Finance (No. 2) Act, 1980 - Circular No. 281, Dated 22-9-1980
Circular No. 281 was issued by the Central Board of Direct Taxes on 22 September 1980. Its subject is Finance (No. 2) Act, 1980 - Circular No. 281, Dated 22-9-1980.
This grants an exemption or a relief under a provision that allows one. Read the conditions attached: an exemption notification is construed strictly, and a condition missed is the exemption lost.
Carries the Board's explanatory notes on the Finance (No. 2) Act, 1980, with an amendment-at-a-glance table pointing to the paragraph that discusses each change. On the income-tax side it covers the rate structure; taxation of benefits or perquisites enjoyed by representative assessees and beneficiaries of trusts under section 2(24)(iva); the new exemption for regimental and non-public funds of the armed forces in section 10(23AA); extension of standard deduction to pensioners under section 16(i); additional depreciation on new machinery or plant; the scientific research deductions in section 35 and the balancing charge in section 41(2) that follows the new section 35(2B); changes to the export markets development allowance in section 35B; a weighted deduction for employers employing blind or physically handicapped persons under section 36(1)(iia); discontinuance of the disallowance of part of advertisement, publicity and sales promotion expenditure under sections 37(3A) to (3D); the new sections 80AA and 80AB on inter-corporate dividends and other Chapter VI-A deductions; an increased section 80C deduction; withdrawal of the section 80FF education deduction; changes to section 80G, and to sections 80-I, 80J, 80JJ, 80L, 80RR, which is extended to sportsmen and athletes, 80T, 80TT and 80U; changes to returns under section 139(9) and assessment under section 143(1)(b); amendment of assessment under section 155(5B) where a scientific research completion certificate is not filed in time; measures against avoidance through private trusts in section 164; the derecognition of partial partition of a Hindu undivided family in section 171(9); a higher advance tax threshold in section 208(2)(c) and related company provisions; and the exemption of interest credited in a recognised provident fund under rule 6 of Part A of the Fourth Schedule. It also explains the corresponding changes to the Wealth-tax Act, including the discontinuance of wealth-tax on agricultural property other than specified plantations, the Gift-tax Act, the Interest-tax Act, which was revived, and the Compulsory Deposit Scheme (Income-tax Payers) Act.
The Board issues explanatory notes after each Finance Act so that officers and taxpayers work from one departmental statement of the year's amendments.
FINANCE (NO. 2) ACT, 1980 - CIRCULAR NO. 281, DATED 22-9-1980
Finance (No. 2) Act, 1980
Amendments at a glanceSECTION/SCHEDULE
PARTICULARSFinance Act
2 and 1st Sch.
Rate structure 3-5Income-tax Act
2(24)(iva)
Taxation of benefits or perquisites enjoyed by representative assessees and beneficiaries of trusts, etc. 610(23AA)
Exemption from income-tax in the case of regimental funds, non-public funds, etc., set up by armed forces 716(i)
Extension of benefit of standard deduction to pensioners 832(1)(iia), 34
Additional depreciation in respect of new machinery(2)(ii), 38(2)
or plant in certain cases 935(2)(iv), (2A),
Deduction of capital expenditure on scientific(2B)
Research 1035B(1)(b)(ii)/
Modification of the provisions relating to the export(iii)/(v)/(vi)/
Markets development allowance 11(viii) and Expln.
36(1)(iia)
Grant of weighted deduction to employers employing blind or physically handicapped persons 1237(3A) to (3D)
Discontinuance of provisions relating to the disallowance of a part of expenditure on advertisement, publicity and sales promotion 1341(2) (2nd
Balancing charge in respect of assets represented byprov.), (3)
capital expenditure eligible for weighted deduction under new sub-section (2B) of section 35 1480AA and
Deduction in respect of inter-corporate dividends80AB
and similar deductions under Chapter VIA 1580C(1)
Deduction in respect of long-term savings through life insurance, provident fund, etc. - Quantum of deduction increased 1680FF
Withdrawal of deduction in respect of expenses incurred by Indian citizens on higher education of dependants 1780G(4), (5A)
Modification of the provisions relating to deduction in respect of donations to certain funds, charitable institutions, etc. 1880-I
Deduction in respect of profits and gains from industrial undertakings, etc., established after a certain date 1980J(1A)
Deduction in respect of profits and gains from newly established industrial undertakings, etc. 2080JJ(a), (b)
Tax treatment of income derived from the business of live-stock breeding or poultry or dairy farming 2180L(1)(vii)
Deduction in respect of interest on deposits with public housing finance companies 2280RR
Extension of the benefit of deduction in respect of professional income from foreign sources to sportsmen and athletes 2380T(a)
Deduction in respect of long-term capital gains in the case of non-corporate assessees 2480TT(a)
Deduction in respect of winnings from lotteries 2580U
Increase in the amount of deduction in the case of totally blind or physically handicapped resident persons 26139(9)
Returns of income 27143(1)(b)(ii), (iii)
Assessment 28155(5B)
Amendment of assessment in cases where certificate of completion of approved programme of scientific research is not furnished within the time allowed 29164(1),(3)/prov.
Measures to plug loopholes for tax avoidance(i), Explns.
through the medium of private trusts 301 and 2 to
the section
171(9)
Partial partition of Hindu undivided families 31208(2)(c)
Raising of threshold for payment of advance tax in certain cases 32209A(4), (prov.),
Payment of advance tax and other related matters in212(3A) (prov.),
the case of companies 33273(1) (prov.)/
2 (prov.)
