Circular : No. 100 [F. No. 195/1/72-IT(A-I)], dated 24-1-1973.

SECTION 11 l income from property held for charity

162. Repayment of debt incurred for purposes of trust/loans advanced by educational trusts to students for higher studies - Whether amounts to application of income

1. Section 11 requires 100 per cent of the income of a charitable and religious trust to be applied for religious and charitable purposes to be entitled to the exemption under the said section. Two questions have been considered regarding the application of income :

1. Where a trust incurs a debt for the purposes of the trust, whether the repayment of the debt would amount to an application of the income for the purposes of the trust ; and

2. Whether loans advanced by an educational trust to students for higher studies would be treated as application of income for charitable purposes.

2. The Board has decided that repayment of the loan originally taken to fulfil one of the objects of the trust will amount to an application of the income for charitable and religious purposes. As regards the loans advanced for higher studies, if the only object of the trust is to give interest-bearing loans for higher studies, it will amount to carrying on of money-lending business. If, however, the object of the trust is advancement of education and granting of scholarship loans as only one of the activities carried on for the fulfilment of the objectives of the trust, granting of loans, even if interest-bearing, will amount to the application of income for charitable purposes. As and when the loan is returned to the trust, it will be treated as income of that year.

JUDICIAL ANALYSIS

Explained in - In CIT v. Cutchi Memon Union [1985] 155 ITR 51 (Kar.), it was held that under the provisions of section 11, only the income spent on charitable or religious purposes is excluded from the total income of a trust. That exemption from taxation is given not because it is expenditure of the trust or any other outgoing. It is exempted as income to the extent applied for charitable or religious purposes. When that amount is returned by the beneficiaries of the trust, the receipt in the hands of the trust can only be its income of the years in which it is received. It cannot have any different character. This is also the tenor of the CBDT Circular No. 100, dated January 24, 1973.

Explained in - In CIT v. Ramchandra Poddar Charitable Trust [1987]164 ITR 666 (Cal.), the above circular was explained with the following observations:

. . . An assessee may borrow money and spend it for charitable object. The circular merely recognises that in such a case, application of income for repayment of a loan taken for charitable purpose will amount to application of income for charitable purpose. The circular, however, does not permit an assessee to accumulate more than 25 per cent of its income or Rs. 10,000, whichever is higher (for the purpose of charity). The wording of section 11 is clear and unambiguous. The relief is limited to the amount of income of a charitable trust actually applied for charitable purpose. Accumulation of income is permitted only to the extent and subject to the conditions laid down in that section. An assessee can accumulate or set apart only 25 per cent of the income of the trust or Rs. 10,000, whichever is higher, in a given year. The circular does not seek to and cannot enlarge the scope of the section. (p. 673)

Explained in - In ITO v. K. Ravindranathan Nair [1992] 41 ITD 462 (Coch.-Trib.), the Tribunal took aid of this Circular of the Board of Direct Taxes though it was in the context of section 11 only for the limited purposes of the treatment to be accorded to the loans and advances when given and the recovery of the same when received.

Circular: No. 101 [F. No. 195/1/72-IT(A-I)], dated 24-1-1973.

12. Whether public company will be deemed to be company in which public are not substantially interested by reason only of the fact that number of its directors at any time during previous year is less than six

1. Reference is invited to Circular No. 44 (LXXV-8) of 1955 [F. No. 4(47)55/Tec.], dated 1-11-1955 of the then Central Board of Revenue on the above subject copy of which is enclosed for ready reference [Annex].

2. Necessary instructions may please be issued to the Income-tax Officers to follow the instructions for purposes of section 2(18)(b)(B)(iii) [as it stood prior to its substitution by the Finance Act, 1983, w.e.f. 2-4-1983].

ANNEX - CIRCULAR, DATED 1-11-1955 REFERRED TO IN CLARIFICATION

A question has been raised whether the public company will be deemed to be a company in which the public are not substantially interested within the meaning of the Explanation to section 23A of the 1922 Act (inserted by the Finance Act, 1955) by reason only of the fact that the number of its directors at any time during the previous year is less than six. The case of such a company has to be considered under paragraph (iii) of the Explanation. It is not possible to give a cut and dried definition of the expression control of the affairs of a company. It is, however, not the same as the running of the business from day-to-day by a director. It is, therefore, not necessary that there should be not less than six directors in order that section 23A should not apply.

Circular : No. 102 [F. No. 167/56/71-IT(A-I)], dated 3-2-1973.

93. Exemption of interest on savings certificates under clause (15)(ii) - Interest on holdings in the names of wife and minor children whether eligible for exemption - Exemption in the event of death of one of the joint holders

clarification 1

1. Reference is invited to Circular No. 10 [XLVII-9]-D of 1958, dated 20-5-1958 and Circular No. 102 [F. No. 167/56/71 -IT(A-I)], dated 3 -2-1973 [Clarifications 2 and 3 on p. 1.161 and p. 1.163, respectively].

2. It has been brought to the notice of the Board by the National Savings Commissioner that some Income-tax Officers are not giving exemption from income-tax on tax-free savings certificates and accounts held in the names of the spouse and minor children of the assessee.

3. Under the rules governing the issue of the various savings certificates and accounts, deposits may be made by an adult individual in his own name or by two adults jointly or by a guardian on behalf of a minor. Various limits have been laid down for these accounts and certificates for individuals and for two persons jointly. Where any assessee makes an investment in the name of his wife or minor child, the income derived from such investments is included in the total income of the assessee under the relevant provisions of the Income-tax Act, 1961.

4. The Board had decided that where investments are made by an assessee in the names of his wife and minor children, the exemption from income-tax should be allowed and in respect of the investments made in the name of his wife or each minor child up to the limit of the maximum amount that may be invested in their names in the tax-free savings certificates. This decision was communicated vide Boards Circular No. 10(XLVII-9)-D of 1958 [F. No. 39(3)IT/57]. Similarly, in Boards Circular No. 102, the Governments decision was communicated that in the case of joint holdings, the interest earned is free of income-tax even when one of the joint holders dies. The limits up to which the investments could be made by an individual and by two persons jointly were given in the Circular No. 102. These limits have since been increased. The new limits are as follows :

		Limits up to which investments can be made singly	Limits up to which investments can be made jointly
1.	National Savings Certificates, II & III Issues combined	Rs.  75,000	Rs. 1,50,000
2.	Post Office Savings Bank Account	Rs.  25,000	Rs.  50,000
3.	10-Year CTD Accounts (including 15-Year CTD Accounts since discontinued)	Rs. 1,20,000	Rs. 2,40,000
4.	Public Provident Fund	Rs.  20,000 in a year	Joint investments not allowed

These limits are for the entire period of the accounts standing in the name of the assessee or his minor children and wife.

5. The certificates covered under section 10(15)(ii) which have since been discontinued but interest on which continues to be free of income-tax are as under:

1. 10-Year TSDCs and 10-Year DDCS.

2. PO Cash Certificates.

3. 12-Year National Plan Savings Certificates.

4. 10-Year National Defence Certificates.

5. 10-Year National Plan Certificates.

The limits for these certificates are inclusive of limits for National Savings Certificates II and III Issues mentioned above. For example, if a person holds NSCs II and III Issues up to Rs. 35,000 in his own name, Rs. 30,000 in the name of his wife, Rs. 10,000 in the name of his minor son and Rs. 15,000 in the name of his minor daughter, his entire holdings amounting to Rs. 90,000 will be free of income-tax as the holdings in each persons name are within the limits prescribed, and will not be limited to a total of Rs. 75,000.

6. The Board have decided that if in any case involving the application of the above provisions relief had not been given as stated above, suitable remedial measures should be taken to grant such-relief.

Circular : No. 218 [F. No. 184/5/76-IT(A-I)], dated 30-4-1977

clarification 2

1. The following items of income are exempt from income-tax under clauses (xvii) and (xviia) of section 4(3) of the 1922 Act [corresponding to section 10(15)(ii) of the 1961 Act] :

1. Interest on the 10-Year Treasury Savings Deposit Certificates or the monthly payments on the 15-Year Annuity Certificates issued by or under the authority of the Central Government for an amount not exceeding the maximum amount which is permitted to be invested therein.

2. Interest on deposits in Post Office Savings Bank, Post Office Cash Certificates, Post Office National Savings Certificates and Post Office National Plan Certificates for amounts not exceeding in each case the maximum amount which is permitted to be deposited or invested therein.

Under the rules governing the issue of the 10-Year Treasury Savings Deposit Certificates, deposits may be made by an adult individual in his own name or by two adults jointly or by a guardian on behalf of a minor. The limit laid down for an individual is Rs. 25,000 and for an individual jointly with another is Rs. 50,000. Where an assessee makes investments in the name of his wife or minor child, the income derived from such investments is included in the total income of the assessee under the provisions of section 16(3). If an assessee has invested Rs. 25,000 in the 10-Year Treasury Savings Deposit Certificates in his own name and Rs. 25,000 in the name of his wife or a minor child, it has been the practice of Income-tax Officers to allow the exemption only in respect of the interest derived from the former amount and not in respect of the latter on the ground that the income derived from the investments standing in the name of the wife or minor child is deemed to be the income of the husband and, therefore, the overall limit should be only Rs. 25,000. The Board have now decided that the exemption should be allowed also in respect of the investments made in the name of the wife or each minor child up to the limit of the maximum amount that may be invested in their names in the Treasury Savings Deposit Certificates under the rules. The same decision will apply to the monthly payments on the 15-Year Annuity Certificates as well as interest on deposits in the Post Office Savings Bank, Post Office Cash Certificates, Post Office National Savings Certificates, Post Office National Plan Certificates and Post Office National Plan Savings Certificates.

2. The following table sets out the kinds of investments which are covered by clauses (xvii) and (xviia) of section 4(3) and the maximum limits up to which individuals can invest moneys in their names :

	Nature of investments individuals	By one individuals in his own name	By two individuals in joint names
		Rs.	Rs.
1.	Post Office Savings Bank Accounts	15,000	30,000
2.	Post Office Cash Certificates (Discontinued from June 15,1947)	10,000	10,000
3.	National Savings Certificates (Discontinued from June 1, 1957)	25,000	50,000
4.	National Plan Certificates (Discontinued from June 1, 1957)	2,500	5,000
5.	National Plan Savings Certificates (Issued from June 1, 1957)	25,000	50,000
6.	Treasury Savings Deposit Certificates	25,000	50,000
7.	15-Year Annuity Certificates (Discontinued from January 2, 1958)	28,000	56,000
8.	15-Year Annuity Certificates2nd Series (Issued from January 2, 1958)	26,600	53,200

NOTE 1 : Prior to June 15, 1947, the Post Office used to issue Post Office Cash Certificates in which an individual could invest up to Rs. 10,000 in his own name or in two joint names. Persons who are still holding these certificates will continue to get exemption up to this limit.

NOTE 2 : Prior to June 1, 1957, an individual was allowed to invest (1) Rs. 25,000 in National Savings Certificates, and (2) Rs. 2,500 in National Plan Certificates. These two were discontinued from June 1, 1957 and replaced by National Plan Savings Certificates for which the limit is Rs. 25,000 for an individual. The earlier certificates will continue to get exemption up to the limits of Rs. 25,000 and Rs. 2,500 respectively. It may be noted, however, that the total holding of an individual in one or more of the four types of certificates mentioned at Serial Nos. 2, 3, 4 and 5 above will continue to be Rs. 27,500. Double the above figures will apply in the case of investments in joint names, but no individual holder shall under any circumstances hold certificates exceeding in value Rs. 27,500, taking into account the holding in his own name or holdings held by him jointly with any other holder. For the purpose of calculating the individual holdings when a certificate is held by two persons jointly, one-half of the amount shall be deemed to belong to each.

NOTE 3 : Before January 2, 1958, the limit for investment in 15-Year Annuity Certificates by an individual was Rs. 28,000. After January 2, 1958, a second series of certificates with a higher yield was introduced. The limit for the second series is Rs. 26,600 for an individual. The combined limit for both the first and the second series is Rs. 28,000. Double the above figures will apply in the case of investments in joint names, but no holders shall under any circumstances hold certificates of the 1st and 2nd series exceeding in value twenty-eight thousand rupees, taking into account the holding in his own name or holdings held by him jointly with any other holder. For the purpose of calculating the individual holding, when a certificate is held by two persons jointly, one-half of the amount shall be deemed to belong to each.

NOTE 4 : No holder of Treasury Savings Deposit Certificates shall under any circumstances hold certificates exceeding twenty-five thousand rupees in value, taking into account the holding in his own name or holdings held by him jointly with any other holder. For the purposes of calculating the individual holding of Treasury Savings Deposit Certificates, when two persons hold them jointly, one-half of the joint holdings shall be deemed to belong to each.

3. The Board have decided that if in any case involving the application of section 16(3), the exemption available under clauses (xvii) and (xviia) of section 4(3) has been restricted in the past, relief should be given by the Commissioners under section 33A(1) by waiving the time limit, if necessary.

Circular : No. 10(XLVII-9)-D of 1958, dated 20-5-1958.

clarification 3

1. A question has arisen as to whether in the event of death of one of the joint holders of the 12-Year National Plan Savings Certificates, exemption under section 10(15)(ii) would be admissible only in respect of the maximum amount admissible to an individual holder singly or the exemption as available to the joint holders will continue to be available to the surviving joint holder.

2. According to the proviso to section 13 of the Post Office Savings Certificates Rules, 1960, a holding shall not be considered in excess of the limit prescribed in these rules, if it is due to any of the following reasons, namely :

a. inheritance;

b. award by the Government for meritorious service;

c. survivorship in the case of joint holdings;

d. statutory devolution; and

e. nomination.

3. It has been decided that under section 10(15)(ii) of the Income-tax Act, 1961, read with the proviso (c) to section 13 of the Post Office Savings Certificates Rules, 1960, in the event of death of a joint holder of the certificates, the surviving joint holder would continue to get exemption from tax on the interest received up to the maximum amount permitted to be held in the case of joint holdings. Following are the various investments in Small Savings Certificates and Accounts covered by the provisions of section 10(15)(ii) along with the limits of investments singly and jointly by the holders of these certificates/accounts :

	Nature of investments	Limits up to which investments can be made singly	Limits up to which investments can be made jointly
		Rs.	Rs.
1.	National Savings Certificates II & III Issues combined	50,000	1,00,000
2.	Post Office Savings Bank Accounts	25,000	50,000
3.	Cumulative Time Deposit Accounts	90,000	1,80,000

The old certificates, covered under section 10(15)(ii), are as under :

1. TSDCs and DDCs.

2. PO Cash Certificates.

3. 12-Year National Plan Savings Certificates.

4. 12-Year National Defence Certificates.

5. 10-Year National Plan Certificates.

The limits for these certificates are inclusive of the limits for National Savings Certificates II and III Issues.

4. Boards Circular No. 10(XLVII-9)-D, dated 20-5-1958 [Clarification 2], may be treated as modified to the extent specified above.

Circular : No. 103 [F. No. 166/1/73-IT(A-I)], dated 17-2-1973.

FINANCE ACT, 1966 - SECTION 2(7)(d) l INDUSTRIAL COMPANY

1476. Meaning of industrial company under Explanation to section2(7)(d)

1. Under sub-section (7)(d) of section 2 of the Finance Act, 1966, an industrial company means a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining. According to the Explanation to clause (d) of sub-section (7) of section 2, a company shall be deemed to be mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining, if the income attributable to any of the aforesaid activities included in its total income for the previous year is not less than fifty-one per cent of such total income.

2. The question as to the exact meaning of the Explanation to sub-section (7)(d) of section 2, came up for the consideration and the Board are advised that an industrial company would mean

(a) a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining, even if its income from such activities is less than 51 per cent of its total income; and

(b) a company which, even though not mainly so engaged, derives in any year 51 per cent or more of its total income from such activities.

