).

n CBDT circular No. 681, dated 8-3-1994 is based on an erroneous reading of decision of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435/67 Taxman 346 and certain observations made therein and, therefore, it is illegal and without jurisdiction insofar as it requires deduction of tax at source under section 194C from payments made under contracts for mere carriage of goods which do not include any other services like loading and unloading and are not in any way connected with any work to be performed by carrier - Bombay Goods Transport Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).

Note : SLP granted [Source : [1995] 212 ITR 375 (St.)]

n Circular No. 681, dated 8-3-1994 is ultra vires the provisions of section 194C insofar as it purports to cover cases of actual carriage of goods on hire in case of truck-owners/transporters - Delhi Goods Transport Association v. CBDT [1995] 80 Taxman 525 (Delhi).

n Section 194C will not apply to transport contracts for mere carriage of goods - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.).

n Amount of two per cent required to be deducted by payer out of sum credited to account of or paid to contractor is not to be confined to his income component out of that sum, but it has to be deducted on sum credited to account of or paid to contractor in pursuance of contract - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 (SC).

n Circular No. 681 issued by the Board in so far as it provides that the transport contracts fall within the mischief of section 194C, is legal and valid - Ekonkar Dahsmesh Transport Co. v. CBDT [1996] 219 ITR 511 (Punj. & Har.).

n CBDT Circular No. 681, dated 8-3-1994 requiring deduction at source from payments to professionals, i.e., lawyers, chartered accountants, doctors, engineers, architects etc., is beyond the scope of Boards powers under section 119 and, therefore, liable to be quashed - Rakesh Raj & Associates v. CBDT [1997] 223 ITR 282/91 Taxman 158 (Punj. & Har.).

n There is no infirmity in CBDT Circular No. 681, dated 8-3-1994, making section 194C applicable to transport contracts. It was issued under the authority of law and within the jurisdiction and competence of the Board - Birla Cement Works v. CBDT [1997] 95 Taxman 377 (Raj.).

n CBDT Circular No. 681, dated 8-3-1994 to the effect that transport contracts in general come within the purview of section 194C, is erroneous and illegal - Sethi Transport v. CBDT [1997] 226 ITR 274 (Ori.).

n CBDTs Circular No. 681 extending purview of section 194C to transport contracts for mere carriage of goods is based on a misreading and misconstruction of judgment of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 and therefore, said circular to that extent is erroneous and illegal - Inter State Transporters Association v. CBDT [1997] 93 Taxman 227 (Ori.).

n Circular No. 681, dated 8-3-1994 making section 194C applicable to professionals is not valid in respect of period up to 30-6-1995 - Rajasthan Tax Consultants Association v. CBDT [1998] 229 ITR 657 (Raj.).

n Question of deduction of tax at 2 per cent from payment made to contractor has to be decided independent of CBDT Circular No. 681, dated 8-3-1994 which is issued only as guideline in regard to applicability of section 194C - All Gujarat Federation of Tax Consultant v. CBDT [1994] 76 Taxman 307 (Guj.).

Explained in : Birla Cement Works v. CBDT [2001] 248 ITR 216 (SC), in following words :

It is evident that Associated Cement Co. Ltd.s case [1993] 201 ITR 435 (SC), was not in respect of transport contracts. The controversy therein was deduction of tax at source from payments made for loading and unloading of goods. The question whether the expression carrying out any work would include therein carrying of the goods or not, was not in issue in Associated Cement Co. Ltd.s case [1993] 201 ITR 435 (SC). That is precisely the question in the present case. The decision in Associated Cement Co. Ltd.s case [1993] 201 ITR 435 (SC) has not been correctly understood by the Central Board of Direct Taxes. It would not be correct to come to the conclusion, as the Central Board of Direct Taxes did, that the question involved is covered by the decision in the case of Associated Cement Co. Ltd.s case [1993] 201 ITR 435 (SC). (pp. 229, 230)

... If the only view of section 194C had been the one reflected in the impugned circular, then the issue of earlier circulars and acceptance and acting thereupon by the Revenue reflecting the contrary view would have been of no consequence. That, however, is not the position. Further, there are no compelling reasons to hold that Explanation III inserted in section 194C with effect from July 1, 1995, is clarificatory or retrospective in operation. We hold that section 194C before insertion of Explanation III is not applicable to transport contracts, i.e., contracts for carriage of goods.

For the aforesaid reasons the appeal is allowed, the impugned circular to the extent it relates to transport contracts is quashed. (p. 231)

Explained in : Chief Electoral Officer v. ITO [1999] 68 ITD 439 (Chd.) in following words:

The contents of para 7(vi)(b) and (c) of Circular No. 681 which are still valid and binding on the departmental authorities cannot be ignored. It is clearly mentioned in sub-clause (b) of clause (vi) of para 7 that where the contractor undertakes to supply any article or thing fabricated according to the specifications given by the Govt. or any other specified person and the property in such article or thing passes to the Govt. or such person only after such article or thing is delivered, the contract will be a contract for sale and outside the purview of section 194C. (p. 455)

Circular : No. 682, dated 30-3-1994.

1605B. Clarification regarding agreement for avoidance of double taxation with Mauritius

1. A Convention for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes of income and capital gains was entered into between the Government of India and the Government of Mauritius and was notified on 6-12-1983. In respect of India, the Convention applies from the assessment year 1983-84 and onwards.

2. Article 13 of the convention deals with taxation of capital gains and it has five paragraphs. The first paragraph gives the right of taxation of capital gains on the alienation of immovable property to the country in which the property is situated. The second and third paragraphs deal with right of taxation of capital gains on the alienation of movable property linked with business or professional enterprises and ships and aircrafts.

3. Paragraph 4 deals with taxation of capital gains arising from the alienation of any property other than those mentioned in the preceding paragraphs and gives the right of taxation of capital gains only to that State of which the person deriving the capital gains is a resident. In terms of paragraph 4, capital gains derived by a resident of Mauritius by alienation of shares of companies shall be taxable only in Mauritius according to Mauritius tax law. Therefore, any resident of Mauritius deriving income from alienation of shares of Indian companies will be liable to capital gains tax only in Mauritius as per Mauritius tax law and will not have any capital gains tax liability in India.

4. Paragraph 5 defines alienation to mean the sale, exchange, transfer or relinquishment of the property or the extinguishment of any rights in it or its compulsory acquisition under any law in force in India or in Mauritius.

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

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.

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.

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

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.

FINANCE ACT, 1994 - CIRCULAR NO. 684, DATED 10-6-1994

• Amendments at a glance
• Rate structure
• Amendments to Income-tax Act
• Amendments to Wealth-tax Act
• Amendments to Gift-tax Act
• Amendments to Expenditure-tax Act

Circular : No. 685,686, dated 17-6-1994.

Section 201 l Consequence of failure to deduct or pay

1190. Non-initiation of penalty and prosecution proceedings in certain cases of defaulters under Chapter XVII-B

It has come to the notice of the Board that some of the employers, including foreign companies operating in India, have been defaulting in deducting tax at source as required under section 192, on the salaries and allowances paid abroad, or perquisites provided abroad, to their employees for services rendered in India. In some cases, tax might have been deducted at source, but not remitted to Government. All payments and perquisites to employees for services rendered in India are taxable in India irrespective of the place where the payment occurs. The employers are, therefore, liable to deduct tax at source even on payment of salary, allowances and perquisites paid or provided abroad to their employees who have rendered service in India. They are also required to remit such deducted tax to Government. Failure to comply with these requirements would render the employer an assessee in default, and would attract interest under section 201(1A). Penalties under sections 221 (assessee in default) and 271C (failure to deduct tax) are then leviable and prosecution proceedings under section 276B can also be initiated in such cases.

2. To encourage immediate voluntary compliance, the Board has decided that proceedings under sections 221 and 271C for levy of penalties and proceedings under section 276B for prosecution need not be initiated in cases where an employer voluntarily comes forward and pays the whole of the tax due under section 192, along with interest liability under section 201(1A) on or before July 31, 1994.

3. Employers (Indian and foreign), who committed default in the past are advised to make use of this opportunity to pay up arrears of TDS (tax deductible at source) together with interest on or before 31-7-1994 and avoid penalty and prosecution proceedings.

4. Wide publicity may be given regarding this opportunity.

5. From 1-8-1994, penalty provisions under sections 221 and 271C and prosecution provisions under section 276B will be strictly implemented according to law.

Clarification 1

Reference is invited to Boards Circular No. 685, dated 20-6-1994 (File No. 275/69/94-ITB) providing for non-initiation of proceedings under section 221/276B/271C of the Income-tax Act, 1961 in respect of employers defaulting in deducting tax at source on the salaries and allowances paid abroad or perquisites provided abroad to their employees for services rendered in India. Doubts have been raised in some quarters as to whether, due to the disclosure of the excess salary payments by the employers, any consequential action will be taken in the hands of the employees.

2. The Board has considered the matter. The spirit behind issue of Circular No. 685 dated 20-6-1994 was to encourage immediate voluntary compliance on the part of the employers defaulting in tax deduction. In order that this intention is fully achieved. Accordingly the Board has decided that the assessments of the employees, in respect of whom payments of short-deduction and interest thereon are made by the employers in pursuance of Circular No. 685 dated 20-6-1994, will not be reopened or otherwise disturbed merely on account of the excess salary payments now disclosed by the employers.

Circular : No. 686, dated 12-8-1994.

Clarification 2

It has come to the notice of the Board that some employers are not correctly evaluating the perquisites, allowances or other profits in lieu of or in addition to any salary of wages (referred to as salaries hereinafter) paid to their employees for the purpose of deducting tax at source under section 192 of the Income-tax Act, 1961. Such defaulters are liable to penalty proceedings under sections 221 and 271C of the Act, and also liable to prosecution under Chapter XXII of the Act.

2. However, before taking stringent measures, the Board has decided to grant an opportunity to such defaulters. Even now if they pay the proper tax on salaries as envisaged under section 192 along with interest liability under section 201(1A) of the Act no penalty proceedings under section 221 or prosecution under Chapter XXII of the Act shall be initiated provided such payment is made on or before February 28, 1995.

3. This circular shall also cover such cases which were earlier covered by Circular No. 685, dated 17th June, 1994, where the facility was extended in respect of salaries and allowances paid abroad or perquisites provided abroad to the employee for services rendered in India. The time limit of 31st July, 1994, was fixed by Circular No. 685 (which was later extended to 31st August, 1994) is now extended to 28th February, 1995.

4. The contents of this circular may be brought to the notice of all the assessees especially those responsible for deducting tax under section 192, so that they can avail of this opportunity. It may be emphasised that the Department will intitate coercive steps to recover the due tax, which was not deducted at source and/or not paid to the Government before 28th February, 1995.

5. The circular will apply in respect of the assessment years beginning from 1989-90 till the assessment year 1994-95.

Circular : No. 696, dated 16-12-1994.

Circular : No. 687, dated 19-8-1994.

