Circular : No 34 [F. No. 13A/92/69-IT(A-II)], dated 5-3-1970.

section 40a l expenses or payments not deductible

379. Disallowance of expenditure for which payment exceeding Rs. 2,500 [`1] 1is made otherwise than by crossed cheque/bank draft under sub-section (3), read with rule 6DD of the Income-tax Rules - Scope and operation of the sub-section explained

clarification 1

1. The Ministry of Finance have received enquiries from various trade associations and members of the public about the operation of the new provision in section 40A(3) for the disallowance of expenditure in business and professions for which a payment exceeding Rs. 2,500 [`2] 1is made otherwise than by a crossed cheque or bank draft.

2. The above provision applies to payments made on or after April 1, 1969. Certain categories of payments have been excluded from its operation. These exclusions have already been notified by the Central Board of Direct Taxes in the Gazette of India, Extraordinary, dated 14-2-1969 [`3] 2and the Gazette of India, Extraordinary, dated 25-3-1969. Broadly, the following categories of payments have been excluded from the operation of the above provisions :

u Payments which under contracts entered into before April 1, 1969, have to be made in cash

u Payments by book adjustment by the taxpayer in the account of the payee against money due to the taxpayer for any goods supplied or services rendered by him to the payee

u Payments made in villages and towns having no banking facilities, to persons ordinarily residing or carrying on business or profession in any such village or town

u Payments made to cultivators, growers or producers for purchase of agricultural or forest produce, animal husbandry products including hides and skins, products of dairy or poultry farming, products of horticulture or epiculture[`4] 3, [fish or fish products] and products of any cottage industry run without the aid of power

u Payments made to the Reserve Bank of India, State Bank of India, other banking institutions, including co-operative banks and land mortgage banks, primary credit societies, including agricultural credit societies, Life Insurance Corporation, Unit Trust of India and specified financial institution

u Certain categories of payments made through the banking system, e.g., letters of credit, mail or telegraphic transfers, book adjustments and bills of exchange made payable only to a bank

u Payments of terminal benefits, e.g., gratuity, retrenchment compensation, etc., to low-paid employees or to members of their families

u A residuary exception is also provided in respect of payments which could not be made by crossed bank cheque or draft due to exceptional and unavoidable circumstances, provided the taxpayer furnishes evidence as to the genuineness of the payment and the identity of the payee.

3. The points on which enquiries have been made, and clarifications in the matter are given below :

Question 1 : Does the requirement of making payments over Rs. 2,500 by cheque or draft apply also to payments made for purchase of goods for the business?

Answer : Yes, the provisions apply to all categories of expenditure involving payments for goods or services, which is deductible in computing the taxable income.

Question 2 : Does the requirement apply also to loan transactions?

Answer : No, because advancing of loans or repayment the principal amount of the loan do not constitute expenditure deductible in computing the taxable income. However, interest payments in amounts exceeding Rs. 2,500 at a time are required to be made by crossed bank cheques or drafts, as interest is a deductible expenditure.

Question 3 : Does the requirement apply to payments made by commission agents (arhatias) for goods received by them for sale on commission or on consignment basis ?

Answer : No, this is because such a payment is not an expenditure deductible in computing the taxable income of the commission agent (arhatiya). For the same reason, the requirement does not also apply to advance payments made by the commission agent to the party concerned against supply of goods. However, where a commission agent (arhatiya) purchases goods on his own account, and not on commission basis, the requirement will apply in that case.

Question 4: Does the requirement apply to payments made for goods purchased on credit?

Answer : Yes, if the payment is made in an amount exceeding Rs. 2,500 at a time.

Question 5: What categories of hundi payments are excluded from the operation of the requirement in section 40A(3)?

Answer : Hundi transactions entered into in connection with the advancing of loans or the repaying of loans are outside the scope of the provisions because such transactions do not constitute expenditure deductible in computing the taxable incomevide answer 2 above.

Payments for goods or services made by a bill of exchange (hundi) where the hundi is made payable only to a bank, have been specifically excluded from the operation of section 40A(3) under the Notification in the Gazette of India, Extraordinary, dated 14-2-1969.

Question 6 : Are payments made to the grower or producer of agricultural products excluded from the operation of section 40A(3) even where these have been subjected to some processing by him?

Answer : Yes, payments made to the grower or producer of agricultural or forest produce, produce of animal husbandry, dairy or poultry farming, etc., have been specifically excluded from the requirement in section 40A(3) by the Gazette Notification, dated 14-2-1969, read with the corrigenda published in the Gazette of March 25,1969.

Thus, payments made to a grower or producer of kapas ginned by him or to a grower of paddy which has been converted by him into rice, are excluded from this provision.

Question 7 : Are payments, made in towns having banking facilities, for purchase of goods from villager whose village does not have banking facilities, excluded from the requirement in section 40A(3)?

Answer : No, because in such a case, the payment is made in a town having banking facilities. If the payment is made to the villager in the village in which he is residing and where there are no banking facilities, the requirement in section 40A(3) will not apply.

Press Note : Dated 2-5-1969, issued by Ministry of Finance.

clarification 2

A further relaxation has been made in the provision in the Income-tax Rules requiring payments for business expenses exceeding Rs. 2,500 [`5] 1to be made by crossed cheques or drafts.

The relaxation cover payments in cash in excess of Rs. 2,500¹ made with a view to avoid difficulty to the payee or where it was not practicable to pay in cheque or draft [rule 6DD(j[`6] 2)]. The availability of this benefit depends upon the nature of transaction as well as the need for its expeditious settlement. The assessee making such payments is, however, required to satisfy the Income-tax Officer about the genuineness of the payment and the identity of the payee.

Background -The Income-tax Act contains a provision in section 40A(3)which requires that payments for business expenditure in amounts exceeding
Rs. 2,500 [G7] 1should be made by crossed bank cheque or draft in order to qualify for deduction in computing the taxable profits. With a view to avoiding genuine hardship to taxpayers, particularly in the rural areas, certain exceptions were notified under rule 6DD by virtue of which payment in a sum exceeding Rs. 2,500¹ may be made otherwise than by a crossed cheque drawn on a bank or a crossed bank draft in certain circumstances.

These exceptions cover, inter alia, payments made for purchases of agricultural or forest produce, cottage industry products, etc., from the producers of such products; payments made in villages or towns having no banking facility to any person carrying on business or profession in any such village or town; payments made through the banking system, that is, in the form of letter of credit arrangements, telegraphic transfers, adjustments in accounts, or bills of exchange made payable only to a bank; and payments by way of gratuity, retrenchment compensation or other terminal benefits to low-paid employees of the business or profession.

There is also a residuary exception under clause (j) of rule 6DD which provides that the provision for the disallowance of the expenditure might not be applied if the assessee (i) establishes that the payment could not be made by crossed bank cheque or draft due to exceptional or unavoidable circumstances, and (ii) also furnishes evidence to the satisfaction of the Income-tax Officer as to the genuineness of the payment and the identity of the payee.

After considering representations from various quarters that the existing exceptions were not helpful in preventing disallowance of substantial payments for purchases of commodities on the ground that these were made in cash in amounts exceeding Rs. 2,500, the Central Board of Direct Taxes have now liberalised this residuary clause (j) of rule 6DD so as to avoid disallowance of such payments in genuine cases.

Press Note : Dated 19-11-1970, issued by Ministry of Finance.

clarification 3

1. The Board had occasion to deal with several representations from various chambers of commerce, trade associations and businessmen regarding the scope of provisions of section 40A(3) and rule 6DD. Since many of the points raised therein are of an important nature, the clarifications given thereon are summarised below.

2. The provisions of section 40A(3) would apply in computing the income under the heads Profits and gains of business or profession and Income from other sources as per section 58(2). All payments in excess of Rs. 2,500 at one time whether for goods or services obtained for cash or credit, which are deductible in computing the income, have to be made by crossed cheque or bank draft. Thus, the price of goods purchased for resale or use in manufacturing process or payments for services will be covered by the provisions of section 40A(3). However, the section will not apply to repayment of loans or payment towards the purchase price of capital assets such as plant and machinery not for resale.