Judicial Analysis

Explained in - In CIT v. N.U.C. (P.) Ltd. [1980] 126 ITR 377 (Bom.), the above circular was explained with the following observations :

Shri Khatri then referred to the circular dated February 17, 1973, of the Central Board of Direct Taxes to contend that although the assessee-company was engaged in the business of construction of buildings, it was also at the same time manufacturing or processing window frames, door frames, cement beams and slabs, and the income derived from such manufacture constituted a larger portion of the total income derived by it from its overall business of construction. Hence, he contended, that in terms of the said circular which has sought to interpret the Explanation to clause (d) of sub-section (7) of section 2 of Chapter II of the Finance Act, 1966, the assessee-company will be an industrial company. We fail to understand how this circular helps the assessee-company. Apart from the fact that there is nothing on record to show separately the income derived by the assessee from its so-called different activities, one of constructing buildings and the other of manufacturing frames and beams, we have already held that the assessee-company was not carrying on the said activity of manufacturing frames, etc., independently of or otherwise than in the process of, the construction of the buildings. It is not, therefore, permissible to divide its activity into the said two segments to compare the income from one with the other. The assessee-companys only business is that of construction and repairing of buildings and there are no two activities carried on by it as contended by Shri Khatri. We are, therefore, not impressd by the contention advanced by Shri Khatri and taking into consideration the said extended meaning given in the said circular the assessee-company would fall within the definition of an industrial company .... (pp. 381-382)

Explained in - In S.P. Jaiswal Estates (P.) Ltd. v. CIT [1994] 73 Taxman 320 (Cal.), it was observed that in Boards Circular No. 103, dated 17-2-1973 it was stated that a company which, even though not mainly so engaged, derived in any year 51 per cent or more of its total income from such activities like manufacture or processing of goods, it could be held to be an industrial company.

Explained in - In Vishal International Production (P.) Ltd. v. IAC [1993] 46 ITD 312 (Delhi-Trib.), it was observed that it is apparent that in Circular No. 103, the provisions of section 2(7)(d) of Finance Act, 1966 read with Explanation were being considered and these are not in any way different to the corresponding provisions of the Finance Act, 1980.

Explained in - In Nova Bharat Enterprises (P.) Ltd. v. CIT (1983) 143 ITR 804 (AP), this circular was referred to, and the High Court observed as follows :

We are of the opinion that the construction placed by the Central Board of Direct Taxes upon the definition represents the correct view. Adopting the view contended for by the Department would result in anomalous and inequitable results. . . (p. 812)

Explained in - The above circular was applied in ITO v. Hedavkar Mechanical Works (P.) Ltd. (1984) Taxation 72(6) - 48 (ITAT - Bom.), and on the facts of the case, it was held that the respondent-assessee was not an industrial company, since it was not covered under either of the two alternatives mentioned in the circular.

Explained in - The above circular was explained in ITO v. Kalima Plastics (P.) Ltd. (1990) 38 TTJ (Delhi) 535, with the following observations :

The Explanation to clause (c) of section 2(7) of the Finance Act, 1982, contains a deeming provision as a result of which a company which, in fact, is not mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in the mining shall be deemed to be engaged in such activities if the income attributable to any one or more of such activities included in its total income is not less than 51% of such total income. It is precisely for this reason that the Board has clarified in its Circular No. 103 that a company which is mainly engaged in one or more of the activities enumerated in the Explanation would be an industrial company even if its income from such activities is less than 51% of its total income. Here, it may be pointed out that definition of an industrial company in sub-section (7)(d) of section 2 of the Finance Act, 1966, and the Explanation thereto are in pari materia with clause (c) of section 2(7) of the Finance Act, 1982 and the Explanation to clause (c). The Boards circular further makes it clear that a company which is even though not mainly so engaged in one of the aforesaid activities, derives in any year 51% or more of its total income from such activities, would be an industrial company. It is, therefore, not correct to say that it is only when income derived by a company from one or more activities enumerated in clause (c) of section 2(7) of the Finance Act, 1982, is not less than 51% of its total income that it can be treated as an industrial company for the purpose of applying the concessional rate of tax at 55%. Explanation to clause (c) applies only to cases where a company, in fact, is not mainly engaged in one of the activities enumerated in clause (c) but by legal fiction it is deemed to be mainly engaged in one or more such activities provided its income from such activities is not less than 51% of such total income. If an industrial company is mainly engaged in one or more of the activities enumerated in clause (c) it would be an industrial company within the meaning of clause (c) of section 2(7) and in such a case the Explanation is not at all called into play. The Boards Circular No. 103 makes the position quite clear. (pp. 538-539)

Explained in - The above circular was explained in Khoday Industries Ltd. v. ITO (1994) 51 ITD 18 (Bang.), in the following words :

. . .The Supreme Court has held in its recent decision in the case of Minocha Brothers (P.) Ltd. [1994] 74 Taxman 466 (SC) that the assessee failed to discharge the burden that lay upon him to adduce evidence to establish that income attributable to manufacturing activity undertaken by him was not less than 51% of the total income. As regards reliance placed by the assessees counsel on the CBDTs circular dated 17-2-1973 (supra), the Supreme Court simply stated that construction of buildings is not one of the activities mentioned in the said circular and, hence, it was unnecessary to express any opinion whether the said circular runs contrary to the Explanation to the definition of industrial company, in the Finance Acts and if so, whether it can be acted upon. Thus, it is clear that the Supreme Court has not exactly passed any opinion that the circular of the CBDT, as rightly pointed out by the learned counsel for the assessee, cannot be acted upon to get at the real meaning of an industrial company. (p. 23)

. . . The circular issued by the CBDT, if it is favourable to the assessee, is purely binding on the departmental authorities unless and until such circular is specifically repealed . . . . (p. 24)

It is clear from above that in the said circular, the CBDT has recognised that for being given the benefit of a lower tax rate as an industrial company, it is not necessary for a company to have its income from manufacturing activities to be actually 51% or more of its total income in any particular year provided the company be found to be mainly engaged in manufacturing business. . . . (p. 25)

Explained in - The above circular was explained in CIT v. Beehive Engg. Co. and Allied Industries (P.) Ltd. [1996] 221 ITR 561 (AP), in the following words :

From the above extract (of the Circular), two things are clear, viz., (i) that for a company to be an industrial company within the meaning of the abovesaid provision, it is enough if the company is carrying on manufacturing of goods, and (ii) that the application of the Explanation would arise only in a case where the company is not mainly an industrial company; in such a case if the income of that company from manufacture of goods exceeds 51 per cent, it would be treated as industrial company. . . . (pp. 566-567)

Circular : No. 104 [F. No. 208/8/72-IT (A-II)], dated 19-2-1973.

478. Wife or minor child of individual incurs loss, which if it were income would be includible in income of that individual - Whether such loss should be treated as if it were loss sustained by that individual

CLARIFICATION 1

1. Reference is invited to the Boards Instruction No. 405 [F. No. 208/2/71 IT (A-II)], dated 6-4-1972[`1] 1, on the above subject.

2. On the basis of the decision of the Gujarat High Court in the case of Dayalbhai Madhavji Vadera v. CIT [1966] 60 ITR 551, the Board had issued instructions that if the share of the wife in a firm in which the assessee is a partner is a loss, such loss is not to be considered in the assessment of the husband under section 16(3) of the 1922 Act [corresponding to section 64(1) of the 1961 Act]. A question has been raised whether in the assessment of the wife, can such a loss be allowed to be set-off against any other income in the same assessment year ?

3. The Board has decided that such a set-off should be allowed while framing the assessment of the spouse. If after setting-off such a loss in the same assessment year, there is still a loss left then the balance should be allowed to be carried forward and set-off allowed in subsequent years in accordance with the provisions of law.

CLARIFICATION 2

Attention is invited to the Boards Circular No. 35 of 1941, on the above subject. It was laid down therein that where the wife or minor child of an individual incurs a loss which if it were income would be includible in the income of that individual under section 16(3) of the 1922 Act, such loss should be set-off only against the income, if any, of the wife or minor child and if not wholly set-off should be carried forward, subject to the provisions of section 24(2) of the 1922 Act. The Board has reconsidered the question and has decided that, although this view may be tenable in law, the other and more equitable view is, at least equally tenable, that such loss should be treated as if it were a loss sustained by that individual. Thus, if the wife or minor child has a personal income of Rs. 5,000 which is not includible in the individuals income and sustains a loss of Rs. 10,000 from a source the income of which would be includible in the income of the individual, the loss should be set-off against the income of the individual under section 24(1), and if not wholly set-off should be carried forward under section 24(2). The wife or the minor child would, therefore, be assessable on the personal income of Rs. 5,000. If in any case the wife or minor child claims a set-off of the loss against the personal income, it should be brought to the notice of the Board. The Boards Circular No. 35 of 1941 is hereby cancelled.

Circular : No. 20 of 1944 [C. No. 4(13)-IT/44], dated 15-7-1944.[`2] 1

Circular : No. 105 [F. No. 225/86/71-IT(A-II)], dated 23-2-1973.

927. Requirement of filing declaration under section 184(7), as amended by Taxation Laws (Amendment) Act, 1970, within time allowed under section 139(1)/(2) for furnishing return of income - ITOs to be liberal in condoning delay for assessment year 1970-71 and earlier years where, even after 1-4-1971, declaration had been filed along with return

1. Prior to the amendment of section 184(7) by the Taxation Laws (Amendment) Act, 1970, a firm, which had been granted registration for any assessment year, could get the benefit of the registration for a subsequent year provided, inter alia, that the firm furnished along with the return of income a declaration in Form No. 12. After the amendment of section 184(7), which is effective from April 1, 1971, the firm has to furnish Form No. 12 within the time allowed under section 139(1)/(2) for furnishing the return of income.

2. The Board, in the Explanatory Notes on provisions of the Taxation Laws (Amendment) Act, 1970, have observed that the amendment will apply not only in relation to the assessments for the year 1971-72 and subsequent years but also for the assessment year 1970-71 or any earlier year where the question of registration or continuation thereof is considered on or after April 1, 1971. If, therefore, an assessee-firm files returns of income for 1970-71 or earlier years within the time limit under section 139(4)(a) and also files Form No. 12 for continuation of registration after April 1, 1971, the firm would not be eligible for the benefits or registration because the form would not have been filed within the time allowed under section 139(1)/(2). A strict interpretation of this nature is likely to cause genuine hardship to such firms. Section 184(7), proviso (ii), however, empowers the Income-tax Officers to allow to furnish the declaration at any time before the assessment where he is satisfied that the firm was prevented by sufficient cause from furnishing the declaration in time. In view of the hardship that is likely to be caused, the Board desires that the Income-tax Officers should be liberal in condoning the delay for 1970-71 and the earlier assessment years, where, even after April, 1971, the declaration had been filed along with the return of income and condone the delay.

JUDICIAL ANALYSIS

Explained in - In Anil Sound Caps v. CIT [1983] 141 ITR 457 (Mad.), the above circular was commented upon with the following observations:

...That circular ex facie contains the procedure to be adopted in cases where section 184(7) is attracted. Section 184, as already seen, deals with cases of filing of declaration (for continuation) by the assessee within the time allowed stating that there was no change in the constitution of the firm or in the shares of the partners. It is with reference to the filing of such a declaration that the ITO is given power to condone the delay if he was satisfied that the firm was prevented by sufficient cause from furnishing the declaration within the time allowed under the law. The circular does not prima facie deal with cases arising under section 185. Therefore, even assuming that we have to consider the circular in interpreting the provisions of the Act, we are not satisfied that the assessee can derive any assistance from the said circular. However, we would not stand in the way of the assessee getting any benefit if the Board is satisfied, on being moved by the assessee, that the circumstances of this case would warrant the application of the said circular. (p. 461)

Explained in - In CIT v. Ramkisan Tapade & Co. [1993] 70 Taxman 133 (Bom.), the court observed that by its Circular Nos. D.O.F.No. 1(38)-63/TPL, dated 9-7-1963 and 105 dated 23-2-1973 the Board has instructed the ITOs not to refuse continuation of registration merely on the ground of delay in applying for renewal. When section 184(7) was amended with effect from 1-4-1971 the Board again issued instructions in this regard on 23-2-1973 vide its Circular No. 105 dated 23-2-1973. In the said circular it was observed that a strict interpretation of the above provision was likely to cause genuine hardship in many cases. In that view of the matter and in view of the specific power conferred on the ITO to allow the assessee-firm to furnish the declaration at any time before the assessment was made where he was satisfied that the firm was prevented by sufficient cause from furnishing the declaration in time, the Board desired the ITOs to be liberal in condoning the delay. The instructions of the Board are clear. The object is to instruct the ITOs not to refuse continuation of registration merely on the ground of delay and to take a liberal approach in the matter.

Circular : No. 106 [F. No. 275/58/73-ITJ], dated 7-3-1973.

Financial year 1973-74

1731. Instructions for deduction of tax at source from interest on securities during financial year 1973-74 at the rates specified in Part III of First Schedule to Finance Bill, 1973

I am directed to forward a copy of draft circular letter setting out the rates at which income-tax and surcharge should be deducted from interest on Government securities on or after April 1, 1973. 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 1972-73.

2. According to the Finance Bill, 1973 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	3 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 4.5 per cent of the amount of the interest,
		or
		income-tax and surcharge on income-tax in respect of the interest at the rates prescribed in Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Finance Bill, 1973, if such interest income had been the total income,
		whichever is higher;
	(b) on interest payable on a tax-free security	15 per cent	2.25 per cent
II.	In the case of a company
	(i) where the company is a domestic company on interest on securities (excluding interest payable on a tax-free security)-	22 per cent	1 per cent
	(ii) where the company is not a domestic company
	(a) on interest payable on a tax-free security	44 per cent	2.2 per cent
	(b) on interest on other securities	70 per cent	3.5 per cent

3. The term domestic company for the present purposes means an Indian company or any other company which, in respect of its income liable to income-tax under the Act, for the assessment year commencing on April 1, 1963 has made the prescribed arrangements for the declaration and payment within India of the dividends (including dividends on preference shares) payable out of such income in accordance with the provisions of section 194.

In making payment or crediting interest on Government securities on or after April 1, 1973 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 followed in this connection :

(1) Exemption or abatement certificates issued before April 1, 1973, 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, 1974.

(2) Where a certificate is issued by the Income-tax Officer on or after April 1, 1973 authorising deduction of tax at a specified rate in respect of any person, income-tax should be deducted at the rates specified therein.

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

(4) No tax should be deducted from any interest payable on 4 per cent National Defence Bonds, 1972 or 6 per cent Gold Bonds, 1977 or 7 per cent Gold Bonds, 1980 where any such Bonds are held by a resident individual and in the case of the aforesaid Gold Bonds, where the holder thereof makes 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). 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 :

(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 by or under a Central Act which, under any law for the time being in force, is exempt from income-tax on its income.

(9) Under section 288B, fractions of one rupee contained in the amount of tax (including advance tax and tax deducted at source) will have to be rounded off to the nearest rupee by ignoring amounts less than fifty paise and increasing amounts of fifty paise or more to one rupee. Hence, the amount of tax to be deducted at source should be rounded off to the nearest rupee in accordance with the aforesaid provision of the Act.

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

Circular : No. 107 [F. No. 275/57/73-ITJ], dated 7-3-1973.

FINANCIAL YEAR 1973-74

1698. Instructions for deduction of tax at source from salary during financial year 1973-74 at the rates specified in Part III of First Schedule to Finance Bill, 1973

1. I am directed to invite a reference to this Ministrys Circular No. 83 [F. No. 275/10/72-ITJ], dated 21-3-1972, on the subject of deduction of income-tax from salaries paid during the year 1972-73. The Finance Bill introduced in the Parliament on February 28, 1973, inter alia, prescribes the rates at which income-tax has to be deducted during the financial year 1973-74 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, 1973. An extract of Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Finance Bill, 1973 insofar as it relates to levy of income-tax on salaries, is enclosed herewith incorporating also an Explanatory Note [Annex I]. It is requested that pending the passing of the Finance Bill, 1973, deductions of tax from salaries may be made during financial year 1973-74 according to the rates in the said Schedule. Three typical examples of calculations are given in Annex II.

2. The substance of the main provisions in the law insofar as they relate to income from salaries on which tax is to be deducted at source during the financial year 1973-74 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 the whole of the first Rs. 2,000, 50 per cent of the next Rs. 3,000 and 40 per cent of the balance of the qualifying amount of payments towards life insurance premia, contributions to provident fund, contributions for participation in the Unit-linked Insurance Plan, 1971 made under section 19(1)(cc) of the Unit Trust of India Act, 1963 and deposits in a 10-year Account or 15-year Account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959. 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. 20,000, 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 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; such expenditure has to be claimed by the taxpayer at the time of finalisation of the assessment.