454. Taxability of interest accrued on the Kisan Vikas Patras

Kisan Vikas Patras were introduced on 1st April, 1988. The Department of Economic Affairs, Ministry of Finance, in its notifications dated 23-3-1988[`2] 1, 16-12-1991[`3] 2, 24-4-1992[`4] 3 and 2-9-1993[`5] 4 had specified the amount payable on these after 2 years and up to the date of maturity. However, interest and maturity amount during 2 years had not been provided in these notifications.

2. As interest on these Patras has to be assessed to income-tax on accrual basis, the amount of interest accrued on these Patras during initial 2 years has also been determined in consultation with the Department of Economic Affairs. The amount of interest accrued on investment in Kisan Vikas Patras by an assessee is to be calculated on the basis of the following table received from the Department of Economic Affairs wherein rate of interest and maturity amount for Rs. 100 denomination of Kisan Vikas Patras are given :

Period from the date of certificate to the date of its Encashment	Purchased from 1-4-1988 to 15-12-1991		Purchased from 16-12-1991 to 23-4-1992		Purchased from 24-4-1992 to 1-9-1993		Purchased from 2-9-1993
	Rate of interest	Maturity value	Rate of interest	Maturity value	Rate of Interest	Maturity value	Rate of Interest	Maturity value
	(Notification dated 23-3-1988)		(Notification dated 16-12-1991)		(Notification dated 24-4-1992)		(Notification dated 2-9-1993)
(1) 1 Year	10	1,100	12	1,120	12	1,120	11	1,110
(2) 2 Years	10	1,220	12	1,260	12	1,260	11	1,240
(3) 2 Years &   6 Months	10	1,280	12	1,340	12	1,340	11	1,310
(4) 3 Years	11	1,380	13	1,460	13	1,460	12	1,420
(5) 3 Years &   6 Months	11	1,450	13	1,550	13	1,550	12	1,500
(6) 4 Years	12	1,590	13.5	1,690	13.5	1,690	12.5	1,620
(7) 4 Years &   6 Months	12	1,690	13.5	1,800	13.5	1,800	12.5	1,730
(8) 5 Years	13	1,880	13.75	1,940		2,000	12.75	1,860
(9) 5 Years &   6 Months		2,000		2,100				2,000

Note : Maturity values cited are calculated on half-yearly compounding basis based on the rate of interest cited.

Circular : No. 688, dated 23-8-1994.

SECTION 80E[`6] 2 l REPAYMENT OF LOAN TAKEN FOR HIGHER EDUCATION

518. Whether graduate or post-graduate studies in Engineering would include studies in architecture

A doubt has been raised whether graduate or post-graduate courses in architecture would be covered as a branch of engineering for the purpose of the tax concession under section 80E of the Income-tax Act.

2. It is hereby clarified that, for the purposes of section 80E, graduate or post-graduate, studies in engineering would include such studies in architecture.

Circular : No. 689, dated 24-8-1994.

SECTION 143(1)(a[`7] *) l PRIMA FACIE ADJUSTMENTS

864. Scope of prima facie disallowances under section 143(1)(a)

Section 143(1)(a) authorises, with effect from assessment year 1989-90, inter alia, disallowance of any loss carried forward, deduction, allowance or relief claimed which, on the basis of information available in the return or the accompanying accounts or documents, is prima facie inadmissible. The earlier instructions of the Board were to the effect that no disallowance should be made of items on which two opinions are possible. The matter has been further considered by the Board in the light of the recommendations of the Tax Reforms Committee headed by Prof. Raja J. Chelliah and it has been decided that prima facie disallowance shall be made only in respect of the following types of claims :

(a) an incorrect claim, if such incorrect claim is apparent from the existence of other information in the return or the accompanying accounts or documents.

EXAMPLE

If a deduction has been claimed under the head Capital Gains under section 54F, and if there is information in the return of income or the accompanying accounts or documents to show that the unutilised net consideration had not been deposited in an account specified in the notified scheme as stipulated under section 54F(4), the claim is incorrect and can be disallowed as a prima facie adjustment.

(b) any claim in respect of which there is an omission of information which is required, under the specific provisions of the Act or the Rules, to be furnished along with the return to substantiate such claim :

EXAMPLE

If the audit report specified under section 80HHC(4), which is required to be filed along with the return of income, is not so filed, the deduction claimed under that section can be disallowed as a prima facie adjustment. Some more examples in this regard are the non-filing of audit reports or other evidence along with the return of income as required under section 12A(b), 33AB(2), 35E(6), 43B (first proviso), 54(2), 54B(2), 54D(2), 54F(4), 54G(2), 80HH(5), 80HHA(4), 80HHB(3), 80HHD(6), 80HHE(4), 80-I(7), 80-IA(8) and the like. But if evidence is subsequently furnished, rectification under section 154 should be carried out to the extent permitted by Boards Circular No. 669, dated 25-10-1993. No prima facie disallowance shall however be made if any evidence, required to be filed along with the return of income only in pursuance of the non-statutory guidance notes for filling in the return of income, is not so filed.

(c) A claim for deduction or rebate of any amount which exceeds statutory limit imposed, if such limit is expressed either as a specific mandatory amount or as a percentage, ratio or a fraction, and if the information relevant to application of the statutory limits appear in the return or the accompanying accounts or documents.

EXAMPLE

(i) If under section 24(1)(i) the deduction in respect of repairs and collection charges to claimed in excess of 1/5th of the annual value (applicable with effect from assessment year 1993-94), such excess can be disallowed as a prima facie adjustment.

(ii) If the rebate on contribution eligible under section 88 is claimed in excess of 20 per cent of such contribution, the excess can be disallowed, provided there is indication of the total amount of such contribution in the return or the accompanying accounts or documents.

(d) Any claim which is patently inadmissible in law.

EXAMPLE

Deduction of items like income-tax, wealth-tax, personal expenses, depreciation claimed on conveyance under the head salary, depreciation claimed under the head house property and the like. The items of disallowance should be such that no two opinions are possible on their inadmissibility.

3. The Board desires that no other prima facie disallowance should be made except with the previous approval of the Commissioner of Income-tax who will, after according approval in suitable cases, bring the same to the notice of the Board.

4. The above procedure applies to all returns pending processing under section 143(1) on the date of issue of this Circular.

Judicial Analysis

In Kamaljeet Singh Ahluwalia v. Dy. CIT [2000] 113 Taxman 120 (Jp. - Trib.) (Mag.) it was held that Circular No. 689 being benevolent in nature is binding on the revenue.

EXPLAINED IN - ACIT v. R.R. Hosiery (P.) Ltd. [1999] 68 ITD 25 (Mum. - Trib.) in following words:

The Board had issued a Circular No. 689, dated 24-8-1994 which permits the Assessing Officer to take into consideration the evidence furnished subsequent to the passing of the intimation under section 143(1)(a).

It may be observed that the above Circular No. 669 permits the Assessing Officer to entertain evidence furnished along with the application for rectification under section 154 even after completion of the assessment under section 143(3). We are of the view that these beneficial circulars have to be given due effect. (pp. 30 & 31)

EXPLAINED IN - ITO v. Mandira D. Vakharia [2001] 250 ITR 432 (Kar.), in following words :

The intention of the Board is clear (in Circular No. 689, dated 24-8-1994). The illustrations and instances referred to in the Board circular are qualified by the words ... and the like. The illustrations and instances given by the Board are not exhaustive. The intention behind the Board circular is that in case the audit report required to be filed, was not furnished with the return of income, then the deduction claimed can be disallowed as a prima facie adjustment. But, if it is furnished subsequently, then rectification should be carried out to the extent permitted by the Board Circular No. 669, dated October 25, 1993. The illustrations given in the Board circular, being not exhaustive, it would include provisions like sections 80HHE and 80GG as well. The assessee has claimed the same relief as would have been admissible to an assessee who was claiming deduction under section 80HHC(4) and other sections mentioned in the Boards circular. The assessee claiming deduction under sections 80HHE and 80GG of the Act would be similarly situated as an assessee claiming deduction under section 80HHC(4) of the Act or other provisions mentioned in the Board circular. The use of the words ...and the like, in the Board circular, would include the assessees who are claiming a similar relief although the provision of the Act is not specifically mentioned in the Board circular. (p. 435)

CLARIFICATION ONE

In the context of the legal position as outlined above, it follows that it will not be permissible for the Assessing Officer to disallow a claim for deduction, allowance or relief in case where the claim is made on the basis of the decision of any High Court, Appellate Tribunal or other Appellate Authority, even though a contrary view in the matter may have been expressed by another High Court or another Bench of the Tribunal or any other appellate authority. The fact that the claim is based on a decision which had not been accepted by the Board will also not make any difference to this position.

Instruction : No. 1814, dated 4-4-1989. [Asstt. CIT v. Smt. Geeta Mayor [2000] 74 ITD 321 (Ahd.)

Circular : No. 690, dated 1-9-1994.

Financial Year 1994-95

1673. Instructions for deduction of tax at source from salary - Rate of tax for the financial year 1994-95

1. Reference is invited to Boards Circular No. 654, dated the 22nd July, 1993, wherein the rates of deduction of income-tax from the payment of income under the head Salaries under section 192 of the Income-tax Act, 1961, during the financial year 1993-94, were intimated. The present circular contains the rates of deduction of income-tax from the payment of income chargeable under the head Salaries during the financial year 1994-95 and explains certain related provisions of the Income-tax Act.

2. The Finance Act, 1994, has raised the income-tax exemption limit for individuals from Rs. 30,000 to Rs. 35,000. The tax rate of 20 per cent will apply to the income slab of Rs. 35,000 to Rs. 60,000; tax rate of 30 per cent will apply to income slab of Rs. 60,001 to Rs. 1,20,000, and of 40 per cent will apply to incomes above Rs. 1,20,000. The surcharge of 12 per cent has been abolished by the Finance Act, 1994, in the case of individuals from the financial year 1994-95, onwards. An extract of Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Finance Act, 1994, containing the tax rates applicable, is given at Annexure I.

3. 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 1994-95 is given hereunder :

(i) 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 under this head. The provisions of sub-section (3) of the said section are intended for making adjustment for any excess or shortfall in the deduction of tax made during the financial year. 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. No tax will, however, be deducted at source in any case unless the estimated salary income, including the value of perquisites, for the financial year, exceeds Rs. 35,000. (Some typical examples of computation of tax are given 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 to 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. It may be noted that, since salary includes pensions, tax at source would have to be deducted from pension also, if otherwise called for. However, no tax is required to be deducted from the commuted portion of pensions as explained in para 4(iii) of this Circular.

(iii) The value of perquisites by way of free or concessional 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 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 perquisites received by the employee unless the employees income under the head Salary 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 of tax deduction at source.

