DIRECT TAXES / DIRECT TAX LAWS

AMENDMENTS BY THE FINANCE ACT, 2007

I INCOME-TAX ACT, 1961

1. RATES OF TAX
Section 2 of the Finance Act, 2007 read with Part I of the First Schedule to the Finance
Act, 2007, seeks to specify the rates at which income-tax is to be levied on income
chargeable to tax for the assessment year 2007-08. Part II lays down the rate at which
tax is to be deducted at source during the financial year 2007-08 i.e. A.Y. 2008-09 from
income subject to such deduction under the Income-tax Act; Part III lays down the rates
for charging income-tax in certain cases, rates for deducting income-tax from income
chargeable under the head "salaries" and the rates for computing advance tax for the
financial year 2007-08 i.e. A.Y.2008-09. Part III of the First Schedule to the Finance Act,
2007 will become Part I of the First Schedule to the Finance Act, 2008 and so on.

Rates for deduction of tax at source for the A.Y. 2008-09

Part II of the First Schedule to the Act specifies the rates at which income-tax is to be
deducted at source during the financial year 2007-08 i.e. A.Y. 2008-09 from income other
than "salaries". These rates of tax deduction at source are the same as were applicable
for the A.Y.2007-08. However, for A.Y.2008-09, a threshold limit has been fixed for
applicability of surcharge in the case of firms and companies also.
(i) Surcharge @ 10% of income-tax deducted at source would be attracted in the case
of firms and domestic companies only if the income or the aggregate of such
incomes paid or likely to be paid and subject to tax deduction at source exceeds
Rs.1 crore.
(ii) Surcharge @ 2½% of income-tax deducted at source would be attracted in the case
of foreign companies only if the income or the aggregate of such incomes paid or
likely to be paid and subject to tax deduction at source exceeds Rs.1 crore.

Rates for deduction of tax at source from "salaries", computation of "advance tax"
and charging of income-tax in certain cases during the financial year 2007-08
Part III of the First Schedule to the Act specifies the rate at which income-tax is to be
deducted at source from "salaries" and also the rate at which "advance tax" is to be
computed and income-tax is to be calculated or charged in certain cases for the financial
year 2007-08 i.e. A.Y. 2008-09. There is no change in the rate structure as compared to
A.Y.2007-08, except for increase in the threshold limit by Rs.10,000 in the case of
individuals, HUFs, AOPs, BOIs and artificial juridical persons.

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(i) (a) Individual/ HUF/ AOP / BOI and every artificial juridical person
Level of total income Rate of income-tax
Where the total income does Nil
not exceed Rs.1,10,000
Where the total income 10% of the amount by which the total
exceeds Rs.1,10,000 but income exceeds Rs.1,10,000.
does not exceed Rs.1,50,000
Where the total income Rs.4,000 plus 20% of the amount by which
exceeds Rs.1,50,000 but the total income exceeds Rs.1,50,000.
does not exceed Rs.2,50,000
Where the total income Rs.24,000 plus 30% of the amount by which
exceeds Rs.2,50,000 the total income exceeds Rs.2,50,000.

The threshold exemption level will be Rs.1,45,000 for resident women and
Rs.1,95,000 for resident individuals of the age of 65 years or more at any time
during the previous year. The slab rates for these assessees are as given in
(b) and (c) below.
(b) For resident women below the age of 65 years at any time during the
previous year
Level of total income Rate of income-tax
Where the total income does Nil
not exceed Rs.1,45,000
Where the total income 10% of the amount by which the total
exceeds Rs.1,45,000 but income exceeds Rs.1,45,000.
does not exceed Rs.1,50,000
Where the total income Rs.500 plus 20% of the amount by which
exceeds Rs.1,50,000 but the total income exceeds Rs.1,50,000.
does not exceed Rs.2,50,000
Where the total income Rs.20,500 plus 30% of the amount by which
exceeds Rs.2,50,000 the total income exceeds Rs.2,50,000.

(c) For resident individuals of the age of 65 years or more at any time during
the previous year
Level of total income Rate of income-tax
Where the total income does not Nil
exceed Rs.1,95,000

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 Where the total income exceeds 20% of the amount by which the total
Rs.1,95,000 but does not exceed income exceeds Rs.1,95,000.
Rs.2,50,000
Where the total income exceeds Rs.11,000 plus 30% of the amount
Rs.2,50,000 by which the total income exceeds
Rs.2,50,000.

(ii) Co-operative society

There is no change in the rate structure as compared to A.Y.2007-08.
Level of total income Rate of income-tax
(1) Where the total income does not 10% of the total income
exceed Rs.10,000
(2) Where the total income exceeds Rs.1,000 plus 20% of the amount
Rs.10,000 but does not exceed by which the total income exceeds
Rs.20,000 Rs.10,000
(3) Where the total income exceeds Rs.3,000 plus 30% of the amount
Rs.20,000 by which the total income exceeds
Rs.20,000

(iii) Firm
The rate of tax for A.Y.2008-09 is the same as that for A.Y.2007-08 i.e. 30% on the
whole of the total income of the firm.

(iv) Local authority

The rate of tax for A.Y.2008-09 is the same as that for A.Y.2007-08 i.e. 30% on the
whole of the total income of the local authority.
(v) Company
The rates of tax for A.Y.2008-09 are the same as that for A.Y.2007-08.
(1) In the case of a domestic company 30% of the total income
(2) In the case of a company other than 50% of specified royalties and
a domestic company fees for rendering technical
services and 40% on the balance
of the total income.

Surcharge

The rates of surcharge applicable for A.Y.2008-09 are as follows -

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(i) Individual/HUF/AOP/BOI
Where total income exceeds Rs.10,00,000, surcharge is payable at the rate of 10%
on the income-tax computed in accordance with the provisions of Paragraph (i) [(a),
(b) or (c)] above or section 111A or 112 after reducing rebate under Chapter VIII-A.
Marginal relief: In case of such individuals/HUFs/AOPs/BOIs having a total income
exceeding Rs.10,00,000, the additional amount of income-tax payable (together
with surcharge) on the excess of income over Rs.10,00,000 should not be more
than the amount of income exceeding Rs.10,00,000. This is called ‘marginal relief’.
Income-tax on total income of Rs.10 lakhs works out to Rs.2,49,000. Surcharge is
not attracted on this tax since the total income does not exceed Rs.10 lakhs.
However, if the total income is say, Rs.10,30,000, tax on the same would be
Rs.2,83,800 (i.e. Rs.2,58,000 + 25,800, being surcharge of 10%). The additional
tax works out to Rs.34,800 (i.e., 2,83,800-2,49,000). However, the additional tax
cannot exceed the amount by which Rs.10,30,000 exceeds Rs.10,00,000. That is,
the additional tax cannot exceed Rs.30,000. Therefore, the total tax payable would
be only Rs.2,79,000 (i.e. 2,49,000 + 30,000). The marginal relief is Rs.4,800 (i.e.
34,800-30,000).
(ii) Artificial juridical person
Surcharge is payable at the rate of 10% of income-tax computed in accordance with
the provisions of paragraph (i)(a) above or section 111A or section 112.
(iii) Firm/Domestic company
Where the total income exceeds Rs.1 crore, surcharge is payable at the rate of 10%
of income-tax computed in accordance with the provisions of para (iii)/(v)(1) above
or section 111A or section 112. Marginal relief is available in case of such
firms/companies having a total income exceeding Rs.1 crore i.e. the additional
amount of income-tax payable (together with surcharge) on the excess of income
over Rs.1 crore should not be more than the amount of income exceeding Rs.1
crore.
(iv) Foreign company
Where the total income exceeds Rs.1 crore, surcharge is payable at the rate of
2½% of income-tax computed in accordance with the provisions of paragraph (v)(2)
above or section 111A or section 112. Marginal relief is available in case of such
companies having a total income exceeding Rs.1 crore i.e. the additional amount of
income-tax payable (together with surcharge) on the excess of income over Rs.1
crore should not be more than the amount of income exceeding Rs.1 crore.
Education cess on income-tax
The amount of income-tax as increased by the union surcharge should be further
increased by an additional surcharge called the “Education cess on income-tax”,
calculated at the rate of 2% of such income-tax and surcharge. Education cess is
leviable in the case of all assessees i.e. individuals, HUF, AOP/BOI, co-operative

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 societies, firms, local authorities and companies. Further, “Secondary and higher
education cess on income-tax” @1% of income-tax and surcharge is leviable from
A.Y.2008-09 to fulfill the commitment of the Government to provide and finance
secondary and higher education.

2. BASIC CONCEPTS
(a) Assessing Officer to include Additional Commissioner and Additional Director
[Section 2(7A)]
Clauses (1C) and (1D) inserted in section 2 to define Additional Commissioner
and Additional Director, respectively.
(i) The definition of Assessing Officer, as it stands at present, does not include
Additional Commissioner and Additional Director.
(ii) The Delhi Bench of the Tribunal, in Bindal Apparels Ltd. v. ACIT 104 TTJ (Del)
950, held that the Additional Commissioner of Income-tax cannot exercise or
perform all or any powers and functions of an Assessing Officer, as the
definition of "Assessing Officer" under the Income-tax Act does not include
Additional Commissioner of Income-tax.
(iii) Therefore, in order to fill this lacuna, Additional Commissioner of income-tax
and Additional Director of income-tax have now been included within the scope
of definition of “Assessing Officer” with retrospective effect from 1.6.94 and
1.10.96, respectively.
(iv) Consequently, sub-sections (1C) and (1D) have been inserted in section 2
w.e.f. 1.6.94 to define Additional Commissioner and Additional Director,
respectively, to mean a person appointed to be so under section 117(1).
(v) Further, clause (9B) has been inserted w.e.f. 1.4.88 to define an “Assistant
Director” to mean a person appointed to be an Assistant Director of Income-tax
under section 117(1).
(b) Amendment of definition of 'India' [Section 2(25A)]
The Income-tax Act extends to the whole of India. Therefore, the definition of the
term “India” is very important. Section 2(25A) has been substituted to define the
term 'India' to mean –
(i) the territory of India as per article 1 of the Constitution,
(ii) its territorial waters, seabed and subsoil underlying such waters,
(iii) continental shelf,
(iv) exclusive economic zone or
(v) any other specified maritime zone and the air space above its territory and
territorial waters.
Specified maritime zone means the maritime zone as referred to in the Territorial

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 Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act,
1976.
This amendment is likely to have an effect on income assignable to satellites and
the signals beamed through air space.
(Effective retrospectively from 25.8.76)

3. RESIDENCE AND SCOPE OF TOTAL INCOME

(a) Contribution made by any employer to the pension scheme of Central
Government deemed to be income received [Section 7(iii)]
Related amendment in sections: 17(1)(viii), 80CCD
(i) As per clause (iii) of section 7, the contribution made by the Central
Government in the previous year to the account of an employee under a
pension scheme referred in section 80CCD is deemed to be income received
in the previous year.
(ii) As per section 17(1)(viii), salary includes the contribution made by the Central
Government in the previous year to the account of an employee under a
pension scheme referred to in section 80CCD.
(iii) Section 80CCD provides for deduction of employee’s and employer’s
contribution to pension scheme notified by the Central Government. However,
if the amount contributed exceeds 10% of salary, then the deduction would be
restricted to 10% of salary. This restriction is applicable both in the case of
employee’s contribution and employer’s contribution to such scheme.
(iv) The benefit of deduction under this section is currently available only to
individuals employed by the Central Government on or after 1.1.2004.
(v) This deduction is now extended also to individuals employed by any other
employer on or after 1.1.2004.
(vi) The entire employer’s contribution would be included in the salary of the
employee. However, deduction under section 80CCD would be restricted to
10% of salary.
(vii) Accordingly, clause (iii) of section 7 has been amended to also deem the
contribution made by any other employer in the previous year to the account of
an employee under a pension scheme referred in section 80CCD as income
received in the previous year.
(viii) Further, clause (viii) of section 17(1) has been amended to provide for
inclusion of the contribution made by any other employer in the previous year
to the account of an employee under a pension scheme referred in section
80CCD in the salary of the employee.
(Effective retrospectively from 1.4.2004)

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 (b) Income deemed to accrue or arise in India to a non-resident by way of interest,
royalty and fee for technical services to be taxed irrespective of territorial
nexus [Explanation to section 9]
(i) The Supreme Court, in Ishikawajima-Harima Heavy Industries Ltd. v. Director
of Income-tax (2007) 288 ITR 408, observed that in order to tax the income of
a non-resident assessee under section 9(1)(vii), relating to fee for technical
services, the income sought to be taxed must have sufficient territorial nexus
with India i.e. the fees paid for technical services provided by a non-resident
cannot be taxed in India unless the services were utilized in India and
rendered in India. This observation is not in consonance with the source rule
spelt out in the law and the stand taken by India in the bilateral treaties with
different countries.
(ii) It is now clarified that such income by way of interest, royalty or fee for
technical services which is deemed to accrue or arise in India by virtue of
clauses (v), (vi) and (vii) of section 9(1), shall be included in the total income of
the non-resident, whether or not the non-resident has a residence or place of
business or business connection in India.

(Effective retrospectively from 1.6.76)

4. INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME

(a) Exemption of compensation received on account of disaster [Section 10
(10BC)]
(i) This clause exempts any amount received or receivable as compensation by
an individual or his legal heir on account of any disaster.
(ii) Such compensation should be granted by the Central Government or a State
Government or a local authority.
(iii) However, exemption would not be available in respect of compensation for
alleviating any damage or loss, which has already been allowed as deduction
under the Act.
(iv) "Disaster" means a catastrophe, mishap, calamity or grave occurrence in any
area, arising from natural or man made causes, or by accident or negligence. It
should have the effect of causing -
(1) substantial loss of life or human suffering; or
(2) damage to, and destruction of, property; or
(3) damage to, or degradation of, environment.
It should be of such a nature or magnitude as to be beyond the coping capacity
of the community of the affected area.
(Effective retrospectively from A.Y.2005-06)

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(b) Exemption of interest on notified bonds issued by State Pooled Finance
Entities [Section 10(15)(vii)]
(i) Under sub-clause (vii) of section 10(15), interest on bonds issued by a local
authority and specified by the Central Government by notification in the Official
Gazette, is exempt from income-tax.
(ii) This clause has been amended so as to provide that interest on bonds issued
by a State Pooled Finance Entity and specified by the Central Government by
notification in the Official Gazette, shall also be exempt from income-tax.
(iii) “State Pooled Finance Entity” means such entity which is set up in accordance
with the guidelines for the Pooled Finance Development Scheme notified by
the Central Government in the Ministry of Urban Development.
(Effective from A.Y. 2008-09)
(c) Exemption of income of ASOSAI-SECRETARIAT [Section 10(23BBD)]
(i) Clause (23BBD) provides exemption of any income of the Secretariat of the
Asian Organisation of the Supreme Audit Institutions registered as “ASOSAI-
SECRETARIAT” under the Societies Registration Act, 1860 for seven previous
years relevant to A.Y.2001-02 to A.Y.2007-08.
(ii) The Comptroller and Auditor General of India is the Secretary General of
ASOSAI and its Secretariat functions from his office.
(iii) Since the term of the Comptroller and Auditor General of India as the
Secretary General of ASOSAI has been extended by another three years, this
clause has been amended to extend the said exemption for a further period of
three assessment years i.e. A.Y 2008-09, A.Y.2009-10 & A.Y.2010-11.
(Effective from A.Y.2008-09)
(d) Exemption of income of Central Electricity Regulatory Commission [Section
10(23BBG)]
A new clause (23BBG) has been inserted in section 10 to provide exemption to any
income of Central Electricity Regulatory Commission constituted under sub-section
(1) of Section 76 of the Electricity Act, 2003.
(Effective from A.Y. 2008-09)
(e) Approval of prescribed authority required for exemption of funds/institu tions
established for charitable purposes [Section 10(23C)]
Related amendment in sections: 80E, 143(3) & 296
(i) Sub-clause (iv) of section 10(23C) provides for exemption of the income of any
fund or institution established for charitable purposes which is notified by the
Central Government in the Official Gazette, having regard to the objects of the
fund or institution and its importance throughout India or throughout any State
or States.

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 (ii) Similarly, sub-clause (v) of section 10(23C) provides for exemption of the
income of any trust (including any other legal obligation) or institution
established wholly for public religious purposes or wholly for public religious
and charitable purposes, which is notified by the Central Government in the
Official Gazette.
(iii) Sub-clauses (iv) and (v) have been amended to provide that such exemption
would be available to the entities referred to therein only if they are approved
by the prescribed authority. The Central Government will no longer issue
notification for this purpose.
(iv) Consequential amendments have been made in clause (23C) of section 10, so
as to include a reference to approval granted by the prescribed authority under
sub-clause (iv) or sub-clause (v) of the said clause.
(v) It has also been provided that all pending applications in respect of which no
notification has been issued under the said sub-clause (iv) or (v) before 1st
June, 2007, shall stand transferred on that day to the prescribed authority and
the prescribed authority may proceed with such applications from the stage at
which they were on that day.
(vi) Consequently, an amendment has been made in the definition of “approved
charitable institution” under section 80E. Such an institution was required to
be notified by the Central Government under section 10(23C). Now, hereafter
such institutions have to be approved by the prescribed authority under section
10(23C).
(vii) Consequential amendment has been made in sub-clause (ii) of the proviso to
section 143(3). Therefore, in the case of such fund, trust or institution which is
required to furnish a return under section 139(4C), no order of assessment of
total income shall be made by the Assessing Officer without giving effect to the
provisions of section 10, unless the approval granted to such fund, trust or
institution has been withdrawn.
(viii) Further, section 296 has been amended to provide that only notifications
issued before 1st June, 2007 under section 10(23C)(iv) shall be placed before
each House of Parliament within the specified period.
(Effective from 1.6.2007)
(f) Exemption of specified income of Investor Protection Fund set up by
commodity exchanges [Section 10(23EC)]
(i) Clause (23EA) exempts income by way of contributions received from
recognised stock exchanges and the members thereof, of notified Investor
Protection Fund, set up by recognised stock exchanges in India, either jointly
or separately.
(ii) In order to provide similar exemption to Investor Protection Funds set up by
commodity exchanges, a new clause (23EC) has been inserted in section 10.

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 (iii) This clause exempts income, by way of contributions received from commodity
exchanges and the members thereof, of such Investor Protection Fund set up
by commodity exchanges in India, either jointly or separately, as the Central
Government may, by notification in the Official Gazette, specify in this behalf.
(iv) Where any amount standing to the credit of the said Fund and not charged to
income-tax during any previous year is shared, either wholly or in part, with a
commodity exchange, the entire amount so shared shall be deemed to be the
income of the previous year in which the amount is so shared and shall
accordingly be chargeable to income-tax.
(v) A “commodity exchange” means a “registered association” as defined in clause
section 2(jj) of the Forward Contracts (Regulation) Act, 1952. i.e. an
association to which for the time being a certificate of registration has been
granted by the Forward Markets Commission under Sec. 14B of that Act.
(Effective from A.Y. 2008-09)
(g) Pass through status restricted to investment in a venture capital undertaking
engaged in specified businesses [Section 10(23FB)]
(i) Under clause (23FB), any income of a venture capital company or venture
capital fund set up to raise funds for investment in a venture capital
undertaking is exempt from tax.
(ii) Section 115U provides that any income received by a person out of
investments made in a venture capital company or venture capital fund would
be chargeable to income-tax in the same manner as if such income was
received by such person directly from the venture capital undertaking.
Therefore, at present, venture capital company/venture capital fund is a pass
through entity.
(iii) As per the existing definition, “venture capital undertaking” means a venture
capital undertaking referred to in the Securities and Exchange Board of India
(Venture Capital Funds) Regulations, 1996 made under the Securities and
Exchange Board of India Act, 1992 and notified in the Official Gazette by the
Board.
(iv) This clause has been amended to restrict such exemption only in respect of
income of a venture capital company or venture capital fund from investment in
a venture capital undertaking engaged in certain specified businesses or
industries.
(v) For this purpose, this clause has amended the definition of venture capital
undertaking to mean such domestic company whose shares are not listed in a
recognised stock exchange in India and which is engaged in
(i) the business of -
(A) nanotechnology;

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 (B) information technology relating to hardware and software
development;
(C) seed research and development;
(D) bio-technology;
(E) research and development of new chemical entities in the
pharmaceutical sector;
(F) production of bio-fuels,
(G) building and operating composite hotel-cum-convention centre with
seating capacity of more than three thousand; or
(H) developing or operating and maintaining or developing, operating
and maintaining any infrastructure facility as defined in the
Explanation to clause (i) of sub-section (4) of section 80-IA i.e.
(1) a road including toll road, a bridge or a rail system;
(2) a highway project including housing or other activities being an
integral part of the highway project;
(3) a water supply project, water treatment system, irrigation
project, sanitation and sewerage system or solid waste
management system;
(4) a port, airport, inland waterway, inland port or navigational
channel in the sea.
(ii) dairy or poultry industry.
(vi) Therefore, exemption under this clause would be available only if the venture
capital company/venture capital fund invests in the businesses or industries
specified in (v) above. In such cases, tax would be payable by the investor
under section 115U. If the venture capital company/venture capital fund
invests in other businesses or industries, then it would not be eligible for
exemption under this clause.
(Effective from A.Y.2008-09)
(h) Restrictive conditions to apply for units in SEZ also for availing benefit under
section 10AA
(i) Under the Income-tax Act, in respect of provisions in the nature of tax holidays
for an undertaking, benefit of exemption/deduction available to newly
established undertakings is generally denied to units which are reconstructed
or split up.
(ii) These restrictive conditions are already contained in, inter alia, sections 10A
and 10B. However, there was no such restriction in section 10AA.