3. A large portion of trade in agricultural commodities is channelled through the institution of arhatias. While the payments made to the cultivators or growers of agricultural produce are specifically excluded from the purview of section 40A(3) by clause (f) of rule 6DD, the payments made to the arhatiya for purchases made from him are not so exempted. It is contended that the arhatiy is not in a position to pay the cultivators in cash until the cheques are encashed and this procedure involves severe hardship. However, this difficulty can be met by obtaining the advances from the purchasers, which should of course conform to requirements of section 40A(3). The extension of the exemption to the purchases would defeat the objective of the provisions.

4. So far as payments made to the railways on account of freight charges or for booking of wagons, and payment of sales tax, excise duty, are concerned, clause (b) of rule 6DD specifically exempts such payments from the purview of section 40A(3) if, under the rules framed by the Government, these are required to be made in legal tender.

clarification 4

Section 40A(3) requires that if any payment in a sum exceeding Rs. 2,500 [`8] 1in respect of an expenditure incurred after March 31, 1969 is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction. It has now been represented to the Board that the entries in bank pass book do not specifically indicate whether the payment made is by a bearer or crossed cheque. The cheques after their encashment are retained by the bank and cannot be produced before the assessing authorities to prove that the payments have been made by crossed cheques.

2. The difficulty pointed out has been considered by the Board in consultation with the Department of Banking and it has been decided that the banks may now return the paid cheques to their constituents after obtaining a formal undertaking from them to the effect that they shall retain the returned paid cheques for a period of eight years and produce them before the Income-tax Officer whenever called upon to do so.

Circular : No 33 [F. No. 9/50/69-IT (A-II) ], dated 29-12-1969.

Circular : No. 35 [F. No. 275/41/70-ITJ], dated 24-3-1970.

Financial year 1970-71

1734. Instructions for deduction of tax at source from interest on securities during financial year 1970-71 at the rates specified in Part III of First Schedule to Finance Bill, 1970

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 after April 1, 1970. 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 1969-70.

2. According to the Finance Bill, 1970, 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
	on interest on securities (excluding interest payable on a tax-free security)	20 per cent	2 per cent
	(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 Paragraph A of Part III of the First Schedule to the Finance Bill,1970, 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	Nil
	(ii) where the company is not a domestic company
	(a) on interest payable on a tax-free security	44 per cent	Nil
	(b) on interest on other securities	70 per cent	Nil

3. The term domestic company under the Act means an Indian company or any other company which, in respect of its income liable to tax under this Act, 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 provision of section 194.

4. In making payment or crediting interest on Government securities on or after April 1, 1970 you should, therefore, deduct income-tax at the rates specified above, except in the 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 allowed in this connection :

(1) Exemption or abatement certificates issued before April 1, 1970 authorising deduction of tax at a particular rate expressed as a percentage of the amount of interest should be accepted and acted upon, if operative for the financial year ending on March 31, 1971.

(2) Where a certificate is issued by the Income-tax Officer on or after April 1, 1970 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. In this connection it may be specifically noted that under clauses (20A) and (22A) proposed to be inserted in section 10, income of the following categories of persons will be completely exempt from tax :

(a) State Housing Boards, Development Boards and similar other authorities constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages;

(b) hospitals and other medical institutions which exist solely for philanthropic purposes and not for purposes of profit.

(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 Gold Bonds, where the holder thereof makes a 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, issued under section 10(4) of the Income-tax Act, 1961. 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 you to the effect that :

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

(b) his total income of the 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 by way of interest or dividends in respect of any securities or shares owned by a corporation established 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 cases of doubt the Income-tax Officer should be consulted before making the deduction from interest on Government securities.

Circular : No. 36 [F. No. 275/42/70-ITJ], dated 25-3-1970.

FINANCIAL YEAR 1970-71

1701. Instructions for deduction of tax at source from salary during financial year 1970-71 at the rates specified in Part III of First Schedule to Finance Bill, 1970

1. I am directed to invite a reference to this Ministrys Letter F. No. 12/41/69-ITCC, dated 5-4-1969, on the subject of deduction of income-tax from salaries paid during the year 1969-70. The Finance Bill introduced in the Parliament on February 28, 1970, provides, inter alia, the rates at which income-tax has to be deducted during the financial year 1970-71 from income chargeable under the head Salaries. These rates will be applicable to deduction of tax from salaries paid or payable on or after April 1, 1970. An extract from Paragraph A of Part III of the First Schedule to the Finance Bill, 1970, insofar as it relates to levy of income-tax on salaries is enclosed herewith [Annex I]. It is requested that pending the passing of the Finance Bill, 1970, deductions of tax from salaries may be made during the financial year 1970-71 according to the rates in the said Schedule. A couple of examples of calculation 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 1970-71, 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. 5,000.

(2) While computing the taxable income, the disbursing officers should allow a deduction of 60 per cent of the first Rs. 5,000 and 50 per cent of the balance of the qualifying amount of payments towards life insurance premia, contributions to provident fund and deposits in a 10-year account or 15-year account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959. The qualifying amount of these items taken together will be limited to 30 per cent of the estimated salary [after the deduction, if any, for profession tax, etc., referred to in item (5) and for expenditure on travelling referred to in item (7) hereinbelow] or Rs. 15,000, whichever is less.

(3) 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 rupees.

(4) No deduction should be made from the salary income in respect of any donations for charitable purposes. The tax relief on such donations 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 or the Prime Ministers Drought Relief Fund are made by deduction from the pay bills, 55 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.

(5) In cases where deductions are claimed on account of tax on professions, trades, callings or employments levied under any State or Provincial Act the same may be allowed from the total income for purposes of deduction of tax at source on production of proof by the assessee before the disbursing officer. The adjustment in this behalf in the tax deductible at source may be made in the last month.

(6) No deduction should be made from the salary income in respect of any expenditure on the purchase of books and other publications.

(7) The Income-tax Act provides for standard deductions in the case of salaried taxpayers in respect of expenditure on travelling for the purposes of employment, provided they are not in receipt of a conveyance allowance. The amounts of these standard deductions, as proposed by the Finance Bill, 1970, are given below :

	Category of taxpayers	Amount of standard deduction for every month or part of the month comprised in the period of employment or during which the conveyance has been used for the purpose of employment
		Rs.
1.	Taxpayers owning motor cars	200
2.	Taxpayers owning motor cycles, scooters or other mopeds	60[`9] 1
3.	Taxpayers other than those referred to at items (1) and (2)	30[`10] 1

In the case of taxpayers owning motor cars, motor cycles, scooters or other mopeds, the standard deduction is admissible only if the conveyance is registered in the employees name and not in the name of any other person even though such employee may claim to have purchased it from his own funds. (Each employee claiming such deduction will furnish to the disbursing authority a certificate that the conveyance is registered in his own name.)

The standard deduction of Rs. 30 per month is admissible to such of the salaried taxpayers who do not own any conveyance as also to those who own a bicycle or any other conveyance, not being a motor car, motor cycle, scooter or other moped.

The deduction of the appropriate amount for expenditure should be allowed in calculating the tax to be deducted at source from the salary income.

The standard deductions mentioned above will not be available to an employee who is in receipt of a conveyance allowance whether as such or as part of his salary.

(8) In the case of an employee in receipt of a conveyance allowance, the disbursing officer may exclude from the salary of the employee that part of the conveyance allowance which is equal to the amount that was treated as exempt under section 10(14) by the Income-tax Officer in the last completed assessment of the employee. For this purpose, the employee concerned should furnish to the disbursing authority a declaration as to the amount of the conveyance allowance which was treated as exempt from tax in his last completed income-tax assessment specifying also the year to which such assessment relates.

(9) Attention is also invited to the provisions of 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 provision of Chapter XVII-B, he shall be punishable with rigorous imprisonment for a term which may extend to six months, and shall also be liable to fine which shall be not less than a sum calculated at the rate of fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid.