(7) The 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 are given below :

	Category of taxpayers	Amount of standard deduction for each calendar month or part thereof 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	75
3.	Taxpayers other than those referred to at items (1) and (2)	50

In the case of taxpayers owning 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. 50 per month is admissible to such of the salaried taxpayers who did 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; for such an employee to be eligible for this deduction, it is not necessary to establish that he had actually incurred any expenditure on travelling for the purpose of his employment.

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 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, 1973 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, 1973

Paragraph A

Sub-Paragraph I

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

Rates of income-tax

(1)	where the total income does not exceed Rs. 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 Amount 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 by which the total income exceeds Rs. 30,000;
(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;

Surcharge on income-tax

The amount of income-tax computed in accordance with the preceding provisions of this Paragraph shall be increased by a surcharge for purposes of the Union calculated at the following rates, viz :

(a) in a case where the total income does not exceed Rs. 15,000	10 per cent;
(b) in any other case	15 per cent :

Provided that the amount of surcharge payable shall, in no case, exceed the aggregate of the following sums, namely :

(i) an amount calculated at the rate of 10 per cent on the amount of income-tax on an income of Rs. 15,000 if such income had been the total income; and

(ii) 40 per cent of the amount by which the total income exceeds Rs. 15,000.

Explanatory Note

The operation of the above-noted marginal relief provision in respect of surcharge, may be illustrated by the following examples :

Example A

Total income	Rs. 15,100
Income-tax on Rs. 15,100	Rs. 1,373 (Rs. 1,350 plus 23 per cent of Rs. 100)
Surcharge leviable :
- at the flat rate of 15 per cent	Rs. 205.95 (15 per cent of Rs. 1,373)
- under the proviso	Rs. 175.00 (Rs. 135, being 10 per cent of Rs. 1,350 which is the tax on a total income of Rs. 15,000 plus Rs. 40, being 40 per cent of the amount by which the total income exceeds Rs. 15,000.

As the surcharge calculated under the proviso is lower, the surcharge leviable in this case will be Rs. 175 only.

Example B

Total income	Rs. 15,200
Income-tax on Rs. 15,200	Rs. 1,396 (Rs. 1,350 plus 23 per cent of Rs. 200)
Surcharge leviable :
- at the flat rate of 15 per cent	Rs. 209.40 (15 per cent of Rs. 1,396)
- under the proviso	Rs. 215.00 (Rs. 135 + Rs. 80 being 40 per cent of Rs. 200.)

As the surcharge calculated at the flat rate of 15 per cent is lower, the surcharge leviable will be Rs. 209.40. The marginal relief provision will not, therefore, apply at this level, or above it.

ANNEX II - TYPICAL EXAMPLES OF INCOME-TAX CALCULATION

Rs.

Example I

1.	Total salary income	9,500
2.	Contributions to general provident fund	720
3.	Payment towards life insurance premia	500
		1,220
	[The employee does not own a motor car, motor cycle, scooter or other moped.]
4.	Total salary income	9,500
5.	Deduct : Standard deduction in respect of expenditure on traveling at Rs. 50 p.m.	600
		8,900
6.	Deduct : Whole of the qualifying contributions towards general provident fund and life insurance premia	1,220
7.	Taxable income	7,680
8.	Income-tax payable on Rs. 7,680 i.e., at 10 per cent on Rs. 2,680	268.00
9.	Union surcharge at 10 per cent on income-tax	26.80
10.	Total tax payable	294.80
	Rounded off to	295.00

Example II

1.	Total salary income	18,325
2.	Contributions to general provident fund	1,200
3.	Payment towards life insurance premia	1,600
	[The employee has a scooter registered in his name and uses it for the purpose of employment. He was on leave from 5th August to 3rdOctober during the year.]	2,800
4.	Total salary income	18,325
5.	Deduct : Standard deduction at Rs. 75 p.m. for 11 months (since he was on leave for the full calendar month of September, no standard deduction is admissible for one month; full deduction will be admissible for months of August and October during part of which he was on leave.)	825
		17,500
6.	Deduct : Whole of the first Rs. 2,000 and 50 per cent of the balance qualifying contributions towards general provident fund and life insurance premia (Rs. 2,000 plus 50 per cent of Rs. 800)	2,400
7.	Taxable income	15,100
8.	Income-tax on Rs. 15,100 (Rs. 1,350 plus 23 per cent of Rs. 100)	1,373
9.	Union surcharge [at 15 per cent of Rs. 1,373 works out to Rs. 205.95 but limited to Rs. 175 (Rs. 135 being 10 per cent of Rs. 1,350 which is the tax on a total income of Rs. 15,000 plus Rs. 40 being 40 per cent of amount by which the total income exceeds Rs. 15,000)]	175
10.	Total tax payable	1,548

Example III

1.	Total salary income		28,588
2.	Contributions to general provident fund		3,500
3.	Payment towards life insurance premium		6,275
			9,775
4.	Profession tax		138
	[The employee has a car in the last eleven months of the year registered in his name and uses it for purposes of employment.]
5.	Total salary income		28,588
6.	Deduct:
	- Profession tax	Rs. 138
	- Standard deduction in respect of expenditure on travelling at Rs. 200 for 11 months and at Rs. 50
	for one month	Rs. 2,250	2,388
			26,200
7.	Deduction on account of contributions towards general provident fund and life insurance premia. Paid Rs. 9,775 in all but limited to 30 per cent of Rs. 26,200 i.e., Rs. 7,860

Circular : No. 109 [F. No. 202/21/71-IT(A-II)], dated 20-3-1973.

246. Normal depreciation/Extra shift depreciation allowance up to 1969-70/from 1970-71 in the case of seasonal factories/concerns/approved hotels - Item III(iii)/(iv) of Part I of Appendix, I to Income-tax Rules

The correct legal position regarding depreciation and extra shift allowance is clarified as under :

NORMAL DEPRECIATION UP TO 1969-70 - Non-seasonal factory was entitled to no depreciation unless it worked for more than 30 days, 50 per cent if it worked for more than 30 days, and 100 per cent depreciation if it worked for 180 days or more.

A seasonal factory was entitled to full depreciation if it worked during all the working seasons of the previous year. If it did not, depreciation allowance was admissible with reference to the period of user set forth above.

NORMAL DEPRECIATION FROM 1970-71 - Normal depreciation is fully admissible for a seasonal as well as a non-seasonal factory if it worked at any time during the previous year irrespective of the period of actual user.

EXTRA SHIFT ALLOWANCE UP TO 1969-70 - The allowance was in addition to the normal allowance of depreciation. It could be allowed only when the assessee had claimed and proved to the satisfaction of the Income-tax Officer that a concern, for which the allowance was claimed, had actually worked double or triple shifts, as the case might be. No such extra allowance for multiple shift was admissible in respect of machinery or plant against which the letters NESA appeared in the depreciation schedule.

The normal working days for which a factory had to work to get extra shift allowance was 300 for seasonal as well as non-seasonal factories. The extra shift depreciation allowance was allowable in the proportion which the number of days for which the factory actually worked double shift, or as the case may be, triple shift, bore to the normal number of working days throughout the previous year, the norm of which was fixed at 300 days for a seasonal as well as non-seasonal factory.

EXTRA SHIFT ALLOWANCE FROM 1970-71 - The position relating to the extra depreciation allowance in respect of double/triple shifts, as applicable from the assessment year 1970-71 onwards, is clarified below :

1. The allowance is in addition to the normal allowance of depreciation.

2. It can be allowed only when the assessee has claimed and proved to the satisfaction of the Income-tax Officer that a concern, for which the allowance is claimed, has actually worked double or triple shift, as the case may be.

3. No such extra allowance for multiple shift is admissible in respect of (a) machinery or plant, against which the letters NESA appear in the depreciation schedule, (b) the machinery and plant of the categories specified at sub-items (1) to (10) under clause (iv) of item III relating to Machinery and plant (not being a ship), in the revised rate schedule of depreciation such as locomotives, boilers, railway sidings, etc.

4. The said allowance is calculated separately for the period for which the concern has actually worked double shift only and the periods for which it has worked triple shift, expressed in terms of the proportion which such period bears to the normal number of working days during the previous year. For this purpose, the norm of normal number of working days during the previous year has been fixed :

a. in the case a seasonal factory or concern, at 180 days, or the number of days on which the factory or concern actually worked during the previous year, whichever is greater; and

b. in the case of non-seasonal factory or concern, at 240 days, or the number of days for which the factory or the concern actually worked during the previous year, whichever is greater.

5. The formulae for calculating the extra shift depreciation allowance in regard to a factory or concern, whether seasonal or non-seasonal, which has worked double shift or triple shift for any period during the previous year, may be stated as follows:

Double shift
	One-half of the normal depreciation allowance	Number of days during the previous year for which a factory or concern actually worked double shift
		Normal number of working days in the previous year
Triple shift
	Full amount of the normal depreciation allowance	Number of days during the previous year for which a factory or concern has actually worked triple shift
		Normal number of working days in the previous year

To illustrate the calculation of extra shift depreciation allowance in accordance with the formulae mentioned in the preceding paragraph, where a non-seasonal concern, which has worked 270 days during the previous year, out of which it worked triple shift for 135 days and double shift for another 90 days, the extra shift, depreciation allowance for triple shift working will be :

135/270, i.e., one-half of the normal depreciation allowance and for double shift working the extra depreciation allowance will be:

90/270, i.e., one-third of one-half of the normal depreciation allowance.

In this case, if the full amount of normal depreciation allowance is Rs. 9,000, the extra shift depreciation allowance for triple shift working will be 9,000 135/270, i.e., Rs. 4,500; and the depreciation allowance for double shift working will be one-third of (9,000 ), i.e., Rs. 1,500.

EXTRA DEPRECIATION ALLOWANCE FOR APPROVED HOTELS FOR THE ASSESSMENT YEAR 1970-71 AND SUBSEQUENT YEARS - Machinery and plant installed in a hotel does not qualify for the extra shift depreciation allowance but is entitled to an extra allowance under Item III(iii) [of Part I of Appendix I to the Income-tax Rules]. The provisions relating to the grant of extra depreciation allowance aforesaid are as follows :

1. The machinery or plant must be owned and installed by the assessee, being an Indian company, in the premises used by it as a hotel.

2 Such hotel must be approved, for the time being, by the Central Government for the purpose of grant of development rebate in respect of new machinery or plant at the higher rate specified in section 33(1)(ii).

3. The extra depreciation allowance aforesaid is in an amount equal to one-half of the normal depreciation allowance in respect of the entire machinery and plant installed in the hotel, irrespective of the period of its actual user during the previous year.

4. The extra depreciation allowance in the case of an approved hotel run by an Indian company is allowable in addition to the normal depreciation allowance.

judicial analysis

Explained in - The above circular was explained and applied in Hindustan Machine Tools Ltd. v. CIT [1992] 197 ITR 18 (Kar.), with the following observations :

On behalf of the Revenue, emphasis was laid upon a departmental circular No. 109 issued on March 20, 1973. It summarises the position about allowance of normal depreciation and extra shift allowance from year to year. In regard to extra shift allowance from 1970-71, the position is stated to be this :

(1) The allowance is in addition to the normal allowance of depreciation.

(2) It can be allowed only when the assessee has claimed and proved to the satisfaction of the Income-tax Officer that a concern, for which the allowance is claimed, has actually worked double or triple shift, as the case may be.

(3) No such extra allowance for multiple shift is admissible in respect of

(a) machinery or plant against which the letters NESA appear in the depreciation Schedule...

This departmental circular reiterates that what is relevant is that a concern has worked double or triple shift and that is what the assessee has to prove.

On behalf of the Revenue, Mr. H. Raghavendra Rao drew our attention to a judgment of the Madras High Court in South India Viscose Ltd. v. CIT [1982] 135 ITR 206, where this departmental circular was referred to and it was held that the word concern had been used in the circular only to show that the Income-tax Officer was obliged to allow extra shift depreciation allowance if the assessee made a claim therefor ; except for the use of this word, the court did not find that the departmental circular gave any kind of global allowance on all the machinery purchased by the assessee and set up in its business. The Income-tax Officer, the court held, was required to apply his mind to examine which machinery owned by the assessee had been used in the extra shift. So long as the particular machinery had worked the extra shift in the relevant year for the specific period, it would be eligible for extra shift allowance on the basis of the number of days, provided the words NESA did not apply thereto.

For the purpose of this reference, we are concerned only with the terms of the said circular No. 109, dated March 20, 1973. It is that circular which is referred to specifically in the question. Upon an interpretation of that circular, we are left in no doubt about the answer to the question.

Our attention was also drawn by Mr. Raghavendra Rao to a short note stating that the Supreme Court had dismissed a special leave petition against the judgment of the Allahabad High Court in Juggilal Kamlapat Spinning and Weaving Mills Co. Ltd. v. CIT [1992] 193 ITR (St.) 25, where the High Court had held, on a reference, that extra shift allowance should be restricted only to the particular items of machinery worked and to the number of days worked. We have no means of knowing what the assessment order was in regard to which the reference had been made to the Allahabad High Court, whether the said circular dated March 20, 1973, had been brought to the attention of the court and what the questions were that were posed to the court. (pp. 21-22)

Explained in - The above circular was explained in CIT v. Meghdoot Hotels (P.) Ltd. [1996] 220 ITR 190 (All.), in the following words :

The Central Board of Direct Taxes elucidating the scope of item III, sub-item (iii), of Part I Appendix I, issued Circular No. 109, dated March 20, 1973. The Board clarified in the said circular as under :

Machinery and plant installed in a hotel does not qualify for the extra-shift depreciation allowance but is entitled to an extra allowance under item III(iii) of Part I of Appendix I of the Income-tax Rules.

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**

**

From the aforesaid circular, it is manifest that the Board clarified the scope of item III, sub-item (iii), of Part I of Appendix I fully. From the Boards circular and the statutory position it is clear that extra-shift depreciation allowance is not allowable to approved hotels in addition to extra depreciation allowance and that approved hotels are entitled may to extra depreciation allowance under item III, sub-item (iii) of Part I of Appendix I. (pp. 193-194)

Circular : No. 110 [F. No. 215/172-IT(A-II)], dated 13-4-1973.

311. Contribution to recognised provident fund - Trustees of funds allowed to make provision that payment to nominee will be sufficient discharge of liabilities - Clause (iv) of sub-section (1) read with rules 67A and 101A of Income-tax Rules

1. The Punjab, Haryana. and Delhi Chamber of the Commerce and Industry have approached the Board for amendment of rules 67A and 101A of the Income-tax Rules, as these rules, in case of payments to the nominee or nominees, do not give discharge to the trustees of the funds against all future claims and liabilities.

2. Under the provisions of rules 67A and 101A of the Income-tax Rules, the nominee becomes entitled to receive the monies standing at the credit of the subscriber without any specific requirement of producing probate or letter of administration to the estate of the deceased. It is left to the trustees to satisfy themselves that nominees will deal with the monies in the proper manner and if they feel it necessary they may even insist on their producing a proper grant of representation to the estate of the deceased before making the payment. The Board has, therefore, decided that the trustees of the funds may be allowed to make a provision in their provident fund rules that the payment to the nominee or nominees will be sufficient discharge of the liabilities of the trustees and no claim in future will lie. The trust deeds containing such a provision should, therefore, not be refused recognition if the other conditions prescribed under the rules are satisfied

Circular : No. 111

SECTION 10(13A) l house rent allowance

77. Exemption of house rent allowance under clause (13A) - Eligibility and computation

clarification 1

1. I am directed to invite reference to this Ministrys letter No. F. 12/19/64-IT (A-I), dated 2-1-1967 [Clarification 2] wherein the manner in which the house rent allowance is to be treated as exempt from income-tax under section 10(13A) read with rule 2A of the Income-tax Rules, was explained.