Rule 6 of Part
Exemption of interest credited on the balance to theA of 4th Sch.
credit of an employee in a recognised provident fund 34Finance (No. 2) Act, 1971
54
Tax exemption in the case of Housing and Urban Development Finance Corporation Ltd. 35Wealth-tax Act
2(e) [prov. to
Discontinuance of levy of wealth-tax on agriculturalsub-clause
Property excluding property comprised in specified(2)], 5(1)
Plantations 36(iva)/(ivb)/(viiib)
5(1)(xxvii)
Exemption in respect of deposits with public housing finance companies 377(1), Expln.
Measures to plug loopholes for tax avoidance through inclusion of restrictive covenants in trust deeds, etc. 3820A
Derecognition of partial partition of Hindu undivided family 3921(1), (1A),
Measures to plug loopholes for tax avoidance through(4) and prov.
the medium of private trusts 40(i)/(ia) thereto
Sch. I
Raising of exemption limit for wealth-tax 41Gift-tax Act
2(xxiv)(c),
Lacunae pointed out by the Bombay High Court4(1)(e)
plugged 42Interest-tax Act
2(7)(ia)/(iii),
All-India industrial finance institutions covered 43.2(9)
6(2)
Interest-tax Act revived 43.128
Notification issued under the section excluding co-operative banks 43.3Compulsory deposit scheme (income-tax payers) act
7A
Exemption from wealth-tax of compulsory deposits within the overall limit of Rs. 1.5 lakhs 44.108(2)
Payment of interest on amounts retained in compulsory deposit accounts after they have become repayable 44.1110(1)/(2), 12A
Discretionary powers vested in Income-tax Officers for the purpose of levy of penalty 44.2-611(1), (2)
Orders passed by Inspecting Assistant Commissioner authorised to perform functions of Income-tax Officer 44.712(1)/(2)
Appeals against orders passed by Inspecting Assistant Commissioner 44.813(1)
Rectification of mistakes by Commissioner (Appeals) 44.9Rate Structure
Finance (No. 2) Act, 1980
Rates of income-tax for the assessment year 1980-81
3.1 The rates of income-tax for the assessment year 1980-81 in the case of all categories of assessees (corporate as well as non-corporate) are specified in Part I of the First Schedule to the Finance Act. These rates are the same as those specified in Part III of the First Schedule to the Finance Act, 1979 for the purposes of computation of �advance tax�, deduction of tax at source from �salaries� and retirement annuities payable to partners of registered firms engaged in specified professions and computation of tax payable in certain cases where accelerated assessments were required to be made during the financial year 1979-80.
Finance (No. 2) Act, 1980
3.2 As in the past, the Finance Act provides that in the case of individuals, Hindu undivided families, unregistered firms or other associations of persons or bodies of individuals and artificial juridical persons, the net agricultural income will be taken into account for determining the rates of income-tax on incomes liable to tax for the assessment year 1980-81 [vide section 2(2) of the Finance Act]. The mode of computation of net agricultural income in such cases is set out in Part IV of the First Schedule to the Finance Act. These provisions are the same as those contained in the Finance Act, 1979 except for certain minor modifications as explained in paragraph 5.5 of this circular.
Finance (No. 2) Act, 1980
Rates for deduction of income-tax at source during the financial year 1980-81 from incomes other than �salaries� and �retirement annuities�
4. The rates for deduction of income-tax at source during the financial year 1980-81 from incomes other than �salaries� and �retirement annuities�, payable to partners of registered firms engaged in specified professions, have been specified in Part II of the First Schedule to the Finance Act. These rates apply to income by way of interest on securities, other categories of interest, dividends, insurance commission, winnings from lotteries and crossword puzzles, winnings from horse races and other categories of non-salary income of non-residents. As explained later in this circular, the rate of surcharge on income-tax in the case of non-corporate taxpayers has been reduced from 20 per cent to 10 per cent of the income-tax. Consequently, the rates for deduction of income-tax at source during the financial year 1980-81 differ from the rates specified in Part II of the First Schedule to the Finance Act, 1979 for purposes of deduction of tax at source from such incomes during the financial year 1979-80 in certain respects as explained below:
1. Payments to residents other than companies - (i) In the case of income by way of winnings from lotteries and crossword puzzles and income by way of winnings from horse races payable to resident taxpayers (other than companies) during the financial year 1980-81, tax will be deductible at the rate of 33 per cent made up of basic income-tax of 30 per cent and surcharge of 3 per cent (being 10 per cent of the income-tax). This is lower than the rate at which tax was deductible from such income during the financial year 1979-80 by 3 per cent. The reduction has been made in the context of the reduction in the rate of surcharge on income-tax in the case of non-corporate assessees as explained in paragraph 5.3 of this circular.
(ii) In the case of income by way of �interest on securities� issued by the Central or a State Government (not being interest on a tax-free security) or interest on debentures or other securities issued by or on behalf of a local authority or a statutory corporation or interest on debentures issued by companies where such debentures are listed in a recognised stock exchange in India payable to resident assessees (other than companies) during the financial year 1980-81, tax will continue to be deducted at the rate of 10 per cent.
(iii) In the case of income by way of interest on securities, other than those mentioned in (ii) above, or dividends payable to resident assessees (other than companies) during the financial year 1980-81, income-tax will, however, be deductible at the rate of 23 per cent made up of basic income-tax of 21 per cent and surcharge of 2 per cent. This is lower than the rate at which tax was deductible from such income during the financial year 1979-80 by 1 per cent. In this connection, it may be noted that in the case of interest on debentures of companies which are not listed in a recognised stock exchange in India, income-tax will be deductible at source at the rate of 23 per cent (income-tax 21 per cent plus surcharge 2 per cent).
