Circular : No. 188 [F. No. 142/(7)/74-TPL], dated 6-1-1976.

Fourth Schedule - Part A l Recognised Provident Fund

1331. Whether notifications fixing rate of interest issued under rule 6 have only prospective effect

1. Under rule 6(b) of Part A of the Fourth Schedule interest credited on the balance to the credit of an employee participating in a recognised provident fund is exempt from income-tax, to the extent it does not exceed one-third of the employees salary for the relevant year or is not allowed at a rate exceeding that fixed by the Central Government in this behalf by notification in the Official Gazette. Under Notification No. SO 225(E), dated 30-3-1974 [printed here as Annex I] the rate of interest specified in this behalf was increased from 6 per cent to 6.5 per cent with effect from April 1, 1974. Under Notification No. SO 153(E), dated 25-3-1975 [printed here as Annex II] the rate of interest was further increased from 6.5 per cent to 7.5 per cent with immediate effect.

2. The Board are advised that a notification fixing the rate of interest issued under rule 6 of Part A of the Fourth Schedule will have only prospective effect. In this view of the matter, the benefit of exemption from tax in respect of interest credited at the enhanced rates would be available only in respect of amounts credited to the individual account of employees on or after the date on which the relevant notification came into force.

Annex I - Notification No. SO 225(E), dated 30-3-1974 referred to in clarification

In pursuance of clause (b) of rule 6 of Part A of the Fourth Schedule and in supersession of the notification No. 10, dated March 3, 1974 issued under section 58F(2) of the 1922 Act, the Central Government has fixed, with effect from April 1, 1974, 6 per cent as the rate referred to in the said clause (b).

Annex II - Notification No. SO 153(E), dated 25-3-1975 referred to in clarification

In pursuance of clause (b) of rule 6 of Part A of the Fourth Schedule to the Income-tax Act, 1961 (43 of 1961), and in supersession of the notification of the Government of India in the Ministry of Finance (Department of Revenue and Insurance) No. SO 225(E), dated March 30, 1974, the Central Government hereby fixes with immediate effect 7 per cent as the rate referred to in the said clause (b).

Circular : No. 189 [F. No. 228/8/72-IT(A-II)], dated 30-1-1976[`1] 1.

276. Development rebate reserve in the case of industrial undertakings in which there is Government participation and where there are certain obligations for maintenance of reserve for development purposes - Earlier instruction contained in Boards Letter F. No. 10/49/65-IT (A-I), dated 14-10-1965 superseded in part

1. Reference is invited to the Boards Letter F. No. 10/49/65-IT(A-I),-dated14-10-1965 [see Sl. No. 266] which, inter alia explained the position regarding the creation of statutory reserve for allowance of development rebate as follows :

(a) In the case of certain industrial undertakings, particularly those in which there is Government participation either by way of capital, loan or guarantee, and where there are certain obligations by law or agreement about the maintenance of reserve for development purposes, the development rebate reserve may be treated as included in the said reserve though not specifically created as a development rebate reserve.

(b) In a case where the total income computed before allowing the development rebate is a loss, there was no legal obligation to create any statutory reserve in that year, as no development rebate would actually be allowed in that year.

(c) Where there was no deliberate contravention of the provisions, the Income-tax Officer may condone genuine deficiencies subject to the same being made good by the assessee through creation of adequate additional reserve in the current years books in which the assessment is framed.

2. The Supreme Court, in the case of Indian Overseas Bank Ltd. v. CIT [1970] 77 ITR 512 had occasion to consider the validity of the position as explained at (a) above. In that case, the Bank had not created any development rebate as such, although the books of account disclosed a substantial reserve under section 17 of the Banking Companies Act, 1949. On the claim of the Bank that reserve had been created for purposes of claiming development rebate, the Supreme Court held that the reserve contemplated under the Income-tax Act was altogether an independent reserve and since the taxpayer had not complied with the requirements for the creation of special development rebate reserve, it was not entitled to claim the allowance in question. The Supreme Court also observed that the entries in the account books were not ideal formalities. Thus the instructions of the Board set out above insofar as part (a) is concerned became inoperable. However, the position explained in parts (b) and (c) above were not specifically considered by the Supreme Court in that decision. Taking note of the decision of the Supreme Court in Indian Overseas Banks case (supra) as well as a subsequent pronouncement of the Gujarat High Court in the case of Surat Textile Mills Ltd. v. CIT [1971] 80 ITR 1, the Board had withdrawn in 1972 the aforesaid circular dated 14-10-1965 to the extent it was superseded by the aforesaid Supreme Court decision and the judgment of the Gujarat High Court in Surat Textiles Ltd. case (supra).

3. It was also directed that past assessments be reviewed and suitable action taken to retrieve loss of revenue including securing of necessary disallowances by way of enhancement, etc., in appeals relying on the aforesaid judicial pronouncements. It would appear that this has been interpreted by the field officers as having withdrawn of not only part (a), but parts (b) and (c) of para 1 above also, and rectificatory/revisionary action has been initiated in a number of cases.

4. It has been represented to the Board that their earlier instruction dated 14-10-1965 represented the correct position in law and that its withdrawal to the extent it was presumed to be overruled by the Supreme Court in Indian Overseas Banks case (supra) created unnecessary hardship to assessees. Some of the rectificatory actions taken had also reached the High Court for decision and in two separate decisions the Bombay High Court struck down the rectificatory order under section 154 in the case of Tata Iron & Steel Co. Ltd. v. N.C. Upadhyaya [1974] 96 ITR 1 and in a more detailed discussion on merits in the writ petition of Indian Oil Corpn. Ltd. v. S. Rajagopalan, ITO [1973] 92 ITR 241.

5. The Board have re-examined the issues involved and are of the view that except the clarification given in part (a) of para 1 above, which stands superseded by the aforesaid decision of the Supreme Court, the clarifications given in parts (b) and (c) of para 1 above hold good.

JUDICIAL ANALYSIS

applied in - This circular was referred to and applied in Shri Shubhlakshmi Mills Ltd. v. Addl. CIT [1989] 177 ITR 193 (SC) with the following observations :

In view of these decisions of the Honble Supreme Court and several High Courts referred to above, we are of the opinion that even if there is a decision of the Supreme Court in the case of Shubhlaxmi Mills Ltd. (supra), benevolent circular of the Board has to be followed. As per the Boards circular relied on by the assessee, the assessee is entitled to investment allowance irrespective of the income in that year. . . . (p. 82)

Explained in - In CIT v. Modi Spg. & Wvg. Mills Co. Ltd. [1991] 187 ITR 51 (SC), it was observed as under :

. . . The Board stated to have re-examined the issue involved coming to the view that, except the clarification given in paragraph (a) above, which stood superseded by the decision of this Court in Indian Overseas Banks case [1970] 77 ITR 512, the clarifications given in paragraphs (b) and (c) quoted above hold good. It can thus legitimately be stated that the Board has itself opted for the view expressed in Tata Iron & Steel Co. Ltd.s case [ 1 974] 96 ITR 1 (Bom.) and other cases of the kind taking the broader view in the matter. When the Board has itself opted for that view and that view is being followed by the Income-tax authorities concerned, we see no reason to do the exercise of taking any side of the two views and leave the matter at that. It is undisputed that the Boards view is not only valid under the new Income-tax Act of 1961 but also under the Indian Income-tax Act, 1922, as well. (pp. 53-54)

Explained in - In Prakash Cotton Mills (P.) Ltd. v. CIT [1993] 70 Taxman 254 (Bom.), the abovesaid circular was explained with the following observations :

The assessee has relied upon the circular issued by the CBDTs Letter F. No. 10/49/65-IT(A-I), dated 14-10-1965 as clarified by another CBDT Circular No. 189, dated30-1-1976. As per the latter circular dated 30-1-1976 the original circular issued by the CBDT, dated 14-10-1965 dealt with three contingencies which are set out in Para 1 of that circular at (a), (b) and (c). We are concerned here with contingency (c) which is as follows :

The circular of 30-1-1976, after referring to various judgments of the Supreme Court and High Courts in paras 2, 3 and 4, has clarified that only Part (a) in Para 1 stands superseded by the decision of the Supreme Court referred to therein. Parts (b) and (c) of Para 1 hold good. It is, therefore, clarified that the withdrawal of the circular dated 14-10-1965 was confined only to Part (a) of Para 1.