2. As per rule 2A salary has the same meaning as assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule to the Act, i.e., @ salary includes dearness allowance if the terms of employment so provide but excludes all other allowances and perquisites. A question has arisen about the treatment to be given to the element of dearness pay in relation to rule 2A insofar as Government servants are concerned. With the issue of orders in the Government of India, Ministry of Finance (Department of Expenditure), O.M. No. F. 1(34) E-II(B)/68, dated 18-1-1969, dearness pay is considered as pay for purposes of pension and gratuity and compensatory allowance (including house rent allowance, etc.) in the case of Central Government servants. It is, therefore, clarified that for the purposes of calculating the house rent allowance that would be exempt under rule 2A, the term salary includes dearness pay also. Where State Government servants are being paid dearness pay as in the case of Central Government employee, the clarification given above will apply.

3. The above clarification may please be brought to the notice of all Disbursing Officers and State Undertakings under the control of the State Government; this may be kept in view, inter alia, for calculating income-tax to be deducted at source from salaries.

Circular : No. 90 [F. No. 275/79/72-ITJ], dated 26-6-1972.

CLARIFICATION 2

1. Reference is invited to the Central Board of Direct Taxes letter F. No. 12/19/64-IT(B), dated 22-2-1966 [Clarification 3], where in it was intimated that the house rent allowance given at flat rates may be treated as exempt from income-tax without verification of the fact whether the employee concerned had paid any house rent and the allowance exempted is less than the difference between the actual expenditure on the house rent and 10 per cent of the salary of the employee. These instructions were applicable for the financial year 1964-65 only. As the system of paying house rent at flat rates to Central Government employees has since been withdrawn, these instructions are no longer in operation and may, therefore, be treated as cancelled.

2. Section 10(13A) exempts from tax only the allowance granted by the employer to meet expenditure already incurred on payment of rent for the residential accommodation occupied by the employee. The limits for the purposes of exemption of house rent allowance under section 10(13A) have been laid down in rule 2A. Though for purposes of grant of house rent allowance, a rent receipt may not be insisted upon by Government, it is necessary for granting the exemption under section 10(13A) that the employee should have actually incurred the expenditure on rent. For purposes of deduction of tax, therefore, the disbursing officer should ensure that the employee concerned has in fact incurred the expenditure on rent. The payment of rent should be verified through rent receipts in the cases of all employees.

3. A reference is also invited to the Finance Ministrys letter F. No. 12/19/64-IT(B), dated 8-1-1965, forwarding extracts of section 10(13A) and rule 2A relating to exemption of house rent allowance from income-tax. It has come to the notice of the Finance Ministry that for purpose of working out the exempted amount of house rent allowance the limits laid down in rule 2A are not taken into consideration and the entire house rent allowance is being treated exempt from income-tax by some disbursing officers. The amount of house rent allowance, which is to be treated as exempt from income-tax, has to be worked out in the following manner:

EXAMPLE 1 : Persons getting a salary of Rs. 600 p.m. and house rent allowance of Rs. 90 p.m., the expenditure incurred for rent of the house being Rs. 160 p.m.

As per clauses of rule 2A :

a. Rs. 90; b. Rs. 100 (expenditure on rent in excess of one-tenth of salary); c. Rs. 120; d. Rs. 300.

Since Rs. 90 is the least amongst the four amounts worked out as per clauses of rule 2A, only this amount will be treated as exempt under rule 2A.

EXAMPLE 2 : Persons getting Rs. 600 p.m. and house rent allowance of Rs. 90 p.m., expenditure on house rent being Rs. 140 p.m.

As per clauses of rule 2A :

a. Rs. 80; b. Rs. 90 (expenditure on rent in excess of one-tenth of salary);

c. Rs. 120; d. Rs. 300.

Exemption available will be for Rs. 80 as this is the least amount.

EXAMPLE 3 : Persons getting a salary of Rs. 600 p.m. and house rent allowance of Rs. 90 p.m., expenditure on rent being Rs. 60 p.m. or less.

As per clauses of rule 2A:

a. Rs. 90; b. Rs. nil (expenditure on rent in excess of one-tenth of salary);

c. Rs. 120; d. Rs. 300.

No exemption is available in this case.

4. It is also clarified that the house rent allowance paid to a person, who is living in his own house or in a house for which he does not actually pay any rent, is not exempt from tax in any circumstances.

Letter : F. No. 12/19/64-IT(A-I), dated 2-1-1967

clarification 3

1. Reference is invited to the Boards letter No. 12/19/64-IT(B), dated 8-1-1965, addressed to all State Governments. A question has been raised whether the house rent allowance at flat rates sanctioned to Central Government servants without verification of rent receipts vide the Ministry of Finance (Department of Expenditure) O.M. No. 2(22) E-II/60, dated 2-8-1960, will be exempt from tax under section 10(13A) read with rule 2A of the Rules or it is necessary for the Disbursing Officers to verify in each case whether the employee has paid house rent and the allowance exempted is less than the difference between the actual expenditure on house rent and 10 per cent of the salary?

2. The Board have decided that in the case of Central Government employees who are in receipt of house rent allowance at flat rates and who are not residing in their own house or in the house of their parents, the allowance at the flat rates so received may be treated as exempt from income-tax under section 10(13A) without further verification. Necessary amendment to the rules is being made accordingly but pending this amendment there is no objection to Disbursing Officers ignoring such house rent allowance while calculating the tax to be deducted at source during the current financial year.

Letter : F. No. 12/19/64-IT(B), dated 22-2-1966.

Circular : No. 112 [F. No. 275/64/73-ITJ], dated 31-5-1973.

Section 194D l Insurance Commission

1123. Scope of provision of the section requiring deduction of tax at source from insurance commission explained

1. The Finance Act, 1973 has introduced a new section 194D with a view to providing for deduction of income-tax at source, at such rates as may be prescribed in the Finance Act of the relevant year, from payments of income by way of insurance commission. For this purpose, insurance commission will mean any income by way of remuneration or reward whether by way of commission or otherwise for soliciting or procuring insurance business (including business relating to continuance, renewal or revival of policies of insurance). This provision will apply only in the case of a resident individual. The broad effect of the provisions of the new section will be that any person responsible for paying any such income to a resident individual[`3] 1 will be required to deduct income-tax at the prescribed rates. The rate for deduction of tax at source for the financial year 1973-74 which has been prescribed in Part II of the First Schedule to the Finance Act, 1973 is as below :

	Rate of Income-tax	Rate of surcharge
On income by way of insurance commission	10 per cent	Nil.

Although a specific provision has not been made for deduction of tax at source from insurance commission paid to an individual who is not resident in India, tax from such payments made to non-resident will have to be deducted under section 195. The rate for deduction of tax at source in the case of a non-resident individual has been specified in item 1(b)(i) of Part II of the First Schedule to the Finance Act, 1973, at 34.5 per cent (income-tax 30 per cent plus surcharge 4.5 per cent) of the income-tax by way of insurance commission or income-tax and surcharge thereon at the rates prescribed in Sub-Paragraph I of Paragraph A of Part III of the First Schedule, if such income had been the total income of the recipient, whichever is higher.

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

(1) No tax will be deducted at source where the amount is credited or paid before June 1, 1973.

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

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

3. The relevant forms etc., in relation to the provisions for deduction of income-tax at source under section 194D are being prescribed by rules. In the meanwhile, the following instructions may please be noted :

(1) It will be open to the recipient of the commission to make an application to the Income-tax Officer concerned and obtain from him a certificate authorising the payer to deduct tax at such lower rate or deduct no tax, as may be appropriate to his case; such certificate will be valid for the period specified therein unless it is cancelled by the Income-tax Officer earlier.

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

(3) The tax deducted should be paid to the credit of the Central Government within one week from the date of such deduction or the date of receipt of the challan by the person making the deduction, as the case may be. Challans for paying tax into the Government account are obtainable from the Income-tax Officer concerned.

(4) The person responsible for making the payment should issue a certificate showing therein the amount paid, the amount of tax deducted at source and the date of payment to the Government account. Necessary form in this regard is being prescribed under the Income-tax Rules [see Form 19D].

Circular : No. 113 [F. No. 220/13/73-IT (A-II)], dated 20-6-1973.

815. Extension of time for filing return for assessment year 1973-74 in cases where returns due to be filed by June 30 or July 31, 1973 - Waiver of interest chargeable for period of delay up to August 15, 1973

1. The Central Board of Direct Taxes have decided to extend the time for furnishing returns of income and net wealth for the assessment year 1973-74 till August 15, 1973, in cases where returns are due to be filed by June 30, 1973 or July 31, 1973. A copy of the Press Note dated 20-6-1973 [printed here as Annex] in this regard is attached.

2. Under the provisions of section 139, as amended by the Finance Act, 1972, interest at the rate of 12 per cent per annum is to be charged for delay in furnishing the return of income from the expiry of the date up to the date of furnishing the return. Hence, interest at the rate of 12 per cent per annum will be chargeable from July 1, 1973 and August 1, 1973 in cases where the voluntary return of income due by June 30, 1973 or July 31, 1973, respectively, is not furnished by that date. As the time for furnishing the voluntary return of income has been extended till August 15, 1973, the Board desire that the Income-tax Officers may please be instructed to waive, in exercise of their powers under rule 117A(v) of the Income-tax Rules, the interest chargeable in respect of the period of delay up to August 15, 1973 in such cases. In terms of the proviso to the aforesaid rule, the previous approval of the Inspecting Assistant Commissioner will have to be obtained by the Income-tax Officer in cases where the amount of interest so waived exceeds Rs. 1,000.

ANNEX - PRESS NOTE REFERRED TO IN CLARIFICATION

The time for filing the returns of income and net wealth for the current assessment year 1973-74 has been extended until August 15, 1973, in cases where such returns are due to be filed by June 30 or July 31.

From April 1, this year, revised returns of income and net wealth have been brought into force. Taxpayers who have not furnished their returns for the assessment year 1973-74 or who have furnished such returns in the old forms are expected to submit them in the up-to-date forms. For revised forms or for any assistance, they should contract the Income-tax Officer or the Public Relations Officer.

In all cases of delay in furnishing the returns of income, Income-tax Officers are being issued instructions to waive the interest chargeable up to August 15.

Circular : No. 114 [F.No. 275/61/73-ITJ], dated 21-6-1973.

1113. Co-operative societies included in the categories of persons who are to deduct tax at source from payments to contractors and sub-contractors under the section with effect from 1-4-1973

1. Reference is invited to this Ministrys Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-1972, No. 93 [F.No. 275/100/72-ITJ], dated 26-9-1972 and No. 95 [F.No. 275/9/72-ITJ], dated 15-11-1972 on the subject mentioned above.

2. Under section 194C, inserted in the 1961 Act, by the Finance Act, 1972, income-tax is deductible at source from income comprised in payments made by the Central Government or any State Government, local authorities, statutory corporations and companies to contractors engaged for carrying out any work or for supplying labour for carrying out such work, at the rate of 2 per cent of such payments. Similarly, income-tax is deductible from payments made by contractors, other than individuals and Hindu undivided families, to sub-contractors at the rate of 1 per cent of the payment. Such deduction is to be made in all cases where the consideration for the contract or the sub-contract, as the case may be, exceeds Rs. 5,000.

3. The Finance Act, 1973 has amended section 194C so as to include co-operative societies in the categories of persons who are required to deduct tax at source from payments made by them to contractors. Accordingly, income-tax will now be deductible from payments made by co-operative societies to contractors in respect of works and labour contracts, at the rate of 2 per cent of the payment; and the contractors, not being individuals or Hindu undivided families, obtaining contracts from co-operative societies will, in turn, be required to deduct tax at source from payments made by them to sub-contractors, at the rate of 1 per cent of the payment. These provisions will not apply to sums paid or credited by co-operative societies or by contractors to sub-contractors before June 1, 1973.

Circular : No. 115 [F. No. 180/21/73-IT(A-I)], dated 30-6-1973.

SECTION 12A l CONDITIONS AS TO REGISTRATION OF trusts

170. Time for filing of applications for registration by charitable and religious trusts - Extended up to August 1973

1. All charitable and religious trusts, which desire to avail of the benefits of tax exemption under sections 11 and 12 are, inter alia, required to file under section 12A(a) an application in the prescribed form for registration of the trust before the Commissioner of Income-tax by July 1, 1973 or one year from the date of creation of the trust, whichever is later. A copy of the Press Note is enclosed [Annex].

2. I am directed to state that the time for filing of such applications has been extended until August 15, 1973 or one year from the date of creation of the trust, whichever is later.

3. The Board desire that wherever requests have been received for extension of time for filing of application under section 12A, the Commissioners of Income-tax may allow time till August 15, 1973 in all cases. Requests for extension of time to file applications beyond August 15, 1973 may be considered on merits.

ANNEX - PRESS NOTE REFERRED TO IN CLARIFICATION

The time for filing applications for registration by charitable and religious trust has been extended until August 15, 1973, or one year from the date of creation of the trust, whichever is later. The time limit originally fixed was July 1.

All charitable and religious trusts, which wish to take advantage of the benefits of tax exemption under sections 11 and 12, are required, among other things, to file an application for registration before the Commissioner of Income-tax. For prescribed application forms or any other assistance they can contact the Income-tax Officer or the Public Relations Officer.

Circular : No. 116 [ F. No. 145/32-FTD], dated 10-7-1973.

717. Income-tax (Double Taxation Relief) (Dominions) Rules, 1956 providing for grant of double taxation relief with certain dominions - Present position thereunder

Clarification 1

1. In exercise of the powers available under section 49A of the 1922 Act, the Government of India had issued a Notification dated 23-6-1956 called the Income-tax (Double Taxation Relief) (Dominions) Rules, 1956 [Annex], providing for grant of relief in respect of income on which tax has been paid both in India and in any of the following Dominions:

1. Kenya	6. Nigeria
2. Tanganyika	7. Sierra Leone
3. Uganda	8. Gambia
4. Zanzibar	9. Mauritius
5. Gold Coast

These rules being consistent with the corresponding provisions of the 1961 Act continued to be operative by virtue of the provisions contained in section 297(2)(k).

2. The following countries have, however, stated that the agreements on the basis of which the said rules were applicable are no longer binding on them after the date of their attainment of independence as shown against each:

1. Uganda	9-10-1962	3. Kenya	12-12-1963
2. Gambia	18-2-1965	4. Tanzania	9-12-1961
		(Tanganyika & Zanzibar)

Thus, there is no subsisting agreement, between India and the above-named four countries for the avoidance of double taxation of income after the dates shown above. The cases of Indian residents will, therefore, be covered by the provision for grant of unilateral relief under section 91. This will be applicable in respect of the assessment years commencing from the assessment year immediately following the financial year in which a particular country attained independence. Thus, the provision for unilateral relief will become applicable in case of income in these countries for and from the assessment year as indicated below:

	Assessment year
1. Uganda	1963-64
2. Gambia	1965-66
3. Kenya	1964-65
4. Tanzania (Tanganyika & Zanzibar)	1962-63

3. The Government of Sierra Leone has informed that it has no objection in principle to continue the arrangements with India as contained in the Income-tax (Double Taxation Relief)(Dominions) Rules, 1956. Hence, the said rules will continue to remain in force in relation to Sierra Leone.

4. The position in respect of the remaining countries, viz., Gold Coast, Nigeria and Mauritius is being ascertained.

Annex - Text of Income-tax (Double Taxation Relief)(Dominions) Rules, 1956

In exercise of the powers conferred by section 49A of the Indian Income-tax Act, 1922 (11 of 1922), and in supersession of the Notification of the Government of India in the late Finance Department (Central Revenues), No. 1, dated the 4th January, 1941, the Central Government makes the following rules for the granting of relief in respect of income on which tax has been paid both in the taxable territories and in certain of Her Majestys Dominions, namely:

1. (1) These rules may be called the Income-tax (Double Taxation Relief) (Dominions) Rules, 1956.

(2) They extend to the taxable territories as defined in section 2(14A) of the Indian Income-tax Act, 1922 (11 of 1922).

2. In these rules unless the context otherwise requires,

(a) Dominion means any of the territories specified in the first column of the Schedule annexed to these rules;

(b) Dominion income-tax means tax charged for any year in accordance with the provisions of the Dominion enactment specified in the second column of the said Schedule;

(c) Dominion rate of tax has the meaning assigned to it in the section of the respective Dominion enactment specified in the third column of the said Schedule;

(d) the expression Indian income-tax means income-tax and super tax charged in accordance with the provisions of the Indian Income-tax Act, 1922 (11 of 1922);

(e) the expression Indian rate of tax means the amount of Indian income-tax exclusive of super tax after deduction of any relief due to a claimant under the other provisions of the Indian Income-tax Act, 1922 (11 of 1922), but before deduction of any relief due to him under these rules, divided by his total income after deducting therefrom any income (including income from a share in an unregistered firm) exempted from tax by or under the provisions of the said Act, added to the amount of Indian super tax before deduction of any relief due to the claimant under these rules divided by his total income.