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 (iii) Therefore, these conditions have now been introduced in section 10AA to
prevent misuse of benefit available thereunder by merely shifting the location
of an existing unit to a SEZ, since the same would mitigate the objective of
encouraging industrial development, employment generation etc.
(iv) This amendment has been effected by substituting existing sub-section (4) of
section 10AA.
(v) Benefit under section 10AA would no longer be available to those units which
are formed by splitting up or reconstruction of a business already in existence
(except in circumstances provided in section 33B), or formed by transfer to a
new business, of plant and machinery previously used for any purpose
exceeding 20% of the total value of machinery and plant used in the business.
(vi) For this purpose, any machinery or plant which was used outside India by any
person other than the assessee shall not be regarded as machinery or plant
previously used for any purpose if the following conditions are fulfilled:
(a) such machinery or plant was not at any time 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 has been allowed in respect of
such machinery or plant to any person earlier.
(Effective retrospectively from 10.2.2006)

5. CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS

(a) Removal of requirement to file an application for registration within one year
of creation or establishment of the trust or institution [Section 12A]
Related amendment in section: 12AA
(i) The marginal heading of section 12A has been substituted. Section 12A now
provides the conditions for applicability of sections 11 and 12.
(ii) Clause (a) of section 12A requires a charitable or religious trust or institution to
make an application for registration within one year from the date of creation of
the trust or establishment of the institution. The Commissioner is empowered
to condone the delay in making the application for registration if he is satisfied
that there were sufficient reasons for such delay. In such cases, the
exemption provisions of section 11 and 12 would apply from the date of
creation of the trust or establishment of the institution.
(iii) This requirement of filing an application for registration under section 12A
within one year of creation of the religious or charitable trust or institution has
been removed. The application can be filed at any time now. This has been
provided by insertion of new clause (aa) in section 12A(1). Further, a proviso
has been inserted in clause (a) to restrict the applicability of that clause to
applications made prior to 1.6.2007.

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 (iv) Also, the power of the Commissioner to grant registration for past years, by
condoning the delay in filing such application, has been removed.
(v) Accordingly, in respect of applications filed on or after 1 st June, 2007, the
provisions of sections 11 and 12 shall apply from the assessment year relevant
to the financial year in which the application is made i.e. the exemption would
be available only with effect from the assessment year relevant to the previous
year in which the application is filed. It would not be available in respect of any
earlier assessment year.
(vi) Consequential amendments have been made in sub-sections (1) and (2) of
section 12AA to include a reference to an application for registration of a trust
or institution made under the newly inserted clause (aa) of section 12A.
(Effective from 1.6.2007)
(b) Exemption not to be denied to trusts investing in shares of a public sector
company or shares prescribed as a form or mode of investment under section
11(5)(xii) [Section 13(1)]
(i) Section 13 provides that the exemption provisions contained in sections 11
and 12 shall not apply to a charitable or religious trust or institution if any
shares in a company, other than a Government company or a corporation
established by or under a Central, State or Provincial Act, are held by the trust
or institution after 30.11.83.
(ii) This condition has now been relaxed to permit the charitable or religious trusts
and institutions to invest in shares in a public sector company and shares
prescribed as a form or mode of investment under section 11(5)(xii).
Note – Section 11(5) specifies the forms and modes of investing and depositing the
money for the purpose of claiming exemption. Clause (xii) of section 11(5) permits
investment/deposit in any other form or mode of investment or deposit as may be
prescribed.
(Effective retrospectively from 1.4.99)

6. INCOME FROM SALARIES

Deemed concession in the matter of rent [Section 17]
(i) Under section 17(2)(ii), the value of any concession in the matter of rent arising to
an employee in respect of any accommodation provided by his employer is
considered as "perquisite" chargeable to tax in the hands of the employee.
(ii) Rule 3(1) of the Income-tax Rules provides the basis of valuation of perquisites in
respect of accommodation provided to an employee, as under:
(a) 20% of salary in cities having population exceeding 4 lacs (10% of salary up to
31.3.2006)
(b) 15% of salary in other cities (7.5% of salary up to 31.3.2006)

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(iii) In case of furnished accommodation provided by an employer, the value arrived as
above was to be further increased by 10 percent of the cost of furniture, where the
same is owned by the employer, or the actual hire charges paid by the employer in
case the furniture is hired.
(iv) This method of perquisite valuation resulted in genuine hardship to employees
availing facility of residential accommodation in remote areas, as the value of
perquisite was determined as a percentage of salary of the employee, irrespective
of the fair rental value of the property (which may be much lower than 20%/15% of
salary in such cases).
(v) Rule 3(1) was challenged as ultra vires before the Supreme Court in the case of
Arun Kumar v. UOl (2006) 286 ITR 89. The Apex court, while holding that the
provisions of Rule 3(1) were constitutionally valid, observed that the same would be
applicable only if 'concession in the matter of rent' with respect to the
accommodation provided by an employer accrues to the employee under the
substantive provisions of section 17(2)(ii). The Assessing Officer, before applying
Rule 3(1), was required to establish that there was 'concession in the matter of rent'
provided to the employee.
(vi) Further, as per the Apex court, the difference between the value as per Rule 3(1)
and the rent recovered from the employee, could not per se be considered as
‘concession in the matter of rent’ provided to the employee.
(vii) In order to clarify the correct intent of law, Explanations have been inserted in
section 17(2)(ii) to provide that the difference between the specified rate (as shown
in column 4 of the table below w.e.f. 1.4.2006 and column 2 of the table below upto
31.3.2006) and the amount of rent recoverable/recovered from the employee would
be deemed to be the concession in the matter of rent in case of accommodation
owned by the employer. In case of accommodation taken on lease or rent by the
employer, the difference between the actual lease rent or 15% of salary (10% of
salary up to 31.3.2006), whichever is lower, and rent recovered/recoverable from
the employee would be deemed to be the concession in the matter of rent.
Upto 31.3.2006 From 1.4.2006
(1) (2) (3) (4)
Type of Deemed Type of Deemed
accomodation concession in accomodation concession in
the matter of the matter of
rent rent
Accommodation Accommodation
owned by the owned by the
employer employer
In cities having a 10% of salary In cities having a 15% of salary
population minus rent population minus rent
exceeding 4 lakh recoverable from exceeding 25 lakh recoverable from
the employee. the employee.

14
 In other cities 7.5% of salary In cities having a 10% of salary
minus rent population minus rent
recoverable from exceeding 10 lakh recoverable from
the employee. but not exceeding the employee.
25 lakh
In other cities 7½% of salary
minus rent
recoverable from
employee.

Accommodation Rent paid by the Accommodation Rent paid by the

taken on lease employer or 10% taken on lease by employer or 15%
by the employer of salary, the employer of salary,
whichever is whichever is
lower, minus rent lower, minus
recoverable from rent recoverable
the employee. from the
employee.
(viii) This deeming provision is applicable to employees other than Government
employees. In case of furnished accommodation provided to such employees, the
excess of hire charges paid or 10% p.a. of cost of furniture, as the case may be,
over and above the charges paid or payable by the employee would be added to the
value determined in column (4) above for determining whether there is a concession
in the matter of rent.
Note – Once there is a deemed concession, the provisions of Rule 3(1) would
be applicable in computing the taxable perquisite.
(ix) “Salary” includes pay, allowances, bonus or commission payable monthly or
otherwise or any monetary payment, by whatever name called, from one or more
employers, as the case may be. However, it does not include the following,
namely–
(1) dearness allowance or dearness pay unless it enters into the computation of
superannuation or retirement benefits of the employee concerned;
(2) employer’s contribution to the provident fund account of the employee;
(3) allowances which are exempted from the payment of tax;
(4) value of the perquisites specified in section 17(2);
(5) any payment or expenditure specifically excluded under the proviso to section
17(2) i.e., medical expenditure/payment of medical insurance premium
specified therein.

15
 (x) In case of Government employees, the excess of licence fees determined by the
employer as increased by the value of furniture and fixture over and above the rent
recovered/recoverable from the employee and the charges paid or payable for
furniture by the employee would be deemed to be the concession in the matter of
rent.

7. PROFITS AND GAINS OF BUSINESS OR PROFESSION

(a) Increase in time limit for availing weighted deduction in respect of scientific
research expenditure [Section 35(2AB)]
Section 35(2AB) provides for a weighted deduction of one and a half times of the
expenditure on in-house research and development incurred up to 31.3.2007 by a
company engaged in the business of bio-technology or manufacturing or production
of any drugs or pharmaceuticals etc. The benefit would now be available in respect
of such expenditure incurred up to 31.3.2012.
(Effective from A.Y.2008-09)
(b) Medical insurance premium paid by employer to insure the health of his
employees to qualify for deduction if paid by any mode other than cash
[Section 36(1)(ib)]
(i) Section 36(1)(ib) provides deduction in respect of premium paid by an
employer to keep in force an insurance on the health of his employees under a
scheme framed in this behalf by GIC or any other insurer.
(ii) So far, only premium paid by cheque qualified for deduction under this section.
Now, premium paid by any mode other than cash would qualify for deduction.
(Effective from A.Y.2008-09)
(c) Co-operative banks to be allowed deduction in respect of provision for bad
and doubtful debts [Section 36(1)(viia)]
Related amendment in section: 10(15)
(i) Under section 36(1)(viia), deduction of an amount not exceeding 7½% of the
total income (computed before making any deduction under the said clause
and Chapter VIA) and an amount not exceeding 10% of the aggregate average
advances made by the rural branches of a scheduled bank or a non-scheduled
bank computed in the prescribed manner is allowed in the computation of
income of such banks. “Scheduled bank”, as defined in the Explanation to
clause (viia) of section 36(1) specifically excludes a co-operative bank.
(ii) The deduction earlier allowable under section 80P in the case of a co-
operative society engaged in carrying on the business of banking (i.e. co-
operative banks) has been withdrawn from A.Y. 2007-08 except in the case of
a primary agricultural credit society or a primary co-operative agricultural and
rural development bank. This is for the purpose of treating the co-operative

16
 banks at par with other commercial banks, which do not enjoy similar benefits.
(iii) Since profits of co-operative banks are now taxable, the deduction in respect
of any provision for bad and doubtful debts allowable to other banks under
section 36(1)(viia) has been extended to co-operative banks also. However,
this deduction is not available to primary agricultural credit societies and
primary co-operative agricultural and rural development banks, since they are
still eligible for deduction under section 80P.
(iv) Consequently, the definition of scheduled bank in the Explanation to said
clause (viia) has been amended to include a co-operative bank.
(v) Section 43D provides that in the case of, inter alia, a scheduled bank, the
interest on bad and doubtful debts as per the guidelines of the RBI shall be
chargeable to tax in the year in which it is credited to the profit and loss
account or in the year in which it is actually received, whichever is earlier. This
provision would now be applicable to co-operative banks also, since the
Explanation to this section provides that “scheduled bank” shall have the same
meaning assigned to it in the Explanation to section 36(1)(viia).
(vi) Section 10(15) exempts, inter alia, interest payable by a scheduled bank to a
non-resident or to a person who is not ordinarily resident within the meaning of
section 6(6) on deposits in foreign currency where the acceptance of such
deposits by the bank is approved by the Reserve Bank of India.
(vii) However, in this case, exemption under section 10(15) is not available to a co-
operative bank. Therefore, scheduled banks, which so far had the same
meaning as defined in the Explanation to section 36(1)(viia), has now been
defined in section 10(15) itself to specifically exclude a co-operative bank.
(Effective from A.Y.2007-08)
(d) Restriction of deduction under section 36(1)(viii) relating to transfer to any
special reserve
(i) The existing clause (viii) of section 36(1) has been substituted with a new
clause mainly for making the ensuing amendments in the scheme for granting
the deduction on account of transfer to the special reserve by a specified entity
[specified in the table below (b)]–
(a) Deduction is now admissible also to a co-operative bank other than a
primary agricultural credit society and primary co-operative agricultural
and rural development bank;
(b) Deduction was earlier available to the extent of 40% of the profits derived
from such business of providing long-term finance carried to the reserve
account. Now, this deduction is restricted to a maximum of 20% of the
profits derived from eligible business. The eligible business for different

17
 entities specified are given in the table below –

Specified entity Eligible business

1. Financial Corporation specified in Business of providing long-
section 4A of the Companies Act, 1956 term finance for -
Financial corporation which is a public (i) industrial or agricultural
sector company development or development
of infrastructure facility in
Banking company
India; or
Co-operative bank (other than a primary
(ii) construction or purchase
agricultural credit society or a primary
of houses in India for
co-operative agricultural and rural
residential purposes.
development bank)
2. A housing finance company Business of providing long-
term finance for the
construction or purchase of
houses in India for
residential purposes.
3. Any other financial corporation including Business of providing long-
a public company term finance for
development of
infrastructure facility in India.

(ii) However, where the aggregate amount carried to such reserve account
exceeds twice the amount of paid up share capital and general reserve, no
deduction shall be allowed in respect of such excess. This provision remains
unchanged.
(Effective from A.Y.2008-09)
(e) Withdrawal of deduction in respect of contribution towards Exchange Risk
Administration Fund by public financial institutions [Section 36(1)(x)]
(i) Under section 36(1)(x), any sum paid by a public financial institution by way of
contribution towards any Exchange Risk Administration Fund (ERAF) set up by
public financial institutions, either jointly or separately, is allowed as deduction
in the computation of income of the payer institution.
(ii) ERAFs were set up under a scheme known as Exchange Risk Administration
Scheme (ERAS). The benefit of coverage of exchange risk under the Scheme
was available to borrowers of foreign currency loans provided by institutions
out of their external commercial borrowings.

18
 (iii) The foreign exchange scenario in India has undergone a sea change since the
launching of ERAS. There are several options available in the market for
borrowers to hedge their foreign exchange risk. Responding to changed
market dynamics ERAFs have been discontinued by the Industrial and
Development Bank of India (IDBI), Power Finance Corporation (PFC) and
Indian Renewable Energy Development Agency (IREDA). This clause has,
therefore, outlived its utility.
(iv) Therefore, the Finance Act 2007 has omitted this clause w.e.f. A.Y.2008-09.
(Effective from A.Y.2008-09)
(f) Central Government empowered to notify statutory corporations and body
corporates for the purpose of deduction under section 36(1)(xii)
(i) Section 36(1)(xii) provides for deduction of any expenditure (not being in the
nature of capital expenditure) incurred by a corporation or a body corporate
constituted or established by a Central, State or Provincial Act, for the objects
and purposes authorised by the said Acts.
(ii) It is possible that the objects and purposes as listed in the Acts may permit any
kind of expenditure, the allowability of which cannot be questioned in terms of
the existing provisions. Therefore, the Central Government has now been
empowered to notify the statutory corporations or bodies after studying the
objects and purposes enunciated in the Acts under which these statutory
corporations or bodies are established.
(iii) Accordingly, this section has been substituted to provide that the deduction
shall be allowed if such corporation or body corporate is notified by the Central
Government in the Official Gazette under the said clause, having regard to the
objects and purposes of the corresponding Central, State or Provincial Act.
(Effective from A.Y.2008-09)
(g) Deduction of contribution by a public financial institution to Credit guarantee
fund trust for small industries [Section 36(1)(xiv)]
(i) New clause (xiv) has been inserted in section 36(1) to provide for deduction of
any sum paid by a public financial institution by way of contribution to such
credit guarantee fund trust for small industries notified by the Central
Government in the Official Gazette.
(ii) Public financial institution has the meaning assigned to it in section 4A of the
Companies Act, 1956.
(Effective from A.Y.2008-09)
(h) Disallowance of entire expenditure in respect of which payments exceeding
Rs.20,000 have been made otherwise than by account payee cheque or
account payee bank draft [Section 40A(3)]
(i) Under section 40A(3), 20% of the expenditure in respect of which payment

19
 exceeding Rs.20,000 has been made by account payee cheque or account
payee bank draft is disallowed.
(ii) The disallowance has been raised from 20% to 100% of the expenditure. In
case of an assessee following mercantile system of accounting, if an
expenditure has been allowed as deduction in any previous year on due basis,
and payment exceeding Rs.20,000 has been made in the subsequent year
otherwise than by account payee cheque or account payee bank draft, then the
payment so made shall be deemed to be the income of the subsequent year in
which such payment has been made.
(iii) However, no disallowance would be made in such cases and under such
circumstances as may be prescribed, having regard to the nature and extent of
banking facilities available, considerations of business expediency and other
relevant factors.
(Effective from A.Y.2008-09)
(i) Method of computing deduction in the case of business reorganisation of co-
operative banks [New section 44DB]
Related amendments in sections: 47 & 49
(i) This section provides the manner in which the deduction under the following
sections are to be allowed in a case where business reorganisation of a co-
operative bank has taken place during the financial year –
(1) Section 32 (Depreciation);
(2) Section 35D (Amortisation of certain preliminary expenses);
(3) Section 35DD (Amortisation of expenses in case of amalgamation or
demerger);
(4) Section 35DDA (Amortisation of expenditure incurred under voluntary
retirement scheme).
(ii) Business reorganisation means the reorganisation of business involving the
amalgamation or demerger of a co-operative bank.
(iii) Co-operative bank shall have the meaning assigned to it in clause (cci) of
section 5 of the Banking Regulation Act, 1949 i.e., a primary co-operative
bank or Central Co-operative bank or a State co-operative bank.
(iv) Predecessor co-operative bank means the amalgamating co-operative bank or
the demerged co-operative bank, as the case may be.
(v) Successor co-operative bank means the amalgamated co-operative bank or
the resulting bank, as the case may be.
(vi) The amount of deduction allowable to the predecessor co-operative bank
under the above-mentioned sections has to be determined in accordance with
the following formula -

20
 B
A
C
A = the amount of deduction allowable to the predecessor co-operative bank if
the business reorganisation had not taken place;
B = the number of days comprised in the period beginning with the 1st day of
the financial year and ending on the day immediately preceding the date
of business reorganisation; and
C = the total number of days in the financial year in which the business
reorganisation has taken place.
(vii) The amount of deduction allowable to the successor co-operative bank under
the above-mentioned sections has to be determined in accordance with the
formula -
B
A
C
A = the amount of deduction allowable to the predecessor co-operative bank if
the business reorganisation had not taken place;
B = the number of days comprised in the period beginning with the date of
business reorganisation and ending on the last day of the financial year; and
C = the total number of days in the financial year in which the business
reorganisation has taken place.
For example, let us take a case where the deduction allowable under section
32 to the predecessor co-operative bank is, say, Rs.1,20,000 and the business
re-organisation took place on 1.11.06. Then, the deduction allowable to the
predecessor co-operative bank under section 32 would be Rs.70,356 i.e.
Rs.1,20,000 x 214 / 365. The deduction allowable to the successor co-
operative bank would be Rs.49,644 i.e. Rs.1,20,000 x 151/365.
(viii) In a case where an undertaking of the predecessor co-operative bank entitled
to the deduction under sections 35D, 35DD or 35DDA is transferred before the
expiry of the period specified therein to a successor co-operative bank on
account of business reorganisation, the provisions of section 35D, section
35DD or section 35DDA shall apply to the successor co-operative bank in the
financial years subsequent to the year of business reorganisation as they
would have applied to the predecessor co-operative bank, as if the business
reorganisation had not taken place.
(ix) Amalgamated co-operative bank means -
(1) a co-operative bank with which one or more amalgamating co-operative
banks merge; or

21
 (2) a co-operative bank formed as a result of merger of two or more
amalgamating co-operative banks;
(x) Amalgamating co-operative bank means -
(1) a co-operative bank which merges with another co-operative bank; or
(2) every co-operative bank merging to form a new co-operative bank.
(xi) Amalgamation means the merger of an amalgamating co-operative bank or
banks with an amalgamated co-operative bank, in such a manner that -
(1) all the assets and liabilities of the amalgamating co-operative bank or
banks immediately before the merger (other than the assets transferred,
by sale or distribution on winding up, to the amalgamated co-operative
bank) become the assets and liabilities of the amalgamated co-operative
bank;
(2) the members holding 75% or more voting rights in the amalgamating co-
operative bank become members of the amalgamated co-operative bank;
and
(3) the shareholders holding 75% or more in value of the shares in the
amalgamating co-operative bank (other than the shares held by the
amalgamated co-operative bank or its nominee or its subsidiary,
immediately before the merger) become shareholders of the
amalgamated co-operative bank.
(xii) Demerger means the transfer by a demerged co-operative bank of one or more
of its undertakings to any resulting co-operative bank, in such manner that
(1) all the assets and liabilities of the undertaking or undertakings
immediately before the transfer become the assets and liabilities of the
resulting co-operative bank;
(2) the assets and the liabilities are transferred to the resulting co-operative
bank at values (other than change in the value of assets consequent to
their revaluation) appearing in its books of account immediately before
the transfer;
(3) the resulting co-operative bank issues, in consideration of the transfer, its
membership to the members of the demerged co-operative bank on a
proportionate basis;
(4) the shareholders holding 75% or more in value of the shares in the
demerged co-operative bank (other than shares already held by the
resulting bank or its nominee or its subsidiary immediately before the
transfer), become shareholders of the resulting co-operative bank,
otherwise than as a result of the acquisition of the assets of the
demerged co-operative bank or any undertaking thereof by the resulting
co-operative bank;

22
 (5) the transfer of the undertaking is on a going concern basis; and
(6) the transfer is in accordance with the conditions specified by the Central
Government, by notification in the Official Gazette, having regard to the
necessity to ensure that the transfer is for genuine business purposes.
(xiii) Demerged co-operative bank means the co-operative bank whose undertaking
is transferred, pursuant to a demerger, to a resulting bank.
(xiv) Resulting co-operative bank means -
(1) one or more co-operative banks to which the undertaking of the
demerged co-operative bank is transferred in a demerger; or
(2) any co-operative bank formed as a result of demerger.
(xv) Consequential amendment has been made in section 47 to provide that any
transfer in a business reorganisation, of a capital asset by the predecessor co-
operative bank to the successor co-operative bank is not considered as a
transfer for charge of capital gains. Similarly, any transfer by a shareholder, in
a business reorganisation, of a capital asset being a share or shares held by
him in the predecessor co-operative bank would not be considered as a
transfer if it is made in consideration of the allotment to him of any share or
shares in the successor co-operative bank.
(xvi) Consequently, section 49 has been amended to provide that where the capital
asset became the property of the assessee by such mode as specified in (xv)
above, then the cost of acquisition of the asset shall be deemed to be the cost
for which the previous owner of the property acquired it, as increased by the
cost of any improvement of the assets incurred or borne by the previous owner
or the assessee, as the case may be.
(xvii) The cost of acquisition of shares in the amalgamated co-operative bank, which
became the property of the assessee by virtue of a transfer as a result of
business reorganisation shall be the cost of acquisition to him of the shares in
the amalgamating co-operative bank.
(xviii)Similarly, the cost of acquisition of the shares in the resulting co-operative
bank shall be the amount which bears to the cost of acquisition of shares held
by the assessee in the demerged co-operative bank, the same proportion as
the net book value of the assets transferred in a demerger bears to the net
worth of the demerged co-operative bank immediately before demerger i.e.,
B
Cost of acquisition of shares in the resulting co-operative bank = A
C
A = Cost of acquisition of shares held in the demerged co-operative bank
B = Net book value of the assets transferred in a demerger

