Surtax capital computation requires a seven-year repayment agreement and proof of use for capital assets in India.

For surtax capital computation, a borrowing qualifies only if the loan agreement itself provides for repayment over not less than seven years; the relevant date is the agreement date, not the loan sanction date. On the stated terms, the repayments fell within seven years, so the loans were not eligible for inclusion in capital. The assessee also had to prove that the borrowed monies were actually used to create capital assets in India. A mere statement of intended use was insufficient, and no evidence linked the borrowings to asset additions, so that condition was not established. The surtax exclusion therefore failed.

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Issues: (i) Whether the loans qualified for inclusion in the company's capital under the surtax provisions having regard to the requirement that the agreement provide for repayment for not less than seven years; (ii) Whether the borrowed monies were shown to have been utilised for the creation of capital assets in India.

Issue (i): Whether the loans qualified for inclusion in the company's capital under the surtax provisions having regard to the requirement that the agreement provide for repayment for not less than seven years.

Analysis: The relevant rule permitted inclusion only where the borrowing was made under an agreement and the agreement stipulated repayment during a period of not less than seven years. The material date was therefore the date of the agreement, not the date of sanction of the loan. On the terms of the agreements, the repayments were scheduled within seven years.

Conclusion: The loans did not satisfy the seven-year requirement and were not eligible for capital computation. This issue was decided against the assessee.

Issue (ii): Whether the borrowed monies were shown to have been utilised for the creation of capital assets in India.

Analysis: A mere statement of intended use was insufficient. The assessee was required to establish a nexus between the borrowed monies and the increase in capital assets. As no supporting evidence was produced to correlate the borrowings with the asset additions, the statutory condition was not proved.

Conclusion: The condition that the monies were borrowed for creation of capital assets in India was not established. This issue was decided against the assessee.

Final Conclusion: The reference was answered wholly in favour of the Revenue, and the surtax exclusion claimed by the assessee failed.

Ratio Decidendi: For eligibility under the surtax capital computation rule, the agreement itself must provide for repayment over not less than seven years, and the assessee must prove that the borrowed monies were actually utilised for creating capital assets in India.

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