Supreme Court Dismisses Assessee Bank's Appeals in Companies (Profits) Surtax Act Computation of Chargeable Profits. The Court Held That Deduction Under Rule 1(xi)(a) of the First Schedule Is Limited to the Amount Required Under Section 17(1) of the Banking Regulation Act, 1949, i.e., 20% of Profits, Not the Entire Amount Transferred Even If Directed by Reserve Bank of India Under Section 35A.

Case Note & Summary

Background: The dispute arose under the Companies (Profits) Surtax Act, 1964 regarding computation of chargeable profits of a banking company for assessment years 1971-72 and 1972-73, corresponding to previous years calendar 1970 and 1971. The appellant, M/s. The Andhra Bank Ltd., Hyderabad, was assessed under the Income Tax Act, 1961, and its chargeable profits were to be adjusted in accordance with the First Schedule. The core issue concerned the extent of exclusion allowable under Rule 1(xi)(a) of that Schedule for sums transferred by a banking company to its statutory reserve fund under Section 17(1) of the Banking Regulation Act, 1949. Facts: For the relevant previous years, the assessee bank transferred amounts of Rs.4,12,780 and Rs.5,50,000 to its reserve fund. The Income Tax Officer, while computing chargeable profits for surtax, allowed only the minimum amount required under Section 17(1) i.e., 20% of the disclosed profits before declaration of dividend, and excluded the excess from deduction. The assessee claimed before the ITAT that the entire transferred amount should be excluded because the bank had transferred amounts in excess of 20% pursuant to directions from the Reserve Bank of India under Section 35A of the Banking Regulation Act, thereby making the entire contribution a statutory obligation. The matter was referred to the High Court on the question whether the sums were liable to be excluded under Rule 1(xi)(a); the High Court answered in the affirmative and against the assessee, holding that the exclusion was limited to the amount required under Section 17(1). The assessee appealed to the Supreme Court. Legal Issues: The primary question was whether Rule 1(xi)(a) of the First Schedule to the Surtax Act, 1964 allows exclusion of the entire amount transferred by a banking company to a reserve fund under Section 17(1) of the Banking Regulation Act, 1949, or only the amount required to be transferred, i.e., not less than 20% of profits. A subsidiary issue was whether a direction from the Reserve Bank of India under Section 35A could enlarge the exclusion beyond the statutory minimum. Arguments: The assessee argued that the entire amount transferred to the reserve fund should be deducted because the excess over 20% was contributed pursuant to binding directions from the Reserve Bank of India under Section 35A, and therefore the bank was under a legal obligation to transfer more than 20%; thus the whole sum qualified for exclusion. The revenue contended that the clause expressly limits the deduction to the amount required under Section 17(1), which is 20% of profits, and any sum in excess, regardless of source of obligation, cannot be excluded. The assessee also relied on RBI circulars and letters to show such direction. Court's Analysis: The Supreme Court examined the language of clause (xi)(a) and observed that it is clear and unambiguous. The clause excludes '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.' The phrase 'not exceeding the amount required' restricts the deduction to the sum statutorily mandated by Section 17(1), which is not less than 20% of the profits as disclosed in the profit and loss account before dividend. Any excess transfer, even if made voluntarily or under other statutory directions, does not meet the condition. The Court rejected the argument that an RBI direction under Section 35A could enlarge the permissible deduction, because the 'aforesaid provisions' in the clause refer only to Section 17(1). Moreover, the Court examined the RBI circulars dated 27.12.1961, 25.01.1962, 29.03.1971 and 25.05.1972 and found them to be advisory or clarificatory regarding the basis of computation, not directives requiring transfer of more than 20%. The Court stated that the letters did not constitute a direction under Section 35A. It also distinguished other reserves like cash reserve, which are not eligible under the clause. Decision: The Supreme Court held that the High Court had correctly answered the reference in the affirmative and against the assessee. The appeals were dismissed with no order as to costs. Civil Appeal No.861 of 1985 was also dismissed in light of the judgment in the main appeals.

Headnote

Issue of Consideration

Final Decision

The Supreme Court dismissed the appeals, holding that the High Court correctly answered the referred question in the affirmative and against the assessee. The sums of Rs.4,12,780 and Rs.5,50,000 were held liable to be excluded only to the extent of the amount required under Section 17(1) of the Banking Regulation Act, 1949, i.e., 20% of profits, and not the entire transferred amount. No order as to costs. Civil Appeal No.861 of 1985 also dismissed.

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