APPENDIX TWO

APPENDIX TWO

AN ANALYSIS OF RELEVANT RULES OF
INCOME-TAX RULES

SECTION 2(1A)/RULES 7 AND 8: INCOME WHICH IS PARTIALLY
AGRICULTURAL AND PARTIALLY FROM BUSINESS :
COMPUTATION OF

Rule 7 provides that for disintegrating a composite business income which is partially agricultural and partially non-agricultural, the ‘market value’ of any agricultural produce, raised by the assessee or received by him as rent in kind and utilised as raw material in his business, is deducted. No further deduction is permissible in respect of any expenditure incurred by the assessee as cultivator or receiver of rent-in-kind.

Where agricultural produce is ordinarily sold in the market in its raw state, or after application to it of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render it fit to be taken to market, the market value will be the value calculated according to the average price at which it has been so sold during the relevant previous year.

Where agricultural produce is not ordinarily sold in the market in its raw state or after application to it of any process aforesaid, the market value will be the aggregate of—

(i) the expenses of cultivation;

(ii) the land revenue or rent paid for the area in which it was grown; and

(iii) such amount as the Assessing Officer finds, having regard to all the circumstances in each case to represent a reasonable profit.

Rule 8 provides that the income in respect of the business of growing tea leaves and manufacturing tea is computed under the Act as if it were derived from business, after making permissible deductions. 40 per cent of the income so arrived at is treated as business income and the balance 60 per cent is treated as agricultural income.

In computing such income an allowance shall be made in respect of the cost of planting bushes in replacement of bushes that have died or become permanently useless in an area already planted, if such area has not previously been abandoned. However, for the purpose of determining such cost, no deduction shall be made in respect of the amount of any subsidy which, under the provisions of clause (30) of section 10, is not includible in the total income.

Sections 9 and 92/Rules 10 and 11 : Income in case of
Non-residents/Determination of Income from
Transactions With non-Residents :
Computation of

Where actual amount of income accruing or arising to any non-resident person, whether directly or indirectly:

· through or from any business connection in India; or

· through or from any property in India; or

· through or from any asset/source of income in India; or

· through or from any money lent at interest and brought into India;

· is, according to Assessing Officer, not definitely ascertainable, the amount of such income can be calculated in either of the following manner:

· A percentage of turnover so accruing or arising as the Assessing Officer may consider to be reasonable; or

· An amount which bears the same proportion to the total profits and gains of business of such person, as the receipts so accruing or arising bear to the total receipt of the business; or

· An amount calculated in the manner which Assessing Officer may deem suitable.

Profits and gains derived from any business carried on in the manner referred to in section 92 may also be determined in the manner indicated above.

Before, invoking any of the three methods mentioned above, the Assessing Officer has to be satisfied that the assessee does not have the required material or even otherwise the real or actual amount of income is not ascertainable. If the actual income can be calculated by making some adjustments to income disclosed in the accounts maintained in respect of Indian income, rule 10 cannot be applied.

Rule 10(i) - Relevant material for working out ‘reasonable percentage’ has to be provided by the assessee. Some of the relevant factors which Assessing Officer should take into account while applying the ‘reasonable percentage’ are : nature of business; rate of net profit made by non-resident in business; usual rate of profit in that line of businesses; type of business operation carried on in India, etc.

Rule 10(ii) - Rule 10(ii) is applicable only if income is from business. Following steps need be taken:

· Compute total world income of non-resident assessee from business in accordance with provisions of Indian Income-tax Laws.

· Determine the proportion between the receipts accruing or arising within the taxable territories and total world receipt of business.

· Determine profits or gains of business by application of that proportion for the purposes of assessment to income-tax.

The income so determined will be taxable without any further allowances.

Section 10(14)/Rule 2BB: Prescribed Allowances
Which are Exempt Upto Prescribed Limits

Section 10(14) grants exemption on special allowances and benefits. Clause (14) is divided into two parts.

(1) Under sub-clause (i) of clause (14) of section 10, any prescribed special allowance or benefit, other than those in the nature of a perquisite, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, is exempt to the extent to which such expenses are actually incurred for that purpose. The allowances prescribed for this purpose (which are fully exempt) are spelt out in rule 2BB(1). These allowances are as follows:

· Any allowance granted to meet the cost of travel on tour or on transfer, including any sum paid in connection with transfer, packing and transportation of personal effects on such transfer.

· Any allowance, whether granted on tour or for the period of journey in connection with transfer, to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty.

· Any allowance granted to meet the expenditure incurred on conveyance in performance of duties of an office or employment of profit, provided that free conveyance is not provided by the employer.

· Any allowance granted to meet the expenditure incurred on a helper, where such helper is engaged for the performance of duties of an office or employment of profit.