23
 C = Net worth of the demerged co-operative bank i.e. the aggregate of the
paid up share capital and general reserves as appearing in the books of
account of the demerged company immediately before the demerger.
(xix) The cost of acquisition of the original shares held by the shareholder in the
demerged co-operative bank shall be deemed to have been reduced by the
amount as so arrived at in (xviii) above.
(Effective from A.Y.2008-09)

8. CAPITAL GAINS
(a) Transfer of drawings, paintings, sculptures etc. to attract capital gains tax
[Section 2(14)]
(i) Section 2(14) defines the term “Capital Asset”. “Personal effects”, other than
jewellery, were specifically excluded from the definition of the term “Capital
assets”.
(ii) Now, archaelogical collections, drawings, paintings, sculptures or any work of
art are included within the meaning of the term “Capital assets”. This
amendment has been effected by excluding the above from the ambit of
“personal effects”.
(Effective from A.Y.2008-09)
(b) Cost of acquisition of specified securities and sweat equity shares [Section
49(2AB)]
Related amendment in section: 2(42A), 115WB & 115WC
(i) Currently, the allotment of shares under eligible Employee Stock Option Plans
(ESOPs) does not attract tax liability either in the hands of the employee or
employer, even where the allotment of shares is at a price lower than the
market value of such shares.
(ii) The Finance Act, 2007 has brought ESOPs under the FBT net. FBT would be
leviable on the employer to the extent of concession given to the
employee/former employee while allotting any specified security (which
includes ESOPs) or sweat equity shares.
(iii) “Specified security” means the securities as defined in section 2(h) of the
Securities Contracts (Regulation) Act, 1956 and includes employees’ stock
option.
(iv) “Sweat equity shares” means equity shares issued by a company to its
employees or directors at a discount or for consideration other than cash for
providing know-how or making available rights in the nature of intellectual
property rights or value additions, by whatever name called.
(v) The value of fringe benefits would be the fair market value of the specified
security or sweat equity shares on the date on which the option vests with

24
 employee as reduced by the amount actually paid by, or recovered from the
employee in respect of such security or shares. Fair market value means the
value determined in accordance with the method prescribed by the CBDT.
(vi) Consequently, it has been provided that for the purpose of computing capital
gains in the hands of the employee at the time of sale of such
securities/shares by the employee, the cost of acquisition shall be the fair
market value which has been taken into account for the purpose of computing
the value of fringe benefits in the hands of the employer.
(vii) Further, the period of holding, in the case of a specified security or sweat
equity shares allotted or transferred, directly or indirectly, by the employer free
of cost or at concessional rate to his employees, including former employees,
shall be reckoned from the date of allotment or transfer of such specified
security or sweat equity shares. Such period of holding will determine whether
the asset transferred is a long-term capital asset or short-term capital asset.
(Effective from A.Y.2008-09)
(c) Quantum of exemption under section 54EC in respect of investment of capital
gains in long-term specified assets restricted
(i) Section 54EC provides exemption in respect of capital gains arising from
transfer of long-term capital assets if such capital gains are invested in long-
term specified assets, namely, bonds redeemable after three years issued by
NHAI or RECL, within a period of 6 months from the date of such transfer.
(ii) This exemption has been restricted, by limiting the maximum investment on or
after 1.4.2007 in such long-term specified assets to Rs.50 lakh during any
financial year.
(iii) Prior to amendment, "Long term specified assets" meant any bond redeemable
after three years and issued on or after 1st April, 2006 by National Highways
Authorities of India and Rural Electrification Corporation Ltd. Such bonds had
to be notified by the Central Government in the Official Gazette.
(iv) The requirement of notifying such bonds by the Central Government in the
Official Gazette has now been dispensed with.
(v) "Long term specified assets" is now defined to mean any bond redeemable
after three years and issued on or after 1st day of April, 2007 by the National
Highways Authorities of India or by the Rural Electrification Corporation Ltd.
This amendment is effective from 1st April, 2007.
9. INCOME FROM OTHER SOURCES
Income to include gifts received by an individual under section 56(2)(vi) [Section
2(24)(xiv)]
(i) Gifts received by an individual or HUF from any person was taxable under section
56(2)(v) under the head “Income from other sources” unless such gifts fell within

25
 the exempted categories specified therein. This provision was introduced by the
Finance (No.2) Act, 2004 w.e.f. 1.9.2004.
(ii) Thereafter, the Taxation Laws (Amendment) Act, 2006 restricted the applicability of
clause (v) of section 56(2) to gifts received up to 31.3.2006.
(iii) New clause (vi) was introduced to tax gifts received by an individual or HUF on or
after 1.4.2006. This clause provided an exemption if the aggregate value of gifts
received by such individual or HUF is not more than Rs.50,000. Further, gifts
received from the following persons are also fully exempt -
(i) any local authority; or
(ii) any fund or foundation or university of other educational institution or hospital
or other medical institution or any trust or institution referred to in section
10(23C); or
(iii) any trust or institution registered under section 12AA.

(iv) The definition of income under section 2(24) has now been amended to include any
sum referred to in section 56(2)(vi).

(Effective from A.Y.2007-08)

10. SET-OFF AND CARRY FORWARD OF LOSSES

(a) Scope of benefit under section 72A expanded

(i) Under section 72A, the benefit of carry forward of losses and unabsorbed
depreciation of amalgamating company is available to the amalgamated
company only if the amalgamating company is owning an industrial
undertaking or a ship or a hotel or in the case of amalgamation of banking
companies.
(ii) Now, the benefit has been extended to amalgamation of public sector
companies engaged in the business of operation of aircrafts.
(iii) This amendment would entitle the benefit of carry forward and set-off of
unabsorbed loss and depreciation in case of merger of Air India and Indian
Airlines.
(Effective from A.Y.2008-09)

(b) Provisions relating to carry forward and set off of accumulated loss and
unabsorbed depreciation allowance in business reorganisation of co-
operative banks [Section 72AB]

(i) Under this section, in a case where the amalgamation has taken place during
the previous year, set-off of accumulated loss and the unabsorbed depreciation
of the predecessor co-operative bank will be allowed in the hands of the
successor co-operative bank as if the amalgamation had not taken place. All

26
 the other provisions of this Act relating to set off and carry forward of loss and
allowance for depreciation would apply accordingly.
(ii) The benefit of carry-forward and set-off of accumulated losses under this
section would be allowed only on fulfillment of the following conditions -
(a) Conditions to be fulfilled by the predecessor co-operative bank
(1) It should have been engaged in the business of banking for three or
more years; and
(2) It has held at least three-fourths of the book value of fixed assets as
on the date of the business reorganisation, continuously for two
years prior to the date of business reorganisation;
(b) Conditions to be fulfilled by the successor co-operative bank
(1) It should hold at least three-fourths of the book value of fixed assets
of the predecessor co-operative bank acquired through business
reorganisation, continuously for a minimum period of five years
immediately succeeding the date of business reorganisation;
(2) It continues the business of the predecessor co-operative bank for a
minimum period of five years from the date of business
reorganisation; and
(3) It fulfils such other conditions as may be prescribed to ensure the
revival of the business of the predecessor co-operative bank or to
ensure that the business reorganisation is for genuine business
purpose.
(iii) The amount of set-off of the accumulated loss and unabsorbed depreciation
allowable to the resulting co-operative bank has to be calculated in the
following manner -
(1) In a case where the whole of the amount of such loss or unabsorbed
depreciation is directly relatable to the undertakings transferred to
the resulting co-operative bank - the entire accumulated loss or
unabsorbed depreciation of the demerged co-operative bank is allowed to
be set-off.
(2) In a case where the accumulated loss or unabsorbed depreciation is
not directly relatable to the undertakings transferred to the resulting
co-operative bank - the amount which bears the same proportion to the
accumulated loss or unabsorbed depreciation of the demerged co-
operative bank as the assets of the undertaking transferred to the
resulting co-operative bank bears to the assets of the demerged co-
operative bank.
For example, if A [Link] Bank is the demerged co-operative bank and B
Co. op Bank is the resulting co-operative bank, the amount of set-off of

27
 the accumulated loss and unabsorbed depreciation allowable to B Co-op.
bank would be –

Assets of the undertaking transferred

Unabsorbed business loss/depreciation to B Co - op bank

of A Co - Op bank Assets of A Co - op bank

(iv) The Central Government may specify other conditions by notification in the
Official Gazette as it considers necessary, to ensure that the business
reorganisation is for genuine business purposes.
(v) The period commencing from the beginning of the previous year and ending on
the date immediately preceding the date of business reorganisation, and the
period commencing from the date of such business reorganisation and ending
with the previous year shall be deemed to be two different previous years for
the purposes of set off and carry forward of loss and allowance for
depreciation.
For example, if the date on which business re-organisation took place is
1.11.06, then the period between 1.4.06 and 31.10.06 and the period between
1.11.06 and 31.3.07 would be deemed to be two different previous years for
the purposes of set-off and carry forward of unabsorbed business losses and
depreciation.
(vi) In a case where the conditions specified in (ii) above or notified under (iv)
above are not complied with, the set-off of accumulated loss or unabsorbed
depreciation allowed in any previous year to the successor co-operative bank
shall be deemed to be the income of the successor co-operative bank
chargeable to tax for the year in which the conditions are not complied with.
(vii) Accumulated loss means so much of loss of the amalgamating co-operative
bank or the demerged co-operative bank, as the case may be, under the head
“Profits and gains of business or profession” (not being a loss sustained in a
speculation business) which such amalgamating co-operative bank or the
demerged co-operative bank, would have been entitled to carry forward and
set-off under the provisions of section 72 as if the business reorganisation had
not taken place.
(viii) Unabsorbed depreciation means so much of the allowance for depreciation of
the amalgamating co-operative bank or the demerged co-operative bank, as
the case may be, which remains to be allowed and which would have been
allowed to such bank as if the business reorganisation had not taken place.
(Effective from A.Y.2008-09)

28
11. DEDUCTIONS FROM GROSS TOTAL INCOME
(a) Furnishing return of income on or before due date mandatory for claiming
exemption under sections 80-ID and 80-IE also [Section 80AC]
(i) Section 80AC stipulates compulsory filing of return of income on or before the
due date specified under section 139(1), as a pre-condition for availing benefit
under the following sections –
(1) Section 80-IA applicable to industrial undertakings or enterprises
engaged in infrastructure development, etc.
(2) Section 80-IAB applicable to undertakings or enterprises engaged in any
business of developing a special economic zone.
(3) Section 80-IB applicable to certain industrial undertakings other than
infrastructure development undertakings.
(4) Section 80-IC applicable to certain undertakings or enterprises in certain
special category States.
(ii) New section 80-ID has been inserted to provide a tax holiday in respect of
profits and gains from the business of hotel or business of building, owning
and operating a convention centre in NCR.
(iii) New section 80-IE has been inserted to provide a tax holiday in respect of
profits and gains derived by certain undertakings in North-Eastern States.
(iv) Consequently, section 80AC has been amended to make filing of return on or
before the due date mandatory for availing benefit of deduction under sections
80-ID and 80-IE also.
(Effective from A.Y.2008-09)
(b) Subscription to notified bonds of NABARD to qualify for deduction under
section 80C
Section 80C(2) has been amended to provide that the subscription to such bonds
issued by NABARD (as the Central Government may notify in the Official Gazette)
would qualify for deduction under section 80C w.e.f. A.Y.2008-09.
(Effective from A.Y.2008-09)
(c) Increased deduction for medical insurance premium [Section 80D]
(i) The maximum permissible deduction under section 80D in respect of medical
insurance premium has been increased from Rs.10,000 to Rs.15,000.
(ii) Further, for senior citizens, the maximum permissible deduction has been
increased from Rs.15,000 to Rs.20,000.
(iii) So far, only premium paid by cheque qualified for deduction under this section.
Now, premium paid by any mode other than cash would qualify for deduction.
(Effective from A.Y.2008-09)

29
(d) Deduction in respect of interest on loan for higher education of
spouse/children [Section 80E]
The deduction under section 80E available to an individual in respect of interest on
loan taken for his higher education has now been extended to also include interest
on such loan taken for higher education of his relative i.e. his or her spouse and
children.
(Effective from A.Y.2008-09)
(e) Widening of scope of benefit and extension of time limit under section 80-IA
(i) Benefit of deduction under section 80-IA has been extended to an undertaking
which lays and begins to operate a cross country natural gas distribution
network, including pipelines and storage facilities being an integral part of
such network by inserting clause (vi) in sub-section (4).
(ii) For claiming benefit under this clause, the undertaking should fulfill the
following conditions-
(1) it is owned by a company registered in India or a consortium of such
companies or a board or corporation established or constituted under any
Central or State Act;
(2) it is approved by the Petroleum and Natural Gas Regulatory Board;
(3) one-third of its total pipeline capacity is available for use on common
carrier basis by any person other than the assessee or an associated
person;
(4) it starts functioning on or after 1 st April, 2007.
(iii) Further, the conditions that it should not be formed by splitting up or
reconstruction of a business already in existence (except in circumstances
provided in section 33B) and it should not be formed by the transfer to a new
business of plant and machinery previously used for any purposes would apply
to these undertakings also.
(iv) An “associated person” in relation to the assessee means a person -
(i) who participates directly or indirectly or through one or more
intermediaries in the management or control or capital of the assessee;
(ii) who holds, directly or indirectly, shares carrying not less than twenty-six
per cent of the voting power in the assessee;
(iii) who appoints more than half of the Board of directors or members of the
governing board, or one or more executive directors or executive
members of the governing board of the assessee; or
(iv) who guarantees not less than 10% of the total borrowings of the
assessee.

30
 (v) Deduction under section 80-IA(4)(v) is available to an undertaking owned by
an Indian company and set up for reconstruction or revival of a power
generating plant if such undertaking begins to generate or transmit or distribute
power before 31.3.07. The time-limit has now been extended up to 31.3.08.
(vi) Navigational sea channels have been included within the scope of the term
“Infrastructure facility” for the purpose of deduction under section 80-IA(4)(i)
available to an enterprise carrying on the business of developing or operating
and maintaining or developing, operating and maintaining any infrastructure
facility fulfilling the conditions prescribed therein.
(Effective from A.Y.2008-09)
(f) Denial of transfer of benefit of deduction under section 80-IA to the
amalgamated/resulting company [Section 80-IA(12A)]
The transfer of benefit of deduction under section 80-IA to the
amalgamated/resulting company by virtue of sub-section (12) of section 80-IA would
not be available in respect of any enterprise or undertaking which is transferred in a
scheme of amalgamation or demerger effected on or after 1.4.2007.
(Effective from A.Y.2008-09)
(g) Works contractor not entitled to benefit of deduction under section 80 -IA
[Section 80-IA(13)]
The benefit provided under section 80-IA to an undertaking engaged in development
of infrastructure facility like highways and ports, industrial parks etc. would not be
available to a person who merely executes a works contract entered into with the
undertaking or enterprise referred to in that section.
(Effective retrospectively from A.Y.2000-01)
(h) Extension of time limit for industries in the State of Jammu and Kashmir for
the purpose of tax holiday under section 80-IB
(i) Section 80-IB(4) provides for deduction of 100% of profits and gains for the
first five assessment years and 25% (30% in case of a company) of profits and
gains for the next five assessment years in case of profits derived from an
industrial undertaking set up in the State of Jammu and Kashmir.
(ii) However, such industrial undertaking should begin to manufacture or produce
articles or things or operate a cold storage plant on or before 31.3.2007.
(iii) This deduction has now been extended to all such industrial undertakings set
up in Jammu and Kashmir which begin to manufacture or produce articles or
things or operate a cold storage plant on or before 31.3.2012.
(Effective from A.Y.2008-09)

31
(i) Tax holiday in respect of profits and gains from the business of hotel or
business of building, owning and operating a convention centre in NCR [New
section 80-ID]
Related amendment in section: 80A
(i) New section 80-ID has been inserted to provide a deduction of 100% of profits
and gains derived by an undertaking from the eligible business i.e. business of
hotel or business of building, owning and operating a convention centre in a
specified area, for a period of 5 consecutive assessment years beginning from
the year in which such hotel starts functioning or convention centre starts
operating on a commercial basis.
(ii) However, such hotel or convention centre should be constructed at any time
during the period from 1.4.2007 to 31.3.2010.
(iii) Specified area means the National Capital Territory of Delhi and the districts of
Faridabad, Gurgaon, Gautam Budh Nagar and Ghaziabad. This is to boost the
construction activity in NCR in view of the upcoming Common Wealth Games
in 2010.
(iv) “convention centre” means a building of a prescribed area comprising of
convention halls to be used for the purpose of holding conferences and
seminars, being of such size and number and having such other facilities and
amenities, as may be prescribed.
(v) “hotel” means a hotel of two-star, three-star or four-star category as classified
by the Central Government;
(vi) Such business should not be formed by the splitting up, or the reconstruction,
of a business already in existence. It should not be formed by the transfer to a
new business of a building previously used as a hotel or convention center.
Further, it should not be formed by the transfer to a new business of machinery
or plant previously used for any purpose exceeding 20% of the total value of
machinery and plant used in the business.
(vii) For this purpose, any machinery or plant which was used outside India by any
person other than the assessee shall not be regarded as machinery or plant
previously used for any purpose if the following conditions are fulfilled:
(a) such machinery or plant was not at any time 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 has been allowed in respect of
such machinery or plant to any person earlier.
(viii) The profits and gains from the eligible business should be computed as if such
eligible business were the only source of income of the assessee during the
relevant assessment year.

32
 (ix) The deduction under this section should not exceed the profits of such eligible
business of the undertaking.
(x) The deduction shall be allowed only if the accounts are audited by a Chartered
Accountant, who is also required to certify that the deduction has been
correctly claimed. Further, the audit report should be furnished along with the
return of income.
(xi) Further, where any amount of profits of an undertaking or enterprise is allowed
as deduction under this section, no deduction under any other provision of
Chapter VI-A or section 10AA is allowable in respect of such profits.
(xii) Where any goods or services held for the purposes of eligible business are
transferred to any other business carried on by the assessee or, where any
goods held for any other business are transferred to the eligible business and,
in either case, if the consideration for such transfer as recorded in the
accounts of the eligible business does not correspond to the market value
thereof, then the profits eligible for deduction shall be computed by adopting
market value for such goods or services. In case of exceptional difficulty in
this regard, the profits shall be computed by the Assessing Officer on a
reasonable basis.
(xiii) Similarly, where due to the close connection between the assessee and the
other person or for any other reason, it appears to the Assessing Officer that
the profits of eligible business is increased to more than the ordinary profits,
the Assessing Officer shall compute the amount of profits on a reasonable
basis for allowing the deduction.
(xiv) The Central Government may notify that the benefit conferred by this section
shall not apply to any class of undertaking with effect from any specified date.
(xv) Consequent to insertion of this section, section 80A has been amended to
provide that where in computing the total income of an AOP or a BOI, any
deduction is admissible under, inter-alia, section 80-ID, no such deduction
shall be made in computing the total income of a member of the AOP or BOI in
relation to the share of such member in the income of the AOP or BOI.
(Effective from A.Y.2008-09)
(j) Tax holiday in respect of profits and gains from eligible business of certain
undertakings in North-Eastern States [New Section 80-IE]
Related amendment in sections: 80A & 80-IC
(i) This section provides incentive to an undertaking which has during the period
between 1st April, 2007 and 1st April, 2017, begun or begins, in any of the
North-Eastern States (i.e., the States of Arunachal Pradesh, Assam, Manipur,
Meghalaya, Mizoram, Nagaland, Sikkim and Tripura) -
(1) to manufacture or produce any eligible article or thing;

33
 (2) to undertake substantial expansion to manufacture or produce any
eligible article or thing;
(3) to carry on any eligible business.
(ii) Eligible article or thing means the article or thing other than the following -
(a) goods falling under Chapter 24 of the First Schedule to the Central Excise
Tariff Act, 1985 which pertains to tobacco and manufactured tobacco
substitutes;
(b) pan masala as covered under Chapter 21 of the First Schedule to the
Central Excise Tariff Act, 1985;
(c) plastic carry bags of less than 20 microns; and
(d) goods falling under Chapter 27 of the First Schedule to the Central Excise
Tariff Act, 1985 produced by petroleum oil or gas refineries.
(iii) Substantial expansion means increase in the investment in the plant and
machinery by at least 25% of the book value of plant and machinery (before
taking depreciation in any year), as on the first day of the previous year in
which the substantial expansion is undertaken.
(iv) Eligible business means the business of -
(a) hotel (not below two star category);
(b) adventure and leisure sports including ropeways;
(c) providing medical and health services in the nature of nursing home with
a minimum capacity of 25 beds;
(d) running an old-age home;
(e) operating vocational training institute for hotel management, catering and
food craft, entrepreneurship development, nursing and para-medical, civil
aviation related training, fashion designing and industrial training;
(f) running information technology related training centre;
(g) manufacturing of information technology hardware; and
(h) Bio-technology.
(v) Where the gross total income of an assessee includes any profits and gains
derived by such an undertaking, a deduction of 100% of the profits and gains
derived from such business for 10 consecutive assessment years commencing
with the initial assessment year shall be allowed in computing the total income
of the assessee. Initial assessment year means the assessment year relevant
to the previous year in which the undertaking begins to manufacture or
produce articles or things, or completes substantial expansion.
(vi) However, the following conditions have to be fulfilled by the undertaking for
claiming benefit of deduction under this section -

