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Salient Features of Finance Bill, 1973
Cite as : (1973) 1 SCC (Jour) 21
Except for items in Paras 4 and 8 infra, all other amendments proposed in the Finance Bill, 1973 and discussed below are prospective, that is to say, they will come in force only from Assessment Year 1974-75.
1. Agricultural Income — Clause 2(6).— Whenever an assessee is called upon to explain the nature and source of a cash credit appearing in his name or in the name of a third party in his account books, the pet explanation is that the deposit represents agricultural income. The I.T.O. is helpless to verify how far the explanation is true because agricultural income is a State-subject and the Income Tax Department has no material with it to find out whether the assessee or the third party really owns agricultural land. If so, what is its extent and how much its income? At present "agricultural income" is being used as a catalytic to convert black money into white.
An attempt has been made in the Finance Bill, 1973, to stop the above abuse. Clause 2(6) of the Bill seeks to prepare a sort of Roster of assessees having agricultural income and the extent thereof; so that the assessees will be committed to the factum and the quantum of the agricultural income in case they are faced with an unexplained cash credit in future. If the assessee has declared his agricultural income in the past at Rs 50,000, it will not be possible for him to explain away fully a deposit of rupees one lakh.
In preparing this Roster of agricultural income, the legislature has sedulously avoided infringement of Item 46, List II, Seventh Schedule of the Constitution, by making no attempt to tax the agricultural income.
The agricultural income is used only as a base to push up the non-agricultural income to a higher tax-slab. Take the case of a person with Rs 10,000 non-agricultural income and Rs 5000 agricultural income. Excluding 10% surcharge for the moment, tax on him will be calculated as under, as per clause 2(6) of the Finance Bill:
| (i) |
Tax on agricultural and non-agricultural income put together i.e. on Rs 10,000+5000=15,000 |
... |
Rs 1350 |
| (ii) |
Tax on agricultural income+ad hoc5000=10,000 |
... |
Rs 500 |
| |
Net tax payable i.e. difference between (i) and (ii) |
... |
Rs 850 |
If the agricultural income were mentioned in Chapter VII and were to be included for rate purposes, the position would be as under:
| (i) |
Tax on Rs 15,000 as at (i) above.
Rate of tax on above books out to Rs 8.1 paid Supreme Court per Rupee |
... |
Rs 1350 |
| (ii) |
Rebate on agricultural income of Rs 5000 @ 8.1% |
... |
Rs 405 |
|
Net tax payable i.e. different between (i) and (ii) |
... |
Rs 945 |
By not declaring the agricultural income as "exempt income" and by not including it in the "total income", yet making it feature in the tax structure by the new expedient adopted in clause 2(6), not only the assessee has been made to gain Rs 95 but the legislature has also avoided any challenge to its competence to levy "tax" on agricultural income. The vires of the new legislation can also not be challenged under Article 14 of the Constitution; because the grouping of assessees having both agricultural and non-agricultural income and those having only agricultural income, is based on an intelligible differentia. It is a reasonable classification having regard to the object of preventing evasion of tax.
2. Hindu Undivided Family — Finance Act, First Schedule, Part III, Paragraph A, Sub-Paragraphs I and II; Wealth Tax Act, Schedule, Part I, Paragraph A, Item 1(A).— In Sundar Singh Majithia (1942) 10 ITR 457, the Privy Council decided that a Hindu Undivided Family may continue to exist and yet divide its business among the coparceners, by the simple expedient of dividing the capital invested in business. The result was a spate of "partial partitions" and for every Hindu Undivided Family there was a parallel registered firm. The immediate rejection of the Government was to levy tax on registered firms, which were hitherto exempt. To begin with, income of registered firms was exempt to up to Rs 40,000 from 1956-57 to 1961-62. The exemption limit was lowered down to Rs 25,000 from 1962-63 to 1969-70; and further down to Rs 10,000 from 1970-71 up to date. With every decrease in the exemption limit, the rates of tax on registered firm have gone on increasing. The tax was at first nominal—9 pies in the rupee on incomes up to Rs 75,000 and 11/2 annas on incomes above Rs 1,50,000. In 1962-63 the rates were suddenly increased to 7% on incomes up to Rs 40,000 and 12% on incomes above Rs 1,50,000. The rates today are 4% on the first slab up to Rs 25,000 rising to 20% on incomes above Rs 1,00,000.
In Gowli Budanna (1966) 60 ITR 293 (SC), the Supreme Court held that a sole surviving coparcener without a male issue, constitutes a Hindu Undivided Family all by himself. In N. V. Narendranath (1969) 74 ITR 190 (SC), the Supreme Court went a step further and held that every separated branch of a Hindu Undivided Family constitutes a Hindu Undivided Family by itself, be it a family of only one member. In Keshavlal Lallubhai, (1965) 55 ITR 637 (SC), the Supreme Court held that it is permissible for an individual to impress his "self-acquired" property with the character of a joint Hindu family property.
The result of the above Supreme Court judgments is that Hindu Undivided Families are multiplying like amoeba and every "individual" has a "split-personality".
To avoid this abuse of Hindu Law, sub-section (2) to Section 64 was inserted by Taxation Laws (Amendment) Act, 1970. The new sub-section seeks to club with the separate income of an individual, his share and the share of his wife and minor children in the income of the Hindu Undivided Family which is the creation of the individual. Gift Tax is also imposable on the individual when he throws his self-acquired property in the family hotchpot.