· Any allowance granted for encouraging the academic, research and training pursuits in educational and research institutions.

· Any allowance granted to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the performance of the duties of an office or employment of profit.

(2) Under sub-clause (ii) of section 10(14), any prescribed allowance granted to the assessee either 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, or to compensate him for the increased cost of living, is exempt upto the prescribed extent. Rule 2BB(2) enumerates these allowances and the limits upto which they are exempt. These allowances are as follows :

Name of allowance/places where exempt	Extent of exemption
(i) Any special compensatory allowance in the nature of Special Compensatory (Hilly Areas) Allowance or High Altitude Allowance or Uncongenial Climate Allowance or Snow Bound Area Allowance or Avalanche Allowance—
(i) At places mentioned under Item I in Col. 3 of Sl. No. 1 of the Table in rule 2BB(2)	Rs. 800 per month
(ii) Siachen area of Jammu and Kashmir	Rs. 7,000 per month
(iii) All other places situated at a height of 1,000 metres or more above sea level	Rs. 300 per month
(ii) Any special compensatory allowance in the nature of Border Area Allowance or Remote locality Allowance or Difficult Area Allowance or Disturbed Area Allowance—
(a) At places mentioned under Item I in Col. 3 of Sl. No. 2 of the Table in rule 2BB(2)	Rs. 1,300 per month
(b) Installations in the Continental Shelf of India and the Exclusive Economic Zone of India	Rs. 1,100 per month
(c) At places mentioned in Item III in Col. 3 of Sl. No. 2 of the Table in rule 2BB(2)	Rs. 1,050 per month
(d) At places mentioned in Item IV in Col. 3 of Sl. No. 2 of the Table in rule 2BB(2)	Rs. 750 per month
(e) Jog Falls in Shimoga District in Karnataka	Rs. 300 per month
(f) At places mentioned in Item VI in Col. 3 of Sl. No. 2 of the Table in rule 2BB(2)	Rs. 200 per month
(iii) Special Compensatory (Tribal Area/Scheduled Areas/ Agency Areas) Allowance in States mentioned in Col. 3 of Sl. No. 3 of Table in rule 2BB(2)	Rs. 200 per month
(iv) Any allowance granted to an employee working in any transport system to meet his personal expenditure during his duty performed in the course of running of such transport from one place to another place, provided that such employee is not in receipt of daily allowance (whole of India)	70 per cent of such allowance upto a maximum of Rs. 6,000 per month
(v) Children educational allowance (whole of India)	Rs. 100 per month per child upto a maximum of two children
(vi) Any allowance granted to an employee to meet the hostel expenditure on his child (whole of India)	Rs. 300 per month per child, upto a maximum of two children
(vii) Compensatory Field Area Allowance, at places mentioned in Col. 3 of Sl. No. 7 of Table in rule 2BB(2)	Rs. 1,300 per month
(viii) Compensatory Modified Field Area Allowance at places mentioned in Col. 3 of Sl. No. 8 of Table in rule 2BB(2)	Rs. 500 per month
(ix) Any special allowance in the nature of counter-insurgency allowance granted to the members of the armed forces operating in areas away from their permanent locations for a period of more than 30 days (whole of India)	Rs. 1,300 per month
(x) Transport allowance granted to an employee [other than an employee referred to in (xi)] to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty (whole of India)	Rs. 800 per month
(xi) Transport allowance granted to an employee, who is blind or orthopaedically handicapped with disability of lower extremities, to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty (whole of India)	Rs. 1,600 per month
(xii) Underground allowance granted to an employee working in underground coal mines	Rs. 800 per month

Note : An assessee who claims exemption under (vii) and (viii) above, will not be entitled to the exemption in respect of the allowance referred to at (ii).

An assessee who claims exemption under (ix) will not be entitled to the exemption in respect of the allowance referred to at (ii) (disturbed area allowance).

Section 17/ Rule 3: Perquisites: Rules For
Valuation of Perquisites

Rent-Free Residential Accommodation

For computation of perquisite value of rent-free residential accommodation, all employees are divided in the following three categories:

· Central and State Government employees

· Semi-Government employees

· Private Sector employees

Government employees	Value of perquisite
This category includes:	Standard rent chargeable under the relevant Government rules.
 Central and State Government Employees
 Government employees whose services have been lent to a public sector undertaking or a Government body, the accommodation itself having been allotted to such body or undertaking by the Government.
Semi-Government employees
This category includes, employees of—	10 per cent of the salary of the employee.
a. Reserve Bank of India
b. a corporation established by a Central, State or Provincial Act or its wholly owned subsidiary company
c. a company in which all the shares (whether singly or taken together) are held by the Government or Reserve Bank of India or a corporation owned by that bank, or its wholly owned subsidiary company;
d. a body or undertaking, including a society registered under the Societies Registration Act, 1860, financed wholly or mainly by the Government; and
e. a company [other than a corporation referred to in (b) and (c) above] in which not less than 40 per cent of the shares are held (whether singly or taken together) by the Government or Reserve Bank of India, provided the employee is a retired Government Officer or a Government Officer on deputation.