34
 (1) It should not be formed by splitting up, or the reconstruction, of a
business already in existence (except in circumstances provided in
section 33B)
(2) It should not be formed by the transfer to a new business of machinery or
plant previously used for any purpose exceeding 20% of the total value of
machinery and plant used in the business.
(vii) For this purpose, any machinery or plant which was used outside India by any
person other than the assessee shall not be regarded as machinery or plant
previously used for any purpose if the following conditions are fulfilled:
(a) such machinery or plant was not at any time 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 has been allowed in respect of
such machinery or plant to any person earlier.
(viii) Where deduction has been allowed under this section in computing the total
income of the assessee, no deduction shall be allowed under any other section
contained in Chapter VIA or in section 10A or section 10AA or section 10B or
section 10BA, in relation to the profits and gains of the undertaking.
(ix) Further, no deduction shall be allowed to any undertaking under this section,
where the total period of deduction inclusive of the period of deduction under
this section, or under section 80-IC or under the second proviso to sub-section
(4) of section 80-IB or under section 10C, as the case may be, exceeds 10
assessment years.
(x) The profits and gains from the eligible business should be computed as if such
eligible business were the only source of income of the assessee during the
relevant assessment year.
(xi) The deduction under this section should not exceed the profits of such eligible
business of the undertaking.
(xii) The deduction shall be allowed only if the accounts are audited by a Chartered
Accountant, who is also required to certify that the deduction has been
correctly claimed. Further, the audit report should be furnished along with the
return of income.
(xiii) Where any goods or services held for the purposes of eligible business are
transferred to any other business carried on by the assessee or, where any
goods held for any other business are transferred to the eligible business and,
in either case, if the consideration for such transfer as recorded in the
accounts of the eligible business does not correspond to the market value
thereof, then the profits eligible for deduction shall be computed by adopting
market value for such goods or services. In case of exceptional difficulty in
this regard, the profits shall be computed by the Assessing Officer on a

35
 reasonable basis.
(xiv) Similarly, where due to the close connection between the assessee and the
other person or for any other reason, it appears to the Assessing Officer that
the profits of eligible business is increased to more than the ordinary profits,
the Assessing Officer shall compute the amount of profits on a reasonable
basis for allowing the deduction.
(xv) The Central Government may notify that the benefit conferred by this section
shall not apply to any class of undertaking with effect from any specified date.
(xvi) Where any undertaking of an Indian company which is entitled to the deduction
under this section is transferred before the expiry of the period of deduction to
another Indian company in a scheme of amalgamation or demerger, no
deduction shall be admissible to the amalgamating or demerged company for
the previous year in which the amalgamation or demerger takes place and the
amalgamated or the resulting company shall be entitled to the deduction as if
the amalgamation or demerger had not taken place.
(xvii) Consequent to insertion of this section, amendment has been made in section
80-IC(2) restricting the period upto which the benefit of deduction therein is
available in respect of income derived from an eligible undertaking set up in
the State of Sikkim. Such benefit was available in respect of any undertaking
or enterprise which has begun to manufacture or produce eligible articles or
things or undertake substantial expansion during the period between
23.12.2002 and 31.3.2012 in the State of Sikkim. Now, the terminal date
under section 80-IC has been restricted to 31.3.2007, in view of insertion of
section 80-IE.
(xviii)Further, section 80A has been amended to provide that where in computing
the total income of an AOP or a BOI, any deduction is admissible under, inter-
alia, section 80-IE, no such deduction shall be made in computing the total
income of a member of the AOP or BOI in relation to the share of such
member in the income of the AOP or BOI.
(Effective from A.Y.2008-09)
12. TRANSFER PRICING
Order of Transfer Pricing Officer now binding on the Assessing Officer [Section
92CA]
Related amendment in sections: 153 & 153B
(i) The order of the Transfer Pricing Officer determining the arm’s length price of an
international transaction is now binding on the Assessing Officer and the Assessing
Officer shall proceed to compute the total income in conformity with the arm’s length
price determined by the Transfer Pricing Officer [New sub-section (4)].
(ii) In order to provide sufficient time to the Assessing Officer to complete the
assessment in a case where reference is made to the Transfer Pricing Officer, new

36
 sub-section (3A) has been inserted in section 92CA to provide for determination of
arm’s length price of international transactions by the Transfer Pricing Officer at
least 60 days before the expiry of the time limit under section 153 or section 153B
for making an order of assessment by the Assessing Officer. This provision would
apply in a case where reference is made on or after 1.6.2007 or in a case where
reference is made before that date but the order of the Transfer Pricing Officer is
pending on that date [New sub-section (3A)]
(iii) Consequently, the time limit for completion of assessment/re-assessment where a
reference is made to the Transfer Pricing Officer under section 92CA(1) (on or after
1.6.2007 or before that date but the order is yet to be passed as on that date) has
been increased by 12 months i.e.
Section Particulars Time-limit
Second Completion of assessment under 33 months from the end of
Proviso to section 143 or section 144 for the the assessment year in
section A.Y. 2005-06 onwards which the income was first
153(1) assessable.
Third proviso Completion of assessment/ 21 months from the end of
to section reassessment/recomputation the financial year in which
153(2) under section 147 if notice is notice under section 148 is
served under section 148 on or served
after April 1, 2006
Third proviso Fresh assessment in pursuance of 21 months from the end of
to section an order under section 254 the financial year in which
153(2A) (received by the Chief such order is received by the
Commissioner / Commissioner on Chief Commissioner /
or after April 1, 2006) or an order Commissioner or passed by
passed by the Commissioner the Commissioner, as the
under sections 263 and 264 on or case may be.
after April 1, 2006
Third Completion of assessment in 33 months from the end of
Proviso to cases where the last of the the financial year in which
section authorizations for search under the last of the authorizations
153B(1) section 132 or for requisition for search under section 132
under section 132A was executed or requisition under section
during F.Y.2005-06 or thereafter. 132A was executed

37
 Fourth Completion of assessment/ 33 months from the end of
Proviso to reassessment in case of other the financial year in which
section person referred to in section 153C the last of the authorizations
153B(1) in cases where the last of the for search under section 132
authorizations for search under or for requisition under
section 132 or for requisition section 132A was executed
under section 132A was executed or 21 months from the end of
during F.Y.2005-06 or thereafter. the financial year in which
the books of account or
documents or assets seized
or requisitioned are handed
over under section 153C to
the Assessing Officer having
jurisdiction over such other
person, whichever is later.

(Effective from 1.6.2007)

13. ASSESSMENT OF VARIOUS ENTITIES

(a) Levy of minimum alternate tax (MAT) on units claiming exemption under
section 10A and 10B also [Section 115JB]
(i) Income of units established in Free Trade Zones or as Software Technology
Park Units or as 100% export oriented units enjoyed tax exemption under
sections 10A and 10B and were also exempt from applicability of MAT.
(ii) Now, MAT is leviable on income eligible for deduction under section 10A and
10B also.
(iii) These companies will now be hit by the MAT provisions, under which they
would have to pay a tax of 10% of book profits plus surcharge 10%, if
applicable, plus education cess @ 2% plus secondary and higher education
cess @ 1%. The effective rate would be 11.33% of book profit, if the
company’s total income is higher than Rs.1 crore and 10.30% if the total
income is up to Rs.1 crore.
(Effective from A.Y.2008-09)
(b) Increase in rate of tax on distributed profits [Sections 115-O & 115-R]
(i) The Finance Act, 2007 has raised the rate of tax on distributed profits from
12.5% to 15% in respect of any amount declared, distributed or paid by a
domestic company by way of dividends [Section 115-O].
(ii) The rate of tax on distributed profits in respect of income distributed by a
money market mutual fund or a liquid fund has been increased to 25% [Section
115-R]

38
 (iii) The rate of tax on distributed profits is summarized in the table below -
Dividend / Income distributed by Rate of tax
(i) A domestic company 15%
(ii) Money market mutual funds or liquid funds 25%
(iii) Other funds -
on income distributed to individuals/HUFs 12.5%
on income distributed to any other person 20%

(iv) Money market mutual fund means a means a money market mutual fund as
defined in sub-clause (p) of clause 2 of the Securities and Exchange Board of
India (Mutual Funds) Regulations, 1996 i.e. it means a scheme of a mutual
fund which has been set up with the objective of investing exclusively in money
market instruments.

(v) Liquid fund means a scheme or plan of a mutual fund which is classified by the
Securities and Exchange Board of India as a liquid fund in accordance with the
guidelines issued by it in this behalf under the Securities and Exchange Board
of India Act, 1992 or regulations made thereunder.
(Effective from 1.4.2007)

14. INCOME-TAX ON FRINGE BENEFITS

(a) FBT exemption extended to expenditure on advertisement by way of display of

products and distribution of free samples [Section 115WB(2)(D)]
(i) Under the proviso to clause (D) of section 115WB(2), certain expenditure on
advertisement have been excluded from “Sales promotion including publicity”.
The Finance Act, 2006 had excluded expenditure on distribution of free
samples of medicines or of medical equipment to doctors from “sales
promotion including publicity” and consequently, such expenditure is exempt
from levy of FBT.
(ii) The Finance Act, 2007 now excludes any expenditure on distribution of
samples free of cost or at a concessional rate from “Sales promotion including
publicity”. Therefore, the exemption is now not restricted to only distribution of
free medical samples but is extended to distribution of all samples.
(iii) Further, expenditure on advertisement by way of display of products have also
been excluded from “Sales promotion including publicity” and hence exempt
from levy of FBT.
(Effective from A.Y.2008-09)

39
(b) FBT liability extended to Stock Options also [Section 115WB(1)& 115WC(1)]
Related amendment in sections: 17(2)(iii) & 115WKA
(i) A new clause (d) has been inserted in section 115WB(1) to provide for levy of
FBT on the value of any specified security or sweat equity shares allotted or
transferred, directly or indirectly, by the employer free of cost or at
concessional rate to his employees, including former employees.
(ii) Specified security means “securities” as defined in section 2(h) of the
Securities Contracts (Regulation) Act, 1956 and includes employees' stock
option.
(iii) Sweat equity shares means equity shares issued by a company to its
employees or directors at a discount or for consideration other than cash for
providing know-how or making available rights in the nature of intellectual
property rights or value additions, by whatever name called.
(iv) A new clause (ba) has been inserted in section 115WC(1), in order to prescribe
the value of such specified security or sweat equity shares.
(v) The value of specified security or sweat equity shares, for the purpose of levy
of FBT, shall be the fair market value of such security or shares on the date on
which the option vests with the employee, as reduced by any amount actually
paid by, or recovered from, the employee in respect of such security or shares.
(vi) The fair market value means the value determined in accordance with the
method as may be prescribed by the CBDT.
(vii) “Option” means a right but not an obligation granted to an employee to apply
for the specified security or sweat equity shares at a pre-determined price.
(viii) Consequently, the proviso to section 17(2)(iii) has been omitted. So far, the
value of any benefit provided by a company free of cost or at a concessional
rate to its employees by way of allotment of shares, debentures or warrants,
directly or indirectly under any Employees' Stock Option Plan or Scheme of the
company offered to such employees was an exempt perquisite. Now, it is a
taxable fringe benefit.
(ix) A new section 115WKA has been inserted for the purpose of enabling the
employer to recover the FBT in respect of any specified security or sweat
equity shares from the employees. If sweat equity shares are allotted or
transferred, directly or indirectly, by an employer on or after 1.4.2007, it shall
be lawful for the employer to vary the agreement or scheme under which such
specified security or sweat equity shares has been allotted or transferred. The
agreement or scheme can be modified so as to recover from the employee, the
FBT, to the extent to which such employer is liable to pay the FBT in relation to
the value of fringe benefits provided to the employee and determined in the
manner specified in (v) above.
(Effective from A.Y.2008-09)

40
(c) Advance tax liability in respect of fringe benefits [Section 115WJ(2) to (5)]
(i) Under section 115WJ(2), quarterly payment of advance fringe benefits tax,
equal to 30% of the value of fringe benefits paid or payable during each
quarter, is required to be made by an assessee, on or before the 15 th day of
the month following such quarter. The advance tax payable for the quarter
ending on 31st March is payable by 15th of March. This was causing genuine
hardship to the assesses since specific computations were required to be
made for each quarter. Further, the FBT return also required information on a
quarterly basis.

(ii) The existing sub-section (2) of section 115WJ has been substituted to remove
this difficulty. The new sub-section (2) requires payment of advance tax on the
value of fringe benefits paid or payable in a financial year in the same manner
as payment of advance income-tax. Accordingly, advance FBT will be payable
in four installments in the case of companies in the following manner:
Due date of installment Advance tax payable
On or before 15 th June Not less than 15% of such advance tax.
On or before 15th September Not less than 45% of such advance tax, as
reduced by the amount, if any, paid in the
earlier installment.
On or before 15 th December Not less than 75% of such advance tax, as
reduced by the amount or amounts, if any, paid
in the earlier installment or installments.
On or before the 15 th March The whole amount of such advance tax as
reduced by the amount or amounts, if any, paid
in the earlier installment or installments.

Similarly, non-corporate assessees shall be liable to pay advance tax on the

value of fringe benefits paid or payable in a financial year in three installments
in the following manner -
Due date of installment Advance tax payable
On or before the 15 th September Not less than 30% of such advance tax.
On or before the 15 th December Not less than 60% of such advance tax,
as reduced by the amount, if any, paid
in the earlier installment.
On or before the 15 th March The whole amount of such advance tax
as reduced by the amount or amounts,
if any, paid in the earlier installment or
installments.

41
 Therefore, computation of value of fringe benefits on a quarterly basis is no
longer required for payment of advance FBT.
(iii) Interest for deferment of advance FBT in the case of corporate assessees
[Section 115WJ(3)]
In case of corporate assessees, simple interest (calculated as per the table
given below) is payable in case of failure to pay advance tax before the due
date of any installment or shortfall in the advance tax paid vis-à-vis advance
tax due in any installment -
Rate of Interest Amount on which interest is payable
(1) 1% per month for 3 months 15% of advance tax payable minus
advance tax paid on or before 15 th June.
(2) 1% per month for 3 months 45% of advance tax payable minus
advance tax paid on or before 15 th
September.
(3) 1% per month for 3 months 75% of advance tax payable minus
advance tax paid on or before 15 th
December.
(4) 1% 100% of advance tax payable minus
advance tax paid on or before 15 th March.

(iv) Interest for deferment of advance FBT in the case of non-corporate

assessees [Section 115WJ(4)]

In the case of non-corporate assesses, simple interest (calculated as per the

table given below) is payable in case of failure to pay advance tax before the
due date of any installment or shortfall in the advance tax paid vis-à-vis
advance tax due in any installment -
Rate of Interest Amount on which interest is payable
(1) 1% per month for 3 months 30% of advance tax payable minus
advance tax paid on or before 15 th
September.
(3) 1% per month for 3 months 60% of advance tax payable minus
advance tax paid on or before 15 th
December.
(4) 1% 100% of advance tax payable minus
advance tax paid on or before 15 th March.

(v) Where an assessee has failed to pay the advance tax payable by him during a
financial year or where the advance tax paid by him is less than 90% of the tax

42
 assessed under sections 115WE, 115WF or 115WG, the assessee shall be
liable to pay simple interest @1% per month for every month or part of a month,
from 1st April next following such financial year to the date of assessment of tax
under sections 115WE or 115WF or 115WG [Section 115WJ (5)].
(Effective from 1.6.2007)

15. INCOME-TAX AUTHORITIES

(a) Additional Commissioner and Additional Director may exercise the powers /
perform the functions conferred on or assigned to the Assessing Officer
[Section 120(4]
(i) Under clause (b) of section 120(4), the CBDT can empower the Director
General or Chief Commissioner or Commissioner to issue orders in writing to
the effect that the powers and functions conferred on or assigned to the
Assessing Officer can be exercised or performed by a Joint Commissioner or
Joint Director.
(ii) This clause has been amended to provide that the powers and functions
conferred on or assigned to the Assessing Officer may also be exercised or
performed by an Additional Commissioner and Additional Director, on issue of
order in writing to that effect by the Director General, Chief Commissioner or
Commissioner.
(iii) This amendment takes effect retrospectively from 1st June, 1994 (for inclusion
of Additional Commissioner) and 1 st October 1996 (for inclusion of Additional
Director).
(b) Change of method for calculation of interest from per annum basis to per
month basis [Section 132B(4), 201(1A), 245D, Rules 60(1)(a) and 68A(3) of the
Second Schedule]
(i) According to section 132B(4)(a), the Central Government shall pay simple
interest at the rate of 6% per annum on the excess of money seized and the
sale proceeds arising on the sale of assets seized over the amount required to
meet the liabilities i.e. tax, interest and penalty.
(ii) Section 201(1A) provides that the person who has not deducted the whole or
any part of the tax or after deduction has failed to pay the tax as required by or
under the Act, shall be liable to pay simple interest at the rate of 12% 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.
(iii) Section 245D(6A) provides for levy of interest @15% per annum in case of
failure by the assessee to pay the additional amount of income-tax within a
period of 35 days of receipt of copy of order of the Settlement Commission.
Similarly, section 22D(6A) of the Wealth-tax Act provides for levy of interest
@15% per annum in case of failure by the assessee to pay the additional

43
 amount of wealth-tax within a period of 35 days of receipt of copy of order of
the Settlement Commission.
(iv) As per Rule 60(1)(a) of the Second Schedule requires the defaulter or any
person, whose interests are affected by the sale of immovable property in
execution of a certificate, to deposit the amount specified in the proclamation
of sale along with interest @ 15%.
(v) As per Rule 68A(3) of the Second Schedule relating to acceptance of property
in satisfaction of the amount due from the defaulter, the Central Government is
required to pay simple interest @ 6% p.a., if the Assessing Officer fails to pay
to the defaulter the excess of the price of the property over the amount due
within a period of 3 months from the date of delivery of possession of the
property.
(vi) Under sections 220(2), 234A, 234B, 234C, 234D and 244A, interest is
chargeable on per month basis. Accordingly, the following sections/rules to the
second schedule have now been amended to change the method of calculation
of interest to per month basis from the existing per annum basis –
Sl. No. Section / Rule of Interest on per Interest on per
Second Schedule annum basis month of part of a
month basis
(1) Section 132B(4)(a) 6% ½%
(2) Section 201(1A) 12% 1%
(3) Section 245D (6A) 15% 1¼%
(4) Rule 60(1)(a) 15% 1¼%
(5) Rule 68A(3) 6% ½%

Similar amendment has been made in section 22(6A) of the Wealth-tax Act
providing for calculation of interest @1¼% for every month or part of the
month in case of failure by the assessee to pay the additional amount of
wealth-tax within a period of 35 days of receipt of copy of order of the
Settlement Commission.
(vii) The difference between calculation of interest on per-annum basis and per-
month basis lies in the procedure followed for calculation of interest under
these two methods. When interest is calculated on per annum basis, any
fraction of a month is ignored and when interest is calculated for every month
or part of a month basis, any fraction of a month is deemed a full month and
interest is calculated for the full month. This principle has been followed in
framing rule 119A which provides for procedure for calculation of interest on
annual or monthly basis.

44
 (viii) The amendments regarding change of method of calculation of interest to
monthly basis will be applicable in respect of interest chargeable or payable for
the period commencing on or after 1st April, 2008. For any period ending on or
before 31st March, 2008, interest shall continue to be charged or paid on per
annum basis under the aforementioned sections and rules to the Second
Schedule which have been amended.
(ix) Further, in a case where interest is chargeable or payable in respect of both
the periods, that is, the period before 31st March, 2008 and the period
thereafter, interest shall be calculated on per annum basis upto 31.3.2008 and
per month basis for so much of such period as falls after that date.
(Effective from 1.4.2008)

16. ASSESSMENT PROCEDURE

(a) Power of CBDT to dispense with furnishing documents etc. with the return
and filing of return in electronic form [Sections 139C & 139D]
Related amendment in section: 295(2) & 139(9)
(i) The Finance Act, 2006 inserted a proviso to section 139(9) empowering the
Board to frame rules to relax the requirement of filing of documents along with
the return of income for any class or classes of persons.
(ii) The Finance Act, 2007 has now introduced new sections 139C and 139D,
wherein wide ranging powers, including the power to frame rules to dispense
with furnishing documents etc. with the return, have been given to the CBDT
for implementing the scheme of filing Electronic Returns.
(iii) Since the scheme, including notifying new forms for filing electronic returns for
corporate assesses was already implemented during the earlier period, these
provisions have been introduced with retrospective effect from 1.6.2006.
Consequently, the proviso to section 139(9) has been omitted with
retrospective effect from 1.6.2006.
(iv) Section 139C provides that the CBDT may make rules providing for a class or
classes of persons who may not be required to furnish documents, statements,
receipts, certificate, reports of audit or any other documents, which are
otherwise required to be furnished along with the return under any other
provisions of this Act.
(v) However, on demand, the said documents, statements, receipts, certificate,
reports of audit or any other documents have to be produced before the
Assessing Officer.
(vi) Section 139D empowers the CBDT to make rules providing for –
(a) the class or classes of persons who shall be required to furnish the return
of income in electronic form;

45
 (b) the form and the manner in which the return of income in electronic form
may be furnished;
(c) the documents, statements, receipts, certificates or audited reports which
may not be furnished along with the return of income in electronic form
but have to be produced before the Assessing Officer on demand;
(d) the computer resource or the electronic record to which the return of
income in electronic form may be transmitted.
(vii) Consequentially, new clauses (eeba) and (eebb) have been inserted in section
295(2), which provides for rule making powers of the CBDT.
(viii) The CBDT is empowered to make rules for carrying out the powers of the Act.
Such rules may also provide for -
(1) the documents, statements, receipts, certificates or audited reports which
may not be furnished along with the return but shall be produced before the
Assessing Officer on demand under section 139C [New clause (eeba) of
section 295(2)];
(2) the class or classes of persons who shall be required to furnish the return
of income in electronic form; the form and the manner of furnishing the
said return in electronic form; documents, statements, receipts,
certificates or reports which shall not be furnished with the return in
electronic form and the computer resource or electronic record to which
such return may be transmitted under section 139D [New clause (eebb) of
section 295(2)].
(Effective from 1.6.2006)
(b) Assessee to be given an opportunity of being heard before issuing directions
for special audit [Section 142(2A)]
(i) There is currently no specific requirement that the Assessing Officer should
give the assessee an opportunity of being heard, before directing special audit
under section 142(2A). The Supreme Court in Rajesh Kumar & Ors. v. DCIT
(2006) 287 ITR 91 observed that the order under section 142(2A) is a quasi
judicial order. Therefore, the principles of natural justice have to be applied
and the assessee has to be given an opportunity of being heard before
directing the special audit. The principles of natural justice are based on two
principles, namely, (i) nobody shall be condemned unheard; (ii) nobody shall
be a judge of his own cause. Once it is held that the assessee suffers civil
consequences and any order passed would be prejudicial to him, the principles
of natural justice must be held to be implicit. If the principles of natural justice
were to be excluded, the Parliament could have said so expressly.
(ii) Accordingly, to give effect to the observation of the Supreme Court, the
Finance Act, 2007 has provided that the Assessing Officer is now required to
give the assessee an opportunity of being heard before issuing directions for
special audit under section 142(2A).