3. If any changes are made in the Finance Bill, 1970, 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, 1970

Paragraph A

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 any other Paragraph of this Part applies :

Rates of income-tax

(1)	where the total income does not exceed Rs. 5,000	Nil;
(2)	where the total income exceeds Rs. 5,000 but does not exceed Rs. 10,000	10 per cent of the amount by which the total income exceeds Rs. 5,000;
(3)	where the total income exceeds Rs. 10,000 but does not exceed Rs. 15,000	Rs. 500 plus 17 per cent of the amount by which the total income exceeds Rs. 10,000;
(4)	where the total income exceeds Rs. 15,000 but does not exceed Rs. 20,000	Rs. 1,350 plus 23 per cent of the by which the total income exceeds Rs. 15,000;
(5)	where the total income exceeds Rs. 20,000 but does not exceed Rs. 25,000	Rs. 2,500 plus 30 per cent of the amount by which the total income exceeds Rs. 20,000;
(6)	where the total income exceeds Rs. 25,000 but does not exceed Rs. 30,000	Rs. 4,000 plus 40 per cent of the amount by which the total income exceeds Rs. 25,000;
(7)	where the total income exceeds Rs. 30,000 but does not exceed Rs. 40,000	Rs. 6,000 plus 50 per cent of the amount which the total income exceeds Rs. 30,000;by
(8)	where the total income exceeds Rs. 40,000 but does not exceed Rs. 60,000	Rs. 11,000 plus 60 per cent of the amount by which the total income exceeds Rs. 40,000;
(9)	where the total income exceeds Rs. 60,000 but does not exceed Rs. 80,000	Rs. 23,000 plus 70 per cent of the amount by which the total income exceeds Rs. 60,000;
(10)	where the total income exceeds Rs. 80,000 but does not exceed Rs. 1,00,000	Rs. 37,000 plus 75 per cent of the amount by which the total income exceeds Rs. 80,000;
(11)	where the total income exceeds Rs. 1,00,000 but does not exceed Rs. 2,00,000	Rs. 52,000 plus 80 per cent of the amount by which the total income exceeds Rs. 1,00,000;
(12)	where the total income exceeds Rs. 2,00,000	Rs. 1,32,000 plus 85 per cent of the amount by which the total income exceeds Rs. 2,00,000 :

Provided that, for the purposes of this Paragraph in the case of Hindu undivided family which at any time during the previous year relevant to the assessment year commencing on April 1, 1971, satisfies either of the following two conditions, namely :

(a) that it has at least two members entitled to claim partition who are not less than eighteen years of age, or

(b) that it has at least two members entitled to claim partition who are not lineally descended one from the other and who are not lineally descended from any other living member of the family :

(i) no income-tax shall be payable on a total income not exceeding Rs.7,000;

(ii) where the total income exceeds Rs. 7,000 but does not exceed Rs. 7,660 the income-tax payable thereon shall not exceed forty per cent of the amount by which the total income exceeds Rs. 7,000.

Surcharge on income-tax

The amount of income-tax computed in accordance with the preceding provision of this 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		9,500
2.	Contributions to general provident fund		720
3.	Payment towards life insurance premia		500
4.	Gross salary income		9,500
5.	Deduct : 60 per cent of the contributions to general provident fund and life insurance premia (60 per cent of Rs. 1,220)		732
6.	Balance taxable income		8,768
	[The tax has to be worked out on Rs. 8,770 after rounding off to the nearest multiple of ten rupees.]
7.	Income-tax payable on Rs. 8,770 i.e., 10 per cent of Rs. 3,770		377.00
8.	Surcharge at 10 per cent on income-tax		37.70
9.	Total tax payable rounded off to		415.00
	Note : No deductions from tax should be allowed on account of personal allowances and dependent parent allowance, as these are proposed to be discontinued.
	Example II
			Rs.
	Salary income		28,088
	Provident fund contributions		3,500
	Life insurance premium		6,275
	Profession tax payable		138
	[The employee maintains a motor car registered in his own name and is likely to use it for 11 months for official purposes.]
			Rs.
	Total salary as above		28,088
	Less	Rs.
	- Profession tax	138
	- Allowance for expenditure and wear and tear on account of maintenance of motor car at Rs. 200 p.m. for 11 months	2,200	2,338
			25,750
	Less :
	Deduction on account of provident fund and life insurance premium paid Rs. 9,775 in all but limited to 30 per cent of Rs. 25,750, i.e., Rs. 7,725 at 60 per cent of the first Rs. 5,000 = Rs. 3,000 and at 50 per cent on the balance of Rs. 2,725 = Rs. 1,363		4,363
	Resultant income		21,387
	Rounded off to		21,390
	Income-tax on Rs. 21,390 (Rs. 2,500 plus 30 per cent on the balance of Rs. 1,390)		2,917.00
	Union surcharge at 10 per cent		291.70
	Total tax payable		3,208.70
	Rounded off to		3,209.00

Note : No deductions from tax should be allowed on account of personal allowances as these are proposed to be discontinued.

Circular : No. 40 [F. No. 10/59/69-IT(A-II)], dated 11-5-1970.

277. Development rebate allowed on assets sold to Government - Whether not liable to be withdrawn even if vendor credits to profit and loss account reserve which he had originally created

clarification 1

1. In para 1.45 of their 100th Report (1969-70), the Public Accounts Committee have observed as follows :

The Government are yet to clarify to the public whether a party would forfeit the development rebate when the entire assets are sold to Government and the development rebate reserve cannot stand as such in his books. The Committee trust that Government will take suitable action at an early date.

2. Section 34(3)(a) provides, inter alia, that development rebate shall be allowed only if in addition to certain other requirements, an amount equal to 75 per cent of the development rebate to be actually allowed is to be debited to the profit and loss account and credited to a reserve account. The reserve so credited is not to be utilised for a period of 8 years either for distribution by way of dividends or profits or for remittance outside India, as profits or for creation of any asset outside India. When an assessee sells his entire assets to the Government, the development rebate reserve created on such assets cannot stand as such in his books. The development rebate reserve account would then be closed by transfer to the capital account of the proprietor. If the sale takes place within 8 years of the previous year when the development rebate was created and the reserve is credited to the proprietors capital account, it would amount to utilisation of the reserve for distribution by way of profit to the proprietor under section 34(3)(a)(i).

clarification 2

1. There is an impression that the development rebate allowed in respect of an asset sold to the Government will not be withdrawn even if the vendor credits to the profit & loss account the reserve which he had originally created to qualify for the grant of the rebate. This is wrong as clarified below.

2. Section 34(3)(a) provides, inter alia, that development rebate shall be allowed only if in addition to certain other requirements, the following two conditions are also satisfied :

1. An amount equal to 75 per cent of the development rebate to be actually allowed is debited to the profit & loss account and credited to a reserve account. The reserve so created is not to be utilised for a period of 8 years either for distribution by way of dividends or profits, for remittance outside India as profits, or for creation of any asset outside India; and

2. The machinery or plant in respect of which development rebate has been allowed is not to be sold or otherwise transferred for a period of 8 years.

3. Under proviso to section 34(3)(b), the transfer or sale of the asset will not be penalised in certain circumstances. However, while claiming protection under this proviso in respect of the development rebate already allowed on the ground that the condition should not be enforced, the assessee cannot claim that the first condition too, namely, that the amount of the development rebate reserve should not be utilised for the distribution of dividends or profits, should also not be enforced. Even if the asset is not sold or transferred at all but continues to remain with the original owner, he, too, would forfeit the development rebate allowance in the event of a violation of the first condition. Merely because the violation of the second condition is condoned in certain circumstances by virtue of the proviso to section 34(3)(b), it does not follow that, in those cases, the violation of the first condition also stands condoned. Thus, if this condition is violated, the development rebate already allowed to the assessee will have to be withdrawn.

Circular : No. 26 [F. No. 10/59/69-IT(A-II)], dated 6-8-1969.

Circular : No. 42 [F. No. 275/62/70-ITJ], dated 20-6-1970.

1072. Banks exempted from deducting tax at source from interest paid on deposits under clause (vii) of sub-section (3) from 1-4-1970 - Whether tax already deducted and paid into Government account could be refunded directly by banks

1. I am directed to invite a reference to the Boards Circular No. 22/68-IT(B) [F.No. 12/23/68-IT(B)], dated 28-3/13-5-1968, and to say that the Finance Act of 1970, has made an important change in section 194A by inserting a new clause (vii) in sub-section (3) of that section. As per this clause, the provisions of section 194A are not applicable to income by way of interest credited or paid in respect of deposits with a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act), or with a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank). All such banking institutions are, therefore, no longer required to deduct tax from interest paid or credited to the accounts of a resident depositor.

