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TMI Blog1950 (1) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... 4, to 12th April, 1945, they received from their customers a sum of ₹ 7,69,569 as security deposits and the question that has to be decided is whether this sum is borrowed money within the meaning of Rule 2A of Schedule II to the Excess Profits Tax Act, 1940. The assessees claim that it is borrowed money while on behalf of the Income-tax Commissioner it is urged that it is merely a business liability and not borrowed money and that therefore Rule 2A does not help the assessees. The circumstances under which these security deposits were made by the customers of the assessees have been explained by three letters which have been put in evidence. Up to 5th May, 1944, the system of sales adopted by the assessees in selling yarn to customers was to obtain an advance of an amount in respect of forward contracts under which the assessees agreed to supply yarn to their customers. This was roughly about 80 per cent. of the sale price and when the goods were delivered this payment was adjusted towards the purchase price after receiving from the customers the balance of 20 per cent. On the 5th May, 1944, the assessees issued a circular to all the customers in the following terms:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oval. Against the said amount, a sum of Rs...................stands credit with us now in the said deposit. Therefore, the balance of Rs............... due by you/to you is to be remitted/will be returned. Kindly let us have your reply immediately in this connection. Please note that an interest of 3 per cent per annum will be allowed as usual to the said deposit amounts until further notice. From a perusal of these three letters it will be seen that to start with an advance under each contract was obtained towards the purchase price which was to be adjusted at the time of the delivery of the goods towards the final payment of the purchase price. It was later altered into a deposit with reference to each contract variously described as contract advance fixed deposit account and security deposit account. Finally, under the last of the circulars an amount roughly of 30 per cent of the average of the dealings between a customer and the assessees was demanded as a security for the entire dealings between the assessees and the customer and he was called upon to make good the balance of the amount. The amount to be deposited was also fixed by the assessees themselves and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrowed money unless the legal relationship of lender and borrower exists between A and B. After all, the words 'borrow' and 'lend' are not words of narrow legal meaning. They represent a transaction well known to business people which has taken its place in the law as a result of commercial transactions among the merchants of this country, and when the law, under the Bills of Exchange Act or elsewhere has to deal with matters of this kind, it is dealing with commercial transactions. As Somervell, L.J., put it during the argument, whether the words are to be looked at from the point of view of Bullen and Leake or whether they are to be looked at from the point of view of a commercial transaction in the City of London, one arrives ah the same result, that for there to be borrowed money there must be the legal relationship of lender and borrower, and I find it impossible to discover that there was such a relationship existing either between the company and Erlangers (the acceptance house) or between the company and the discount houses . This view was concurred in by Somervell, L.J., and Cohen, L.J. Somervell, L.J., at page 487 stated the legal effect of the transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat, although the transaction had some of the incidents of borrowing money, the money obtained from it was not, commercially speaking, borrowed money . In that case, as appears in the facts, money was raised specifically for the purpose of financing the purchase of raw materials by the company and the credit was obtained by securing the consent of an accepting house to accept the bills which also arranged for the discounting of the bills and by that process a earn of 268,232 was raised for the purpose of the business. Notwithstanding these facts it was held that there was no borrowing of money in the commercial sense though actually money was forthcoming into the business of the assessee. In our opinion, this decision of the Court of Appeal throws light on the interpretation of the expression borrowed money occurring in Rule 2A which provision is analogous to the provision which was under consideration before the Court of Appeal. What is it that we have in the case now before us to constitute a borrowing of money from the customers? It was argued on behalf of the assessees that even though it was called a deposit it was in substance and in effect a loan by which money was ma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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