M/S. THE ANDHRA BANK LTD., HYDERABAD vs. THE COMMISSIONER OF INCOME TAX, A.P. LLL, HYDERABAD

CIVIL APPEAL No. 4895/1984Supreme Court1995 INSC 59322 September 1995Bench: 3 JudgesAuthor: A.M. AHMADI, S.C. SEN, K.S. PARIPOORNAN7 pages
AI SummaryDismissed

What were the facts?

The appellant, Andhra Bank Ltd., is challenging the computation of its 'chargeable profits' for the assessment years 1971-72 and 1972-73. The dispute centers on the exclusion of amounts transferred to a reserve fund. The assessee bank contended that the entire amount transferred to the reserve fund, even if exceeding 20% of its profits, should be deducted from its total income to arrive at chargeable profit. This was argued on the basis that the excess contribution was made pursuant to directions from the Reserve Bank of India, which are binding. The revenue, represented by the Commissioner of Income Tax, argued that only the amount statutorily required to be transferred under Section 17(1) of the Banking Regulation Act, 1949, qualifies for exclusion.

What did the Supreme Court hold?

The Tribunal held that the exclusion permissible under clause (xi) of Rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, is limited only to the sum 'not exceeding the amount required under the aforesaid provisions to be so transferred'. The 'aforesaid provisions' refer to Section 17(1) of the Banking Regulation Act, 1949, which mandates a transfer of 'not less than twenty per cent' of the profits. Therefore, if a banking company transfers any amount in excess of 20% of its profit to this reserve fund, the exclusion in clause (xi)(a) will be limited to that 20% requirement. The Tribunal further found that the circulars relied upon by the assessee did not demonstrate any direction from the Reserve Bank of India under Section 35A of the Banking Regulation Act to transfer more than 20% to the reserve fund. The letters from the RBI were either general advice or dealt with the calculation of profits before transfer, not a directive for excess transfers. Consequently, the excess contribution was not due to a requirement of Section 17 but potentially other provisions, and thus did not qualify for exclusion. The High Court's answer to the question of law in favor of the revenue was upheld. No issue was expressly left undecided.

What were the issues?

1. Whether sums of Rs. 4,12,700 and Rs. 5,50,000 are liable to be excluded under Rule 1(xi)(a) of the Surtax Rules in computing chargeable profits for assessment years 1971-72 and 1972-73, turning on the interpretation of Section 17(1) of the Banking Regulation Act, 1949, and Rule 1(xi)(a) of the First Schedule to the Companies (Profits) Surtax Act, 1964. Assessee's Contention: The entire amount transferred to the reserve fund, even if exceeding the statutory minimum of 20% of profits, should be deducted from total income to arrive at chargeable profits. This is because the excess was contributed pursuant to directions from the Reserve Bank of India, which are binding on the bank. Revenue's Contention: Only the amount specifically required to be transferred to the reserve fund under Section 17(1) of the Banking Regulation Act, 1949, qualifies for exclusion. Any amount transferred in excess of this statutory requirement is not eligible for deduction.

Which sections of the Income-tax Act were involved?

Section 17,Section 35A,Section 2(5)

AI-generated summary — verify with the full judgment below

> M/S. THE ANDHRA BANK LTD., HYDERABAD A V, THE COMMISSIONER OF INCOME TAX, AP. lll, HYDERABAD SEPTEMBER 22, 1995 [AM. AHMADI, CJ, S.C. SEN AND KS. PARIPOORNAN, .LL[ B Companies (Proji1s) Swtax Act, 1964/Banking Regulalion Act, 1949: Ss.2(5), First Sched11/e R11/e 1 cla11se (xi)/Section 17-Swtax assess- mcnt.1---<:hargeab/e profit.1-20'70 Profit to be tra11.1fC1red to the rese1ve fund C as per S. 17( J) of' Banking Rci,"J/ation and q11alifies j(H exclusion-Any s11111 more than the specified 21!'7'r-Held: Would not qua/if)' for exclusion.

The dispute raised in these appeals by the appellant-Bank relates to the computation of 'chargeable profits'.

It was contended by the appellant-assessee that a reserve fund was created by the assessee bank to comply with the provisions of S.17 of the Banking Regulation Act; that though the amount of contribution was higher than 20% of its balance of profits, the entire amount would have to D be deducted from its total income in order to arrive at chargeable profit E under clause (xi) of Rule 1 of the First Schedule to the Companies (Profits) Surtax Act because the amount in excess of t_he statutory mini- mum was contributed pur

The order continues below.

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