Capital treatment of foreign collaboration consideration upheld for surtax purposes; technical know-how and related rights were not revenue expenditure.

Consideration received from a foreign collaborator in the form of share capital for technical know-how, patents, trademarks, designs and allied rights was treated as capital, not revenue expenditure. The Madras High Court held that Rule 2 of the Second Schedule applied only to the specific categories in clause (iii), (vi) or (viii) of Rule 1, and could not be extended to paid-up share capital falling under clause (i). The Explanation to Rule 2 was confined to the main rule. On that basis, the sum of Rs. 2 lakhs was not excluded from capital computation for surtax purposes and was held to remain part of capital.

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Issues: Whether the sum of Rs. 2 lakhs shown in the balance-sheet as goodwill and representing consideration for technical know-how, patents, trademarks, designs and allied rights received from the foreign collaborator was to be excluded from capital computation for surtax purposes.

Analysis: The amount was found to have been allotted as share capital in consideration of the collaborator's technical know-how and the right to use patents, trademarks, designs, certification marks and related commercial rights. The Court held that Rule 2 of the Second Schedule applied only to the situations specifically covered by clause (iii), (vi) or (viii) of Rule 1, and not to paid-up share capital falling under clause (i) of Rule 1. The Explanation to Rule 2 could not be extended beyond the scope of the main rule. The Court also rejected the contention that the amount was merely revenue expenditure, holding that licence rights and know-how acquired for shares constituted a capital acquisition and not a mere revenue outgoing.

Conclusion: The amount of Rs. 2 lakhs was capital and was not liable to be excluded from capital computation for surtax purposes; the question was answered against the Department and in favour of the assessee.

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