1953 (5) TMI 16 - HC - Income Tax

Summary

Issues Involved:
1. Legality of increasing the standard profit under the third proviso to Rule 5A of Schedule I of the Excess Profits Tax Act.
2. Definition and applicability of "borrowed money" under the third proviso to Rule 5A of Schedule I.
3. Consideration of interest on deferred shares as "borrowed money" for the purpose of increasing standard profits.

Issue-wise Detailed Analysis:

1. Legality of Increasing the Standard Profit under the Third Proviso to Rule 5A of Schedule I of the Excess Profits Tax Act:

The primary question was whether the standard profit fixed by the Central Board of Revenue under Section 26(1) of the Excess Profits Tax Act should be increased under the third proviso to Rule 5A of Schedule I by the interest apportionable to the standard period on deferred share capital, later treated as borrowings, even if such interest had not been charged to the profit and loss account during the standard period. The Tribunal accepted the assessee's claim based on the specific provision under the Act, while the Excess Profits Tax Officer and the Appellate Assistant Commissioner had previously rejected it, arguing there was no charge or liability against the assessee company on account of this interest at the time of the application under Section 26(1).

2. Definition and Applicability of "Borrowed Money" under the Third Proviso to Rule 5A of Schedule I:

The court examined whether the money obtained from the issuance of deferred shares could be considered "borrowed money." The Commissioner argued that there was no "borrowed money" involved, as the money was obtained via share issuance, not a loan. The court noted that "borrowed money" requires a borrower-lender relationship and a positive act of lending and acceptance as a loan. The court referenced the Supreme Court's decision in Shree Ram Mills Ltd. v. Commissioner of Excess Profits Tax, Central, Bombay, which emphasized that borrowed money involves a clear act of lending and acceptance.

3. Consideration of Interest on Deferred Shares as "Borrowed Money" for the Purpose of Increasing Standard Profits:

The assessee contended that the interest on the deferred shares should be added to the standard profits as per the third proviso to Rule 5A. The court, however, found that the money obtained from the issuance of deferred shares was not "borrowed money" but rather "money had and received," as per the High Court's order. The court held that the interest liability attached to the amount received on the deferred shares did not convert it into borrowed money. The court concluded that the terms used in the rules should be interpreted based on their ordinary meaning and practical context, not through legal fictions or implied promises.

Judgment:

The court answered the question in the negative, stating that the amounts in question did not come under the description "borrowed money" as used in the third proviso to Rule 5A of Schedule I to the Excess Profits Tax Act. Consequently, the standard profit fixed by the Central Board of Revenue should not be increased by the interest apportionable to the standard period on deferred share capital. The Commissioner of Excess Profits Tax, Central, Calcutta, was awarded the costs of the reference.

Separate Judgments:

Both judges, Chakravartti C.J. and Lahiri J., delivered a unanimous judgment, agreeing on the interpretation and application of the relevant provisions.