After this clarificatory circular was issued, the Supreme Court has had an occasion to consider in passing part (b) of the circular of 14-10-1965 in the case of Shri Shubhlaxmi Mills Ltd v. Addl. CIT [1989] 177 ITR 193. The Supreme Court has held that in order to claim a deduction on account of development rebate under section 33(1), it is obligatory that the debit entry in the profit and loss account and the credit entry in a reserve account should be made in the relevant previous year in which the machinery or plant is installed or first put to use. It has observed at page 197:

The circular dated 30th January, 1976 does not affect the true position in law.

In view of section 34 which has been subsequently amended retrospectively, we need not, however, go into this aspect of the case relating to the binding nature of this circular at any length. We will assume for the sake of the present reference that Part (c) of Para 1 of the circular dated 30-1-1976 is in force and the department is bound to give the benefit of this part of the circular to the assessee. But in order that the assessee can claim the benefit of this part of the circular, it is contemplated that there should be no deliberate contravention of any provision of law by the assessee, only then the ITO is given the power to condone any genuine deficiencies subject to the assessee making good the deficiency through creation of additional reserve in the current years books in which the assessment is framed.

Explained in - In International Instruments (P.) Ltd. v. CIT [1980] 123 ITR 11 (Kar.), the abovesaid circular was explained with the following observations :

. . . What had been actually withdrawn by the Board was a part of a Circular No. F. 10/49/65-IT A-I, dated 14th October, 1965, which contained certain general instructions. The remaining parts of that circular which did not conflict with the decision of the Supreme Court in Indian Overseas Bank Ltd v. CIT [1970] 77 ITR 512 remained intact. That it was so is clear from Circular No. 189, dated 30th January, 1976. . . . (p. 22)

Explained in - In Acropolymers (P.) Ltd. v. CIT [1985] 151 ITR 158 (Punj. & Har.), the abovesaid circular was explained with the following observations :

. . . We would have gone on to steer the way but it has been brought to our notice that the Central Board of Direct Taxes has, in Circular No. 189, dated January 30, 1976, clarified the matter and put to rest the controversy. Pithily put, the matter has been summarized to mean that in case, where the total income had been computed before allowing the development rebate, there is a loss, there was no legal obligation to create any statutory reserve in that year, as no development rebate could actually be allowed in that year. That was the view of the Board even earlier as reflected in its Circular No. F. 10/49/65-ITA(I), dated October 14,1965. However, the aforesaid circular of 1965 pertaining to a different aspect in a different context, rubbed against the decision of the Supreme Court in Indian Overseas Bank Ltd. v. CIT [1970] 77 ITR 512. Taking note of the decision in Indian Overseas Bank Ltd.s case, the Board, in 1972, withdrew the circular order of October 14, 1965, to the extent it was superseded by the aforesaid Supreme Court case [1970] 77 ITR 512 and the judgment of the Gujarat High Court in Surat Textile Mills Ltd v. CIT [1971] 80 ITR 1. Somehow, the field officers interpreted the partial withdrawal in the order of 1972 of the Board as if the entire circular dated October 14, 1965, stood withdrawn. This necessitated clarification at the hands of the Board in reiterating that the position with regard to the claiming of development rebate and creation of any statutory reserve in a year in which there was loss, remained the same as before. In so many words, the Board bowed down to the dictum in Indian Oil Corporations case [1973] 92 ITR 241 (Bom.). Thus, the position was and is that in case, where the total income had been computed before allowing the development rebate, there is a loss, there was no legal obligation to create any statutory reserve in that year, as no development rebate is actually to be allowed in that year. (p. 160)

Explained in - In CIT v. Metal Forging (P.) Ltd. [1984] 149 ITR 259 (Delhi), the abovesaid circular was explained with the following observations :

As per these circulars the total income of the assessee being nil, there was no legal obligation on the part of the assessee to create the statutory reserve in the year of installation, i.e., the assessment year in question, and the assessee was entitled to the allowance of development rebate in the year in question and to get the entire amount of development rebate carried forward to be adjusted in the subsequent year. The Andhra Pradesh High Court in the case of CIT v. Agro Insecticides & Allied Industries [1981] 127 ITR 796, answered a similar question of law in favour of the assessee solely in view of the Boards Circular No. 189, dated January 30,1976. The Allahabad High Court in Addl. CIT v. Vishnu Industrial Enterprises [1980] 122 ITR 919, also referred to these two circulars and observed that the Supreme Court in Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 and Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913, has held that the income-tax authorities are bound by the Boards Circulars and that the same are entitled to be given effect by the Courts as well. It was then held by the Allahabad High Court that these circulars supported the assessees contention which was the same as in the present case before us.

It was contended by Mr. Wazir Singh that the Supreme Court did not lay down law that all circulars issued by the Central Board of Direct Taxes are entitled to be given effect to and that these circulars relating to judicial discretion of the ITO cannot be given effect to by the Courts. No finding need be given in that regard. However, the fact remains that these circulars are admittedly operative and applicable to the case of the assessee.... (p. 273)

See also observations in Bharat Vijay Mills Ltd. v. ITO [1985] 154 ITR 786 (Guj.), extracted in the Judicial analysis under Circular No. 259 dated 11-7-1979 (Sl. No. 274).

See also CIT v. Malyalam Manorama & Co. Ltd. [1983] 143 ITR 29 (Ker.).

Circular : No. 190 [F. No. 204/52/75-IT(A-II)], dated 1-3-1976.

SECTION 43(1) l ACTUAL COST

392. Subsidy received under 10 per cent Central Outright Grant of Subsidy Scheme, 1971 - Whether liable to be deducted from cost of asset for the purposes of allowing depreciation, etc., on such assets

1. Reference is invited to the Boards Circular No. 142 [F. No. 204/25/74-IT-(A-II)], dated 1-8-1974, whereby the Board had issued clarification that the amount of subsidy received under 10 per cent Central Outright Grant of Subsidy Scheme, 1971 for industrial units to be set up in certain selected backward districts/areas would constitute capital receipt in the hands of the recipient.

2. A question has arisen for consideration whether the amount of subsidy is to be deducted from the actual cost of the assets for purposes of allowing development rebate and depreciation on such assets. Under section 43(1), actual cost means the actual cost of the assets to the assessee reduced by that portion of cost thereof, if any, as has been met directly or indirectly by any other person or authority. The Board has, therefore, been advised that since the subsidy is related to various assets, provisions of section 43(1) are attracted. The amount of subsidy will accordingly, be deducted from the cost of assets for purposes of allowing development rebate and depreciation on such assets.

JUDICIAL ANALYSIS

Referred to in - The abovesaid circular was referred to in Srinivas Industries v. CIT [1991] 188 ITR 22 (Mad.) with the following observations :

. . . Regarding Circular No. 190, dated March 1, 1976, we may point out that it proceeds on the footing that the subsidy is related to various capital assets, thus attracting section 43(1) of the Act and the amount of subsidy, accordingly, will have to be deducted from the cost of the asset for purposes of allowing development rebate and depreciation on such asset. We have already referred to the provisions in the subsidy scheme and we have pointed out that the quantum of subsidy is worked out with reference to a certain percentage on the value of the fixed capital investment as detailed in clause 4(f) of the scheme and that this is only a method and is not in any manner related to the component parts constituting fixed capital investment for purposes of clause 4(f) of the scheme. We are, therefore, of the view that the circular relied on by learned counsel for the Revenue is of no assistance. (pp. 31-32)

Circular : No. 191 [F. No. 358/9/73-IT(WT)], dated 4-3-1976.

Section 230A l Restrictions on registration of transfers of immovable property[`2] *

1227. Whether income-tax clearance certificate under the section is necessary in a case where Government is transferor

The Board have considered the question whether an Income-tax clearance certificate under section 230A is necessary in a case where the Government is a transferor. They are advised that the expression person appearing in section 230A has been used only in the context of those entities which are required to pay income-tax and taxes under various Acts mentioned in clause (a) of sub-section (1) thereof. It, therefore, follows that section 230A is not applicable to those cases which involve registration of documents in which the Government is a transferor.