2. Where, however, tax has already been deducted at source from interest paid by such banks to resident depositors so far during this financial year, and certificate for such deduction issued to the depositors or the tax so deducted paid into Government account, such tax, under the existing provisions of law, cannot be refunded directly by the banks to depositors concerned and it has to be credited to Government account and the depositors have to obtain necessary refund/as may be due in this behalf, from their Income-tax Officers according to the prescribed procedure. If, on the other hand, tax has been deducted but neither certificate of deduction issued to the depositor nor the amount paid into Government account, the entry in banks account may be written back to nullify deduction of tax.

Circular: No. 43 [F.No. 12/98/69-ITJ], dated 20-6-1970.

1159. Whether non-deduction of tax is only in respect of interest credited to Non-resident (External) Account and not to all types of non-resident accounts

1. Attention is invited to the Boards Circular Letter F.No. 12/29/65-IT(B), dated 1-6-1965 [Annex] instructing that there should be no deduction of tax at source from interest income credited to the account of any non-resident. This instruction was issued on the basis of the provisions of section 10(4A) as introduced from April 1, 1965 which exempted from tax interest falling within this category.

2. With the amendment of section 10(4A) by the Finance Act, 1968, the position has materially changed. The amendment, which is effective from April 1, 1969 has substituted the words Non-resident (External) Account for the words Non-resident Account. The change means that the exemption from tax, will now be available only in respect of a particular type of non-resident account designated as Non-resident (External) Account, which has been defined in accordance with the Foreign Exchange Regulation Act, 1947[`11] 1, and the rules made thereunder.

3. The Ministry of Finance, Department of Economic Affairs issued a Notification, dated 10-2-1970, defining the scope of the term Non-resident (External) Account [See Non-resident (External) Accounts Rules, 1970vide [1970] 77 ITR (St.) 1]. A copy of the Notification was forwarded to the Commissioners of Income-tax with the Boards Circular F.No. 1(10)/69-TPL, dated 2-4-1970.

4. In view of the amendment of section 10(4A) with effect from April 1, 1969 the instructions regarding the non-deduction of tax at source will apply only to interest credited to Non-resident (External) Accounts and not to all types of non-resident accounts.

5. A general question whether tax is deductible at source under the provisions of section 192, 193, 194, 194A or 195, from any income which is exempt from tax under section 10, is under the Boards consideration. As soon as a decision is reached on this question necessary instructions will be issued.

ANNEX - CIRCULAR, DATED 1-6-1965 REFERRED TO IN CLARIFICATION

1. A question has been raised whether interest accruing in a non-resident account on the money transferred from abroad through recognised banking channels and invested in any bank in India will be exempt from tax?

2. In this connection, it is clarified that in the case of a non-resident, any income from interest on moneys standing to his credit in a non-resident account in any bank in India in accordance with the Foreign Exchange Regulation Act, 1947 and any rules made thereunder, will not be included in the total income in view of section 6(i) of the Finance Bill, 1965. As such no tax is to be deducted at source from such interest with effect from April 1, 1965.

Circular : No. 44 [F. No. 275/42/70-ITJ], dated 4-8-1970.

188. Deductions under clause (i) as it stood prior to its substitution, and under clauses (iii) to (v) as they stood prior to their omission, by Finance Act, 1974 with effect from 1-4-1975 - Clarifications on certain issues retained in the compendium for reference purposes

clarification 1

Maintenance of conveyance - Allowance of deduction therefor when vehicle is in repair - I am directed to invite a reference to the Boards Circular No. 15 [F. No. 40/22/69-IT(A-I)], dated 8-5-1969 and to say that in the manner of standard deduction from salaries under section 16(iv), a question has arisen, viz., whether an assessee who owns a conveyance and uses it for the purposes of employment is entitled to the standard deduction for the period during which it was temporarily out of use because it was under repairs. Since during the temporary non-user of the conveyance and the assessee would have been spending on substitute conveyance and further the repair charges are not separately allowable, the Board desire that the assessee may be allowed the prescribed monthly deduction for the period of repairs. The certificate about continuous use of the vehicle for purposes of employment should cover the repairs period also.

Circular : No. 97 [F. No. 200/29/72-IT(A-I)], dated 14-12-1972.

clarification 2

Deduction to salaried employees who do not own any conveyance as also those who own a bicycle - I am directed to invite a reference to this Ministrys Circular No. 36 [F. No. 275/42/70-ITJ], dated 25-3-1970 [printed under section 192] and to say that the two examples in Annexure II to the above circular have been further considered in the light of the intended import of clause (iv) of section 16, as substituted by the Finance Act, 1970. Salaried employees who do not own any conveyance as also those who own a bicycle or any other conveyance, not being a motor car, motor cycle, scooter or other moped, are entitled to standard deduction of Rs. 35 for each calendar month or part thereof comprised in the period of their employment during the year and in order to be eligible for this deduction it is not necessary for the employee to prove that he had actually incurred any expenditure on travelling for the purposes of his employment. The aforesaid deduction should, therefore, be taken into account in calculating tax deducted at source from the salary income of such employees.

clarification 3

Allowance for maintenance expenditure/wear and tear of conveyance Whether available where conveyance is not registered in the name of assessee

1. Reference is invited to this Ministrys Circular letter of even number dated March 26, 1968 [printed under section 192] regarding the procedure to be followed by disbursing officers in deducting tax at source from salaries during the financial year 1968-69.

2. In paragraph 4 in item (ix) of the above letter, it has been stated that in calculating the tax deductible at source from salaries, the salary income is to be reduced by the appropriate amount of standard deduction for maintenance expenditure and wear and tear of motor cars and other conveyances owned by the employee and used by him for the purposes of his employment. A question has arisen whether this standard deduction is allowable in a case where the employee claims to have financed the purchase of the motor car or other conveyance from his own funds but such conveyance stands registered in the name of his wife or any other person.

3. The standard deduction under section 16(iv) is admissible only where the conveyance is owned by the employee and is used for the purpose of his employment. In accordance with the provisions of the Motor Vehicles Act, 1939, the owner of a motor vehicle has to get it registered in his name within a specified period. From this it follows that where a motor vehicle is not registered in the name of the employee, he cannot be regarded to be its owner in law. In view of this position, the standard deduction for the maintenance expenditure and wear and tear of a motor vehicle can be allowed to an employee only where the vehicle is registered in his own name.

Circular : No. 10 [F. No. 12/59/69-ITCC], dated 26-3-1969.

clarification 4

Salaried taxpayers owning conveyances and using them for employment - Deduction therefor for the assessment year 1968-69

1. A reference is invited to the Press Note issued by the Ministry of Finance (Central Board of Direct Taxes) on 25-5-1968, relating to the allowance of standard deduction for maintenance expenditure and wear and tear in the case of salaried taxpayers owning conveyances and using them for the purpose of their employment.

2. In the absence of the definition of the phrase used for the purpose of employment in the Income-tax Act, 1961, a doubt has been expressed as to the meaning of this phrase and the checks which can be applied for the proper verification of the claim, by the disbursing officers.

3. For this purpose, it is hereby clarified that a declaration from the employee that the conveyance is owned by him and is being used by him for the purposes of employment may be considered adequate by the disbursing officer for the purpose of calculation of tax deductible at source under section 192.

Circular : No. 15 [F. No. 40/22/69-IT(A-I)], dated 8-5-1969.

clarification 5

Purchase of books and other publications for the employment purposes/Main- tenance and use of own conveyance for employment purposes

1. **

**

**

2. Books - The intention is that the books and publications purchased should be of use to the employee in providing the service which he is required to give to his employer. Thus, except in the case of a journalist or a person employed on literary work, the deduction is not permissible in respect of expenditure incurred on books of literary interest or magazines, etc., which are read for the purpose of improving ones general knowledge or for entertainment. A detailed list of the books purchased, together with their prices and a certificate that the assessee had actually spent the amount claimed, should be furnished at the time of assessment. As the new provisions became effective from the assessment year 1956-57, the accounting year for which is 1955-56, it is possible that the vouchers in respect of all the purchases made after April 1, 1955 might not be available. In such cases, the production of vouchers for the assessment year 1956-57 will not be insisted upon. The deduction admissible is subject to a maximum of Rs. 500 per year.

