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Issues:
1. Whether the amount shown as "reserve for bad and doubtful debts" can be considered as a "reserve" within the meaning of the Second Schedule to the Companies (Profits) Surtax Act, 1964. 2. Whether the subsidy received from the Government for Industrial Housing constitutes "reserves" for the purpose of computing the capital base under the Act. Analysis: Issue 1: The Tribunal considered whether the amount categorized as "reserve for bad and doubtful debts" in the company's balance-sheet qualifies as a "reserve" under the Second Schedule to the Act. The department argued that such reserves should not be considered for computing the capital base as they were more akin to provisions than reserves. However, since these reserves were not set apart for any known liability at the balance-sheet dates, the court rejected the department's contention. The court ruled in favor of the assessee on this issue. Issue 2: Regarding the subsidy received from the Government for Industrial Housing, the assessee treated it as a reserve in its balance-sheet due to the clause stating repayment in certain circumstances. The department contended that since the subsidy was not derived from profits, it could not be considered a reserve. The court referred to a Supreme Court decision distinguishing between provisions and reserves, emphasizing that reserves need not always be from profits. The court found that the subsidy, being set aside for contingencies unknown at the balance-sheet date, qualified as a reserve. The court also clarified that the surplus after allocation to reserves should not be excluded from the capital base, as the subsidies were allocated as reserves. Consequently, the court upheld the Tribunal's decision, affirming that the subsidies constituted reserves under the Act. In conclusion, the court answered both issues in favor of the assessee, directing each party to bear its own costs.
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