46
 (iii) Further, where the direction for special audit is issued by the Assessing Officer
on or after 1.6.2007, the expenses of, and incidental to, such special audit,
including remuneration of the Accountant, shall be determined by the Chief
Commissioner or Commissioner in accordance with the prescribed guidelines.
The expenses so determined shall be paid by the Central Government.
[Proviso to section 142(2D)]
(Effective from 1.6.2007)
(c) Prior approval of Joint Commissioner required for assessment or
reassessment in respect of search cases [New section 153D)]
New section 153D has been inserted to provide that assessment or reassessment
of search cases in respect of each assessment year referred to in section 153A(b)
or the assessment year referred to in 153B(1)(b) shall not be made by an Assessing
Officer below the rank of Joint Commissioner without the previous approval of the
Joint Commissioner.
Note -
(i) Section 153A(b) provides for assessment or reassessment of total income of
each of the six assessment years immediately preceding the assessment year
relevant to the previous year in which the search was conducted under section
132 or requisition was made under section 132A.
(ii) Section 153B(1)(b) provides the time limit for completion of assessment in
respect of the assessment year relevant to the previous year in which the search
is conducted under section 132 or requisition is made under section 132A.
(Effective from 1.6.2007)
(d) Time limit for completion of assessment of shipping business of non-
residents [Section 172]
(i) Section 172 provides for presumptive taxation at 7½% of the freight paid or
payable in case of shipping business of a non-resident.
(ii) Such income is chargeable to tax in the same previous year in which it is
earned.
(iii) However, the time limit for completion of assessment in such cases has not
been provided in the Act.
(iv) The Finance Act, 2007 now provides a time limit of 9 months for completing
such assessments by inserting sub-section (4A) in section 172.
(v) The period of 9 months is reckoned from the end of the financial year in which
the return under section 172(3) is furnished.
(vi) However, in respect of returns filed on or before 1.4.2007, assessments are
required to be completed on or before 31.12.2008
(Effective from A.Y.2007-08)

47
17. COLLECTION AND RECOVERY OF TAX
The amendments relating to provisions of tax deduction and tax collection at source have
been presented below in tabular form -
Section Nature of Existing provision Amendment by the Finance
payment Act, 2007
193 Interest Interest payable on these Tax has to be deducted at
on bonds is taxable under the source in respect of 8% Savings
Clause (iv)
Govern- Income-tax Act. However, (Taxable) Bonds, 2003, if
of the
ment TDS provisions are not interest payable exceeds
proviso
securities attracted in respect of Rs.10,000 during the financial
interest payable on any year.
security of the Central
Government or State
Government.
194A(3)(i) Interest The threshold limit for tax This limit is increased to
other than deduction in respect of Rs.10,000 in respect of interest
“Interest interest payable under paid on –
on section 194A(3)(i) is
(i) time deposits with a banking
securities” Rs.5,000.
company;
(ii) time deposits with a co-
operative society engaged in
banking business; and
(iii) deposits with post office
under notified schemes.
In all other cases covered under
section 194A(3)(i), the limit
would continue to be Rs.5,000.
Consequential amendment has
been made in section 206A(1)
requiring furnishing of quarterly
return in respect of payment of
interest to residents without
deduction of tax. Interest
payments upto Rs.10,000 to
residents in respect of the above
category of deposits would be
covered under section 206A(1).

48
194C(1) Payment TDS provisions are not Scope of TDS provisions
to attracted in respect of expanded w.e.f. 1.6.2007 to
contractors payments made by an cover contract payments by
individual or a HUF to a specified individuals/HUFs also.
contractor.
Payments made by Individuals/
HUFs to a contractor to attract
TDS if their total sales/turnover
exceeds Rs.40 lakhs (in case of
business) and gross receipts
exceed Rs.10 lakhs (in case of
profession) in the immediately
preceding financial year.
However, relief has been provided
in respect of payments made by
individuals/HUFs to a contractor
exclusively for personal purposes.
194H Commiss- Tax to be deducted at (i) The rate of TDS on
ion or source in respect of commission and brokerage has
brokerage payment of commission or been increased from 5% to 10%
brokerage at 5%. w.e.f. 1.6.2007.
(ii) However, there would be no
requirement to deduct tax at
source on commission or
brokerage payments by BSNL or
MTNL to their public call office
(PCO) franchisees.
194-I Rent Rent includes payment for The rate of tax deduction has
use of plant, machinery been reduced to 10% w.e.f.
and equipment. Such rent 1.6.2007 in respect of rental
is subject to tax deduction payments for use of plant,
at 15% if the payee is an machinery and equipment,
individual/HUF and 20% in irrespective of whether the
other cases. payee is an individual/HUF, firm,
company or any other person.
194J Fees for Tax has to be deducted at This rate has been increased to
profession- source @5% in respect of 10% w.e.f. 1.6.2007.
al or payment of fees for
technical professional services or
services fees for technical services
to a resident.

49
197A(1C) - Relief from TDS provisions Omission of reference to section
in case of individual 88B, consequent to omission of
residents of the age of 65 this section by the Finance Act,
years or more at any time 2005 w.e.f. 1.4.06.
during the previous year
This is a consequential
and entitled to rebate
amendment i.e. consequent to
under section 88B.
omission of section 88B. This
change has no material effect
and the substance of section
197A(1C) remains the same.
206C(1C) - This section provides for Two Explanations have been
tax collection at source inserted w.e.f. 1.6.2007 to clarify
from the licensee or lessee the scope of the term ‘mining
in respect of any licence, and quarrying’.
contract or lease relating
Explanation 1 excludes mining
to, inter-alia, any ‘mining
and quarrying of mineral oil from
and quarrying’ specified in
the scope of ‘mining and
column (2) of the table in
quarrying’.
section 206C(1C).
However ‘mining and Explanation 2 clarifies that
quarrying’ have not been ‘mineral oil’ includes petroleum
defined. and natural gas.
This amendment seeks to
relieve the oil exploration and
incidental services from the
applicability of TCS provisions,
since these services are in the
organized sector.
246A(1) - Section 206C(6A) deems a New clause (hb) has been
person responsible for inserted in section 246A(1)
collecting tax to be an w.e.f. 1.6.2007 to entitle a
assessee in default if he person deemed as an assessee
fails to collect the whole or in default to appeal to the
any part of the tax, or after Commissioner (Appeals).
collection, fails to pay the
This amendment provides the
same in accordance with
right of appeal by a person
the provisions of the Act.
deemed to be an assessee in
The Assessing Officer has
default for failure to collect or
to pass an order deeming
pay tax.
such person as an
assessee in default. There Also, an appeal filed by an
is no provision for filing of assessee in default against an
appeal by the assessee order made under section
against such order of the 206C(6A) on or after 1st April,
Assessing Officer.
50 2007 but before 1st June, 2007
shall be deemed to have been
filed before the Commissioner
(Appeals) under new clause (hb)
of section 246(1).
 appeal by the assessee order made under section
against such order of the 206C(6A) on or after 1st April,
Assessing Officer. 2007 but before 1st June, 2007
shall be deemed to have been
filed before the Commissioner
(Appeals) under new clause (hb)
of section 246(1).

18. SETTLEMENT OF CASES

(a) The existing provisions relating to settlement of cases by the Settlement
Commission have been amended to restrict the cases eligible to appear before the
Settlement Commission. It has been provided that from 1.6.2007, an assessee can
make an application to the Commission only during the pendency of the
proceedings before the Assessing Officer. The definition of “case” in clause (b) of
section 254A has been substituted accordingly. Henceforth, application cannot be
made to the Settlement Commission where -
– notice for assessment/reassessment under section 147 has been issued under
section 148.
– search has been initiated under section 132 or requisition has been made
under section 132A followed by assessments under section 153A(b)/
153B(1)(b).
– fresh assessment has been directed on account of the original assessment
being set aside by the Commissioner(Appeals)/Appellate Tribunal under
sections 263/264/254.
Therefore, no such proceedings, except original assessment proceedings, should
be pending at the time of making an application to the Settlement Commission.
(b) Further, the additional amount of income-tax offered should exceed Rs.3 lakh and
the additional tax offered and interest thereon should be paid before filing the
application and proof of payment should be attached with the application.
(c) The assessee should also intimate to the Assessing Officer in the prescribed
manner that he has made an application to the Settlement Commission. Such
intimation should be made on the same date when he makes an application to the
Settlement Commission [New sub-section (4) of section 245C].
(d) The additional amount of income-tax has to be calculated in the following manner as
provided in the new sub-section (1B) of section 245C read with the amended sub-
section (1C), in a case where the income disclosed in the application relates to only
one previous year–
(i) If the applicant has not Tax should be calculated on the income
furnished a return in disclosed in the application as if such income is
respect of the total the total income. Such tax represents the
income of that year. additional amount of income-tax.

51
 (ii) If the applicant has The tax should be calculated on the aggregate
furnished a return in of total income returned and the income
respect of the total disclosed in the application i.e. as if the
income of that year. aggregate represents the total income. The
additional amount of income-tax is the amount
calculated on such aggregate as reduced by
the amount of tax calculated on the total
income returned for that year.

(e) The entire procedure of admission and disposal of a settlement application has
been revamped for speedy fast-track disposal as under:
(1) Admission of Petition [New sub-section (1) of section 245D]
(i) On receipt of the settlement application, the Settlement Commission shall
issue a notice to the applicant within 7 days from the date of receipt of
application.
(ii) After hearing the applicant, the Settlement Commission shall pass an
order either rejecting or allowing the application to be proceeded with
within 14 days from the date of application.
(iii) Application not disposed off within 14 days shall be treated as admitted.
(2) Deemed date of admission/disposal of Settlement applications made
before 1.6.2007 [New sub-section (2A) of section 245D]
(i) Settlement applications made prior to 1.6.2007, if not disposed off by 31 st
May, 2007, shall be deemed to be admitted, if the additional tax on the
income disclosed in such application and the interest thereon is paid on
or before 31.7.2007.
(ii) 31.7.07 shall also be deemed to be the date of the order of rejection or
admission for such applications.
(3) Time limit for furnishing report by Commissioner and passing order by
the Settlement Commission [New sub-sections (2B) & (2C) of section
245D]
(i) The Settlement Commission shall call for a report from the Commissioner
within the time limit specified below –
(i) In respect of an application Within 30 days from the
admitted under section 245D(1) date of application
(ii) In respect of an application On or before 7.8.2007
deemed to have been admitted
under section 245D(2A)

52
 (ii) The Commissioner is required to furnish the report within 30 days from
the receipt of communication from the Settlement Commission.
(iii) The Settlement Commission can also pass an order declaring the
application as invalid on the basis of the report of the Commissioner.
(iv) Such order should be passed in writing within 15 days of the receipt of
report after giving the applicant an opportunity of being heard.
(v) A copy of the order should be sent to the applicant and the
Commissioner.
(vi) However, in a case where the Commissioner has not furnished the report
within the prescribed time, the Settlement Commission shall proceed
further in the matter without the report of the Commissioner.
(4) Status of pending settlement applications as on 1 st June 2007, which are
already admitted under the old provisions [New sub-section (2D) of
section 245D]
All settlement applications which are admitted under the existing provisions of
section 245D(1), but for which an order under section 245D(4) is not passed
before 1.6.2007, will not be allowed to be proceeded with further unless the
applicant pays the additional tax and interest thereon on or before 31.7.2007.
(5) Proceedings after admission [New sub-section (3) of section 245D]
(i) The Settlement Commission may call for records from the Commissioner
in respect of an application which has not been declared invalid under
sub-section (2C) or an application which has been allowed to be further
proceeded with under sub-section (2D).
(ii) After examination of such records, the Settlement Commission may
require the Commissioner to make further enquiry or investigation and
furnish a report on the matters covered by the application and any other
matter relating to the case.
(iii) The Commissioner shall furnish the report within a period of 90 days of
the receipt of communication from the Settlement Commission.
(iv) If the Commissioner fails to furnish the report within the said period of 90
days, the Settlement Commission may proceed to pass an order under
sub-section (4) without such report.
(6) Final order of settlement [New sub-sections (4) and (4A) of section 245D]
(i) The Settlement Commission may pass such order as it thinks fit on the
matters covered by the application and any other matter relating to the
case not covered by the application but referred to in the report of the
Commissioner.

53
 (ii) Such order should be passed by the Settlement Commission after –
(1) examining the records and report of the Commissioner, if any,
received at the time of admission or on investigation or enquiry
conducted as per the instructions of the Settlement Commission;
(2) giving an opportunity of being heard to the applicant and the
Commissioner;
(3) examining such further evidence as may be placed before it or
obtained by it.
(iii) The time limit for passing such order is –
(1) In respect of an application Within 12 months from the
made on or after 1.6.2007 end of the month in which
the application was made.
(2) In respect of an application On or before 31.3.2008
filed before 1.6.2007 [under
sub-section (2A) or (2D)]

(f) Time restriction for provisional attachment removed [Section 245DD]

(i) Under section 245DD, the Settlement Commission is empowered to
provisionally attach the property belonging to the applicant for protecting the
interest of the revenue. Such provisional attachment is valid for a period of 6
months, after which it ceases to have effect.
(ii) The Settlement Commission may, for reasons to be recorded in writing, extend
the aforesaid period by such further period or period as it thinks fit. However,
the total period of extension cannot exceed two years.
(iii) The Finance Act, 2007 has removed this limitation of 2 years so that the power
to provisionally attach property would be available to the Settlement
Commission for an unlimited period.
(Effective from 1.6.2008)
(g) No power to reopen cases where application is made on or after 1.6.2007
[Section 245E]
(i) Under section 245E, the Settlement Commission is empowered to reopen
completed proceedings (with the concurrence of the applicant) for the proper
disposal of the case pending before it. However, he should record his reasons
for doing so in writing.
(ii) However, the Settlement Commission shall not have any power to reopen the
proceedings in respect of an application made on or after 1.6.2007.
(Effective from 1.6.2007)

54
(h) Exclusive jurisdiction of the Settlement Commission [Section 245F]
(i) Under section 245F, the Settlement Commission has exclusive jurisdiction
over the case during the period between the admission of the application and
its final disposal by passing an order under section 245D(4).
(ii) In respect of an application made under section 245C on or after 1.6.2007,
such exclusive jurisdiction would begin with the date of filing of application with
the Settlement Commission.
(iii) The exclusive jurisdiction of the Settlement Commission would end on –
(a) the date of passing an order under section 245D(4); or
(b) the date of passing the order rejecting the application (made on or after
1.6.2007) under section 245D(1); or
(c) the date on which the application is not allowed to be proceeded with
under section 245D(2A); or
(d) the date on which the application is declared invalid under section
245D(2C); or
(e) the date on which the application is not allowed to be further proceeded
with under section 245D(2D).
(Effective from 1.6.2007)
(i) Power of Settlement Commission to grant immunity from prosecution
restricted [Section 245H]
(i) Under section 245H, the Settlement Commission may grant immunity from
prosecution for any offence under the Indian Penal Code, Income-tax Act and
any other Central Act.
(ii) This power has now been restricted in respect of application made under
section 245C on or after 1.6.2007. In respect of such cases, the Settlement
Commission shall not grant immunity from prosecution for any offence under
the Indian Penal Code or under any Central Act other than the Income-tax Act
and Wealth-tax Act.
(iii) However, in respect of applications pending as on 1.6.2007, the Settlement
Commission has the power to grant immunity from prosecution for any offence
under the Indian Penal Code and other Central Acts also.
(Effective from 1.6.2007)
(j) Abatement of proceeding before the Settlement Commission [New sections
245HA & 245HAA]
(i) In the following cases, the proceedings before the Settlement Commission
shall abate on the specified date as given below –

55
 Case Specified date
(1) where an application made to the The date on which the
Settlement Commission on or after application was rejected.
1.6.2007 has been rejected under section
245D(1).
(2) where any application is not allowed to 31.7.2007
be proceeded with under section
245D(2A) or further proceeded with
under section 245D(2D).
(3) where an application has been declared The last day of the month
invalid under section 245D(2C). in which the application
was declared invalid.
(4) Where an order under section 245D(4) The date on which the
has not been passed within the time time or period specified
allowed under section 245D(4A). in section 245D(4A)
expires.
(ii) On abatement of proceedings, the case would revert back to the Assessing
Officer having jurisdiction or any other income-tax authority before whom the
proceedings were pending at the time of making the application. Such income-tax
authority shall dispose of the case in accordance with the provisions of the Act.

(iii) For completing the proceedings, the Assessing Officer or other Income-tax
authority shall be entitled to use the material and information produced by the
assessee before the Settlement Commission as if such material and
information had been produced before the Assessing Officer or other income-
tax authority. Similarly, the Assessing Officer or other Income-tax authority
shall be entitled to use the results of the inquiry held or evidence recorded by
the Settlement Commission in the course of the proceedings before it, as if
such inquiry or evidence had been held or recorded by him in the course of the
proceedings before him.
(iv) The period from the date on which the application was made before the
Commission up to the date on which proceedings get abated shall be excluded
from the time limit for completion of proceedings by the Assessing Officer and
for payment of interest under section 243, 244 or 244A.
(v) In case of abatement of settlement proceedings, the Assessing Officer is
required to give credit for the tax and interest paid on or before the date of
making the application or during the pendency of the case before the Settlement
Commission. This has been provided by insertion of section 245HAA.
(Effective from 1.6.2007)

56
 (k) Bar on subsequent application for settlement [New section 245K]
(i) In the event of occurrence any of the following, the person concerned shall not
be entitled to apply for settlement in relation to any other matter –
(1) the order of settlement passed under section 245D(4) provides for
imposition of penalty for concealment of income; or
(2) after the passing of order under section 245D(4) in relation to a case, the
person is convicted of an offence under Chapter XXII in relation to that
case; or
(3) the case of such person was sent back to the Assessing Officer by the
Settlement Commission on or before 1.6.2002.
(ii) Further, with effect from 1.6.2007, the option of going to the Settlement
Commission would be available only once in the lifetime of a person.
Therefore, where an application for settlement is made on or after 1.6.2007
and such application has been allowed to be proceeded with, then such person
will not be subsequently entitled to make any application under section 245C.
(Effective from 1.6.2007)
(l) Vice-chairman to include senior member of Bench [Section 245A(g)]
The definition of “Vice-Chairman” has been amended to include a Member who is
senior amongst the Members of a Bench so that, if there is no Vice-Chairman at a
Bench, it can be presided over by a Member who is senior amongst the Members of
the Bench.
(Effective from 1.6.2007)

19. APPEALS AND REVISION

(a) Appeal by person denying liability to deduct tax under section 195 [New
section 248]
Related amendment in section: 249(2)(a)
(i) Under the existing section 248, in all such cases where any person denies his
liability to deduct tax at source under section 195 or pay such tax under
section 200, an appeal can be filed with the Commissioner (Appeals), after
deducting and paying such tax.
(ii) Therefore, the existing provision covered cases where the tax is borne by the
assessee and also cases where the tax is borne by the non-resident who is the
recipient of income.
(iii) This section has been substituted to restrict the eligibility of filing an appeal
only to cases where the tax is borne by the assessee. Therefore, the cases
where the tax is to be borne by the non-resident is now outside the scope of
section 248 and no appeal can be filed in such cases.

57
 (iv) The new section 248 provides that where under an agreement or other
arrangement, the tax deductible on any income, other than interest, under
section 195 is to be borne by the person by whom the income is payable, and
such person having paid such tax to the credit of the Central Government,
claims that no tax was required to be deducted on such income, he may
appeal to the Commissioner (Appeals) for a declaration that no tax was
deductible on such income.
(v) Consequential amendment has been made in section 249(2)(a) to provide that
where the appeal is under section 248, it shall be presented within 30 days of
the date of payment of the tax.
(Effective from 1.6.2007)
(b) Order rejecting approval under section 80G(5)(vi) appealable before Appellate
Tribunal [Section 253]
(i) Under section 80G, deductions in respect of donations to certain funds,
charitable institutions is available from the taxable income of the donor. This
section provides for two categories of funds –
(1) Funds enumerated in sections 80G(2); and
(2) Funds which are approved by the Commissioner under clause (vi) of sub-
section (5) of section 80G.
(ii) Under section 253, as it stands at present, no appeal lies to the Appellate
Tribunal against the order passed by the Commissioner under section
80G(5)(vi) rejecting the approval of such funds.
(iii) This section has, therefore, been amended to allow an appeal to be filed
against such orders of the Commissioner before the Appellate Tribunal.
(Effective from 1.6.2007)

(c) Power of Appellate Tribunal to grant stay of demand of tax [Section 254(2A)]
(i) Under section 254(2A), the Appellate Tribunal can grant stay of demand of tax
which can extend only up to 180 days from the date of granting such stay. If
the appeal is not disposed of within 180 days, the stay order shall stand
vacated after the expiry of the said period. This provision would apply even
where the appeal was not disposed of within a period of 180 days for reasons
not attributable to the fault of the assessee.
(ii) Therefore, sub-section (2A) has been amended to provide that where an order
of stay has been passed and the appeal has not been disposed of within the
specified period of 180 days from the date of such order, the Appellate
Tribunal may extend the period of stay or pass an order of stay for a further
period or periods, as it thinks fit, on an application made in this behalf by the
assessee and on being satisfied that the delay in disposing of the appeal is not
attributable to the assessee.