Exemptions/Deductions in computing total income

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

(i) The value of any travel concession or assistance received by or due to an employee from his employer or former employer for himself and his family, in connection with his proceeding (a) on leave to any place in India, or (b) on retirement from service, or after termination of service to any place in India is exempt under clause (5) of section 10 subject, however, to the conditions prescribed in rule 2B of the Income-tax Rules, 1962. For the purpose of this clause, family in relation to an individual means

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

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

It may also be noted that the amount exempt under this clause shall in no case exceed the amount of expenses actually incurred for the purpose of such travel.

(ii) Death-cum-retirement gratuity or any other gratuity is exempt to the extent specified from inclusion in computing the total income under clause (10) of section 10.

(iii) Any payment in commutation of pension received under the Civil Pension (Commutation) Rules of the Central Government or under any similar scheme applicable to the members of the civil services of the Union, or holders of civil posts/posts connected with defence, under the Union, or civil post under a State, or to the members of the All India Services/Defence Services, or to the employees of a local authority or a corporation established by a Central, State or Provincial Act, is exempt under sub-clause (i) of clause (10A) of section 10. As regards payments in commutation of pension received under any scheme of any other employer, exemption will be governed by the provisions of sub-clause (ii) of clause (10A) of section 10.

(iv) 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 on superannuation or otherwise, is exempt under sub-clause (i) of clause (10AA) of section 10. In the case of other employees, this exemption will be determined with reference to the leave to their credit at the time of retirement on superannuation, or otherwise, subject to a maximum of eight months leave. This exemption will be further limited to the maximum amount specified by the Government of India from time to time. Presently, this limit has been specified in the Government of India Notification No. S.O. 553 (E) [F.No. 142/11/88-TPL], dated 8-6-1988, at Rs. 79,920.

(v) 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 workmen in the undertaking to which the scheme applies and other relevant circumstances.

(vi) Under section 10(10C), as amended by the Finance Act, 1994, any payment received by an employee of the following bodies at the time of his voluntary retirement is exempted from income-tax to the extent of Rs. 5 lakhs, provided the scheme of voluntary retirement has been framed in accordance with the guidelines prescribed under rule 2BA of the Income-tax Rules, 1962 :

(a) A public sector company;

(b) Any other company;

(c) An authority established under a Central, State or Provincial Act;

(d) A local authority;

(e) A cooperative society;

(f) A university established or incorporated by or under a Central State or Provincial Act or an institution declared to be a university under section 3 of the University Grants Commission Act, 1956.

(g) An Indian Institute of Technology within the meaning of clause (g) of section 3 of the Institutes of Technology Act, 1961;

(h) Such institute of management as the Central Government may, by notification in the Official Gazette, specify in this behalf.

It may also be noted that where this exemption has been allowed to any employee for any assessment year, it shall not be allowed to him for any other assessment year. It may be further noted that any such scheme in relation to a company referred to at (b) above, and a co-operative society referred to at (e) above, has to be approved by the Chief Commissioner, or, as the case may be, Director General of Income-tax.

(vii) 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

(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 1/10th 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 salaried employees drawing house rent allowance up to Rs. 600 per month will be exempted from production of rent receipt. It may, however, be noted that this concession 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.

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

(a) 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.

(b) 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.

However, the allowance referred to in (b) above should not be in the nature of a 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 his place of posting or residence.

By Notification Nos. S.O. 143(E), dated 21-2-1989, S.O. 144(E), dated 21-2-1989 [as amended by Notification Nos. S.O. 259(E), dated 27-3-1990 and S.O. 487(E), dated 1-7-1992], G.S.R. 606(E), dated 9-6-1989 and S.O. 267(E), dated 29-3-1990 the Central Government have specified the following allowances as exempt 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;

(c) Tribal 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;

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

(h) Any special compensatory allowance in the nature of a composite hill compensatory allowance or high altitude allowance or uncongenial climate allowance or snowbound area allowance or avalanche allowance; and

(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 profits; 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 the 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. The reimbursement of tuition fee is also not exempt from tax.

(ix) Under section 10(15)(iv)(i) of the Income-tax Act, interest payable by the Government on deposits made by an employee of the Central Government or a State Government or a public sector company from out of his retirement benefits. In accordance with the 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.

(x) (a) Under section 16 of the Income-tax Act, as amended by the Finance Act, 1993, the taxable salary is to be computed after making a standard deduction equal to 33¹/₃ per cent of the salary, subject to the following limits:

(i) Rs. 18,000 in the case of working women whose total income, before making the standard deduction, does not exceed Rs. 75,000 in the financial year;

(ii) Rs. 15,000 in any other case, not covered by (i).

For this purpose, the term salary will include fees, commissions, perquisites, or , profits in lieu of, or, in addition to salary, but will not include any payment received by the employees which is specifically exempt under clauses (10), (10A), (10AA), (10B), (10C), (10D), (11), (12), (13A) and (14) of section 10 of the Act. Thus, for example, 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 standard deduction. This deduction will be available also to all persons drawing pension during the current financial year at the same rate and subject to the ceiling of Rs. 15,000.

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 deduction is also allowed under clause (ii) of section 16 in respect of any allowance in the nature of an entertainment allowance specifically granted to the assessee by his employer subject to certain limits. In the case of a Government employee, a sum equal to one-fifth of his salary (exclusive of any allowance, benefit or other perquisite) or five thousand rupees or the actual amount of entertainment, allowance, whichever is the least, is allowable as deduction. In the case of a non-Government employee, deduction for entertainment allowance to the extent specified in sub-clause (b) of clause (ii) of sectoin 16 will be given only if the allowance is regularly received by him from his present employer from a date prior to 1st April, 1955.

(xi) Under section 17, as amended by the Finance Act, 1994, exemption from tax will also be available in respect of :

(a) the value of any medical treatment provided to an employee or any member of his family, in any hospital maintained by the employer;

(b) any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or of any member of his family

(i) in any hospital maintained by the Government or any local authority or any other hospital approved by the Government for the purposes of medical treatment of its employees;

(ii) in respect of the prescribed diseases or ailments, in any hospital approved by the Chief Commissioner having regard to the prescribed guidelines :

Provided that, in a case falling in sub-clause (ii), the employee shall attach with his return of income a certificate from the hospital specifying the disease or ailment for which medical treatment was required and the receipt for the amount paid to the hospital.

It may be noted that the benefit in respect of the perquisite mentioned in (b) above is allowable retrospectively with effect from the 1st day of April, 1993;

(c) premium paid by the employer in respect of medical insurance taken for his employees (under any scheme approved by the Central Government) or reimbursement of insurance premium to the employees who take medical insurance for themselves or for their family members (under any scheme approved by the Central Government);

(d) reimbursement, by the employer, of the amount spent by an employee in obtaining medical treatment for himself or any member of his family from any doctor, not exceeding in the aggregate, Rs. 10,000 in a year;

(e) As regards medical treatment abroad, the actual expenditure on stay and treatment abroad of the employee or any member of his family, or, on stay abroad of one attendant who accompanies the patient, in connection with such treatment, will be excluded from perquisites to the extent permitted by the Reserve Bank of India. As regards the expenditure incurred on travel abroad by the patient/attendant, it shall be excluded from perquisites only if the employees gross total income, as computed before including the said expenditure does not exceed Rs. 2 lakhs.

(xii) Under section 80D, in the case of the following categories of persons, a deduction can be allowed for a sum not exceeding Rs. 6,000 per annum to the extent payment is made by the cheque out of their income chargeable to tax to keep in force an 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 association or body or on the health of the dependent children of the members of such an association or body.

(xiii) Under section 80DD deduction of Rs. 15,000 is allowed in the case of resident individuals who incur expenditure on the medical treatment (including nursing), training and rehabilitation of a handicapped dependent relative, suffering from permanent physical disability (including blindness) or mental retardation, specified in rule 11A of the Income-tax Rules, 1962. The deduction will be available to all assessees without any restriction with regard to their total income. 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, including a departmental dispensary or a hospital maintained by a local authority as per Explanation given below section 80DD. The Drawing and Disbursing Officers should, therefore, call for such particulars/certificates/information from the employees as they deem necessary to verify the genuineness of the claim before they allow this deduction.

(xiv) Under section 80E which has been introduced into the Income-tax Act, 1961 by the Finance Act, 1994, with effect from 1-4-1995 (i.e., applicable in respect of assessment year 1995-96 and subsequent years), a deduction will be allowed in respect of repayment of loan taken for higher education subject to the following conditions :

(1) In computing the total income of an assessee, being an individual, there shall be deducted, in accordance with and subject to the provisions of this section, any amount paid by him in the previous year, out of his income chargeable to tax, by way of repayment of loan, taken by him from any financial institution or any approved charitable institution for the purpose of pursuing his higher education, or interest on such loan :

Provided that the amount which may be so deducted shall not exceed twenty-five thousand rupees.

(2) The deduction specified above shall be allowed in computing the total income in resepct of the initial assessment year and seven assessment years immediately succeeding the initial assessment year or until the loan referred to above together with interest thereon is paid by the assessee in full, whichever is earlier.

(3) For this purpose,

(a) approved charitable institution means an institution established for charitable purposes and notified by the Central Government under clause (23C) of section 10, or, an institution referred to in clause (a) of sub-section (2) of section 80G;

(b) financial institution means a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act); or, any other financial institution which the Central Government may, by notification in the Official Gazette, specify in this behalf;

(c) higher education means full-time studies for any graduate or post-graduate course in engineering, medicine, management, or, for post-graduate course in applied sciences or pure sciences, including mathematics and statistics;

(d) initial assessment year means the assessment year relevant to the previous year, in which the assessee starts repaying the loan or interest thereon.

(xv) No deduction should be allowed by the D.D.O. from the salary income in respect of any donations made 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 in the return of income. However, in cases where contributions are made to the National Defence Fund, the Jawaharlal Nehru Memorial Fund, the Prime Ministers Drought Relief Fund, the National Childrens Fund, the Indira Gandhi Memorial Trust or the Rajiv Gandhi Foundation, fifty per cent of such contributions may be deducted in computing the total income of the employee. Similarly, the donations to the Prime Ministers National Relief Fund, the Prime Ministers Armenia Earthquake Relief Fund, the Africa (Public Contributions - India) Fund, and, the National Foundation for Communal Harmony, and the Chief Ministers Earthquake Relief Fund, Maharashtra will be eligible for hundred per cent deduction. The existing restriction in section 80G that deduction will be allowed only if the aggregate of donations made in a year is Rs. 250 or more, has been removed by the Finance Act, 1994. Now, all eligible donations, without any lower limit, will be deductible under the provisions of section 80G with effect from 1-4-1994 (i.e., for assessment year 1994-95 and subsequent years).

(xvi) 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 has 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 deduction under section 80GG;

(c) The assessee does not own :

(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, Jabalpore, 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.

(xvii) Section 80RRA provides that where the gross total income of an individual who is a citizen of India, includes any remuneration received by him in foreign currency from any employer (i.e., a foreign employer or an Indian concern) for any services rendered by him outside India, 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 the 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 purposes of deduction under section 80RRA. Likewise, if a part of the remuneration, although paid in foreign currency relates to service 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 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).