3. Conveyance - Every salaried employee who maintains and makes use of a conveyance of his own for the purposes of his official work will be entitled to a deduction from his salary for the financial year 1955-56 (liable to be taxed in the assessment year 1956-57) of a reasonable proportion of the running expenditure and of the normal wear and tear which can be attributed to the use of the conveyance for the purposes of his employment as distinct from his private and personal use. For making a reasonable estimate of the amount to be allowed, the Income-tax Officer will require the following information :

a. the total expenditure incurred in running the conveyance during the relevant year;

b. the date of purchase, the original cost and the period for which it was in the employees use during the year; and

c. the status of the employee and the nature of duties of the employee necessitating the use of the conveyance and indicating the extent of such use for purposes of employment.

Where adequate details in respect of item (a) are not available, the employee should furnish a certificate to the effect that the total cost of running and maintaining the car was not less than a specified amount.

The employee should also furnish a certificate indicating what proportion of the expenditure on the maintenance and use of the car was for purpose of employment. (Care should naturally be taken to see that excessive and unreasonable claims are not made). For this purpose, trips between the residence and office or regular place of work, to and fro, will be regarded as being for the purposes of employment.

Journeys in ones own conveyance for which travelling allowance is charged will not qualify for the concession. Similarly, no deduction will be allowable, if the employee is in receipt of a conveyance allowance, or is provided with free transport, at employers cost.

4. No abatement in respect of this concession will be permissible at the time when tax is deducted from salary at source from month to month. The assessees claim in this behalf will be considered only at the time of assessment.

Circular : No. 23(LVIII-8), dated 9-7-1956 [relevant extracts] as corrected by Circular No. 37(LVIII-10), dated 21-9-1956.

FINANCE ACT, 1970 - CIRCULAR NO. 45, DATED 2-9-1970

Amendments at a glance

Rate structure

Amendments to Income-tax Act

Amendments to Wealth-tax Act

Amendments to Gift-tax Act

Amendments to Unit Trust of India Act

Amendments to Companies (Profits) Surtax Act

Circular : No. 46 [F. No. 194/70-IT(A-I)], dated 14-9-1970.

64. Expressions salary[`12] [`1] and year as used in clause (10) as it stood prior to its substitution by Finance Act, 1974 - Interpretation of

CLARIFICATION 1

1. Reference is invited to the Boards Circular No. 4-P(LVIII-22), dated 6-8-1964 [Clarification 2] on the above subject. Several representations have been received by the Board seeking clarification about the meaning of the term salary as used in section 10(10).

2. As was explained in that circular, salary would include only the periodical payments made to the employee by the employer as compensation for his services. Any payment made by the employer to the employee by way of allowances or perquisites, etc., is not to be taken into consideration as salary for the purposes of section 10(10). If, however, dearness allowance is merged with salary, it no longer remains dearness allowance but becomes salary and is then includible in the term salaries for the purposes of section 10(10).

CLARIFICATION 2

1. Clause (10) of section 10, inter alia, provides that the gratuity received by an employee from a private employer shall not be included in his total income to the extent the amount of such gratuity does not exceed one-half months salary for each year of completed service or 15 months salary or Rs. 24,000, whichever is the least. Under this clause, a months salary is to be calculated on basis of the average salary of the employee for three years immediately preceding the year in which the gratuity is paid.

This circular explains the import of the expressions salary and year used in the aforesaid clause.

2. The Income-tax Act does not contain a general definition of the word salary. The definition contained in section 17 is only for the purposes of sections 15, 16 and 17. Similarly, certain other provisions of the Income-tax Act, and the Rules [e.g., rule 2(h) of Part A of the Fourth Schedule to the Act and clause (2) of the Explanation to rule 3(b) of the Rules], contain a special definition of salary for specified purposes. These definitions are not relevant for the interpretation of the expression salary occurring in section 10(10). The said expression is also not defined in the General Clauses Act, 1897. Hence, the expression has to be given its ordinary natural meaning as understood in the English language. In this view of the matter, salary as contemplated by section 10(10) would include only the periodical payments made to the employee by the employer as compensation for his services. Any payments made by the employer to the employees by way of allowances, or perquisites or any payment in the nature of gratuity or bonus should not, therefore, be taken into consideration as salary for the purpose of the aforesaid provision.

3. The word year is not defined in the Income-tax Act and, therefore, its meaning has to be construed in accordance with its definition in section 3(66) of the General Clauses Act, 1897. According to the said definition, unless there is anything repugnant in the subject or context, years means a year reckoned according to the British calendar, i.e., the calendar year commencing from January 1 and ending on December 31. The word year, wherever it occurs in clause (10) of section 10 (except where it is used therein for the first time in the expression year of completed service), should therefore, be construed to mean each calendar year and not every period of twelve months reckoned from the date of the employees joining service with the employer. Thus, the expression three years in that clause refers to three calendar years immediately preceding the calendar year in which the gratuity is paid to the employee. However, the word year used in the clause for the first time in the expression each year of completed service is not used as simpliciter but in relation to the service rendered by the employee. In this context, the expression each year of completed service is to be construed to mean a period or periods of twelve months service rendered by the employee, reckoned from the date on which he joined service with his employer.

Circular : No. 4-P(LVIII-22) [F. No. 1(2)/63/TPL], dated 6-8-1964.

Circular : No. 47 [F. No. 9/100/69-IT(A-II)], dated 21-9-1970¹

385. Provision for estimated service gratuity payable to its employees -Deduction under section 37(1) and section 40A(7) after its insertion by the Finance Act, 1975, with effect from 1-4-1973

clarification 1

In the Boards Circular No. 47, dated 21-9-1970 [Clarification 2]. It was stated that provisions made by an assessee in his accounts on a scientific basis in respect of estimated service gratuity payable to employees would be admissible as deduction under section 37(1). The matter was re-examined by the Board in 1974 and the earlier instructions were withdrawn by the Boards Circular No. 146 dated 26-9-1974 [Clarification 2]. Some of the High Courts have recently taken a view that a provision made by an assessee in his accounts in respect of estimated service gratuity payable to employees will be deductible in computing the taxable income in cases where the provision has been made on a scientific basis in the form of actuarial valuation. In order to remove uncertainty, in the matter, the Finance Act, 1975 has inserted a new sub-section (7) in section 40A which provides that no deduction will be allowed in the computation of taxable profits in respect of mere provisions made by employers in their books of account for payment of gratuity to their employees on their retirement or on termination of their employment for any reason. The amendment will not, however, affect provisions made for the purpose of payment of sums by way of contribution towards approved gratuity funds that have become payable during the previous year, or for the purpose of making any payment on account of gratuity to employees where such gratuity has become payable during the previous year and such provisions will continue to be eligible for deduction as hitherto.

Circular : No. 169 (para 27), dated 23-6-1975.

JUDICIAL ANALYSIS

Commented upon - The above circular was commented upon in CIT v. Chackolas Spg. & Wvg. Mills Ltd. [1989] 178 ITR 603 (Ker.) with the following observations :

The circular issued by the Central Board of Direct Taxes, as also the Notes on Clauses referred to above, clearly indicate that what is contemplated by section 40A(7)(b)(i) of the Act, is a definite or clear provision by the assessee for the purpose of payment of a sum, by way of any contribution towards an approved gratuity fund. It is not sufficient if a mere reserve or mere provision, without anything more, is made. In this case, there is no dispute that the assessee had made provision, which was clearly one made for payment to an approved gratuity fund. . . . (p. 609)

clarification 2

1. Attention is invited to the Boards Circular No. 47 [F. No. 9/100/69-IT(A-II), dated September 21, 1970] [Clarification 3] on the above subject. In this circular, the Board had considered the question as to whether provision made by an assessee in its accounts for estimated service gratuity payable to its employees could be allowed as a deduction even though no approved gratuity fund under the provisions of the Income-tax Act had been set up. At the relevant time when this circular was issued, the Supreme Courts decision in the case of Metal Box Co. of India Ltd v. Their Workmen [1969] 73 ITR 53 was available and taking note of certain observations in this particular decision of the Supreme Court, it was felt that provision of gratuity on a scientific basis (in the form of actuarial valuation carried out every year) could be considered to represent a real liability of the employer to the employees. Accordingly, the Board decided that such provision would not be a contingent liability and may be treated as admissible deduction under section 37(1).

