1953 (1) TMI 2 - SC - Income Tax

Whether on a true construction of Rule 5 of Schedule II of the Excess Profits Tax Act the expression so far as the contrary is shown applies only to sub-clause (a) or also to sub-clause (b) ? Whether the managing agency commission payable by the company to its managing agents for the year 1943 is borrowed money for the purposes of Rule 2A or a debt for the purposes of Rule 2 of Schedule II to the Excess Profits Tax Act ? Held that - A loan imports a positive act of lending coupled with an acceptance by the other side of the money as a loan. The relationship of borrower and lender cannot ordinarily come about by mere inaction. The clause in the Articles of Agreement quoted above was relied on for the purpose of showing that there was such an agreement in the case. We are unable to construe the provisions in that way. They merely give the managing agents a right to receive their commission at a certain time. If the money is not paid in time it lies with the assessee as a debt due to the agents. We agree with the High Court that it is a debt under Rule 2 and not a borrowing under Rule 2A. Appeal dismissed.

Summary

Issues:
1. Interpretation of Rule 5 of Schedule II of the Excess Profits Tax Act.
2. Classification of managing agency commission as a debt or borrowing under the Act.

Interpretation of Rule 5 of Schedule II:
The case involved a dispute regarding the interpretation of Rule 5 of Schedule II of the Excess Profits Tax Act, 1940. The rule states that profits or losses made in a period are deemed to have accrued evenly and resulted in a corresponding increase or decrease in capital unless proven otherwise. The contention was whether the words "so far as the contrary is shown" applied only to clause (a) or to both clauses (a) and (b). The court held that the words applied to both clauses, allowing either party to rebut the presumptions created by the rule. The High Court's interpretation was upheld, clarifying that the rule's fiction applies to both clauses.

Classification of Managing Agency Commission:
The second issue revolved around the classification of managing agency commission as a debt or borrowing under the Act. The dispute arose from the commission being left with the assessee by the managing agents. The assessee argued it constituted a borrowing under Rule 2A, while the Commissioner of Income-tax contended it was a debt under Rule 2. The court sided with the High Court's decision, determining that the commission left with the assessee was a debt and not a borrowing. It emphasized that inaction by the managing agents did not automatically convert the amount into a loan, highlighting the need for a formal agreement to establish a lending relationship. The court concluded that the commission, as per the agreement, was a debt due to the agents, not a borrowing.

In conclusion, the Supreme Court dismissed the appeal, affirming the decisions of the High Court. The judgment clarified the application of Rule 5 of Schedule II and distinguished between debt and borrowing concerning managing agency commission, providing clarity on these crucial aspects of the Excess Profits Tax Act.