(xviii) Section 80U allows deduction of a sum of twenty thousand rupees in computing the total income of a resident individual, who at the end of the previous year, is suffering from a permanent physical disability (including blindness) or is subject to mental retardation, being a permanent physical disability, or mental retardation, specified in rule 11D of the Income-tax Rules, 1962, which is certified by a physician, surgeon, oculist or psychiatrist as the case may be, working in a Government hospital and which has the effect of reducing considerably such individuals capacity for normal work or engaging in a gainful employment or occupation. The expression Government hospital will include a departmental dispensary or a hospital maintained by a local authority as specified in the Explanation given below section 80DD.

Tax rebate

5. According to section 88, an assessee will be entitled to a rebate (subject to the specified limits) in respect of the amounts invested or deposited in the following items, during the previous year, out of his income chargeable to tax, 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 payment made on a policy as is not in excess of 10 per cent of the 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 as is referred to in item (viii) hereinbelow 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, in so far 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 Fund 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 contributions is to an account standing in the name of an individual, or a minor, of whom he is the guardian;

(c) by an employee to a recognised provident fund;

(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 or any such deposit scheme as the Central Government may, by notification in the Official Gazette, specify in this behalf;

(b) to any such saving certificates 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) and NSC (VIII 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-liked insurance plan of the LIC Mutual Fund notified by the Central Government under clause (23D) of section 10;

(viii) Any payment made to effect or keep in force a contract for such annuity plan of the Life Insurance Corporation as the Central Government may, by notification in the Official Gazette, specify;

(ix) Any subscription not exceeding rupees ten thousand, made to any units of any Mutual Fund, notified under clause (23D) of section 10, or, of the Unit Trust of India established under the Unit Trust of India Act, 1963, under any plan formulated in accordance with any such scheme as the Central Government may, by notification in the Official Gazette, specify in this behalf;

(x) Any contribution made by an individual to any pension fund set up by any Mutual Fund notified under clause (23D) of section 10, or, by the Unit Trust of India established under the Unit Trust of India Act, 1963, as the Central Government may, by notification in the Official Gazette, specify in this behalf;

(xi) Any subscription made to any such deposit scheme of, or, any contribution made to any such pension fund set up by, the National Housing Bank, as the Central Government may, by notification in the Official Gazette, specify in this behalf;

(xii) Any subscription made to any such deposit scheme (not being a scheme the interest on deposits whereunder qualifies for deduction under section 80L), as the Central Government may, by notification in the Official Gazette, specify for the purpose of being floated by (a) public sector companies engaged in providing long-term finance for construction or purchase of houses in India for residential purposes, or, (b) any authority constituted in India by, or, under any law, enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both;

(xiii) Any sums paid by an assessee for the purpose of purchase or construction of a residential house property, 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 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 repayment 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 or a co-operative society. 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 any addition or alteration 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 tax-payer 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 1994-95, no tax rebate in respect of these items shall be admissible to the employees.

6.1 Subject to the limits mentioned for the various items, the entitlement to tax rebate will be calculated at the rate of 20 per cent of the total amount of the aforesaid savings, etc., in the case of individuals, and, at the rate of 25 per cent in the case of an author or playwright or artist or musician or actor or sportsman (including an athlete) whose income derived from the exercise of his profession as such author/playwright/artist/musician/actor/sportsman/athlete constitutes twenty-five per cent or more of his total income.

The maximum tax rebate allowable will be Rs. 12,000 generally, and Rs. 17,500 in the case of authors, playwrights, artists, musicians, actors, sportsmen and athletes. There will, therefore, be an overall limit for savings which will qualify for tax rebate. In the case of individuals, the limit will be tax Rs. 60,000 and in the case of authors, sportsmen, etc., Rs. 70,000.

6.2 Section 88B which provides for special relief to senior citizens (individuals of the age of 65 years and above) has been further amended by the Finance Act, 1994 so as to raise the tax rebate in their case, from 20 per cent to 40 per cent, and, enhance the gross total income qualifying limit for this purpose from Rs. 75,000 to Rs. 1,00,000 with effect from 1-4-1995 (i.e., for assessment year 1994-95 and subsequent years). Thus, all individuals of and above the age of 65 years will be allowed, in respect of financial year 1994-95, a rebate of 40 per cent of the amount of income-tax payable by them (as computed before allowing the deduction under Chapter VIII of the Income-tax Act, 1961), subject to the conditions that their gross total income does not exceed Rs. 1,00,000.

6.3 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. In case, the DDO is not satisfied about the genuineness of the employees claim regarding any deposit/subscription/payment made by the employee, he should not allow the same, and the employee would be free to claim the rebate on such amount by filing his return of income and furnishing the necessary proof, etc., therewith, to the satisfaction of the Assessing Officer. It may also be mentioned here that the deposits/subscriptions/payments towards the items qualifying for the tax rebate should be made out of the employees income chargeable to tax.

Calculation of income-tax

7. (a) The net salary income in the case of each employee, arrived at after allowing the eligible deductions, from the gross salary, is liable to income-tax during the financial year 1994-95, at the rates given in Annexure I. After calculating the tax liability, the tax rebate provided for in section 88 and section 88B (wherever applicable) should be allowed as a deduction. The balance amount is the tax payable by the employee which is required to be deducted from the monthly salary in equal instalments. It may be noted here that the tax rebate under sections 88 and 88B shall not, in any case, exceed the amount of income-tax on the total income of the assessee with which he is chargeable.

(b) Rounding off : It may also 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 less than five rupees and increasing the fraction which is five rupees or more, to ten rupees. Similarly, the net amount of tax deductible should be rounded off to the nearest rupee by ignoring the fraction less than 50 paise and increasing the fraction which is fifty paise or more, to one rupee.

Miscellaneous provisions for information/guidance of DDOs

8.1 As stated in para 2 above, sub-section (1) of section 192 makes the person responsible for paying salary, also responsible for deducting income-tax at source from the payment of salary. The scope of deduction of tax at source from Salaries was further modified by the Finance Act, 1987 by the insertion of sub-sections (2), (2A) and (2B) in section 192. The salient features of these provisions 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), whenever salary, etc., is paid in arrears or in advance.

(c) Sub-section (2B) enables a taxpayer to furnish particulars of income under any head other than Salaries and of any tax deducted at source thereon in the prescribed form (No. 12C). Such income under any other head should not be a loss. The employer shall take such other income and tax, if any, deducted at source from such income, into account for the purpose of computing tax deductible under section 192 of the Income-tax Act. However, if such aggregation results in tax deductible which is less than in the case where income under the head Salaries alone is taken into account for computing tax deductible, then such aggregation under sub-section (2B) is not permissible. In other words, a loss from any other source cannot be adjusted by the DDO against salary income. To meet the requirements of these provisions, the Central Government have enacted rule 26B in the Income-tax Rules. 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.

8.2 Section 197 further enables the tax-payer to make an application in Form No. 13 to his Assessing Officer, and, if the Assessing Officer is satisfied that the total income of the tax-payer justifies the deduction of income-tax at any lower rate or no deduction of income-tax, he may issue an appropriate certificate to that effect which should be taken into account by the Drawing and Disbursing Officer while deducting tax at source.

8.3 In the case of pensioners who receive their pensions from a nationalised bank, the instructions contained in this circular shall apply in the same manner as they apply to salary income. The deductions from the amount of pension on account of standard deduction under section 16 and the tax rebate under section 88B (in the case of pensioners, resident in India, who are 65 years of age or more, and whose gross total income does not exceed Rs. 1,00,000) will be allowed by the concerned bank at the time of deduction of tax at source from the pension, before making payment to the concerned pensioner. As regards the tax rebate under section 88 on account of contribution to Life Insurance, Provident Fund, NSC, etc., if the pensioners furnish the relevant details of the banks, the tax rebate at the specified rate may also be allowed. Necessary instructions in this regard were issued by the Reserve Bank of India to the State Bank of India and other nationalised banks vide RBIs Pension Circular (Central Series) No. 7/C.D.R./1992 [Ref. CO:DGBA:GA(NBS) No. 60/GA. 64(11CVL)-91/92], dated the 27th April, 1992, and, these instructions should be followed by all the branches of the Banks, which have been entrusted with the task of payment of pensions.

9.1 According to the provisions of section 200, any person deducting any sum in accordance with the provisions of section 192 shall pay, within the prescribed time, the sum so deducted to the credit of the Central Government in the prescribed manner (vide rule 30 of the Income-tax Rules, 1962). In the case of deduction, made by , or on behalf of the Government, the payment has to be made on the day of the tax deduction itself. In other cases, the payment has to be normally made within one week of the deduction. If a person fails to deduct at source, or, after deducting, fails to pay the tax to the credit of the Central Government within the prescribed time, he shall be liable to action in accordance with the provision of section 201. Sub-section (1A) of section 201 lays down that such person shall be liable to pay simple interest at fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which tax is actually paid. Section 271C lays down that if any person fails to deduct tax at source, he shall be liable to pay, by way of penalty, a sum equal to the amount of tax not deducted by him. Further, section 276B lays down that if a person fails to pay to the credit of the Central Government within the prescribed time 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.

9.2 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.

9.3 According to the provisions of section 203, every person responsible for deducting tax at source is required to furnish a certificate to the payee to the effect that tax has been deducted and to specify therein the amount deducted and certain other particulars. This certificate, usually called the TDS certificate, has to be furnished within a period of one month from the end of the relevant financial year, in the case of employees receiving salary income. The certificate has to be issued in Form No. 16 which has been prescribed under Boards Notification No. S.O. 148(E), dated 28-2-1991.

A specimen of the certificate is enclosed as Annexure III. This certificate is to be issued on the tax-deductors own stationery. If he fails to issue the TDS certificate to the person concerned as required by section 203, he will 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.

9.4 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 obtain and quote the Tax-deduction Account Number (TAN) in the Challans, TDS-certificates, 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 will be liable to pay, by way of penalty, under section 272BB, a sum up to Rs. 5,000.

9.5 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 section 192, from salaries, shall after the end of each financial year, prepare and deliver, by 31st May, following the financial year, an annual return of deduction of tax to the designated/concerned Assessing Officer. This return has to be furnished in Form No. 24.

If a person fails to furnish in due time the annual return, 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, so, however, that this sum shall not exceed the amount of tax which was deductible at source.

10. These instructions are not exhaustive and are issued only with a view to helping the employers to understand the various provisions relating to deduction of tax from salaries. Wherever there is any doubt, reference may be made to the provisions of the Income-tax Act, 1961, the Income-tax Rules, 1962 and the Finance Act, 1994.

Annexure I

Extract from the Finance Act, 1994, part III of the first schedule

Paragraph A - Sub-Paragraph I

In the case of every individual or Hindu undivided family or 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. 35,000	Nil;
(2)	where the total income exceeds Rs. 35,000 but does not exceed Rs. 60,000	20 per cent of the amount by which the total income exceeds Rs. 35,000;
(3)	where the total income exceeds Rs. 60,000 but does not exceed Rs. 1,20,000	Rs. 5,000 plus 30 per cent of the amount by which the total income exceeds Rs. 60,000;
(4)	where the total income exceeds Rs. 1,20,000	Rs. 23,000 plus 40 per cent of the amount by which the total income exceeds Rs. 1,20,000.