2. The decision of the Board has been re-examined in the light of the unreported judgment of the Supreme Court in the case of Bombay Dyeing & Manufacturing Co. Ltd. v. CWT [since reported in [1974] 93 ITR 603]. In this judgment, their Lordships have confirmed their own views in Standard Mills Co. Ltd. v. CWT [1967] 63 ITR 470 and have observed that the decision in Metal Box Co.s case (supra) was rendered under a different Act and in a different context.

3. In view of the later pronouncement of the Supreme Court in the case of Bombay Dyeing and Manufacturing Co. Ltd. (supra) and on the clear provisions of law contained in section 36(1)(v) under which any sum paid by an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of its employees under an irrevocable trust alone was admissible, any allowance of such liability towards an unapproved gratuity fund under section 37(1) does not arise. In view of this, the earlier instructions of the Board referred to above, stand withdrawn with immediate effect.

4. All pending assessments may be completed in the light of the present instructions.

Circular : No. 146 [F. No. 228/2/73-IT(A-II)], dated 26-9-1974[`13] 1.

Judicial analysis

explained in - In CBDT v. Chloride India Ltd. [1997] 225 ITR 129 (Cal.), it was held that circular of the Central Board of Direct Taxes dated September 26, 1974, providing that any allowance of gratuity liability towards an unapproved gratuity fund under section 37(1) of the Income-tax Act, 1961, shall not be made, is in direct conflict with the law laid down by the Supreme Court in Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53. The circular, therefore, has to be ingored in making assessments for the assessment year 1972-73; for the assessment year 1973-74 onwards the law applicable would be in accordance with section 40A(7) of the Income-tax Act, 1961, as declared by the Supreme Court in Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 (SC).

clarification 3

A question has arisen whether the provision made by an assessee in its accounts on account of the estimated service gratuity payable to the employees can be allowed as a deduction when no gratuity fund has been set up under Part C of the Fourth Schedule to the Income-tax Act.

The Board have decided that following the decision of the Supreme Court in the case of Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53, the provision of gratuity on a scientific basis (in the form of an actuarial valuation carried out every year) can be considered to represent a real liability of the employer to the employees. The Supreme Court, in the case of Garment Cleaning Works v. Workmen AIR 1962 SC 673, decided that the employer would be required to pay gratuity even to an employee who has been dismissed on account of misconduct. The Board have, therefore, come to the conclusion that the liability so ascertained cannot be considered as a contingent liability. Such provision of gratuity may be treated as an admissible deduction under section 37(1).

clarification 4

I am directed to refer to your letter dated 25-1-1971, on the above subject and to say if an assessee decided to start making a provision on gratuity from the current year, then the provision made in respect of the current year only will be allowable as deduction under section 37. The liability for paying gratuity in respect of earlier years will not be allowed as deduction in computing the income for the current year. In the year when the gratuity is actually paid to the employee, the portion of gratuity which is not covered by the annual provisions made in respect of those employees on the basis of actuarial valuation and allowed as deduction in the computation of income, the employer will be allowed as deduction in the year in which the gratuity is paid to the employee.

This will, of course, necessitate maintenance of two sets of accounts for the employee

i. gratuity payable to him for the period during which the provision for gratuity was not allowed as deduction in computing the income of the employer; and

ii. gratuity payable to the employee on the basis of actuarial valuation made from year to year, debited to the profit and loss account and allowed as deduction in the computation of income of the employer.

In the year in which the employee is paid the gratuity, only the first amount will be allowed as deduction, the second having been allowed in the earlier years when provisions were made.

Letter : F. No. 204/10/71-IT(A-II), dated 17-4-1971.

clarification 5

I am directed to refer to your letter dated 31-5-1971 [Annex] on the above subject and to say that the provision has to be made in respect of gratuity payable to each employee and it has to be decided by taking into account several factors such as length of service, salary progressions and the like which would be lost sight of in making an overall provision for the company as a whole and that would not reflect the correct provision for gratuity.

Letter : F. No. 204/10/71-IT(A-II), dated 17-8-1971.

ANNEX - LETTER, DATED 31-5-1971 REFERRED TO IN CLARIFICATION

With reference to your Circular No. 47, dated 21-9-1970 on the above subject, our clients are raising a doubt as to actuarial valuation of gratuity liability.

It appears that actuarial valuation can be made only in respect of general gratuity liability of the company, covering all the employees entitled to gratuity and not in respect of a particular employee of the company.

It appears from your circular that the actuarial valuation for the gratuity liability should be obtained in respect of each and every employee and record is to be maintained by the company, in respect of this particular valuation for each year.

Under the circumstances, we request you to kindly clarify the point and confirm that actuarial valuation of general gratuity liability of the company covering all the employees will suffice.

Circular: No. 48 [F. No. 275/195/70-ITJ], dated 7-11-1970.

1060. Supplier drawing hundi on buyer and routing it through his banker with instructions to charge interest on amount of hundi from date of acceptance to date of actual payment - Whether tax is deductible at source by party retiring hundi from interest at the time of making payment to bank

CLARIFICATION 1

1. I am directed to invite a reference to the Boards Circular No. 48 [F. No. 275/195/70-ITJ], dated 7-11-1970 [Clarification 2]. The Board has been requested to reconsider the views given in that circular. After a careful examination of the legal position the Board is of the view that to the following extent the earlier views need a modification. Where the supplier of goods makes over the usance bill/hundi to his bank which discounts the same and credits the net amount to the suppliers account straightaway without waiting for realisation of the bill on due date, the property in the usance bill/hundi passes on to the bank and the eventual collection on due date is a receipt by the bank on its own behalf and not on behalf of the supplier. For such cases of immediate discounting the net payment made by the bank to the supplier is in the nature of a price paid for the bill. Such a payment cannot technically be held as including interest and therefore no tax need be deducted at source from such payments by the bank. Further, the buyer need not deduct any tax from the payment made by him on due date to the bank in respect of such discounted bill inasmuch as these payments to a bank or a banking cooperative society, conforming to the exemption granted by section 194A(3)(iii)(a).

2. On the other hand, where there is no immediate discounting and the bank merely acting as agent receives on the expiry of the period the payment for the bill from the buyer on behalf of the supplier and credits it to him accordingly, the bank receives interest on behalf of the supplier and the instructions contained in the Boards above-mentioned circular dated November 7, 1970 would apply and the buyer will have to deduct the tax from the interest.

Circular: No. 65 [F. No. 275/97-ITJ], dated 2-9-1971.

CLARIFICATION 2

1. I am directed to invite a reference to the Boards Circular No. 22/68-IT(B) [F. No. 12/23/68-IT(B)], dated 28-3/13-5-1968, regarding the provisions of section 194A. Instances have been brought to the notice of the Board where in the case of outstation sale of goods the supplier draws a hundi on the buyer and routes it through his banker along with transport documents with instructions to deliver the documents on retirement of the hundi and to charge interest on the amount of hundi from the date of acceptance thereof to the date of actual payment. A question has been raised whether, in such circumstances, tax is deductible at source by the party retiring the hundi on the amount of interest at the time of making payment to the bank, or whether the exemption provisions of section 194A(3)(iii)(a) would be attracted in this behalf.

2. In the above case the interest paid by the buyer to the supplier is not to the bank as such but only routed through the bank. In accordance with section 194A(3)(iii)(a), no tax is to be deducted at source in respect of interest paid to a bank but where the interest from the buyer is not for the bank as such, but only routed through bank to the supplier who is the recipient, the buyer has to deduct tax at source under section 194A from the interest paid and routing of the interest through bank will not make any difference.

Circular: No. 49 [F.No. 12/135/69-ITJ], dated 16-11-1970.

