Paid-up share capital for surtax includes shares issued for acquired technical know-how, not a notional book asset.

Shares issued as consideration for acquired technical know-how, drawings and designs were treated as part of paid-up share capital for surtax computation. The Explanation to rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 excludes paid-up share capital brought into existence by creating or increasing a book asset, but that mischief did not apply where the assessee had actually purchased the drawings and designs from third parties and issued shares as the agreed consideration. The shares were therefore includible in capital computation, and the issue was answered in favour of the assessee.

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Issues: Whether shares issued as consideration for technical know-how, drawings and designs acquired from third parties could be treated as capital brought into existence by creating a book asset so as to attract Explanation 1 to rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The capital of a company for surtax purposes is to be computed with reference to the paid-up share capital, but the Explanation excludes paid-up share capital brought into existence by creating or increasing a book asset. On the facts, the assessee had acquired drawings and designs from foreign collaborators and issued shares directly as the agreed consideration. The asset was actually purchased from third parties; the shares were not issued to create a notional or paper asset for inflating capital. In that situation, the mischief of the Explanation does not apply.

Conclusion: The shares issued in consideration of the acquired technical designs and know-how were includible in capital computation, and the question was answered in the affirmative in favour of the assessee.

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