Investment subsidy treated as reserve for capital base computation where no present liability or repayment obligation was shown.

Subsidy received under the Central Investment Outright Subsidy Scheme was treated as a reserve, not a provision or repayable loan, for capital base computation under the Second Schedule to the Companies (Profits) Surtax Act, 1964. The amount was available surplus capable of business use and was not set aside to meet any known liability or contingency. The mere possibility of repayment on breach of subsidy conditions did not change its present character, particularly where no breach had been found. It was therefore included in the capital base, and the issue was decided in favour of the assessee.

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Issues: Whether the subsidy received under the Central Investment Outright Subsidy Scheme was liable to be treated as a reserve and taken into account in computing the capital base under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The subsidy was not a profit distribution, but it was an available surplus in the hands of the assessee capable of being utilised for the business. It was neither a loan repayable in ordinary course nor an amount set aside to meet a known liability or contingency. Applying the distinction between a reserve and a provision, the amount retained the character of a reserve for the purpose of capital base computation. The mere possibility of repayment upon breach of subsidy conditions did not alter its present character, especially in the absence of any finding that such breach had occurred.

Conclusion: The subsidy was rightly treated as a reserve and included in the capital base; the question was answered in favour of the assessee and against the Revenue.

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