3. If any person who has paid by deduction under section 18 of the Indian Income-tax Act, 1922 (11 of 1922), or otherwise Indian income-tax for any year on any part of his income proves to the satisfaction of the Income-tax Officer that he has paid by deduction or otherwise Dominion income-tax for that year in respect of the same part of his income, he shall be entitled to a refund of a sum calculated on that part of his income or a rate to be determined as follows :

(i) if he is resident in the taxable territories the rate at which refund is to be given shall be

(a) the Dominion rate of tax, when that rate does not exceed half of the Indian rate of tax; and

(b) half the Indian rate of tax, in any other case;

(ii) if he is not resident in the taxable territories the rate at which refund is to be given shall be

(a) half of the Dominion rate of tax when that rate does not exceed the Indian rate of tax; and

(b) in any other case, the amount by which the Indian rate of tax exceeds half of the Dominion rate of tax:

Provided that in no case shall the rate at which such refund is calculated exceeds half the Indian rate of tax appropriate to the income of the person entitled to relief or be greater than the excess of the lower of the Indian and the Dominion rate of tax over the rate at which relief is given in the Dominion.

4. (1) The application for refund of income-tax under these rules shall be made as follows:

(i) if the applicant is resident in the taxable territories, to the Income-tax Officer of the district in which the applicant is chargeable directly to income-tax, or if he is not chargeable directly, to the Income-tax Officer of the district in which he ordinarily resides;

(ii) if the applicant is resident outside the taxable territories, to the Income-tax Officer appointed by the Central Board of Revenue.

(2) Such application may be presented by the applicant in person or by a duly authorised agent or may be sent by post, and shall as far as circumstances permit, be in Form I appended to these rules.

5. No claim to any refund of Indian income-tax or super tax under these rules shall be allowed unless it is made within four years from the last day of the financial year commencing next after the expiry of the previous year in which the income arose, accrued or was received or was deemed to have arisen, accrued or been received or was brought into the taxable territories.

6. An applicant for refund under these rules may appeal to the Appellate Assistant Commissioner of Income-tax from any order of the Income-tax Officer disallowing the claim for refund either wholly or in part.

7. The appeal shall be presented within thirty days of the date on which the order of the Income-tax Officer was communicated to the applicant and shall, as far as circumstances permit, be in Form II appended to these rules.

Clarification 2

1. Attention is invited to paragraph (4) of Boards Circular No. 116, dated 10-7-1973 [Clarification 1] on the above subject.

2. The position in respect of Ghana (formerly Gold Coast), Nigeria and Mauritius has since been ascertained. The Governments of these three countries have stated that after the date of attainment of independence by them, they do not consider that any agreement on the question of avoidance of double taxation of income subsists between them and the Government of India. Ghana and Mauritius attained independence on March 6, 1957 and March 12, 1968, respectively, while Nigeria became independent on October 1, 1960. There is, thus, no subsisting agreement between India and these three countries for the avoidance of double taxation of income after the dates indicated above. The cases of Indian residents will, therefore, be covered by the provision for grant of unilateral relief under section 91. This will be applicable in respect of the assessment years commencing from the assessment year immediately following the financial year in which a particular country attained independence. Accordingly, the provision for unilateral relief will become applicable in the case of income in these countries for and from the assessment year as indicated below :

	Assessment year
1. Ghana	1957-58
2. Nigeria	1961-62
3. Mauritius	1968-69

Circular: No. 172 [F.No. 501/21/73-FTD], dated 8-7-1975.

Circular : No. 117 [F. No. 201/5/73-IT(A-II)], dated 22-8-1973.

357. Rebate allowed to members by consumer co-operative stores - Whether allowable as business deduction

1. I am directed to say that an instance has come to the notice of the Board wherein the Income-tax Officer in the case of consumer co-operative store had disallowed the claim of deduction on account of rebate allowed on the purchases made by the members of the store.

2. The Board in consultation with the Department of Community Development and Co-operation has decided that rebate or bonus (which is in the nature of deferred discount) passed on by the consumer co-operative stores to their members on the value of the purchases made by them during a year should be allowed as a deduction in computing the business income of such a society.

Circular : No. 118 [F. No. 319/16/73-WT], dated 15-9-1973.

1389. Valuation of unquoted equity shares of investment companies, holding companies, etc. - Guidelines therefor

CLARIFICATION 1

1. Reference is invited to : (i) the Boards Circular No. 2 (WT) of 1967, dated 31-10-1967 [Clarification 3] for valuation of unquoted equity shares (a) of investment companies other than those which are substantially holding companies; and (b) of investment companies which are substantially holding companies; and (ii) the Boards Circular No. 118, dated 15-9-1973 [printed here as Clarification 2] (in partial modification of circular dated 31-10-1967) for valuation of unquoted equity shares of investment companies which have wholly-owned subsidiaries.

2. The question of valuation of unquoted equity shares of investment companies has been re-examined in the light of the Supreme Courts decision in the case of CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38. The Boards Circulars dated 31-10-1967 and 15-9-1973, therefore, stand modified as set out in the succeeding paragraphs.

3. In the light of the above-quoted Supreme Courts decision as also its earlier decision in CWT v. Mahadeo Jalan [1972] 86 ITR 621, the following guidelines are issued for the valuation of unquoted equity shares of investment companies referred to in paragraph 1 above.

1. The principle of combination of the two methods, i.e., the average of

(a) the break-up value of shares based on the book value of the assets and liabilities disclosed in the balance sheet; and

(b) the capitalised value arrived at by applying certain rate of yield of the maintainable profits,

has to be discarded.

2. In the case of a company which is a going concern and whose shares are not quoted on the stock exchange, the profits which the company has been making and should be capable of making or, in other words, the profit-earning capacity of the company would ordinarily determine the value of its shares.

3. In the case of a company which is ripe for winding up or if the situation is such that the fluctuations of profits and uncertainty of conditions on the date of valuation prevent any reasonable estimation of the profit-earning capacity of the company, the break-up value method will have to be adopted. The later decision of the Supreme Court also refers to its observations in the case of Mahadeo Jalan (supra) as under :

....The yield method is the generally applicable method while the break-up method is the one resorted to in exceptional circumstances or where the company is ripe for liquidation.... (p. 634)

4. The question of application of the break-up value method will depend upon the facts and circumstances of the case. One of the cases of exceptional circumstances referred to in (3) above can be where the assets of the company comprise wholly or mainly of jewellery, precious stones, etc., and the company carries on business of hiring out such assets. In such a case if the income from hiring out of jewellery, gold ornaments, etc., is exceptionally low as compared to the normal return expected of these assets, the break-up value method would be more appropriate.

4. For the purpose of para 3(2) above, the following adjustments may be made for working out the maintainable profits :

1. The book profits of the company for the five years immediately preceding the valuation date will be ascertained.

2. Adjustments will be made to the book profits for each of the said five years for all non-recurring and extraordinary items of income and expenditure and losses.

3. Adjustments will be made for expenditure which is not of a revenue nature and is debited in the accounts and for receipts which are revenue receipts and are not accounted for in the profit and loss account.

4. The development rebate/investment allowance, in case it is debited in the books of account, will be added back.

5. The appropriate tax liability of the company on the book profits so determined will be deducted.

6. The profits required for paying dividends on shares with prior rights, i.e., preference shares, shall be excluded.

7. The average of the companys book profits, as adjusted above, will be determined. The rate of capitalisation may be taken at 10 per cent of the maintainable profits of the company in the case of investment companies other than those which derive the major part of their income from house property and 8.5 per cent in the case of investment companies which derive the major part of their income from house property.

5. In the case of unquoted equity shares of investment companies which are substantially but not wholly holding companies, the fair market of the shares will be determined by adding a premium of 10 per cent to the value of shares arrived at on the basis as set out in the preceding paragraph.

6. The valuation of unquoted equity shares of an investment company which has a wholly-owned subsidiary should be worked out on the basis that the parent investment company and wholly-owned subsidiary or subsidiaries were, in fact, one single company, on the same lines as laid down in circular dated 15-9-1973. The rates of yield to be applied would be 10 per cent and 8.5 per cent as mentioned in para 4 above.

7. The above may please be brought to the notice of all the Assessing Officers in your charge. These instructions will apply to all pending assessments and will hold the ground until rules for the valuation of above shares, which are under consideration of the Board, come into force.

Circular : No. 332A [F. No. 326/2/80-WT], dated 31-3-1982.

Judicial analysis

Explained in - In Brij Mohan Thapar v. CWT [1993] 71 Taxman 167 (Cal.), it was observed that the features that the circular present are :

(i) The working of maintainable profit is to start with the book profits of the company.

(ii) The adjustments to be made in terms of the said circular are exhaustive. The para uses the expression following adjustments. The word following is significant. It clearly spells out that anything not mentioned in the said enumeration cannot be a subject-matter of adjustment by way of exclusion or inclusion.

From this, it is quite obvious that maintainable profits should represent commercial profits.

For the purpose of the valuation of unquoted shares of an investment company, in accordance with the Central Board of Direct Taxes Circular No. 332A, dated March 31, 1982, the net maintainable profits should be arrived at after deducting the provisions for pension and gratuity which had been valued actuarially.

Further the circular directly does not provide any answer whether the provision for doubtful debts should be deducted. Thus far, it is however, clear that the maintainable profit for the purpose of valuation was not the taxable profit.

Explained in - In CIT v. Karan Thapar [1997] 223 ITR 531 (Cal.) it was observed that the valuation date under the Wealth-tax Act, 1957, in relation to any year means the last day of the previous year as defined in section 3 of the Income-tax Act, 1961. Therefore, the year cannot be taken as completed on the valuation date and thus, where a reference is made to any year immediately preceding the valuation date, it is to be taken as a completed year. Therefore, while interpreting paragraph 4(i) of the circular dated March 31, 1982, of the Central Board of Direct Taxes, for purposes of computing the average book profits of a company in which the assessee holds shares, the profits of the year pertaining to the valuation date has to be necessarily excluded in the computation of the book profits of five years immediately preceding the valuation date.

CLARIFICATION 2

1. Reference is invited to the instructions contained in the Boards Circular No. 2 (WT) of 1967, dated 31-10-1967 [printed here as Clarification 3] regarding valuation of unquoted equity shares of investment companies, holding companies and managing agency companies.

2. In partial modification of the above circular, the directions and instructions of the Board with regard to the valuation of unquoted equity shares of investment companies which have wholly-owned subsidiaries (i.e., investment companies having one or more companies which are itself 100 per cent subsidiaries), are as follows :

1. In arriving at the estimated price which a share of such company would fetch if sold in open market on the relevant valuation date, its asset backing must be carefully computed in accordance with well settled principles, in other words, the valuation should take into account the complete enterprise (consisting of the parent investment company and its wholly-owned subsidiary or subsidiaries) as if they were only one company. In arriving at such computation the reserves of the subsidiary company must necessarily be taken into account.

2. Applying the above principles :

(i) The value of a share of the parent investment company would have first to be determined on the basis that the parent investment company and its wholly-owned subsidiary or subsidiaries were in fact one single company. This should be done by assimilating and consolidating the balance sheets of the subsidiary companies with the balance sheet of the parent investment company. Care must be taken to ensure that in such assimilation and consolidation, the inter-company balances are correctly adjusted.

(ii) Maintainable profits would have to be aggregated in respect of the parent investment company and its wholly-owned subsidiary or subsidiaries. The capitalised value should then be arrived at by applying a rate of yield of 9 per cent to the aggregated maintainable profits. The method of calculation of maintainable profits in respect of the parent investment company and its wholly-owned subsidiary or subsidiaries should be in accordance with the Boards Circular No. 2 (WT) of 1967, i.e., they should be determined separately in accordance with the said circular and then aggregated.

(iii) The average of the values arrived at under (i) and (ii) above would determine the price which the share of the parent investment company would fetch if sold in the open market on the relevant valuation date.

3. It is clarified that para 3 of Circular No. 2 (WT) of 1967 [Clarification 3] will not apply in cases of valuation of shares of a parent investment company which has a wholly-owned subsidiary.

4. The above instructions, which are to be read in partial modification of Circular No. 2 (WT) of 1967 are to be followed and implemented in all matters with immediate effect including pending proceedings.

CLARIFICATION 3

1. The method of valuation of unquoted equity shares of (i) investment companies, and (ii) holding companies has since been further examined and the following instructions regarding the valuation of unquoted equity shares of (i) investment companies, (ii) holding companies, and (iii) managing agency companies are issued in supersession of all the earlier instructions for the guidance of the Wealth-tax Officers.

2. Unquoted equity shares of investment companies other than those which are substantially holding companies - An investment company has been defined in rule 1A(g) of the Wealth-tax Rules, 1957, as a company whose total income consists mainly of income which, if it had been the income of an individual would be regarded as unearned income. Unearned income means all incomes other than earned income as defined in the Finance Act of the relevant year. Although the definition of investment company would not cover a banking/insurance company, but to avoid all doubts in the matter, it is clarified that banking and insurance companies will not be treated as investment companies. Their shares will be valued under rule 1D of the Wealth-tax Rules, 1957.

The average of (a) the break-up value of the shares bases on the book value of the assets and liabilities disclosed in the balance-sheet, and (b) the capitalised value arrived at by applying a rate of yield of 9 per cent of its maintainable profits will be taken to represent the fair market value of the shares of an investment company. Maintainable profits of a company should be calculated as under :

1. The book profits of the company for the five years immediately preceding the valuation date will be ascertained.

2. Adjustments will be made to the book profits of each of the said five years for all non-recurring and extraordinary items of income and expenditure and losses.

3. Adjustments will be made for expenditure which is not of a revenue nature and is debited in the accounts and for receipts which are revenue receipts and are not accounted for in the profit and loss account.

4. The development rebate, in case it is debited in the books of account, will be added back.

5. The appropriate tax liability of the company on the book profits so determined will be deducted.

6. The profits required for paying dividends on shares with prior rights, i.e., preference shares, shall be excluded.

7. The average of the companys book profits, as adjusted above, will be determined.

The maintainable profits thus arrived at will be capitalised, as stated above, by adopting 9 per cent rate of capitalisation.

3. Unquoted equity shares of investment companies which are substantially holding companies - An investment company whose assets to the extent of 50 per cent or more consist of shares in companies controlled by it, will be treated as a holding company. The fair market value of the shares of an investment company, which is also a holding company, will be determined by adding a premium of 10 per cent to the value of the shares arrived at on the basis set out in the preceding paragraph.

4. Unquoted equity shares of managing agency companies - A managing agency company has been defined in rule 1A(h) of the Wealth-tax Rules, 1957, as a company the entire income of which or any part thereof is derived by way of managing agency. In the case of companies whose income consists wholly or partly of managing agency commission, the higher of the value arrived at according to (a) the break-up value method based on the book value of assets and liabilities disclosed in the balance-sheet, and (b) capitalisation of income method is to be adopted as the fair market value of the shares. The capitalised value of managing agency commission income and non-commission income will be determined separately in the following manner :

The capitalised value of the managing agency commission will be taken as the present (that is, discounted) worth of the net income from this source for the unexpired term of the managing agency. From the maintainable managing agency commission (determined on the lines stated in para 2 above), the proportionate tax liability will be deducted and the net commission for the unexpired term of managing agency will be calculated. The present worth of this income will be determined with reference to a compound interest rate of 6 per cent per annum.

The maintainable non-commission income (determined on the lines stated in para 2 above) will be capitalised at 10 per cent of capitalisation. The aggregate of the capitalised value of non-commission income and the present worth of the net managing agency income will give the total value of the shares of the company. The value per share will be arrived at by dividing the total capitalised value by the number of shares.

Illustration

XYZ Ltd. is a managing agency company. Its capital consists of 1,000 shares of Rs. 1,000 each. The unexpired life of the managing agency is four years, commission income is Rs. 1 lakh and net non-commission income is Rs. 2 lakhs. Ascertain the value of the share according to capitalised value method.