As an exception to this general rule, in the cases cited above where the perquisite is to be valued at 10 per cent of the salary, if the employee is of the opinion that the fair rental value of the accommodation provided to him is less than 10 per cent of his salary, he can make a claim before the Assessing Officer at the assessment stage or through his return of income that the fair rental value may be adopted as the value of the perquisite.

	Value of the perquisite
Other employees, i.e., Private Sector Employees	Accommodation situated in Bombay, Calcutta, Delhi or Madras	Accommodation situated in other places
Fair rental value is less than 10 per cent of the salary of the employee	Fair rental value	Fair rental value
Fair rental value is 10 per cent of salary or more but not more than 60 per cent of the salary of the employee	10 per cent of the salary of the employee	Not applicable
Fair rental value is more than 60 per cent of the salary of the employee	Fair rental value minus 50 per cent of the salary of the employee	Not applicable
Fair rental value is 10 per cent of salary or more but not more than 50 per cent of the salary of the employee	Not applicable	10 per cent of the salary of the employee
Fair rental value is more than 50 per cent of the salary of the employee	Not applicable	Fair rental value minus 40 per cent of the salary of the employee

WHAT IS FAIR RENTAL VALUE

Fair rental value is the rent which a similar accommodation would fetch in the same locality, or the municipal valuation of the accommodation, whichever is higher.

Where accommodation is subject to the Rent Control Act, the fair rental value as determined above, cannot exceed the standard rent determined (or determinable even if not fixed) under the Rent Control Act.

Where the accommodation is owned by the employer, expenses incurred by the employer on maintenance of garden attached to the accommodation (inclusive of salary of gardener), will also to be taken into account - See Circular No. 122, dated 19-10-1973.

However, if such accommodation is not owned by the employer and the employer provides facility of gardener, etc., to the employee, salary paid to gardener will not enter into the computation of fair rental value, but will be taken as perquisite in employee’s hands.

What is ‘Salary’

The items to be included and excluded in the computation of ‘salary’ are as follows :

Items to be included	Items to be excluded
Basic pay	Dearness allowance, if it is not taken into account for computing retirement benefits, or if it does not form part of salary according to terms of employment.
Dearness allowance, if the terms of employment so provides	Employer’s contribution to provident fund.
Other allowances which are not exempt from tax	Other allowances which are exempt from tax.
Bonus or commission or fees	Entertainment allowance, to the extent deduction is admissible thereon.
Taxes borne by the employer1[R1]	Value of perquisites.
Electricity/gas/water expenses paid or reimbursed by the employer to his employee.2[R2]

While computing salary for the purpose of valuation of perquisite in respect of rent-free accommodation, salary, bonus, etc., are included on ‘due’ basis. Again it may be noted that salary of the period during which rent-free accommodation is not occupied by the employee, will not be considered.

Additions to be made if the accommodation is furnished

The value of the perquisite calculated as above will represent the value for unfurnished accommodation only. Where the accommodation is furnished by the employer (i.e., by way of sofa sets, cots, dining table, T.V. set, radio, refrigerators and other household appliances) the value of the perquisite computed as if it is an unfurnished accommodation should be increased to the following extent:

· Where the furnishings are owned by 10 per cent per annum of the original cost the employer of the furnishings.

· Where the furnishings are taken on Hire charges borne by the employer. hire by the employer

Provision of accommodation at concessional rent

Where the employer provides residential accommodation to an employee at a concessional rent, the value of the perquisite should first be calculated as if the residential accommodation is provided rent-free. From the value so arrived at, the rent actually paid by the assessee should be deducted, so as to arrive at the value of taxable perquisite.

Provision of Sweeper/GARdener/Watchman

Under rule 3(ba), inserted with effect from 2-6-1995, the benefit to an employee resulting from the provision by the employer of free services of a sweeper, a gardener or a watchman shall be valued at Rs. 120 per month per person.

