Seetharam Reddy, J.
1. The question referred for our answer at the instance of the Revenue is :
'Whether, on 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 Sch. I to the Surtax Act, 1964, in computing the chargeable profits in surtax assessment for the assessment years 1971-72 and 1972-73 ?'
2. As per the statement of case, the assessee, a scheduled bank, is a banking company. On December 27, 1961, the Reserve Bank of India, which is the controlling authority for all the scheduled banks, issued a general letter stating that reserve should be created in accordance with s. 17(1) of the Banking Regulation Act, 1949 (hereinafter to as 'the Act'), in order to achieve a ratio of 6% of the deposits. By a subsequent letter dated January 25, 1962, it was clarified that 20% of the profits would mean profits after deduction of tax and other necessary provisions, in other words, 20% of the net profits before deduction of dividends. In para. 3 of the said letter, however, it was added that those who follow the computation of reserve on profits before tax from 1960, should continue to do so. Admittedly, the assessee-bank has been making reserves on the basis of profits before taxation. For the purpose of creating a reserve for the - assessment year 1971-72, the assessee-bank wrote a letter dated March 20, 1971, asking the Reserve Bank to exempt the creation of reserve on the basis of profits before tax, A similar letter was written for the subsequent year also. The Reserve Bank, in its reply dated March 29, 1971, allowed as a special case to effect transfer to its statutory reserves after making provision for income-tax. A similar letter also was written for the subsequent year. Statutory reserves which were created were Rs. 4,12,780 and Rs. 5,50,000 for the assessment year 1971-72 and 1972-73 respectively. -
3. The ITO excluded the said sums of transfer to statutory reserves from the chargeable profits under rule 1(xi)(a) of Sch. I to the Surtax Act, 1964. The Commissioner, however, thought that the ITO erred in doing so. The Commissioner, while referring to the letters issued by the Reserve Bank, felt that the assessee-bank created more reserves than the minimum and so it not entitled to the exclusion under rule 1(xi)(a) of Sch. I to the Surtax Act. True, 20% of the profits after deducting taxes would work out to Rs. 1,81,952 and Rs. 2,44,124 for the said two assessment years and since the assessee created reserves of more than the said amounts, the excess has been ordered to be excluded by the Commissioner. According to the Commissioner, since the Reserve Bank had permitted to create reserves at 20% of the profits after taxation, the assessee is under no obligation to create more than the minimum required and what is to be allowed under rule 1(xi)(a) of Sch. I to the Surtax Act is only that much which is required to be created.
4. The Tribunal, on appeal, considered the question : whether the Reserve Bank of India could direct higher amount to be created as reserve by asking the banks to calculate the reserve on the basis of profit before taxation. Though the question was not adverted to by the Commissioner, the Tribunal, however, considered and ultimately held that the banking company is obliged to set apart reserve as per the directions of the Reserve Bank. The Tribunal further held that even though the minimum reserve that has to be created is 20% of the profits after taxation the Reserve Bank, in exercise of its powers under s. 35A of the Banking Regulation Act, can direct the bank to create more reserves. The Tribunal also found as a fact that the assessee-bank was already creating reserves on the basis of profits before taxation from 1960 and, therefore, the bank was obliged to follow the same pattern for the purpose of creating reserves. In fact, that is how the assessee-bank approached the Reserve Bank for relaxing the direction given earlier, and the Reserve Bank ultimately allowed the relaxation. Thus, the Tribunal held, the reserves created by the assessee for the two years have to be allowed under rule 1(xi)(a) of Sch. I to the Surtax Act. The further conclusion of the Tribunal was that the impact of s. 17(1) of the Act is that the reserves created by the banks, as per that section, would qualify for the exclusion under rule 1(xi)(a). The Tribunal negatived the contention of the Revenue that s. 17(1) of the Act does not speak of the minimum reserve that has to be created, but it may include more provided the Reserve Bank directs the scheduled banks to so create. The Tribunal eventually observed that any direction given by the Reserve Bank of India must be considered as one under s. 17(1) of the Act and if so applied, the said sums have to be excluded under rule 1(xi)(a) of Sch. I to the Surtax Act. The orders of the Commissioner were set aside by the Tribunal and the appeal of the assessee was allowed.
5. Relevant statutory provisions may now be set out.
6. Section 17(1) of the Banking Regulation Act, 1949 :
'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.'
7. Section 35A of the Act :
'35A. Power of the Reserve Bank to give directions. - (1) Where the Reserve Bank is satisfied that -
(a) in the public interest; or
(aa) in the interest of banking policy; or
(b) to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or
(c) to secure the proper management of any banking company generally;
it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.
(2) The Reserve Bank may, on representation made to it or in its own motion, modify or cancel any direction issued under sub-section (1), and in so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect.'
8. Rule 1(xi)(a) of the First Schedule to the Companies (Profits) Surtax Act, 1964 :
'1. Income, profits and gains and other sums falling within the following clauses shall be excluded from such total income, namely : - .....
(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, or is deposited by it with the Reserve Bank of India under sub-clause (ii) of clause (b) of sub-section (2) of section 11 of the Act, not exceeding the amount required under the aforesaid provisions to be so transferred or deposited, as the case may be, or.......'
9. Though there was some debate with regard to the impact of s. 17(1) as to whether the words : 'transfer to the reserve fund a sum equivalent to not less than 20% of such profits', obtaining therein would mean that the bank is restricted to transfer to the reserves only to the extent of 20%, neither more nor less, and also whether the power conferred on the Reserve Bank of India under s. 35A enables it to give directions in contravention of any other provisions in the Act, it is needless to advert and adjudicate inasmuch as, without doing so, the question referred to could be answered. Indeed, the question referred does not contemplate that aspect of the matter to be gone into at all. So, in answering the question referred, we proceed on the assumption that under s. 17(1) of the Act, it will be competent for a bank to make reserves of more than 20%, if it so chooses, and the Reserve Bank is equally empowered to give directions for ploughing into the reserves limiting to certain extent course to the minimum, which should in no case be less than 2o%. So, the only question is what is the extent of amount of reserve that could be excluded in computing the chargeable profits under rule 1(xi)(a) The answer depends purely upon the construction of the provisions of the said rule.
10. From the words, 'not exceeding the amount required under the aforesaid provision (s. 17(1) of the Act)', occurring in the said rule, it is quite manifest that irrespective of the fact that though the amount transferred to its reserve fund by a bank from the chargeable profits may be in excess to its reserve fund by a bank from the chargeable profits may be in excess of 20%, which is. However, the minimal requirement under s. 17(1), the relief by way of exclusion for the purpose of computation and assessment will be limited to 20% only. That, to our mind, is the irresistible conclusion from a plain reading of those words. However, it is mandatory on the bank to create a reserve fund in a sum equivalent to not less than 20% of the profits referred to therein. In other words, it is not obligatory on the part of any bank to reserve more than 20%, so long as the minimal requirement is satisfied. That is precisely what is postulated by the relief provision under r. 1(xi)(a). The question of liberal or beneficial interpretation favourable to the assessee in case of tax provision being ambiguous, does not arise herein as we do not come across any equivocality in the said rule. In our judgment, therefore, the relief of exclusion of the chargeable profits from being assessed is restricted and limited only to the extent of transfer to a reserve fund up to and not in excess of 20%, notwithstanding the fact that a bank is constrained to comply with the directions given by the Reserve Bank of India under s. 35A of the Act and also notwithstanding the fact that s. 17(1) presumably allows a bank to transfer to its reserve fund more than 20% from out of the chargeable profits.
11. Resultantly, the question referred is answered in the negative and against the assessee. No costs.