Statutory reserve from accrued profits is not diversion at source and remains includible in book profit computation.

Amounts set apart from accrued profits for a statutory reserve, where the assessee retains control and no diversion at source is shown, are treated as an appropriation of profits rather than a diversion of income by overriding title. The transfer was therefore not allowable as a deduction under the general computation provisions of the Income-tax Act, 1961. The same reserve was also includible in book profit under section 115JB because it was created out of profits and did not represent an ascertained liability, and no exclusion applied under the statutory computation scheme.

---

---

Issues: (i) Whether the amount transferred to the statutory reserve fund under the Reserve Bank of India Act, 1934 constituted diversion of income by overriding title and was allowable as deduction in computing taxable income under the Income-tax Act, 1961; (ii) Whether the same amount was required to be added while computing book profit under section 115JB of the Income-tax Act, 1961.

Issue (i): Whether the amount transferred to the statutory reserve fund under the Reserve Bank of India Act, 1934 constituted diversion of income by overriding title and was allowable as deduction in computing taxable income under the Income-tax Act, 1961.

Analysis: The transfer to reserve fund was treated as an appropriation of profits after income had accrued to the assessee. The reserve remained under the assessee's control and was not shown to have been diverted at source by any overriding title. The mandatory nature of the reserve under the Reserve Bank of India Act, 1934 did not convert the transfer into an allowable deduction under the general computation provisions of the Income-tax Act, 1961.

Conclusion: The amount transferred to the statutory reserve fund was not an allowable deduction and the issue was decided against the assessee.

Issue (ii): Whether the same amount was required to be added while computing book profit under section 115JB of the Income-tax Act, 1961.

Analysis: Book profit under section 115JB is to be computed in accordance with the statutory scheme governing reserves and the items permitted by the Explanation. A statutory reserve created out of profits and not representing an ascertained liability falls within the class of amounts to be included in book profit. The reserve created under the Reserve Bank of India Act, 1934 could not be excluded from the computation.

Conclusion: The amount transferred to the statutory reserve fund was includible in book profit under section 115JB and the issue was decided against the assessee.

Final Conclusion: The transfer to statutory reserve was held to be an appropriation of profits and not a diversion of income at source, and it was also held to be includible while computing book profits.

Ratio Decidendi: Amounts set apart from accrued profits for a statutory reserve, where the assessee retains control and no diversion at source is shown, are not deductible as diversion of income by overriding title and are includible in book profit unless expressly excluded by the governing computation provisions.

---