Circular No. 495

What this is

Circular No. 495 was issued by the Central Board of Direct Taxes on 22 September 1987. Its subject is Finance Act, 1987 - Circular No. 495, Dated 22-9-1987.

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.

What it does

Explains the Finance Act, 1987. It opens with a table of the amendments, covering among others the widened definition of transfer in section 2(47), the deemed dividend in section 2(22)(e), the measures against employers who misuse provident fund and Employees' State Insurance contributions worked through sections 2(24), 36(1)(va), 43B, 56(2)(ic) and 57(ia), the new scheme for set-off and carry forward of long-term capital losses, exemption of voluntary retirement compensation of public sector employees under section 10(10C), the enlarged meaning of ownership of house property in section 27, the new presumptive provisions in sections 44BB and 44BBA, the deposit scheme for claiming capital gains exemption under sections 54, 54B, 54D and 54E, exemption on shifting an industrial undertaking from an urban area under section 54G, the new section 80CCA national savings scheme, the withdrawal of additional tax on closely-held companies in sections 104 to 109, the new minimum tax on book profit in section 115J, changes to deduction of tax at source in sections 192, 194, 194A, 194D, 195, 195A, 197, 203 and the new tax deduction account number provisions in sections 203A, 272BB and 273B, the recast settlement provisions, and the bar of civil suits in section 293, along with parallel amendments to the Wealth-tax Act and the Gift-tax Act. The explanation then begins with the rate structure: for assessment year 1987-88 the rates for all categories of taxpayer, corporate and non-corporate, are specified in Part I of the First Schedule to the Finance Act, and are the same as those in Part III of the First Schedule to the Finance Act, 1986.

Why it was issued

It is the Board's explanatory circular on a Finance Act, issued to set out the substance of that year's direct tax amendments.

Who it reaches

• Assessees computing income for assessment year 1987-88
• Closely-held companies, whose additional tax was withdrawn, and companies newly brought within section 115J
• Employers dealing with provident fund and Employees' State Insurance contributions
• Wealth-tax and gift-tax assessees affected by the parallel amendments

The instrument, as the Board published it

FINANCE ACT, 1987 - CIRCULAR NO. 495, DATED 22-9-1987
FINANCE ACT, 1987
Amendments at a glance

SECTION/SCHEDULE
PARTICULARS

Finance Act

2/1st Sch.
Rate structure 4-9

Income-tax Act

2(22)(e)
Definition of �dividend� 10.2

2(24)/36(1)
Measures for penalising employers who misutilise

(va)/43B, 56(2)
contributions to provident fund or any fund set up

(ic)/57(ia)
under provisions of Employees� State Insurance Act,

1948, or any other fund for welfare of employees 12

2(29 A)/
New provisions relating to set off and carry forward

2(42B)/
of long-term capital losses 13

70(1) & (2)/71/

72(1)/74

2(42A)
Tax incentive for investment in shares 14

2(47)
Definition of �transfer� widened to include certain transactions 11

10(10C)
Exemption of compensation received by employees of public sector companies on voluntary retirement 15

10(15)(ii)
Modification in nomenclature for exemption of income-tax on certain deposits with post office 16

10(15)(iv)
Exemption of interest on bonds issued by certain public sector undertakings 17

10(17)
Modification of provision relating to exemption of allowances received by Members of Parliament 18

10A
Clarificatory amendment to extend tax holiday to units in Free Trade Zones 19

27
Enlarging meaning of �ownership� of house property 23

32AB
Modification of provisions relating to investment deposit account 20

44BB
New provisions for computation of taxable income from activities connected with exploration of mineral oils 21

44BBA
Simplification of computation of income in respect of foreign airlines 22

45/47/49
Capital gains on transfer of firm�s assets to partners and vice versa and on transfer by way of compulsory acquisition 24

48/53
Modification of provisions relating to computation of capital gains 25

54/54B/
New scheme for deposits for claiming exemption

54D/54E
from capital gains 26

54G
Exemption of capital gains on shifting of industrial undertakings from urban areas 27

55(1), (2)
Capital gains arising on transfer of goodwill 28

80C(2), (4),
Modification of provisions relating to deduction in

(7), (8)
respect of subscription to any security of Central Government specified by notification in this behalf and any payments made for purchase or construction of residential house 29

80CC(3), (5)
Tax incentive for investment in certain new shares 30

80CCA
New provisions relating to national savings scheme to augment savings 31

80G
Modification of the provisions relating to deduction in respect of donations to certain funds, etc. 32

80-O
Modification of provisions relating to deduction in respect of royalties, etc., from certain foreign enterprises 33

80RRA
Modification of provisions in respect of remuneration received for services rendered outside India 34

