Reserve fund deduction under surtax law is limited to the statutory minimum transfer, not any excess amount.

For computing chargeable profits under the Companies (Profits) Surtax Act, 1964, rule 1(xi)(a) of Schedule I allows exclusion only of the amount transferred to a banking company's reserve fund that is required under section 17(1) of the Banking Regulation Act, 1949. The deduction is confined to the statutory minimum mandatory transfer and does not extend to any excess amount, even if made with Reserve Bank of India advice or directions unless a binding section 35A direction is shown. On the stated facts, the excess transfer was not deductible and the question was answered against the assessee.

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Issues: Whether, for computing chargeable profits under the Companies (Profits) Surtax Act, 1964, the amount transferred by a banking company to the reserve fund in excess of the minimum required by section 17(1) of the Banking Regulation Act, 1949, is excludible under rule 1(xi)(a) of Schedule I.

Analysis: Rule 1(xi)(a) permits exclusion only of the sum transferred to the reserve fund, but limits the deduction to the amount required to be transferred under section 17(1) of the Banking Regulation Act, 1949. The statutory language "not exceeding the amount required" makes the exclusion co-extensive only with the minimum mandatory transfer of not less than twenty per cent of profits. Any excess transfer, even if said to have been made pursuant to directions or advice of the Reserve Bank of India, is not a transfer required by section 17(1) and therefore does not fall within the allowance. The materials relied on did not establish a binding direction under section 35A compelling a transfer beyond the statutory minimum.

Conclusion: The excess amount transferred to the reserve fund was not deductible in computing chargeable profits. The question was correctly answered against the assessee.

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