Car Provided by employer to Employee

Car Owned or Hired by Employer

	Value of the perquisite
Maintenance and running charges met by	Car used wholly for private purposes by employee	Car used partly for official and partly for private purposes by employee	Car used solely for official purposes
Employee	Value of normal wear and tear of the car or hire charges, plus, if chauffeur is provided at employer’s expense, remuneration paid to chauffeur	Proportionate value of normal wear and tear or hire charges (as well as chauffeur’s remuneration). If determination of such value presents difficulties, at the following rates:	Nil
		Small car : Rs. 200 p.m.
		Big car : Rs. 300 p.m. Chauffeur : Rs. 300 p.m.
Employer	Expenditure incurred by employer for maintenance and running of car plus value of normal wear and tear or hire charges (as the case may be) plus remuneration paid to chauffeur	Reasonable proportion of sum actually spent by employer for maintenance and running, value of normal wear and tear or hire charges (as well as chauffeur’s remuneration). If determination on this basis presents difficulties, at the following rates:	Nil
		Small car : Rs. 600 p.m.
		Big car : Rs. 800 p.m.
		Chauffeur : Rs. 300 p.m.

Notes :

1. ‘Small car’ is one whose h.p. rating does not exceed 16. ‘Big car’ is one whose h.p. rating/engine capacity exceeds 16 h.p.

2. ‘Month’ means a completed month according to the English calendar, any part of the month should be ignored.

3. Where no particular car is placed at the disposal of the employee but he is allowed to use one or more cars out of a pool of cars, and any of such cars is a ‘Big car’, valuation will be on basis of ‘Big car’.

4. User of employer’s vehicle for purposes of going from his residence to place where duties of employment are to be performed or from such place back to his residence cannot be taken as user for private purposes and will not be a taxable perquisite.

5. Conveyance facility provided to Judges of High Courts/Supreme Court is exempt from tax.

Car owned by employee

Taxability will be on the following basis :

	Value of perquisite
Where car expenses are met by employee	Nil
Where maintenance and running expenses are met by employer :
- If car is used wholly for official purposes	Nil
- If car is used wholly for private purposes	Actual expenditure incurred by employer
- If car is partly used for official purposes and partly for private purposes	A reasonable proportion of sum actually incurred by employer which in Assessing Officer’s opinion can reasonably be attributed to use of car for private purposes.

PROVISION OF CAR AT A CONCESSIONAL RATE

In some cases, the employer may provide the amenity of a car to the employee, but recover some amount from the employee at a fixed rate to cover the cost of the personal use of the car. In such cases, the value of the perquisite should first be determined as if the amenity has been allowed free of cost, and from the amount so arrived at, the amount recovered from the employee should be deducted, so as to arrive at the taxable value of the perquisite.

PROVISION OF CONVEYANCE OTHER THAN CAR

The value of the perquisite in cases where the employer provides any conveyance other than a car to an employee will be determined as so much of the sum actually expended by the employer on the maintenance and running of the conveyance (where the conveyance is owned by the employer, the value of the normal wear and tear of the vehicle should also be added) which, in the opinion of the Assessing Officer can reasonably be attributed to the user by the assessee for purposes other than in the performance of the duties.

Free Supply of Gas, Electricity or Water for Household Consumption

If the employer arranges free supply of gas, electric energy or water for household consumption by the employer, the value of the perquisite will be determined as follows:

 Where such supply is made from resources owned by the employer without purchasing them from any other outside agency (like supply of electric energy by an Electricity Board to its employees)	Nil
 Where supply is made by purchasing them from outside agencies :
- If the items are for private use by the employee	Amount paid by employer to the supplying agency
- If the Assessing Officer is satisfied that the items are consumed by the employee also for the purpose of his official duties	Amount paid by employer to the supplying agency or 6¼ per cent of the salary of the employee, whichever is less

‘Salary’ for above purposes will include basic pay, dearness allowance (if terms of contract of employment so provides) and commission³.[R3]

Free education

Taxability of this perquisite will be as under :

	Value of perquisite
 Amount spent by employer for training/educating employee	Nil
 Fixed allowance paid to employee	Exempt to the extent of Rs. 50 per child per month (maximum of two children)*
 Reimbursement of school fees or other educational expenses	Sum so paid
 Education facilities to employee’s family members in an institution maintained by employer	Reasonable cost of education in a similar institution in or near the locality.

*Note : Any allowance granted to an employee to meet hostel expenditure of his child is exempt from tax to the extent of Rs. 150 per month per child for a maximum of two children.

Free Transport

The basis of valuation of such a perquisite is as given below:

· Transport facility provided by a transport undertaking engaged in carriage of goods or passengers to any employee and dependent family members of the employee (including dependent relatives), either, free of charge or at concessional rate, is not taxable provided conveyance used for this purpose is owned by the employer. Accordingly, the facility of granting privilege passes and privilege tickets to the railway employees and similar facility made available to the employees of Air India and Indian Airlines, is not taxable.

