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FINANCE ACT, 1987

Ministry of Law and Justice

Act nº 11 of 1987


  • Chapter I
  • Chapter II
  • Chapter III
  • Chapter V
  • Chapter VI
  • Schedules
  • Act nº 11 of 1987

Preamble

THE FINANCE ACT, 1987

[Act, No. 11 of 1987]

[Extract Relevant To Direct Taxes]

[12th May, 1987]

PREAMBLE

An Act to give effect to the financial proposals of the Central Government for the financial year 1987-88.

BE it enacted by Parliament in the Thirty-eighth Year of the Republic of India as follows: -

Chapter I

Section 1. Short Title And Commencement

(1) This Act may be called the Finance Act, 1987.

(2) Save as otherwise provided is this Act, sections 2 to 91 shall be deemed to have come into force on the 1st day of April, 1987.

Chapter II

Section 2. Income-Tax

(1) Subject to the provisions of sub-sections (2) and (3), for the assessment year commencing on the 1st day of April, 1987, income-tax shall be charged at the rates specified in Part I of the First Schedule.

(2) In the cases to which Sub-Paragraph I or Sub-Paragraph II of Paragraph A of Part I of the First Schedule applies, where the assessee has, in the previous year, any net agricultural income exceeding six hundred rupees, in addition to total income, and the total income exceeds, -

(i) in a case to which the said Sub-Paragraph I applies, eighteen thousand rupees, and

(ii) in a case to which the said Sub-Paragraph II applies, twelve thousand rupees, then, -

(a) the net agricultural income shall be taken into account, in the manner provided in clause (b) [that is to say, as if the net agricultural income were comprised in the total income after, -

(i) in a case to which the said Sub-Paragraph I applies, the first eighteen thousand rupees, and

(ii) in a case to which the said Sub-Paragraph II applies, the first twelve thousand rupees, of the total income but without being liable to tax], only for the purpose of charging income-tax in respect of the total income; and

(b) the income-tax chargeable shall be calculated as follows :-

(i) the total income and the net agricultural income shall be aggregated and the amount of income-tax shall be determined in respect of the aggregate income at the rates specified in Sub-Paragraph I or, as the case may be, Sub-Paragraph II of the said Paragraph A, as if such aggregate income were the total income;

(ii) the net agricultural income shall be increased, -

(A) in a case to which the said Sub-Paragraph I applies, by a sum of eighteen thousand rupees; and

(B) in a case to which the said Sub-Paragraph II applies, by a sum of twelve thousand rupees, and the amount of income-tax shall be determined in respect of the net agricultural income as so increased at the rates specified in Sub-Paragraph I or, as the case may be, Sub-Paragraph II of the said Paragraph A, as if the net agricultural income as so increased were the total income;

(iii) the amount of income-tax determined in accordance with sub-clause (i) shall be reduced by the amount of income-tax determined in accordance with sub-clause (ii) and the sum so arrived at shall be the income-tax in respect of the total income.

(3) In cases to which the provisions of Chapter XII or Chapter XII-A or sub-section (1A) of section 161 or section 164 or section 164A or section 167A of the Income-tax Act, 1961 (43 of 1961) (hereinafter referred to as the Income-tax Act), apply, the tax chargeable shall be determined as provided in that Chapter or that section, and with reference to the rates imposed by sub-section (1) or the rates as specified in that Chapter or section, as the case may be.

(4) In cases in which tax has to be deducted under sections 193, 194, 194A, 194B, 194BB, 194D, and 195 of the Income-tax Act at the rates in force, the deduction shall be made at the rates specified in of the First Schedule.

(5) Subject to the provisions of sub-section (6), in cases in which income-tax has to be calculated under the first proviso to sub-section (5) of section 132 of the Income-tax Act or charged under sub-section (4) of section 172 or sub-section (2) of section 174 or section 175 or sub-section (2) of section 176 of the said Act or deducted under section 192 of the said Act from income chargeable under the head "Salaries" or deducted under sub-section (9) of section 80E of the said Act from any payment referred to in the said sub-section (9) or in which the "advance tax" payable under Chapter XVII-C of the said Act has to be computed, at the rate or rates in force, such income-tax or, as the case may be, "advance tax" shall be so calculated, charged, deducted or computed at the rate or rates specified in I of the First Schedule :

Provided that in cases to which the provisions of Chapter XII or Chapter XII-A or sub-section (1A) of section 161 or section 164 or section 164A or section 167A of the Income-tax Act apply, "advance tax" shall be computed with reference to the rates imposed by this sub-section or the rates as specified in that Chapter or section, as the case may be.