Circular : No. 192 [F. No. 204/39/75-IT(A-II)], dated 10-3-1976.

328. Apprentices training - Expenditure on apprentices covered under the Apprentices Act, 1961 - Whether allowable as business deduction

1. The Board have considered the question of allowability under section 37(1), expenditure incurred on training of apprentices covered under the Apprentices Act, 1961. Any expenditure to qualify for deduction under section 37(1) must be laid out or expended wholly and exclusively for the purposes of the business or profession carried on by the assessee.

2. Section 9(4), read with section 11, of the Apprentices Act, casts a legal obligation on the employers for imparting of basic training to the apprentices. If the number of employees in the establishment is 500 or more, then the training to the apprentices has to be given either in separate parts of the workshop building or in a separate building which is specially set up by the employer for this purpose. In case the number of workers is less than 500, the basic training is to be imparted to the apprentices in training institutes set up by the Government. In view of the statutory obligation cast on the employers under the provisions of the Apprentices Act, 1961, recurring expenses incurred on imparting of the basic training to the apprentices under the said Act will be allowable as a deduction under section 37(1).

3. As regards expenses for imparting of practical training under practical Training Stipends Scheme and Programme of Apprenticeship Training (PAT), these expenses will not be covered within the meaning of section 37(1), as no statutory obligation is cast on the employer under these two training schemes.

Circular : No. 193 [F.No. 275/46/76-ITJ], dated 20-3-1976.

FINANCIAL YEAR 1976-77

1728. Instructions for deduction of tax at source from interest on securities during financial year 1976-77 at the rates specified in Part III of First Schedule to Finance Bill, 1976

I am directed to forward a copy of draft circular letter setting out the rates at which income-tax and surcharge should be deducted from interest on Government securities on or after April 1, 1976. It is requested that a circular on the basis of this draft may be issued by you immediately to all Treasury Officers and Sub-Treasury Officers under your control, individually.

DRAFT CIRCULAR REFERRED TO IN INSTRUCTIONS

1. I am to invite your attention to this Office Letter........regarding deduction of income-tax and surcharge from interest on Government securities during the financial year 1975-76.

2. According to the Finance (No. 2) Bill, 1976, except in the case of interest on securities payable to Life Insurance Corporation of India which is proposed to be exempt from deduction of income-tax with effect from June 1, 1976 through an amendment of the Life Insurance Corporation Act, 1956, income-tax is to be deducted from the entire amount of interest on securities at the following rates, namely :

		Income-tax
		Rate of Income-tax	Rate of Surcharge
I.	In the case of a person other than a company
	(i) where the person is resident in India	21 per cent	2 per cent
	on interest on securities (excluding interest payable on a tax-free security)
	(ii) where the person is not resident in India
	(a) on interest on securities (excluding interest payable on a tax-free security)	income-tax at 30 per cent and surcharge at 3 per cent of the amount of the interest,
		or
		income-tax and surcharge on income-tax in respect of the interest at the rates prescribed in Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Finance Bill, 1976, if such interest income had been the total income,
		whichever is higher;
	(b) on interest payable on a tax-free security	15 per cent	1.5 per cent
II.	In the case of a company
	(i) where the company is a domestic company on interest on securities (excluding interest payable on a tax-free security)	22 per cent	1 per cent;
	(ii) where the company is not a domestic company
	(a) on interest payable on a tax-free security	44 per cent	2.2 per cent
	(b) on interest on other securities	70 per cent	3.5 per cent

3. The term domestic company means an Indian company or any other company which, in respect of its income liable to income-tax under the Act, for the assessment year commencing on April 1, 1976 has made the prescribed arrangements for the declaration and payment within India of the dividends (including dividends on preference shares) payable out of such income in accordance with the provisions of section 194 of that Act.

4. In making payment or crediting interest on Government securities on or after April 1, 1976, you should, therefore deduct income-tax at the rates specified above, except in cases where an exemption or abatement certificate granted by an Income-tax Officer under sub-section (1) of section 197 is produced. The following instructions should be followed in this connection :

(1) Exemption or abatement certificates issued before April 1, 1976 authorising deduction of tax at a particular rate expressed as percentage of the amount of interest should be accepted and acted upon, if operative for the financial year ending on March 31, 1977.

(2) Where a certificate is issued by the Income-tax Officer on or after April 1, 1976 authorising deduction of tax at a specified rate in respect of any person, income-tax should be deducted at the rates specified therein.

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

(4) No tax should be deducted from any interest payable on 4 per cent National Defence Bonds, 1972 or 6 per cent Gold Bonds, 1977 or 7 per cent Gold Bonds, 1980 where any such Bonds are held by a resident individual and in the case of the aforesaid Gold Bonds, where the holder thereof makes declaration in writing before the person responsible for making the payment that the total nominal value of the 6 per cent Gold Bonds, 1977 or, as the case may be, the 7 per cent Gold Bonds, 1980 held by him (including such Bonds, if any, held on his behalf by any other person) did not in either case exceed Rs. 10,000 at any time during the period to which the interest relates.

(5) No tax should be deducted from interest payable to a non-resident on 4 per cent National Defence Loans, 1968 and 4 per cent National Defence Loans, 1972, as the interest paid on these loans to non-residents is totally exempt from income-tax under Notification No. SO 3331, dated 19-10-1965 issued under section 10(4). In the case of residents receiving interest on these loans, deduction of tax has to be made at the prescribed rates, except when the recipient is an individual.

(6) No tax should be deducted from interest payable on National Savings Certificates (First Issue) including National Savings Certificates (First Issue) Bank Series or 7-year National Savings Certificates (Fourth Issue).

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

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

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

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

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

(9) Under section 288B fractions of one rupee contained in the amount of tax (including advance tax and tax deducted at source) 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.

(10) In the cases of doubt, the Income-tax Officer should be consulted before making the deduction from interest on Government securities.

Circular : No. 194 [F. No. 167/37/71-IT (A-I)], dated 20-3-1976.

497. Contributions to family pension fund established under Employees' Provident Fund and Family Pension Fund Act -Whether covered under clause (a)(ii) of sub-section (2)

1. The question whether contributions to family pension fund established by a scheme under the Employees' Provident Fund and Family Pension Fund Act, 1952, will be entitled to the relief under section 80C(2)(a)(ii) has been considered by the Board.

2. The provision contained in section 80C(2)(a)(ii) is wide enough to include the contributions made towards the family pension fund established by a scheme under the Employees' Provident Fund and Family Pension Fund Act, 1952, for determining the aggregate of sums qualifying for deduction under section 80C(1).

Circular : No. 195 [F. No. 275/47/76-ITJ], dated 25-3-1976.

FINANCIAL YEAR 1976-77

1694. Instructions for deduction of tax at source from salary during financial year 1976-77 at the rates specified in part III of First Schedule to Finance Bill, 1976

1. I am directed to invite a reference to this Ministrys Circular Nos. 161 [F. No. 275/12/75-ITJ], dated 22-3-1975 and 176 [F. No. 275/12/75-ITJ], dated 16-8-1975 on the subject of deduction of income-tax from salaries paid during the year 1975-76. The Finance Bill introduced in the Parliament on March 15, 1976, inter alia, prescribes the rates at which income-tax has to be deducted during the financial year 1976-77 from income chargeable under the head Salaries. These rates will be applicable to deduction of tax from the salaries paid or payable on or after April 1, 1976. An extract of Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Finance Bill, 1976, insofar as it relates to levy of income-tax on salaries is enclosed [Annex I]. It is requested that pending the passing of the Finance Bill, 1976, deduction of tax from salaries may be made during the financial year 1976-77 according to the rates in the said Schedule. Three typical examples of calculations are given in Annex II.

2. The substance of the main provisions in the law insofar as they relate to income from salaries on which tax is to be deducted at source during the financial year 1976-77 is given hereunder :

(1) No tax will be deductible at source in any case unless the estimated salary income for the financial year exceeds Rs. 8,000.

