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Salient Features of Taxation Laws (Amendment) Bill, 1973

Cite as : (1973) 1 SCC (Jour) 31

Leaving apart Wealth Tax Act, Gift Tax Act, Companies (Profits) Surtax Act, the Bill has proposed 83 amendments in Income Tax Act alone. Some important ones have been briefly touched below:

1. Charities — Sections 11 and 13.— (a) The Finance Act, 1970 had placed an absolute embargo on "accumulations". By the present Bill, the legislature has reverted to the old pattern. Twenty-five per cent income of a Charitable Trust may be "accumulated" in one single year and may not be applied to charity. Even the remaining 75 per cent may be applied to charity next year. If the income is only "derived" and not actually received, the remaining 75 per cent may be applied to charity in the year of receipt. For working out the above percentages donations received by the Trust will be deemed to be part of its income.

(b) Religious Trusts created or established after the commencement of this Act did not hitherto qualify for exemption. The disqualification now extends to all religious trusts, whether created before or after the commencement of the 1961 Act.

(c) Anonymous donations or donations in fictitious names will be treated as part of taxable income of the recipient-Trust. This will be taxed at 65 per cent.

(d) From Assessment Year 1978-79 onwards, all funds of a charitable or religious trust will be brought to tax if they are invested in any business concern, including a company.

2. Property Income — Section 23.— (a) The age-long concept of bona fide letting value has been abandoned in cases where actual rent received from tenants is found to be more.

(b) Formerly the A.L.V. of all house property in the use of an assessee as residence was limited to half its bona fide letting value or 10 per cent of the total income of the assessee, whichever was less. By Taxation Laws (Amendment) Act, 1970, this concession was restricted to only two residential houses. The concession has now been further restricted to only one residential house. The Supreme Court judgment in Col.H.H. Sir Harinder Singh,1 stands superseded by legislation.

3. Compulsory maintenance of Account Books — Section 44-B.— All assessees whose income from business exceeds Rs 25,000 or whose turnover exceeds Rs 21/2 lakhs will be required to maintain regular account books. Failure to do so will be punishable under new Section 271-A. The penalty may range from 10 per cent to 25 per cent of tax.

4. Aggregation of Income — Section 64.— Following new cases of aggregation are contemplated: (a) "Salary, commission, fees or any other form of remuneration" paid to wife from a concern in which the husband has a substantial interest.

(b) Share of a minor child in a firm, irrespective of the fact whether the father is a partner in that firm or not.

(c) Income of son's wife or son's minor child from assets transferred directly or indirectly to the beneficiary by the father-in-law or the grandfather, as the case may be.

(d) All income from property thrown in the family hotchpot. Formerly the clubbing was only to the extent of the share of the transferor and the share of his wife and minor child in the joint family property.

5. Unexplained expenditure — Section 69-C.— Formerly unexplained cash credits or unexplained investments were brought to tax. Now even expenditure, the source of which is not properly explained, will be subjected to tax, say, for example, vulgar display of wealth in marriages.

6. Hundi Loans — Section 69-D.— All Hundi Loans will be treated as income from undisclosed source, unless they have been received by an Account Payee cheque drawn on a bank.

7. Share Speculation — Section 73, Explanation.— Except in the cases of a banking or investment company, the profit of all other companies from purchase and sale of shares will be treated as Speculation Profit.

8. Donations — Section 80-G.— Formerly 50 per cent of the donation in the hands of a company and 55 per cent of donations in the hands of other assessees was exempt from tax. The distinction between a company and other assessees have now been abolished. In all cases now only 50 per cent of the donation will qualify for deduction.

9. House Rent Allowance — Section 80-GG.— All assesses, other than salaried employees, may claim deduction of rent paid for their own residence. The deduction will be allowed only if the rent paid is in excess of 10 per cent of the total income. There is also a ceiling. The maximum allowance will be only Rs 300 per month or 15 per cent of the total income, whichever is less.