(6) In the cases to which Sub-Paragraph I or Sub-Paragraph II of Paragraph A of I of the First Schedule applies, where the assessee has, in the previous year or, if by virtue of any provision of the Income-tax Act, income-tax is to be charged in respect of the income of a period other than the previous year, in such other period, any net agricultural income exceeding six hundred rupees, in addition to total income and the total income exceeds, -

(i) in a case to which the said Sub-Paragraph I applies, eighteen thousand rupees, and

(ii) in a case to which the said Sub-Paragraph II applies, twelve thousand rupees, then, in calculating income-tax under the first proviso to sub-section (5) of section 132 of the Income-tax Act or in charging income-tax under sub-section (2) of section 174 or section 175 or sub-section (2) of section 176 of the said Act or in computing the "advance tax" payable under Chapter XVII-C of the said Act, at the rate or rates in force, -

(a) the net agricultural income shall be taken into account, in the manner provided in clause (b)

that is to say, as if the net agricultural income were comprised in the total income after, -

(i) in a case to which the said Sub-Paragraph I applies, the first eighteen thousand rupees, and

(ii) in a case to which the said Sub-Paragraph II applies, the first twelve thousand rupees, of the total income but without being liable to tax, only for the purpose of calculating, charging or computing such income-tax or, as the case may be, "advance tax" in respect of the total income; and

(b) such income-tax or, as the case may be, "advance tax" shall be so calculated, charged or computed as follows :-

(i) the total income and the net agricultural income shall be aggregated and the amount of income-tax or "advance tax" shall be determined in respect of the aggregate income at the rates specified in Sub-Paragraph I or, as the case may be, Sub-Paragraph II of the said Paragraph A, as if such aggregate income were the total income;

(ii) the net agricultural income shall be increased -

(A) in a case to which the said Sub-Paragraph I applies, by a sum of eighteen thousand rupees; and

(B) in a case to which the said Sub-Paragraph II applies, by a sum of twelve thousand rupees, and the amount of income-tax or "advance tax" shall be determined in respect of the net agricultural income as so increased at the rates specified in the said Sub-Paragraph I or, as the case may be, the said Sub-Paragraph II, as if the net agricultural income as so increased were the total income;

(iii) the amount of income-tax or "advance tax" determined in accordance with sub-clause (i) shall be reduced by the amount of income-tax or, as the case may be, "advance tax" determined in accordance with sub-clause (ii) and the sum so arrived at shall be the income-tax or, as the case may be, "advance tax" in respect of the total income.

(7) For the purposes of this section and the First Schedule, -

(a) "company in which the public are substantially interested" means a company within the meaning of clause (18) of section 2 of the Income-tax Act, and includes a subsidiary of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year;

(b) "domestic company" means an Indian company, or any other company which, in respect of its income liable to income-tax under the Income-tax Act for the assessment year commencing on the 1st day of April, 1987, has made the prescribed arrangements for the declaration and payment within India of the dividends (including dividends on preference shares) payable out of such income in accordance with the provisions of section 194 of the Act;

(c) "insurance commissions" means any remuneration or reward, whether by way of commission or otherwise, for soliciting or procuring insurance business (including business relating to the continuance, renewal or revival of policies of insurance);

(d) "investment company" means a company whose gross total income (as defined in section 80B of the Income-tax Act) consists mainly of income which is chargeable under the heads "Interest on securities", Income from house property", "Capital gains" and "Income from other sources";

(e) "net agricultural income", in relation to a person, means the total amount of agricultural income, from whatever source derived, of that person computed in accordance with the rules contained in Part IV of the First Schedule;

(f) "tax-free security" means any security of the Central Government issued or declared to be income-tax free, or any security of a State Government issued income-tax free, the income-tax whereon is payable by the State Government;

(g) "trading company" means a company whose business consists mainly in dealing in goods or merchandise manufactured, produced or processed by a person other than that company and whose income attributable to such business included in its gross income (as defined in section 80B of the Income-tax Act) is not less than fifty-one per cent. of the amount of such gross total income;

(h) all other words and expressions used in this section or in the First Schedule but not defined in this sub-section and defined in the Income-tax Act shall have the meanings respectively assigned to them in that Act.

Chapter III

Section 3. Amendment Of 2

In section 2 of the Income-tax Act, -

(a) in clause (22), with effect from the 1st day of April, 1988, -

(i) in sub-clause (e), for the words "by way of advance or loan to a shareholder, being a person who has a substantial interest in the company,", the words, figures, letters and brackets "made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent. of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)" shall be substituted;

(ii) in sub-clause (ii), after the words "a shareholder", the words "or the said concern" shall be inserted;

(iii) after Explanation 2, the following Explanation shall be inserted, namely :-

'Explanation 3 : For the purposes of this clause, -

(a) "concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company;

(b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent. of the income of such concern;';

