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PETITIONER: THE INDIAN OVERSEAS BANK LTD.

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX, MADRAS.

DATE OF JUDGMENT: 23/04/1970

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. SHAH, J.C. GROVER, A.N.

CITATION:  1970 AIR 1530            1971 SCR  (1) 348  1970 SCC  (2)   4  CITATOR INFO :  D          1989 SC1406  (5)  C          1991 SC2033  (2,6)

ACT: Income-tax   Act,   1922,  s.  10(2)(vi-b),   Proviso   (b)- Development  rebate-If  can  be claimed  where  no  separate reserve created but only transfer to reserves in  compliance with s. 17 Banking Companies, Act, 1949.

HEADNOTE: The  appellant  was  a public limited  company  carrying  on banking business.  For the calendar year 1958, which was the previous  year relating to the assessment year 1959-60,  the appellant  claimed  allowance 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 were that during the  accounting year the appellant had transferred a sum of Rs. 6 lakhs from the  profit and loss account to the reserve fund;  this  was 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 Income-tax Act,  1922;  but  no  separate reserve fund as required by proviso (b) to s. 10(2)  (vi)(b) had been created.  It was contended by the appellant that as the  transfer  to  the reserve was sufficient  to  meet  the requirements of s. 17 of the Banking Companies Act, 1949  as well  as  proviso  (b) to s. 10(2) (vi-b)  of  the  Act,  in substance,  if  not  in  form,  it  had  complied  with  the requirements  of  law and therefore it was entitled  to  the allowance claimed.  The assessing authorities as well as the High  Court, upon a reference, held against  the  appellant. On appeal to this Court. HELD  : The High Court had rightly held that the  appellant, was  not  entitled to the, allowance by way  of  development rebate claimed. [350 A-B] The  creation  of  reserve contemplated by  proviso  (b)  to Explanation  (2) to s. 10(2)(vi-b) is a condition  precedent for  obtaining  the allowance of  development  rebate.   The appellant  had  admittedly  not created  any  such  separate reserve. [350 D]

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The  reserve contemplated by s. 17 of the Banking  Companies Act, 1949 is a separate reserve.  The amount transferred  to that reserve cannot be utilised for business purposes.   The reserve contemplated by proviso (b) to s. 10(2)(vi-b) of the Act is an independent reserve.  The amount to be transferred to  that  reserve  is debited before  the  profit  and  loss account is made up.  That amount is required to be  credited to a reserve account to be utilised by the assessee during a period of ten years for the purposes of the business of  the undertaking.  The nature of the two reserves are  different. They are intended to serve two different purposes. [350 E-H] C.I.T.  v.  Veeraswami  Nainar  and  Ors.,  55,  I.T.R.  35; referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 615 of 1967. Appeal  from the judgment and order dated June 21,  1966  of the  Madras  High,  Court  in  Tax  Case  No.  216  of  1963 (Reference No. 66 of 1966. 349 C.   V.   Mahalingam  and  T.  A.  Ramachandran,   for   the appellant., R.   N. Sachthey and B. Datta, for the respondent. The Judgement of the Court was delivered by  Hegde,  J. At the instance of the assessee, the Income  Tax Appellate Tribunal (Madras Bench) referred to the High Court of  Madras a statement of case under s. 66(1) of the  Indian Income  Tax Act, 1922 (to be hereinafter referred to as  the Act) The High Court answered one of the questions  submitted alongwith  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 assessee 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 appeals is :               "Whether   the  creation  of  a   reserve   in               compliance  with  Section 17  of  the  Banking               Companies  Act is sufficient  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 the negative. The  appellant  is  a public  Limited  Company  carrying  on banking business.  For the calendar year 1958, the  previous year relating to the assessment year 1959-60, the  appellant claimed allowance 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 transferred a sum of Rs. 6 lakhs  from the  profit and loss account to the reserve fund.  This  sum 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; 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 transfer   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

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substance, if not in form, it has 350 complied  with the requirements of law and therefore  it  is entitled 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 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               credited  to a reserve account to be  utilised               by  him during a period of ten years  for  the               purposes  of the business of  the  undertaking               except...... The  creation of the reserve contemplated by this  provision is  a  condition precedent for obtaining  the  allowance  of development  rebate.   Admittedly  the  appellant  has   not created  any  such  separate reserve.   Section  17  of  the Banking Companies Act, 1949 prescribed :               "Every  banking company incorporated in  India               shall maintain a reserve fund, and shall,  put               of the net profits of each year and before any               dividend   is   declared,.  transfer   a   sum               equivalent to not less than twenty per cent of               such  profits  to the reserve fund  until  the               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)." The  reserve  contemplated by that provision is  a  separate reserve.   The amount transferred to that reserve cannot  be utilised for business purposes.  The reserve contemplated by proviso (b) to S. 10(2) (vi-b) of the Act is an  independent reserve.   The amount to be transferred to that  reserve  is debited before the profit and loss account is made up.  That amount is required to be credited to a reserve account to be utilised  by the assessee during a period of ten  years  for the purposes of the business of the undertaking. The nature of  the  two reserves are different.  They are  intended  to serve  two  different purposes.  As observed by  the  Madras High  ’Court in C.I. T. v. Veeraswami Nainar and  Ors.  (1),  that   the  object  of  the  legislature  in   allowing   a development  of  the  assessee’s business from  out  of  the reserve  fund  is apparent from the terms of,  the  proviso. The entries in the account books required by the (1)  55 I.T R. 35 351 proviso  are  not  an idle formality.   The  assessee  being obliged  to credit the reserve fund 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 Fund should be made at  the time of making up the profit and loss account. The assessee not having complied with the requirements of s.   10 (2) (vi-b) read with Explanations thereto, he is not

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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. (1) 59 I.T.R. 42. 352