10. New Industrial Undertakings employing displaced persons — Section 80-H.— This section has been omitted. Fifty per cent profit of such undertakings, which were hitherto exempt, will now be taxable.

11. Interest — Section 80-V.— Any interest paid on money borrowed for clearing off-Income tax dues will be allowed as deduction. The decision in Bhuriben Lallubhai,2 is superseded by legislation.

12. Counsel's Fee — Section 80-VV.— All expenditure incurred in presenting one case before Income Tax Authorities or before the Appellate Tribunal will qualify for deduction. This is in consonance with the Supreme Court judgment in Birla Brothers Pvt Ltd.3 However, the maximum that will qualify for deduction is Rs 2000 each year.

13. Assessment by Deputy Commissioner (Assessment) - Sections 125-A, 144-A and 144-B.— Inspecting Assistant Commissioner of Income tax will hereafter be designated as Deputy Commissioner (Assessment). He has been given powers of assessment concurrently with the Income Tax Officer subordinate to him. If the Income Tax Officer proposes to enhance an assessee's income by more than Rs 25,000 or proposes to make a disallowance of over Rs 25,000 in any deduction claimed by the assessee, he shall have to send a copy of the draft assessment order to the assessee. The assessee will have to submit to the Deputy Commissioner the objection to the addition/ disallowance, within seven days. After hearing the assessee's objection, the Deputy Commissioner will make the final assessment. The Deputy Commissioner has also been given general power to give directions "for guidance of the Income Tax Officer to enable him to complete the assessment". A general direction as to the lines on which an investigation connected with the assessment should be made, is not deemed to be direction prejudicial to the assessee. But a particular direction as to the addition of a particular amount or the disallowance of any particular deduction claimed, will entitle the assessee to a prior hearing. These new provisions supersede the Punjab High Court judgment in S. Sewa Singh Gill,4 and the Supreme Court Judgment in J.K. Synthetics Ltd.5

14. Summons — Section 131(1-A).— Power to summon any person or interrogate any person has been given to the Assistant Director of Inspection, even where no assessment proceedings are pending against that person. This is in cases where the Assistant Director of Inspection suspects concealment.

15. Compulsory Audit — Section 139(1-A).— Apart from companies, every person whose turnover exceeds Rs 5 lakhs or whose profit exceeds Rs 50,000, will have to get his account audited by a chartered accountant.

16. Permanent Account Number — Section 139-A.— System hitherto prevailing for Sales Tax Department for registration of assessees, has now been introduced in the Income Tax Department also. In the Sales Tax Department, compulsory registration is incumbent if the turnover exceeds Rs 12,000, while the, limit in Income Tax Department has been kept at Rs 50,000. Also all persons who are in receipt of taxable income and have not yet been assessed will have to apply to the I.T.O. for allotment of a PAN.

17. Self-assessment — Section 140-A.— Hitherto the assessee had to deposit tax on self-assessment within one month of the filing of return. Hereafter, the tax will have to be deposited along with the return The vagueness attaching to the quantum of penalty for default in making self-assessment has been removed. The penalty will now be 2 per cent of the tax "for every month during which the default continues". These amendments have been made to overcome the Madras High Court Judgment in A.M. Sali Marikar, Writ Petitions Nos. 594 and 595 of 1970.

18. Reopening of Assessments — Section 146(2).— Formerly I.T.Os. use to make an ex parte assessments on slightest pretext, reopen them, and leave them at that. To combat the lethargy of the I.T.Os., sub-section (2-A) was added to Section 153 by Direct Taxes (Amendment ) Act, 1970, whereby it was made incumbent on the I.T.Os. to complete a reopened assessment "before the expiry of two years from the end of the financial year" in which the ex parte assessment was reopened. This provision did not act as a sufficient spur. To avoid the limitation in new Section 153(2-A), the I.T.Os. chose not to re-open at all the ex parte assessment. A new sub-section has now been inserted in Section 146, calling upon the I.T.Os. to dispose of application for re-opening within 30 days of its receipt.