80U
Enhancing deduction in case of totally blind or physically handicapped persons 35

104 to 109
Levy of additional tax on certain closely-held companies withdrawn 10

115J
New provisions to levy minimum tax on book profit of certain companies 36

192(2), (2A),
Modification of scope of deduction of tax at source

(2B)
from salaries 37

194/194A/
Modification of provisions relating to tax deduction at

194D/195/
source from dividend, interest, insurance commission

195A/197/
and payments to non-residents 38

206/285/286

203
Amendment of provisions relating to issue of certificate for tax deduction 39

203A/272BB/
New provisions relating to allotment of tax deduction

273B
account number 40

245A/245B/
Modification of the provisions relating to settlement

245BA to
of cases 41

245BD/245C,

245D/245E/

245F/245H/

245HA/245K/

245M

293
Bar of suits in civil courts to set aside or modify any order passed 42

11th Sch.
Non-priority products to include �aerated waters� using synthetic essences, and to exclude computers 43

WEALTH-TAX ACT

2(m)
Enlarging meaning of house property - consequential amendment to correspond to amended provisions in Income-tax Act 23.3

5(1)(xxvb)
Exemptions of deposits in National Savings Scheme subject to overall limit of Rs. 5 lakhs 31.1

22A/22B/
Modification of provisions relating to settlement of

22BA to
cases on lines similar to Income-tax Act 41.6

22BD/22C/

22D/22F/

22H/22HHA/

22K/22M

31
Modification of provisions relating to waiver of interest 44

43
Bar of suits in civil courts to set aside or modify any order passed 42.2

GIFT-TAX ACT

2(xii)
Enlarging meaning of house property corresponding to similar provisions in Income-tax Act 23.3

42
Bar of suits in civil courts to set aside or modify any order passed 42.2

Rate Structure
Finance Act, 1987
Rates of income-tax in respect of incomes liable to tax for the assessment year 1987-88
4. In respect of incomes of all categories of taxpayers (corporate as well as non-corporate) liable to tax for the assessment year 1987-88, the rates of income-tax have been specified in Part I of the First Schedule to the Finance Act. These rates are the same as those laid down in Part III of the First Schedule to the Finance Act, 1986, 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 during the financial year 1986-87.
Finance Act, 1987
Rates for deduction of tax at source during the financial year 1987-88 from income other than �Salaries� and retirement annuities
5. The rates for deduction of income-tax at source during the financial year 1987-88 from incomes, other than �Salaries� and retirement annuities payable to partners of registered firms engaged in certain 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, income by way of winnings from horse races and income of non-residents (including non-resident Indians) other than salary income.
Finance Act, 1987
Rates for deduction of tax at source from �Salaries�, computation of �advance tax� and charging of income-tax in special cases during the financial year 1987-88
6. The rates for deduction of tax at source from �Salaries� in the case of individuals during the financial year 1987-88 and also for computation of �advance tax� payable during the year in the case of all categories of taxpayers have been specified in Part III of the First Schedule to the Finance Act. These rates are also applicable for deduction of tax at source during the financial year 1987-88 from retirement annuities payable to partners of registered firms engaged in certain professions (such as chartered accountants, solicitors, lawyers, etc.) and for charging income-tax during the financial year 1987-88 on current incomes in cases where accelerated assessments have to be made, e.g., provisional assessment of shipping, profits arising in India to non-residents, assessment of persons leaving India for good during the financial year 1987-88, assessment of persons who are likely to transfer property to avoid tax, where an order has to be passed in a case of search and seizure for calculating the amount of tax on the estimated undisclosed incomes, etc.
Finance Act, 1987
Rates of tax applicable to individuals, Hindu undivided families, unregistered firms, etc., co-operative societies, registered firms and local authorities
7. In the case of individuals, HUFs, unregistered firms, etc., the rates of income-tax have been specified in Paragraph A of Part III of the First Schedule to the Finance Act. In the case of co-operative societies, registered firms and local authorities, the rates of income-tax have respectively been specified in Paragraph B, Paragraph C and Paragraph D of Part III of the First Schedule to the Finance Act. These rates are the same as those specified in the corresponding Paragraph of Part I of the First Schedule.
Finance Act, 1987
Rates of tax applicable to companies
8. In the case of companies, the rates of income-tax have been specified in Paragraph E of Part III of the First Schedule to the Finance Act. These rates are the same as specified in the corresponding Paragraph of Part I of the First Schedule to the Finance Act, 1986.
Finance Act, 1987
Partially integrated taxation of non-agricultural income with income derived from agriculture
9. As in the past, the Finance Act provides that in the case of individuals, Hindu undivided families, unregistered firms, other associations of persons, etc., the net agricultural income will be taken into account for computation of �advance tax� and charging of income-tax. These provisions are broadly on the same lines as those in earlier years.
[Section 2 and the First Schedule to the Finance Act]

