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TMI Blog1979 (1) TMI 73X X X X Extracts X X X X X X X X Extracts X X X X ..... "), read with s. 256(1) of the I.T. Act, 1961, are these : " (i) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the sums representing the subsidy received from the Government for purposes of Industrial Housing constitute ' reserves ' within the meaning of rule 1(iii) of the Second Schedule the Companies (Profits) Surtax Act, 1964? (ii) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the sum under the head ' reserves for bad and doubtful debts' constitutes ' reserves ' within the meaning of rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?" It is convenient to answer the second question firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees under the Industrial Housing Subsidy. Clause 12 of the said scheme provided thus : " If the applicant(s) shall become insolvent or go into liquidation or the applicant(s) shall fail to observe or perform any of the terms and conditions herein contained and/or specified in the pamphlet ' Government of India subsidised housing scheme for industrial workers' and on its/their part to be observed and performed then and in such case, the whole of the amount of the subsidy shall become payable forthwith to the Government with interest thereon at the rate of 8% per annum calculated from the date of payment by the Government of the subsidy." In view of the above clause, the assessee showed the amount received by way of subsidy from the Gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputed in accordance with the provisions of the Second Schedule, or an amount of two hundred thousand rupees, whichever is greater. It becomes clear from a combined reading of s. 4 and sub-ss. (5) and (8) of s. 2 of the Act, the liability to surtax would get diminished as the capital base computed in accordance with the Second Schedule of the Act increases. Rule 1 of the Second Schedule of the Act provides that " subject to the provision contained in that Schedule, the capital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year, of-- (i) its paid-up share capital ; (ii) its reserves, if any, created under the proviso (b) to clause (vib) of sub-section (2) of secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in all these three cases. It was argued by Sri S.R. Rajasekharamurthy, learned counsel for the department, that in order to claim the benefit under r. 1(iii) of the Second Schedule of the Act, the assessee should show that the " reserves " in question had been created by it from out of the profits earned by it and since admittedly the amounts in question were subsidies given by the Government of India, they could not be treated as " reserves " entitling it to claim their inclusion in the capital base for purposes of determining statutory deduction under the Act. In Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 ; 39 Comp Cas 410, the Supreme Court had occasion to deal with the nature of a " reserve " found in the balance-sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove observation of the Supreme Court that a reserve need not always be created out of profits and it can be created out of other surpluses also. We, therefore, find it difficult to agree with the submission made on behalf of the department that the amounts in question which did not form part of the profits of the assessee could not be considered as " reserves ". The expression " reserve " is not defined in the Act. It has, therefore, to be understood in the manner in which it is used in commercial practice As observed by the Supreme Court, it is an amount which is set apart to meet a contingency, which is not known at the time when the balance-sheet is prepared. In the instant case, as already observed, the subsidy received by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs to us that the amounts in question fall under item 4 of Sch. VI of the Companies Act under the head " Reserves and Surplus " which reads : Other reserves specifying the nature of each reserve and the amount in respect thereof." The Tribunal was, therefore, right in holding that the amounts in question fall under cl. (iii) of r. 1 of the Second Schedule of the Act which provides for the inclusion of the other reserves as reduced by the amounts credited to such reserves as have been allowed as income of the company for the purposes of the Indian I.T. Act, 1922, or the I.T. Act, 1961, in the capital base for purposes of determining the statutory deduction. We, therefore, answer question No. 1 also against the department. In the result ..... X X X X Extracts X X X X X X X X Extracts X X X X
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