Borrowed money test in excess profits tax: customer security deposits were excluded from capital computation.

Security deposits received from customers under forward contract arrangements were not "borrowed money" for capital computation under Rule 2A of the Second Schedule to the Excess Profits Tax Act, 1940. Although the amounts were fixed at the assessee's instance, carried interest, and could be retained or appropriated against contractual breaches or sums due, the transaction did not create the essential lender-borrower relationship. Applied in its commercial sense, the phrase "borrowed money" covered a loan simpliciter, not a deposit made available for business use. The deposits therefore could not be included in the assessee's capital.

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Issues: Whether customers' security deposits received by the assessee could be treated as borrowed money within Rule 2A of the Second Schedule to the Excess Profits Tax Act, 1940 for capital computation.

Analysis: The amounts began as advance payments under forward contracts but were later recharacterised as security deposits to secure performance of the contracts. The arrangement fixed the amount at the assessee's instance, allowed interest, and entitled the assessee to retain or appropriate the amounts against breaches or sums due under the contracts. Applying the expression "borrowed money" in its commercial sense, the transaction lacked the essential legal relationship of lender and borrower and was distinguishable from a loan simpliciter. A deposit, even if it may resemble a loan in some respects, does not become borrowed money merely because funds are made available to the assessee for business use.

Conclusion: The security deposits were not borrowed money within Rule 2A of the Second Schedule to the Excess Profits Tax Act, 1940 and could not be included in capital.

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