Annexure II

Example 1

(Calculation of income-tax in the case of woman employee having
income up to Rupees Seventy-five Thousand)

		Rs.	Rs.
1.	Gross salary (including allowances)		75,000.00
2.	Contribution to GPF	12,000.00
3.	Central Govt.
	Employees Insurance
	Scheme (CGEIS)	720.00
4.	Payment towards	1,000.00
	Life Insurance premium
5.	Subscription to	3,000.00
	NSC (VIII Issue)
6.	Subscription to an	5,000.00
	approved mutual fund		21,720.00

Computation of total income & tax payable thereon

		Rs.	Rs.
1.	Gross salary income		75,000.00
2.	Less : Standard deduction		(-) 18,000.00
	[Pl. see para 4(x)(a)(i)]
3.	Total income		57,000.00
4.	Tax on total income		4,400.00
	[20% of (57000 - 35000)]
5.	Computation of tax rebate
	(a) Total of savings eligible	21,720.00
	for tax rebate under section 88
	(b) Tax rebate a t20% of total savings	4,344.00	4,344.00
6.	Net tax payable (4 - 5)		56 only

N.B. : If the gross salary in this case were more than Rs. 75,000, standard deduction would be limited to Rs. 15,000 only, as per para 4(x)(a)(ii).

Example 2

(Illustrating calculation of House Rent Allowance under section 10(13A) in respect of residential accommodation situated in Delhi)

		Rs.
1.	Salary	49,500
2.	Dearness Allowance	43,680
3.	H.R.A.	9,600
4.	CCA	1,200
5.	Actual rent paid	18,000
6.	Contribution to GPF	24,000
7.	Life Insurance premium	2,500
8.	Deposit in 10-year account	2,400
	under the Post Office Savings Bank (Cumulative Time Deposit) Rules, 1959
9.	Contribution to Mutual Fund	12,000

Computation of total income and tax payable thereon

				Rs.
1.	Salary income (1 + 2 + 4)			94,380
	(Excluding HRA)
2.	H.R.A.			9,600
3.	Total salary income			1,03,980
4.	Less : HRA exempt under section 10(13A) :
	(a)	Actual amount of HRA received	9,600
	(b)	Expenditure on rent in excess of 10%
		of salary [including D.A. see para
		4(vii)] (18,000 - 9,318)	8,682
	(c)	50% of salary (including D.A., i.e.,
		Rs. 46,590), whichever is the least;
		hence (b) is exempt here :		(-) 8,682
				95,298
5.	Less : Standard deduction under
	section 16(i) @ 33^1/3% subject to
	a maximum of Rs. 15,000			(-) 15,000
6.	Total income			80,298
				or 80,300
7.	Tax on total income			11,900
	(Rs. 5,000 plus 30% of Rs. 20,300)
8.	Less : tax rebate on savings :

			Rs.
	(i)	GPF	24,000
	(ii)	LIC	2,500
	(iii)	Post Office	2,400
	(iv)	Mutual Fund	10,000
		[See para 5(ix)]	38,900
	Tax rebate 20% of 38,900 = 7,780			7,780
9.	Net tax payable (11,900 - 7,780)			4,120

(Average monthly deduction comes to Rs. 343.00 for the first 11 months and Rs. 347.00 for the last month during the financial year).

Example 3

(Illustrating valuation of perquisites and calculation of tax in the case of an employee of a private company, posted at Bombay)

		Rs.
1.	Salary	1,08,000
2.	Bonus	12,000
3.	Free gas, electricity, water, etc.	6,000
	(actual bills paid by the company)
4.	Furnished flat provided to the employee by the company for which actual rent paid by the company	78,000
5.	Rent recovered from the employee	12,000
6.	Furniture at cost provided by the company (including television, fridge, washing machine and air-conditioner)	50,000
7.	Deposits made by the employee under specified schemes (e.g., NSS)	12,000
8.	Subscription to Mutual Fund	12,000
9.	LIC premium	3,000
10.	Subscription to NSC (VIII Issue)	6,000
11.	Contribution to recognised provident fund	24,000

Computation of total income and tax payable thereon

1.	Salary		1,08,000
2.	Bonus		12,000
3.	Total of Salary and Bonus		1,20,000
4.	Valuation of perquisites :
	(a)	Furnished flat at concessional rent
		[Pl. see section 17(2) of the IT Act read with
		clauses (a) and (b) of rule 3 of the IT Rules, 1962].
		Fair rental value (FRV) assumed to be equal to
		actual rent paid by the company, i.e., Rs. 78,000
		perquisite value of flat = 10 per cent of salary
		including bonus, i.e., 1,20,000	12,000
	(b)	Add excess of (FRV) over 60% of salary including
		bonus i.e. (78,000 - 72,000)	6,000
	(c)	Add : Perquisite of furniture
		(10% of cost, i.e., 10% of 50,000)	5,000
			23,000
	(d)	Less : Rent paid by employee	(-) 12,000
			11,000
	(e)	Add : Perquisite of free gas, electricity, etc.	6,000
		[see rule 3(d) of IT Rules, 1962]	17,000
5.	Gross total Income		1,37,000
6.	Less : Standard deduction under section 16(i) of
	Income-tax Act, 1961 (33^1/3% of subject to maximum of Rs. 15,000)		(-) 15,000
7.	Net total income		1,22,000
8.	Tax on total income :
	(i)	up to Rs. 1,20,000	23,000
	(ii)	40% of Rs. 2,000	800
			23,800

9.	Tax rebate on eligible savings (under section 88)
			Rs.
	(a)	Deposits in specified scheme	12,000
	(b)	Mutual Fund [see para 5(ix)]	10,000
	(c)	LIC	3,000
	(d)	NSC (VIII Issue)	6,000
	(e)	Provident Fund	24,000
		Total savings	55,000
		Tax rebate (20 per cent of 55,000)	11,000	11,000
10.	Net tax payable (23,80011,000)			12,800

(Average monthly deduction comes to Rs. 1,066 for the first 11 months and Rs. 1,074 for the last month in the financial year)

Notes :

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

(ii) In case the accommodation is situated in Bombay, Calcutta, Delhi or Madras, the excess of fair rental value over 60 per cent of salary, as against 50 per cent in other cases, is required to be added in determining the value of perquisites in view of Boards Circular No. 374, dated 14-12-1983. If this excess is a negative figure, it should be taken as NIL.

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

(iv) Where unfurnished accommodation is provided to its employees by the Reserve Bank of India or any other public sector body specified in sub-clause (2) of clause (a) of rule 3 of the Income-tax Rules, say, a natioanlised 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.

Example 4

(Income-tax calculation in the case of an employee posted in Delhi
and repaying house building loan)

		Rs.
1.	Salary	48,000
2.	Dearness Allowance	36,000
3.	House Rent Allowance	12,000
4.	Special Duties Allowance	2,400
5.	Subscription to units of Mutual Fund	6,000
	referred in para 6(ix)
6.	Subscription to recognised Provident Fund	12,000
7.	LIC Premium	2,000
8.	Deposit in N.S.S.	6,000
9.	Actual rent paid by the employee for	18,000
	accommodation hired by him
10.	Repayment of house building loan taken	12,000
	by the employee from LIC

Computation of total income and tax payable thereon

1.	Gross salary (48,000 + 36,000 + 12,000 + 2,400)		98,400
2.	Less : House rent allowance exempt under section 10(13A)
	(a)	Actual amount of HRA received, i.e., 12,000,
		or
	(b)	Expenditure on rent in excess of 10% of salary
		[including D.A. only; see para 4(vii)], i.e., (18,000
		10 per cent of 84,000), i.e., 9,600,
		or
	(c)	50 per cent of salary (including DA), i.e., 42,000,
		whichever is the least; therefore (b) is exempt	(-) 9,600
3.	Total salary income		88,800
4.	Less : Standard deduction under section 16(1),
	@ 33^1/3% of total salary subject to the maximum
	of Rs. 15,000		(-) 15,000
5.	Net taxable total income		73,800
6.	Tax on total income :
	(i)	up to Rs. 60,000	5,000
	(ii)	on next Rs. 13,800 @ 30 per cent	4,140
			9,140

7.	Tax rebate under section 88
	(a)	Total of savings	Rs.
	(i)	Mutual Fund	6,000
	(ii)	Provident Fund	12,000
	(iii)	LIC	2,000
	(iv)	NSS	6,000
	(v)	Repayment of house building	10,000
		loan [pl. see para 5(xiii)]	36,000
	(b)	Tax rebate (20% of 36,000)		(-) 7,200
8.	Net Tax payable			1,940

(Average monthly deduction comes to Rs. 162 for the first 11 months and Rs. 158 for the last month during the financial year).

Example 5

[Showing calculation of tax liability of a person of 65 years of age
(or more) and drawing pension]

(Please see para 6.2) Rs.

1.	Total pension (including dearness relief)	60,000.00
2.	Income from interest/dividends	35,000.00
3.	Subscription to National Savings Certificates	10,000.00
	(VIII Issue)
4.	Contribution to specified Mutual Fund	12,000.00

Computation of total income and tax thereon

1.	Total pension	60,000.00
2.	Standard deduction	(-) 15,000.00
	(33^1/3%, limited to Rs. 15,000)
3.	Total pension income (taxable)	45,000.00
4.	Add : Interest/dividend income	(+) 35,000.00
5.	Gross total income	80,000.00
6.	Less : Deduction under section 80L in respect of	(-) 10,000.00
	interest/dividend (allowed up to a maximum of Rs. 10,000)
7.	Total income	70,000.00
8.	Tax on total income	8,000.00
	(5,000 plus 30 per cent to 10,000)
9.	Tax rebate under section 88B	3,200.00
	(40% of 8,000)
10.	Tax payable	4,800.00
11.	Tax rebate under section 88, on savings (20% of 20,000)	4,000.00
	(mutual fund to be limited to Rs. 10,000)
12.	Net tax payable (10 - 11)	800.00

ANNEXURE II

FORM NO. 16

[See rule 31(1)(a)]

Certificate under section 203 of the Income-tax Act, 1961 for tax deducted at
source from income chargeable under the head Salaries

Name and address of the Employer		Name and Designation of the Employee
--------------------------------------------------------------------------		--------------------------------------------------------------------------
--------------------------------------------------------------------------		--------------------------------------------------------------------------
--------------------------------------------------------------------------		--------------------------------------------------------------------------
PAN/GIR NO.	TAN	PAN/GIR No.
TDS Circle where Annual Return/Statement under section 206 is to be filed		Period		Assessment
		From	To	Year 19	-19

DETAILS OF SALARY PAID AND ANY OTHER INCOME AND TAX DEDUCTED

1.	Gross Salary*			Rs._____
2.	Less: Allowance to the extent exempt under section 10		Rs._____	Rs._____
3.	Balance (12)			Rs._____
4.	Deductions :
	(a) Standard deduction	Rs._____
	(b) Entertainment allowance	Rs._____
	(c) Tax on Employment	Rs._____
5.	Aggregate of 4 (a to c)		Rs._____
6.	Income chargeable under the head Salaries (35)				Rs._____
7.	Add : Any other income reported by the employee				Rs._____
8.	Gross Total Income (6+7)				________
9.	Deductions under Chapter VI-A

*See sections 15 and 17 and rule 3. Furnish separate details of value of the perquisites and profits in lieu of or in addition to salary and wages.

