Commissioner of Income Tax vs Pandian Chemicals Ltd.

R. Jayasimha Babu, J.—The question referred to us at the instance of the Revenue is as to whether the subsidy received by the assessee,

which is an industrial concern under the Central Investment Outright Subsidy Scheme, is to be taken into account for computing the capital base as

per the Second Schedule to the Companies (Profits) Surtax Act, 1964 (in short ""the Act""). The assessment year is 1980-81.

The Supreme Court in the case of Metal Box Company of India Ltd. Vs. Their Workmen, , pointed out the distinction between a provision and

a reserve and observed that an amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commit- merit or

diminution in value of assets known to exist at the date of the balance-sheet is a reserve, but an amount set aside out of profits and other surpluses

to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision. Thus, a reserve has come out

of profits as also from ""other surpluses"". The subsidy received by the assessee though not to be treated as a profit was capable of being treated as

a surplus in its hands, as that amount was available for being expended for the business. Even though that amount had not been generated by way

of profits or even as contribution by the shareholders and also was not a loan which was required to be repaid. The available subsidy which when

used in accordance with the terms of the subsidy would help to reduce the costs of the industry. The subsidy received, when used becomes the

part of the assets of the assessee.

It is no doubt possible that the subsidy may have to be repaid, if the assessee fails to comply with the conditions, subject to which the subsidy

had been granted. However, those are unknown factors and it cannot be presumed that the assessee would violate the condition and would

thereby become disentitled to retain the amount of the subsidy. There is nothing on record to indicate that any such violation had taken place,

which had exposed the assessee to demand for the repayment of the subsidy.

In the circumstances, the Tribunal''s view that the subsidy was capable of being treated as a reserve, as has been done by the assessee for the

purpose of computing the capital base under the Act must be held to be correct. The question referred to us, viz., ""whether, on the facts and in the

circumstances of the case the Tribunal was right in holding that the subsidy received through the Small Industries Promotion Corporation from the

Central Investment Outright Subsidy Scheme should be treated as a reserve and taken into account in computing the capital as per the Second

Schedule to the Companies (Profits) Surtax Act, 1964 ?"" is therefore answered in favour of the assessee and against the Revenue.