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TMI Blog1976 (6) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... required under the aforesaid provisions to be so transferred or deposited, as the case may be, or" We may state that this case rests on the above said clause and not on cl. (b) of Surtax Rule 1(xi). The assessee credited reserves of Rs. 4,12,780 and Rs. 5,50,000 in the accounting years relevant to the assessment says that these are the reserves which are required to be made in accordance with s. 17(1) of the Banking Regulation Act, which is referred to in Surtax Rule 1(xi)(a). The CIT says that what is required to be credited under s. 17(1) is in accordance with the directions of the Reserve Bank of India and it would be less. Sec. 17(1) of the Banking Regulation Act, reads as under: " 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 s. 29 and before any divided is declared, transfer to the reserve fund a sum equivalent to not less than twenty per cent of such profit." Before we discuss about the impact of s. 17(1), a few more relevant facts would be stated: The Reserve Bank of India which is the controlling authority f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducting taxes. Since the assessee created more reserves that the minimum, it is not entitled to the exclusion under r. 1(xi)(a) of the Surtax Rules. There is no doubt that 20 per cent of the profits after deducting taxes would work out to Rs. 1,81,952 and Rs. 2,44,124 for the two assessment years under appeal. Since the assessee created reserves more than these amounts, the excess has been ordered to be excluded by the CIT What the CIT finds is that when the Reserve Bank of India permitted the assessee to create more than the minimum required and what is to be allowed under r. 1(xi)(a) of Surtax Rules is only that much which is required to be created. 4. Mr. Swamy, the learned counsel for the assessee, contended that s. 17(1) of the Bank Regulation Act contemplated creation of reserves before taxation and, therefore, when the assessee had created reserves of less than that amount the entire amount should be excluded. This raises the controversy as to what is the scope of s. 17(1) especially as regards the expression of "the balance of profit of each year as disclosed in the profit and loss account prepared under s. 29". Admittedly, the section itself contemplates the balance of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of more than 20 per cent by calculating the reserve on the profits before taxation. Mr. Swamy in this connection referred to us s. 35A wherein the Reserve Bank has been given the power to issue directions to the banking-companies generally or to any banking company in particular and those instructions are bound to be complied with by the bank. Mr. Bhaskara Rao, on the other hand, contended that the reserve Bank of India has merely issued letters to the banks in a sort of advisory capacity and they are not directions as contemplated under s. 35A. He referred to us the letter of the Governor of the Reserve Bank of India dt. 27th Dec., 1961 and pointed out that the conventions were only established by the Bank in regard to the creation of reserve and not that they were any directions in this regard by the Reserve Bank of India. But we think that the Reserve Bank of India has issued the directions to all the banks in pursuance of the powers vested in it under s. 35A. It is true that the language employed by the Governor of the Reserve Bank of India, as pointed out by Mr. Bhaskara Rao, shows as if certain conventions were developed and he requested the banks to follow those convention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer to its statutory reserves out of the profit for the year 1970, after making provision for income-tax. However, in future, the bank should transfer to the above reserves a sum not less than 20 per cent of its profit before providing for income-tax." Stress is laid on this by the CIT and also by the learned Departmental Representative and it was argued that when the Reserve Bank of India directed the assessee to effect transfer to its statutory reserves out of the profit after making provision for income-tax, there was no need to effect transfer of more amount than the minimum required and if the assessee had done it, the assessee cannot claim the excess to be excluded under r. 1(xi)(a) of the Surtax Rules. Mr. Swamy, the learned counsel for the assessee, contended that the directions as was done in the earlier direction already referred to above and they did not mention any specific figures. They have merely stated in general that as a special case reserve could be created after calculating it on the basis of profit after taxation and it did not mean that any amount more than the minimum but less than the amount which the bank was obliged to set apart as reserve as per the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s required under s. 17(1), that would qualify for the exclusion under r. 1(xi)(a) of the Surtax Rules. 7. Viewed in the above context let us see as to what is the position in this case. The assessee was obliged to create reserves of more than the minimum but it could not do so on account of certain difficulties as pointed out to the Reserve Bank of India. The Reserve Bank of India relaxed it and they permitted the assessee-bank as a special case to create a minimum reserve contemplated under the Banking Regulation Act. It does not mean that it has not permitted the assessee-bank to create more than the minimum. All that the Reserve Bank of India mentioned was that the assessee-bank was entitled to create a lesser reserve than what it was obliged to create under the directions issued by the Reserve Bank of India. Thus, we find that the amounts created as reserves by the assessee-bank for the two years under appeal are nothing but reserves created as required under s. 17(1) of the Banking Regulation Act. We are not able to conceive under what category these amounts come. There cannot also be any doubt that whatever was created by the assessee-bank as reserves for the years were the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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