		Gross Amount	Qualifying Amount	Deductible Amount
	(a)	Rs._____	Rs._____	Rs._____
	(b)	Rs._____	Rs._____	Rs._____
	(c)	Rs._____	Rs._____	Rs._____
	(d)	Rs._____	Rs._____	Rs._____
10.	Aggregate of deductible amount under Chapter VI-A			Rs._____
11.	Total Income (810)				Rs._____
12.	Tax on Total Income				Rs._____
13.	Rebate and Relief under Chapter VIII

I. Under section 88 (please specify) :

		Gross	Qualifying	Tax Rebate
		Amount	Amount	/Relief
	(a)	Rs._____	Rs._____
	(b)	Rs._____	Rs._____
	(c)	Rs._____	Rs._____
	(d)	Rs._____	Rs._____
	(e)	Rs._____	Rs._____
	(f) Total (a) to (e)	Rs._____	Rs._____	Rs._____
II.	Under section 88A (Please specify)
		Gross Amount	Qualifying Amount
	(a)	Rs._____	Rs._____
	(b)	Rs._____	Rs._____
	(c) Total (a) + (b)	Rs._____	Rs._____	Rs._____
III.	Under section 89 (attach details)			Rs._____
14.	Aggregate of Tax Rebates and Relief at 13 above [I (f) + II (c) + III]				Rs._____
15.	Tax Payable (1214)				Rs._____
16.	Less : Tax deducted at source				Rs._____
17.	Tax Payable/Refundable (1516)				Rs._____

DETAILS OF TAX DEDUCTED AND DEPOSITED INTO
CENTRAL GOVERNMENT ACCOUNT

Amount

Date of Payment

Name of Bank & Branch where tax Deposited

Certified that a sum of Rs........(in words).................has been deducted at source and paid to the credit to the Central Government. Further certified that the above information is true and correct as per records.

	Signature of the person responsible for deduction
	of tax
Place :.........	Full Name...................................................
Date :...........	Designation...................................................

Circular : No. 691, dated 5-9-1994.

600. Effect of decision of the Supreme Court in Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120

Circular No. 341, dated 10-5-1982 (Annex) had been issued in the, wake of the Supreme Courts judgment in the case of Cloth Traders (P.) Ltd [1979] 118 ITR 243/1 Taxman 335. This decision was subsequently overruled by the Supreme Court in the case of Distributors (Baroda) (P.) Ltd v. Union of India [1985] 155 ITR 120/22 Taxman 49 which therefore gives the correct legal position. It is therefore clarified that Circular No. 341 ceases to have applicability for any assessment year consequent to the decision of Supreme Court in the case of Distributors (Baroda) (P.) Ltd (supra).

ANNEX

Reference is invited to the judgment of the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243/[1979] 1 Taxman 335, where it was observed that the amount of deduction under section 80MM should be worked out with reference to gross income. Section 80AB, inserted by the Finance (No. 2) Act, 1980, provides that the deduction under section 80MM should be worked out with reference to net income. Section 80AB has been made effective from April 1, 1981, and not retrospectively. It is, therefore, clarified that the judgment of the Supreme Court applies to assessments up to and inclusive of the assessment year 1980-81.

Circular : No. 341 [F. No. 167/231/74-IT(A-I)], dated 10-5-1982.

Judicial analysis

Commented upon in - The above circular dated 10-5-1983 was commented upon in Industrial Consulting Bureau (P.) Ltd. v. CIT [1991] 189 ITR 346 (Bom.), with the following observations :

. . . Reliance placed by Shri Dilip Dwarkadas on the Boards Circular No. 341 dated May 10, 1982, reported in [1982] 137 ITR (St.) 4, is of no consequence as the said circular was issued on the basis of the Supreme Courts earlier decision in the case of Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243 which now stands overruled by the Supreme Courts subsequent decision in Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120. In that view of the matter, it has to be held that, on the basis of the interpretation of the language used in section 80MM, the relief is to be allowed on the net income and not on the gross income. (p. 348)

Applied in - The above circular dated 10-5-1983 was applied in Agrima Project Engg. & Consultancy Service Ltd. v. IAC [1990] 32 ITD 421 (Bom.), with the following observations :

8. The above circular, admittedly, is a beneficial and benevolent circular and de hors the decision of the Honble Supreme Court in the case of Distributors (Baroda) (P.) Ltd. (supra), in our considered opinion, relief has to be allowed to the assessee on gross amount. (p. 431)

Note : This decision cannot be considered as good law in the light of the subsequent judgment of the High Court in Industrial Consulting Bureau case (supra).

Circular : No. 692, dated 15-11-1994.

Section 193 l Interest on securities

Instructions for deduction of tax at source fromincome from interest on securities

FINANCIAL YEAR 1994-95

1709. Instructions for deduction of tax at source from interest on securities - Rate of deduction from interest on securities during financial year 1994-95

1. Reference is invited to the Boards Circular No. 655, dated the 26th August, 1993, regarding deduction of income-tax at source from the payment of interest on securities for the financial year 1993-94.

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 a credit of such income to the account of the payee.

3. For the financial year 1994-95, the applicable rates insofar as they relate to deduction of tax at source from the payment of interest on securities are given in Part II of the First Schedule to the Finance Act, 1994. Briefly stated, these are as follows :

(A)	In the case of a person other than a company
	(1) Where the person is resident in India, on income by way of interest payable on
	(a) any security of the Central or a State Government :	10%
	(b) any debentures or other securities for money issued by or on behalf of any local authority or a corporation established by a Central, State or Provincial Act :	10%
	(c) any debentures issued by a company where such debentures are listed on a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 and any rules made thereunder :	10%
	(2) Where the person is not resident in India	income-tax @ 30% of the amount of income
		or
		income-tax in respect of the income at the rates prescribed in Sub-paragraph I of paragraph A of Part III of First Scheduled of Finance Act, 1994 (Annexure I), if such income had been the total income, whichever is higher.
	(B) In the case of a company
	(a) Where the company is a domestic company :	21.5%
	(b) Where the company is not a domestic company :	55%.

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

by a surcharge @15% of such income-tax in the case of a domestic company only.

5. It may be noted that,

(a) Tax will be deducted at source under section 193 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, being debentures listed on a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956, and, any rules made thereunder, 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 individual does not exceed Rs. 2,500.

(c) Tax will not be deducted at source under section 193 in the case of a resident individual who makes a declaration in Form No. 15F (vide Annexure II) as provided by section 197A, to the effect that tax on his estimated total income of the financial year 1994-95 will be nil. A copy of such declaration should be forwarded by the tax-deductor, on, or, before the seventh day of the month next following the month in which the declaration is received by him, to the Chief Commissioner/Commissioner of Income-tax concerned, as provided in rule 29C(5) of the Income-tax Rules, 1962;

(d) No tax will be deducted at source or it will be deducted at a lower rate in the case of a person (including a company) where a certificate under section 197 is issued by the Assessing Officer on, or, after 1st April, 1994, specifying the rate of such deduction of tax at source. Where such exemption on abatement certificate has been issued before 1st April, 1994, it should be accepted and acted upon, if it is operative for the financial year ending 31st March, 1995.

(e) No tax should be deducted from interest payable on securities/bonds/debentures which have been specifically exempted from the requirement of tax deduction at source under the proviso to section 193, or, which have been specified by the Central Government by notification in the Official Gazette under the proviso to section 193.

(f) 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. For instance, payments made to the Life Insurance Corporation, Unit Trust of India and the Small Industries Development Bank of India (SIDBI) are exempt from the requirement of tax deduction at source by virtue of their respective Acts.

(g) 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.

(h) As provided by 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 provision of the Act.

6. The responsibilities, obligations, etc., under the Income-tax Act, of the person deducting tax at source, are as follows :

(a) According to the provisions of section 200, any person deducting any sum in accordance with the provisions of section 193 is required to pay, within the prescribed time (as laid down in rule 30 of the Income-tax Rules, 1962) the sum so deducted to the credit of the Central Government. In the case of deduction by or on behalf of the Government, the sum has to be paid on the day of deduction itself. In other cases, normally, the sum has to be paid within one week from the last day of the month in which the deduction is made. If a person fails to pay the tax, deducted by him, to the credit of the Central Government he shall be liable to action under the provisions of section 201. Sub-section (1A) of section 201 lays down that such person shall be liable to pay simple interest at fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid to the Government. Further, section 271C lays down that if any person fails to deduct tax at source, he shall be liable to pay by way of penalty a sum equal to the amount of tax which he failed to deduct at source. In this regard, attention is also invited to the provisions of section 276B which lays down that if a person fail 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.

(b) According to the provisions of section 203, every person deducting tax at source is required to furnish a certificate to the effect that tax has been deducted and to specify therein the amount so deducted and certain other particulars. The certificate has to be furnished in Form No. 16A (see Annexure III) within the prescribed period of one month and fourteen days to the person to whose account credit is given or to whom payment is made by any mode, as the case may be Form No. 16A can be issued by the tax deductors on their own stationery. If a person fails to furnish a certificate as required under section 203, 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) According to the provisions of section 203A, it is obligatory for all persons responsible for deducting tax at source to obtain and quote the tax deduction account number (TAN) in the challans, TDS certificates, returns, etc. Detailed instructions in this regard are available in the Boards Circular No. 497 [F. No. 275/118/87-IT(B)], dated 9-10-1987. If a person fails to comply with provisions of section 203A, he shall be liable to pay, by way of penalty under section 272BB, a sum up to Rs. 5,000.

(d) According to the provisions of section 206, read with rules 36A and 37 of the Income-tax Rules, the prescribed person in the case of every company, the prescribed person in the case of every office of Government, the principal officer in the case of every local authority or public body or association, every private employer and every other person responsible for deducting tax at source under the various provisions of the Act shall prepare and deliver by the prescribed date the annual return of deduction of tax at source to the designated/concerned Assessing Officer. In the case of deduction of tax at source from interest on securities, the said annual return has to be prepared in Form No. 25 and delivered by the 30th June following the financial year to which it relates. If a person fails to furnish in due time the annual return, 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. The maximum penalty will, however, not exceed the amount of tax deductible at source.

7. The State Governments/Union Territory administrations, the Reserve Bank of India, State Bank and other Banks, Financial Institutions, etc., are requested to bring the contents of this Circular to the notice of their concerned departments/officers, who are responsible for making payment of interest on securities, for necessary action and compliance.