	Rs.
Maintainable commission income less expenses	1,00,000
Tax at 65%	65,000
Net maintainable managing agency commission	35,000
The unexpired life of the managing agency on the valuation date is 4 years
Present discounted value of Re. 1 per annum of managing agency @ 6% for 4 years	3,465
Capitalised value of the managing agency income 35,000 3,465	1,21,275(a)
Maintainable non-commission income less expenses	2,00,000
Less : Tax at 65%	1,30,000
Net maintainable non-commission income at 10% rate of capitalisation	7,00,000(b)
Total capitalised value of all the 1,000 shares (a + b)	8,21,275
Value of each share	8,21,275

The value determined above will be compared with the break-up value and the higher of the two will be adopted as the market value.

TABLE GIVING THE PRESENT WORTH OF RE. 1 @ 6%
RATE OF INTEREST FOR YEARS 1 TO 20
PRESENT VALUE OF RE. 1 PER ANNUM AT 6% INTEREST

Years	6% compound interest	Years	6% compound interest
1	0.943	11	7.887
2	1.833	12	8.384
3	2.673	13	8.853
4	3.465	14	9.295
5	4.212	15	9.712
6	4.917	16	10.106
7	5.582	17	10.477
8	6.210	18	10.828
9	6.802	19	11.158
10	7.360	20	11.470

Circular : No. 2 (WT) of 1967, dated 31-10-1967.

Judicial analysis

explained in - The above two circulars dated 15-9-1973 and 31-10-1967 were relied on in A. Sivasailam v. CWT [1997] 228 ITR 322 (Mad.), with the following observations:

. . . There is no dispute that the unquoted equity shares have to be valued in terms of the Boards Circular Nos. 2(WT) of 1967, dated October 31, 1967, and 118, dated September 15, 1973. In working out the value of the shares in terms of the circulars, there are two points on which there was difference between the assessee and the Wealth-tax Officer. As pointed out, both sides want Circular No. 2 (WT) of 1967, dated October 31, 1967, as modified by Circular No. 118 dated September 15, 1973, to be followed. These circulars require the value to be worked out by adding 10 per cent as premium to the average of (a) the break-up value of the shares based on the book value of the assets and liabilities disclosed in the balance-sheet, and (b) the capitalised value arrived at by applying a rate of yield of nine per cent of its maintainable profits. It was this resultant value that had to be taken as representing the fair market value of the shares of an investment company, which are substantially holding companies. The Tribunal agreed with the Department that they have to limit their consideration to the assets and liabilities disclosed and that the book value alone has to be reckoned, but the Tribunal was not prepared to accept the view that the mention of the liabilities as a note in the profit and loss account or a mention in the directors report has to be ignored. According to the Tribunal, the directors report is an integral part of the final accounts and so is the profit and loss account. It is more so in the case of a company incorporated under the Indian Companies Act. The Tribunal pointed out that the balance-sheet, the profit and loss account and the directors report always go together. According to the Tribunal, a prudent or an average investor would ask for all the three even if he were supplied only with the bare balance-sheet. Therefore, the Tribunal considered that the directors report and the profit and loss account as necessary adjuncts and, therefore, part of the balance-sheet in a more comprehensive and commercial sense. Therefore, the Tribunal held that the liabilities mentioned therein cannot be ignored. (p. 333)

. . . The correct picture of the creditworthiness of the company and the intrinsic value of the share can be seen only by seeing all the three abovesaid documents. By seeing merely the balance-sheet alone, one cannot vouchsafe the creditworthiness of the company and the approximate intrinsic value of the share. Considering all these aspects on the accountancy principles, we accept the finding of the Tribunal for the last two years that mentioning of the provisional estate duty liability in the directors report and the profit and loss account of the company can be taken as the liability as disclosed in the balance-sheet as per the abovesaid two circulars issued by the Board. (p. 336)

. . . in the present case, we are bound to ascertain the value of the unquoted equity shares as per the two circulars mentioned above. In the abovesaid circulars it is clearly stated that unless the liability is shown in the balance-sheet, it cannot be allowed as a deduction. In the present case, whatever might be the quantum of liability, there was no mention about the liability in the balance-sheet for the first year and only the provisional demand of estate duty was mentioned in the directors report and in the profit and loss account in the last two years. Therefore, in the present case, there is no possibility for allowing the entire estate duty liability determined much later after the valuation date in the wealth-tax assessment. . . . (p. 337)

u The above circulars were also referred to in Smt. Kalyani Sundaram v. IAC [1991] 37 ITD 76 (Mad.).

Circular : No. 119 [F. No. 207/5/73-IT (A-II)], dated 26-9-1973.

857. Payment of tax on self-assessment/regular assessment, in cases where capital gains have not been invested, for the purposes of availing exemption under sections 54, 54B and 54D, before filing return - Whether time therefor could be extended under the section

1. Section 45 provides for the taxation of capital gains arising on the transfer of capital assets. Sections 54, 54B and 54D grant exemption in respect of capital gains arising on transfer of property used for self-residence, land used for agricultural purposes and compulsory acquisition of lands and buildings under any law, provided the conditions laid down in the three sections are satisfied. These sections, inter alia, provide investment of the capital gains in the house building and land, as the case may be, within the stipulated period which is 2 to 3 years. If the assessee is able to do so between the date of the transfer and that of filing the return of income, there is no difficulty. But if he is not able to do so but wishes to avail of the exemption in the subsequent years, he will have to disclose the capital gain in the return of income of the relevant year.

2. The question of payment of the tax on self-assessment and regular assessment in cases where the capital gains have not been invested before filing the return, although assessee proposes to do so later, has been considered, and I am directed to convey the following instructions :

(a) in cases where the assessee has received the sale proceeds of the capital asset transferred, the time for payment of tax under sections 140A and 220 need not be extended as the assessee has the necessary funds to pay the taxes;

(b) in cases where sale proceeds of the asset transferred have not been received for any reason the Income-tax Officer may not formally extend time for payment under sections 140A and 220 but may not impose penalty for non-payment of the tax in view of the special circumstances due to which the assessee is prevented from paying the tax. However, as soon as the sale proceeds are received the collection may be enforced and failure to pay the taxes may be visited with penalty.

Circular : No. 120 [F. No. 275/107/73-ITJ], dated 8-10-1973.

1124. Whether, at the time of deducting tax from insurance commission credited to agents account, adjustment for debits made earlier is permissible

1. A doubt has been raised whether at the time of deducting tax from the insurance commission credited to an agents account adjustment for the debits made earlier is permissible or not. At the time a proposal is brought by an agent, his account is credited with the appropriate amount of commission. It may happen after some time that a portion of the premium paid earlier is refunded to the insurer. At the time of making the refund of premium the agents account is debited by an appropriate amount representing the commission on the premium refunded. On the original credit the insurer is required to deduct tax at the rate of 10 per cent. The doubt is whether at the time when a subsequent credit is made and the tax is to be deducted from such credit, an adjustment for intervening debits is permissible so that deduction at the rate of 10 per cent is made only on the amount credited as reduced by the debit made to that account.

2. The Board are of the view that in such cases adjustment for intervening debits is not permissible. Under section 194D, the person responsible for paying insurance commission to a resident is required to deduct tax at the time of credit of such insurance commission to the account of the payee or at the time of payment thereof, whichever is earlier. A plain reading of this section would suggest that the deduction of income-tax is to be made from the amount credited or paid. If the credit to the account is made subsequent to making of the debits, the deductions will have to be made from the full amount credited.

Circular : No. 121 [F. No. 275/64/73-ITJ], dated 8-10-1973

FINANCIAL YEAR 1973-74

1787. Instructions for deduction of tax at source from insurance commission during financial year 1973-74 at the rates specified in Part II of First Schedule to Finance Act, 1973

1. In partial modification of Ministry of Finance (Department of Revenue and Insurance) Circular No. 112 [F. No. 275/64/73-ITJ], dated 31-5-1973 it is hereby clarified that the provisions of section 194D inserted by the Finance Act, 1973, providing for deduction of income-tax at source from payments of income by way of insurance commission apply in relation to all such payments made to a resident whether individual, company or any other category of person. These provisions do not restrict the deduction of tax at source to insurance commission paid only to individuals.

2. The rates for deduction of tax at source for the financial year 1973-74, prescribed in Part II of the First Schedule to the Finance Act, 1973 are as below :

			Income-tax	Surcharge
I.	In the case of a person other than a company		10 per cent	Nil;
II.	In the case of company
(i)		where the company is a domestic company	22 per cent	1 per cent;
(ii)		where the company is not a domestic company	70 per cent	3.5 per cent.

3. Although there is no specific provision for deduction of tax at source from insurance commission paid to a non-resident, tax from such payments made to a non-resident, not being a company, or to a company which is neither an Indian company nor a company which has made the arrangements as prescribed by rule 27 for the declaration and payment of dividends within India, will have to be deducted under section 195 of the Income-tax Act. The rate of deduction of tax at source in the case of persons other than companies, as specified in item 1(b)(i) of Part II of the First Schedule to the Finance Act, 1973 is 34.5 per cent (income-tax 30 per cent plus surcharge 4.5 per cent) of the income by way of insurance commission or income-tax and surcharge thereon at the rates prescribed in Sub-Paragraph I of Paragraph A of Part III of the said First Schedule, if such income has been the total income of the recipient, whichever is higher. In the case of companies, the tax is to be deducted at the rate of 73.5 per cent (income-tax 70 per cent plus surcharge 3.5 per cent).

4. Necessary forms for use in regard to deduction of tax at source from insurance commission have since been prescribed under the Rules, as amended w.e.f. July 15, 1973 vide Notification No. SO 369(E), dated 2-7-1973.

5. Applications for certificate for deduction of tax at lower rate [Form Nos. 13D and 15D], the certificates of deduction of tax [Form No. 19D] and returns in regard to tax deducted at source [Form Nos. 26D, 26E, 26F] should now be filed in these forms.

Circular : No. 122 [F. No. 200/3/72-IT(A-I)], dated 19-10-1973.

200. Rule 3(g) of Income-tax Rules - Valuation of perquisibte on account of services of household servants

1. Boards Instruction No. 133 [F. No. 40/25/69-IT(A-I), dated 10-12-1969 (Annex) provides that the taxable perquisite in the hands of the employee on account of the services of gardeners, night watchmen and sweepers provided by the employer should be calculated on the following ad hoc basis :

(i) Sweeper - 75 per cent of actual wages or Rs. 60 p.m., whichever is less;

(ii) Gardener; and

(iii) Watchman - 50 per cent of actual wages or Rs. 60 p.m., whichever is less.

2. The Board has received representation to clarify whether reimbursement by the employer of wages of sweeper engaged by the employee is covered by the above instruction.

3. Boards Instruction No. 133, dated 10-12-1969, is applicable only when the services of sweeper are provided by the employer, i.e., the sweeper is recruited by the employer and remunerated by him but his services are placed at the disposal of the employee. Therefore, the reimbursement of wages of sweeper, gardener or watchman engaged by the employee is fully taxable as income from Salaries in the hands of the employee.

Circular : No. 662, dated 27-9-1993.

clarification 1

1. I am directed to invite reference to the Boards Instruction No. 133 [F. No. 40/25/69-IT(A-I)], dated 10- 12-1969 (Annex) on the above subject.

2. The Board in consultation with the Ministry of Law has re-examined the question of taxability of the salaries paid to the gardeners of the buildings belonging to the employers and occupied by the employees as a perquisite. Section 17(2)(iv) provides that the term perquisite includes any sum paid by the employer in respect of any obligation which but for such payment would have been payable by the assessee. Hence, for this definition to apply, the position must be that if the employer had not laid out the money, the employee himself should have been obliged to do so. An individual might not be interested in having a gardener at all and he might allow the garden to run to weed. On the other hand, he might be an enthusiastic gardener who might himself have laid out large sums on the garden and have employed more gardeners than one. A gardener is employed by the employers primarily with a view to maintain the garden and he renders services whether or not the building is occupied by any employee. In view thereof, it amounts to the maintenance of the house and the grounds which the employer in any case would have done irrespective of the fact whether the building was occupied or vacant. As such, the amount spent on the salary of a gardener by the employer does not represent a sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the employee. The payment of salary to a gardener as such cannot be regarded as a perquisite so as to justify that amount being taxed in the hands of the employees. However, the expenses incurred by way of maintenance of a gardener may be taken into account for the purposes of estimating the value of the rent-free residential accommodation provided by the employer under rule 3 of the Income-tax Rules, 1962.

3. The Boards Instruction No. 133, dated 10-12-1969 referred to in para 1 [Annex] above stands modified to the above extent.

ANNEX - PARA 1 OF INSTRUCTION NO. 133, DATED 10-2-1969 REFERRED TO IN CLARIFICATION

lt has been decided by the Board that the taxable perquisite in the hands of the employee on account of services of gardeners, night watchmen and sweepers, provided by the employer should be calculated on the following ad hoc basis :

Sweeper : 75 per cent of actual wages or Rs. 60 per month, whichever is less.

Gardener :  50 per cent of actual wages or Rs. 60 per month, whichever is less

Watchman.

Circular : No. 123 [F. No. 279/112/73-ITJ], dated 31-10-1973.

522. Whether deduction under the section is allowed from income of registered firms and only resultant net income is distributed for assessment in partners cases

1. The Allahabad High Court have held in their judgment dated 24-3-1971 in the case of CIT v. Bharat Bhandar [1974] 94 ITR 315 that rebate under sections 84 and 88 should be allowed to a registered firm as well as its partners. The Board has accepted the decision and has decided that the law as laid down by the Allahabad High Court should be applied to all cases covered by sections 15B/ 15C of the 1922 Act, and by the corresponding sections 88/84 of the 1961 Act, before their deletion by the Finance (No. 2) Act, 1967 with effect from April 1, 1968. Instructions apprising the departmental officers of this legal position had been issued on July 19, 1971.

2. Sections 84 and 88 of the 1961 Act were deleted by the Finance (No. 2) Act, 1967 with effect from April 1, 1968 and substituted by sections 80G and 80J replacing the system of tax rebate by a system of deduction in assessable income. After April 1, 1968, therefore, under the aforesaid new provisions, the deduction as prescribed has to be allowed from the income of registered firms and only the resultant net income distributed for assessment in the partners cases.

Circular : No. 124

SECTION 80MM [`4] [`1]l ROYALTIES, ETC., RECEIVED FROM ANY CONCERN IN INDIA

599. Approval of agreement under which assessee-company receives royalty, etc., from any concern in India which is eligible for deduction under the section - Guidelines therefor

clarification 1

Attention is invited to the Boards Circular No. 140 [F. No. 167/231/74-IT(A-I)], dated 6-7-1974 [Clarification 2], para 1(xiii), wherein it was stated that in the case of a composite agreement which specified a consolidated amount as consideration for purposes which included matters outside the scope of section 80MM, the Board may not approve such an agreement for purposes of section 80MM if, in the opinion of the Board, it was not possible to properly ascertain and determine the amount of the consideration relatable to the provision of technical know-how or services in connection with provision of such technical know-how qualifying for section 80MM. Thus, the benefit of section 80MM could be denied to the entire amount of royalty, commission, fees, etc., receivable under such an agreement. The Board has had occasion to reconsider it. It has been decided that in such cases approval would be granted by the Board subject to a suitable disallowance for the non-qualifying items, after taking into consideration the totality of the agreement, so that the balance, royalty, commission, fees, etc., which is for provision of technical know-how or services in connection with provision of such technical know-how covered by section 80MM, can be exempted.

Circular : No. 332 [F. No. 167/231/74-IT(A-I)], dated 25-3-1982.

clarification 2

1. Reference is invited to the Boards Circular No. 124 [F. No. 167/231/72-IT(A-I)], dated 13-11-1973 [Annex II]. Paragraph 2 of the said circular contains the guidelines which had then been evolved by the Board for the grant of its approval to agreements for the purpose of section 80MM. These guidelines have since been reviewed and modified. The revised guidelines are as follows :

(i) An agreement which, in the opinion of the Board, is not bona fide and genuine and is a collusive arrangement for abuse of the tax concession admissible under section 80MM will not be approved.