2. Payments to non-residents other than companies - In the case of income (other than interest on a tax-free security) payable to non-corporate non-resident persons during the financial year 1980-81, income-tax will be deductible at theminimum rate of 33 per cent made up of income-tax of 30 per cent and surcharge of 3 per cent (being 10 per cent of the income-tax). If the rate of income-tax and surcharge appropriate to such income, as specified in Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Finance Act, is higher than 33 per cent, tax will be deducted at such higher rate. In respect of interest on a tax-free security payable to a non-corporate non-resident assessee, the rate for deduction will be 16.5 per cent, made up of income-tax of 15 per cent and surcharge of 1.5 per cent (being 10 per cent of the income-tax).
3. Payments to domestic companies - In the case of income by way of interest other than �interest on securities� payable to domestic compa-nies during the financial year 1980-81, income-tax will be deductible at the rate of 21.5 per cent, made up of income-tax of 20 per cent and surcharge of 1.5 per cent (being 7.5 per cent of the income-tax). Further in the case of any other income (excluding interest payable on a tax-free security) payable to domestic companies during the financial year 1980-81, tax will be deductible at the rate of 23 per cent, made up of income-tax of 21.5 per cent and surcharge of 1.5 per cent. It will be seen that the rate for the deduction of income-tax at source from dividends payable to domestic companies is the same as the rate at which income-tax is deductible at source from dividends payable to resident non-corporate assessees.
4. Payments to foreign companies - The rates for deduction of tax at source laid down in the Finance Act in respect of the various categories of income payable to foreign companies are the same as those prescribed for this purpose in Part II of the First Schedule to the Finance Act, 1979.
Finance (No. 2) Act, 1980
Rates for deduction of income-tax at source from �salaries�, computation of �advance tax� and charging of income-tax in special cases during the financial year 1980-81
5.1 The rates for deduction of income-tax at source from �salaries� in the case of individuals during the financial year 1980-81 and for computation of �advance tax� payable during that year in the case of all categories of assessees have been specified in Part III of the First Schedule to the Finance Act. These rates are also applicable for deduction of income-tax at source during the financial year 1980-81 from retirement annuities payable to partners of registered firms which render professional service as chartered accountants, solicitors, lawyers, etc., and for charging income-tax during the financial year 1980-81 on current incomes in special cases where accelerated assessments have to be made. The special cases where accelerated assessments have to be made are cases of (i) calculation of income-tax on undisclosed income represented by seized assets [section 132(5)] ; (ii) levy of tax on provisional basis on income of non-residents from shipping of cargo or passengers from Indian ports [section 172(4)]; (iii) assessment of persons leaving India [section 174(2)]; (iv) assessment of persons likely to transfer property to avoid tax [section 175]; and (v) assessment of profits of a discontinued business or profession [section 176(2)]. These rates are the same as those specified in Part I of the First Schedule to the Finance Act for the assessment of incomes liable to tax for the assessment year 1980-81, except for certain modifications. The modifications in the rate schedule, read with section 2 of the Finance Act, relate to the following matters:
a. raising of the exemption limit from Rs. 10,000 to Rs. 12,000 in the case of individuals, Hindu undivided families, unregistered firms, etc.;
b. reduction in the rate of surcharge in the case of all non-corporate assessees from 20 per cent to 10 per cent;
c. increase in the rates of income-tax in the case of Hindu undivided families having one or more members with independent income exceeding the exemption limit;
d. modification of the provision for calculating income-tax in cases where the assessee has any net agricultural income in addition to total income.
The modifications in regard to the above matters are explained in paragraphs 5.2 to 5.5 of this circular.
Finance (No. 2) Act, 1980
5.2 Raising of the exemption limit - The exemption limit in the case of individuals, Hindu undivided families, unregistered firms, associations of persons, bodies of individuals and artificial juridical persons has been raised from Rs. 10,000 to Rs. 12,000. It is relevant to note that although the rate schedule in the case of individuals, Hindu undivided families (other than those liable to income-tax at higher rates), unregistered firms, etc. (including nil rate slab of income up to Rs. 8,000) has not been changed, a provision has been made in clause (i) of the proviso below Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Finance Act to the effect that no income-tax will be payable in cases where the total income of the assessee does not exceed Rs. 12,000. In order to avoid hardship in cases where the total income of the assessee exceeds Rs. 12,000 by a small margin, a provision has been made in clause (ii) of the said proviso for the grant of marginal relief in such cases. Under this provision, where the total income of the assessee exceeds Rs. 12,000 but does not exceed Rs. 16,250, the income-tax excluding surcharge payable thereon shall not exceed 30 per cent of the amount by which the total income exceeds Rs. 12,000.
In the case of Hindu undivided families having one or more members with independent taxable income exceeding Rs. 12,000, although the rates of income-tax on various slabs of income have been stepped up as explained in paragraph 5.4 below, the nilrate slab of income has been retained at Rs. 8,000 and a provision has been made in clause (i) of the proviso below Sub-Paragraph II of Paragraph A of Part III of the First Schedule to the Finance Act to the effect that no income-tax shall be payable in cases where the total income of the assessee does not exceed Rs. 12,000. A marginal provision has also been made in clause (ii) of the said proviso for the grant of marginal relief in cases where the total income of the Hindu undivided family exceeds Rs. 12,000 by a small margin. Under this provision, where the total income of the assessee exceeds Rs. 12,000, but does not exceed Rs. 17,610, the income-tax payable thereon shall not exceed 40 per cent of the amount by which the total income exceeds Rs. 12,000.
Finance (No. 2) Act, 1980
5.3 Reduction in the rate of surcharge - The rate of surcharge on income-tax in the case of all categories of non-corporate assessees, including individuals, Hindu undivided families, unregistered firms, registered firms, co-operative societies, local authorities, etc., has been reduced from 20 per cent to 10 per cent of the income-tax.
