813/CBDT. - Income Tax - 813/CBDT

INSTRUCTION NO. 813/CBDT Dated : December 17, 1974 Section(s) Referred: Rule 1 , II Schedule Statute: Income - Tax Act, 1961 The Board has examined the question as to what meaning should be assigned to the expression "the first day of the previous year" occurring in Rule I of the Second Schedule to the Companies (Profits) Surtax Act, 1964 and Explanation 1(b) in Para F of Part I of the First Schedule to Finance Act, 1966. The expression "on the first day of the previous year" has not been defined either in the companies (Profits) Surtax Act, 1964 or in the Finance Act 1966. 2. As per principle of construction, when a particular word is not specially defined it should be construed in the context in which it occurs. For the purpose of computing capital under Rule I of the Second Schedule to the Sur-tax Act, the capital is computed with reference to the balance-sheet of the company as on the commencement of the first day of the previous year. In view thereof, the capital means the capital as at the beginning of the first day of the previous year and not at the close of the first day. The percentage of dividends will have relevance only to the capital employed in earning the income out of which dividends are distributed. The Income or the profits could have been earned out of the capital which was employed for the purpose up to the last day of the previous year. In addition thereto, on the subsequent day, which is the first day of the next year, it would not be instrumental in earning the income from which the dividends are distributed. As such, it would be logical as well as consistent with the principles of accountancy that any change in the capital structure effected on the first day of the previous year could not be really taken into account for the purpose of determining the paid up capital . Similar considerations will apply to the relevant provisions of the Finance Act, 1966. 3. Necessary instructions may please be issued to all the officers working in the charge on the lines indicated above for their guidance.