The present Bill has swooped over these pseudo—"Hindu Undivided Families" with a sledge-hammer:
(i) The higher exemption limit of Rs 7000 has been abolished;
(ii) Tax on a Hindu Undivided Family, which has a member with independent income exceeding Rs 5000, has been upgraded by one slab in each income group;
(iii) Likewise, each slab of wealth of a Hindu Undivided Family, which has a member with independent wealth exceeding rupees one lakh, has been upgraded by one stage.
Income tax and wealth tax on families with and without members having independent income/wealth in the beginning and the ending slabs is given below to illustrate how ruthlessly taxes have been increased on Hindu Undivided Families.
Income tax
| Income |
Family having member with independent income |
Family having no member with indepen-
dent income |
Difference |
Percentage increase |
|
| 10,000 |
850 |
500 |
350 |
70 |
| 15,000 |
2000 |
1350 |
650 |
50 |
| 20,000 |
3500 |
2500 |
1000 |
25 |
| 80,000 |
43,000 |
37,000 |
6000 |
16 |
| 1,00,000 |
59,000 |
52,000 |
7000 |
14 |
| 2,00,000 |
1,44,000 |
1,32,000 |
12,000 |
10 |
Wealth tax
| Wealth |
Family having member with independent income |
Family having no member with indepen-
dent income |
Difference |
Percentage increase |
|
| 3,00,000 |
6000 |
3000 |
3000 |
100 |
| 4,00,000 |
8000 |
4000 |
4000 |
100 |
| 5,00,000 |
10,000 |
5000 |
5000 |
100 |
| 10,00,000 |
25,000 |
15,000 |
10,000 |
75 |
| 20,00,000 |
1,05,000 |
70,000 |
35,000 |
50 |
All this vendetta against the Hindu Undivided Family could have been avoided by dropping the Hindu Undivided Family from the list of taxable entities mentioned in Section 2(31) of the Income Tax Act and Section 3 of the Wealth Tax Act.
3. Short Term Capital Gain — Section 2(42-A).— In Section 2(42-A) when it was originally enacted in 1961, "Short Term Capital Asset" was defined as an asset not held by the assessee for more than a year. The period was extended from one year to two years by the Finance Act, 1968. The period has further been extended to five years by the present Finance Bill. The difference between a Capital Gain and ordinary business profit is being gradually narrowed. Any gain arising from a Capital Asset held by an assessee even for a long period of five years, has now been equated to ordinary business profit.
4. Compensation for Compulsory Acquisition by Government — Section 28 (ii)(d).— A new sub-clause (d) has been added to Section 28 (ii) with retrospective effect from April 1, 1972. This new sub-clause seeks to bring to tax "Compensation Moneys" received by an assessee on nationalisation of his business venture. But the most cruel cut is that the compensation moneys will be taxed down right and will bolster up the tax on the total income to a very high figure. While for all other compensation moneys received on termination of managing or selling agency, the assessee is allowed to deduct 25% under Section 80-S, this remission of 25% is not allowed on compensation received from Government. One can only say that:
"You take my life when you do take the means whereby I live."
5. Life Insurance Premium, etc. Section 80-C.— Upto 1971, an assessee was allowed to deduct 50% of the premium paid by him up to Rs 5000 and thereafter 40%. From 1972, while retaining the old percentages, the first Rs 1000 of the premium was allowed to be fully deducted. The present Bill has extended the ad hoc deduction from the first 1000 to first 2000.
An assessee who paid an annual premium of Rs 5000 could deduct Rs 2500 up to 1971. Thereafter, Rs 3500 in Assessment Years 1972-73, 1973-74. From next year he may deduct Rs 35,000.
6. Sports Associations—Section 80-G (5).— Donations to Sports Associ-ations will now qualify for deduction from Assessment Year 1974-75.
7. Additional Tax on "Controlled Companies"—Sections 104 and 105.—In the Editorial Note on Page 61 of 1973 Supreme Court Cases (Tax), the soundness of the Supreme Court judgment in CIT, W.B. v. Abdul Rahim Osman & Co., (P) Ltd., has been doubted. The Supreme Court opined that if a "controlled company" failed to declare the "statutory percentage" of dividend within twelve months of the close of the accounting period, the I.T.O. assumed jurisdiction to pass an order for the levy of additional tax on the company; but it the company does declare the "statutory percentage" of divided before the I.T.O. passes his order demanding additional tax, the I.T.O. would become functus officio and no additional tax could actually be levied on the company. The present amendment seeks to resolve the conundrum posed by the Supreme Court, by adding the words "within the said period of twelve months", at the end of Section 104(1). Likewise, the words "within the period of twelve months referred to in sub-section (1) of Section 104" have been inserted in clauses (i) and (ii) of Section 104(2) and in clauses (i) to (iii) of Section 105(1). An Explanation has also been inserted at the end of Section 105(1) to clarify the position.
8. Insurance Agents — Section 194-D.— Section 194-D is a new section. It casts upon insurance companies responsibility to deduct tax-at-source when paying commission or remuneration to an insurance agent. Tax will be deducted at-source from payments to be made after May 31, 1973.
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