Introduction

The objective of this article is to highlight the amendments relating to the exemptions, deductions and rebates effective from 1st April, 2005. i.e. A.Y. 2005-06.

Exemptions

This section deals with exemption of interest, premium on redemption, or other payment on such securities, bonds annuity certificates, savings certificates, other certificates issued by Central Government.

Sub-clause (iiic) has been inserted w.e.f. 1st April, 2005 to exempt interest payable to European Investment Bank, on a loan granted by it in pursuance of the framework agreement for financial co-operation entered into on 25th day of November, 1993 by the Central Government.

Family pension received by the widow of children or nominated heirs of a member of the armed forces including the paramilitary forces of the union is exempt from taxes where the death of such member has occurred in the course of operational duties in such circumstances and subject to such conditions as may be prescribed.

The section deals with exemption of income by way of dividends, other than dividends referred to in section 115-O, interest on long- term capital gains of an infrastructure capital company or a co-operative bank on investments specified and approved in this regard.

A proviso has been inserted to the said section, to provide that the said income on account of dividend and long-term capital gains of the infrastructure capital company shall be taken into account in computing the book profit of the company and tax shall be payable on the same as per the provisions of section 115JB irrespective of the income being exempt as per the provisions of section 10.

Any income chargeable under the head capital gains arising from the transfer of agricultural land received by an Individual or an HUF, on or after 1st April, 2004, by way of compensation or consideration including enhanced compensation enhanced by any court, Tribunal or any other authority shall be exempt where

1. such land is situated in any area which is comprised within the jurisdiction of a municipality or a cantonment board as provided in sub-clause (a) of clause (iii) of section 14 or in any area within such distance, as provided in clause (b) clause (iii) of section 14, not being more than eight kilometres from the local limits of any municipality or cantonment board.

2. such land was being used for agricultural purposes by the HUF or individual or his parents during the period of two years immediately preceding the date of transfer,

3. the transfer is by way of compulsory acquisition under any law or the consideration of the transfer is determined or approved by the Central Government or Reserve Bank of India.

Any income arising from transfer of a long- term capital asset being an equity share in a company or a unit in an equity oriented fund is exempt from tax where

1. The transaction of such sale is entered into on or after the date on which Chapter VII of the Finance Act (No. 2) came into force; i.e., from 1st October, 2004. and

2. Such transaction is chargeable to securities transaction tax under chapter VII of the Finance Act (No. 2)

For the purpose of this section equity oriented fund would mean a fund where the investible funds are invested by way of equity shares in domestic companies to the extent of more than fifty per cent of the total proceeds of the fund or a fund which has been set up under a scheme of Mutual Fund specified in clause (23D) of section 10.

The percentage of equity shareholding of the fund shall be computed with reference to the annual average of the monthly averages of the opening and closing figures of the investments.

Deductions

This section provides for a deduction in respect of expenditure incurred on maintenance of a dependent, being a person with disability, including medical treatment for nursing, training and rehabilitation of a handicap dependent.

The definition of person with severe disability is amended with effect from 1st April, 2005 to mean a person with eighty per cent or more disabilities, as referred to in sub-section (4) of section 56 of the persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995 or a person with severe disability referred to in clause (o) of section 2 of the National Trust of Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act 1999.

This section deals with the deduction in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development etc.

Sub-section (3) of section 80-IA provides for the eligibility criteria of an industrial undertaking to avail such a deduction on fulfilling the prescribed conditions. One of them as mentioned in clause (ii) provides for an undertaking to be eligible if the same is not formed by the transfer of machinery or plant used for any purpose earlier to its transfer to a new business for which deduction is being considered.

A proviso has been inserted with effect from assessment year 2005-06 by which the condition as provided in clause (ii) would not apply, in case where the transfer either in whole or in part of machinery or plant previously used by a State Electricity Board referred to in clause (7) of section 2 of the Electricity Act, 2003 whether or not such transfer is in pursuance of the splitting up, reconstruction or reorganization of the board under Part XIII of the Act.

Further, sub-clause (c) has been added to clause (iv) of sub-section (4) of 80-IA to provide the benefit of the deduction to an undertaking which undertakes substantial renovation and modernization of the existing network of transmission or distribution lines of power at any time during the period beginning on the 1st day of April, 2004 and ending on the 31st day of March, 2006.

Substantial renovation and modernization for the purpose of this clause means an increase in the plant and machinery in the network of transmission or distribution lines by at least fifty per cent of the book value of such plant and machinery as on the 1st April, 2004.

This section deals with deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings.

1. Sub-section (4) of section 80-IB provides for deduction in case of an industrial undertaking in an industrially backward state specified in the Eighth Schedule. The criteria for eligibility provided in the first proviso provides that an industrial undertaking begins to manufacture or produce article or operate cold storage plant or plants during the period beginning on the 1st April, 1993 and ending on the 31st March, 2004.
   
   A proviso has been added to extend such time limit provided in the first proviso to 31st March, 2005 where the industrial undertaking is situated in the State of Jammu & Kashmir except for the undertakings engaged in the manufacture or production of any article or thing specified in Part C of the Thirteenth Schedule; i.e., in the manufacture of cigarettes/ cigars of tobacco, manufactured tobacco and substitutes, distilled/brewed alcoholic drink or aerated branded beverages and their concentrates.
    

2. Sub section (10) of section 80-IB deals with the deduction available in respect of the undertaking developing and building housing projects. The provisions of this sub- section are substituted with effect from 1st April, 2005.
   
