Interest-free shareholder loan remains a liability until share allotment, and is not treated as paid-up capital or reserve.

An interest-free amount advanced by a shareholder remains a loan until shares are actually allotted and the sum is appropriated towards share capital; it does not become paid-up share capital merely because it is intended for future adjustment or shown as capital suspense. For surtax computation, the same amount is not a reserve while it continues to be a liability and has not been set apart for a definite capital purpose. It becomes part of capital only on actual allotment and adjustment against shares. On that basis, the amount was neither paid-up share capital nor reserve on the relevant date.

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Issues: (i) Whether an interest-free loan advanced by a shareholder could be treated as the assessee's paid-up share capital before allotment of shares; (ii) Whether the same amount could be regarded as a reserve for computing capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Issue (i): Whether an interest-free loan advanced by a shareholder could be treated as the assessee's paid-up share capital before allotment of shares.

Analysis: The amount advanced by the foreign shareholder remained a loan until the shares were actually allotted and the amount was appropriated towards the value of the shares. On the relevant date, the approval to increase share capital had not even been obtained, and no allotment had taken place. A loan does not acquire the character of paid-up share capital merely because it is intended to be adjusted against future shares or shown in the balance-sheet as capital suspense.

Conclusion: The amount was not paid-up share capital on the relevant date and could not be included on that basis; the issue is against the assessee.

Issue (ii): Whether the same amount could be regarded as a reserve for computing capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: A reserve, in its commercial sense, is not a mere liability. Amounts received as interest-free loans continue to be liabilities until they are set apart or appropriated for a definite purpose. Applying that principle, the sums advanced here could not be treated as a reserve while they continued to retain their character as loans. They became part of capital only when shares were allotted and the amount was adjusted against such allotment.

Conclusion: The amount was not a reserve and was not includible on that basis; the issue is against the assessee.

Final Conclusion: The disputed amount became part of the assessee's capital only upon allotment of shares and not earlier, and it was neither paid-up share capital nor reserve on the relevant date.

Ratio Decidendi: An amount received as an interest-free loan does not become paid-up share capital or a reserve for surtax purposes until shares are actually allotted and the amount is duly appropriated towards the share capital.

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