1950 (1) TMI 13 - HC - Income Tax

Summary

Issues Involved:
1. Whether the security deposits made by customers with the assessee firm constitute "borrowed money" under Rule 2A of the Second Schedule to the Excess Profits Tax Act, 1940.

Detailed Analysis:

Issue 1: Definition and Interpretation of "Borrowed Money"

Context and Background:
The central question pertains to the capital computation under the Excess Profits Tax Act, 1940. The assessees, acting as selling agents for yarn, received Rs. 7,69,569 from their customers as security deposits during the chargeable accounting period from 13th April, 1944, to 12th April, 1945. The assessees claimed this amount as "borrowed money" under Rule 2A of Schedule II to the Excess Profits Tax Act, 1940, while the Income-tax Commissioner argued it was merely a business liability.

Evolution of the Transactions:
1. Initial System: Initially, the assessees obtained an advance of roughly 80% of the sale price from customers under forward contracts, adjusted at the time of delivery.
2. May 5, 1944 Circular: The system was altered to treat these advances as "Contract Advance Fixed Deposit Account" and return them only after the completion of the contract.
3. December 5, 1944 Circular: The account was renamed "Security Deposit" account, effective from November 1, 1944.
4. February 14, 1945 Circular: The final arrangement fixed a sum as a security deposit to be maintained as long as the business connection under forward contracts continued. An interest of 3% per annum was allowed on these deposits.

Legal Interpretation:
The Excess Profits Tax Officer and the Appellate Tribunal concluded that these security deposits did not constitute "borrowed money." The judgment referenced the English Court of Appeal's decision in Inland Revenue Commissioners v. Rowntree Co. Ltd. [1948] 1 All E.R. 482, which clarified that "borrowing" implies a real loan and a legal relationship of lender and borrower.

Commercial vs. Legal Sense:
The judgment emphasized that "borrowed money" should be interpreted in a commercial sense rather than a technical legal sense. The Court of Appeal's decision highlighted that not every raising of money constitutes borrowing, and the legal relationship of lender and borrower must exist.

Application to Present Case:
1. Nature of Transactions: The transactions started as advance payments and evolved into security deposits for the due performance of contracts. The assessees themselves fixed the deposit amounts, indicating no intention of raising a loan.
2. Repayment Conditions: The repayment depended on various contingencies, such as contract breaches, further negating the idea of a loan.
3. Commercial Interpretation: The mere availability of money or the deposit's resemblance to a loan does not convert it into "borrowed money." The transactions were security deposits, distinct from loans.

Conclusion:
The Court agreed with the Appellate Tribunal's conclusion that these security deposits do not qualify as "borrowed money" under Rule 2A of Schedule II to the Excess Profits Tax Act. The question was answered in the negative, against the assessees, with the Commissioner of Income-tax entitled to costs of Rs. 250.

Reference Answered Accordingly:
The security deposits made by customers with the assessee firm were not "borrowed money" within the meaning of Rule 2A of the Second Schedule to the Excess Profits Tax Act, 1940.