Finance (No. 2) Act, 1980
5.4 Increase in the rates of income-tax in the case of Hindu undivided families, having one or more members with independent income exceeding the exemption limit - The rates of income-tax in the case of Hindu undivided families having one or more members with independent taxable income exceeding the exemption limit (which stands raised to Rs. 12,000) have been stepped up in the following manner, namely:Income slab
Rate of income-tax specified in Sub- Paragraph II of Paragraph A of Part III of the First Schedule to the Finance Act, 1979
Rate of income-tax specified in Sub-Paragraph II of Paragraph A of Part III of the First Schedule to the Finance (No. 2) Act, 1980Rupees
Per cent
Per centBelow 8,000
Nil
Nil8,001�15,000
18
2215,001�20,000
25
2720,001�25,000
30
3525,001�30,000
40
4030,001�50,000
50
5050,001�70,000
55
60Over 70,000
60
60Finance (No. 2) Act, 1980
5.5 Modification of the provision for calculating income-tax in cases where the assessee has any net agricultural income in addition to total income - The net agricultural income is to be computed in accordance with the rules contained in Part IV of the First Schedule to the Finance Act. The mode of computation of the net agricultural income under these provisions is the same as in the relevant provisions of the Finance Act, 1979, except for the following modifications, namely:�
1. The net agricultural income will be taken into account for determining the advance tax payable by an assessee or for determining the income-tax payable in cases where accelerated assessments are to be made during the financial year 1980-81only if such net agricultural income exceeds Rs. 600. Where the net agricultural income exceeds Rs. 600, the whole of such net agricultural income shall be taken into account for the purpose.
2. The unabsorbed loss in agriculture incurred during the previous year relevant to the assessment year 1979-80 will also be set off against the agricultural income for the previous year relevant to the assessment year 1980-81.
3. Any unabsorbed loss incurred during the previous year relevant to the assessment year 1980-81 will also be set off in determining the net agricultural income for the purposes of payment of advance tax during the financial year 1980-81.
[Section 2 of, and the First Schedule to, the Finance Act]Amendments to income-tax Act
THE FINANCE (NO. 2) ACT, 1980
Taxation of benefits or perquisites enjoyed by representative assessees and beneficiaries of trusts, etc. - Section 2(24)
6.1 A new sub-clause (iva) has been inserted in clause (24) of section 2 relating to definition of �income�. The new sub-clause deems to be income�
a. the value of any benefit or perquisite, whether convertible into money or not, obtained by any representative assessee mentioned in clause (iii) or clause (iv) of sub-section (1) of section 160 or by any person on whose behalf or for whose benefit any income is receivable by the representative assessee; and
b. any sum paid by the representative assessee in respect of any obligation which, but for such payment, would have been payable by the beneficiary.
For this purpose, �representative assessee� means the Court of Wards, the Administrator-General, the Official Trustee, any receiver or manager appointed by or under any order of a court or a trustee appointed under a trust declared by a duly executed instrument in writing, whether testamentary or otherwise (including any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913) who receives or is entitled to receive any income on behalf or for the benefit of any person. The items covered by this sub-clause are taxable as income irrespective of the fact whether the recipient of the benefit is charged to income-tax under section 56 or the assessment is made on the representative assessee under section 161 or section 164.
THE FINANCE (NO. 2) ACT, 1980
6.2 This provision has come into force with effect from 1st April, 1980 and is accordingly applicable in relation to the assessment year 1980-81 and subsequent years.
[Section 3 of the Finance Act]
THE FINANCE (NO. 2) ACT, 1980
Exemption from income-tax in the case of regimental funds, non-public funds, etc., set up by armed forces - New section 10(23AA)
7.1 There are several Regimental Funds and Non-Public Funds set up by the armed forces of India for the welfare of their present and past members and their dependents. These Funds include Benevolent Funds, Charitable Funds, Child Welfare Funds, Children�s School Funds, etc. The Funds set up by the Army are generally known as Regimental Funds and those by the Navy and Air Force are called Non-Public Funds. A new clause (23AA) has been inserted in section 10 to provide for exemption from income-tax in respect of the income of the Regimental Funds or Non-Public Funds established by the armed forces of the Union for the welfare of the past and present members of such forces or their dependents.
THE FINANCE (NO. 2) ACT, 1980
7.2 This provision has been made with retrospective effect from 1st April, 1962, i.e., from the commencement of the Income-tax Act, 1961 and is accordingly applicable in relation to the assessment year 1962-63 and subsequent years.
[Section 4 of the Finance Act]
THE FINANCE (NO. 2) ACT, 1980
Extension of benefit of standard deduction to pensioners - Section 16(i)
8.1 Under section 16, a standard deduction in respect of expenditure incidental to employment is allowed in computing the income of an assessee under the head �Salaries�. The standard deduction is allowed in an amount equal to 20 per cent of the salary up to Rs. 10,000 and 10 per cent of the salary in excess thereof, subject to a maximum of Rs. 3,500. The standard deduction on this basis is allowed irrespective of whether any expenditure incidental to employment has actually been incurred by the employee or not. Hitherto, standard deduction was not admissible in computing the salary income of a pensioner.
THE FINANCE (NO. 2) ACT, 1980
8.2 The Finance Act has amended section 16 with a view to extending the benefit of standard deduction to pensioners as well. Under the amended provision, the standard deduction at the existing rates will be available in computing the income chargeable under the head �Salaries� in the case of all assessees deriving income under that head.