   As per the amended provisions the deduction will be available in case of an industrial undertaking developing and building housing projects approved by a local authority before 31st March, 2007 as against 31st March, 2005 earlier. The conditions to be fulfilled to avail the deduction include:
    

   1. Completion of construction
      The undertaking which has commenced or commences development and construction of the housing project on or after 1st October, 1998 should complete such construction

      Where the plans are approved

      before 1st April, 2004 – on or before 31st March, 2008

      after 1st April, 2004 – within four years from the end of the financial year in which the housing project is approved.

      In case where the approval in respect of the housing project is obtained more than once the date of approval for the purpose of determining the completion criteria would be the first date on which building plan of such housing project was approved by the local authority.

      The date of completion shall be taken to be the date on which completion certificate in respect of such housing project is issued by the local authority.
       

   2. Size of the plot developed
      For claiming deduction under the said provisions the size of the plot, which is used for developing the housing project, should have minimum area of one acre.
       

   3. Size of the residential unit/shop area in the project
      The residential unit in the project should have a maximum built up area of one thousand square feet where such residential area is situated within the city of Delhi or Mumbai or within twenty-five kilometres of the municipal limits of these cities and one thousand five hundred square feet at any other place.

      The built up area of the shops and other commercial establishments included in the housing project should not exceed five per cent of the aggregate built up area of the housing project or two thousand square feet whichever is less.

      Built up area means the inner measurement of the residential unit at the floor level, including the projections and balconies, as increased by the thickness of the walls but does not include the common areas shared with other residential unit.

      The conditions of completion of construction and the size of the plot would not be applicable where the project is carried out in accordance with a scheme framed by the Central Government or a State Government for reconstruction or redevelopment of existing buildings in areas declared to be slum areas under any law for the time being in force and such scheme is notified by the board in this behalf.
       

3. The scope of sub section (11A) of section 80-IB has been amended to include profits from the business of processing, preservation and packaging of fruits, vegetables in addition to the integrated business of handling, storage and transporta-tion of food grains eligible for deduction.
    

4. A new sub-section (11B) has been inserted granting deduction in case of an industrial undertaking deriving profits from the business of operating and maintaining a hospital in a rural area at 100% of the profits and gains of such business for a period of five consecutive assessment years beginning from the initial year. The conditions to be fulfilled include.

   1. The hospital is constructed at any time during the period beginning on the 1st October, 2004 and ending 31st March, 2008.

   2. The hospital has at least one hundred beds for patients

   3. The construction of the hospital is in accordance with the regulations for the time being in force of the local authority and

   4. The assessee furnishes along with the return of income the report of audit in such form and containing such particulars as may be prescribed.

For the purpose of this section the hospital will be deemed to be constructed on the date on which completion certificate in respect of such construction is issued by the concerned authority. This means that the hospitals, which had commenced construction before October 2004 but have completed the construction and procured a completion certificate after October 2004 would be eligible for such deduction

Initial assessment year for the purpose of availing the deduction means the assessment year relevant to the previous year in which the undertaking begins to provide medical services.

The section provides for a deduction in computing the total income of a resident being a person with disability as certified by the medical authority.

The definition of disability, medical authority, persons with disability and persons with severe disabilities have been substituted w.e.f. 1st April, 2005 to be the same as defined in section 80DD. The readers may refer to the respective section for the new definition.

Rebates

By insertion of this new section, rebate has been provided in case of certain individuals whose income does not exceed one lakh rupees or whose income exceeds marginally over one lakh rupees due to which his income after payment of taxes is below one lakh.

This rebate is available to only individuals and to avail the benefit of this section the individual should be a resident of India during the relevant previous year.

The amount of rebate under the provisions of section 88D would be

1. in case where the total income does not exceed Rs. 1 lakh
   — total amount of tax thereon
    

2. in case where the total income exceeds Rs.1 lakh where the total tax liability payable on such income is more than the amount by which the amount of income exceeds Rs. 1 lakh.
   — the amount of tax payable in excess of the amount of income in excess of Rs. 1 lakh.

for example,

1. In case of an individual having income of Rs. 96,000/-
   Tax thereon would be Rs. 8,200/-
   As per the provision s of sec. 88D clause (a) rebate would be Rs. 8,200/-
    

2. In case of an individual having income of Rs. 1,08,000/-

   Tax thereon would be Rs. 10,600/-
   Tax payable being more than the amount of income exceeding Rs. 1 lakh.
   Rebate as per the provisions of section 88D clause (b) would be Rs. 2,600/-. (the amount by which the tax liability is more than the income in excess of Rs. 1 lakh)
    

3. In case of an individual having income of Rs. 1,22,000/-.
   Tax payable would be Rs. 13,400/-.

Since the amount of tax payable is less than the amount by which income exceeds Rs. 1 lakh the assessee is not eligible to rebate under section 88D.

Effectively the tax payable by the assessee will be restricted to the amount by which the income exceeds Rs. 1,00,000/- till the time the income in excess of Rs. 1,00,000 is more than the tax liability on the total income.

By insertion of this new section rebate has been provided to any assessee whose total income during the previous year includes any income chargeable under the head profits and gains of business and profession arising out of taxable securities transactions.

Rebate on account of the securities transaction tax (STT) paid by an assessee in respect of taxable securities transactions entered into in the course of his business during that previous year shall be available against the tax payable on such income returned under the head profits and gains of business.

The amount of rebate shall be amount of securities transaction tax paid during the previous year restricted to the amount calculated by applying average rate of income tax on such income chargeable to tax.

Average rate of tax would be worked out as follows:

If the STT paid is more than the tax liability on securities transactions calculated at average rate the rebate will be restricted to the amount of such tax liability. Alternatively if the STT paid is less than the tax liability on such income of securities transaction total amount of STT paid will be eligible for the purpose of rebate under section 88E.