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Issues Involved:
1. Exclusion of reserves under Rule 1(xi)(a) of the First Schedule to the Companies (Profits) Surtax Act, 1964. 2. Interpretation of Section 17(1) of the Banking Regulation Act, 1949. 3. Authority of the Reserve Bank of India (RBI) under Section 35A of the Banking Regulation Act. 4. Validity of CIT's revision of ITO's assessment orders. Issue-wise Detailed Analysis: 1. Exclusion of Reserves under Rule 1(xi)(a) of the First Schedule to the Companies (Profits) Surtax Act, 1964 The core issue revolves around whether the reserves created by the assessee-bank qualify for exclusion under Rule 1(xi)(a) of the First Schedule to the Companies (Profits) Surtax Act, 1964. The CIT enhanced the chargeable profits by excluding the amounts of Rs. 2,30,828 and Rs. 3,05,876 for the assessment years under appeal, arguing that the reserves created exceeded the minimum required under Section 17(1) of the Banking Regulation Act. However, the Tribunal found that the reserves created by the bank, even if exceeding the minimum, were still within the scope of Rule 1(xi)(a) as they were required by the RBI's directions. 2. Interpretation of Section 17(1) of the Banking Regulation Act, 1949 Section 17(1) mandates that every banking company must create a reserve fund and transfer a sum equivalent to not less than 20% of the balance of profit each year. The CIT argued that the reserves should be calculated on profits after deducting taxes, as per RBI's directions. However, the Tribunal clarified that "balance of profit" as mentioned in Section 17(1) includes profits after making all necessary provisions, including taxes. Therefore, the minimum reserve under Section 17(1) would be 20% of the balance of profit after taxation. 3. Authority of the Reserve Bank of India (RBI) under Section 35A of the Banking Regulation Act The Tribunal examined whether the RBI had the authority to direct banks to create reserves higher than the statutory minimum. The Tribunal concluded that the RBI, under Section 35A, has the power to issue binding directions to banks, including directives to create reserves based on profits before taxation. The RBI's letters were interpreted as directions rather than mere advisories, thus obligating the banks to comply. 4. Validity of CIT's Revision of ITO's Assessment Orders The CIT revised the ITO's assessment orders on the grounds that the ITO had erroneously excluded the reserves created by the bank, leading to prejudice against the revenue. However, the Tribunal found that the CIT's interpretation was flawed. The Tribunal held that the reserves created by the bank, as per the RBI's directions, were indeed required under Section 17(1) and thus qualified for exclusion under Rule 1(xi)(a) of the Surtax Rules. Consequently, the Tribunal set aside the CIT's consolidated order and restored the ITO's original assessments. Conclusion The Tribunal allowed the appeals, setting aside the CIT's consolidated order and restoring the ITO's original assessments. The Tribunal affirmed that the reserves created by the bank, even if exceeding the statutory minimum, were in compliance with Section 17(1) of the Banking Regulation Act and the RBI's directions. Therefore, these reserves qualified for exclusion under Rule 1(xi)(a) of the Surtax Rules.
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