THE FINANCE (NO. 2) ACT, 1980
8.3 This provision will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years.
[Section 5 of the Finance Act]
THE FINANCE (NO. 2) ACT, 1980
Additional depreciation in respect of new machinery or plant in certain cases - Sections 32, 34 and 38
9.1 Under section 32, an assessee carrying on business or profession is entitled to a deduction, in the computation of his taxable profits, in respect of depreciation of buildings, machinery, plant or furniture owned by him and used for the purpose of the business or profession. In the case of ships other than ships ordinarily plying on inland waters depreciation allowance is granted at the prescribed rates on the actual cost of such ships, i.e., the straight-line method. In the case of buildings, machinery, plant (other than ocean-going ships) or furniture, the depreciation allowance is granted at the prescribed rates on the written down value of such assets, i.e., the declining-balance method.
THE FINANCE (NO. 2) ACT, 1980
9.2 At present, under the Income-tax Rules, 7 different rates of depreciation have been prescribed in respect of machinery or plant ranging from 5 per cent to 100 per cent. In addition to the normal depreciation allowance, an extra allowance up to one-half of the normal allowance is allowed where the concern works double shift and an extra allowance up to the amount of normal depreciation is allowed where the concern works triple shift. In the case of approved hotels, an extra allowance of depreciation is made in an amount equal to one-half of the normal allowance in respect of machinery or plant installed in such hotels.
THE FINANCE (NO. 2) ACT, 1980
9.3 With a view to stimulating investment during the new Five-Year Plan period, the Finance Act has inserted a new clause (iia) in sub-section (1) of section 32 to provide for a further deduction in respect of additional depreciation in respect of new machinery or plant installed in certain cases. The main points to be noted in regard to this provision are as follows, namely:
1. Additional depreciation will be admissible in respect of new machinery or plant installed after 31st March, 1980 but before 1st April, 1985. For this purpose, the expression �new machinery or plant� will have the same meaning as in clause (2) of the Explanation below clause (vi) of section 32(1) and will, accordingly, include second-hand machinery or plant imported from a foreign country if the following conditions are fulfilled, namely:
a. such machinery or plant was not, at any time, prior to the date of its installation by the assessee, used in India;
b. such machinery or plant is imported into India from any country outside India; and
c. no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of the 1922 Act or the 1961 Act, in computing the total income of any person for any period prior to the date of installation of the machinery or plant by the assessee.
2. Additional depreciation will not be admissible in respect of ships, aircraft, road transport vehicles, office appliances or machinery or plant installed in any office premises or in any residential accommodation. For this purpose, �residential accommodation� includes accommodation in the nature of a guest house but does not include premises used as a hotel. Machinery or plant installed in hotels will, therefore, qualify for deduction on account of additional depreciation if other conditions laid down in this behalf are fulfilled.
Additional depreciation will also not be admissible in respect of any machinery or plant the whole of the actual cost of which is allowed as deduction, whether by way of depreciation or otherwise, in any one previous year.
3. Additional depreciation will be allowable only in respect of the previous year in which the machinery or plant is installed or, if the machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year. It should be carefully noted that additional depreciation will be admissible only in one year, i.e., in the year of installation or if the machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year.
4. Additional depreciation will be allowed in an amount equal to 50 per cent of the normal depreciation allowance (excluding extra shift allowance and the extra allowance in respect of machinery or plant installed in any premises used as a hotel). Thus, where the assessee is entitled to depreciation allowance at the rate of 10 per cent in respect of certain machinery or plant and also to extra shift allowance on account of double or multiple shift working of the machinery or plant, the additional depreciation allowance will be 5 per cent of the actual cost of the machinery or plant.
5. Additional depreciation allowance will be taken into account in determining the written down value of the machinery or plant for subsequent years, and, accordingly, additional depreciation will be taken into account in calculating the balancing charge for determining the profits under section 41(2). The aggregate of the additional depreciation and normal depreciation (including multiple shift allowance) over the years will also not exceed the actual cost of the qualifying machinery or plant.
6. Additional depreciation will not be admissible if the machinery or plant is sold, discarded, demolished or destroyed in the previous year.
7. Where the machinery or plant is not exclusively used for the purposes of the business or profession, the additional depreciation, as in the case of normal depreciation, will be restricted to a fair proportionate part which the Income-tax Officer may determine having regard to the user of such machinery or plant for the purposes of the business or profession.
8. The provisions of section 32(2) relating to set off and carry forward of depreciation allowance shall apply in relation to additional depreciation admissible under the new clause (iia) of section 32(1) as they apply in relation to normal or initial depreciation allowance admissible under clauses (i), (ii), (iv), (v) and (vi) of that section.
THE FINANCE (NO. 2) ACT, 1980
9.4 These provisions will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years.
[Section 6 of the Finance Act]
THE FINANCE (NO. 2) ACT, 1980
Deduction of capital expenditure on scientific research - Section 35
10.1 The Finance Act has made a few amendments to section 35 relating to expenditure on scientific research.
THE FINANCE (NO. 2) ACT, 1980
10.2 Section 35(1)(iv) provides for deduction in respect of capital expenditure incurred on scientific research related to the assessee�s business. Where such capital expenditure was incurred before 1st April, 1967, one-fifth of the capital expenditure was deductible in computing the business profits in the year in which the expenditure was incurred and the balance of the expenditure was allowed as deduction in equal instalments in each of the four immediately succeeding previous years. Where such capital expenditure has been incurred after 31st March, 1967, the whole of such expenditure qualifies for deduction in the previous year in which it is incurred. In view of this position, no deduction by way of depreciation is admissible in respect of any asset the cost whereof has been allowed as deduction under section 35 and a provision to that effect has been made in section 35(2)(iv). The appellate authorities have, however, taken the view in some cases that the existing provision in section 35(2)(iv) would apply only in relation to the year in which the expenditure is allowed as deduction under section 35 and in a case where the asset continues to be used for the purposes of scientific research in subsequent years, the assessee will be entitled to a further deduction by way of depreciation on the capital asset in such subsequent years. As this interpretation is contrary to the underlying intention, the Finance Act has amended section 35(2)(iv) with a view to clarifying that no depreciation will be admissible on any capital asset represented by expenditure which has been allowed as deduction under section 35 whether in the year in which deduction under section 35 was allowed or in any other previous year. This amendment has come into force with effect from 1st April, 1962, i.e., from the commencement of the Income-tax Act, 1961, and is accordingly applicable in relation to the assessment year 1962-63 and subsequent years.
