The Indian Overseas Bank Lid. v. the Commissioner of Income-tax, Madras.

The Judgement of the Court was delivered by llegde, J. At the instance of the assessee, th6 Income Twc Appellate Tribunal (Madras. Bench) referred to the High Court of Madras a statement of case under s. 66 ( 1) of the Indian In­ come Tax Act, 1922 (to be hereinafter referred to as the Act). The High Court answered one of the questions submitted along·· with the statement of case in favour of the assessee and the other · in favour of the Revenue. The Revenue has not appealed against the decision of the High Court to the extent it went against it but the as~.essee has brought this appeal by certificate challenging the correctness of the view of the law taken by the High Court on question No. 1 submitted for its opinion. The question of law that we have to consider in this appeal ~: . "Whether the creation of a reserve in compliance with Section 17 of the Banking Companies Act is suffi­ cient compliance with the requirements of s. 10(2) (vi-b), proviso (b) of the Indian Income-tax Act, 1922". The authorities under the Act as well as the High Court have· answered this question in t1'.e negative. The appellant is a public Limited Company carrying on bank-· ing bµsir..ess. For the calendar year 1958, the previous year relat­ ing to the assessment year 1959-60, the appellant claimed allow­ ance by way of development rebate under proviso (b) of s. 10(2) (vi) (b) amounting to Rs. 1,37,836/- in the computation of its. business income. The admitted facts of the case are : that during the accounting year_ relating to the assessment year, the appellant Company . had transf:rred a sum of Rs. 6 lakhs from the profit and loss account to the reserve fund.-, This sum is sufficient to meet the require­ ments of s. 17 of the Banking Companies Act, 1949 as well as of proviso (b) tos.10(2)(vi)(b) of the Act; but no separate reserve fund as required by proviso (b) to s. 10(2)(vi)(b) had been created. The contention of the appellant is that as the trans-· fer to the reserve is sufficient to meet the requirements of s. 17 of the Banking Companies Act, 1949 as well as of proviso (b) to· s. 10(2)(vi-b) of the Act, in substance, if not in form, it has "350 SUPREME 'COURT REPORTS [1971 J l s.c.R. complied with the requirements of law and therefore it is entitled A to the allowance of the rebate claimed. We are in agreement with the High Court that the appellant is not entitled to the allowance by way of development rebate, claimed. The rebate under proviso (b) of s. 10(2) ( vi-b) is a concession granted but that concession is made subject to fulfilment of certain requirements. The grant of this allowance is made subject to the conditions prescribed in 11 proviso (b) 'to Explanation (b) to s. 10(2) (vi-b). The relevant portion of that proviso reads : ". . . . . . an amount equal to seventy-five percent of the development rebate to be actually allowed is debited to the profit and lass account of the relevant previous year and credit.:d to a reserve account to be utilised by C him during a period ofJen years for the purposes of the .business of the undertaking except. ..... " ·The creation of the reserve contemplated by this provision is 11 condition precedent for obtaining the. allowance of development rebate. 'Admittedly the appellant has not created any such sepa- rate reserv.:. Section 17 of the Banking Companies Act, 1949 D .Prescribed : "Every banking company incorporated in India shall maintain a reserve fund, and ~all, put of the net profits of each year and before any dividend is declared, transfer ·a sum equival.:nt to not less than twenty per cent of such profits to the reserve fund until th.: amount of the said fund is equal to the paid up capital. Explanation.-For the purposes of this section, the ·expression 'net profits' shall have the meaning assigned to it in sub-section (3) of section 87C of the Indian 'Companies Act, 1913 (VII of 1913)." F The reserve contemplated by that provision is a separate teserve. The amount transferred to that reserve cannot be utilised for business purposes. The reserve contemplated by proviso (b) to s. l 0 (2 )( vi-b) of the Act is an independent reserve. The amount to be transferred to that reserve is debited before the profit an,d loss account is made up. That amount is required to be credited G to a reserve account to be utilised by the assessee during a period ·of f.:n .years for the purposes of the business of the undertaking. 'The nature of the two reserves ;ire different. They are intended to serve two different ourposes. As <)bserved by the Madras High 'Court in C.l.T. v. Veeraswami Nainar and ors.('), that the object . of the legislature in allowing a develqpment of the assessee's busi- -ness from out of the reserve fund is apparent from the terms of. H · <the proviso. The entries in the account books required by the . l) SS I:TR. :IS I .l OVERSEER BANK v. C,I.T. (Hegde, J.) 351 A proviso are not an idle formality. The assessee being obliged to cr.~it the reserve funo for a specific purpose; he cannot draw upon the same for purposes other than those of the business and that amount cannot be distributed by way of dividend. It is also clear from the terms of the proviso that the transfer to the reserve lund should be made at the time of making up the profit and loss II account. The assessee not having complied with the requirements of s. 10(2) (vi-b) read with Explanations thereto, he is not entitled to claim the allowance in question. In the result our answer to the question formulated above is in the negative. This appeal is accordingly dismissed with costs. R.K.P.S. Appeal dismissed. / (I) 591.T;R. 42. I