19. Post-Discontinuance Receipts — Section 176(3-A).— In the case of A.N. Shroff,6 the Supreme Court held that any fees received by the heir of a deceased man in profession could not be assessd in the hands of the heir; because it is obviously not his income, nor it could be assesseed as the income of the deceased because it was received after the death of the person to whom it was due. To overcome the judgment in Shroff case, Section 176(4) was brought on the statute-book. But this sub-section dealt only with cases of men in profession and not with cases of men in business. The new sub-section (3-A) seeks to rope in receipts received after the discontinuance of business. The judgment in Hukumchand Mohanlal,7 is sought to be superseded by legislation.

20. Registration of Firms — Section 185, Explanation.— In H. Abdul Rahim & Co.,8 the Supreme Court held that registration to a firm cannot be refused on the ground that one of the partners is a benamidar of another person. The I.T.O. was bound to register the firm though the share of profit given to the benamidar may be assessed in the hands of the real owner. To overcome this judgment, an Explanation was added to Section 185(1) declaring a firm to be not genuine, if any partner therein was a benamidar of any other partner. This amendment served no useful purpose because it hit only those firms whose one of the partners was a benamidar of the other, but not where he was a benamidar of an outsider. This lacuna has been overcome by adding a new clause (b) to the Explanation.

21. Settlement of Cases — Chapter XIX-A.— In the old Act there was a provision for settlement of involved cases, vide Sections 34(1-A) to (1-D); but this settlement could only be in respect of income falling within the period September 1, 1939 to March, 1, 1946. New Chapter XIX-A has revived the "Settlement Scheme". The Settlement Committee will consist of three members of the Central Board of Direct Taxes. Any assessee may apply to the Committee for settlement of his case. No settlement application will be entertained if any concealment or fraud has already been detected by the I.T.O. before the application is made. If a person gives full co-operation to the Settlement Committee and makes a full and true disclosure of his income, the Settlement Committee may grant immunity from penalty and/or prosecution.

22. Prosecution of Karta — Section 278-C.— In Kappor Chand Srimal,9 the Supreme Court held that the Karta of a Joint Hindu Family cannot be prosecuted for an offence committed by the family. New Section 278-C has been enacted to supersede the above judgment

23. Attachment before Judgment — Section 281-B.— Under Section 230-A, no immovable property exceeding the value of Rs 50,000 can be sold without a Clearance Certificate from the I.T.O.; but the I.T.O. cannot withhold the Clearance Certificate if no tax arrears are outstanding against the assessee. How about the capital gain that would arise on sale of property, which would be assessed only next year following the sale of the property. If the property is big and the capital gain is large, it may be difficult to realise the capital gain tax from the assessee after the property is sold. To meet such a situation the new Section 281-B provides for provisional attachment of property.

24. Film Industry — Section 285-B.— Film industry is one of the major industries of the country and much revenue stake is involved in this industry. It has now been made incumbent on all film producers to submit annual returns "off all payments" of over Rs 5000 made by them to "persons engaged by them as employees or otherwise".

25. Invalid Returns — Section 292-B.— In Malik Damsaz Khan,10 it was argued that no penalty for concealment can be imposed on the basis of an invalid return. Similarly in S.B. Deshmukh,11 it was argued that there could be no prosecution on the basis of an invalid return. The Privy Council/Supreme Court met the assessee's argument thus: If the assessee could not be penalised/prosecuted for filing a false return, he could albeit be penalised/prosecuted for failure to file the return because an irregular return was non est in law. The debates which arose before the Privy Council. Supreme Court may not hereafter arise in future because the new Section 292-B lays down that a return shall not be considered invalid "by reason of any mistake, defect or omission" if such return "is in substance and effect in conformity with the intent and purpose of the Act".