THE FINANCE (NO. 2) ACT, 1980
10.3 With a view to encouraging development of indigenous technology, the Finance Act has extended the area of tax concessions for scientific research in the following directions:
1. Under sub-section (2A) of section 35, a weighted deduction in an amount equal to one and one-third times the expenditure actually incurred by an assessee on sponsored research in approved laboratories is allowed where such expenditure is incurred on a programme approved by the prescribed authority having regard to the social, economic and industrial needs of India. The Finance Act has amended the said sub-section (2A) so as to extend its scope to cover expenditure incurred on sponsored research carried out in the in-house research and development facilities of public sector companies. For this purpose, the expression �public sector company� has the same meaning as in clause (b) of theExplanation below sub-section (2B) of section 32A. In other words, �public sector company� means any corporation established by or under any Central or State or Provincial Act or a Government company as defined in section 617 of the Companies Act, 1956. The term �Government company� as defined in the said section 617 means any company in which not less than 51 per cent of the paid-up share capital is held by the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary of a Government company as thus defined.
2. A new sub-section (2B) has been inserted in section 35 under which a weighted deduction will be allowed in an amount equal to one and one-fourth times the expenditure incurred by an assessee on scientific research undertaken by him under a programme approved in this behalf by the prescribed authority having regard to the social, economic and industrial needs of India. The revenue expenditure and expenditure incurred on the purchase of machinery and equipment for carrying out the approved programme will qualify for the weighted deduction. It has been specifically provided that capital expenditure incurred on the acquisition of land or acquisition or construction of buildings will not be eligible for the weighted deduction. Further, the expenditure qualifying for the weighted deduction will be limited to the amount certified in this behalf by the prescribed authority. Where a deduction is allowed under new sub-section (2B) of section 35, no deduction in respect of the same expenditure will be allowed under section 35(1)(i) or section 35(2)(ia) for the same or any other previous year. Further, no depreciation will be allowed in respect of any asset represented by expenditure in respect of which a weighted deduction has been allowed under the new sub-section (2B) whether in the year in which the weighted deduction was allowed or in any other previous year. Section 41 has also been amended to provide that where such asset is ultimately sold, whether before or after being used in the business of the assessee, the sale proceeds will be included in the taxable income of the assessee. This position has been explained in paragraph 14 of this circular. In order to ensure that the concession is not misused, it has been provided that the assessee will be required to furnish a certificate of completion from the prescribed authority after the programme of scientific research has been implemented and if the assessee fails to furnish such certificate within one year of the period allowed by the prescribed authority for completion of the programme, the tax concession already allowed will be withdrawn. A suitable provision for enabling the withdrawal has been made in sub-section (5B) of section 155, as explained in paragraph 29 of this circular.
THE FINANCE (NO. 2) ACT, 1980
10.4 The provisions discussed in items (1) and (2) in the preceding paragraph will take effect from 1st September, 1980 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years.
[Section 7 of the Finance Act]
THE FINANCE (NO. 2) ACT, 1980
Modification of the provisions relating to the export markets development allowance - Section 35B
11.1 Under section 35B, domestic companies and non-corporate assessees resident in India are entitled to a weighted deduction in the computation of their taxable profits at the rate of one and one-third times the amount of the qualifying expenditure incurred by them on the development of export markets. The weighted deduction under this provision is allowed with reference to expenditure on the following activities:
1. Advertisement or publicity outside India in respect of the goods, services or facilities dealt in or provided by the assessee in the course of his business.
2. Obtaining information regarding markets outside India for such goods, services or facilities.
3. Distribution, supply or provision outside India of such goods, services or facilities, where such expenditure is incurred before 1st April, 1978. [Expenditure incurred in India in connection with these activities or expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit is not taken into account for determining the qualifying amount of expenditure under this category. Expenditure incurred by an assessee engaged in the business of operating any ship, aircraft, etc., or the carriage of or making arrangements for the carriage of, passengers, livestock, mail or goods, or in relation to such operations, carriage or arrangements, is not regarded as expenditure incurred by the assessee on the supply outside India of services or facilities for the purposes of this provision.]
4. Maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities.
5. Preparation and submission of tenders for the supply or provision outside India of such goods, services or facilities, and activities incidental thereto.
6. Furnishing to a person outside India samples or technical information for the promotion of the sale outside India of such goods, services or facilities.
7. Travelling outside India for the promotion of the sale outside India of such goods, services or facilities, including travelling outward from and return to India.
8. Performance of services outside India in connection with or incidental to the execution of any contract for the supply outside India of such goods, services or facilities.
9. Such other activities for the promotion of the sale outside India of such goods, services or facilities as may be prescribed.
THE FINANCE (NO. 2) ACT, 1980
11.2 The actual operation of this provision revealed considerable misuse of this important tax concession by claiming a weighted deduction in respect of expenditure incurred in India on activities which have no direct relation with the basic objective of development of export markets. The claim for weighted deduction in respect of several items had led to considerable protracted litigation and resulted in loss of revenue.
