Statutory deeming provisions and unpaid commission treated as debt, not borrowed money, under the Excess Profits Tax framework.

Rule 5 of Schedule II to the Excess Profits Tax Act is explained as creating two deeming presumptions about even accrual of profits and the corresponding effect on capital employed, and the qualifying words "so far as the contrary is shown" are said to govern both presumptions, allowing rebuttal of each. The note also distinguishes debt from borrowed money under Schedule II: managing agency commission that remains unpaid under the agreement is treated as a debt under Rule 2, not borrowed money under Rule 2A, unless there is a clear lending arrangement converting the liability into a loan. On that reasoning, both substantive points are stated against the assessee.

---

---

Issues: (i) Whether the expression "so far as the contrary is shown" in Rule 5 of Schedule II of the Excess Profits Tax Act, 1940 applies only to sub-clause (a) or also to sub-clause (b); (ii) Whether managing agency commission left with the assessee is borrowed money under Rule 2A of Schedule II or a debt under Rule 2 of Schedule II.

Issue (i): Whether the expression "so far as the contrary is shown" in Rule 5 of Schedule II of the Excess Profits Tax Act, 1940 applies only to sub-clause (a) or also to sub-clause (b).

Analysis: Rule 5 creates a statutory fiction that profits are deemed to accrue evenly throughout the period and, as they accrue, to result in a corresponding increase or decrease in capital employed. The qualifying words governing the Rule apply to both deeming parts, so either party may rebut either presumption by showing that the facts do not support even accrual or corresponding effect on capital.

Conclusion: The expression applies to both sub-clause (a) and sub-clause (b), against the assessee.

Issue (ii): Whether managing agency commission payable by the company to its managing agents is borrowed money under Rule 2A of Schedule II or a debt under Rule 2 of Schedule II.

Analysis: Amounts payable as commission become due under the governing agreement and, if not withdrawn, remain money owed by the company. Mere inaction by the managing agents does not convert a debt into a loan, since borrowing requires a positive act of lending and acceptance as such. The contractual clause fixing the time for payment did not create a loan arrangement.

Conclusion: The amount is a debt under Rule 2 and not borrowed money under Rule 2A, against the assessee.

Final Conclusion: The substantive questions were decided against the assessee and the tax appeal was unsuccessful.

Ratio Decidendi: Where a statutory rule creates alternative presumptions by a deeming provision subject to contrary proof, the qualifying words govern each presumption separately; and an unpaid contractual liability is a debt unless there is a clear agreement converting it into a loan.

---