58
 (iii) However, the aggregate period of stay, including the original stay granted and
the extension allowed, cannot exceed 365 days. If such appeal is not
disposed of within the period originally allowed or the extended period or
periods, the order of stay stall stand vacated after the expiry of such period or
periods.
(Effective from 1.6.2007)

20. PENALTIES
(a) Penalty leviable on tax on assessed income less advance tax, TDS, TCS and
self-assessment tax [Explanation 4 to Section 271(1)]
(i) Under section 271(1)(c), if the Assessing Officer or the Commissioner
(Appeals) or the Commissioner, in the course of any proceedings under the
Act, is satisfied that any person has concealed the particulars of his income or
has furnished inaccurate particulars of such income, he may direct such
person to pay a penalty of 100% to 300% of the tax sought to be evaded.
(ii) Explanation 4(b) provides that the amount of tax sought to be evaded means
the tax on total income assessed.
(iii) A combined reading of section 271(1)(c), Explanation 3 & 4 shows that if the
asessee has failed to furnish his return of income within the period specified in
section 153(1) and if no notice under section 142 or section 148 is issued by
the Assessing Officer before the expiry of such period, then the assessee is
deemed to have concealed the particulars of his income. In such a case, he is
liable to pay penalty on the entire assessed income, even if he has disclosed
this income in the return furnished pursuant to notice under section 148 after
the expiry of the aforesaid period.
(iv) This has caused genuine hardship in several cases where for bona fide
reasons, the return could not be filed before the period specified in section
153(1).
(v) This section has been amended retrospectively from A.Y.2003-04 to provide
that no penalty shall be leviable in respect of tax on assessed income, to the
extent the assessee has paid taxes before the date of issue of notice under
section 148 by way of advance tax, tax deducted at source, tax collected at
source or self-assessment tax. The meaning of “the amount of tax sought to
be evaded” in clause (b) of Explanation 4 has been accordingly amended.
(Effective retrospectively from A.Y.2003-04)
(b) Penalty where search has been initiated [Explanations 5 & 5A to section 271(1)
& Insertion of New Section 271AAA]
Related amendment in section: 246A
(i) Under Explanation 5 to section 271 (1), where any undisclosed income/ asset
is found during the course of search which has not been declared before the

59
 income tax authority, such income/ asset will be deemed as concealed income
or income in respect of which inaccurate particulars have been furnished by
the assessee. The existing provisions cover the year of search and the earlier
years, whether or not such income/asset is disclosed in the return filed
subsequent to the search.
(ii) Under Explanation 5, the assessee was entitled to immunity from imposition of
penalty under certain situations where the assessee had made full disclosure
of the undisclosed income/asset and the manner of earning such income in a
statement recorded during search and pays the tax, together with interest, if
any, in respect of such income.
(iii) Therefore, under the present provisions of section 271(1)(c) read with
Explanation 5 thereto, it is possible to escape levy of penalty by making a
disclosure under section 132(4) in the course of search, even in cases where
the due date of filing the return has expired and the person concerned has not
filed his return.
(iv) The application of the aforesaid Explanation 5 has, therefore, been restricted
to searches initiated before 1 st June, 2007.
(v) New Explanation 5A has been inserted in section 271(1) w.e.f. 1.6.2007 which
would be applicable in respect of searches conducted on or after 1 st June,
2007. This Explanation provides that where an assessee is found to be the
owner of any -
– asset and he claims that such assets have been acquired by him by
utilizing his income for any previous year; or
– income based on any entry in the books of account or documents or
transactions and he claims that such entry represents his income for any
previous year,
which has ended before the date of the search and the due date for filing of the
return has expired and return has not been filed, such income would be
deemed to be concealed income, even if such income is declared in the return
of income filed on or after the date of search.
(vi) A new section 271AAA has been inserted w.e.f. 1.4.2007 to provide for
imposition of penalty at 10% of undisclosed income of the specified previous
year, in respect of searches initiated under section 132 on or after 1.6.2007.
(vii) Undisclosed income means -
(a) any income represented by any asset or entry in the books of accounts
or other documents or transactions found in the course of search under
section 132 which has -
(1) not been recorded in the regular books of accounts or documents on
or before the date of search; or

60
 (2) otherwise not been disclosed to the Chief Commissioner or
Commissioner before the date of search.
(b) any income represented by any entry in respect of an expense recorded
in regular books of accounts or documents, which is found to be false as
a result of search.
(viii) Specified previous year means –
(i) the previous year which has ended before the date of search, but the due
date of filing the return of income under section 139(1) has not expired
before the date of search; or
(ii) the previous year in which the search was conducted.
(ix) Therefore, this section covers the previous year for which the due date of filing
the return has not expired on the date of search and the year of search.
(x) No penalty under section 271(1)(c) is leviable in respect of such undisclosed
income.
(xi) This section grants immunity from imposition of penalty, if:
(1) the assessee admits undisclosed income in a statement under section
132(4) during the course of search and,
(2) specifies the manner in which such income has been derived;
(3) substantiates the manner in which the undisclosed income was derived;
and
(4) pays the tax, together with interest, if any, in respect of the undisclosed
income.
(xii) The provisions of section 274 relating to the procedure for levying penalty and
section 275 relating to bar of limitation for imposing penalties shall, to the
extent relevant, be applicable to the penalty referred to in this section.
(xiii) Section 246A has been amended to include an order imposing penalty under
section 271AAA as an appealable order before Commissioner (Appeals).
(xiv)The provisions of penalty in respect of search initiated on or after 1.6.2007 is
summarized in the table below –
Section Relevant previous year Penalty
Explanation P.Y. which has ended before 100% to 300% of the tax
5A to section the date of search, in respect sought to be evaded.
271(1) of which the due date has
expired, but the return has
not been furnished.

61
 For example, in respect of
P.Y.2006-07, if the date of
search is 15.11.2007, then
the P.Y. has ended before
that date (i.e., on 31.3.2007)
and the due date of filing
return (31.7.2007/31.10.07,
as the case may be) has also
expired, but the return has
not been furnished. In such a
case, penalty would be
attracted under this section.

271AAA (i) P.Y. which has ended 10% of the undisclosed

before the date of search, but income. However, no penalty
the due date for filing return is leviable if disclosure is
has not expired before the made under section 132(4),
date of search, and the return manner of earning is
has not been furnished. disclosed and tax and
interest is paid.
For example, in respect of
P.Y.2006-07, if the date of
search is 15.5.2007, then the
P.Y. has ended before the
date of search, but the due
date of filing the return has
not expired.
(ii) P.Y. in which the search is
conducted.

21. MISCELLANEOUS PROVISIONS

(a) Presumption as to assets, books of account, etc. [New section 292C]
(i) Under section 132(4A), it is provided that the books of account, money, bullion,
jewellery or other valuable article or thing found in the possession or control of
any person in the course of a search under section 132 will be presumed to
belong to the said person.
(ii) It is further provided that it will be presumed that -
(1) the contents of such books of account and other documents are true; and
(2) the signature and every other part of such books of account and other
documents which purport to be in handwriting of any particular person or

62
 which may reasonably be assumed to have been signed by, or to be in
the handwriting of, any particular person, are in that person’s handwriting,
and
(3) in the case of a document stamped, executed or attested, that it was duly
stamped and executed or attested by the person by whom it purports to
have been so executed or attested.
(iii) The Supreme Court, in P.R. Metrani v. CIT (2006) 287 ITR 209, held that the
aforesaid presumption is not available for framing regular assessment and
such presumption is available only in regard to the proceedings for search and
seizure under section 132. However, this decision does not reflect the correct
intent of law.
(iv) Therefore, new section 292C has been inserted to clarify that presumptions
provided in section 132(4A) can be made in any proceedings under this Act.
(v) This section provides that where any books of account, other documents,
money, bullion, jewellery or other valuable article or thing are or is found in the
possession or control of any person in the course of a search under section
132, it may, in any proceeding under this Act, be presumed that -
(1) such books of account, other documents, money, bullion, jewellery or
other valuable article or thing belong or belongs to such person;
(2) the contents of such books of account and other documents are true; and
(3) the signature and every other part of such books of account and other
documents which purport to be in the handwriting of any particular person
or which may reasonably be assumed to have been signed by, or to be in
the handwriting of, any particular person, are in that person’s handwriting;
(4) In the case of a document stamped, executed or attested, that it was duly
stamped and executed or attested by the person by whom it purports to
have been so executed or attested.
(Effective retrospectively from 1.10.75)
(b) Relaxation of according and withdrawal of recognition of recognized provident
fund [Amendment of Fourth Schedule to the Income-tax Act]
(i) The time limit specified in the proviso to Rule 3(1) of Part A of the Fourth
Schedule for a recognized provident fund, where it has received recognition on
or before 31.03.2006, for satisfying the conditions set out in clause (ea) of
Rule 4 and any other conditions such as the Board may notify, has been
extended from 31.3.2007 to 31.3.2008.
(ii) It has also been provided that where the provident fund of the establishment
has been notified by the Central Government under section 16(2) of the
Employees' Provident Funds and Miscellaneous Provisions Act, 1952, the
recognition shall not be withdrawn on the ground of not satisfying the

63
 conditions specified in clause (ea) of Rule 4 within the prescribed time period,.
(iii) Rule 4 of Part of A of the Fourth Schedule to the Income-tax Act provides for
the conditions which are required to be satisfied by a provident fund for
receiving or retaining recognition under the Income-tax Act. Clause (ea) of the
said rule provides that the fund shall be of an establishment to which the
provisions of sub-section (3) or sub-section (4) of section 1 of the Employees’
Provident Funds and Miscellaneous Provisions Act, 1952 are applicable and
such establishment has been exempted under section 17 of the said Act from
the operation of all or any of the provisions of any scheme referred to in that
section.
(iv) Clause (ea) has been substituted to provide that for receiving and retaining
recognition under the Income-tax Act, the fund shall be a fund of an
establishment –
(1) to which the provisions of section 1(3) of the Employees’ Provident Funds
and Miscellaneous Provisions Act, 1952 apply; or
(2) which has been notified by the Central Provident Fund Commissioner
under section 1(4) of the said Act.
(v) Further, such establishment is required to obtain exemption under section 17
of the said Act from the operation of all or any of the provisions of any scheme
referred to in that section.
(Effective from 1.4.2007)

II. WEALTH-TAX ACT, 1957

1. DEFINITIONS
(a) Assessing Officer to include Additional Commissioner and Additional Director
[Section 2(ca)]
(i) The definition of Assessing Officer, as it stands at present, does not include
Additional Commissioner and Additional Director.
(ii) Therefore, in order to fill this lacuna, Additional Commissioner and Additional
Director have now been included within the scope of definition of “Assessing
Officer” with retrospective effect from 1.6.94 and 1.10.96, respectively.
(b) Amendment of definition of 'India' [Section 2(ka)]
The Wealth-tax Act extends to the whole of India. Therefore, the definition of the
term “India” is very important. Section 2(ka) has been substituted to define the term
'India' to mean –
(i) the territory of India as per article 1 of the Constitution,
(ii) its territorial waters, seabed and subsoil underlying such waters,

64
 (iii) continental shelf,
(iv) exclusive economic zone or
(v) any other specified maritime zone and the air space above its territory and
territorial waters.
Specified maritime zone means the maritime zone as referred to in the Territorial
Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act,
1976.
(Effective retrospectively from 25.8.76)

2. SETTLEMENT OF CASES
(a) The existing provisions relating to settlement of cases by the Settlement
Commission have been amended to restrict the cases eligible to appear before the
Settlement Commission. It has been provided that from 1.6.2007, an assessee can
make an application to the Commission only during the pendency of the
proceedings before the Assessing Officer. The definition of “case” in clause (b) of
section 22A has been substituted accordingly. Henceforth, application cannot be
made to the Settlement Commission where -
– notice for assessment/reassessment has been issued under section 17.
– search has been initiated under section 37A or requisition has been made
under section 37B followed by assessment or reassessment.
– fresh assessment has been directed on account of the original assessment
being set aside by the Commissioner(Appeals)/Appellate
Tribunal/Commissioner under sections 23A/24/25.
Therefore, no such proceedings, except original assessment proceedings, should
be pending at the time of making an application to the Settlement Commission.
(b) Further, the additional amount of wealth-tax offered and interest thereon should be
paid before filing the application and proof of payment should be attached with the
application.
(c) The assessee should also intimate to the Assessing Officer in the prescribed
manner that he has made an application to the Settlement Commission. Such
intimation should be made on the same date when he makes an application to the
Settlement Commission [New sub-section (4) of section 22C].
(d) The additional amount of wealth-tax has to be calculated in the following manner as
provided in the new sub-section (1B) of section 22C read with the amended sub-
section (1C), in a case where the income disclosed in the application relates to only
one previous year–

65
 (i) If the applicant has not Wealth-tax should be calculated on the wealth
furnished a return in disclosed in the application as if such wealth is
respect of the net the net wealth. Such tax represents the
wealth of that year. additional amount of wealth-tax
(ii) If the applicant has The wealth-tax should be calculated on the
furnished a return in aggregate of net wealth returned and the
respect of the net wealth disclosed in the application i.e. as if the
wealth of that year. aggregate represents the net wealth. The
additional amount of wealth-tax is the amount
calculated on such aggregate as reduced by
the amount of wealth-tax calculated on the net
wealth returned for that year.

(e) The entire procedure of admission and disposal of a settlement application has
been revamped for speedy fast-track disposal as under:
(1) Admission of Petition [New sub-section (1) of section 22D]
(i) On receipt of the settlement application, the Settlement Commission shall
issue a notice to the applicant within 7 days from the date of receipt of
application.
(ii) After hearing the applicant, the Settlement Commission shall pass an
order either rejecting or allowing the application to be proceeded with
within 14 days from the date of application.
(iii) Application not disposed off within 14 days shall be treated as admitted.
(2) Deemed date of admission/disposal of Settlement applications made
before 1.6.2007 [New sub-section (2A) of section 22D]
(i) Settlement applications made prior to 1.6.2007, if not disposed off by 31 st
May, 2007, shall be deemed to be admitted, if the additional wealth-tax
on the wealth disclosed in such application and the interest thereon is
paid on or before 31.7.2007.
(ii) 31.7.07 shall also be deemed to be the date of the order of rejection or
admission for such applications.
(3) Time limit for furnishing report by Commissioner and passing order by the
Settlement Commission [New sub-sections (2B) & (2C) of section 22D]
(i) The Settlement Commission shall call for a report from the Commissioner
within the time limit specified below –

66
 (i) In respect of an application Within 30 days from the
admitted under section 22D(1) date of application
(ii) In respect of an application On or before 7.8.2007
deemed to have been admitted
under section 22D(2A)
(ii) The Commissioner is required to furnish the report within 30 days from
the receipt of communication from the Settlement Commission.
(iii) The Settlement Commission can also pass an order declaring the
application as invalid on the basis of the report of the Commissioner.
(iv) Such order should be passed in writing within 15 days of the receipt of
report after giving the applicant an opportunity of being heard.
(v) A copy of the order should be sent to the applicant and the
Commissioner.
(vi) However, in a case where the Commissioner has not furnished the report
within the prescribed time, the Settlement Commission shall proceed
further in the matter without the report of the Commissioner.
(4) Status of pending settlement applications as on 1 st June 2007, which are
already admitted under the old provisions [New sub-section (2D) of
section 22D]
All settlement applications which are admitted under the existing provisions of
section 22D(1), but for which an order under section 22D(4) is not passed
before 1.6.2007, will not be allowed to be proceeded with further unless the
applicant pays the additional wealth-tax and interest thereon on or before
31.7.2007.
(5) Proceedings after admission [New sub-section (3) of section 22D]
(i) The Settlement Commission may call for records from the Commissioner
in respect of an application which has not been declared invalid under
sub-section (2C) or an application which has been allowed to be further
proceeded with under sub-section (2D).
(ii) After examination of such records, the Settlement Commission may
require the Commissioner to make further enquiry or investigation and
furnish a report on the matters covered by the application and any other
matter relating to the case.
(iii) The Commissioner shall furnish the report within a period of 90 days of
the receipt of communication from the Settlement Commission.
(iv) If the Commissioner fails to furnish the report within the said period of 90
days, the Settlement Commission may proceed to pass an order under

67
 sub-section (4) without such report.
(6) Final order of settlement [New sub-sections (4) and (4A) of section 22D]
(i) The Settlement Commission may pass such order as it thinks fit on the
matters covered by the application and any other matter relating to the
case not covered by the application but referred to in the report of the
Commissioner.
(ii) Such order should be passed by the Settlement Commission after –
(1) examining the records and report of the Commissioner, if any,
received at the time of admission or on investigation or enquiry
conducted as per the instructions of the Settlement Commission;
(2) giving an opportunity of being heard to the applicant and the
Commissioner;
(3) examining such further evidence as may be placed before it or
obtained by it.
(iii) The time limit for passing such order is –
(1) In respect of an application Within 12 months from the
made on or after 1.6.2007 end of the month in which
the application was made.
(2) In respect of an application On or before 31.3.2008
filed before 1.6.2007 [under
sub-section (2A) or (2D)]

(f) Time restriction for provisional attachment removed [Section 22DD]

(i) Under section 22DD, the Settlement Commission is empowered to
provisionally attach the property belonging to the applicant for protecting the
interests of the revenue. Such provisional attachment is valid for a period of 6
months, after which it ceases to have effect.
(ii) The Settlement Commission may, for reasons to be recorded in writing, extend
the aforesaid period by such further period or periods as it thinks fit. However,
the total period of extension cannot exceed two years.
(iii) The Finance Act, 2007 has removed this limitation of 2 years so that the power
to provisionally attach property would be available to the Settlement
Commission for an unlimited period.
(Effective from 1.6.2007)
(g) No power to reopen cases where application is made on or after 1.6.2007
[Section 22E]
(i) Under section 22E, the Settlement Commission is empowered to reopen
completed proceedings (with the concurrence of the applicant) for the proper

68
 disposal of the case pending before it. However, he should record his reasons
for doing so in writing.
(ii) However, the Settlement Commission shall not have any power to reopen the
proceedings in respect of an application made on or after 1.6.2007.
(Effective from 1.6.2007)
(h) Exclusive jurisdiction of the Settlement Commission [Section 22F]
(i) Under section 22F, the Settlement Commission has exclusive jurisdiction over
the case during the period between the admission of the application and its
final disposal by passing an order under section 22D(4).
(ii) In respect of an application made under section 22C on or after 1.6.2007, such
exclusive jurisdiction would begin with the date of filing of application with the
Settlement Commission.
(iii) The exclusive jurisdiction of the Settlement Commission would end on –
(a) the date of passing an order under section 22D(4); or
(b) the date of passing the order rejecting the application (made on or after
1.6.2007) under section 22D(1); or
(c) the date on which the application is not allowed to be proceeded with
under section 22D(2A); or
(d) the date on which the application is declared invalid under section
22D(2C); or
(e) the date on which the application is not allowed to be further proceeded
with under section 22D(2D).
(Effective from 1.6.2007)
(i) Power of Settlement Commission to grant immunity from prosecution
restricted [Section 22H]
(i) Under section 22H, the Settlement Commission may grant immunity from
prosecution for any offence under the Indian Penal Code, Income-tax Act and
any other Central Act.
(ii) This power has now been restricted in respect of application made under
section 22C on or after 1.6.2007. In respect of such cases, the Settlement
Commission shall not grant immunity from prosecution for any offence under
the Indian Penal Code or under any Central Act other than the Income-tax Act
and Wealth-tax Act.
(iii) However, in respect of applications pending as on 1.6.2007, the Settlement
Commission has the power to grant immunity from prosecution for any offence
under the Indian Penal Code and other Central Acts also.
(Effective from 1.6.2007)

69
(j) Abatement of proceeding before the Settlement Commission [New sections
22HA & 22HAA]
(i) In the following cases, the proceedings before the Settlement Commission
shall abate on the specified date as given below –
Case Specified date
(1) where an application made to the The date on which the
Settlement Commission on or after application was rejected.
1.6.2007 has been rejected under section
22D(1).
(2) where any application is not allowed to 31.7.2007
be proceeded with under section 22D(2A)
or further proceeded with under section
22D(2D).
(3) where an application has been declared The last day of the month
invalid under section 22D(2C). in which the application
was declared invalid.
(4) Where an order under section 22D(4) has The date on which the
not been passed within the time allowed time or period specified
under section 22D(4A). in section 22D(4A)
expires.
(ii) On abatement of proceedings, the case would revert back to the Assessing
Officer having jurisdiction or any other wealth-tax authority before whom the
proceedings were pending at the time of making the application. Such wealth-tax
authority shall dispose of the case in accordance with the provisions of the Act.
(iii) For completing the proceedings, the Assessing Officer or other wealth-tax
authority shall be entitled to use the material and information produced by the
assessee before the Settlement Commission as if such material and
information had been produced before the Assessing Officer or other wealth-
tax authority. Similarly, the Assessing Officer or other wealth-tax authority
shall be entitled to use the results of the inquiry held or evidence recorded by
the Settlement Commission in the course of the proceedings before it, as if
such inquiry or evidence had been held or recorded by him in the course of the
proceedings before him.
(iv) The period from the date on which the application was made before the
Commission up to the date on which proceedings get abated shall be excluded
from the time limit for completion of proceedings by the Assessing Officer and
for payment of interest under section 34A.
(v) In case of abatement of settlement proceedings, the Assessing Officer is
required to give credit for the tax and interest paid on or before the date of

70
 making the application or during the pendency of the case before the
Settlement Commission. This has been provided by insertion of new section
22HAA.
(Effective from 1.6.2007)

(k) Bar on subsequent application for settlement [New section 22K]

(i) In the event of occurrence any of the following, the person concerned shall not
be entitled to apply for settlement in relation to any other matter –
(1) the order of settlement passed under section 22D(4) provides for
imposition of penalty for concealment of income; or
(2) after the passing of order under section 22D(4) in relation to a case, the
person is convicted of an offence under Chapter VIII in relation to that
case; or
(3) the case of such person was sent back to the Assessing Officer by the
Settlement Commission on or before 1.6.2002.
(ii) Further, with effect from 1.6.2007, the option of going to the Settlement
Commission would be available only once in the lifetime of a person.
Therefore, where an application for settlement is made on or after 1.6.2007
and such application has been allowed to be proceeded with, then such person
will not be subsequently entitled to make any application under section 22C.
(Effective from 1.6.2007)
(l) Vice-chairman to include senior member of Bench [Section 22A(f)]
The definition of “Vice-Chairman” has been amended to include a Member who is
senior amongst the Members of a Bench so that, if there is no Vice-Chairman at a
Bench, it can be presided over by a Member who is senior amongst the Members of
the Bench.
(Effective from 1.6.2007)

3. MISCELLANEOUS PROVISIONS
Presumption as to assets, books of account, etc. [New section 42D]
(i) New section 42D has been inserted in the Wealth-tax Act.
(ii) This section provides that where any books of account or other documents, articles
or things including money are found in the possession or control of any person in
the course of a search under section 37A, it may, in any proceeding under this Act,
be presumed that -
(1) such books of account or other documents, articles or things including money
belong to such person;

71
 (2) the contents of such books of account and other documents are true; and
(3) the signature and every other part of such books of account or other
documents which purport to be in the handwriting of any particular person or
which may reasonably be assumed to have been signed by, or to be in the
handwriting of, any particular person, are in that person’s handwriting;
(4) In the case of a document stamped, executed or attested, that it was duly
stamped, executed or attested by the person by whom it purports to have been
so executed or attested.
(Effective retrospectively from 1.10.75)

Amendments made by the Taxation Laws (Amendment) Act, 2006 to

the Income-tax Act, 1961

The Taxation Laws (Amendment) Act, 2006 received the assent of the President on
13.7.2006. The CBDT has issued Circular No.1/2007 dated 27.4.2007, which explains the
nature and effect of the amendments made by the Taxation Laws (Amendment) Act, 2006.

