TaxTMI 
TaxTMI 
1995 (9) TMI 64
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....x Act, 1964, 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 the computation of chargeable profits of a banking company. " Chargeable profits " has been defined in clause (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 Schedul....
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....ions 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 per cent. 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 y....
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.... Reserve bank of India, the entire amount so transferred must be allowed as deduction for computation of the chargeable profits. We are unable to uphold this argument for several reasons. In the first place, clause (xi) of rule 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 the 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 18 of the Banking Regulation Act. Any sum transferred to this reserve will not be eligible for deduction fro....
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....ng Regulation Act. If any further sum is transferred to the reserve fund by virtue of the provisions of some other sections of the Act, such sum will not qualify for exclusion in the 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 per cent. to the reserve fund. A circular letter dated December 27, 1961, was issued by the Governor, the 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....
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....of provision for taxation. But those banks whose reserves are not equal to their paid-up capital should transfer 20 per, cent. of their profits before tax to the reserve fund till parity with 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 March 29, 1971, in which the bank's practice of effecting transfer to the statutory reserve, after making provision for income-tax, has been commented upon. In this letter, the Deputy Chief Officer of the Reserve Bank has made it clear that " in future, the bank should transfer to the above reserves a su....