(2) The value of the perquisites by way of free residential accommodation and motor cars provided by employers to their employees shall be determined under rule 3 of the Income-tax Rules, 1962, and it shall be taken into account for the purposes of computing the estimated salary income of the employees for the purposes of deduction of tax at source during the financial year 1976-77.

(3) For the purpose of computing the total income of an employee, the amount credited to his ledger account in the Additional Dearness Allowance Deposit Account under the provisions of the Additional Emoluments (Compulsory Deposit) Act, 1974 shall not be included in his total income of the previous year in which it is so credited but so much of the amount as is repaid to him shall be liable to be included in his total income of the previous year in which it is repaid as already explained in this Ministrys Circular No. 182 [F. No. 275/12/75-ITJ], dated 28-10-1975. The amount repaid will include an element of interest also. While the repayment of principal sum will be regarded as salary paid during the relevant financial year and assessed to tax accordingly, the interest element will qualify for exemption under section 80L.

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

(5) Under section 16, the taxable salary is to be computed after providing a standard deduction in respect of expenditure incidental to employment. The standard deduction is to be allowed in an amount equal to 20 per cent of the salary up to Rs. 10,000 and 10 per cent of the salary in excess thereof, subject to a maximum of Rs. 3,500. For this purpose, the term salary will include fees, commission, perquisites or profits in lieu of or in addition to salary but will not include any payments received by the employee which are specifically exempt from tax under clauses (10), (10A), (10B), (11), (12) and (13A) of section 10. Thus, house rent allowance which is exempt under section 10(13A) of the Income-tax Act will not be taken into account for the purposes of computing the amount of the standard deduction. It may be noted that the standard deduction on the above basis is to be allowed irrespective of whether any expenditure incidental to employment is actually incurred by the employee or not. This deduction will, however, not be admissible in the case of retired pensioners who have not been in employment at any time during the financial year 1976-77. In the case of persons who retire from service in the course of the financial year 1976-77, the standard deduction will be calculated only with reference to the salary derived from employment during that financial year without taking into account the pension received by the employee. Further, the standard deduction will be limited to Rs. 1,000 only in cases (a) where the employee is in receipt of a conveyance allowance, or (b) where he is provided with any motor car, motor cycle, scooter or other moped by his employer (for use otherwise than wholly or exclusively in the performance of his duties) or where he is allowed the use of any one or more motor cars (otherwise than wholly or exclusively in the performance of his duties) out of a pool of motor cars owned or hired by the employer. In this connection, it may be noted that the use of a motor car by the employees for the purposes of going from his residence to the place where the duties of employment are to be performed or from such place back to his residence will not be regarded as use of the motor car in the performance of his duties.

(6) Under section 80C, while computing the taxable income, the disbursing officers should allow a deduction of the whole of the first Rs. 4,000, 50 per cent of the next Rs. 6,000 and 40 per cent of the balance of the qualifying amount of payments towards life insurance premia, contributions to provident fund, contributions for participation in the Unit-linked Insurance Plan, 1971 made under section 19(1)(cc) of the Unit Trust of India Act, 1963 and deposits in a 10-year Account or 15-year Account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959. It may be mentioned that the monetary ceiling limit in respect of contributions to recognised provident funds laid down in clause (d) of sub-section (2) of section 80C as qualifying for tax relief is proposed to be raised from Rs. 8,000 to Rs. 10,000 through the Finance Bill, 1976. The qualifying amount of these items taken together will be limited to 30 per cent of the estimated salary [after the deduction in respect of expenditure incidental to the employment of the assessee referred to in item (5) above], or Rs. 20,000, whichever is less.

(7) Section 80FF provides for deduction in respect of the expenditure incurred by a person on higher education of his dependent children, brother or sister. The deduction is admissible only in the case of Indian citizens whose gross total income does not exceed Rs. 12,000. Where the said dependent of the taxpayer is studying for a degree or post-graduate course in medicine (including surgery and obstetrics) architecture, engineering, technology or business management, a deduction of Rs. 1,000 and where the dependent is studying for a diploma course in these subjects or for any other degree or post-graduate course, a deduction of Rs. 500 for each dependent is to be allowed. In cases where the taxpayer has incurred expenditure on the education of more than two dependents the deduction under the proposed provision will be allowed at the above rates with reference to two such dependents as may be chosen by him. It may be noted that deduction at this rate is to be allowed irrespective of the actual amount spent by the assessee provided some amount is spent by the assessee on such education. The benefit of this deduction can be allowed at the stage of deduction of tax at source on assessees furnishing a certificate to the effect that he has incurred expenditure during the previous year out of his income chargeable to tax on full time education of his child(ren), brother or sister wholly or mainly dependent on him and also declaring the nature of the course for which they are studying.

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

(9) No deduction should be made from the salary income in respect of any donations for charitable purposes. The tax relief on such donations admissible under section 80G will have to be claimed by the taxpayer separately at the time of the finalisation of the assessment. However, in cases where contributions to the National Defence Fund, Jawaharlal Nehru Memorial Fund, the Prime Ministers Drought Relief Fund or the Prime Ministers National Relief Fund are made 50 per cent of such contributions may be deducted in computing the taxable income of the employee. Care should be taken to see that the aggregate of such contributions for the year is not less than Rs. 250. Disbursing officers should show the total contributions in the remarks column of the return under section 206.

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

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

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

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

3. If any changes are made in the Finance Bill, 1976 before it is passed into law, the same will be communicated to you in due course.

ANNEX I - EXTRACT FROM PART III OF FIRST SCHEDULE TO FINANCE BILL, 1976

Paragraph A

Sub Paragraph I

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

Rates of income-tax

(1)	where the total income does not exceed Rs. 8,000	Nil;
(2)	where the total income exceeds Rs. 8,000 but does not exceed Rs. 15,000	15 per cent of the amount by which the total income exceeds Rs. 8,000;
(3)	where the total income exceeds Rs. 15,000 but does not exceed Rs. 20,000	Rs. 1,050 plus 18 per cent of the amount by which the total income exceeds Rs. 15,000;
(4)	where the total income exceeds Rs. 20,000 but does not exceed Rs. 25,000	Rs. 1,950 plus 25 per cent of the amount by which the total income exceeds Rs. 20,000;
(5)	where the total income exceeds Rs. 25,000 but does not exceed Rs. 30,000	Rs. 3,200 plus 30 per cent of the amount by which the total income exceeds Rs. 25,000;
(6)	where the total income exceeds Rs. 30,000 but does not exceed Rs. 50,000	Rs. 4,700 plus 40 per cent of the amount by which the total income exceeds Rs. 30,000;
(7)	where the total income exceeds Rs. 50,000 but does not exceed Rs. 70,000	Rs. 12,700 plus 50 per cent of the amount by which the total income exceeds Rs. 50,000;
(8)	where the total income exceeds Rs. 70,000 but does not exceed Rs. 1,00,000	Rs. 22,700 plus 55 per cent of the amount by which the total income exceeds Rs. 70,000;
(9)	where the total income exceeds Rs. 1,00,000	Rs. 39,200 plus 60 per cent of the amount by which the total income exceeds Rs. 1,00,000;

Surcharge on income-tax

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

ANNEX II - TYPICAL EXAMPLES OF INCOME-TAX CALCULATION

Example I

		Rs.
1.	Total salary income (including Rs. 180) deposited under the Additional Emoluments (Compulsory Deposit) Act, 1974	9,680
2.	Contributions to general provident fund	720
3.	Payment towards life insurance premium	500
		1,220
4.	Total salary income	9,680
5.	Deduct : amount deposited under the Additional Emoluments (Compulsory Deposit) Act, 1974	180
		9,500
6.	Deduct : standard deduction of 20 per cent of salary in respect of expenditure incidental to the employment	1,900
		7,600
7.	Deduct : whole of the qualifying contributions towards general provident fund and life insurance premia	1,220
		6,380
8.	Taxable income	6,380
9.	Income-tax payable on Rs. 6,380	Nil