8. These intructions are not exhaustive and are issued with a view to helping the persons responsible for deducting tax at source from payment of interest on securities. In the case of any doubt, reference should be made to the relevant provisions of the Income-tax Act, 1961, the Income-tax Rules, 1962, and the Finance Act, 1994. If any assistance is required, the Assessing Officer or the Public Relations Officer of the Income-tax Department should be contacted.

ANNEXURE I

EXTRACT FROM THE FINANCE ACT, 1994, PART III OF THE FIRST SCHEDULE

Paragraph A, Sub-Paragraph I

In the case of every individual or Hindu undivided family or 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. 35,000
(2)	where the total income exceeds	20 per cent of the amount by which
	Rs. 35,000 but does not exceed	the total income exceeds Rs. 35,000;
	Rs. 60,000
(3)	where the total income exceeds	Rs. 5,000 plus 30 per cent of the
	Rs. 60,000 but does not exceed	amount by which the total income
	Rs. 1,20,000	exceeds Rs. 60,000;
(4)	where the total income exceeds	Rs. 23,000 plus 40 per cent of the
	Rs. 1,20,000	amount by which the total income exceeds Rs. 1,20,000

.

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, the tax on my estimated total income, including the interest on securities referred to in paragraph 1 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 nil.

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................................;

or

that I was last assessed to income-tax for the 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............................

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

Signature of the declarant

Place : ..............................

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

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

ANNEXURE III

FORM NO. 16A

[See rule 31(1)(b)]

Certificate of deduction of tax at source under section 203of the Income-tax Act, 1961

For interest on securities; dividends, interest other than interest on securities; winnings from lottery or crossword puzzle; winnings from horse race; payments to contractors and sub-contractors; insurance commission; payments to non-resident sportsmen/sports associations; payments in respect of deposits under National Savings Scheme; payments on account of repurchase of units by Mutual Fund or Unit Trust of India; commission, remuneration or prize on sale of lottery tickets; other sums under section 195; income of foreign companies referred to in section 196A(2); income from units referred to in section 196B; income from foreign currency bonds or shares of an Indian company referred to in section 196C; income of Foreign Institutional Investors from securities referred to in section 196D;

Name and address of	TDS circle where	Name and address of the person to whom
the person deducting	annual return under	payment made or in whose account it is
tax	section 206 is to be	credited
	delivered
..............................................................	..............................................................	..............................................................
..............................................................	..............................................................	..............................................................
..............................................................	..............................................................	..............................................................
..............................................................	..............................................................	..............................................................
..............................................................	..............................................................	..............................................................
..............................................................	..............................................................	..............................................................

Tax deduction	nature of	PAN/GIR No. of the payee
Account No. of	payment
The deductor
PAN/GIR No. of		For the period..............19............
The deductor		To 19........................

Details of payment, tax deduction and deposit of tax into central Government Account

Date of pay-	Amount	Amount of	Rate at	Date & Challan No. of	Name of
ment/credit	paid/	Income-	which	deposit of tax into	bank and
	credited	tax	deducted	Central Government	branch
	(Rs.)	deducted		Account	where tax
		(Rs.)			deposited

Certified that a sum of Rs. (in words).................................................... has been deducted at source and paid to the credit of the Central Government as per details given above.

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

	Signature of person responsible for deduction of tax
Place : ..........................	Full Name ............................................
Date : ..........................	Designation ............................................

Circular : No. 693, dated 17-11-1994.

556. Whether profits derived from export of cut and polished dimensional blocks, granite or other rocks is eligible for deduction under section 80HHC

Section 80HHC of the Income-tax Act allows a deduction from the gross total income of the entire profits derived from export of goods other than minerals. Finance (No. 2) Act, 1991 extended the benefit to export of processed minerals and ores mentioned in the Twelfth Schedule to the Income-tax Act. Item (x) of the Schedule mention cut and polished minerals and rocks including cut and polished granite.

Some organisations and individual taxpayers have raised doubts whether the deduction under section 80HHC is available in respect of export of granite or other rocks that are cut and exported as raw blocks after being washed and cleaned.

The entry in the Twelfth Schedule is very clear and unambiguous and uses the term cut and polished. Therefore, for availing of the benefit under section 80HHC, it is necessary that the rock is not only cut into blocks but also polished before it is exported. This is in line with Governments policy to encourage export of polished granite and other rocks where value addition before export is high and to discourage export of raw blocks where value addition is low (See also Sl. No. 557)

Judicial analysis

Explained in - God Granites v. Under Secretary, CBDT [1996] 218 ITR 298/85 Taxman 536 (Kar.) with the following observations :

Circular No. 693 dated November 17, 1994, clarifying that rock should not only be cut into blocks, but also be polished, before it is exported to avail of the benefit of section 80HHC, is valid as it is in accordance with section 80HHC and the Twelfth Schedule to the Act. The Governments policy to encourage export of polished granite and other rocks where value addition before export is high and to discourage export of raw blocks where value addition is low, is evident from section 80HHC, as it extends its benefit not to all minerals, but only to processed minerals specified in the Twelfth Schedule and the word processed with reference to rocks/granite, means cut and polished.

Explained in - God Granites v. ITO [1998] 65 ITD 302 (Bang.) with the observation that the Karnataka High Court, in assessees own case God Granites v. Under Secretary, CBDT [1996] 218 ITR 298/85 Taxman 536 has made an obiter observation that admittedly by the rock and granite exported by the petitioner had not undergone any of the processes including polishing and cutting listed in the Explanation to the Twelfth Schedule and, hence, the petitioner was not entitled to claim deduction under section 80HHC. In this, it was influenced by the idea expressed by the CBDT in its Circular No. 693, dated 17-11-1994 to the effect that ordinary exporters of granite like the assessee did not export cut and polished granites. The said view of the CBDT was, however, revised on factual basis in its latter circular dated 1-11-1995. This was not on the basis of a change in the procedure udnertaken by the exporters of late. On the other hand, the CBDT had a wrong view about the nature of state of export of granite blocks and on full appraisal of facts, it expressed a correct factual view in its latter circular. Hence, the latter circular must be considered to be applicable to the trade of export of granites in a general manner even covering a period prior to the issue of latter circular. Admittedly, before being exported, the granite ores and boulders extracted from the quarries are cut to certain suitable sizes. In the language of CBDT, in this process, dimensional blocks of granite are made.

Further held that since by latter circular, CBDT corrected wrong view after full appraisal of facts, it could be treated as general in nature and applicable to earlier years as well, even though it was stated that said circular was applicable prospectively from assessment year 1996-97 only.

Circular : No. 694, dated 23-11-1994.

SECTION 10A l EXEMPTION FOR NEW INDUSTRIAL UNDERTAKINGS IN FTZ

156. Clarification regarding tax holiday under sections 10A and 10B for units producing computer software in Export Processing Zones (EPZs), Software Technology Parks (STPs) or 100% Export-Oriented Units (EOUs)

Section 10A of the Income-tax Act provides for a five-year total tax holiday to industrial undertakings which manufacture or produce any article or thing and are set up in notified Free Trade Zones (FTZs). This provision was introduced by the Finance Act, 1981.

Similarly, section 10B of the Income-tax Act allows a five-year tax holiday to approved 100% export-oriented undertakings (EOUs) which manufacture or produce any article or thing. This provision was introduced by the Finance Act, 1988.

Finance Act, 1993 extended the tax holiday under section 10A to industrial units in approved Electronic Hardware Technology Parks (EHTP) or Software Technology Parks (STP). This provision is applicable to undertakings that begin production in a previous year relevant to assessment year 1994-95 or after. By the same Finance Act, an Explanation of the term produce was inserted to state that produce includes production of computer programmes.

Certain issues arising from the abovementioned provisions are causing disputes between the Income-tax Department and the software export sector and, therefore, need to be clarified.

Development of programmes on-site

Since computer programmes are not physical goods but are developed as a result of an intellectual analysis of the systems and methods followed by the purchaser of the programme, it is often prepared on-site, with the software personnel going to the clients premises. Doubts have been raised whether units taking up such production of software at the clients premises would be eligible for the tax holiday.

The Governments policy on tax incentive to software exports is reflected in the provisions of section 80HHE introduced in 1991. Under this provision, technical services provided outside India, for the development or production of computer software, are included for the purpose of the tax incentive.

Similarly, for the purpose of section 10A or 10B, as long as a unit in the EPZ/EOU/STP itself produces computer programmes and exports them, it should not matter whether the programme is actually written within the premises of the unit. It is, accordingly, clarified that, where a unit in the EPZ/EOU/STP develops software sur place, that is, at the clients site abroad, such unit should not be denied the tax holiday under section 10A or 10B on the ground that it was prepared on-site, as long as the software is a product of the unit, i.e., it is produced by the unit.

Software exporting units in EPZs/EOUsCommencing production before 1-4-1994

Unlike STPs which have come into existence only recently, EPZs are operating from 1981 and EOUs from 1988. Several software exporting units have been operating in EPZs or as EOUs even before STPs were created. Being units in EPZs/EOUs, they were being allowed the tax holiday under section 10A/10B. It has been brought to the notice of the Board that, in several cases, such units are now being denied the tax holiday for earlier years and are being allowed the benefit only for assessment year 1994-95 onwards. Assessing Officers are often taking the view that, since the Explanation of the term produce to include production of computer programmeshas been inserted only with effect from assessment year 1994-95, the existing EPZ/EOU units exporting software would get the benefit only from assessment year 1994-95 and not for earlier assessment years.

Such a view, is not in consonance with the intention of the Government. Finance Act, 1993 extended the scope of the tax holiday to units in STPs but did not curtail the scope in respect of existing software exporting units in EPZs/EOUs, already availing of the incentive. The Explanation of the term produce is clarificatory in nature and was inserted in 1993 primarily because, in that year, the tax holiday was extended to units in STPs - which produce only computer software.

Accordingly, it is clarified that units in EPZs/EOUs which export software are as much eligible for availing of the five-year tax holiday under sections 10A and 10B as any other units in EPZ/EOU, even for the period prior to the previous year relevant to the assessment year 1994-95. The conditions stipulated in the provisions have, of course, to be fulfilled. The insertion of the Explanation of the term produce in 1993 should not be taken as a ground for denying the tax holiday to such units for earlier years.

Circular: No. 695, dated 29-11-1994.

1163. Streamlining the procedure for obtaining authorisation for payment of sums to non-residents after deduction of tax at source, under section 195(1)

1. The Board has had occasion to examine the procedure being followed for authorisation of remittances to non-residents.

2. Under section 195(1) of the Income-tax Act, any person responsible for paying to a non-resident any sum chargeable to tax under the Act excepting interest on securities and income under the head Salaries, is required to deduct tax at source at the rates in force. Such deduction should be made at the time of the credit of the income to the account of the payee or at the time of payment thereof, whichever is earlier. The proviso to section 195(1), however, lays down that in case of interest payable by the Government or a public sector bank or a public financial institution within the meaning of section 10(23D) of the Act, deduction of tax at source will be made at the time of payment.

