Beneficial ownership controls surtax capital computation where shares shown as investments were held only in trust.

For surtax computation under the Companies (Profits) Surtax Act, shares shown as investments in the balance sheet were excluded from deduction where the true arrangement showed that they were held only as trustee or conduit for another group. The deciding factor was beneficial ownership: the assessee had to acquire and hold the shares in its own name, vote as directed, renounce further rights issues, and transfer the benefit on payment. Mere balance-sheet classification did not change the real character of the holding. The impugned share values were therefore not deductible from paid-up capital and reserves, and capital had to be computed without reducing those values.

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Issues: Whether shares held by the assessee in another company, though shown as investments in the balance sheet, were held on trust and therefore not deductible from paid-up capital and reserves while computing chargeable profits under the surtax provisions.

Analysis: The computation scheme under the Companies (Profits) Surtax Act, 1964 proceeds on exclusion of dividend income and on adjustment of investments shown in the balance sheet for determining capital employed. The decisive question was whether the shares in question were the assessee's own investments or were only held as trustee for another group under a prior understanding. The arrangement showed that the assessee was required to acquire and hold the shares in its own name, vote as directed, renounce further rights issues, and transfer the benefit to the beneficial owners upon payment. On those facts, the shares were not acquired out of the assessee's own funds as its own investment, but were held only as a trustee or conduit for the other group. Mere balance-sheet presentation did not alter the true character of the holding.

Conclusion: The shares were not the assessee's own investments for surtax computation, and their value could not be deducted from paid-up capital and reserves.

Final Conclusion: The assessee succeeded in challenge to the surtax computation, and the Assessing Officer was directed to compute capital without reducing the impugned share values.

Ratio Decidendi: For surtax purposes, assets shown as investments in the balance sheet are not deductible from capital if, on the true facts, they are held only as trustee and not as the assessee's own beneficial investment.

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