· In other cases, the actual amount spent by an employer is taxable, under section 17(2)(iii) as a perquisite.

Any Other Benefits

The value of any other benefit not discussed above shall be determined on such basis as the Assessing Officer considers fair and reasonable.

Section 32/Rule 5(2): Depreciation: Prescribed Conditions
For Claiming Higher rate of Depreciation

Normal rate of depreciation in case of plant and machinery is 25%. However, if the following conditions are satisfied, then plant and machinery shall be treated as a part of block of assets qualifying for depreciation at the rate of 40 per cent (50 per cent for the assessment years 1988-89 to 1991-92) by virtue of rule 5(2):

· New machinery or plant is installed during the previous year relevant to the assessment year 1988-89 (or any subsequent year), for the purposes of business of manufacture or production of any article or thing (not being any article specified in the Eleventh Schedule).

· Such article or thing is manufactured or produced by using any technology (including any process) or other know-how developed in, or is an article or thing invented in, a laboratory owned or financed by the Government or a laboratory owned by a public sector company or a University or an institution recognised in this behalf by the Secretary, Department of Scientific and Industrial Research, Government of India.

· The right to use such technology (including any process) or other know-how or to manufacture or produce such article or thing has been acquired from the owner of such laboratory or any person deriving title from such owner.

· The return, furnished by the assessee for any previous year in which the said machinery or plant is acquired, shall be accompanied by a certificate from the Secretary, Department of Scientific and Industrial Research, Government of India, to the effect that such article or thing is manufactured or produced by using such technology (including any process) or other know-how developed in such laboratory or is an article or thing invented in such laboratory.

Section 40A(3)/Rule 6DD: Business Disallowance - Cash Payments Exceeding prescribed limit - Prescribed Cases & Circumstances
in Which Payment in Sum Exceeding - prescribed limit
May be Made Otherwise than by Cheque

Under section 40A(3), as amended with effect from 1-4-1996, any payment made by an assessee for a sum exceeding Rs. 20,000 will qualify for deduction in full, only if such payment is made by means of a crossed cheque or by a crossed bank draft. If such a payment is made through any other means, twenty per cent of such payment will not be allowed as a deduction. Prior to 1-4-1996, this sub-section provided for a total ban on deduction of the entire amount, if payment was made otherwise than by way of crossed cheque or crossed bank draft. However, rule 6DD(j), as it stood then, provided for a general exception, in cases where the assessee satisfied the assessing authority that payment could not be made through crossed cheque/draft, (i) due to exceptional or unavoidable circumstances, or (ii) due to impracticability of making payment in the prescribed manner, or (iii) due to genuine hardship that such payment would cause to the payee. This clause (j) in rule 6DD has since been omitted with effect from 25-7-1995 and new clauses (j) to (l) are inserted in rule 6DD with effect from 1-12-1995. Henceforth the flat disallowance of 20 per cent of the amount will operate without any exception, in all situations other than those specifically excluded in rule 6DD. Under this rule, (as it stands after amendment by Twenty-first Amendment Rules, with effect from 1-12-1995), no disallowance under section 40A(3) will be made where payment is made in the following cases/circumstances:

1. Where payment is made to banking and other credit institutions like RBI/SBI/Scheduled Banks/Commercial Banks in public and private sector/LIC/UTI/ICICI/IFCI/IDBI/Co-operative bank or land mortgage bank/Primary agricultural credit society/Primary credit society/Madras Industrial Investment Corporation Ltd., Madras/Andhra Pradesh Industrial Development Corporation Ltd., Hyderabad/Kerala State Industrial Development Corporation Ltd., Trivandrum/State Industrial and Investment Corporation of Maharashtra Ltd., Bombay/Public State Industrial Development Corporation Ltd., Chandigarh/National Industrial Development Corporation Ltd., New Delhi/Mysore State Industrial Investment and Development Corporation Ltd., Bangalore/Haryana State Industrial Development Corporation Ltd., Chandigarh/State Financial Corporation.

2. Payments to Central and State Governments, if the rules framed by such a Government provides for payment in legal tender, such as payment of direct taxes, customs or excise duties, sales tax, railway freight, etc. Thus, in case of payments made to railways on account of railway freight charges or for booking wagons, section 40A(3) will not apply - See Circular No. 34, dated 5-3-1970.

3. Payments made by book adjustment by an assessee in the account of payee against money due to assessee for any goods supplied or services rendered by him to payee.

4. Payments through the banking system, like letters of credit, mail transfers, telegraphic transfers, book adjustment in the same bank or between one bank and another, and bills of exchange including hundies made payable to a bank.

5. Payments to a cultivator, grower or producer towards purchase of agricultural or forest produce or produce of animal husbandry (including hides and skins) or dairy or poultry farming or fish or fish products or products of horticulture or apiculture, whether processed or not.