Example II

1.	Total salary income (including Rs. 240) deposited under the Additional Emoluments (Compulsory Deposit) Act, 1974	18,565
2.	Contributions to general provident fund	1,200
3.	Payment towards life insurance premia	1,600
		2,800
4.	Total salary income	18,565
5.	Deduct : amount deposited under the Additional Emoluments (Compulsory Deposit) Act, 1974	240
		18,325
6.	Deduct : standard deduction in respect of expenditure incidental to employment at Rs. 2,000 plus 10 per cent of the amount by which salary exceeds Rs. 10,000	2,832.50
		15,492.50
7.	Deduct : whole of the Rs. 2,800 qualifying contributions towards general provident fund and life insurance premia	2,800.00
8.	Taxable income	12,692.50
	Rounded off to	12.690.00
9.	Income-tax on Rs. 12,690 (i.e., at 15 per cent of Rs. 4,690)	703.50
10.	Union surcharge at 10 per cent	70.35
11.	Total tax payable	773.85
	Rounded off to	774.00

Example III

1.	[`3] 1Total salary income (including Rs. 451) deposited under the Additional Emoluments (Compulsory Deposit) Act, 1974		29,039
2.	Contribution to general provident fund		3,500
3.	Payment towards life insurance premium
	[The employee is in receipt of a conveyance allowance of Rs. 200 per month from his employer]		6,275
			9,775
4.	Total salary income		29,039
5.	Deduct : Amount deposited under the Additional Emoluments (Compulsory Deposit) Act, 1974		451
			28,588
6.	Deduct : Standard deduction in respect of expenditure incidental to employment restricted to Rs. 1,000		1,000
			27,588
7.	Deduction on account of contribution towards general provident fund and life insurance premia. Paid Rs. 9,775 in all but limited to 30 per cent of Rs. 27,588 i.e., Rs. 8,276.40
	- on the first Rs. 4,000 (full)	Rs. 4,000.00
	- on the next Rs. 4,276.40 at 50 per cent	Rs. 2,138.20	6,138.20
8.	Taxable income		21,449.80
	Rounded off to		21,450.00
9.	Income-tax on Rs. 21,450 (Rs. 1,950 plus 25 per cent of Rs. 1,450)		2,312.50
10.	Union surcharge at 10 per cent		231.25
11.	Total tax payable		2,543.75
	Rounded off to		2,544.00

Circular: No. 196 [F. No. 275/29/76-ITJ], dated 31-3-1976.

946. Whether tax is not to be deducted at source from conveyance allowance where disbursing authority is satisfied that conveyance allowance is exempt under section 10(14)

1. Reference is invited to this Departments Circular No. 195 [F.No. 275/47/76-ITJ], dated 25-3-1976 on the above subject.

2. This Department has received several references, enquiries, etc., from various private and public establishments seeking clarification on the point of admissibility of standard deduction under section 16(i) in the cases where the employees are in receipt of conveyance allowance. The procedure for deduction of tax at source explained in this Departments circular referred to above indicates, in the worked example annexed thereto, how, in cases where conveyance allowance is granted by the employer to his employees, the standard deduction under section 16(i) is to be restricted to Rs. 1,000. Normally, conveyance allowance will come within the definition of perquisites under section 17(2)(iv). Hence, in the worked examples, conveyance allowance paid to an employee has been added back to determine the total income for purposes of deduction of tax at source. Section 10 indicates income which do not form part of the total income. Section 10(14) reads as under:

Any special allowance or benefit, not being in the nature of an entertainment allowance or other perquisite within the meaning of clause (c) of section 17, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, to the extent to which such expenses are actually incurred for that purpose.

Explanation : For the removal of doubts, it is hereby declared that any allowance granted to the assessee to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides shall not be regarded, for the purposes of this clause as a special allowance granted to meet expenses wholly, necessarily and exclusively incurred in the performance of such duties.

In terms of this section, allowance granted specifically to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office will not form part of the total income.

3. If the disbursing authority is satisfied that the conveyance allowance granted to the employees is covered by section 10(14), then the obligation to deduct tax thereon may not arise. In such contingency tax is not liable to be deducted at source from this allowance. However, at the same time it will have to be ensured that a certificate in terms of section 10(14) is endorsed on the tax deduction bills, by the disbursing authority. The employees who are in receipt of conveyance allowance would also have to furnish the necessary certificate before the assessing authorities in support of the fact that conveyance allowance is only a reimbursement of expenses laid out wholly, necessarily and exclusively for the performance of the duties of an office. Such satisfaction of the disbursing authority would still be liable for scrutiny by the Income-tax Officer during regular assessment proceedings before him.

FINANCIAL YEAR 1976-77

1753. Instructions for deduction of tax at source from winnings from lottery or crossword puzzle during financial year 1976-77 at the rates specified in Part II of First Schedule to Finance Act, 1976

1. Under section 194B every person responsible for paying to any person, whether resident or non-resident, any income by way of winnings from any lottery or crossword puzzle, in an amount exceeding Rs. 1,000 is required to deduct income-tax thereon at rates prescribed in this behalf in the Finance Act of the relevant year. The rates of deduction of income-tax at source for the financial year 1975-76 have been prescribed in Part II of the First Schedule to the Finance Act, 1976 and are as follows :

Rates of income-tax including surcharge
I. In the case of a person other than a company
(a) where the person is resident	33 per cent (IT 30 per cent + SC 3 per cent);
(b) where the person is not resident in India	33 per cent (IT 30 per cent + SC 3 per cent);
	Or
	income-tax and surcharge on income-tax at the rates prescribed in Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Finance Bill, 1976, if the winnings from lottery or crossword puzzle had been the total income,
	whichever is higher.
II. In the case of a company
(a) where the company is a domestic company	23 per cent (IT 22 per cent + SC 1 per cent);
(b) where the company is not a domestic company	73.5 per cent (IT 70 per cent + SC 3.5 per cent).

2. It is requested that deduction of tax from lotteries and crossword puzzle prizes may be made during the financial year 1976-77, according to the above rates.

3. The substance of the main provisions in the law insofar as they relate to deduction of income-tax at source from winnings from lotteries and crossword puzzles is given hereunder :

(1) No tax will be deducted at source where the income by way of winnings from lottery or crossword puzzle is Rs. 1,000 or less.

(2) Where the prize is given partly in cash and partly in kind, income-tax will be deductible from the cash prizes with reference to the aggregate amount of the cash prize and the value of the prize in kind. Where, however, the prize is given only in kind no income-tax will be required to be deducted.

(3) Income-tax will be deductible at the aforesaid rates during the financial year 1976-77, from prizes given after March 31, 1976, even if the relevant draw in respect of lottery or, as the case may be, the competition in respect of a crossword puzzle may have been held on or before that date.

(4) Where the lottery or crossword puzzle is paid in instalments, the deduction will be made at the time of actual payment of each instalment.

(5) Income-tax will be deductible from the amount of the prize money paid to the owner of the lucky ticket with reference to the amount paid to him. Income-tax is not deductible from the income by way of bonus or commission paid to lottery agents or sellers of lottery tickets on the sales made by them.

(6) In view of section 288B, the amount of tax to be deducted at source should 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.

(7) Tax deducted on behalf of Government should be paid to the credit of the Central Government on the same day by book adjustment. In other cases, the tax deducted should be paid to the credit of the Central Government within one week from the date of deduction. The challans for paying income-tax in the Government account may be obtained from the Income-tax Officer concerned.

(8) The relevant forms in relation to the provisions for deduction of income-tax at source from lotteries and crossword puzzle prizes are prescribed by the Income-tax Rules. In this connection, the following instructions may be noted :

(i) In the case of any person, other than a company, it is open to the recipient of the prize to make an application in Form No. 13B to the Income-tax Officer concerned and obtain from him a certificate authorising the payer to deduct tax at such lower rates or deduct no tax as may be appropriate to his case. Such a certificate will be valid for the period specified therein unless it is cancelled by the Income-tax Officer earlier.

(ii) The person responsible for making any payment by way of winnings from lotteries or crossword puzzles should issue a certificate in Form No. 19B showing therein the amount of the prize, the amount of tax deducted at source and the date of payment in the Government account.