(1) Tax Recovery Officer to exercise or perform the powers and functions of the
Assessing Officer [Section 2(44)]
(i) Section 2(44) provides that a Tax Recovery Officer means any income-tax officer
who may be authorised by the Chief Commissioner or Commissioner, by a general
or special order in writing, to exercise the powers of a Tax Recovery Officer.
(ii) This clause has been amended to enable a Tax Recovery Officer, if he is authorised
by the Chief Commissioner or Commissioner, by general or special order in writing,
to exercise the powers and functions which are conferred on, or assigned to, an
Assessing Officer under the Income-tax Act, 1961 and which may be prescribed.
(Effective from 13.7.2006)
(2) Exemption of income of North-Eastern Development Finance Corporation Limited
[Section 10(23BBF)]
(i) A new clause (23BBF) has been inserted in section 10 to provide for exemption of
any income of the North-Eastern Development Finance Corporation Limited, being a
company formed and registered under the Companies Act, 1956.
(ii) The exemption has been phased out beginning with inclusion of 20% of the total
income for tax for the assessment year 2006-07, 40% for the assessment year
2007-08, 60% for the assessment year 2008-09, 80% for the assessment year
2009-10 and 100% from the assessment year 2010-11. The exemption under this
clause shall be fully phased out in assessment year 2010-11 and no exemption
would be available from such assessment year.
(Effective from A.Y.2006-07)

72
(3) Removal of the requirement of renewal of notification issued under sub-clauses
(iv) and (v) of section 10(23C)
(i) Under section 10(23C), any notification issued by the Central Government in terms
of sub-clause (iv) or sub-clause (v) of the said section has, at any one time, effect
for such assessment year or years, not exceeding three assessment years, as may
be specified in the notification.
(ii) In order to dispense with the requirement of periodic renewal of notifications and
consequent delays, section 10(23C) has been amended to provide that the
restriction of limit of effective period of notification to a maximum of three
assessment years shall be applicable in respect of notifications issued by the
Central Government under sub-clause (iv) or (v) before 13.7.2006, being the date on
which Taxation Laws (Amendment) Bill, 2006 received the assent of the President.
(iii) Therefore, on account of the above amendment, any notification issued by the
Central Government under the said sub-clause (iv) or sub-clause (v), on or after
13.07.2006 will be valid until withdrawn and there will be no requirement on the part
of the assessee to seek renewal of the same after three years.
Note – Clause (iv) exempts income of a fund or institution established for charitable
purposes and notified by the Central Government and clause (v) exempts income of a
trust or institution wholly for public religious purposes or wholly for public religious and
charitable purposes, which may be notified by the Central Government.
(4) Time limit for issue of notification under sub-clauses (iv) and (v) or for approval by
the prescribed authority under sub-clauses (vi) and (via) of section 10(23C)
(i) Under section 10(23C), in respect of application made by a fund or trust or
institution etc. for grant of approval or continuation thereof, there is no time limit for
issue of notification under sub-clauses (iv) and (v) or for grant of approval under
sub-clauses (vi) and (via) or for passing an order rejecting such application. As a
result, there is considerable delay in disposing such applications.
(ii) In order to expedite disposal of such applications, it has now been provided that
where such an application is made on or after 13.7.2006, every notification under
sub-clause (iv) or sub-clause (v) shall be issued or approval under sub-clause (vi) or
sub-clause (via) shall be granted or an order rejecting the application shall be
passed within the period of 12 months from the end of the month in which such
application was received.
(5) Funds/Trusts/Universities/Other educational institutions or hospitals or other
medical institutions referred to in sub-clauses (iv),(v),(vi) or (via) of clause (23C) of
section 10 to get their accounts audited and furnish audit report
(i) At present, there is no requirement on the part of any fund or trust or institution or
any university or other educational institution or any hospital or other medical
institution referred to in sub-clauses (iv), (v), (vi) or (via) of section 10(23C) to
furnish audited accounts along with the return of income.

73
 (ii) It has now been provided that if the total income of any entity referred to in sub-
clauses (iv), (v), (vi) and (via) of section 10(23C), without giving effect to the
provisions of the said sub-clauses, exceeds the basic exemption limit in any
previous year, it shall –
(1) get its accounts audited in respect of that year by an accountant as defined in
the Explanation below sub-section (2) of section 288; and
(2) furnish such audit report along with the return of income for the relevant
assessment year. The report must be in the prescribed form, duly signed and
verified by the accountant, and must contain such particulars as may be
prescribed.
(Effective from A.Y.2006-07)
(6) Accounts of a charitable or religious trust or institution to be audited if their total
income exceeds the basic exemption limit [Section 12A(b)]
(i) Section 12A(b) provides that for availing exemption under sections 11 and 12, the
accounts of the trust or institution for the previous year should have been audited if
the total income of the trust or institution as computed under the Income-tax Act,
1961, without giving effect to the provisions of section 11 and section 12, exceeds
Rs.50,000 in that previous year. Such audit report should be furnished along with
the return of income for the relevant assessment year in the prescribed form.
(ii) Rs.50,000 was the erstwhile basic exemption limit. The basic exemption limit of
AOPs has been increased to Rs.1,00,000 by the Finance Act, 2005. Therefore,
clause (b) of section 12A has been amended to provide for the requirement of
getting the accounts audited if in the previous year the total income exceeds the
basic exemption limit.
(Effective from A.Y.2006-07)
(7) Guidelines, manner and conditions on the basis of which approval is to be granted
under section 35(1)(ii) and section 35(1)(iii)
(i) So far, there have been no guidelines or manner or conditions in relation to grant of
approval of the Central Government to a scientific research association, university,
college or other institution. This has caused undue delay in the processing of
applications received for approval from such entities. There was, therefore, a need
to provide the step-wise procedure to be followed by the applicants, the manner in
which their applications would be processed and the conditions subject to which the
approval was to be granted to a scientific research association under clause (ii) of
section 35(1) and to a university, college or other institution under clause (iii) of
section 35(1).
(ii) These clauses have, therefore, been amended to lay down that the applicant
scientific research association, university, college or other institution shall be
approved in accordance with the guidelines, in the manner and subject to such
conditions as may be prescribed. The guidelines, manner (including application

74
 Forms) and conditions have since been prescribed vide notification bearing S.O.
1856 (E) dated 30.10.2006.
(iii) The deduction under these clauses would be available only if such association,
university, college or other institution is for the time being approved in accordance
with the guidelines, in the manner and subject to such conditions as may be
prescribed.
(iv) Further, it has been clarified that the deduction to which an assessee (i.e. donor) is
entitled on account of payment of any sum to a scientific research association or
university or college or other institution, shall not be denied merely on the ground
that subsequent to payment of such sum by the assessee, the approval granted to
any of the aforesaid entities is withdrawn.
(v) Also, it has been provided that the time limit restricting the maximum effective
period of a notification to 3 assessment years shall be applicable in respect of a
notification issued by the Central Government under clause (ii) or clause (iii) before
13.7.2006. Consequently, any notification issued on or after 13.7.2006 shall remain
in force until approval granted to such entity is withdrawn.
(vi) In respect of an application received on or after 13.7.2006, every notification under
clause (ii) or clause (iii) shall be issued or an order rejecting the application shall be
passed before expiry of 12 months from the end of the month in which the
application for approval was received by the Central Government.
(Effective from A.Y.2006-07)
(8) Deduction not to be denied to the donor-assessee on subsequent withdrawal of
approval of specified donee entities[Section 35(2AA), 35AC & 35CCA]
(i) It has been clarified that the deduction to which an assessee is entitled on account
of payment of any sum by him to a National Laboratory, University, Indian Institute
of Technology or a specified person for the approved programme [referred to in
sub-section (2AA) of section 35] shall not be denied to the donor-assessee merely
on the ground that after payment of such sum by him, the approval granted to any
of the aforesaid donee-entities has been withdrawn.
(ii) A similar amendment has been made in section 35AC clarifying that the deduction
to which an assessee (i.e. the donor) is entitled on account of payment of any sum
by him to a public sector company or a local authority or to an association or
institution shall not be denied to the assessee merely on the ground that after
payment of such sum by him, the approval granted to such association or institution
has been withdrawn or the notification notifying the eligible project or scheme
referred to in section 35AC has been withdrawn.
(iii) A parallel amendment has been made in section 35CCA clarifying that the
deduction to which an assessee is entitled on account of payment of any sum by
him to an association or institution for carrying out the programme of rural
development shall not be denied to the assessee merely on the ground that after

75
 payment of such sum by him, the approval granted to such programme or, as the
case may be, to the association or institution has been withdrawn.
(Effective from A.Y.2006-07)
(9) Disallowance of rent and royalty paid to a resident without deduction of tax at
source [Section 40(a)(ia)]
(i) As per section 40(a)(ia), failure to deduct tax from interest, commission or
brokerage, fees for professional services or fees for technical services payable to a
resident or amounts payable to a resident contractor or sub-contractor, or failure to
remit such tax after deduction results in disallowance of such payments in the
computation of income of the payer.
(ii) This disallowance has now been extended to payments of rent and royalty. The
terms rent and royalty have also been defined. Rent has been defined to have the
same meaning as in clause (i) to the Explanation to section 194-I. As per the said
clause, rent means any payment, by whatever name called, under any lease, sub-
lease, tenancy or any other agreement or arrangement for the use of (either
separately or together) any land or building (including factory building) or land
appurtenant to the building (including factory building) or machinery or plant or
equipment or furniture or fittings whether or not all or any of the above are owned by
the payee. Royalty has the same meaning as given in Explanation 2 to section
9(1)(vi).
(Effective from A.Y.2007-08)
(10) Disallowance of expenses for which payment above Rs.20,000 has been made
otherwise than by account-payee cheque or account-payee bank draft [Section
40A]
(i) Section 40A(3), provides for disallowance of 20% of the expenditure if payment in a
sum exceeding Rs.20,000 is made, against such expenditure, otherwise than by a
crossed cheque or crossed bank draft.
(ii) Since a crossed cheque or crossed bank draft is a negotiable instrument,
endorsement of the same has made it difficult to trace the final payee in many
cases. This defeats the purpose of section 40A(3).
(iii) Since an account payee cheque or account payee bank draft cannot be credited to
any account other than the account of the payee, section 40A(3) has been amended
to require payments over Rs.20,000 to be made by an account payee cheque drawn
on a bank or account payee bank draft.
(iv) Consequential amendment has been made in section 40A(4) to provide that where
any payment has been made by an account payee cheque or account payee bank
draft to escape disallowance under section 40A(3), then no person shall be allowed
to raise a plea in any suit or other proceeding on the ground that the payment was
not made in cash or any other manner.
(Effective from 13.7.2006)

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(11) Cash gifts received in excess of Rs.50,000 on or after 1.4.2006 to be taxed under
section 56(2)(vi)
(i) Section 56(2)(v) provides that any sum of money exceeding Rs.25,000 received
without consideration by an individual or a Hindu undivided family on or after
1.9.2004 from any person, is chargeable to income-tax under the head “Income
from other sources”.
(ii) However, in order to avoid hardship in genuine cases, certain sums of money
received have been exempted -
(a) any sum received from any relative; or
(b) any sum received on the occasion of the marriage of the individual; or
(c) any sum received under a will or by way of inheritance; or
(d) any sum received in contemplation of death of the payer.
(iii) It is now provided that the above provisions of clause (v) shall be applicable in
respect of any sum of money, exceeding the specified amount, received on or after
1.9.2004 but before 1.4.2006.
(iv) Further, a new clause (vi) has been inserted in section 56(2) w.e.f. A.Y. 2007-08 to
provide that where any sum of money is received without consideration on or after
1.4.2006 by an individual or a Hindu undivided family from any person or persons
and the aggregate value of all such sums received during the previous year
exceeds Rs.50,000/-, the whole of the aggregate value of such sum shall be
included in the total income of such individual or Hindu undivided family under the
head “Income from other sources”.
(v) However, certain sums of money received have been exempted i.e. any sum of
money received -
(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer; or
(e) from any local authority as defined in the Explanation to section 10(20) i.e.
Panchayat, Municipality, Cantonment Board or Municipal Committee and
District Board, legally entitled to, or entrusted by the Government with, the
control or management of a Municipal or local fund; or
(f) from any fund or foundation or university or other educational institution or
hospital or other medical institution or any trust or institution referred to in
clause (23C) of section 10; or
(g) from any trust or institution registered under section 12AA.

77
 (vi) For the purposes of the new clause (vi), the term relative has been defined in the
Explanation thereto to mean the -
(i) spouse of the individual;
(ii) brother or sister of the individual;
(iii) brother or sister of the spouse of the individual;
(iv) brother or sister of either of the parents of the individual;
(v) any lineal ascendant or descendent of the individual;
(vi) any lineal ascendant or descendent of the spouse of the individual;
(vii) spouse of the person referred to in clauses (ii) to (vi).
(12) Deduction not to be denied to the donor-assessee on subsequent withdrawal of
approval of the donee- association, university etc. [Section 80GGA]
(i) Section 80GGA has been amended by inserting an Explanation each after clause
(aa) in respect of the entities covered in clause (a) and clause (aa), clause (b) and
clause (bb) of sub-section (2).
Clause Entity covered Purpose
(a) University, college or other institution Scientific research
(aa) University, college or other institution Social science and statistical
research
(b) Association or institution Rural development, training of
persons for implementing rural
development programme.
(bb) Public sector company or a local Carrying out eligible project or
authority or an association or scheme referred to in section
institution approved by the National 35AC.
Committee.

(ii) These Explanations clarify that the deduction to which an assessee is entitled in
respect of any sum paid to a scientific research association, university, college or
other institution or to an association or institution for carrying out the programme of
rural development, or to a public sector company, or to a local authority or to an
association or institution for carrying out the eligible project or scheme referred to in
section 35AC, respectively, shall not be denied merely on the ground that
subsequent to the payment of such sum by the assessee the approval granted or,
as the case may be, the notification has been withdrawn.
(Effective from A.Y.2006-07)

78
(13) Specified universities, colleges and other institutions compulsorily required to file
their return of income [Section 139(4C) & (4D)]
(i) Clause (e) of section 139(4C) makes it mandatory for every –
(a) fund or institution referred to in section 10(23C)(iv) or
(b) trust or institution referred to in section 10(23C)(v) or
(c) any university or other educational institution referred to in section 10(23C)(vi)
or
(d) any hospital or other medical institution referred to in section 10(23C)(via)
to file a return of income for the previous year, if the total income in respect of which
such entities are assessable, without giving effect to the provisions of section 10,
exceeds the basic exemption limit. Such return of income should be in the
prescribed form and verified in the prescribed manner and should contain such
other particulars as may be prescribed. All the provisions of the Income-tax Act
shall, to the extent relevant, apply as if it were a return required to be furnished
under section 139(1).
(ii) The scope of the aforementioned provisions of clause (e) of section 139(4C) has
been expanded to require any university or other educational institution referred to
in section 10(23C)(iiiad) and any hospital or other institution referred to in section
10(23C)(iiiae) to furnish their return of income for the previous year, if the total
income in respect of which such entities are assessable, without giving effect to the
provisions of section 10, exceeds the basic exemption limit.
(iii) Sub-section (4D) has been inserted in section 139 to require every university,
college or other institution referred to in clause (ii) and clause (iii) of section 35(1),
which is not required to furnish its return of income or loss under any other provision
of section 139, to furnish its return in respect of its income or loss in every previous
year. All the provisions of the Income-tax Act, 1961 shall apply to such return as if it
were a return under section 139(1).
(Effective from A.Y.2006-07)
(14) Assessing Officer empowered to send a proposal to the Central Government
recommending withdrawal of approval of scientific research association,
university, college or other institution approved under section 35(1)(ii) and (iii)
[Section 143]
(i) The guidelines, the manner and the conditions in accordance with which an
application made by a scientific research association, university, college or other
institution shall be approved under clause (ii) or clause (iii) of sub-section (1) of
section 35 have been provided by the Taxation Laws (Amendment) Act, 2006. Also,
the amendment provides for grant of one time approval, which means the approval
is to remain in force unless it is withdrawn.

79
 (ii) Therefore, the Assessing Officer is now required to satisfy himself as to the
activities of the university, college or other institution referred to in clause (ii) or
clause (iii) of section 35(1).
(iii) If the activities are not being carried out in accordance with all or any of the
conditions subject to which any of the said entities had been approved, the
Assessing Officer may, after giving a reasonable opportunity of showing cause to
the concerned entity, send a proposal to the Central Government recommending
withdrawal of approval.
(iv) The Central Government may, by order, withdraw the approval and forward a copy
of the order to the concerned university, college or other institution and to the
Assessing Officer.
(Effective from A.Y.2006-07)
(15) Assessing Officer empowered to rectify assessment order to allow deduction
under sections 10A, 10B and 10BA in respect of convertible foreign exchange
subsequently received or brought into India [Section 155]
(i) Under section 155(13), the Assessing Officer has power to rectify an assessment
order to allow deduction under sections 80HHB, 80HHC, 80HHD, 80HHE, 80R, 80-
O etc. (which was earlier denied on the ground that such income had not been
received in convertible foreign exchange in India), when such income is
subsequently received or brought into India with the approval of the competent
authority.
(ii) Similar provisions are not available in respect of the provisions of sections 10A, 10B
and 10BA, which also provide that foreign exchange may be brought into India
within six months from the end of the financial year or within such time as may be
extended by the competent authority.
(iii) Therefore, sub-section (11A) has been inserted in section 155 to provide that where
in the assessment for any year, the deduction under section 10A or section 10B or
section 10BA has not been allowed on the ground that such income -
(1) has not been received in convertible foreign exchange in India, or
(2) having been received in convertible foreign exchange outside India, or having
been converted into convertible foreign exchange outside India, has not been
brought into India, by or on behalf of the assessee with the approval of the
Reserve Bank of India or such other approved authority and
subsequently such income or part thereof has been or is received in, or brought
into, India in the manner aforesaid, the Assessing Officer shall amend the order of
assessment so as to allow deduction under section 10A or section 10B or section
10BA, as the case may be, in respect of such income or part thereof as is so
received in, or brought into, India.