6. Payments to a producer towards purchase of his products if they are manufactured or processed without the aid of power in a cottage industry.

7. Payments made to a person who ordinarily resides or carries on business in a village which is not served by any bank. However, if payment is made to such a villager in a town having banking facilities, the exception will not operate.

8. Payments of terminal benefits like gratuity/retrenchment compensation, etc., to employees drawing salary not exceeding Rs. 7,500 per annum.

9. Salary paid to an employee (after deducting tax at source under section 192) when such employee is temporarily posted for a continuance period of 15 days or more in a place other than his normal place of duty or on a ship, and he does not maintain any account in any bank at such place or ship.

10. Payments required to be made on a day on which the banks are closed either on account of holiday or strike.

11. Payment made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person.

SECTION 89/RULE 21A - RELIEF WHEN SALARY IS PAID IN ARREARS OR
IN ADVANCE, ETC. - RULES FOR COMPUTATION OF

Sometimes a salaried employee may receive lump sum payments in the form of arrears of salary, gratuity, leave encashment and commuted value of pension. These payments relate to services rendered in the past, and in the case of gratuity, leave encashment and commuted value of pension, may not be fully exempt from tax due to the fact that the prescribed conditions and monetary limits are not met with. If these lump sum payments are taxed in the year of receipt, the tax incidence will be very high due to the progressively increasing slab rates of tax. To mitigate the hardship that may be caused due to the high incidence of tax, the Act provides for allowing tax relief on such lump sum payments.

Items on which relief is allowable - Relief is allowed on the following items :

n Salary received in arrears or in advance

n Gratuity received after putting in service of not less than five years (unexempt portion)

n Compensation for termination of employment, provided that the employee had put in at least three years’ continuous service and the unexpired period of service is at least three years

n Commuted value of pension (unexempt portion)

n Leave encashment (unexempt portion).

How to compute relief on receipt of arrears of salary or salary received in advance - The relief on salary received in arrears or in advance (hereinafter to be referred as additional salary) is computed in the manner laid down in rule 21A(2) as under :

1. Calculate the tax payable on the total income, including the additional salary, of the relevant previous year in which the same is received.

2. Calculate the tax payable on the total income, excluding the additional salary, of the relevant previous year in which the additional salary is received.

3. Find out the difference between the tax at (1) and (2).

4. Compute the tax on the total income after excluding the additional salary in the previous year to which such salary relates.

5. Compute the tax on the total income after excluding the additional salary in the previous year to which such salary relates.

6. Find out the difference between tax at (4) and (5).

7. The excess of tax computed at (3) over tax computed at (6) is the amount of relief admissible under section 89(1). No relief is, however, admissible if tax computed at (3) is less than the tax computed at (6). In such a case, the assessee-employee need not apply for relief.

If the additional salary relates to more than one previous year, salary would be spread over the previous years to which it pertains in the manner explained above.

How to compute relief in respect of gratuity - Under section 89(1), a relief can be claimed if gratuity is received in excess of the limits specified. However, no relief is admissible if taxable gratuity is in respect of services rendered for less than five years. Cases in which the relief is admissible may be divided into two categories, namely, (a) where the gratuity payable is in respect of past service of 15 years or more, and (b) where such period is 5 years or more but less than 15 years. Relief in a case belonging to the first category is worked out as under :

1. Compute the average rate of tax on the total income, including the gratuity in the year of receipt.

2. Find out the tax on gratuity at the average rate of tax computed at (1) above.

3. Compute the average rate of tax by adding one-third of the gratuity to the other income of each of the three preceding years.

4. Find out the average of the three-average rates computed in the manner specified in (3) above and compute the tax on gratuity at that rate.

5. The difference between tax on the gratuity computed at (2) and that at (4) will be the relief admissible under section 89(1).

In cases covered under the second category, the relief is computed on the similar lines as above with the only difference that instead of average of the average rates of the preceding three years, the average of the rates of the preceding two years is computed by adding one-half of the gratuity to the other income of each of preceding two years.

Computation of relief in respect of compensation on termination of employment - If compensation is received by the assessee from his employer or former employer at or in connection with termination of his employment after continuous service for not less than 3 years and where the unexpired portion of his term of employment is also not less than 3 years, the relief is calculated in the same manner as if the gratuity was paid to the employee in respect of service rendered for a period of 15 years or more.

Computation of relief in respect of payment in commutation of pension - A relief can be claimed in respect of payment in commutation of pension received in excess of the prescribed limits. Such relief is computed in the same manner as if the gratuity was paid to the employee in respect of service rendered for a period of 15 years or more.

