Income-tax Officers to examine each item of reserve carefully before allowing them to be included in the capital base. - Income Tax - 972/CBDT

INSTRUCTION NO. 972/CBDT Dated : July 8, 1976 Section(s) Referred: Rule 1A II Schedule Statute: Income - Tax Act, 1961 Reference is invited to Board's Instruction No. 784* (F. No. 229/7/73-ITA.II) dated 11th November, 1974, directing the Income-tax Officers to examine each item of reserve carefully before allowing them to be included in the capital base and not being missed by the nomenclature given by the assessees in the Balance Sheet. 2. Finance Act, 1976, (66 of 1976) has inserted a new rule numbered rule 1A after rule 1 in the second Schedule to the Companies (Profits) Surtax Act, 1964. The rule has retrospective effect from 1st April, 1975 and reads as under:- "1A. Where a company has not made any credit in any account in its books as on the first day of the previous year relevant to the assessment year which is of the nature of item(i) or item (9) under the head "CURRENT LIABILITIES AND PROVISIONS" in the column relating to "LIABILITIES" in the "FORM OF BALANCE-SHEET", given in Part I of Schedule VI to the Companies Act, 1956, or where the Income-tax Officer is of opinion that the amount credited in such account falls short of the amount which should have reasonably been credited by it, the amount of its capital as computed under rule 1 shall be reduced by the amount which has not been so credited or, as the case may be, the amount of such shortfall. Explanation- For the purposes of this rule, the amount of credit which should have reasonably been made by a company in relation to any account of the nature of item (9) aforesaid, means the amount of dividend declared or paid by the company, on or after the first day of the previous year relevant to the assessment year, for the previous year immediately preceding the first mentioned previous year." 3. It would be seen from the above that the Income-tax Officers have now been specifically empowered to see whether provision or adequate provision have been made in the balance sheet towards provision for taxation and proposed dividend and in cases of shortfall, reduce the capital base accordingly. 4. Board desires that a review of assessments completed for the assessment year 1975-76 may be undertaken immediately in the light of the above amendment and the result of the review indicating the number of cases reviewed, number of cases in which such mistakes have been noticed and the likely tax effect thereon may be sent positively by 31st July, 1976.