Deduction u/s 80J, 80K, exemption certificates u/s 197 - responsibility of ITO - Income Tax - 555/CBDT

INSTRUCTION NO. 555/CBDT Dated : June 11, 1973 Section(s) Referred: 197(3) ,80K Statute: Income - Tax Act, 1961 In accordance with the provisions of section 80-J of the Income-tax Act, 1961 a new industrial undertaking is entitled to a deduction of an amount upto 6 per cent of the capital employed in the industrial undertaking in computing its total income. Further, under section 80-K, dividends attributable to such profits are allowed to be deducted from the total income of the shareholders. Where by reason of the provisions of section 80-K , the whole or any portion of the dividends is deductible in computing the total income of the shareholders, the Principal Officer of the company before paying the dividend to the shareholder should obtain a certificate under section 197(3) from the Income-tax Officer assessing the company determining the appropriate portion of the dividend to be deducted under the provisions of section 80-K. On such determination by the Income-tax Officer, no tax has to be deducted under section 194 on such proportionate amount. The issue of a certificate under section 197(3) in the above circumstances and final determination of claim for exemption under section 80-J has been finally determined subsequent to the issue of certificates under section 197(3), such certificates have to be revised; indeed Rule 20 of Income-tax Rules, 1962 envisages such adjustments from the provisional stage of beginning of production of the undertaking to the stage of assessment finalisation. 2. It has come to the notice of the Board that in the case of some companies the Income-tax Officers had without carefully examining whether the case of the company was covered under section 80-J or not, issued provisional exemption certificates under section 197(3) in the initial stage authorising the company not to deduct tax on proportionate amounts determined by him. Accordingly, no tax was deducted at source from exempted portion of the dividends by the companies. Subsequently, at the time of making regular assessment the Income-tax Officer found and held that the assessee companies were not entitled to the benefits of section 80-J. However, no steps were taken to cancel or modify the exemption certificates already issued with the result that the excluded dividend income in the hands of shareholders escaped tax. In order to avoid such situations, the Board desire that the Income-tax Officers may follow the following procedure:- (a) While issuing certificate under section 197(3) the Income-tax Officer assessing the company should exercise due care and diligence to ensure that he does not issue any unwarranted certificate authorising a lesser deduction of tax at source from dividends. (b) When the Income-tax Officer issues such a certificate in any case, he should make it abundantly clear that the certificate is provisional and is subject to modification later on. (c) He should also ensure that the company too makes suitable endorsements on the dividend warrants to this effect. (d) The Income-tax Officer should invariably review the provisional certificate issued on the completion of the relevant assessment of the company. If on such review it is found that there has been a lesser deduction of tax at source from dividends as per the provisional authorisation under section 197(3), the Income-tax Officer should remedy the situation immediately by obtaining a list of shareholders as on the date of relevant general body meeting and issuing intimations to all the concerned Commissioners pointing out the tentative figures mentioned in the original certificate and the corresponding correct figures as per assessment. The Commissioners should be requested to have the assessments of the relevant shareholders reopened under section 147(b) for assessing the additional tax liability. Acknowledgments should invariably be obtained for these intimations. (e) Similar procedure should be followed by the Income-tax Officer if there is any modification on this point as a result of appeal etc. (f) The Income-tax Officer assessing the company shall be held responsible for any loss of revenue because of failure to observe the above instructions. (g) The Income-tax Officer assessing a shareholder covered by the above noted provisional certificates should record the name of the concerned shareholder and assessment year in the register maintained by him for watching action under section 147. Unless he receives final information well in advance from the Income-tax Officer assessing the company for information regarding final position emerging on finalisation of assessment in the company's case and take such action as may be necessary to revise the shareholder's assessment.