(iii) The person making deduction of tax in accordance with section 194B from income by way of winnings from lotteries or crossword puzzles should send to the Income-tax Officer having jurisdiction to assess him the statement in Form No. 26B quarterly on July 15, October 15, January 15 and April 15 in respect of deductions made by him during the immediately preceding quarter.

4. These instructions may be brought to the notice of all concerned under the control of the State Government.

5. In case of doubt the Income-tax Officer concerned may be consulted.

Circular : No. 199 [F. No. 275/62/76-ITJ], dated 25-6-1976.

FINANCIAL YEAR 1976-77

1784. Instructions for deduction of tax at source from insurance commission during financial year 1976-77 at the rates specified in Part II of First Schedule to Finance Act, 1976

1. Section 194D provides for deduction of income-tax at source, at such rates as may be prescribed by Finance Act of the relevant year, from payments of income by way of insurance commission, to a resident, whether an individual, a company or any other category of person. The rates for deduction of tax at source for the financial year 1976-77 which are prescribed in Part II of the First Schedule to the Finance Act, 1976 are as below :

		Income-tax	Surcharge
i.	In the case of a person other than a company	10 per cent	Nil;
ii.	In the case of a domestic company	22 per cent	1 per cent.

2. Though provisions of section 194D apply only in relation to income by way of insurance commission paid to residents, under the provisions of section 195, income-tax is required to be deducted from payments (including payments of income by way of insurance commission) made to non-corporate non-resident taxpayers as also to companies which are neither Indian companies nor companies which have made arrangements for declaration and payment of dividends within India as prescribed under rule 27. In the case of a person other than a company, who is not resident in India, the rate of deduction of tax at source, as specified in item 1(b)(i) of Part II of the First Schedule to the Finance Act, 1976 is 33 per cent (income-tax 30 per cent plus surcharge 3 per cent) of the income by way of insurance commission or income-tax and surcharge thereon at the rates prescribed in Sub-Paragraph 1 of Paragraph A of Part III of the said First Schedule, if such income had been the total income of such person, whichever is higher. In the case of company which is not a domestic company, tax is to be deducted at the rate of 73.5 per cent (income-tax 70 per cent plus surcharge 3.5 per cent).

3. It is requested that the deduction of tax at source from payments of income by way of insurance commission may be made during the financial year 1976-77 according to the above rates.

4. The substance of the main provisions in the law insofar as they relate to deduction of income-tax from insurance commission is given hereunder :

(1) For the purpose of deduction of tax at source, insurance commission will mean income by way of remuneration or reward, whether by way of commission or otherwise, for soliciting or procuring insurance business (including business relating to continuance, renewal or reviving of policies of insurance).

(2) Income-tax will be deductible from the amount credited or paid after May 31, 1973 even if the relevant amounts accrued before that date.

(3) Deduction will be made at the time of the credit of the income to the account of, or the payment thereof (by whatever mode) to the payee, whichever is earlier.

(4) The tax deducted should be paid to the credit of the Central Government by remitting it into the Government Treasury or the office of the Reserve Bank of India or State Bank of India within one week from the last day of the month in which the deduction is made. In cases where the income by way of insurance commission is credited to the account of the payee as on the date up to which the accounts of the payers business are made, the tax deducted therefrom may be paid to the credit of the Central Government within two months of the expiration of the month in which the date, up to which the accounts are made, falls. Blank challans for this purpose can be obtained from the Income-tax Officer.

(5) In view of the existing provisions in section 288B, the amount of tax to be deducted at source should be rounded off to the nearest rupee by ignoring amounts less than 50 paise and increasing the amounts of 50 paise or more to one rupee.

(6) At the time of deducting tax from the insurance commission credited to an agents account, adjustment for any debits made in his account in respect of excess commission credited or paid to him earlier is not permissible and income-tax must be deducted from the full amount of commission credited to his account.

(7) It will be open to the recipient of the commission to make an application in Form No. 13D to the Income-tax Officer concerned and obtain from him a certificate authorising the person responsible for paying the income by way of insurance commission to deduct tax at such lower rates, or deduct no tax, as may be appropriate to his case. Such a certificate will be valid for the period specified therein unless it is cancelled by the Income-tax Officer earlier.

(8) The person responsible for making the payments should issue a certificate in Form No. 19D showing therein the amount of income by way of insurance commission credited or paid, the amount of tax deducted at source, and the date of payment to the Government account.

(9) The person making deduction of tax in accordance with section 194D from income by way of insurance commission should send to the Income-tax Officer having jurisdiction to assess him

(a) a certificate in Form No. 26D quarterly on 15 July, 15 October, 15 January and 15 April, in respect of deduction of tax made by him during the preceding quarter;

(b) a statement in Form No. 26E on or before June 30 each year containing details of amounts of insurance commission from which tax has been deducted by him during the immediately preceding financial year; and

(c) a statement in Form No. 26F on or before June 30 each year containing details of amounts of insurance commission paid or credited during the immediately preceding financial year without deduction of tax.

5. These instructions may please be brought to the notice of all concerned. In case of doubt, the Income-tax Officer concerned may be consulted.

Circular : No. 200 [F. No. 204/29/76-IT(A-II)], dated 28-6-1976[`4] 1.

Top of Form

SECTION 37(3[`5] 1) l EXPENDITURE ON ADVERTISEMENT/
MAINTENANCE OF GUEST HOUSE/TRAVELLING

373. Expenditure on advertisement in souvenirs - Allowance thereof as admissible deduction

clarification 1

1. Reference is invited to Boards Circular No. 200, dated 28-6-1976 [Clarification 2] by which it was clarified that no distinction need be drawn between expenditure on advertisements in souvenirs and other types of advertisement.

2. A question has been raised as to whether an assessee can resort to publicity in more than one souvenir published by the same institution/organisation. Souvenirs are one of the recognised media of publicity. A businessman can advertise in more than one newspaper or magazine and also in more than one issue of the same newspaper or magazine. Expenditure on such advertisements will qualify for deduction under section 37(3) read with rule 6B of the Income-tax Rules. Similarly, if advertisements have been released in more than one souvenir published by the same organisation, deduction in respect of such publicity will be admissible provided aforesaid conditions are satisfied.

Circular : No. 203 [F. No. 204/29/76-IT(A-II)], dated 16-7-1976.

Judicial analysis

explained in - The above circular was explained and applied in ITO v. J.K. Synthetics Ltd. [1986] 18 ITD 71 (Delhi), with the following observations :

This circular issued by the CBDT makes it clear that advertisements inserted in souvenirs are recognised modes of publicity and that expenditure on such advertisements would qualify for deduction under section 37(3) of the Act, read with rule 6B of the Income-tax Rules, 1962. Here there is no dispute that the conditions of rule 6B were fully satisfied. In the circumstances there should be no objection for the allowance of this amount as a deduction. We agree with the finding given by the Commissioner (Appeals) that this amount was not a donation made to a political party in the guise of advertisement. A circular given by the CBDT is binding on the department and particularly those circulars which are beneficial to the assessees. This was the view expressed by the Supreme Court as early as in Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 later repeated in Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 and very recently in K.P. Verghese v. ITO [1981] 131 ITR 597. . . . (p. 509)

clarification 2

1. Attention is invited to Boards Circular No. 19 [F. No. 9/20/69-IT(A-II)], dated 13-6-1969 [Clarification 3] on the above subject.

2. It has been represented to the Board that expenditure on advertisements in souvenirs is expenditure incurred wholly and exclusively for the purpose of business and as such is allowable as a deduction under section 37(1). Disallowance of a part of expenditure on advertisement in souvenirs by the Income-tax Officer on the ground that it is in the nature of donation has caused hardship to the assessees and has caused avoidable litigation.

3. The Board has re-examined the question in the light of the representations made. It is clarified that no distinction need be drawn between expenditure on advertisements in souvenirs and other types of advertisements. Claims in respect of expenditure on advertisements in souvenirs may be allowed if the conditions laid down in rule 6B of the Income-tax Rules are fulfilled and there is evidence that the expenditure has been incurred.