26. Penalty—Sections 271, 272-A and 273-A.— In Gokulchand Harivallabhdas,12, a firm opened a new branch in Bombay. A sum of Rs 15,230 was introduced on the opening day in the name of the partners. It was explained that the amount represented sale-proceeds of the ornaments of the deceased wife of a partner. The explanation was found to be false. The amount was assessed as income from undisclosed sources and a penalty of Rs 4000 was imposed. Remitting the penalty, Chagla, C.J., held:

"The proceedings under Section 28(1)(c) in their very nature are penal proceedings, and the elementary principle of criminal jurisprudence is that the burden of proving that the accused is guilty is always upon the prosecution. The assessee is not called upon to prove his innocence, it is for the department to establish his guilt. The assessee is not charged with having given a false explanation. This is not the gist of the offence under Section 28(1)(c). The gist of the offence is that the assessee concealed the particulars of his income or deliberately furnished inaccurate particulars of such income. Therefore, the department must establish that the receipt of Rs 15,230 constitutes 'income' of the assessee. There is not an iota of evidence on the record except the explanation given by the assessee, which explanation has been found to be false. Now it does not follow that if the particular explanation given by the asseessee is false, therefore, necessarily the receipt of Rs 15,230 constitutes a taxable income of the assessee. There may be a hundred and one other possibilities. The assessee may have gone to the Racecourse and earned the sum of Rs 15,230 by means of a very fortunate and successful betting. He may wish to conceal that fact and he may have given a false explanation as to how he came by this sum of Rs 15,230."

Four years after, Brijlal Gupta, J., of the Allahabad High Court took a contrary view in Lalchand Gopaldas.13 A deposit of Rs 5000 was discovered in the Amanat Khata of the assessee and the narration was "cash received from Beopari". The name of the Beopari was not disclosed. The Income Tax Officer assessed the sum of Rs 5000 as "profit from some undisclosed source", and also imposed a penalty of Rs 3500. Confirming the penalty, the learned Judge said:

"A taxing statute itself is required to be interpreted strictly like a penal statute and a provision imposing a penalty in a taxing statute is not to be interpreted differently from any other provision. If there is material justifying the finding that an assessee has concealed particulars of income for the assessment purpose, there is no logic behind the view that it is not sufficient to justify it for the imposition of a penalty . . . . What the Income Tax Authorities cannot do in the penalty proceedings is to refuse to hear the assessee and consider the additional materials produced by him or even to reconsider the materials already produced by him in the assessment proceedings. But here is nothing to prevent their holding that the materials produced in the assessment proceedings were sufficient to justify the finding of concealment of the particulars . . . . If a receipt is income but is disguised in the accounts or in the return as a non-assessable receipt it is clearly a case of concealment of the particulars or of furnishing inaccurate particulars of income. There is no warrant for saying that the Income Tax Authorities must have some materials in addition to those that were before them in the assessment proceedings and on the basis of which they had found that the real nature of the receipt was other than that stated in the accounts or in the return."

The Income tax department found the Allahabad judgment handy and they set about making hasty and ill-digested amendments to the Act. The word "deliberately" was removed from Section 271(1)(c) and an Explanation was inserted at the foot of the sub-section, putting an arithmetical test of mens rea. If the difference in the returned and assessed income was more than 20 per cent., the assessee was to be held guilty of concealment; but if the difference was less, the assessee was innocent. This mechanical test of a man's guilt took away all initiative and independent thinking from the Income Tax Officers. They began levying penalties, wherever they applied proviso to Section 145(1). If an assessee showed 6 per cent recovery of khand from sugarcane and the Income Tax Officer was of the opinion that it should have been 7 per cent., the value of extra 1 per cent recovery estimated was treated as income concealed. Similarly, if a general merchant showed gross profit of 121/2 per cent and the Income Tax Officer was of the view that it should have been 15 per cent., the difference of 21/2 per cent was treated as income concealed. The hardship of this indiscriminate imposition of penalties became all the more accute from 1968 when the quantum of penalty was fixed not with reference to the tax evaded but with reference to income concealed. If the Income Tax Officer added Rupees one lakh for estimated extra recovery in a manufacturing concern, a penalty of an equal amount was imposed. The assessee might not have earned the extra Rs one lakh; but he had to pay that Rupees one lakh out of his pocket by way of penalty. The Supreme Court had to put its foot down against this confiscatory and colourable piece of legislation. In Anwar Ali,14 and Khoday Eswarsa & Sons,15 the Supreme Court gave its unequivocal approval to the Bombay view.

