The main legal point established in the judgment is the treatment of Central subsidy as part of the 'other reserves' and its inclusion in the computation of capital for taxation purposes.

N.K.AGRAWAL, J.

1. The CIT has required under s. 256(2) of the IT Act, 1961, the following questions of law, relating to the asst. yr. 1980-81, to be referred by the Tribunal to this Court for opinion :

"1. The amount of subsidy is not part and parcel of the owned capital of the assessee. Since the amount of subsidy is not owned by the assessee till period of 5 years is over (the period of 5 years will pass in the asst. yr., 1981-82 and not in asst. yr. 1980-81 which is the subject-matter of reference ?"

2. The assessee is a company registered under the Companies Act. Return of chargeable profits was filed by the assessee-company for the asst. yr. 1980-81 under the Companies (Profits) Surtax Act, 1964 (for short, the Act). While computing the capital of the assessee-company for the purpose of allowing statutory deduction from the chargeable profits, the AO did not include the Central subsidy amounting to Rs. 3,20,100 on the plea that the amount of subsidy received by the assessee- company from the Government was not in the nature of a reserve created out of profits and was not part of the companys capital.

3. On assessees appeal, CIT(A) held that the subsidy reserve was to be included in the computation of capital of the assessee- company. The Tribunal, in Departments appeal against the order of the CIT(A), upheld the inclusion of subsidy reserve in the capital base of the company.

4. Shri R.P. Sawhney, learned senior counsel for the Department, has argued that Central subsidy could be taken back by the Government within a period of five years and it was, therefore, not part of the capital of the company but was in the nature of a loan. Moreover, it did not come from the companys profits.

5. Shri G.S. Sandhawalia, learned counsel for the assessee, has on the other hand, argued that the assessee- company received subsidy from the Government because of location of its factory in a backward area. The assessee- company claimed before the AO that the amount of subsidy is includible in the capital employed in the industrial undertaking for the purpose of surtax. The accordingly rejected the claim. The amount of Central subsidy was not a liability as it was received as a capital receipt.

6. The Second Schedule to the Act contains the Rules for computing the capital of a company for the purpose of surtax. Rule 1 in the Schedule lays down that the capital of a company shall comprise its paid-up share capital, the reserve created under the IT Act and also the "other reserves".

7. The Supreme Court had an occasion to examine the character and nature of a subsidy in CIT vs. P. J Chemicals Ltd. (1994) 121 CTR (SC) 201 : (1994) 210 ITR 830 (S0 . In that case, the precise question before the Court was whether the amount of subsidy was to be deducted from the actual cost of the assets for the purpose of allowing depreciation. It was held that the amount of subsidy shall not be deducted from the cost of assets for calculation of depreciation, etc. It was observed (at p. 841) as under :

"The Government subsidy, it is not unreasonable to say, is an incentive not for the specific purpose of meeting a portion of the cost of the assets, though quantified as or geared to a percentage of such cost. If that be so, it does not partake of the character of a payment intended either directly or indirectly to meet the actual costs".

8. In the light of the ratio in the case of CIT vs. P. J Chemicals Ltd. (supra), there is no room for any doubt that the Central subsidy received by the assessee- company is part of the "other reserves" and is to be shown as such in the balance sheet. If it is not to be deducted from the cost of the assets, it would be shown as a reserve in the balance sheet.

9. In view of the above, the questions, as reproduced above, are not referable questions of law.