Banking company reserve exclusion under surtax law is capped at the statutory minimum reserve required by banking regulation.

Rule 1(xi)(a) of the First Schedule to the Companies (Profits) Surtax Act, 1964 allows a banking company to exclude from chargeable profits only the amount transferred to reserve fund that is required under section 17(1) of the Banking Regulation Act, 1949. The exclusion is capped at the statutory minimum of twenty per cent of relevant profits, and does not extend to any higher reserve created under Reserve Bank of India directions or by voluntary transfer. The provision was treated as clear and limited by its wording, so the excess reserve remained includible in chargeable profits.

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Issues: Whether, for computing chargeable profits under rule 1(xi)(a) of the First Schedule to the Companies (Profits) Surtax Act, 1964, the exclusion available to a banking company is confined to the minimum reserve required under section 17(1) of the Banking Regulation Act, 1949, or extends to reserves created in excess of that minimum pursuant to directions of the Reserve Bank of India under section 35A of that Act.

Analysis: Rule 1(xi)(a) permits exclusion only of the sum transferred to a reserve fund under section 17(1) of the Banking Regulation Act, 1949, but only to the extent of the amount required under that provision. Section 17(1) requires transfer of not less than twenty per cent of profits to the reserve fund. Even if the Reserve Bank directs a banking company to create a higher reserve, or the company in fact transfers a larger amount, the relief under the surtax rule is limited by its own words, namely, the amount required under section 17(1). The provision was treated as clear and not requiring a liberal construction in favour of the assessee.

Conclusion: The exclusion from chargeable profits is restricted to twenty per cent of the relevant profits, and any excess reserve transferred is not excludible under rule 1(xi)(a).

Final Conclusion: The reference was answered by holding that the statutory exclusion for banking-company reserves is capped at the minimum amount required under section 17(1), notwithstanding any higher reserve directed or permitted by the Reserve Bank of India.

Ratio Decidendi: Where a surtax exemption provision limits exclusion to amounts transferred to reserve fund under section 17(1) of the Banking Regulation Act, 1949, the exclusion cannot exceed the amount legally required by that section, even if a larger reserve is created under regulatory directions.

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