Computation of relief in respect of other payments - In respect of payment received by an employee other than those mentioned above, the relief under section 89(1) will be granted by the Central Board of Direct Taxes after examining the circumstances of each individual case.

How to claim the relief - In the normal course, the assessee should claim the relief only in the return of income for the assessment year relevant to the previous year in which the lump sum payment is received. For this purpose, a mere application for relief setting out the detailed calculations can be appended to the return of income. Alternatively, he can apply to the ITO even before payment is made for a direction to the employer to deduct tax at a lower rate.

As an exception to this general procedure, a special facility is afforded by the Act to an assessee who falls under any of the following categories :

· a Government servant

· employee of a company, co-operative society, local authority, University, institution, association or body.

In the case of such an assessee, the relief can be worked out and allowed even at the time of deduction of tax at source by the employer. For this purpose, the assessee-employee will have to furnish the prescribed particulars in Form No. 10E.

SECTION 203A/RULE 114A - TAX DEDUCTION ACCOUNT NUMBER -
PRESCRIBED PROCEDURE FOR

Rule 114A(3) provides that where a person has deducted or deducts tax in accordance with the provisions of Chapter XVII-B on or after 1-6-1987, he shall make an application for allotment of TAN within one month from the end of the month in which the tax was deducted.

n Once a TAN is allotted to a person, he need not make any more applications for TAN. In this respect it resembles PAN.

n What if there has been default in making the application ? - The person concerned should submit the application for allotment of TAN immediately and not continue in default.

To whom should application for TAN be made ? - Rule 114A(2) provides that application for TAN shall be made to—

a. the Assessing Officer assigned the function of allotment of TAN by the Chief Commissioner or Commissioner ; and

b. where no such assignment has been made to the Assessing Officer having jurisdiction to assess the applicant.

Board’s Circular No. 497, dated 9-10-1987 states that in the metropolitan charges of Ahmedabad, Bangalore, Bombay, Calcutta, Delhi, Hyderabad, Madras and Pune the work of allotment of TAN has been centralised at the headquarters of the charges.

How should application for allotment of TAN be made ? - Rule 114A(1) provides that an application for allotment of TAN shall be made in duplicate in Form No. 49B.

SECTION 139a/RULEs 114B to 114D - quoting of permanent
account number in documents pertaining to
certain prescribed transactions

The statutory background

(i) Section 139A(5)(c) of the Act requires that every person shall quote the Permanent Account Number (PAN) allotted to him in all documents pertaining to certain prescribed transactions entered into by him, in the interests of revenue. It is also provided that the person should quote his General Index Register Number (GIR) till such time PAN is allotted to him. Section 139A(6) of the Act lays down that every person receiving any document relating to such a prescribed transaction must ensure that PAN or GIR has been duly quoted in the document. Section 139A(8) of the Act, as amended with effect from 1-8-1998, provides inter alia that the Board may make rules providing for the following aspects :

· The categories of transactions in relation to which PAN or GIR should be quoted by every person in the documents pertaining to the aforesaid transactions.

· Class or classes of persons to whom the aforesaid requirement shall not apply.

· The form and manner in which the person who has not been allotted PAN or GIR shall make his declaration.

· The manner in which PAN or GIR should be quoted in the said transactions.

· The time and manner in which the said transactions should be intimated to the prescribed authority.

Rules 114B to 114D cover the aforesaid aspects.

Date of effect

(ii) Rules 114B to 114D have come into effect from 1-11-1998. Therefore, persons entering into the prescribed transactions on or after that date must compulsorily quote the PAN or GIR in the relevant documents, or else make a declaration (Form No. 60) in case they have not been allotted PAN and also do not have any GIR [see (v) below].

The exempted persons

(iii) Rule 114C exempts the following categories of persons from the requirement of quoting PAN or GIR, or of furnishing declaration.

n Agriculturists - Persons having only agricultural income and no other income which is chargeable to tax, are exempted. However, they have to furnish a declaration in Form No. 61 in respect of each transaction entered into by them, if such transaction happens to be one of the prescribed transactions.

n Non-residents - Any person who is non-resident as defined in section 2(30) of the Act is also exempted.

n Central Government - Central Government, State Governments and Consular Officer in transactions where they are payers.

The prescribed transactions

(iv) Rule 114B specifies the categories of transactions in respect of which PAN or GIR should be quoted, or declaration should be filed, if such transactions are entered into on or after 1-11-1998. The specified transactions are briefly explained below.

(iva) Property deals - Transactions relating to sale or purchase of any immovable property valued at Rs. 5 lakhs or more are specified for this purpose. Apparently, the monetary limit will apply to the value shown in the document for transfer. Since both ‘sale’ and ‘purchase’ are covered, the seller as well as the purchaser must quote his PAN or GIR, or must file the declaration.