Judicial analysis

Relied on in - The above circular was relied on in Century Spg. & Mfg. Co. Ltd. v. CIT [1991] 189 ITR 660 (Bom.), with the following observations :

It is brought to our notice by Mr. Mehta, learned counsel for the assessee, that the Central Board of Direct Taxes by its Circular No. 200, dated June 28, 1976, clarified that no distinction need be drawn between expenditure on advertisements in souvenirs and other types of advertisements. It was also clarified that the position would remain so even if the advertisements were released more than once in a year by the same organisation. Dr. Balasubramanian makes no submission in view of the circular cited except that the advertisements in the souvenirs did not really serve the assessees business purpose. Be that as it may, the circulars of the Board are binding on the Income-tax authorities in view of section 119 of the Income-tax Act, 1961. That being so, we have to answer the additional question No. 1 in the negative and in favour of the assessee. (p. 662)

See also CIT v. Sundaram Finance (P.) Ltd. [1985] 154 ITR 564 (Mad.).

clarification 3

1. It has been represented to the Board that expenditure incurred by businessmen on advertisements in souvenirs by trade, commerce and industry should be allowed in full in the same manner as expenditure on advertisements in newspapers since the purpose of both kinds of advertisements is identical.

2. The matter has been examined. The position, in law, is that expenditure on advertisements in souvenirs by trade, commerce and industry will be admissible in full if it can be said to have been laid out wholly and exclusively for the purpose of business. Rule 6B of the Income-tax Rules, which lays down the extent and the conditions subject to which expenditure on advertisement is to be allowed under section 37(3), does not bar the allowance of expenditure on advertisements in souvenirs, etc., in full. It is only where donations are given in the garb of advertisement expenses that the expenditure is inadmissible. Even in such cases, the donations should be considered for relief under section 80G, if the conditions mentioned in that section are fulfilled.

Circular : No. 19 [F. No. 9/20/69-IT(A-II)], dated 13-6-1969.

Circular : No. 201 [F. No. 237/16/76-A & PAC-II], dated 5-7-1976.

SECTION 143 [`6] 1l ASSESSMENT

866. Summary assessment scheme - Steps for accelerating pace of assessment without appearing before Income-tax Officers

1. The Board attaches very great importance to the successful implementation of the summary assessment scheme so that the genuine small taxpayers, who form nearly 70 per cent of the number of taxpayers borne on our registers, are not put to the avoidable inconvenience of appearing before the Income-tax Officers to prove the correctness of the income returned by them. During the current year, the Board has fixed a target of 70 per cent of all assessments to be completed under the summary assessment scheme and only a small percentage of cases are selected on an objective and rational basis for scrutiny. The remaining cases will be completed summarily without calling the taxpayer to appear before the Income-tax Officer with his books of account, etc. With a view to bring home the advantages of this scheme to the taxpayer, a massive campaign of taxpayer education was recently undertaken by the Department explaining the various provisions of the tax laws with particular emphasis on the details and advantages of the summary assessment scheme. This programme of taxpayer education will be a continuing process.

2. However, the success of this scheme depends, to a large extent, on the cooperation of the taxpayers and their advisers. In order to enable the Income-tax Officer to complete the assessment in a summary manner and in accordance with law, the returns of income should be correct and complete in all respects, and be accompanied by copies of trading, profits and loss accounts, balance-sheets, etc., that are required under the rules. It is also necessary that evidence in support of rebates, reliefs and tax credit, etc., claimed should accompany the returns. To remove any misgivings regarding the safety of these documents steps have been taken to streamline the procedure for receipt and registration of returns in the income-tax officers and to ensure that documents accompanying the returns are properly docketed.

3. The above steps taken to accelerate the pace of assessments in a summary manner in all suitable cases may be brought to the notice of the general public.

FINANCE ACT, 1976 - CIRCULAR NO. 202, DATED 5-7-1976

Circular : No. 203 [F. No. 204/29/76-IT(A-II)], dated 16-7-1976.

SECTION 37(3[`7] 1) l EXPENDITURE ON ADVERTISEMENT/
MAINTENANCE OF GUEST HOUSE/TRAVELLING

373. Expenditure on advertisement in souvenirs - Allowance thereof as admissible deduction

clarification 1

Judicial analysis

explained in - The above circular was explained and applied in ITO v. J.K. Synthetics Ltd. [1986] 18 ITD 71 (Delhi), with the following observations :

clarification 2

1. Attention is invited to Boards Circular No. 19 [F. No. 9/20/69-IT(A-II)], dated 13-6-1969 [Clarification 3] on the above subject.

Circular : No. 200 [F. No. 204/29/76-IT(A-II)], dated 28-6-1976[`8] 1.

Judicial analysis

Relied on in - The above circular was relied on in Century Spg. & Mfg. Co. Ltd. v. CIT [1991] 189 ITR 660 (Bom.), with the following observations :

See also CIT v. Sundaram Finance (P.) Ltd. [1985] 154 ITR 564 (Mad.).

clarification 3

Circular : No. 19 [F. No. 9/20/69-IT(A-II)], dated 13-6-1969.

Circular : No. 205 [F. No. 201/50/76-IT(A-II)], dated 27-7-1976.

SECTION 44AA l MAINTENANCE OF ACCOUNTS BY PROFESSIONALS

403. Requirement of maintaining books of account by professionals to apply in respect of accounting years commencing on or after April 1, 1976

1. Section 44AA casts a legal obligation for maintenance of books of account by persons specified therein. This section has come into force with effect from April 1, 1976.

2. The Board have examined the question as to the date from which provisions of section 44AA are applicable. The requirement contained in sub-sections (1) and (2) of section 44AA regarding maintenance of books of account and documents will apply only in relation to books of account and documents in respect of accounting years commencing on or after April 1, 1976.

Circular : No. 206 [F. No. 204/64/75-IT(A-II)], dated 9-8-1976.

SECTION 36 l OTHER DEDUCTIONS

306. Bonus - Employees not covered by Payment of Bonus Act - Whether restriction laid down in the first proviso¹ to clause (ii) of sub-section (1) applies to such persons - Bonus paid to such persons whether falls under the second proviso [`9] 1to the said clause

1. Section 29 of the Payment of Bonus (Amendment) Act, 1976 has inserted a new proviso to clause (ii) of sub-section (1) of section 36 and has made an amendment to the existing proviso to the said clause with effect from September 25, 1975. The newly inserted first proviso to clause (ii) of section 36(1) will apply in relation to bonus paid to an employee employed in a factory or other establishment to which the provisions of the Payment of Bonus Act, 1965 apply. The term employee has been defined in section 2(13) of the Payment of Bonus Act to mean any person (other than an apprentice) employed on a salary or wage not exceeding Rs. 1,600 per month in any industry to do any skilled or unskilled, manual, supervisory, managerial, administrative, technical or clerical work for hire or reward, whether the terms of employment be express or implied. Under this definition, persons drawing a salary or wage exceeding Rs. 1,600 per month and employed in a factory or establishment to which the provisions of the Payment of Bonus Act apply, are not covered by the provisions of that Act relating to compulsory payment of bonus. In view thereof the restriction laid down in the aforesaid first proviso regarding deduction in respect of bonus paid to employees covered by the Payment of Bonus Act will not apply in relation to such persons. Bonus paid to such persons will, therefore, fall under the second proviso to section 36(1)(ii) and its admissibility will be governed by the conditions spelt out in the said proviso.

2. Since the amendment made in section 36(1)(ii) by the Payment of Bonus (Amendment) Act has come into force with effect from September 25,1975, the amended provisions will apply in relation to the assessment year 1976-77 and subsequent years.