SECTION 288B l ROUNDING OFF OF TAX

1322. Procedure to be followed in cases where separate amounts of tax payable or refundable under various minor heads include fractions of a rupee

CLARIFICATION 1

1. Section 288B, introduced by the Finance Act, 1966, provides for rounding off of the amount of tax (including tax deductible at source or payable in advance), interest, penalty, fine or any other sum payable and the amount of refund due under the provisions of the Act, to the nearest rupee and for this purpose where such amount contains a part of a rupee consisting of paise, then if such part is 50 paise or more, it is to be increased to one rupee and if such part is less than 50 paise, it is to be ignored. The scope and applicability of this section has already been explained in para 56 of Boards Circular No. 4-P, dated 21-7-1966.

2. Clarification has been sought regarding the procedure to be followed in cases where the separate amounts of tax payable or refundable under the various minor heads, e.g., income-tax, surcharge, etc., include fractions of a rupee. The Boards views in this matter are set forth in the following paragraphs.

3. Under the provisions of the Act, the rounding off is to be done in relation to total amount of tax finally payable or refundable, and not in relation to the amounts under the various minor heads, viz.,income-tax, surcharge, etc. If the total tax payable or refundable is comprised of amounts falling under different minor heads, the rounding off of these separate amounts should be done in such a manner that the aggregate amount of the tax as rounded off conforms to the sum of the separate amounts under the various minor heads as rounded off. This may be done notwithstanding that in some cases it may result in a rounded off amount under one or more heads not being strictly in conformity with the principle adumbrated in section 288B.

4. The following examples will make the position clear :

Tax payable/ refund due under various heads		Amount of total Tax payable/ refund due Rs.	Total tax/refund due after rounding off Rs.		Amounts as rounded off under separate heads Rs.
						Remarks Rs.
1		2	3		4	5
IT	SC		IT	SC
50.20	5.10	55.30	55.00	50.00	5.00	Rounding off of amount under minor heads in conformity with section 288B.
50.80	5.30	56.10	56.00	51.00	5.00	Rounding off of amount under minor heads in conformity with section 288B.
50.65	5.90	56.55	57.00	51.00	6.00	Rounding off of amount under minor heads in conformity with section 288B.
50.60	5.60	56.20	56.00	51.00	5.00	Rounding off of amount under surcharge has been made to adjust total amount to Rs. 56.
50.60	5.60	56.20	56.00	51.00	5.00	Rounding off of amount under surcharge has been made to adjust total amount to Rs. 56.
50.40	5.30	55.70	56.00	51.00	5.00	Rounding off of amount under income-tax has been made to arrive at the total demand of Rs. 56.

5. Tax payable/refund due will be shown in the assessment from before rounding off under the various heads, but the same will be shown in the Demand and Collection Register after rounding off, as illustrated above. The demand notice or refund order will be issued for the total tax payable/refundable as rounded off.

Letter: F. No. 12/40/66-IT(B), dated 25-1-1967.

CLARIFICATION 2

1. Attention is invited to the Boards Circular No. 4-P(LXXVI-61) of 1966, dated 21-7-1966 and Letter F. No. 12/40/66-IT(B), dated 25-1-1967 [Clarification 1] wherein instructions have been issued on the provisions of section 288B.

2. A copy of a letter No. Co. Dt. Admn. 45/65-66/2119, dated 4-10-1967 [printed here as Annex] received from the Reserve Bank of India, Bombay is printed below. The point raised in para 2 of the letter has been considered and the view expressed is correct. The rounding off process is applied when the tax is finally calculated and this is done at the time of deduction of tax at source by the person responsible for making such deduction. It is, therefore, no necessary to round off the figures again at the time of issue of sub-divided certificates, etc., which should be issued based on the actual figures of tax deduction.

3. The point mentioned in para 3 of the Reserve Banks letter is covered by the example in the Boards above-noted circular dated 25-1-1967 and the Banks presumption is confirmed.

ANNEX - LETTER, DATED 4-10-1967 REFERRED TO IN CLARIFICATION

1. Please refer to your Circular letter F. No. 12/40/66-IT(B), dated 25-1-1967 on the above subject.

2. Our Public Debt Offices are often required to issue sub-divided income-tax deduction certificates in respect of deduction certificates already issued while paying interest on Government securities. This usually happens in the case of banks, who hold the securities on behalf of their customers and who do not disclose this fact while collecting interest. As, in terms of the instructions contained in your above circular, the rounding off of tax deducted from interest on Government securities is to be done in relation to the total tax deductible and the amounts under the minor heads, viz., income-tax, surcharge, etc., are to be rounded off in such a manner that their aggregate agrees with the total rounded off figure, once the tax is deducted and income-tax deduction certificate is issued, the issue of sub-divided deduction certificate, if requested by a bank or other holders of Government securities, present certain difficulties.

To cite an example, half-yearly interest on securities of 4 per cent Loan 1970 amounting to Rs. 2,000 is Rs. 40 and income-tax and surcharge chargeable thereon is Rs. 9 [Income-tax Rs. 7.20 + Surcharge Rs. 1.60 = Rs. 8.80, i.e., Rs. 9 (Rs. 7 + Rs. 2) after rounding off]. If the securities had actually belonged to two persons in amounts of Rs. 1,000 each the gross amount of interest payable to each would have been Rs. 20, and the amount of tax Rs. 4[Income-tax Rs. 3.60+Surcharge Re. 0.80 = Rs. 4.40, i.e., Rs. 4.00 (Rs. 3 + Re. 1) after rounding off]. Thus, for both holders, the amount of tax deducted would have been Rs. 8 as against Rs. 9 actually deducted. In some of other cases, splitting up of income-tax deduction certificate might reveal that deductible tax was more than the actually recovered on the basis that the holding belonged to one person. For example, half-yearly interest on securities of 5 per cent Loan 1982 for Rs. 2,000 would be Rs. 50 and the deduction of tax on the basis that they belong to only one person would be Rs. 11 [Income-tax Rs. 9 + Surcharcharge Rs. 2]. If the securities had actually belonged to two persons in equal shares deduction of tax for each (on gross amount of interest of Rs. 25) would have been Rs. 6 [Income-tax Rs. 4.50 + Re. 1.00 = Rs. 5.50, i.e., Rs. 6.50 (Rs. 5 + Re. 1) after rounding off] and total tax deduction for both the holder would have been Rs. 12 as against Rs. 11 actually deducted. We presume that such discrepacies may be ignored by the Public Debt Offices and that they may issue sub-divided deduction certificates on he basis of tax actually deducted and the amounts in such sub-divided certificates need not be in round figures. We shall be glad to have your concurrence to this proposal.

3. In the example cited above, where the income-tax is shown as Rs. 3.60 and surcharge Re. 0.80 both the broken amount exceed 50 paise and we have ignored the broken amount under income-tax and rounded off the surcharge to the next higher rupee. There may also be cases where the broken amount of surcharge is less than the broken amount of income-tax, and still it may be necessary to ignore the broken amount the income-tax and rounded off the surcharge to next higher rupee, as shown below :

Amount of interest: Rs. 13

Income-tax	Rs. 2.70
Surcharge	Re. 0.60
Total	Rs. 3.30
After rounding off	Rs. 3.00
Income-tax	Rs. 2.00
Surcharge	Re. 1.00

Further, where the total tax after rounding off amounts to Re. 1.00 only, surcharge need not be shown at all as in the example given below :

Amount of interest : Rs. 500	Re. 0.90
Income-tax	Re. 0.20
Surcharge	Re. 0.20
Total	Re. 1.10
After rounding off	Re. 1.00
Income-tax	Re. 1.00
Surcharge	Nil

We shall be glad if you will please examine the above proposals and let us have your instructions in the matter.

Circular : No. 51 [F. No. 152/(49)70-TPL], dated 23-12-1970.

177. Whether provisions of section 13(2)(h), providing for forfeiture of exemption, apply with reference to shares in company initially settled on trust or donated to it subsequently

1. Reference is invited to paragraph 21 of the Boards Circular No. 45, dated 2-9-1970 which explains the scope and ambit of section 13 as substituted by the Finance Act, 1970.