(ii) An agreement which does not clearly specify the technical know-how to be. provided thereunder or the services in connection with the provision of the technical know-how to be rendered thereunder, which is expressed in very general and broad terms and which is vague as to the nature and scope of the technical know-how to be provided or the services to be rendered and the consideration therefor will not qualify for approval.

(iii) In cases, where grant of the tax concession envisaged, under section 80MM, will not, in the opinion of the Board, further the objectives underlying the grant of the tax concession, viz., minimising repetitive import of technical know-how from abroad and encouraging indigenous development of the technical know-how in India, the agreements will not be approved in such cases.

(iv) An agreement which has not been genuinely entered into on or after April 1, 1969 will not be eligible for approval. In cases where the provision of a technical know-how or rendering of services in connection with the provision of the technical know-how is really pursuant to an agreement, whether written or oral, made before April 1, 1969, agreements entered into on or after April 1, 1969 for the provision of such technical know-how or for rendering of services in connection therewith will not be approved.

(v) Agreement with a person who is not carrying on a business in India will not be eligible for approval. The person must be carrying on a business in India at the time the income which is to be the subject-matter of tax relief, under section 80MM, is received from him. Carrying on a profession or vocation in India is not equivalent to carrying on a business in India for the purpose of Income-tax Act, and therefore, an agreement with a person carrying on a profession or vocation will not qualify for approval.

(vi) The technical know-how provided under the agreement must be such as, by its nature and the manner of its provision, is covered by any of the clauses of sub-section (2) of section 80MM and is likely to assist directly in any of the operations mentioned in clause (i) of sub-section (1) of the said section.

1[(vii[A5] [A2]) (a) Where the agreement is for provision of a technical know-how which is likely to assist in the manufacture of goods or the processing of materials or in the installation or erection of plant or machinery for such manufacture or processing, the technical know-how provided should be manufacturing/ processing techno-logy and/or plant/machinery design and/or installation/erection technology of plant or machinery.

(b) Agreements for provision of know-how relating to management organisation, sales, finance and accounts and for market or demand studies will not qualify for approval.

(c) Agreements for preparation of feasibility or project reports for the purpose of supporting applications for assistance from financial or other institutions will also not qualify for approval.

(d) Agreements for preparation of feasibility or project reports aimed at assessing the techno-economic viability of a project for the purpose of investment decisions will qualify for approval under section 80MM only if the objectives for which the report was prepared had matured so far as it relates to qualifying items under section 80MM in the project reports.]

(viii) Agreements for rendering services without the provision of any technical know-how within the meaning of clause (i) of sub-section (1) read with sub-section (2) of section 80MM will not qualify for approval. In order to qualify for approval, the services rendered under the agreement must be in connection with the provision of such technical know-how and these should be rendered by the person providing such technical know-how. There should be an inter-connection and inter-relationship between the services rendered and the provision of such technical know-how.

(ix) Agreements for the provision of technical know-how relating to civil construction or for rendering services in connection therewith will not qualify for approval except where the technical know-how provided is such as is likely to assist directly in any of the operations mentioned in clause (i) of sub-section (1) of section 80MM and the services rendered are in connection with the provision of such technical know-how.

([`6] [`3]x) Agreements for the supply, erection, installation and commissioning of plant or machinery whether designed and engineered by the supplier itself or not, on turnkey basis will not qualify for approval unless the supplier is also required under the agreement to provide technical know-how within the meaning of clause (i) of sub-section (1) read with sub-section (2) of section 80MM or to render services in connection with the provision of such technical know-how. Mere furnishing of copies of designs and drawings of the plant or machinery supplied under the agreement, as also giving of information concerning the working, maintenance, etc., of such plant or machinery will not be regarded as provision of technical know-how within the meaning of sub-section (2) of section 80MM.

(xi) An agreement for the provision of technical know-how to a person who obtains it merely for the purpose of trading in it and who would thus be acting as a middleman between the person from whom he receives the technical know-how and the third party to whom he will further pass on the technical know-how for use in the operation likely to be assisted by it will not qualify for approval.

(xii) In cases where the amount of the consideration receivable under an agreement for the provision of technical know-how and/or for rendering services in connection with the provision of the technical know-how is, in opinion of the Board, is unreasonably excessive or is motivated by other considerations, the Board may refuse to give approval in respect of such an agreement.

(xiii) In cases where the amount of consideration payable under an agreement is consolidated composite figure for provision of a technical know-how or for rendering of services in connection with the provision of such technical know-how within the meaning of section 80MM as also for provision of technical know-how or goods or services outside the scope of section 80MM and, in the opinion of the Board, it will not be possible to properly ascertain and determine the amount of the consideration relatable to the provision of the technical know-how or for rendering of services in connection with the provision of technical know-how covered under section 80MM, 1[A7] [A4][the approval would be granted by the Board subject to suitable disallowance for the non-qualifying items, after taking into consideration the totality of the agreement, so that the balance royalty, commission, fees, etc., which is for provision of technical know-how or services in connection with provision of such technical know how covered by section 80MM, can be exempted.]

(xiv) Agreements for rendering general technical consultancy services will not qualify for approval.

2. Consequent to the amendments made to the provisions of section 80MM by section 7 of the Finance Act, 1974, the tax relief, under section 80MM, will be available with effect from April 1, 1975 only to an Indian company and will not be available to any other assessee. Accordingly, agreements entered into by a person other than an Indian company for the provision of a technical know-how or for rendering services in connection therewith, will not be eligible for approval for the assessment year 1975-76 and onwards. Further, approval already given in respect of the agreement entered into by any such person will also cease to be operative as from April 1, 1975 and such person shall not be entitled to the tax relief, under section 80MM, in the assessments for 1975-76 and later years.

3. Two certified copies of such agreement should be sent to the Board along with the application for its approval. In cases, where the agreement is through exchange of letters, two certified copies of all the relevant letters constituting offer and acceptance should be enclosed with the application for approval of the agreement.

4. The applicants should also furnish information in the proforma enclosed [Annex I] along with the application or as soon thereafter as possible.

The information furnished should be duly signed and certified to be correct by the person authorised to sign the return of income on behalf of the applicant.

Circular : No. 140 [F. No. 167/231/74-IT (A-I)], dated 6- 7-1974, as modified by Circular No. 332 [F. No. 167/231/74-IT(A-I)], dated 25-3-1982 and Circular No. 360 [F. No. 167/231/74-IT (A-I) ], dated 16-5-1983.

ANNEX I - REVISED PROFORMA OF APPLICATION

1. Particulars of the applicant for approval of the agreement :

(i) Name and address

(ii) Status (whether Individual/HUF/Firm/AOP/Company)

(iii) If a company, whether an Indian company within the meaning of section 2(26)

(iv) If not a company, whether resident in India

(v) Nature of business(es) and/or other activities

(vi) Designation of the ITO having jurisdiction for assessment purposes and Permanent Account Number or General Index Number

2. Particulars of the other party to the agreement :

(i) Name and address

(ii) Whether he is carrying on a business in India; if so, the nature of the business, its name and style and location

(iii) Designation of the ITO having jurisdiction for assessment purposes, and Permanent Account Number or General Index Number

3. The date on which the agreement was entered into. If the agreement was in fact entered into on a date earlier than that on which the agreement has been reduced to writing, please also mention such earlier date

4. Is the present agreement in renewal, extension or modification of any previous agreement, oral or written? If so, please give particulars of such previous agreement(s)

5. Did the applicant provide any technical know-how or render any service in connection therewith to the party at (2) above or to some other person on his behalf, before the present agreement?

If so, please give particulars of any such previous agreement and of the nature of the technical know-how, etc., provided

6. Did the applicant provide or is providing similar know-how or services as under the present agreement to any other person ? If so, please give brief particulars thereof, also indicating whether the agreement(s) in respect thereof was/were approved by the Central Government/Board

7. Is the present agreement for provision of technical know-how or for rendering services in connection with the provision of technical know-how, or both?

In case the agreement is for rendering services only, please specify who is providing the technical know-how in connection with which the services are rendered by the applicant and how the rendering of services by the applicant is connected with the provision of the technical know-how by another person.

8. Whether the technical know-how is provided and/or services are rendered under the present agreement in India or outside India?

If outside India, whether wholly or partly, please specify the technical know-how provided and/or services rendered outside India and the amount of the consideration in respect of them. Also indicate the party to whom the technical know-how is provided/services are rendered.

9. Whether the technical know-how provided under the present agreement is :

(i) a patent, invention, model, design, secret formula or process or similar property. (Please specify the category in which it falls and explain how); or

(ii) an information concerning industrial, commercial or scientific knowledge, experience or skill. (Please briefly describe the information and specify in which category it falls.)

10. If the technical know-how falls under 9(i) above, please indicate :

(a) how the applicant acquired it or what arrangements he has made for acquiring it;

(b) what are the applicants own rights in respect thereof ;

(c) whether its provision to the other party to the agreement involves :

(i) transfer of all or any rights of the applicant in respect of it; if so, please specify the nature and extent of the right transferred and the manner of its transfer;

(ii) the imparting of any information concerning its working or use; if so, please specify the information imparted and the manner of its imparting;

(iii) its use by the other person to the agreement; if so, please specify the nature and manner of the use.

11. If the technical know-how falls under 9(ii) above, please specify :

(i) the arrangements available with the applicant for obtaining and imparting it;

(ii) the manner of imparting it.

12. Please refer to the provisions of clause (i) of sub-section (1) of section 80MM and give the following information in respect of each type of technical know-how provided under the agreement :

Sl. No	Brief particulars of the technical know-how provided, its nature and the manners of its provision. (Please also cite reference of the appropriate entry under paras 9, 10 and 11 above as may be applicable)	Which of the activities mentioned in thesaid clause is likely to be assisted in, viz, (i) the manufacture or processing of goods or materials; (ii) the installation or erection of machinery or plant for such manufacture or processing; (iii) in the working of a mine, oil well or other source of mineral deposit; (iv) in the search for, or discovery or testing of, mineral deposits or the winning of access to them; (v) any operation relating to agriculture, animal husbandry, dairy or poultry farming, forestry or fishing Please give a precise description	Please indicate how a particular activity will be assisted	Amount of consideration receivable/received
.

13. Are any services also rendered under the agreement in addition to the provision of technical know-how ? If so, please give the following information in respect of each such service :

Sl. No.

Nature of the service rendered

Whether the rendering of the service is in connection with the provision of a know-how

If answer to col. 3 is yes, please specify the technical know-how in connection with which the service is rendered (please also cite reference to the Sl. No. under para 12 above against which the particular know-how is mentioned)

Please explain how the rendering of the service is in connection with the provison of a technical know-how

Amount of consideratation receivable/received

14. Does the agreement cover provisions of a know-how, services and/or goods other than those mentioned in paras 12 and 13 above? If so, please specify them and also the amount of consideration receivable/received in respect of them.

15. Does the applicant (including any of its members/partners/ directors, as the case may be) has any family relationship with the other party to the agreement (including any of its members/partners/directors, as the case may be)? If so, please give details thereof

16. Does the applicant (including any of its members/partners/ directors, as the case may be) has any interest, other than that under this agreement, in the business of the other party to the agreement (including any of its members/partners/directors, as the case may be)? If so, please give details thereof

17. What are the arrangements and facilities available with the applicant for providing the technical know-how and/or for rendering services in connection therewith as under this agreement

18. Has the applicant made any agreement or arrangement with any other person, in India or abroad, for obtaining the technical know-how to be provided under this agreement or for rendering services in connection therewith? If so, please give the following information :

(i) the name and address of such other person ;

(ii) details of the agreement or arrangement together with a certified copy of the written agreement, if any;

(iii) the nature and extent of applicants relationship and association with such other person

19. Was any application made previously for the approval of this agreement under section 80MM of the Income-tax Act ? If so, please state :

(i) the date on which the application was made;

(ii) whether approval was granted or refused (please quote the letter number under which the decision regarding approval/refusal was communicated)

20. If the agreement is a turnkey contract involving manufacture, supply, erection, etc., of a plant, please state :

(i) whether the process know-how/product design, and/ or the plant design and engineering know-how is being provided by the other party to the agreement, if not, how has the applicant acquired this know-how ? If he is acquiring it from some other person, the name and address of such other person, the particulars of the agreement/arrangement made with such other person in this behalf and particulars of any family relationship or other association and interest between the applicant and such other person;

(ii) the amount of the consideration relatable to the provision of technical know-how, if any, or for rendering services, if any, in connection therewith, and the amount of the consideration relatable to the price of the machinery/plant as such. The basis on which the total consideration receivable under the agreement is so split up as may also please be specified

21. If the agreement involves provision of technical know-how consisting of plant designing and engineering, please state whether the process know-how or product design has been provided by the other party to the agreement, if not, has the applicant acquired it from some other person? In case the applicant is receiving/has received it from some other person, please specify :

(i) the name and address of such other person;

(ii) the particulars of the agreement/arrangement made with such other person in this behalf;

(iii) particulars of any family relationship or other association or interest between the applicant and such other person

22. Any other information which the applicant considers relevant.

ANNEX II - CIRCULAR NO. 124, DATED 13-11-1973 REFERRED TO IN CLARIFICATION

1. The Finance Act, 1969 introduced, with effect from April 1, 1970, a new provision in section 80MM for the concessional taxation of income received by an Indian company by way of royalties, technical service fees, etc., from any business concern in India in consideration of providing technical know-how or rendering services in connection with the provision of such technical know-how. Under the provision, a company was entitled to a deduction of 40 per cent of such income in the computation of its taxable income. The section has been amended by the Finance Act, 1970 and the Finance (No. 2) Act, 1971. With effect from April 1, 1972, the tax concession has been extended to cover cases where technical know-how or technical services are provided by resident non-corporate taxpayers, such as individuals, Hindu undivided families, partnership firms, etc. The requirements of the section are as under :

(a) The deduction is allowable only it the technical know-how (whether patented or not) provided by the assessee is likely to assist in the manufacture or processing of goods or materials or in the installation or erection of machinery or plant for such manufacture or processing, or in the working of a mine, oil well or other source of mineral deposits, or in prospecting for and testing of mineral deposits or winning access to them, or in carrying out any operation relating to agriculture, animal husbandry, dairy or poultry farming, forestry or fishing.

Royalties, commission, fees, etc., received in consideration of provision of technical know-how relating to production of electricity or construction of ships will also qualify for deduction.

(b) The term provision of technical know-how has been defined in sub-section (2) to mean

(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or similar property;

(ii) the imparting of any information concerning the working of or the use of a patent, invention, model, design, secret formula or process or similar property;

(iii) the use of any patent, invention, model, design, secret formula or process or similar property;

(iv) the imparting of any information concerning industrial, commercial or scientific knowledge, experience or skill.

The agreement for the provision of technical know-how need not provide for all the matters listed in clauses (i) to (iv). This is because clauses (i) to (iv) of sub-section (2) of section 80MM have to be read disjunctively and an agreement which provides for any matter referred to in any one of these clauses would fall within the ambit of section 80MM. It is, however, important to note that the provision of technical know-how must directly assist in the manufacture or processing of goods or materials, or in the installation or erection of machinery or plant for such manufacture or processing or in any one or more of the other operations or activities specified in sub-section (1) of section 80MM.

(c) The technical know-how or services should be provided under an agreement entered into by the assessee on or after April 1, 1969.

(d) Deduction under the section will be allowable only if the agreement in question has been approved by the Board. Approval of the Board will, however, not be necessary in cases where the agreement was approved by the Central Government for the purposes of this section before April 1, 1972. All applications for approval made to the Central Government, which had not been disposed of before April 1, 1972 have been transferred to the Board for disposal.

(e) In order to be eligible for this deduction, the technical know-how and services should be provided under an agreement entered into by the assessee on or after April 1, 1969 and the approval of the Board to such agreement should have been applied for before 1st October of the relevant assessment year. Once a valid approval has been granted, it would hold good for the life of the agreement provided the conditions laid down in the law continued to be satisfied.

(f) In the case of non-corporate taxpayers other than co-operative societies, the deduction under the section will be allowed in respect of the agreements which have been approved only if the accounts of the relevant previous years have been audited as provided in sub-section (2A) and the assessee furnishes along with his return of income the report of such audit in Form No. 3C prescribed under rule 6AB duly signed and verified by the auditor.

(g) No deduction is allowable under this section in respect of any income which is chargeable under the head Capital gains.