(b) in clause (24), after sub-clause (ix), the following sub-clause shall be inserted with effect from the 1st day of April, 1988, namely :-

"(x) any sum received by the assessee from his employees as contribution to any provident fund or superannuation fund or any fund set up under the provisions of the Employees' State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees;";

(c) after clause (29), the following clauses shall be inserted with effect from the 1st day of April, 1988, namely :-

'(29A) "long-term capital asset" means a capital asset which is not a short-term capital asset;

(29B) "long-term capital gain" means capital gain arising from the transfer of a long-term capital asset;';

(d) after clause (36), the following clause shall be inserted, namely :-

'(36A) "public sector company" means any corporation established by or under any Central, State or Provincial Act or a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956);';

(e) in clause (42A), before the Explanation, the following proviso shall be inserted with effect from the 1st day of April, 1988, namely :-

'Provided that in the case of a share held in a company, the provisions of this clause shall have effect as if for the words "thirty-six months", the words "twelve months" had been substituted.';

(f) after clause (42A), the following clause shall be inserted with effect from the 1st day of April, 1988, namely :-

'(42B) "short-term capital gain" means capital gain arising from the transfer of a short-term capital asset;';

(g) in clause (47), with effect from the 1st day of April, 1988, -

(i) in sub-clause (iv), the word "or" shall be inserted at the end;

(ii) after sub-clause (iv), the following sub-clauses and Explanation shall be inserted, namely :-

'(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or

(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.

Explanation : For the purposes of sub-clauses (v) and (vi), "immovable property" shall have the same meaning as in clause (d) of section 269UA

Section 4. Amendment Of 10

In section 10 of the Income-tax Act, -

(a) after clause (10B), the following clause shall be inserted, namely :-

"(10C) any payment received by an employee of a public sector company at the time of his voluntary retirement in accordance with any scheme which the Central Government may, having regard to the economic viability of such company and other relevant circumstances, approve in this behalf."

(b) in clause (15), -

(i) in sub-clause (ii), -

(A) in the opening paragraph, for the words, brackets and figures "the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959", the words and figures "the Post Office Cumulative Time Deposit Rules, 1981" shall be substituted and shall be deemed to have been substituted with effect from the 1st day of April, 1983;

(B) in the proviso, for the words, brackets and figures "in item (3) in the Table below rule 3 of the Post Office Savings Banks Rules, 1965", the words and figures "in item 6 in the Table below rule 4 of the Post Office Savings Account Rules, 1981" shall be substituted and shall be deemed to have been substituted with effect from the 1st day of April, 1983;

(ii) in sub-clause (iv), after item (g) and the Explanation thereto, the following item shall be inserted, namely :-

"(h) by any public sector company in respect of such bonds or debentures and subject to such conditions, including the condition that the holder of such bonds or debentures registers his name and the holding with that company, as the Central Government may, by notification in the Official Gazette, specify in this behalf;";

(c) in clause (17), -

(i) in sub-clause (i), the word "and" shall be omitted and shall be deemed to have been omitted with effect from the 1st day of April, 1986;

(ii) for sub-clause (ii), the following sub-clauses shall be substituted and shall be deemed to have been substituted with effect from the 1st day of April, 1986, namely :-

"(ii) any allowance received by any person by reason of his membership of Parliament under the Members of Parliament (Constituency Allowance) Rules, 1986;

(iii) all other allowances not exceeding six hundred rupees per month in the aggregate received by any person by reason of his membership of any State Legislature or of any Committee thereof, which the Central Government may, by notification in the Official Gazette, specify in this behalf;".

Section 5. Amendment Of 10A

In section 10A of the Income-tax Act, in the Explanation occurring at the end after clause (ii), the following clause shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1981, namely :-

'(iii) "manufacture" includes any -

(a) process, or

(b) assembling, or

(c) recording of programmes on any disc, tape, perforated media or other information storage device.'.

Section 6. Amendment Of 27

In section 27 of the Income-tax Act, for clause (iii), the following clauses shall be substituted with effect from the 1st day of April, 1988, namely :-

"(iii) a member of a co-operative society, company or other association of persons to whom a building or part thereof is allotted or leased under a house building scheme of the society, company or association, as the case may be, shall be deemed to be the owner of that building or part thereof;

(iiia) a person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882), shall be deemed to be the owner of that building or part thereof;

(iiib) a person who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof, by virtue of any such transaction as is referred to in clause (f) of section 269UA, shall be deemed to be the owner of that building or part thereof;".