THE FINANCE (NO. 2) ACT, 1980
11.3 Having regard to the fact that the basic objective for the grant of a weighted deduction in respect of expenditure on development of export markets was primarily to provide an incentive for promoting exports on a continuing basis, the Finance Act has amended section 35B so as to limit the benefit of the weighted deduction only in respect of the following categories of expenditure, namely:
1. Advertisement or publicity outside India in respect of the goods, services or facilities which the assessee deals in or provides in the course of his business.
2. Maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities.
3. Travelling outside India for the promotion of the sale outside India of such goods, services or facilities, including travelling outward from and return to India.
4. Such other activities for the promotion of the sale outside India of such goods, services or facilities as may be prescribed in the Income-tax Rules. (No rules have so far been framed in this regard.)
Sub-clauses (ii), (iii), (v) and (viii) of clause (b) of section 35B(1) have accordingly been omitted.
THE FINANCE (NO. 2) ACT, 1980
11.4 Further, the Finance Act has substituted another Explanation for Explanation 2 below clause (b) of section 35B(1) with a view to clarifying that any expenditure which, by its very nature, is debitable to the trading account or a manufacturing account of a business, such as, wages to labourers, purchase of raw materials, carriage inward, etc., will not qualify for the weighted deduction.
THE FINANCE (NO. 2) ACT, 1980
11.5 These amendments will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years.
[Section 8 of the Finance Act]
THE FINANCE (NO. 2) ACT, 1980
Grant of weighted deduction to employers employing blind or physically handicapped persons - Section 36
12.1 In order to encourage employers to employ persons who are totally blind or physically handicapped, the Finance Act has inserted a new clause (iia) in section 36(1) to provide for a weighted deduction in an amount equal to one and one-third times the salary paid to such persons. The weighted deduction will be admissible only in respect of employees whose income chargeable under the head �Salaries� does not exceed Rs. 20,000 during the relevant previous year. For the purpose of this tax concession, �salary� will include the allowances, bonus or commission, whether payable monthly or otherwise. In order to qualify for this concession, the employer will have to produce before the Income-tax Officer, in respect of the first assessment year for which deduction is claimed under the new provision, a certificate as to the total blindness of the employee from a registered oculist and in the case of an employee who is suffering from a permanent physical disability a certificate from a registered medical practitioner, to the effect that the employee suffers from a permanent physical disability (other than blindness) which has the effect of reducing substantially his capacity to engage in a gainful employment or occupation. These provisions are similar to the provisions contained in section 80U.
THE FINANCE (NO. 2) ACT, 1980
12.2 This amendment will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years.
[Section 9 of the Finance Act]
THE FINANCE (NO. 2) ACT, 1980
Discontinuance of provisions relating to the disallowance of a part of expenditure on advertisement, publicity and sales promotion - Section 37(3A)
13.1 Under sub-section (3A) of section 37, a part of the expenditure incurred in India on advertisement, publicity and sales promotion is disallowed in cases where the aggregate of such expenditure exceeds Rs. 40,000. Sub-sections (3A), (3B), (3C) and (3D) also contain some related provisions. The Finance Act has repealed the aforesaid sub-sections (3A), (3B), (3C) and (3D) of section 37 and accordingly the expenditure on advertisement, publicity and sales promotion will now be admissible as deduction in computing the profits and gains of business or profession subject, however, to the fulfilment of requirements of sub-sections (1) and (3) of section 37 read with rule 6B of the Income-tax Rules.
THE FINANCE (NO. 2) ACT, 1980
13.2 This amendment will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years.
[Section 10 of the Finance Act]
THE FINANCE (NO. 2) ACT, 1980
Balancing charge in respect of assets represented by capital expenditure eligible for weighted deduction under new sub-section (2B) of section 35 - Section 41
14.1 As explained in item (ii) of paragraph 10.3 of this circular, a new sub-section (2B) has been inserted in section 35 under which a weighted deduction will be allowed in an amount equal to one and one-fourth times the expenditure incurred by an assessee on scientific research undertaken by him under a programme approved in this behalf by the prescribed authority having regard to the social, economic and industrial needs of India. Under this provision, capital expenditure incurred on the purchase of machinery and equipment would, in some cases, qualify for the weighted deduction. The Finance Act has made two consequential amendments in section 41. In a case where such machinery or equipment used for the purpose of business after it ceased to be used for the purpose of scientific research related to the business is sold, discarded, demolished or destroyed, moneys payable in respect of such machinery or equipment, together with the amount of scrap value, if any, shall become chargeable to income-tax to the extent such moneys do not exceed 125 per cent of the actual cost of such machinery or equipment. In a case where such machinery or equipment is sold, without having been used for other purposes, the sale price to the extent it does not exceed 125 per cent of the actual cost will be included in the income of the assessee for the previous year in which the sale takes place.
THE FINANCE (NO. 2) ACT, 1980
14.2 These amendments will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years.
[Section 11 of the Finance Act]
THE FINANCE (NO. 2) ACT, 1980
Modification of the provisions relating to deduction in respect of inter-corporate dividends and similar deductions under Chapter VIA of the Income-tax Act - New sections 80AA and 80AB
15.1 The provisions relating to concessional tax treatment of inter-corporate dividends have been on the statute book in one form or the other since 1953. At present, full deduction is granted in respect of income by way of dividends received by a domestic company from an Indian company formed and registered under the Companies Act, 1956 after 28th February, 1975 and engaged exclusively or almost exclusively in the manufacture or production of any one or more of the following articles or things, namely:
1. Non-ferrous metals.
2. Ferro-alloys and special steels.
3. Steel castings and forgings.
4. Electric motors.
5. Industrial and agricultural machinery.
6. Earth-moving machinery.
7. Machine tools.
8. Fertilisers, namely, ammonium sulphate, ammonium sulphate nitrate (double salt), ammonium nitrate, calcium ammonium nitrate (nitrolime stone), ammonium chloride, super-phosphate, urea and complex fertilisers of synthetic origin containing both nitrogen and phosphorus, such as, ammonium phosphates, ammonium sulphate phosphate and ammonium nitrophosphate.
