The main legal point established in the judgment is the interpretation of 'reserves' under the Companies (Profits) Surtax Act, 1964, and the inclusion of specific amounts, such as subsidies and reserves for bad and doubtful debts, in the capital base for determining the statutory deduction.

Venkataramaiah, J.—The assessee in all these three cases is M/s. Indian Telephone Industries Ltd., Bangalore, and the relevant assessment years are 1966-67, 1967-68 and 1968-69. The common questions in these cases which are referred to us by the Income Tax Appellate Tribunal, Bangalore Bench, Bangalore, under s. 18 of the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as "the Act"), 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 to 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 ?"

2. It is convenient to answer to second question first. The question is whether the amount shown as "reserve for bad and doubtful debts" in the balance-sheet of a company can be considered as a "reserve" within the meaning of r. 1(iii) of the Second Schedule to the Act. It is seen from the order of the Tribunal that the amounts which have been set apart during the relevant years by the assessee under the head "Reserve for bad and doubtful debts" were not set apart to meet any known liability or contingency on the dates of the balance-sheets. The main contention urged by the departmental representative before the Tribunal on the above question was that such "reserves" could not be taken into consideration for purposes of computing the capital base for determining the statutory deduction during the relevant years as they were in the nature of "provisions" and not "reserves". Since the sums set apart as "reserve for bad and doubtful debts" were not in regard to any known liability on the dates of the balance-sheets, we do not find any substance in the contention urged on behalf of the department. The second question has, therefore, to be answered against the department. It is answered accordingly.

3. Few facts have to be stated in order to consider the connotations involved in the first question. During the relevant accounting years, the assessee had received Rs. 2,82,500, Rs. 5,34,666 and Rs. 5,34,666, respectively, from the Government of India by way of subsidy towards the cost of construction of houses for its employees 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 the Government with interest thereon at the rate of 8% per annum calculated from the date of payment by the Government of the subsidy".

4. In view of the above clause, the assessee showed the amount received by way of subsidy from the Government of India as a "reserve" in its balance-sheet since the amount received by way of subsidy was liable to be payable forthwith to the Government of India in the event of any of the events mentioned therein taking place. The balance-sheets were approved at the meeting of the company. During the relevant assessment years, the assessee claimed that the subsidy received by its shown as "reserves" in the relevant balance-sheet should also be taken into consideration as forming part of the capital base for determining the statutory deduction admissible under the provisions of the Act. It has to be mentioned here th