Bill discounting is not borrowed money when the transaction is a true discounting arrangement, not a loan or pledge.

For super profits tax capital computation, a provision for taxation standing on 1 April 1962 was excluded from the capital base because earlier binding authority had already settled the point against inclusion. On bill discounting facilities, amounts outstanding were treated on their substance: where the bank credited the bill value, charged interest until realisation, and the arrangement operated as a discounting transaction rather than a loan or pledge, the sums were not "moneys borrowed" and could not be treated as borrowed capital for super profits tax and surtax purposes. The ratio turns on the legal character of the transaction, not its form.

---

---

Issues: (i) Whether the provision for taxation standing as on April 1, 1962, was includible in computing capital for levy of super profits tax in the assessment year 1963-64. (ii) Whether amounts standing outstanding on account of bill discounting facilities constituted moneys borrowed and outstanding, so as to form part of capital for the purpose of super profits tax and surtax computation.

Issue (i): Whether the provision for taxation standing as on April 1, 1962, was includible in computing capital for levy of super profits tax in the assessment year 1963-64.

Analysis: The question was treated as concluded by earlier binding authority. On that basis, the amount set apart as provision for taxation on the relevant date could not be brought into the capital base for super profits tax computation.

Conclusion: The issue was answered against the assessee and in favour of the revenue.

Issue (ii): Whether amounts standing outstanding on account of bill discounting facilities constituted moneys borrowed and outstanding, so as to form part of capital for the purpose of super profits tax and surtax computation.

Analysis: The character of the transactions depended on whether the bills were merely pledged as security for advances or were transferred to the bank by way of discount. The surrounding features pointed to a financial arrangement in which the bank credited the full value of the bills, charged interest until realization, and recovered the proceeds from the drawees, but the bills had not been accepted when delivered and the bank had no recourse to the drawees if they defaulted. The legal effect was that the transaction was not a true loan or borrowing; it was a purchase-like discounting arrangement in the course of banking business, and therefore the sums could not be treated as borrowed money.

Conclusion: The issue was answered in favour of the assessee and against the revenue.

Final Conclusion: The reference was answered in part for the revenue on the taxation provision issue and in part for the assessee on the bill discounting issue, with the resultant legal effect that the disputed bill-discounting amounts were not excludable as borrowed money in capital computation.

Ratio Decidendi: For capital-computation purposes, an amount credited under a bill discounting arrangement is not borrowed money where the transaction, judged by its substance, is an absolute transfer or discounting of bills and not a pledge or loan secured on the bills.

---