1950 (1) TMI 13 - HC - Income Tax

Security deposits not 'borrowed money' under Rule 2A. Commissioner entitled to costs.

The Court held that the security deposits made by customers with the assessee firm did not constitute 'borrowed money' under Rule 2A of the Second ... Borrowed money - security deposit - commercial sense of borrowing - capital computation - Rule 2A of the Second Schedule to the Excess Profits Tax Act, 1940Borrowed money - security deposit - commercial sense of borrowing - Rule 2A of the Second Schedule to the Excess Profits Tax Act, 1940 - Whether moneys deposited by customers as security deposits were 'borrowed money' within the meaning of Rule 2A of the Second Schedule to the Excess Profits Tax Act, 1940, for the chargeable accounting period 13th April, 1944 to 12th April, 1945. - HELD THAT: - The Court analysed the contractual documents and circulars exchanged between the assessee and its customers, noting the evolution from advance payments under forward contracts to amounts described as 'Contract Advance Fixed Deposit Account' and finally 'Security Deposit' account. The declared arrangement fixed by the assessee its own quantum of deposit, permitted the assessee to retain or appropriate sums against breaches of contract, and entitled customers to interest at 3% per annum. Applying the commercial test of 'borrowed money' as explained by the English Court of Appeal in Inland Revenue Commissioners v. Rowntree Co. Ltd., the Court held that a transaction must create the legal relationship of lender and borrower and amount to a real borrowing in the commercial sense to qualify as 'borrowed money'. The facts showed the sums were intended as security for performance and arose out of advance payments and contractual adjustments rather than a loan relationship; the assessees retained discretion to appropriate amounts on contingencies and were not contractually bound to repay the entire amount irrespective of the dealings. Thus, notwithstanding that funds were made available for business use, the nature and incidents of the arrangement negated a commercial borrowing and the sums could not be treated as 'borrowed money' under Rule 2A.The security deposits received from customers are not 'borrowed money' within the meaning of Rule 2A of the Second Schedule to the Excess Profits Tax Act, 1940, for the chargeable accounting period 13th April, 1944 to 12th April, 1945.Final Conclusion: Reference answered in the negative; the Appellate Tribunal's conclusion that the security deposits are not 'borrowed money' under Rule 2A is upheld, and costs awarded to the Commissioner of Income-tax. 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.