3. The Department of Economic Affairs, Ministry of Finance issued a Press Note dated 17-5-1988 laying down the procedure for remittances to foreign companies by way of royalty and fees for technical services under approved agreements. This procedure is applicable only where income-tax @ 30% from such payments is deducted and paid into designated banks. As per this procedure the remitter has to furnish to the designated bank details of payments in the prescribed form certified by a chartered accountant along with the income-tax challan of payment. On payment of tax by the remitter, the designated bank would forward a certificate regarding such payment to the Reserve Bank of India. On receipt of the certificate of payment of tax from the concerned bank, the Reserve Bank of India would permit the remittance of the balance without insisting on a No Objection Certificate from the income-tax authorities.

4. It is observed that the Reserve Bank of India insists on the production of a No Objection Certificate from the income-tax authorities whenever there is a claim that the rate or rates for deduction of tax at source is lower than 30% in case of royalty or fees for technical services, or if the proposed remittance is in respect of other types of income.

5. In order to simplify and to bring uniformity in the form of application to be made by the remitter and the authorisation to be issued, the Board has considered the issue of non-statutory forms for such purposes. A copy of each of these forms is enclosed. These new forms may be used while applying for authorisation and for granting authorisation under section 195. The authority to whom the application for authorisation is made will verify the claims of the payers in the light of the Income-tax Act, the Double Taxation Avoidance Agreements and the specific facts of the transactions, before authorising the remittance.

Application seeking authorisation for payments to non-resident [See section 195(1) of the Income-tax Act, 1961]

Notes:

1. This application relates to payments to a non-resident not being a company, or to a foreign company.

2. The payments covered by this application may be of interest (not being interest on securities) or any other sum chargeable to income-tax (excluding income chargeable under the head Salaries).

3. An authorisation from the income-tax authority will not be required for the payment of royalty and fees for technical services to foreign companies under approved contracts, where income-tax at 30% has been deducted and paid into designated banks as per instructions issued by the Economic Affairs Department. In all other cases, an authorisation is to be obtained for the proposed payment.

1.

. Name and address of payer

2.

PA Number

2A.

TA Number

3.

Proposed Payment :

(a) Nature

(b)

Amount

(Attach copy of agreement or document)

4.

Name and address of payee

5.

Payee is resident of (name of country)

6.

Is the payment covered by Double Taxation Avoidance Agreement If yes, give article/paragraph No.

Yes

No

7.

Rate of tax applicable under section 195(1) of the Income-tax Act, 1961, to the payment :

8. I, (name).......................................................................................................................................

(designation)..............................................................................................................................

being the person responsible for making this proposed payment request that I may be authorised to pay the sum mentioned at col. 3(b) to the non-resident mentioned at col. 4 after deduction of tax at the rate mentioned at col. 7 above.

I declare that what is stated in this application is correct and complete.

	........................................
Place :............	Signature
Date :.............	........................................
	Designation

Authorisation for payment of sums to non-residents after deduction of tax at source

under section 195(1) of the Income-tax Act, 1961

Income-tax Office,

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

Dated...............19.......

To

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

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

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

Sir,

Please refer to your application dated ................................... requesting for authorisation to remit the sum of.......................................being in the nature of...................................................to..............................................

(Name and address of the non-resident recipient)

2. You are hereby authorised to make payment of the aforesaid sum to...........................................................................................

(Name and address of the recipient)

being in the nature of*..................................., after deducting income-tax at source at the rate of ................... thereon under section 195(1) of the Income-tax Act, 1961.

3. Proof of payment of income-tax to the credit of the Central Government has to be produced before the concerned bank authorities at the time of the remittance of the said sum to the non-resident. A copy of the proof of payment of income-tax must be submitted to the undersigned (within a week of the payment) along with Form No. 27 read with rule 37A of the Income-tax Rules, 1962.

4. This authorisation shall remain in force for the financial year 19............., unless it is cancelled or modified before the expiry of the said financial year. The fact of the cancellation or modification will be intimated to you.

Yours faithfully,

(Assessing Officer)

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

(Seal)

1. *Please specify nature of payment, e.g., dividends, interest, royalty and fees for technical services.

2. The provisions regarding rates of exchange for the purpose of deduction of tax at source on income payable in foreign currency, are contained in rule 26 of the Income-tax Rules, 1962.

Circular : No. 696, dated 16-12-1994.

Section 201 l Consequence of failure to deduct or pay

1190. Non-initiation of penalty and prosecution proceedings in certain cases of defaulters under Chapter XVII-B

It has come to the notice of the Board that some of the employers, including foreign companies operating in India, have been defaulting in deducting tax at source as required under section 192, on the salaries and allowances paid abroad, or perquisites provided abroad, to their employees for services rendered in India. In some cases, tax might have been deducted at source, but not remitted to Government. All payments and perquisites to employees for services rendered in India are taxable in India irrespective of the place where the payment occurs. The employers are, therefore, liable to deduct tax at source even on payment of salary, allowances and perquisites paid or provided abroad to their employees who have rendered service in India. They are also required to remit such deducted tax to Government. Failure to comply with these requirements would render the employer an assessee in default, and would attract interest under section 201(1A). Penalties under sections 221 (assessee in default) and 271C (failure to deduct tax) are then leviable and prosecution proceedings under section 276B can also be initiated in such cases.

2. To encourage immediate voluntary compliance, the Board has decided that proceedings under sections 221 and 271C for levy of penalties and proceedings under section 276B for prosecution need not be initiated in cases where an employer voluntarily comes forward and pays the whole of the tax due under section 192, along with interest liability under section 201(1A) on or before July 31, 1994.

3. Employers (Indian and foreign), who committed default in the past are advised to make use of this opportunity to pay up arrears of TDS (tax deductible at source) together with interest on or before 31-7-1994 and avoid penalty and prosecution proceedings.

4. Wide publicity may be given regarding this opportunity.

5. From 1-8-1994, penalty provisions under sections 221 and 271C and prosecution provisions under section 276B will be strictly implemented according to law.

Circular : No. 685, dated 17-6-1994.

Clarification 1

Reference is invited to Boards Circular No. 685, dated 20-6-1994 (File No. 275/69/94-ITB) providing for non-initiation of proceedings under section 221/276B/271C of the Income-tax Act, 1961 in respect of employers defaulting in deducting tax at source on the salaries and allowances paid abroad or perquisites provided abroad to their employees for services rendered in India. Doubts have been raised in some quarters as to whether, due to the disclosure of the excess salary payments by the employers, any consequential action will be taken in the hands of the employees.

2. The Board has considered the matter. The spirit behind issue of Circular No. 685 dated 20-6-1994 was to encourage immediate voluntary compliance on the part of the employers defaulting in tax deduction. In order that this intention is fully achieved. Accordingly the Board has decided that the assessments of the employees, in respect of whom payments of short-deduction and interest thereon are made by the employers in pursuance of Circular No. 685 dated 20-6-1994, will not be reopened or otherwise disturbed merely on account of the excess salary payments now disclosed by the employers.

Circular : No. 686, dated 12-8-1994.

Clarification 2

It has come to the notice of the Board that some employers are not correctly evaluating the perquisites, allowances or other profits in lieu of or in addition to any salary of wages (referred to as salaries hereinafter) paid to their employees for the purpose of deducting tax at source under section 192 of the Income-tax Act, 1961. Such defaulters are liable to penalty proceedings under sections 221 and 271C of the Act, and also liable to prosecution under Chapter XXII of the Act.

2. However, before taking stringent measures, the Board has decided to grant an opportunity to such defaulters. Even now if they pay the proper tax on salaries as envisaged under section 192 along with interest liability under section 201(1A) of the Act no penalty proceedings under section 221 or prosecution under Chapter XXII of the Act shall be initiated provided such payment is made on or before February 28, 1995.

3. This circular shall also cover such cases which were earlier covered by Circular No. 685, dated 17th June, 1994, where the facility was extended in respect of salaries and allowances paid abroad or perquisites provided abroad to the employee for services rendered in India. The time limit of 31st July, 1994, was fixed by Circular No. 685 (which was later extended to 31st August, 1994) is now extended to 28th February, 1995.

4. The contents of this circular may be brought to the notice of all the assessees especially those responsible for deducting tax under section 192, so that they can avail of this opportunity. It may be emphasised that the Department will intitate coercive steps to recover the due tax, which was not deducted at source and/or not paid to the Government before 28th February, 1995.

5. The circular will apply in respect of the assessment years beginning from 1989-90 till the assessment year 1994-95.

Circular : No. 697, dated 16-12-1994

804. Clarification on the use of challan forms with only three counterfoils for payment of advance tax and self-assessment tax

1. Board had recently prescribed the form of challans with three counterfoils for payment of advance tax and self-assessment tax. Some problems have been reported in the implementation of the above decision. It has been reported that banks receiving payment of tax are retaining two counterfoils and returning only one foil to the taxpayer. As the taxpayer is expected to enclose proof of payment of advance tax and self-assessment tax along with the return of income, it has been pointed out that the absence of an extra foil for this purpose leads to difficulties.

2. The question has been examined in the Board. Currently, both types of challan, viz., having four counterfoils (the old challan) and three counterfoils (the new challan) are in use. Where the old challans are used, the existing distribution pattern will continue to be followed by the banks, viz.,

1. copy to the ZAO

2. copy to the ITO

3. copy to the taxpayer for his record

4. copy to the taxpayer to be annexed to the return.

Where the new challan forms are used, the three foils will be distributed by the banks as under :

1st counterfoil to the Assessing Officer (i.e., CTU)

2nd counterfoil to the ZAO

3rd counterfoil to the taxpayer for his record.

In such cases, the taxpayer may enclose with his return of income a photocopy (attested by him) of his copy of the foil No. 3, which will be adequate compliance with Explanation (c)(i) to section 139(9) of the Income-tax Act.

FINANCE (NO. 2) ACT, 1991 - CIRCULAR NO. 621, DATED 19-12-1991, AS AMENDED BY CIRCULAR NO. 642, DATED 11-12-1992 AND CIRCULAR NO. 698, DATED 28-12-1994

• Amendments at a glance
• Rate structure
• Amendments to Income-tax Act
• Amendments to Wealth-tax Act
• Amendments to Gift-tax Act
• Amendments to Interest-tax Act
• Amendments to Expenditure-tax Act

---

[`1]1. See Explanation III to section 194C, inserted with effect from 1-7-1995.

[`2]1. See [1988] 172 ITR (St.) 24.

[`3]2. See [1992] 194 ITR (St.) 222.

[`4]3. See [1992] 198 ITR (St.) 169.

[`5]4. See [1993] 204 ITR (St.) 142.

[`6]2. Inserted by the Finance Act, 1994, with effect from 1-4-1995.

[`7]*Substituted with effect from 1-6-1999.