The Finance Act, 2006

The Hon’ble Finance Minister Shri P. Chidambaram had presented in the Parliament the Finance Bill, 2006 on 28th February, 2006. Normally, the Bill is passed in the subsequent session sometime in the month of May. During the period in-between; i.e., March and April, the Finance Bill proposals are discussed and debated in the different sections and classes of the society and representations are made by professional bodies, business community and others for final consideration by the Government and the Parliament. Such exercise is essential for proper control on arbitrary amendments. Though due importance to such exercise was not given in the past, the situation was not so bad. At least some suggestions were considered and changes were made. But the situation in this year is the worst. There is not even the time for the public debate and proper representation. The Finance Bill was passed by the Parliament on 22nd March, 2006 without any debate or discussion. This is a very unhealthy development, as the entire process of Budget 2006-07 is rather made to look like an empty annual ritual. We hope that such practice will not be continued.

Chapter Vi-a Deductions

Under the Income-tax Act, 1961 the charge is on total income. The ‘total income’ is computed under Chapters IV to VI-A. Chapter VI-A provides for certain deductions. The ‘total income’ so computed before claiming deductions under Chapter VI-A is termed as ‘Gross Total Income’.

Chapter VI-A deductions are tax incentives. These deductions are given to achieve different objectives like promoting investment in general or as a matter of economic or social policy. In Bajaj Tempo Ltd vs. CIT; 196 ITR 188 (SC) the Hon’ble Supreme Court has held that the incentive provisions for the promotion of growth and development should be construed liberally and that since a provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed strictly so as to advance the objective and not to frustrate it.

Where an assessee is entitled to a deduction in respect of income of a particular category (e.g., profits and gains derived from an industrial undertaking or dividend received from a domestic company) under two or more provisions in the Chapter VIA, the deductions under those provisions are to be allowed in a specified order or priority. There is no order of priority for the allowance of deductions admissible under the Chapter VIA with reference to payments or expenditure.

Section 80A lays down certain general principles which are relevant for the purpose of the deductions to be allowed, in computing the total income, under sections 80C to 80U. Such deductions are to be allowed from the gross total income of an assessee in computing his taxable income. The aggregate amount of deductions allowable under the new Chapter VIA is to be limited to the ‘gross total income’ of the assessee and any excess over it is to be ignored.

In terms of section 80A(1), the deductions under any of the sections of Chapter VIA are to be allowed if the assessee claims any of them and establishes the circumstances warranting such a deduction. It would then be the duty of the assessing officer to allow any such deduction. If no such deduction is claimed, the assessing officer will not, ordinarily, be bound to himself to allow any such deduction.

The deductions under Chapter VIA could be classified into two parts. First on the basis of investment/expenditure; and the second on the basis of income.

Special Story : Chapter VIA-Deductions (Part 2 – Income Based Deductions)

The Special Story on ‘Chapter VIA – Deductions’ has been divided into two parts. In the first part the general provisions and expenditure-based deductions are covered. This part was published in previous issue. In the second part for the current month, the income-based deductions are covered. I thank Shri Niraj Sheth for designing the Special Story on ‘Chapter VIA – Deductions’. I also thank all the authors for sparing their valuable time and giving their articles in time.