Case: Messrs The Andhra Bank Limited, Hyderabad Vs. Commissioner of Income Tax, A.P. Iii, Hyderabad

These are appeals from a judgment of the Andhra Pradesh High Court which answered the following question of law in the affirmative and against theon the facts and in the circumstances of the case, the sums of Rs.4, 12, 780/- and Rs.5, 50, 000/- are liable to be excluded under Rule 1(xi) (a) of the Surtax Rules 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 computation of chargeable profits of a banking company. Chargeable Profits has been defined in sub-section (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 Firstis a specific rule in the First Schedule of the Act relating to computation of chargeable profits of a ban king company which is ascomputing the chargeable profits of a previous year, the total income computed for that year under the Income- Tax Act shall be adjusted as follows:- 1. Income, profits and gains and other sums falling within the following clauses shall be excluded from such total income, namely:- x x x x x x x x x (xi) in the case of a banking company- (a) any sum which during the previous year is transferred by it to a reserve fund under sub-section (1) of section 17 of the Banking Companies Act, 1949............., not exceeding the amount required under the aforesaid provisions to be so transferred or deposited, as the case may be, or"language of clause (xi) (a) is clear. Whatever amount as deposited in the reserve fund created under Section 17 (1) of the Banking Regulation Act will not qualify for deduction. The deduction will be limited only to the amount which is required to be transferred to the reserve fund by sub -section (1) of Section 17 of the Banking Regulation Act, 1949. Sub clause (a) of clause (xi) clearly states that when an amount is transferred to the statutory reserve fund, deduction will be limited to a sum not exceeding the amount required under the aforesaid provisions to be so transferred.. The legislative intent is not to allow the entire sum transferred to the reserve fund as deduction but to limit it to the amount which is actually required by the provisions of Section 17 ( 1) of the Banking Regulation Act to be transferred to the reserve fund.

Reasoning: This letter is in the nature of advice and contains direction as to how profit should be calculated before transfer of the requisite 20% is made to the reserve fund. Banks having reserves equal to or in excess of their paid-up capital should transfer 20% of the profits after making the usual provisions and after deduction of provisions for taxation. But those Banks whose reserves are not equal to their paid-up capital should transfer 20% of their profits Deforo tax to the reserve fund till the parity of paid-up capital is reached. This circular letter was written by the Executive Director of the Reserve Bank ofhas been placed upon two other letters written by the Reserve Bank of India to the assessee Bank. The first letter is dated 29th March, 1971 in which the Banks practice of effecting transfer to the statutory reserve, after making provisions for Income Tax, has been commented upon. In this letter, the Deputy Chief Officer of the Reserve Bank has made it clear that lin future, bank should transfer to the above reserves a sum not less than 20% of its profits before providing for income tax. We may add that our approval does not affect in any way the obligation imposed on your bank by or under any other provisions of the Banking Regulation Act, 1949 or of the Companies Act, 1956 or any other law for the time being in force.The other letter dated 25.5.1972 is also in the same vein. None of these circular-letters sent by the Reserve Bank of India nor the letters written specifically to the assessee-Bank go to show that the Reserve Bank of India had directed the Banks or the assessee-bank to transfer a larger amount than what was required by Section 17 (1) of the Banking Regulation Act. Therefore, this argument that the assessee had been directed by the Reserve Bank of India under Section 35A to contribute a larger amount to the reserve fund than what was required by Section 17(1) is misconceived.