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PETITIONER: M/S. THE ANDHRA BANK LTD.,HYDERABAD.

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME TAX,A.P. III, HYDERABAD.

DATE OF JUDGMENT22/09/1995

BENCH: SEN, S.C. (J) BENCH: SEN, S.C. (J) AHMADI A.M. (CJ) PARIPOORNAN, K.S.(J)

CITATION:  1995 SCC  Supl.  (4) 133 JT 1995 (7)   373  1995 SCALE  (5)477

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T SEN,J.      These are appeals from a judgment of the Andhra Pradesh High Court  which answered  the following question of law in the affirmative and against the assessee:-      "Whether  on   the  facts   and  in  the      circumstances of  the case,  the sums of      Rs.4,12,780/-  and   Rs.5,50,000/-   are      liable to  be excluded  under Rule 1(xi)      (a) of the Surtax Rules in computing the      chargeable profits in Surtax assessments      for the  assessment  years  1971-72  and      1972-73?"      The assessment  years involved in this case are 1971-72 and 1972-73  for which  the  relevant  previous  years  were calendar years 1970 and 1971 respectively.      The dispute  in  this  case  is  about  computation  of chargeable  profits   of  a   banking  company.  ’Chargeable Profits’ has been defined in sub-section (5) of Section 2 of The Companies  (Profits) Surtax  Act, 1964  (for short  ’the Act’) to mean the total income of an assessee computed under the Income  Tax Act,  1961 for  any previous  year or years, .......... and adjusted in accordance with the provisions of the First Schedule."      There is  a specific  rule in the First Schedule of the Act relating  to computation  of  chargeable  profits  of  a banking company which is as under :      "In computing  the chargeable profits of      a  previous   year,  the   total  income      computed for that year under the Income-      Tax Act shall be adjusted as follows:-      1.   Income, profits and gains and other      sums  falling   within   the   following      clauses  shall  be  excluded  from  such

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    total income, namely:-      x  x  x  x  x  x  x  x  x           (xi)  in  the  case  of  a  banking           company-                (a) any  sum which  during the                previous year  is  transferred                by it  to a reserve fund under                sub-section (1)  of section 17                of the  Banking Companies Act,                1949.............,         not                exceeding the  amount required                under the aforesaid provisions                to  be   so   transferred   or                deposited, as the case may be,                or"      The language  of clause  (xi) (a)  is  clear.  Whatever amount as  deposited  in  the  reserve  fund  created  under Section 17  (1) of  the  Banking  Regulation  Act  will  not qualify for deduction. The deduction will be limited only to the amount  which is  required  to  be  transferred  to  the reserve fund by sub-section (1) of Section 17 of the Banking Regulation Act,  1949. Sub clause (a) of clause (xi) clearly states that  when an  amount is transferred to the statutory reserve fund,  deduction will  be  limited  to  a  sum  ’not exceeding the amount required under the aforesaid provisions to be  so transferred.’.  The legislative  intent is  not to allow the  entire sum  transferred to  the reserve  fund  as deduction but  to limit  it to  the amount which is actually required by  the provisions of Section 17 (1) of the Banking Regulation Act to be transferred to the reserve fund.      Section 17 of the Banking Regulation Act, 1949 makes it necessary for a banking company to create a reserve fund and transfer not  less than  20/ of  its profits to that reserve fund.      "17. Reserve  Fund-  (1)  Every  banking      company  incorporated   in  India  shall      create a  reserve fund and shall, out of      the balance  of profit  of each  year as      disclosed in the profit and loss account      prepared under Section 29 and before any      dividend is  declared, transfer  to  the      reserve fund  a sum  equivalent  to  not      less  than   twenty  per  cent  of  such      profit."      The mandate of Section 17 is that every banking company will have  to transfer  to a  reserve fund every year, a sum equivalent to  "not  less  than  twenty  per  cent  of  such profit". In other words, at least 20% of the profit as shown in the  Profit and  Loss Account  before declaration  of any dividend has  to be transferred to the reserve fund. This is the statutory  requirement. If  a banking  company transfers any amount  in excess  of 20%  of its  profit of any year to this reserve  fund, the exclusion in clause (xi) (a) will be limited to  20% of  the profit  which is  the requirement of Section 17 (1) of the Banking Regulation Act.      Mr.  Ramachandran   on  behalf   of  the  assessee  has contended that  in this  case, a reserve fund was created by the assessee  bank to  comply with the provisions of Section 17 of  the Banking Regulation Act. Even though the amount of contribution for  the relevant  accounting period was higher than 20%  of its  balance of profits, the entire amount will have to be deducted from its total income in order to arrive at chargeable  profit under  clause (xi)  of Rule  1 of  the First Schedule  to the  Act, because the amount in excess of the  statutory  minimum  was  contributed  pursuant  to  the