Amendments to Income-tax Act

FINANCE ACT, 1987

Definition of �Dividend� [section 2(22) (e)]

10.1 Sections 104 to 109 relate to levy of additional tax on certain closely-held companies (other than those in which the public are substantially interested) if they fail to distribute a specified percentage of their distributable profits as dividends. These provisions had lost much of their relevance with the reduction of the maximum marginal rate of personal tax to 50 per cent, which is lower than the rate for corporation tax on closely-held companies. Sections 104 to 109 have, therefore, been omitted by the Finance Act, 1987.

FINANCE ACT, 1987

10.2 With the deletion of sections 104 to 109 there was a likelihood of closely-held companies not distributing their profits to shareholders by way of dividends but by way of loans or advances so that these are not taxed in the hands of the shareholders. To forestall this manipulation, sub-clause (e) of clause (22) of section 2 has been suitably amended. Under the existing provisions, payments by way of loans or advances to shareholders having substantial interest in a company to the extent to which the company possesses accumulated profits is treated as dividend. The shareholders having substantial interest are those who have a shareholding carrying not less than 20 per cent voting power as per the provisions of clause (32) of section 2. The amendment of the definition extends its application to payments made (i) to a shareholder holding not less than 10 per cent of the voting power, or (ii) to a concern in which the shareholder has substantial interest. �Concern� as per the newly insertedExplanation 3(a) to section 2(22) means a HUF or a firm or an association of persons or a body of individuals or a company. A shareholder having a substantial interest in a concern as per part (b) ofExplanation 3 is deemed to be one who is beneficially entitled to not less than 20 per cent of the income of such concern.

FINANCE ACT, 1987

10.3 The new provision would, therefore, be applicable in a case where a shareholder has 10 per cent or more of the equity capital. Further, deemed dividend would be taxed in the hands of a concern where all the following conditions are satisfied :

(i) where the company makes the payment by way of loans or advances to a concern ;

(ii) where a member or a partner of the concern holds 10 per cent of the voting power in the company ; and

(iii) where the member or partner of the concern is also beneficially entitled to 20 per cent of the income of such concern.

With a view to avoid the hardship in cases where advances or loans have already been given, the new provisions have been made applicable only in cases where loans or advances are given after 31st May, 1987.

These amendments will apply in relation to assessment year 1988-89 and subsequent years.

[Sections 3(a) and 41 of the Finance Act]

FINANCE ACT, 1987

Definition of �transfer� widened to include certain transactions

11.1 The existing definition of the word �transfer� in section 2(47) does not include transfer of certain rights accruing to a purchaser, by way of becoming a member of or acquiring shares in a co-operative society, company, or association of persons or by way of any agreement or any arrangement whereby such person acquires any right in any building which is either being constructed or which is to be constructed. Transactions of the nature referred to above are not required to be registered under the Registration Act, 1908. Such arrangements confer the privileges of ownership without transfer of title in the building and are a common mode of acquiring flats particularly in multistoreyed constructions in big cities. The definition also does not cover cases where possession is allowed to be taken or retained in part performance of a contract, of the nature referred to in section 53A of the Transfer of Property Act, 1882. New sub-clauses (v) and (vi) have been inserted in section 2(47) to prevent avoidance of capital gains liability by recourse to transfer of rights in the manner referred to above.

FINANCE ACT, 1987

11.2 The newly inserted sub-clause (vi) of section 2(47) has brought into the ambit of �transfer�, the practice of enjoyment of property rights through what is commonly known as Power of Attorney arrangements. The practice in such cases is adopted normally where transfer of ownership is legally not permitted. A person holding the power of attorney is authorised the powers of owner, including that of making construction. The legal ownership in such cases continues to be with the transferor.

FINANCE ACT, 1987

11.3 These amendments shall come into force with effect from 1-4-1988 and will accordingly apply to the assessment year 1988-89 and subsequent years.

[Section 3(g) of the Finance Act]

What to watch

• The text as supplied is clipped in the first paragraph on the rate structure, so the paragraph-wise explanation of each amendment listed in the table is not before you.
• The table is an index with paragraph references, not the operative explanation.
• An explanatory circular states the Board's understanding; the operative words are those of the Finance Act.
• Almost every provision it introduces, section 115J and section 80CCA among them, has since been amended, replaced or omitted.

Where you meet it

When the scope of a provision first introduced in 1987, such as section 115J or the capital gains deposit scheme, is in dispute and the Board's contemporaneous understanding is relied on.

← Circular No. 496  ·  Circular No. 494 →