Judicial analysis

Applied in - The above circular was referred to and applied in Eisen Pharmaceutical Co. (P.) Ltd. v. ITO [1992] 40 ITD 467 (Pune), with the following observations :

5. After due consideration of the rival submissions, we are of the opinion that the CIT was not justified in invoking the jurisdiction under section 263 and consequently directing the ITO to disallow the excess payment of bonus. Admittedly the six employees to whom bonus of Rs. 12,462 has been paid, are not the employees as per the definition under section 2(13) of the Payment of Bonus Act, 1965. Therefore, the claim of deduction of bonus paid to them requires to be considered only under the second proviso to section 36(1)(ii) of the Income-tax Act, 1961 as clarified by the CBDT in Circular No. 206 dated 9-8-1976. The Board clarified that the persons drawing salary or wage exceeding Rs. 1,600 p.m. and who are employed in a factory or establishment to which the provisions of Payment of Bonus Act apply, are not covered by the provisions of that Act relating to compulsory payment of bonus. In view thereof, the restrictions laid down in the aforesaid first proviso regarding the deduction in respect of bonus paid to employees covered by the Payment of Bonus Act will not apply in relation to such persons. The bonus paid to such persons will therefore, fall under the second proviso to section 36(1)(ii) and its admissibility will be governed by the conditions spelt out in the said proviso.

6. In view of this clarification given by the CBDT the CIT is not correct in coming to the conclusion that for the excess payment of bonus only the first proviso is applicable and the second proviso is not applicable. It is to be observed that the Board Circular No. 206 dated 9-8-1976 has contemplated a situation which is applicable to the assessee also, viz., the bonus is paid to employees who are governed by the Payment of Bonus Act as well as those who are not covered by the Payment of Bonus Act but the establishment is one which is governed by the Payment of Bonus Act. Consequently, the CIT was clearly in error in coming to the conclusion that the second proviso to section 36(1)(ii) is not applicable to the assessees case and therefore, the entire payment is excess payment of bonus to be disallowed under the first proviso to section 36(1)(ii) of the Act. Even the Circular No. 287 dated 4-12-1980 relied upon by the CIT clarifies that in case of employees covered by the Payment of Bonus Act, 1965, excess payment over the limit prescribed is not permissible under section 37(1) as ex gratia paid in cash or in kind. Even here the CIT is not correct in relying on this circular. (pp. 469, 470)

Referred to in - The above circular was referred to in ITO v. Coimbatore Kamala Mills Ltd. [1984] 20 TTJ (Mad.) 319, with the following observations :

. . . The CBDT itself has issued a Circular No. 206, dated 9-8-1976 instructing the ITO(s) to allow bonus under the first proviso of section 36(1)(ii) wherever the bonus does not fall within the scope of the Payment of Bonus Act. Since the additional amount was paid under a settlement with the workmen under the auspices of the Government it is not the case of the revenue that any of the conditions prescribed under the first proviso are not met or that the additional bonus was not allowable under that proviso. Even if the additional payment is not to be considered as a bonus clearly, it is undisputedly paid for the purpose of the business and, therefore, allowable as a business expenditure. Since in any view of the matter, the additional payment was an allowable deduction, we see no reason to interfere with the order of the CIT (Appeals) on this point. (p. 319)

Circular: No. 207 [F. No. 220/20/76-IT], dated 24-9-1976.

934. Whether coparcener of HUF can be regarded as benamidar of HUF and thus obliged to file Form No. 12A in terms of Explanation (b) of section 185(1)

Clarification 1

1. Reference is invited to the Boards Circular No. 207 [F. No. 220/20/76-IT (A-II)], dated 24-9-1976 [Clarification 2] wherein it was explained that the karta of the Hindu undivided family cannot be regarded as a benamidar of the Hindu undivided family within the meaning of the Explanation to section 185(1) and as such there is no obligation to file Form No. 12A in such cases.

2. The Board have examined the question whether the provisions of clause (b) of Explanation to section 185(1) will apply to a case where a coparcener other than a karta of Hindu undivided family is a partner in a firm on behalf of his Hindu undivided family. The Board is of a view that a coparcener of a Hindu undivided family cannot be regarded as a benamidar of Hindu undivided family and as such there is no obligation to file Form No. 12A in such cases.

Circular: No. 224 [F. No. 220/8/77-IT(A-II)], dated 22-6-1977.

Clarification 2

1. Reference is invited to the Explanation to section 185(1) as substituted by the Taxation Laws (Amendment) Act, 1975. This Explanation has been made effective from April 1, 1976. The Explanation reads as under:

For the purposes of this section and section 186, a firm shall not be regarded as a genuine firm if any partner of the firm was, in relation to the whole or any part of his share in the income or property of the firm, at any time during the previous year, a benamidar

(a) of any other partner to whom the first-mentioned partner does not stand in the relationship of a spouse or minor child, or

(b) of any person, not being a partner of the firm, and any of the other partners knew or had reason to believe that the first-mentioned partner was such benamidar and such knowledge or belief had not been communicated by such other partner to the Income-tax Officer in the prescribed manner.

2. The Board have examined the question whether the provisions of clause (b) of the Explanation referred to above will apply to a case where a karta of Hindu undivided family is a partner in a partnership firm on behalf of this Hindu undivided family. The Board are of the view that a karta of the Hindu undivided family cannot be regarded as a benamidar of the Hindu undivided family. In view of this there is no obligation to file Form No. 12A in such cases.

Judicial analysis

Explained in - In DCIT (Asstt.) v. Coal Ash Distributors (1997) 139 Taxation 15 (Trib), the Tribunal referred to the aforesaid circulars, as well as to circular F. No. 220/46-76-ITA, and observed :

. . . Likewise the CBDT has also issued one more circular No. 220/46/76-ITA-II in which it has been clarified that when a trustee becomes a partner in his representative capacity on behalf of the trust he does not become a benamidar and hence it will not be necessary for the firm to file form No. 12A in such cases. It is evident from the aforesaid Circulars issued by CBDT that the law does not require in all cases, where some of the partners have joined as partners in their representative capacity, to file form No. 12A but such compliance is required to be made only in a case where the partner is a benamidar of another persons. This necessarily excludes those partners who themselves have some interest in the income/assets of the persons whom they represent in their representative capacity as a partner. A benamidar would be only those persons who are mere name lender, simply ostensible owners and do not have any beneficial interest in the said property namely the interest as partner in the partnership firm . . . (pp. 33-34)

Circular : No. 208 [F. No. 208/7/76-IT(A-II)], dated 15-11-1976.

475. Whether payment on or after April 1, 1977 of amount borrowed on hundi is to comply with the section regardless of whether hundi was executed prior to the said date or on or after that date

1. The Taxation Laws (Amendment) Act, 1975 has added a new section 69D with effect from April 1, 1977, which provides that if any amount is borrowed from any person on a hundi or any amount due on it is repaid to any person, otherwise than through an account payee cheque drawn on a bank, the amount so borrowed or repaid shall be assessed as the income of the taxpayer borrowing or repaying the said amount, for the previous year in which the amount is borrowed or repaid. This will also apply to the amount of interest paid on the amount borrowed on hundis. This provision is applicable only in respect of hundis and does not cover other types of loans, such as repayment of loan by employees to employers, repayment of loan to banks, co-operative societies, etc.

2. The term hundi has not been defined in the 1961 Act. In common commercial parlance, it denotes an indigenous instrument in vernacular language which can be used by the holder thereof to collect money due thereon without using the medium of currency. It may also be regarded as an indigenous form of bill of exchange expressed in vernacular language which has been in use in the mercantile community in India for the purpose of collecting dues. There are numerous varieties of hundis, for example, darshani hundi, muddati hundi, shahjog hundi, jokhmi hundi, namjog hundi, dhanijog hundi, jwabi hundi and zickri chit. The characteristics of hundis differ according to the varieties of the same. The following characteristics are found in most of the hundis :

1. A hundi is payable to a specified person or order or negotiable without endorsement by the payee.

2. A holder is entitled to sue on a hundi without an endorsement in his favour.

3. A hundi accepted by the drawee could be negotiated without endorsement.

4. If a hundi is lost, the owner could claim a duplicate or a triplicate from the drawer and present it to the drawee for payment. Interest can be charged where usage is established.

3. This provision will come into force with effect from April 1, 1977. Accordingly, any payment on or after April 1, 1977 in respect of an amount borrowed on a hundi will have to comply with the requirements of this provision regardless of whether the hundi was executed prior to the said date or on or after that date.

Income-tax

Surcharge on income-tax

Rates of income-tax including surcharge

Income-tax