Fact of the matter is that the Bombay and the Allahabad views are at two extremes. To say that no penalty can be imposed even if an assessee's explanation is found to be false is to put a premium on dishonesty; but at the same time to equate penalty assessment proceeding with proceeding would be harassment to honest assessees. Fortunately, saner counsel have prevailed and a golden mean has been struck in the amended Explanation. The new provision can be best understood by means of a table. An assessee, when called to prove the source of a particular sum, may choose to adopt one or the other of the following several alternatives open to him.

In case (f), no further question about imposing of penalty arises. It is only in case (h) that it can reasonably be said that on the material that was produced before the Income Tax Officer or other higher authority no penalty should be levied. In all other cases viz.: (a), (c) and (g), it is possible to hold that the provisions of Section 271(1)(c) are attached.

The highlights of the new penalty provisions are:

(a) For belated returns the ceiling of 50 per cent has been removed. The penalty may be any figure. It may even exceed the tax, depending upon how late the return is filed.

(b) The new legislation has returned to the pre-1968 pattern. The penalty will again be calculated with reference to the tax evaded and not with reference to the income concealed. However, the minimum and the maximum have been raised from 20 to 100 per cent and from 150 to 200 per cent.

(c) In one respect the legislation has gone back to the 1922 Act pattern. Previous approval of the Deputy Commissioner (Assessment) will be required where the penalty exceeds Rs 25,000.

(d) Assessees having taxable income but not filing returns even within the extended period of three years allowed to them under Section 139(4), will be deemed to have concealed income, when they are brought in the net of taxation by proceedings in "back-assessment".

(e) The Supreme Court Judgment in Mansukhlal and Borthers,16 has been superseded. Tax evaded will not be the difference between the tax on the assessed income and the returned income; but the tax ascribable to income actually concealed.

(f) Any person summoned under Section 131 and refusing to make a statement or sign a statement made, can be penalised to the extent of Rs 1000.

(g) The Commissioner's powers of reduction or waiver of penalty have been retained but have been made the subject-matter of a new Section 273-A instead of being sub-sections of Section 271. The new Section 273-A also gives power to the Commissioner to reduce or waive interest.

  1. (1972) 83 ITR 416, 429 (SC): AIR 1972 SC 7. Return to Text
  2. (1956) 29 ITR 543. Return to Text
  3. (1971) 82 ITR 166 (SC): (1973) 3 SCC 344. Return to Text
  4. (1962) 46 ITR 152. Return to Text
  5. (1972) 83 ITR 335, 338 (SC). Return to Text
  6. (1963) 48 ITR 59(SC): 1963 Supp 1 SCR 699: AIR 1963 SC 1448: (1963) 1 SCJ 411. Return to Text
  7. (1967) 64 ITR 341. Return to Text
  8. (1965) 55 ITR 651, 659 (SC): (1965) 2 SCR 13: AIR 1965 SC 1703: (1965) 1 SCJ 434. Return to Text
  9. (1969) 72 ITR 623: (1969) 1 SCR 691: AIR 1969 SC 682: (1969) 1 SCJ 882. Return to Text
  10. AIR 1947 PC 176: (1947) 15 ITR 445 (PC). Return to Text
  11. AIR 1955 SC 249: (1955) 27 ITR 30(SC). Return to Text
  12. (1958) 34 ITR 98, 105. Return to Text
  13. (1963) 48 ITR 324, 337. Return to Text
  14. (1970) 2 SCC 185: (1970) 76 ITR 696. Return to Text
  15. (1971) 3 SCC 555: (1972) 83 ITR 369. Return to Text
  16. AIR 1969 SC 835: (1969) 2 SCJ 388: (1969) 73 ITR 546: (1969) 1 SC 970. Return to Text
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