Deferred share receipts are not borrowed money under excess profits tax rules, so apportionable interest was excluded.

Amounts originally received on the issue of deferred shares were not "borrowed money" for the third proviso to Rule 5A of Schedule I to the Excess Profits Tax Act, 1940. The proviso was confined to interest on money actually borrowed in the ordinary sense, and a later liability arising after the share issue was declared invalid did not change the character of the receipt into a loan. The sum was therefore not treated as borrowed capital, the apportionable interest was excluded, and the standard profits under Section 26(1) were not increased.

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Issues: Whether amounts originally received on issue of deferred shares, and later treated as liability on refund, constituted "borrowed money" for the purposes of the third proviso to Rule 5A of Schedule I to the Excess Profits Tax Act, 1940, so as to require addition of the apportionable interest to the standard profits fixed under Section 26(1) of that Act.

Analysis: The reference turned on the meaning of "borrowed money" in the special computation provisions of the Excess Profits Tax Act, 1940. The Court held that the proviso contemplated interest on money actually borrowed as a loan in the ordinary sense, and not amounts which could only be treated as a liability after the company's share issue was declared invalid. The amount originally received by the company was taken on deferred shares, not by lending and borrowing, and the later characterisation of the sum as "money had and received" did not convert it into borrowed money. The proviso was a special concession and had to be construed strictly. The absence of any debit in the profit and loss account during the standard period did not matter; what mattered was that the transaction was not a loan.

Conclusion: The sum in question was not borrowed money within the third proviso to Rule 5A of Schedule I to the Excess Profits Tax Act, 1940, and the standard profits could not be increased by the apportionable interest.

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