The Indian Overseas Bank Ltd. Vs. The
Commissioner of Income-Tax, Madras [1970] INSC 105 (23 April 1970)
23/04/1970 HEGDE, K.S.
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] 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.
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 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 fulfillment 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 loss 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
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.
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