9. Soda ash.
10. Caustic soda.
11. Commercial vehicles.
12. Ships.
13. Tyres and tubes.
14. Paper, pulp and newsprint.
15. Cement.
16. Pesticides.
17. Inorganic heavy chemicals (other than soda ash and caustic soda mentioned in items 9 and 10, respectively).
18. Organic heavy chemicals.
19. Industrial explosives.
In respect of other dividends received by a domestic company from any other domestic company, the deduction is allowed at the rate of 60 per cent of such dividend income.
THE FINANCE (NO. 2) ACT, 1980
15.2 The income by way of dividends is charged to tax under the head �Income from other sources� and is computed after making the deduction, firstly, in respect of any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purposes of realising such dividends on behalf of the company and, secondly, in respect of any other expenditure, not being capital expenditure, laid out or expended wholly or exclusively for the purpose of making or earning such income, e.g., interest paid on borrowings utilised for the purchase of shares, etc.
THE FINANCE (NO. 2) ACT, 1980
15.3 In computing the total income of the assessee, the deduction specified in section 80M is allowed from the �gross total income�. For this purpose, �gross total income� means the total income computed in accordance with the provisions of the Income-tax Act before making any deduction under Chapter VIA. The income by way of dividends computed in accordance with the provisions of the Income-tax Act, i.e., after allowing the necessary expenditure specified in the preceding paragraphs, forms part of the �gross total income� of the assessee. The departmental view has accordingly all along been that any deduction in respect of inter-corporate dividends has necessarily to be calculated with reference to the amount of dividend which forms part of the �gross total income�. In other words, it has always been the intention to grant the deduction at the specified percentage on the net amount of such dividends and not the gross amount thereof.
THE FINANCE (NO. 2) ACT, 1980
15.4 In Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243, the Supreme Court has, however, held that the deduction admissible for the inter-corporate dividends has to be calculated with reference to the gross amount of dividends received by a domestic company from an Indian company and not with reference to the dividend income as computed in accordance with the provisions of the Income-tax Act,i.e., after making the deductions provided under the Act.
THE FINANCE (NO. 2) ACT, 1980
15.5 In order to get over the difficulty caused by the aforesaid ruling of the Supreme Court, the Finance Act has inserted a new section 80AA to provide that the deduction under section 80M in respect of inter-corporate dividend will be calculated with reference to the dividend income as computed in accordance with the provisions of the Income-tax Act (before making any deduction under Chapter VIA) and not with reference to the gross amount of such dividends. This provision has been inserted with retrospective effect from 1st April, 1968, i.e., the date of insertion of Chapter VIA in the Income-tax Act, and will, accordingly, apply in relation to the assessment year 1968-69 and subsequent years.
THE FINANCE (NO. 2) ACT, 1980
15.6 In order to preserve the sanctity of the ruling of the Supreme Court, the Finance Act has made a saving provision in section 44 to provide that the provisions of new section 80AA will not apply to the assessment of an assessee for a particular assessment year where the Supreme Court has, on an appeal or reference in respect of the assessment of that assessee for that year, held before the 18th June, 1980,i.e., the date on which the Finance (No. 2) Bill, 1980 was introduced in the Lok Sabha, that the deduction in respect of inter-corporate dividends should be allowed with reference to the full amount of dividends.This saving provision will apply only in relation to the particular year of assessment for which the Supreme Court has given a judgment adverse to the Revenue on an appeal or reference made to that Court. The saving provision will not, therefore, apply in relation to cases where neither the assessee nor the Commissioner of Income-tax had gone up in appeal or reference to the Supreme Court. Persons who entered only as interveners will not, therefore, be eligible to the benefit of the saving provision. Even in cases where the matter had gone up in appeal or reference to the Supreme Court, the deduction with reference to the gross amount of dividends will be allowed in computing the total income only in respect of the years for which the appeals or references were preferred.
THE FINANCE (NO. 2) ACT, 1980
15.7 Although the issue before the Supreme Court in Cloth Traders� case (supra) was in respect of concessional tax treatment of inter-corporate dividends only, the Supreme Court has specifically referred to the provisions of some of the other sections contained in Chapter VIA of the Income-tax Act. The Supreme Court has in respect of such other sections observed that on a plain reading of these sections, it appears that the deduction admissible is in respect of the gross amount of income received by the assessee and not in respect of the net income computed after making the deductions provided in the Income-tax Act. The Finance Act has, accordingly, inserted another section 80AB to provide that, for the purpose of calculating the deductions specified in sections 80HH to 80TT the net income as computed in accordance with the provisions of the Income-tax Act (before making any deduction under Chapter VIA) shall alone be regarded as the income which is received by the assessee and which is included in his gross total income. Accordingly, the deductions specified in the aforesaid sections will be calculated with reference to the net income as computed in accordance with the provisions of the Act (before making any deduction under Chapter VIA) and not with reference to the gross amount of such income, subject, however, to the other requirements of the respective sections. The new section 80AB will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years. It should be carefully noted that the new section 80AB, unlike section 80AA, will not have any retrospective operation.
[Sections 12 and 44 of the Finance Act]
In an assessment or appeal turning on the effect or the effective date of a 1980 amendment, particularly on private trusts or partial partition.
Rules it names. Rule 6, 6B of the Income-tax Rules, 1962. The 1962 Rules were replaced by the Income-tax Rules, 2026, which renumbered nearly everything: a rule number quoted here almost never means the same rule today.
Source: the Income Tax Department’s own published text — its page for this instrument.