2. A question has been raised whether the provision in section 13(2)(h), which provides for the forfeiture of exemption from tax in a case where the trust funds are invested in a concern in which the author of the trust or other persons specified in section 13(3) have a substantial interest, would apply with reference to shares in a company initially settled on the trust or donated to it subsequently. The Board have been advised that the expression funds of the trust, as used in section 13(2)(h), is wide enough to cover not only uninvested cash but also shares, stocks, Government securities, etc., and, in fact, property of every kind belonging to the trust. Now, the provisions of section 13(2)(h) apply not only in a case where the funds of the trust are invested, during the relevant previous year, in any concern in which the author or other persons referred to in section 13(3) have a substantial interest but also in a case where such funds, having been invested in such a concern before the beginning of the relevant previous year, continue to remain so invested for any period during that previous year. It, therefore, follows that a trust will forfeit exemption from tax if it continues to hold, after December 31, 1970; shares in a company in which its author, or other connected persons, are substantially interested, regardless of whether the shares form part of the original corpus of the trust or were subsequently acquired by it. The same considerations will apply in regard to investment towards capital of any concern other than a company. In other words, if a trust, which has invested its funds, in any concern in which the author, etc., are substantially interested, does not divest itself of such investment before January 1, 1971, it will forfeit the exemption from tax on its entire income if the investment in such concern exceeds 5 per cent of the capital of the concern. Where the investment does not exceed 5 per cent of the capital of the concern, the exemption from tax will be forfeited only in relation to the income from such investment and not in relation to the remainder of its income.

Circular : No. 52 [F. No. 152(55) 70-TPL], dated 30-12-1970.

164. Capital gain arising to charitable trust - Whether it could be regarded as having been applied to charitable purposes if trust invests amount received from sale of capital asset in acquiring another capital asset for trust [`14] 1- Section 11(1) as amended by the Finance Act, 1970

Under section 11(1), as amended by the Finance Act, 1970, income derived from property held under trust for charitable or religious purposes is exempt from income-tax only to the extent such income is actually applied to such purposes during the previous year itself or within three months next following. As income includes capital gains a charitable or religious trust will forfeit exemption from income-tax in respect of its income by way of capital gains unless such income is also applied to the purposes of the trust during the period referred to above. In this connection, a question has been raised whether the capital gains arising to a charitable or religious trust from the sale of capital assets belonging to it would be regarded as having been applied to charitable or religious purposes, if the trust invests the amount received from the sale of the capital asset, including the capital gains realised, in acquiring another capital asset for the trust. This question was earlier examined by the Board in 1963 and instructions were issued vide Circular No. 2-P(LXX-5), dated 15-5-1963 [Annex] to the effect that where a charitable or religious trust transfers a capital asset forming part of the corpus of its property solely with a view to acquiring another capital asset for the use and benefit of the trust, and utilises the capital gains arising from the transaction in acquiring the new capital asset, the amount of capital gains so utilised would be regarded as having been applied to the charitable or religious purposes of the trust within the meaning of section 11(1). The Board have decided that the above instructions should continue to be operative notwithstanding the changes made in the scheme of tax exemption of charitable or religious trusts through the Finance Act, 1970.

ANNEX - CIRCULAR, DATED 15-5-1963 REFERRED TO IN CLArifiCATION

1. Under section 11(1), a religious or charitable trust which accumulates its income in excess of 25 per cent of its total income or Rs. 10,000, whichever is higher, is liable to pay tax on the income accumulated by it in excess of the said limit. In other words, such a trust has to apply at least 75 per cent of its total income, including any capital gains forming part of it during the relevant previous year, in order to be entitled to exemption on the entire amount of its income. In this connection, a question was raised during the third meeting on the Direct Taxes Advisory Committee whether the capital gains arising to a trust from the sale of a capital asset belonging to it would be regarded as having been applied for the purposes of the trust, if the trust invested the amount received from the sale of the capital asset, including the capital gains realised, in acquiring another capital asset for the trust. This point has been considered and it has been decided that where a religious or charitable trust transfers a capital asset forming part of the corpus of its property solely with a view to acquiring another capital asset for the use and benefit of the trust and utilises the capital gains arising from the transaction in acquiring the new capital asset, the amount of capital gain so utilised should be regarded as having been applied for the religious or charitable purposes of the trust within the meaning of section 11(1).

2. Under sub-section (2) of section 11, a trust, which desires to accumulate its income in excess of the limit specified in sub-section (1) for subsequent application to the purposes of the trust, is entitled to do so on giving a notice to the Income-tax Officer in this behalf in the prescribed form and investing the money so accumulated in certain securities of the Government. Under rule 17 of the Income-tax Rules, 1962, the notice of accumulation is required to be given in Form No. 10 of the Income-tax Rules, 1962. According to para 2 of this Form, the accumulated money has to be invested in specified securities before the expiry of one month commencing from the end of the relevant previous year and, according to para 3 to the Form, copies of the annual accounts of the trust along with details of investment and utilisation, if any, of the money so accumulated or set apart, have to be furnished to the Income-tax Officer before April 30 every year. It was pointed out during the third meeting of the Direct Taxes Advisory Committee that it may not always be possible for the trustees to ascertain the income of the trust within one month of the end of the previous year and they may not, therefore, be able to comply with the requirements referred to above. In respect of the assessment year 1962-63, instructions were issued in the Boards Circular No. 17(LXX-4), dated 2-6-1962 [Clarification 6 to Sl. No. 165 on p. 1.499 post] that the first requirement should be regarded as having been fulfilled if the accumulated money were invested in the specified securities before September 30,1962, and similarly the second requirement should be regarded as having been fulfilled if copies of the relevant accounts along with details of investment and utilisation of the accumulated money were furnished to the Income-tax Officer concerned before September 30,1962. Having regard to the difficulty mentioned above, it has now been decided that in respect of subsequent assessment years, trustees should be allowed to invest the accumulated income in specified securities within an extended period of four months commencing from the end of the relevant previous year. Similarly, with regard to the second requirement of furnishing copies of accounts, etc., it has been decided that trustees may be allowed to do so within a period of four months from the end of the relevant previous year or before April 30 of the assessment year, whichever is later.

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[`1] 1. Increased to Rs. 20,000 vide the Finance Act, 1997. Scheme of section 40A(3) and rule 6DD is also altered materially with effect from 1-4-1996 and 25-7-1995.

[`2] 1. Increased to Rs. 20,000 vide the Finance Act, 1997. Scheme of section 40A(3) and rule 6DD is also altered materially with effect from 1-4-1996 and 25-7-1995.

[`3] 2. The Income-tax (Amendment) Rules, 1969 inserting rule 6DD in the Income-tax Rules.

[`4] 3. Prawns, lobsters and crustaceans, molluscs and other marine species come under the definition of fish or fish products vide Instruction No. 1163 [F. No. 206/76-77-IT(A-II)], dated 7-4-1978.

[`5] 1. Increased to Rs. 20,000 vide the Finance Act, 1997.

[`6] 2. Omitted w.e.f. 1-12-1995.

[G7]1. Increased to Rs. 20,000 vide the Finance Act, 1997.

[`8] 1. Increased to Rs. 20,000 vide the Finance Act, 1997.

[`9]1. Substituted for 50 and 20, respectively, by Letter F. No. 275/42/70 ITJ, dated 28-5-1970.

[`10]1. Substituted for 50 and 20, respectively, by Letter F. No. 275/42/70 ITJ, dated 28-5-1970.

[`11]1. Since repealed. Now Foreign Exchange Regulation Act, 1973.

[`12]1. The Explanation to section 10(10), as substituted by the Finance Act, 1974, w.e.f. 1-4-1975, specifically provides that salary shall have the same meaning assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule.

[`13] 1. Views expressed by the Board in these circular were adversely commented upon by the Bombay High Court in the case of Tata Iron & Steel Co. Ltd v. D.V. Bapat, ITO [1975] 101 ITR 292 which can profitably be referred to on this subject.

[`14]1. The clarification on this issue has been placed on a legal footing in terms of sub-section (1A) of section 11 inserted by the Finance (No. 2) Act, 1971, with retrospective effect from 1-4-1962.