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Personal Balance Sheet
[Submitted by CA. Dev Kumar Kothari
B.Com, Grad.CWA, ACS, FCA
Kolkata, West Bengal]
June 23, 2007
Preparation of balance sheet and P&L A/c. is always advisable so that
state of affairs can be ascertained and the assets owned and liabilities
owed are quantified and reflected in the balance sheet. Maintenance of
balance sheet for individuals is not compulsory in all cases and a larger
part of assessees who do not have any business income or business
activities are not required to maintain books of accounts and to submit
balance sheet and profit & loss account. However, maintenance of such
records is also equally importance for such persons to disclose their
state of affairs and to have records of the assets owned by them readily
available so that at any time it can be proved that assets, articles,
things, cash, property certificates found with him are disclosed and
accounted for and is not un-disclosed assets.
UTILITY FOR ASSESSEE AS WELL AS REVENUE AUTHORITIES
Balance Sheet and P&L A/c. are very useful instruments for the assessee as
well as the revenue authorities. Once a balance sheet is prepared and
submitted to the revenue authorities, the assets held and liabilities
incurred are disclosed to the Department. Therefore, in case of search at
the premises of an assessee, the items of assets disclosed in the balance
sheet are fully covered and need not require further explanation. However,
if a balance sheet is not prepared and is not readily available, it
becomes quite difficult to prove that all these items which are found at
the time of search have been disclosed to the revenue or have been
acquired out of tax paid or tax free income of several earlier years.
ACQUISITION OUT OF TAX FREE RECEIPTS
Every householder may have something, which is acquired or purchased out
of certain capital receipts; tax free income or the articles or things
received itself was a capital receipt. In case a balance sheet and P&L
A/c. is not prepared and merely statement of income has been submitted
over several years, it may be quite difficult, in case of search to prove
that such articles or things were acquired by way of gifts or out of other
capital receipts or tax from income received by the assessee during
earlier years. If a balance sheet is prepared every year, the capital
receipts in cash or any kind can be duly recorded from time to time and it
can be reflected in the capital account. Smaller sum accumulated over a
period of time may not be reflected in records unless a balance sheet is
prepared. For a simple example, let us consider a case of certain gifts
received at the time of marriage, which took place about say 25 years ago.
At that time, gifts received would have been of about Rs. 20,000/-, which
may be valued today at about Rs. 5.00 Lakhs. Suppose a search takes place
and there is no balance sheet and these things are not recorded in any
other books of accounts, or documents the value being Rs. 5.00 Lakhs can
be considered as an undisclosed income of the year in which search takes
place. If these items were recorded in the balance sheet such problem may
be avoided. Smaller gifts are generally received in every household;
similarly some gifts are given to others also. It is desirable that they
should be recorded in books of account.
CERTAIN ITEMS NOT CORRECTLY RECORDED
In many cases it is found that certain items of assets are not correctly
recorded. Some items, which represent assets, are charged to the P&L A/c.
or drawings account. On a survey of about 50 files maintained by different
10 accountants, it was noticed that in many cases the following types of
assets are either charged to the P&L A/c. or drawings account or therefore
not reflected in many cases in the balance sheet.
1) Contribution to P.F. & F.P. Funds deduction from salary including
interest accumulated.
2) PPF including interest accumulated.
3) Life Insurance Premium paid and bonus accumulated.
4) Jewellery and its improvement.
5) Personal effects - furniture, paintings, collections for hobby,
durable utensils, durable apparels, etc.
6) Improvement to various assets- jewellery, land and building, personal
effects.
7) Petty cash gifts received and gifts received in kind. Etc.
Accounting for these items as an item of assets in the balance sheet
will make computation of income easy and nearer to profit disclosed in the
P&L A/c. and the Balance Sheet of the individual shall also be improved
and give true and fair view of the affairs.
PROPER CLASSIFICATION IN BALANCE SHEET
A proper classification of assets and liabilities in the balance sheet of
individuals is also important. The Balance Sheet must appear not only
healthy but also a balanced one. If various items of asset as discussed
earlier are not disclosed in the balance sheet, the balance sheet wills
neither be healthy nor balance sheet will be a balanced one. For example,
a person having total business assets of say Rs. 50.00 Lakhs must have
some personal assets also in the balance sheet. However, since these
personal assets were wrongly charged to the P&L A/c. or drawings account
they are not at all reflected in the balance sheet and that shows a
distorted picture of the state of affairs. In such cases the A.O. can
justifiably start re assessment proceedings on the ground that any
personal assets are not disclosed in the balance sheet so they might have
been acquired out of un- disclosed income.
Revaluation of properties:
Old properties, assets, articles and things, which are to be reflected in
the balance sheet, can be revalued to show the current replacement price
of the same. In case of depreciation assets also the depreciation may be
considered while revaluing the assets to show correct picture.
Corrections in the balance sheet as on 31.03.2007:
In case earlier these items are is not disclosed in the balance sheets of
any clients they may be asked to provide details of the same, obtain
valuation report, and reasonable evidence and disclose the same in the
balance sheet by way of addition to capital account and respective assets.
The details may be compiled and a timely decision may be taken to
incorporate the same in the balance sheet.
Appreciation can be reflected:
During last three years gold, silver and precious stones have appreciated
considerably. Therefore, a review should be made, valuation at CMP as on
310307 should be made and same can be revalued in balance sheet by adding
appreciation in capital and asset accounts. This will also keep a check
and vigil in case of marginal assessees of WT.
Any items gifted to family members or other should be excluded from
donors account and included in wealth of donee.
Protection in case of reassessment and search proceedings:
A properly drawn and detailed balance sheet can protect assessees from
action by the revenue authorities against reassessment proceedings and in
case of search and seizure and survey etc. If the balance sheet and
details are readily available the items found in possession , their year
of acquisition, the cost etc. can be easily explained.
Other items of personal effect:
Similarly reflection of other items of personal effects in the personal
balance sheets or balance sheet of HUF is important. In case exact details
for past acquisition are not available at least some estimated value can
be put in the balance sheet by capitalizing the same in balance sheet in
assets side and adding in capital, after compiling inventory of such
items.
In case of self created/ created by family members personal effects
like drawings, paintings, artistic articles etc. and similar items
received as gifts from relatives and friends also disclosure can be made
in balance sheet at estimated market value or at nominal value (of say
Re.125 per piece) so that items get incorporated in the balance sheet and
an inventory is kept ready for record and reference. The fact that some
items did not cost any thing should be mentioned so that in case of sale
in future, there will not be dispute.
Helpful in establishing the cost of acquisition and cost of
improvement:
It is found many times that due to absence of capitalized cost of capital
assets difficulty arises in establishing such cost and the year of
incurring of costs. The transfer of capital asset may take place after
considerable time. If the balance sheets of earlier years are on record of
the assessing Officer, the work of convincing about the year and cost
becomes much easy.
Capitalization of such costs in the balance sheet help is establishing
the year of acquisition, year of improvement and cost for acquisition and
improvement for computing the capital gains by applying the cost inflation
index.
Salaried persons - a balance sheet is very important:
For salaried persons balance sheet may not be required for assessment,
however, for future reference, and to keep assets on record a balance
sheet is very important document. Therefore, it is advisable that even for
clients who have only income from salary and other sources, practice for
preparing balance sheet be adopted. The clients can easily be explained
importance and the author feels that the client shall willingly pay for
additional value added service provided which is likely to remove a lot of
tension of the client.
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