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Interpretation of the Companies (Profits) Surtax Act, 1964 regarding the inclusion of the value of shares allotted to foreign collaborators in the computation of capital. Analysis: The case involved a departmental reference related to the assessee's surtax assessment for the years 1967-68 to 1972-73. The main question referred to the court was whether the amount representing the value of shares allotted to foreign collaborators in exchange for technical know-how should be included in the computation of capital under the Companies (Profits) Surtax Act, 1964. The assessee had entered into an agreement with two foreign companies, under which shares were issued to them in consideration of technical designs and know-how. The shares were shown as part of the fixed assets in the balance sheet. The issue was whether this constituted capital under the Act. For surtax assessment, it was necessary to compute the company's capital as on the first day of each previous year. The relevant rule stated that the capital shall include paid-up share capital. However, an explanation provided that paid-up share capital brought into existence by creating or increasing any book asset is not considered capital. The department argued that issuing shares in exchange for designs and drawings created a book asset, thus reducing the share capital. The Tribunal disagreed, stating that when an asset is purchased from a third party and paid for by issuing shares, it does not constitute creating a book asset to bring capital into existence. The court analyzed the explanation and the facts of the case. It noted that the shares were issued directly in exchange for the designs and drawings, without first paying cash and then receiving money for shares. The court agreed with the Tribunal's interpretation, stating that when an asset is actually purchased for consideration, the shares issued for that purpose do not fall under the explanation's scope. The court emphasized that creating a book asset to bring capital into existence would mean creating an asset that is not truly an asset. Therefore, the court upheld the Tribunal's decision and ruled in favor of the assessee. In conclusion, the court answered the question in the affirmative, stating that the shares issued for technical know-how did not constitute creating a book asset to bring capital into existence. No costs were awarded in the case.
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