Section 7. Amendment Of 32AB

In section 32AB of the Income-tax Act, -

(a) in sub-section (1), -

(i) for the words "deduction of", the words, brackets and figures "deduction (such deduction being allowed before the loss, if any, brought forward from earlier years is set off under section 72) of" shall be substituted;

(ii) the following proviso shall be inserted at the end, namely :-

"Provided that where such assessee is a firm, or any association of persons or any body of individuals, the deduction under this section shall not be allowed in the computation of the income of any partner, or, as the case may be, any member, of such firm, association of persons or body of individuals.";

(b) in sub-section (2), for clause (ii), the following clauses shall be substituted, namely :-

'(ii) "new ship" or "new aircraft" includes a ship or aircraft which before the date of acquisition by the assessee was used by any other person, if it was not at any time previous to the date of such acquisition owned by any person resident in India;

(iii) "new machinery or plant" includes machinery or plant which before its installation by the assessee was used outside India by any other person, if the following conditions are fulfilled, namely :-

(a) such machinery or plant was not, at any time previous to the date of such installation by the assessee, 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 in respect of such machinery or plant has been allowed or is allowable under this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee;

(iv) "Tea Board" means the Tea Board established under section 4 of the Tea Act, 1953 (29 of 1953);';

(c) in sub-section (3), in clause (a), for the words "as increased by an amount equal to the depreciation, if any, debited in the audited profit and loss account; and", the following shall be substituted, namely :-

"as increased by the aggregate of -

(i) the amount of depreciation;

(ii) the amount of income-tax paid or payable, and provision therefor;

(iii) the amount of surtax paid or payable under the Companies (Profits) Surtax Act, 1964 (7 of 1964);

(iv) the amounts carried to any reserves, by whatever named called;

(v) the amount or amounts set aside of provisions made for meeting liabilities, other than ascertained liabilities;

(vi) the amount by way of provision for losses of subsidiary companies; and

(vii) the amount or amounts of dividends paid or proposed,

if any debited to the profit and loss account; and as reduced by any amount or amounts withdrawn from reserves or provisions, if such amounts are credited to the profit and loss account; and";

(d) after sub-section (5), the following sub-sections shall be inserted namely :-

'(5A) Any amount standing to the credit of the assessee in the deposit account shall not be allowed to be withdrawn before the expiry of a period of five years from the date of deposit except for the purposes specified in the scheme and in the circumstances specified below :-

(a) closure of business;

(b) death of an assessee;

(c) partition of a Hindu undivided family;

(d) dissolution of a firm;

(e) liquidation of a company.

(5B) Where any amount standing to the credit of the assessee in the deposit account is utilised by the assessee for the purposes of any expenditure in connection with the eligible business or profession in accordance with the scheme, such expenditure shall not be allowed in computing the income chargeable under the head "Profits and gains of business or profession".';

(e) in sub-section (6), -

(i) for the words "is not utilised in accordance with the scheme", the words "is not utilised in accordance with, and within the time specified in, the scheme" shall be substituted;

(ii) the words "within that previous year," shall be omitted.

Section 8. Amendment Of 33AB

In section 33AB of the Income-tax Act, in sub-section (5), for the words, figures and letters "assessment year commencing on the 1st day of April, 1986, and the four assessment year next following that assessment year", the words, figures and letters "assessment years commencing on the 1st day of April, 1986, and the 1st day of April, 1987" shall be substituted with effect from the 1st day of April, 1988.

Section 9. Amendment Of 36

In section 36 of the Income-tax Act, in sub-section (1), after clause (v), the following clause shall be inserted with effect from the 1st day of April, 1988, namely :-

'(va) any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee's account in the relevant fund or funds on or before the due date.

Explanation : For the purposes of this clause, "due date" means the date by which the assessee is required as an employer to credit an employee's contribution to the employee's account in the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise.'.

Section 10. Amendment Of 43B

In section 43B of the Income-tax Act, before the Explanation, the following provisos shall be inserted with effect from the 1st day of April, 1988, namely :-

"Provided that nothing contained in this section shall apply in relation to any sum referred to in clause (a) which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return :

Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid during the previous year on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36."

Section 11. Insertion Of New 44BB

In the Income-tax Act, after section 44B, the following section shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1983, namely :-

'44BB. Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils. - (1) Notwithstanding anything to the contrary contained in section 28 to 41 and sections 43 and 43A, in the case of an assessee engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten per cent. of the aggregate of the amounts specified in sub-section (2) shall be deemed to be profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession" :

Provided that this sub-section shall not apply in a case where the provisions of section 42 or section 44D or section 115A or section 293A apply for the purposes of computing profits or gains other income referred to in those sections.

(2) The amounts referred to in sub-section (1) shall be the following namely :-

(a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction of production of, mineral oils in India; and

(b) the amount received or deemed to be received in India by or on behalf of the assessee on account of the provision of service and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India.

Explanation : For the purposes of this section, -

(i) "plant" includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment, used for the purposes of the said business;

(ii) "mineral oil" includes petroleum and natural gas.'