(h) No deduction under the section will be allowed in relation to any income if the assessee is entitled to a deduction under section 80-O in respect of the same income.

2. The incentive has been provided with the twin objectives of minimising repetitive import of technology and of encouraging development of local know-how by providing tax relief as explained above in respect of income arising from the transfer and servicing of technical know-how. Keeping in view the purpose behind the incentive and the requirements of the statutory provisions, the Board have evolved the following guidelines for grant of such approval :

(i) The agreement should have been entered into bona fide and not collusively for the purpose of tax avoidance.

(ii) An agreement which is in very broad terms or is vague may not be approved.

(iii) The agreement should have been genuinely entered into on or after April 1, 1969. An old agreement in a new garb will not qualify for approval.

(iv) In the case of resident non-corporate taxpayers, agreements genuinely entered into on or after April 1, 1969 will be considered for approval, but the benefit under section 80MM will be available to them only for and from the assessment year 1972-73.

(v) The know-how provided must be such as will minimise repetitive import of technology or will contribute to the development of local technology.

(vi) Agreements for rendering services will qualify for approval under section 80MM only if such services are rendered in connection with the provision of technical know-how by the person providing the know-how. Services rendered as a consultant or in any other capacity otherwise than in connection with the provision of technical know-how will not qualify under the section.

(vii) Agreements for preparation of project reports dealing with the feasibility of the project from the point of view of the availability of raw materials, the market, the nature of the equipment, size of the plant, etc., for making a techno-economic decision will normally qualify for approval under the section. Agreements for provision of commercial information in the fields of management, accounting, sales, etc., or for rendering of services in connection therewith, will, however, not qualify for approval unless the provision of such information will directly assist in the manufacture of goods, etc.

(viii) Agreements for provision of technical know-how relating to civil construction, or for rendering services in connection therewith, will not qualify for approval unless the civil construction is directly and intricately connected with the process or the plant.

(ix) Turnkey contracts for the erection and supply at site of a ready-built plant will not qualify for approval. Where, however, they involve transfer of a right in a patent or design or imparting any know-how relating to any formula or operation or the supply of designs and drawings relating to manufacture or operation, or the provision of manuals concerning manufacturing operations, the fees attributable to such provision of technical know-how will qualify for deduction.

(x) The agreement should be with a person carrying on business in India. For this purpose the expression person will include Govermnent. It is necessary that there should be a nexus between the technical know-how provided and the business. The test to be applied will be whether or not the provision of know-how is likely to assist in manufacture or processing of goods or materials or other specified operations. Conveyance of know-how to a person who merely trades in know-how will not qualify for approval. Know-how conveyed or services rendered in connection therewith to promoters of industrial undertakings will, however, qualify notwithstanding that the promoters and the undertakings are distinct legal entities.

(xi) It is necessary that the industry in which the technical know-how will be utilised should be located in India. Know-how provided, which is meant to be exported and utilised in setting up an industry outside India, will not qualify for the purpose of approval under the section.

(xii) The payment under the agreement should be reasonable both in relation to its quantum and its tenure. Where the payments appear to be excessive or motivated by other than commercial considerations, the application is liable to be rejected.

(xiii) In the case of composite agreements specifying a consolidated amount as consideration for purposes which, inter alia, include matters outside the scope of section 80MM, such as use of trade marks, supply of equipment, imparting of information which cannot be considered as technical know-how, imparting of technical know-how which is not likely to assist in the manufacture or processing of goods or materials or other operations specified in the section, or services not rendered in connection with the provision of technical know-how, the amount of the consideration relating to the provision of technical know-how or rendering services in connection therewith will have to be determined separately on an investigation of all the relevant facts. Where, however, such an ascertainment is not possible, the Board reserves the right to refuse the grant of approval to such a composite agreement.

JUDICIAL ANALYSIS

Explained in - In Dey Paper Consultants (P.) Ltd. v. CBDT [1991] 197 ITR 624 (Bom.) the abovesaid circular was referred to with the following observations :

The result is that, even according to the guidelines, if the agreement is in connection with technical know-how and the services are rendered by a person providing such technical know-how and there is an inter-connection and inter-relationship between the services rendered and the provision of such technical know-how, the agreement will qualify for approval under section 80MM. (p. 628)

Circular : No. 125 [F.No. 274/1/73-ITJ], dated 26-11-1973.

879. Court fee or stamp duty payable on power of attorney or vakalatnama filed before Income-tax Officer/on applications or petitions filed before Commissioner and other income-tax authorities

CLARIFICATION 1

1. The Institute of Chartered Accountants of India have represented to the Board requesting for reconsideration of its earlier instructions that a power-of-attorney in favour of chartered accountants was required to be stamped in the manner prescribed in the Stamp Act.

2. The issue raised by the Institute of Chartered Accountants of India was considered earlier in the Boards Circular No. 9 (XL-48) of 1958, dated 18-5-1958 and No. 3-P(LX-69) of 1968, dated 20-2-1968 [printed here as Clarifications 3 and 2]. In the Circular of 1958 the Board directed, after a very careful consideration of the question whether accountants and income-tax practitioners should file vakalatnama or power-of-attorney and, if the latter, what were the scales of court fees or stamp duty leviable thereon:

A document purporting to authorise a person who is not a pleader or mukhtar duly appointed under section 7 of the Legal Practitioners Act, 1879, is not a vakalatnama or a mukhtarnama and requires to be stamped as a power-of-attorney under the Stamp Act. Therefore, the power-of-attorney in favour of registered accountant or an income-tax practitioner or any other person who is not a duly appointed mukhtar under section 7 of the Legal Practitioners Act is a power-of-attorney (and not a vakalatnama or mukhtarnama) and requires to be stamped not under the Court Fees Act, but under the provisions of the Stamp Act as in force in the particular area, i.e., subject to the local amendments.

These instructions were reviewed in the light of the judgment of the Bombay High Court (Nagpur Bench) in the case of L.M. Mahurkar v.STO [1967] 66 ITR 561, wherein it was held that the sales tax authority was a revenue Court and the letter of authorisation presented before it should be governed by the Court Fees Act and not by the Indian Stamp Act. The Board were advised that no reconsideration of the earlier instructions was necessary and that the instructions contained in Circular of 1958 may continue to be followed till there was a contrary decision from the Courts. In the Circular of 1963, therefore, the earlier instructions were reiterated.

3. In the light of the representation made by the Institute of Chartered Accountants of India the matter has again been considered carefully. The Board are advised that the existing instructions may continue to be followed in all charges except the Punjab charges. Insofar as the Punjab charges are concerned the letter of authorisation presented by the income-tax practitioners and chartered accountants before the income-tax authority may be governed by the Court Fees Act in view of the decision of the erstwhile Punjab Chief Court in Ganpat v. Prem Singh [1912] 15 IC 122 wherein it was held that the power-of-attorney empowering any person to represent another in a civil court should be governed only by the provisions of the Court Fees Act and not by the Stamp Act.

CLARIFICATION 2

1. In the case of L.M. Mahurkar v. STO [1967] 66 ITR 561, the Nagpur Bench of the Bombay High Court have held that as sales tax authority is a revenue court, the letters of authorisation presented before it should be governed by the Court Fees Act and not by the Indian Stamp Act. A question has been raised whether following this decision, letters of authorisation to be presented by income-tax practitioners and chartered accountants before an income-tax authority should be governed by the Court Fees Act or by the Indian Stamp Act.

2. The Board are advised that the instructions contained in Circular No. 9(XL-48), dated 18-5-1958 [printed here as Clarification 3] may continue to be followed until there is a contrary decision from the Supreme Court.

Circular : No. 3-P(XL-69), dated 20-2-1968.

CLARIFICATION 3

After the issue of the Boards Circular No. 50 (XL-43) of 1956, dated 28-12-1956 [printed here as Clarification 5], the question has been raised whether accountants and income-tax practitioners should file vakalatnamas or powers-of-attorney and if the latter, what the scales of court fees or stamp duties were leviable thereon.

The Board have been advised that a document purporting to authorise a person who is not a pleader or mukhtar duly appointed under section 7 of the Legal Practitioners Act, 1879, is not a vakalatnama or a mukhtarnama and requires to be stamped as a power-of-attorney under the Stamp Act. Therefore, the power-of-attorney in favour of a registered accountant or an income-tax practitioner or any other person who is not a duly appointed mukhtar under section 7 of the Legal Practitioners Act is a power-of-attorney (and not a vakalatnama or mukhtarnama) and requires to be stamped not under the Court Fees Act, but under the provisions of the Stamp Act as in force in the particular area, i.e., subject to the local amendments.

Circular : No. 9 (XL-48), dated 18-5-1958.

Clarification 4

A question has been raised as to which of the applications or petitions presented before the Commissioner of Income-tax and the Central Board of Revenue are liable to Court fees as per item No. 3 of the Schedule annexed to the Boards Circular No. 50(XL-43), dated 28-12-1956 [printed here as Clarification 5].

The Board have been advised that all applications or petitions or representations which invoke any jurisdiction, authority, power, discretion, etc., whether real or supposed, vested in the Commissioner of Income-tax or the Central Board of Revenue under the Income-tax Act or any other Act, shall be liable to court fee under article 1(c) of Schedule II to the Court Fees Act, 1870. Applications or representations which are in the form of complaints such as excessive delay in disposal of any matter, ill-treatment, etc., which are not strictly referable to any provisions in the Income-tax Act or any other Act, would not be liable to court fee. There would, of course, be borderline cases when allegation regarding misconduct, etc., form the grounds of an application or a petition for exercising any jurisdiction, etc., vested in the authority concerned under the Income-tax Act. Such cases would be liable to court fee under article 1(c) of Schedule II to the Court Fees Act, 1870.

In order to illustrate the above classification, the following illustrations are given :

A. Liable to court fee :

(a) applications for stay of recovery or for grant of instalments for payment of tax ;

(b) applications for compromise assessments or for issue of directions to Income-tax Officers when assessments are pending ;

(c) applications for transfer of cases from one Income-tax Officer to another ;

(d) applications for hearing or for adjournment in connection with sections 33A and 33B proceedings ;

(e) applications under section 23A and subsequent applications for adjournments, etc. ;

(f) applications for recognition of provident funds ;

(g) applications for rectification of mistakes, under section 35 of the Income-tax Act, in the orders of the Commissioner or Income-tax ; and

(h) applications for remission of post-certificate interest (or cost) demanded by the Certificate Officer.

B. Not liable to court fee :

(a) petitions requesting for directions to the Income-tax Officer about undue delay in the issue of refunds ; and

(b) complaints and representations against harassment caused by the Officers of the Income-tax Department.

The above illustrations are by no means exhaustive. The Commissioners, however, need not be unduly meticulous in this matter and in doubtful cases the discretion should always be exercised in favour of the assessees.

So far as petitions under section 33A are concerned, the exemption from court fees, as mentioned on page 542 of the Income-tax Manual, Part III (10th edition), will continue.

Circular : No. 36 (XL-52), dated 19-11-1958.

CLARIFICATION 5

A question has been raised as to what are the current amounts of court fees payable on applications and other documents presented before the various income-tax authorities. The Board have been advised that court fees on documents presented before the income-tax authorities are chargeable according to the scales laid down in the Court Fees Act, 1870 and the amendments made in different States are not to be taken into consideration. The amounts of court fees payable at present on various documents filed before the various income-tax authorities in all the charges of the Commissioners of Income-tax are shown in the Schedule annexed hereto.

SCHEDULE

SHOWING THE AMOUNTS OF COURT FEES PAYABLE ON VARIOUS DOCUMENTS PRESENTED BEFORE THE INCOME-TAX AUTHORITIES

Sl. No.	Nature of the Document	Income-tax authority	Provision of Court Fees Act, 1870	Amount of court fees payable Rs
1	2	3	4	5
1.	Vakalatnama	Income-tax Officer,	Art. 10(a)	8/-
		Inspecting Assistant Commissioner, Appellate Assistant Commissioner, Commissioner of Income-tax, Central Board of Revenue	Of Sch. II	1/- 2/-
2.	Application obtaining copy of any order passed by IT authorities or any other document on the record of the IT authorities		Art. 10(b) of Sch. II Art. 10(c) of Sch. II Art. 1(a) of Sch. II	1/-
3.	Application other than an application for copy of any order (passed by IT authorities) or of any other document on the record of the IT authorities when presented to the CIT or CBR	Commissioner of Income-tax, Central Board of Revenue	Art. 1(c) of Sch. II	1/-
4.	Certified copy of any order of the IT authorities (not for private use nor intended for filing before the ITAT)		Art. 6 of Sch. I	8/-
5.	Certified copy of any other document on the record of the IT Department (not for private use)		Art. 9 of Sch. I	8/- for every 360 words or fraction thereof
6.	Memorandum of Appeal	Appellate Assistant Commissioner of Income-tax, Central Board of Revenue	Art. 11(a) of Sch. II	8/- 2/-

Circular : No. 50(XL-43) of 1956, dated 28-12-1956.

FINANCE ACT, 1973 - CIRCULAR NO. 126, DATED 26-11-1973

• Amendments at a glance
• Rate structure
• Amendments to Income-tax Act
• Amendments to Wealth-tax Act
• Amendments to Gift-tax Act
• Amendments to Companies (Profits) Surtax Act
• Miscellaneous provisions

FINANCE ACT, 1972 - CIRCULAR NO. 108, DATED 20-3-1973

• Amendment at a glance
• Rate structure
• Amendments to Income-tax Act
• Amendments to Wealth-tax Act
• Amendments to Gift-tax Act
• Amendments to Companies (Profits) Surtax Act

---

[`1] 1. Withdrawing Circular No. 20, dated l5-7-1944 [printed as Clarification 2, the Board clarified that if the share of the wife in the firm in which the assessee is a partner is a loss, such loss is not to be considered in the assessment of the assessee under section 16(3) of the 1922 Act/section 64(1) of the 1961 Act. With regard to this circular, the Kerala High Court, in the case of CIT v. B.M. Edward, India Sea Foods [1979] 119 ITR 334, held that having regard to the fact that the circular was in force and in operation throughout the assessment year 1971-72 and was withdrawn only on 6-4-1972, the assessee was entitled to have the assessment made and completed in accordance with the circular, which laid down the necessary directions as to how the assessment had to be made. The Court also held that the instruction which was in force on the first day of the assessment year would be applicable and the ITO was bound by it even though he passed the assessment order subsequent to withdrawal of the circular.

[`2]1. The Mysore High Court in Dr. T.P. Kapadia v. CIT [1973] 87 ITR 511 held that the circular was binding on the ITO even though there was a decision of the High Court to the contrary and, accordingly, the Tribunal was in error in following the decision of a different High Court in Dayalbhai Madhavji Vadera v. CIT [1966] 60 ITR 551 (Guj.).

[`3]1. Vide Circular No. 121, dated 8-10-1973, it has been clarified that the provisions do not restrict the deduction of tax at source from insurance commission paid to individuals alone.

[`4]1. Omitted by the Finance Act, 1983, w.e.f. 1-4-1984.

[A5]2. Substituted for the following by Cirtular No. 360 [F. No. 167/231/74-83] dated 16-5-1983:

(vii) Where the agreement is for provision of a technical know-how which is likely to assist in the manufacture of goods or the processing of materials or in the installation or erection of plant or machinery for such manufacture or processing, the technical know-how provided should be the manufacturing/processing technology and/or plants/machinery design and/or installation/erection technology or plant or machinery. Agreements for market or demand studies, pre-investment studies, preparation of project reports aimed at assessing the techno-economic viability of a project for the purpose of investment decisions or for the purpose of supporting applications for assistance from financial or other institutions, will not qualify for approval. Agreements for evaluation/ reappraisal of such studies and reports will also not qualify for approval. Agreements for provision of know-how relating to management, organisation, sales, finance and accounts, etc., will also not qualify for approval.

[`6]3. Commenting upon this para of the circular, the Delhi High Court in Simon Carves India Ltd v. CBDT [1979] 120 ITR 172 observed that it is the duty of the Board to consider whether drawings amount to the provision of technical know-how likely to assist in the manufacture or processing of goods or materials.

[A7]4. Substituted for the agreement may not be approved for the purpose of section 80MM by Circular No. 332, dated 25-3-1982.