(ivb) Vehicle deals - Transactions relating to sale or purchase of a motor vehicle or vehicle as defined in section 2(28) of the Motor Vehicles Act, which requires registration by a registering authority under Chapter IV of that Act are next specified for this purpose. However, sale or purchase of any two-wheeled vehicles, inclusive of any detachable side-car having an extra wheel attached to the motor vehicle, are excluded. Thus sale/purchase of scooters, mopeds and the like does not attract the requirement of quoting PAN/GIR. Here also, since both ‘sale’ and ‘purchase’ are specified, both the seller and the purchaser must quote his PAN/GIR, or file the declaration.

(ivc) Fixed deposits in banks - Transaction involving time deposits (i.e., fixed deposits) in any bank (nationalised banks, scheduled banks, co-operative banks, etc.), are next specified, if the amount involved on each occasion exceeds Rs. 50,000. If a minor having no taxable income desires to open such an account, he must quote PAN/GIR of his father or mother or guardian, as the case may be in the document covering the transaction (i.e., application for opening account).

(ivd) Deposits in post offices - Transactions involving a deposit exceeding Rs. 50,000 in any account with Post Office Savings Bank are next specified. The use of the words ‘any account’ makes it clear that the account may be a savings bank account, or time deposit account. Investment in NSCs, IVPs are, however, not covered, since they are not ‘deposits’ in a Post Office Savings Bank.

(ive) Share transactions - Transactions involving contracts of a value exceeding Rs. 10 lakhs, for sale or purchase of securities are next specified.

(ivf) Opening bank accounts - Transactions involving opening an account in any bank (nationalised banks, scheduled banks, co-operative banks, etc.) are next specified. The ‘account’ contemplated here may be a current account, savings account, or overdraft account; time deposits referred to in (ivc) above are not covered.

If a minor having no taxable income desires to open such an account, he must quote PAN/GIR of his father or mother or guardian, as the case may be, in the document covering the transaction (i.e., application for opening the account).

(ivg) New telephone connections - Making an application for installation of a telephone connection (including a cellular telephone connection) is next specified.

(ivh) Hotel bills - The last item specified pertains to payment to hotels and restaurants against their bills, if the bills are for amounts exceeding Rs. 25,000 at any one time.

Filing of declaration

(v) Under the third proviso to rule 114B, the question of filing a declaration will arise only in cases where the person entering into any of the prescribed transactions has not been allotted PAN and also does not have GIR. This proviso stipulates that such a person must file a declaration in Form No. 60 whenever he makes payment in cash or otherwise than by a crossed cheque drawn on a bank or through credit card issued by any bank in respect of any of the prescribed transactions. No declaration is necessary if the payment is made either by crossed cheque or through credit card issued by any bank. For example, if a bank account is opened by means of a crossed cheque, or if a hotel bill for over Rs. 25,000 is settled by means of a credit card, and the payer does not have PAN or GIR, he is not required to file the declaration in Form No. 60.

Responsibility of the other party

(vi) Under sub-rule (2) of rule 114C, the person who finalises the prescribed transaction [like registering officer, registering authority, bank manager, stockbroker, telephone authority, hotels/restaurants, postmaster - see (via) below] is required to ensure that either PAN or GIR is quoted in the document concerned, or a declaration in Form No. 60 is furnished.

(via) Persons specified in rule 114C(2) - Persons specified in rule 114C(2) are as under :

(a) a registering officer appointed under the Registration Act, 1908 (16 of 1908);

(b) a registering authority referred to in (ivb) above;

(d) post master;

(e) stock broker, sub-broker, share transfer agent, banker to an issue, trustee of a trust deed, registrar to issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediaries registered under section 12 of the Securities and Exchange Board of India Act;

(f) any authority or company receiving application for installation of a telephone by it;

(g) any person raising bills referred to in (ivh) above;

(h) any person who purchases or sells the immovable property or motor vehicle.

Follow-up action by other party

(vii) Rule 114D enjoins upon every person mentioned in (via) above to forward to the concerned Director of Income-tax (Investigation), the following documents, namely :

(a) copies of declaration in Form No. 60.

(b) copies of declaration in Form No. 61.

Copies of declaration furnished in respect of transactions referred to in (ivf) above shall not be furnished to the Director of Income-tax (Investigation).

All declaration in Form Nos. 60 and 61 received during a financial year shall be forwarded to the concerned Director of Income-tax (Investigation) in two instalments, that is, the forms received upto 30th September shall be forwarded latest by 31st October of that year and the declaration received till the 31st March shall be furnished latest by 30th April of the same year.