80
 (iv) The provisions of section 154 shall, to the extent relevant, apply thereto, and the
period of four years for making such rectification shall be reckoned from the end of
the previous year in which such income is so received in, or brought into, India.
(Effective from 13.7.2006)
(16) The scope of tax deduction at source on rent under section 194-I expanded
(i) Under section 194-I, tax is required to be deducted at source on payment of rent.
(ii) The term rent has been defined in the Explanation to the said section to, inter alia,
mean payment for the use of any land or building (including factory building)
together with furniture, fittings and the land appurtenant thereto, whether or not
such building is owned by the payee.
(iii) This definition of rent has been amended to provide that the provisions of the said
section are applicable whether the items are rented separately or together. Rent of
machinery, plant and equipment are also included for the purposes of deduction of
tax at source under section 194-I.
(Effective from 13.7.2006)
(17) Expansion of the scope of tax deduction at source on fees for professional or
technical services under section 194J
(i) Under section 194J(1), tax is required to be deducted at source on payment to a
resident, of a sum exceeding Rs.20,000, by way of fees for professional services or
fees for technical services at the rate of 5% of such sum.
(ii) Section 194J(1) has been amended to include within its fold, payment of royalty and
non-compete fees referred to in section 28(va). The term royalty has been defined
in the Explanation to the amended section and shall have same meaning as in
Explanation 2 to section 9(1)(vi).
(iii) The threshold limit for deduction of tax in respect of each of these payments is
Rs.20,000.
(Effective from 13.7.2006)
(18) Time limit for passing penalty order [New sub-section (1A) of section 275]
(i) Section 275(1) provides the time limit for imposing penalty under Chapter XXI of the
Income-tax Act, 1961, as under -
(1) In a case where the relevant assessment or other order is the subject matter of
an appeal to the Commissioner (Appeals) under section 246 or section 246A or
an appeal to the Appellate Tribunal under section 253, an order imposing a
penalty shall not be passed –
(a) after the expiry of the financial year in which the proceedings, in the
course of which action for the imposition of penalty has been initiated, are
completed; or

81
 (b) six months from the end of the month in which the order of the
Commissioner (Appeals) or, as the case may be, the Appellate Tribunal is
received by the Chief Commissioner or Commissioner,
whichever period expires later.
(2) However, this limitation is applicable only if the Commissioner (Appeals)
passed the order before 1st June, 2003 disposing of the appeal made to him.
(3) In a case where the relevant assessment or other order is the subject matter of
an appeal to the Commissioner (Appeals) under section 246 or section 246A,
and the Commissioner (Appeals) passes the order on or after 1st June, 2003
disposing of such appeal, an order imposing penalty shall be passed –
(a) before the expiry of the financial year in which the proceedings, in the
course of which action for imposition of penalty has been initiated, are
completed; or
(b) within one year from the end of the financial year in which the order of the
Commissioner (Appeals) is received by the Chief Commissioner or
Commissioner,
whichever is later.
(4) In a case where the relevant assessment or other order is the subject matter of
revision under section 263 or section 264, an order imposing penalty shall not
be passed after the expiry of six months from the end of the month in which
such order of revision is passed;
(5) In any other case, an order imposing penalty shall not be passed after the
expiry of the financial year in which the proceedings, in the course of which
action for the imposition of penalty has been initiated, are completed, or six
months from the end of the month in which action for imposition of penalty is
initiated, whichever period expires later.
(ii) A new sub-section (1A) has been inserted in section 275 to facilitate the revision of
an order for the imposition of penalty or dropping the proceedings for the imposition
of penalty, on the basis of subsequent revision of assessment by Commissioner
(Appeals) or Appellate Tribunal or High Court or Supreme Court or by the
Commissioner under section 263 or section 264.
(iii) It has been provided that in a case where the relevant assessment or other order is
the subject-matter of -
(1) an appeal to the Commissioner(Appeals) under section 246 or section 246A; or
(2) an appeal to the Appellate Tribunal under section 253; or
(3) an appeal to the High Court under section 260A; or
(4) an appeal to the Supreme Court under section 261; or
(5) revision under section 263 or section 264

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 and an order imposing or enhancing or reducing penalty or dropping the
proceedings for the imposition of penalty is passed before the order of –
(1) the Commissioner(Appeals); or
(2) the Appellate Tribunal; or
(3) the High Court; or
(4) the Supreme Court
is received by the Chief Commissioner or the Commissioner, or the order of revision
under section 263 or 264 is passed, an order imposing or enhancing or reducing
penalty or dropping the proceedings for the imposition of penalty may be passed on
the basis of assessment as revised by giving effect to such order of the
Commissioner(Appeals) or, the Appellate Tribunal or, the High Court, or the
Supreme Court or order of revision under section 263 or 264. A revision order
under this sub-section can again be revised under this sub-section.
(iv) It has also been provided that no such order imposing or enhancing or reducing or
canceling penalty or dropping the proceedings shall be passed without hearing the
assessee or giving him a reasonable opportunity of being heard.
(v) Further, no such order can be passed after the expiry of six months from the end of
the month in which -
(1) the order of the Commissioner (Appeals) or the Appellate Tribunal or the High
Court or the Supreme Court is received by the Chief Commissioner or the
Commissioner; or
(2) the order of revision under section 263 or section 264 is passed.
(vi) Also, it has been provided that the provisions of section 274(2) shall apply in
respect of such order imposing or enhancing or reducing penalty.
Note - Section 274(2) provides that for passing an order imposing penalty
exceeding Rs.10,000, the Income-tax authority has to take the prior approval of the
Joint Commissioner. Also, for passing an order imposing penalty exceeding
Rs.20,000, the Assistant Commissioner or the Deputy Commissioner should take
the prior approval of the Joint Commissioner.
(vii) Consequently, section 246A(1) has been amended to provide for an appeal to the
Commissioner (Appeals) against an order imposing or enhancing penalty under
section 275(1A).
(Effective from 13.7.2006)
(19) Rounding off of tax payable and refund due [New section 288B]
(i) Section 288B provides that the amount of tax (including TDS and advance tax),
interest, penalty, fine or any other sum payable, and the amount of refund due,
under the provisions of the Income-tax Act, shall be rounded off to the nearest
rupee.

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 (ii) This section has been substituted by a new section to provide that any amount
payable, and the amount of refund due, under the provisions of the Income-tax Act,
1961, shall be rounded off to the nearest multiple of ten rupees.
(iii) For this purpose, any part of a rupee consisting of paise shall be ignored.
(iv) Thereafter, if such amount is not a multiple of ten, then, if the last figure in that
amount is five or more, the amount shall be increased to the next higher amount
which is a multiple of ten and if the last figure is less than five, the amount shall be
reduced to the next lower amount which is a multiple of ten.
(Effective from 13.7.2006)

IMPORTANT NOTIFICATIONS / CIRCULARS ISSUED BETWEEN 1.5.06 and 30.4.07

I NOTIFICATIONS

(1) Notification No.270/2006 dated 19.9.2006 – Cost Inflation Index for F.Y.2006-07
The Central Government has, vide notification no.270/2006 dated 19.9.2006 specified
the cost inflation index for the financial year 2006-07. The CII for F.Y. 2006-07 is 519.
S. No. Financial Year Cost Inflation Index
1. 1981-82 100
2. 1982-83 109
3. 1983-84 116
4. 1984-85 125
5. 1985-86 133
6. 1986-87 140
7. 1987-88 150
8. 1988-89 161
9. 1989-90 172
10. 1990-91 182
11. 1991-92 199
12. 1992-93 223
13. 1993-94 244
14. 1994-95 259
15. 1995-96 281
16. 1996-97 305

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 17. 1997-98 331
18. 1998-99 351
19. 1999-2000 389
20. 2000-01 406
21. 2001-02 426
22. 2002-03 447
23. 2003-04 463
24. 2004-05 480
25. 2005-06 497
26. 2006-07 519

[Notification no.270/2006 dated 19.9.2006]

(2) Notification No.127/2006 dated 1.6.2006 – Notified plan for deduction in respect of
annuity plan of LIC
Notification Date In exercise of Details
No. powers
conferred by
127/2006 1.6.2006 Section Jeevan Akshay-III Plan of the LIC of
80C(2)(xii) India, as filed by the LIC with the
IRDA, as the annuity plan of the LIC
for the purposes of section
80C(2)(xii)

(3) Notification Nos. 142 & 143/2006 dated 29.6.2006 – Notified Bonds for the purpose
of exemption of capital gains under section 54EC
The Central Government has notified bonds of National Highways Authority of India
(NHAI) and Rural Electrification Corporation Limited (RECL), to be issued during the
financial year 2006-07, redeemable after three years, as “long-term specified asset” for
the purpose of exemption under section 54EC i.e. capital gains would be exempt to the
extent of investment in these notified bonds.
The CBDT has, vide Order [Link].142/09/2006-TPL, dated 30.6.2006, extended the
limitation period of six months for making investment under section 54EC of capital gains
arising from the transfer of a long-term capital asset to –
(i) 30.9.2006, in case of persons where the long-term capital asset was transferred
between 29.9.2005 and 31.12.2005;
(ii) 31.12.2006, in case of persons where the long-term capital asset was transferred
between 1.1.2006 and 30.6.2006.

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(4) Notification No 380/2006, dated 22.12.2006 – Restriction of maximum investment to
Rs.50 lakhs for the purpose of section 54EC
The Central Government has, vide this notification, notified the bonds for an amount of
Rs.3,500 crores (redeemable after three years), to be issued by the Rural Electrification
Corporation Limited (RECL) during the period between 26.12.2006 to 31.3.2007, as
'long-term specified asset' for the purposes of section 54EC subject to the following
conditions, namely:-
(i) a person who has made an investment of an amount aggregating more than Rs.50 lakh
in the bonds of NHAI or RECL notified as long-term specified asset by the Central
Government in the Official Gazette for the purposes of section 54EC vide notifications
dated 29.6.2006, shall not be allotted any bonds notified as long-term specified asset
by this notification;
(ii) a person who is not covered by clause (i) above, shall not be allotted the bonds notified
as long-term specified asset by this notification, for any amount which exceeds the
amount of Rs.50 lakh as reduced by the aggregate of the investment, if any, made by
him in the bonds of NHAI and RECL notified as long-term specified asset by the
Central Government for the purposes of section 54EC of vide notifications dated
29.6.2006.
For example, if one Mr.X has been allotted bonds of NHAI or RECL (vide the above-
referred notifications dated 29.6.2006), aggregating to say Rs.52 lakh, he shall not be
allotted any further bonds by this notification. If one Mr.Y has been allotted bonds of
NHAI or RECL(vide the above-referred notifications dated 29.6.2006) to the extent of
say, Rs.30 lakhs, then the allotment of bonds of RECL vide this notification cannot
exceed Rs.20 lakhs.
(5) Notification No.187/2006 dated 20.7.2006 – Conditions to be fulfilled by a public
facility to be eligible to be notified as an infrastructure facility in accordance with
the provisions of clause (d) of the Explanation to section 36(1)(viii)

Rule 6ABAA has been inserted in the Income-tax Rules, 1962 which specifies the
conditions to be fulfilled by a public facility to be eligible to be notified as an infrastructure
facility in accordance with the provisions of clause (d) of the Explanation to clause (viii) of
sub-section (1) of section 36. The conditions specified therein are -
(a) it is owned by a company registered in India or by a consortium of such companies
or by an authority or a board or a corporation or any other body established or
constituted under any Central or State Act;
(b) it has entered into an agreement with the Central Government or a State
Government or a local authority or any other statutory body for (i) developing or (ii)
operating and maintaining or (iii) developing, operating and maintaining a new
infrastructure facility similar in nature to an infrastructure facility referred to in the
Explanation to section 80-IA(4)(i);

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 (c) it has started or starts operating and maintaining such infrastructure facility on or
after 1st April, 1995.

(6) Notification No. 188/2006, dated 20.7.2006 – Notification of public facilities as

infrastructure facility for the purpose of section 36(1)(viii)

The following public facilities have been notified by the CBDT as infrastructure facility for
purposes of section 36(1)(viii)-
(1) Inland Container Depot and Container Freight Station notified under the Customs
Act, 1962
(2) Mass Rapid Transit system
(3) Light Rail Transit system
(4) Expressways
(5) Intra-urban or semi-urban roads like ring roads or urban by-passes or flyovers
(6) Bus and truck terminals
(7) Subways
(8) Road dividers
(9) Bulk Handling Terminals which are developed or maintained or operated for
development of rail system
(10) Multilevel Computerised Car Parking.

(7) Notification No. 267/2006 dated 14.9.2006 – Notification of approved investment

under section 11(5)

A new clause (v) has been inserted in rule 17C of the Income-tax Rules, 1962 so as to
include as an approved investment under section 11(5), investment by a recognized
Stock Exchange, in the equity shares of a company promoted by it to acquire the
membership rights of other stock exchanges, where at least 51% of the paid-up share
capital is held by the Stock Exchange and the balance is held by its members. The
amendment is made effective retrospectively from 26th November, 1999.
(8) Notification No.314/2006, dated 9.11.2006 – Rule 6DD to provide the cases and
circumstances in which payment in a sum exceeding Rs.20,000 may be made
otherwise than by an account payee cheque drawn on a bank or by account payee
bank draft
Section 40A(3), provides for disallowance of 20% of the expenditure if payment in a sum
exceeding Rs.20,000 is made, against such expenditure, otherwise than by a crossed
cheque or crossed bank draft. The Taxation Laws (Amendment) Act, 2006 has amended
section 40A(3) to require payments over Rs.20,000 to be made by an account payee
cheque drawn on a bank or account payee bank draft.

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 Accordingly, the CBDT has amended Rule 6DD to replace the words “a crossed cheque”
and “a crossed bank draft” with “an account payee cheque” and “ account payee bank
draft” respectively in the heading and content. Therefore, Rule 6DD would henceforth
provide the cases and circumstances in which payment in a sum exceeding Rs.20,000
may be made otherwise than by an account payee cheque drawn on a bank or by
account payee bank draft.
Note – The Finance Act, 2007 has raised the disallowance to 100% of the expenditure, in
respect of which payment in a sum exceeding Rs.20,000 is made, otherwise than by an
account payee cheque or account payee bank draft.
(9) Notification No. 357/2006, dated 24.11.2006 - Restriction regarding effective period
of approval for the purposes of section 10(23C)(vi) and (via) removed
The CBDT has, vide this notification, amended Rule 2CA, which provides the guidelines
for approval under sub-clauses (vi) and (via) of section 10(23C). Sub-rule (3) of Rule
2CA, which restricts the effective period of approval of such university or other
educational institution or hospital or other medical institution [covered under sub-clauses
(vi)/(via)] by the CBDT or Chief Commissioner or Director General to a maximum of three
assessment years, has now been amended to provide that such restrictions would apply
only in respect of approvals granted before 1.12.2006.
(10) Notification No. 358/2006, dated 28.11.2006 – Tax Return Preparer Scheme, 2006
The CBDT has, in exercise of the powers conferred by section 139B(1) of the Income-tax
Act, 1961, framed the Tax Return Preparer Scheme, 2006, which came into force from
1.12.2006.
As per this scheme, Tax Return Preparer means any individual who has been issued a
Tax Return Preparer Certificate and a unique identification number by the Partner
Organisation to carry on the profession of preparing the returns of income in accordance
with the provisions of this Scheme. However, the following persons are not eligible to act
as a Tax Return Preparer -
(i) any person referred to in clause (ii) or clause (iii) or clause (iv) of sub-section (2) of
section 288, namely, any officer of a Scheduled Bank with which the assessee
maintains a current account or has other regular dealings , any legal practitioner
who is entitled to practice in any civil court in India and an accountant.
(ii) any person who is in employment and income from which is chargeable to income-
tax under the head salaries
Educational qualification for Tax Return Preparers
Any individual who holds a graduation degree from a recognized Indian University in the
fields of Business Administration or Management or Commerce or Economics or Law or
Mathematics or Statistics shall be eligible to act as Tax Return Preparer.

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(11) Notifications 369-374/2006 dated 15.12.2006 – Notification of Zero Coupon Bonds
Section 2(48) defining zero coupon bonds requires that such bonds should be notified by
the Central Government. Accordingly, the Central Government has, vide Notifications
369-374 dated 15.12.2006, specified the following bonds to be issued on or before
31.3.2009 by HUDCO, SIDBI, NABARD and IDFC as zero coupon bonds –
(i) 10 year zero coupon bonds of HUDCO, SIDBI, NABARD and IDFC
(ii) 15 year zero coupon bonds of HUDCO.
(12) Notification No.1/2007 dated 4.1.2007 – Exemption of interest on tax free municipal
bonds issued by Nagpur Municipal Corporation
Section 10(15)(vii) exempts interest on bonds issued by a local authority, if such bonds are
specified by the Central Government by notification in the Official Gazette. Accordingly, the
Central Government has, vide this notification, specified Tax Free Municipal Bonds issued
by Nagpur Municipal Corporation during the F.Y.2006-07, interest from which would be
exempt under section 10(15)(vii). However, such benefit would be admissible only if the
holder of such bonds registers his or her name and the holding with the Nagpur Municipal
Corporation.
(13) Notification No.2/2007 dated 11.1.2007 – Subscription to public deposit scheme of
HUDCO to qualify for deduction under section 80C
Deduction under section 80C is available, inter-alia, in respect of any sum paid or
deposited in the previous year by the assessee as subscription to any such deposit
scheme of a public sector company which is engaged in providing long-term finance for
construction or purchase of houses in India for residential purposes, as the Central
Government may, by notification in the Official Gazette, specify in this behalf. This has
been provided in clause (xvi)(a) of section 80C(2). Accordingly, the Central Government
has, vide this notification, specified the Public Deposit Scheme of Housing and Urban
Development Corporation Ltd., subscription to which would qualify for deduction under
section 80C.
(14) Notification No. 61/2007, dated 28.2.2007 – Investment by way of acquiring equity
shares of an incubatee by an incubator to qualify as an approved investment under
section 11(5)
Section 11(5) of the Income-tax Act, 1961 specifies the permitted modes of investment
by a charitable trust or institution for claiming exemption under section 11. Clause (xii) of
section 11(5) specifies that investment can be made by any other mode as may be
prescribed. Rule 17C of the Income-tax Rules specifies such other modes of investment.
The CBDT has, through the Income-tax (Second Amendment) Rules, 2007, which came
into force on 1.3.2007, inserted new clause (vi) in Rule 17C. Clause (vi) specifies
another mode of investment, namely, investment by way of acquiring equity shares of an
incubatee by an incubator. Incubatee shall mean such incubatee as may be notified by
the Government of India in the Ministry of Science and Technology and incubator shall
mean such Technology Business Incubator or Science and Technology Entrepreneurship

89
 Park as may be notified by the Government of India in the Ministry of Science and
Technology.
(15) Notification No. 67/2007, dated 8.3.2007 – Exemption of interest on Tax Free
Municipal Bonds issued by Ahmedabad Municipal Corporation
Sub-clause (vii) of section 10(15) exempts interest on bonds issued by a local authority,
if such bonds are specified by the Central Government by notification in the Official
Gazette. Accordingly, the Central Government has, vide this notification, specified Tax
Free Municipal Bonds issued by Ahmedabad Municipal Corporation during the financial
year 2006-07, interest from which would be exempt under section 10(15)(vii). However,
this benefit shall be admissible only if the holder of such bonds registers his or her name
and the holding with the said Corporation.

II CIRCULARS

(1) Circular No.7/2006 dated 17.7.2006 - Clarification regarding deduction of interest

under section 43B in view of clarificatory amendments to section 43B through the
Finance Act, 2006
Section 43B was amended by the Finance Act, 2006 inserting therein two clarificatory
Explanations, namely, Explanation 3C and Explanation 3D. Both the Explanations clarify
that any sum payable by the assessee as interest on any loan or borrowing or advance
shall be allowed as deduction if such interest has been actually paid and any interest
which has been converted into a loan or borrowing or advance but has not been actually
paid shall not be allowed as deduction in the computation of income. The clarificatory
explanations only reiterate the rationale that conversion of interest into a loan or
borrowing or advance does not amount to actual payment.
The manner in which the converted interest will be allowed as deduction has been
clarified in this circular. The unpaid interest, whenever actually paid to the bank or
financial institution, will be in the nature of revenue expenditure deserving deduction in
the computation of income. Therefore, irrespective of the nomenclature, the deduction
will be allowed in the previous year in which the converted interest is actually paid.

(2) Circular No. 8/2006, dated 6.10.2006 - Clarification regarding the meaning of the
expression “the produce of animal husbandry” used in sub-clause (ii) of clause (f)
of rule 6DD of the Income-tax Rules, 1962

The CBDT had, vide Circular No. 4/2006, dated 29th March, 2006 on the above subject,
clarified that the expression “the produce of animal husbandry” used under rule 6DD(f)(ii)
would include livestock and meat and in a case where payment exceeding rupees twenty
thousand is made to a producer of the products of animal husbandry (including livestock,
meat, hides and skins) otherwise than by a crossed cheque drawn on a bank or by a
crossed bank draft for the purchase of such produce, no disallowance would be attracted
under section 40A(3) read with rule 6DD. It was further clarified that the above exception

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 will not be available in respect of payment for the purchase of livestock, meat, hides and
skins from a person who is not proved to be the producer of these goods and is only a
trader, broker or any other middleman by whatever name called.
This circular (Circular No.8/2006) gives a clarification as to -
(i) who are the producers of livestock and meat and
(ii) the evidence required to be furnished in this regard by the persons making the
payments.
The CBDT is of the view that any person, by whatever name called, who buys animals
from the farmers, slaughters them and then sells the raw meat carcasses to the meat
processing factories or to the traders/retail outlets would be considered as a producer of
livestock and meat.
The benefit of rule 6DD of the Income-tax Rules, 1952 shall be available to the person
referred to in the above para subject to furnishing of the following :
(i) A declaration from the person receiving the payment that he is a producer of meat;
(ii) A confirmation that the payment, otherwise than by an account payee cheque or
account payee bank draft, was made on his insistence; and
(iii) A further confirmation from a veterinary doctor certifying that the person specified in
the certificate is a producer of meat and that slaughtering was done under his
supervision.
(3) Circular No.10/2006 dated 16.10.06 - Clarification regarding filing of return of
income by the coffee growers being individuals covered by Rule 7B of the Income
tax Rules, 1962
The CBDT, vide Circular No. 10/2003 dated 24 th December, 2003, had provided that an
individual deriving income from growing and curing of coffee, who is not covered by the
first proviso to section 139(1), would not be required to file a return of his income if his
income from growing and curing of coffee was Rs. 2 lakhs or less. The Finance Act,
2005 has subsequently raised the exemption limit for individual taxpayers from Rs.
50,000 to Rs.1 lakh from the Assessment year 2006-07. The exemption limit in the case
of an individual, being a woman resident in India and below the age of 65 years, has
been increased to Rs. 1,35,000. In the case of an individual, being a resident in India,
who is of the age of 65 or more at any time during the previous year, the exemption limit
has been raised to Rs.1,85,000. Therefore, the CBDT has reconsidered the matter of
filing of return by the individual coffee growers in order to provide further relief to them
and it is clarified that:

(i) An individual deriving income from growing and curing of coffee would not be
required to file his return, if the aggregate of 25% of his income from growing and
curing of coffee and income under all other sources liable to tax in accordance with
the provisions of this Act, is equal to or less than the exemption limit (1st slab of the

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 rates of Income-tax) prescribed for individual tax payers in the First Schedule of the
Finance Act of the relevant year.

(ii) An individual deriving income from growing, curing, roasting and grounding of coffee
with or without mixing chicory or other flavouring ingredients, would not be required
to file the return of income if the aggregate of 40% of his income from growing,
curing, roasting and grounding of coffee with or without mixing chicory or other
flavouring ingredients and income under all other sources liable to tax in
accordance with the provisions of this Act, is equal to or less than the exemption
limit (1st slab of rates of Income tax) prescribed in the First Schedule of the Finance
Act of the relevant year.
(4) Circular No.13/2006, dated 13.12.2006 - Applicability of TDS provisions of section
194C on contract for fabrication of article or thing as per specifications given by
the assessee
The CBDT has clarified the issue regarding the applicability of TDS provisions of section
194C on contract for fabrication of article or thing as per specifications given by the
assessee. The CBDT observed that before taking a decision on the applicability of TDS
under section 194C on a contract, it would have to be examined whether the contract in
question is a contract for work or a contract for sale.
The CBDT clarified that the provisions of section 194C would apply in respect of a
contract for supply of any article or thing as per prescribed specifications only if it is a
contract for work and not a contract for sale as per the principles in this regard laid down
in para 7(vi) of Circular No. 681, dated 8-3-1994. Para 7(vi) of Circular No.681 clarifies
that where the property in the article or thing so fabricated passes from the fabricator-
contractor to the assessee only after such article or thing is delivered to the assessee,
such contract would be a contract of sale and would, therefore, fall outside the purview of
section 194C.

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