45-IC Reserve fund.
According to section 45-IC (1) of The Reserve Bank of India, it is required for every Non-Banking Financial Company to create a reserve fund and transfer a sum not less than 20% of net profit every year before declaration of dividend.
*Net Profit as disclosed in profit and loss account.
According to 45 IC (2) of The Reserve Bank of India, Non-Banking Financial Company shall not make appropriation of any sum from the reserve fund except for the purpose which is specified from the time to time by the bank. Within 21 days from the date of the withdrawal such appropriation shall be reported to the bank.
In case of sufficient cause being shown or in any other particular case bank may extend the period of 21 days by such further period as it thinks fir.
Under Section 45-IC of The Reserve Bank of India, reserve is created out of the profits earned by a non-banking financial institution. Under this, this is not an amount diverted at source by overriding title.
In respect of the said reserve, The Reserve Bank of India Act, 1934 can permit appropriation. Subject to proviso to sub-section (3) of the section 45-IC, assessee can also ask for specific directions from the Central Government.
Under Section 45-IC of The Reserve Bank of India Act, 1934 the reserve created can neither be diversion of income at source nor constitute an expenditure or liability.
Under Section 45-IC of the Reserve Bank of India Act, 1934, reserve is created of not less than 20% of net profit every year. Reserves can only be computed after net profit is calculated and computed.
Created reserve is not a liability known or ascertained. Section 45- IC ensures that entire net profit as disclosed in the Profit and Loss account is not appropriate by Non- Banking Finance Company.
This percentage is either represented by a portion of the asset or ploughed back into business. For reserve no separate bank account is required to be maintained.
For preventing the defaults by the Non-Banking Financial Companies, this an added measure of protection created by the statute. It is created in order to give the entity and its creditors protection from the effect of losses.
Section 45-IC of The Reserve Bank of India Act, 1934 permits appropriation by a Non-Banking Financial Company in restricted or controlled manner.