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direction given  by the  Reserve Bank of India under Section 35A of  the Banking  Regulation Act  is binding on a banking company. Therefore, the Bank was under a legal obligation to transfer more  than 20%  of its profits to the reserve fund. Since this  transfer was made pursuant to direction given by the Reserve  Bank of India, the entire amount so transferred must be  allowed as  deduction for computation of chargeable profit.      We are  unable to  uphold  this  argument  for  several reasons. In  the first place, clause (xi) of Rule c 1 of the First  Schedule   to  the  Act  specifically  restricts  the allowable amount  to a sum not exceeding the amount required under the provisions of Section 17 to be so transferred. Any other sum  transferred to a reserve fund under the direction of Reserve  Bank or  any other  law  will  not  qualify  for deduction. For  example, under the Banking Regulation Act, a bank has  to maintain  a cash reserve under Section 1 of the Banking Regulation  Act. Any sum transferred to this reserve will  not  be  eligible  for  deduction  from  total  income computed  under   the  Income   Tax  Act.  Only  the  amount transferred to  the reserve  fund created  under Section  17 will be  eligible for deduction and the quantum of deduction is restricted to the amount required under the provisions of Section 17  of the Banking Regulation Act to be transferred. Section 17  lays down  that before any dividend is daclared, out of  the balance  of profit  of each year as disclosed in the profit and loss account, a sum not less than 20% of such profit will  have to  be transferred  to the  reserve  fund. Deduction under clause (xi) has been specifically limited to this  amount   which  is   required  by  Section  17  to  be transferred to  the reserve  fund. The phrase ’not exceeding the amount  required ......  to be so transferred’ indicates that any  other sum  in excess of the requirement of Section 17 will not be eligible for deduction.      Assuming that  the assessee  bank  was  under  a  legal obligation to  transfer a  sum in excess of 20% by virtue of a. direction  given by  the Reserve  Bank of India, then the excess contribution  to the  reserve fund was not because of any requirement  of Section 17 but because of the provisions of some  other  Section.  The  exclusion  permissible  under clause (xi)  of Rule  1 of  the first Schedule of the Act is limited only  to the  sum "not exceeding the amount required under the  aforesaid provisions  to be so transferred ....". The  ’aforesaid   provisions’  in   this  clause  means  the provisions of  Section 17 (1) of the Banking Regulation Act. If any  further sum  is transferred  to the  reserve fund by virtue of provisions of some other Sections of the Act, such sum  will  not  quality  for  exclusion  in  computation  of chargeable profits.      Moreover, from the various circulars relied upon by the assessee Bank,  it does  not appear that the Reserve Bank of India gave  any direction under Section 35A to transfer more than 20%  to the  reserve  fund.  A  circular  letter  dated 27.12.1961 was  issued by  the  Governor,  Reserve  Bank  of India, to all the scheduled Banks in which it was stated:-      "I am  aware that  several banks obliged      to  transfer   20  per   cent  of  their      declared profits in terms of section 17,      actually transfer  a quantum larger than      that, I  have no  doubt such  banks will      continue to maintain this practice." This cannot  be construed as a direction by the Reserve Bank of India  under Section  35A. Similarly, the circular letter written on  25th January, 1962 deals with ’a point which has been raised by the Bank’. In reply the Executive Director of

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the Reserve Bank of India stated:-      "In this connection, we advise as under:      2.   Certain banks have already reserves      which are equal to or exceed their paid-      up capital.  The intention  is that such      banks  should  transfer  not  less  than      twenty  per   cent  of  their  disclosed      profits  arrived  at  after  making  the      usual and necessary provisions and after      deduction of the provision for taxation.      3.   There   are   several   banks   the      reserves of which are not equal to their      paid-up  capital.   The  intent  of  the      Governor’s letter  is  that  such  banks      should, till  they reach parity of paid-      up capital and reserves, follow the same      basis of computation as they observed in      their profit  and loss account for 1960.      That  is   to  say,   if  they   compute      transfers to  reserves on profits before      tax they  should continue  to Co so till      parity is reached." This  letter  is  in  the  nature  of  advice  and  contains direction as  to how  profit  should  be  calculated  before transfer of  the requisite  20% is made to the reserve fund. Banks having reserves equal to or in excess of their paid-up capital should  transfer 20% of the profits after making the usual provisions  and  after  deduction  of  provisions  for taxation. But  those Banks  whose reserves  are not equal to their paid-up  capital should  transfer 20% of their profits Deforo tax  to the  reserve fund  till the parity of paid-up capital is  reached. This circular letter was written by the Executive Director of the Reserve Bank of India.      Reliance has been placed upon two other letters written by the Reserve Bank of India to the assessee Bank. The first letter is  dated  29th  March,  1971  in  which  the  Bank’s practice of  effecting transfer  to the  statutory  reserve, after making  provisions for  Income Tax, has been commented upon. In  this letter,  the  Deputy  Chief  Officer  of  the Reserve Bank  has made it clear that lin future, bank should transfer to  the above  reserves a  sum not less than 20% of its profits before providing for income tax. We may add that our approval  does not  affect in  any  way  the  obligation imposed on your bank by or under any other provisions of the Banking Regulation  Act, 1949  or of the Companies Act, 1956 or any other law for the time being in force.’      The other  letter dated  25.5.1972 is  also in the same vein.      None of these circular-letters sent by the Reserve Bank of  India  nor  the  letters  written  specifically  to  the assessee-Bank go  to show that the Reserve Bank of India had directed the Banks or the assessee-bank to transfer a larger amount than  what was  required by  Section 17  (1)  of  the Banking Regulation  Act. Therefore,  this argument  that the assessee had  been directed  by the  Reserve Bank  of  India under Section  35A to  contribute a  larger  amount  to  the reserve fund  than what  was required  by Section  17(1)  is misconceived.      In view  of the  aforesaid, we  hold that  the question referred to  the High  Court was  correctly answered  by it. These appeals  are dismissed.  These will  be  no  order  as costs.                 CIVIL APPEAL NO.861 OF 1985      In view of our Judgment in Civil Appeals Nos.4895-96 of 1964, this appeal is also dismissed.

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