692/CBDT. - Income Tax - 692/CBDT

INSTRUCTION NO. 692/CBDT Dated : May 27, 1974 Section(s) Referred: Rule 3 of IInd Sch Statute: Income - Tax Act, 1961 A company issued bonus shares during the previous year by utilising a part of the accumulation in the general reserve. While computing the statutory deduction allowable in the Surtax assessment of the company, a certain sum was added to the capital of the company as on the first day of the previous year in consideration of the resultant increase in its paid up share Capital during the previous year as per Rule 3 of the Second Schedule to surtax Act, 1964. This addition to the capital was irregular and uncalled for. 2. The capital of a company as defined in Rule 1 in the Second Schedule to the Companies (Profits) Surtax Act, 1964 includes the general reserve standing in the books of the company as on the first day of the relevant previous year as well as the paid up capital on that date. When a portion of the general reserve was utilised for issuing bonus shares, the increase in the paid up share capital referred to in clause (i) of Rule 1 was preceded by an equivalent reduction in the reserve referred to in clause (ii) of Rule 1 and as a result, the capital of the company which included both elements remained unchanged. Thus, the capitalisation of a part of the general reserve meant only a mutually compensating readjustment as between two elements both forming part of the capital of the company as computed in accordance with Rules 1 and 2. Rule 3 provides for an addition to the amount of the capital of the company as on the first day of the relevant previous year only where the capital as computed in accordance with Rules 1 and 2 is increased during the previous year. As there was no such increase during the previous year in the case referred to above, Rule 3 had no application at all. 3. The Board desires that the above instructions may be brought to the notice of all the officers working under your charge for their guidance and compliance. 4. A general review of the completed assessments may also be carried out to locate and take remedial action immediately in case such mistake has occurred in any other case. A report on the result of the review undertaken giving therein the number of cases in which mistakes were noticed and the tax effect may kindly be sent to the Board by 30th June, 1974.