Borrowing for capital asset creation requires the loan itself to bring the asset into existence, not mere debt repayment.

Monies borrowed to discharge earlier loans used for acquiring machinery were held not to be borrowings for the creation of a capital asset in India under the proviso to item (v) of paragraph 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The proviso was read to require that the borrowing itself bring the capital asset into existence in India, and the expression "capital asset" was taken from section 2(14) of the Income-tax Act, 1961. A later borrowing used only to repay acquisition debts, or a notional increase in assets from liquidation of liabilities, did not satisfy that requirement, so the amount was excluded from capital computation.

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Issues: Whether monies borrowed and applied to discharge earlier loans, which had themselves been used to acquire machinery, were borrowed for the creation of a capital asset in India within the meaning of the proviso to item (v) of paragraph 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The expression "capital asset" occurring in the proviso was held to take its meaning from section 2(14) of the Income-tax Act, 1961 by virtue of section 2(9) of the Companies (Profits) Surtax Act, 1964. The proviso was construed on its plain language, which requires that the borrowing itself must be for the creation of a capital asset in India. The Court held that the provision contemplates creation of the capital asset as a result of the borrowing, and not a later borrowing made merely to repay earlier debts incurred for acquisition of that asset. A notional increase in assets resulting from liquidation of liabilities was also held not to amount to creation of a capital asset.

Conclusion: The borrowing was not for the creation of a capital asset in India, and the amount was therefore not includible in capital computation under the Second Schedule.

Ratio Decidendi: A borrowing qualifies under the proviso only when the borrowing itself is made to bring a capital asset into existence in India, and a subsequent borrowing used merely to discharge earlier acquisition debts does not satisfy that requirement.

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