Borrowed money versus trade advance: security deposits with repayment and interest can create a debtor-creditor relationship.

Amounts received from customers under the first arrangement were advance trading receipts, because they were linked to contract deliveries, adjusted against the price of goods, and did not create any independent obligation to repay an equivalent sum; they were therefore not borrowed money under Rule 2A and the answer was against the assessee. Under the revised arrangement, the deposits were retained during the business relationship, carried interest, were not adjusted against contract price, and repayment of an equivalent sum was contemplated; these features created a debtor-creditor relationship and the receipts were borrowed money under Rule 2A, with the answer in favour of the assessee.

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Issues: (i) Whether the moneys received from customers under the arrangement in force from 5 May 1944 to 14 February 1945 were borrowed money within Rule 2A of the Second Schedule to the Excess Profits Tax Act, 1940. (ii) Whether the moneys received under the revised arrangement from 14 February 1945 to 12 April 1945 were borrowed money within Rule 2A of the Second Schedule to the Excess Profits Tax Act, 1940.

Issue (i): Whether the moneys received from customers under the arrangement in force from 5 May 1944 to 14 February 1945 were borrowed money within Rule 2A of the Second Schedule to the Excess Profits Tax Act, 1940.

Analysis: The amounts received during this period were linked to specific contract numbers and were adjusted against the price of goods supplied under forward contracts. They functioned as advance payments to be set off against deliveries and did not create an independent obligation to repay an equivalent sum at the end of the arrangement. In substance, the receipts were part of the trading mechanism and not a loan creating a debtor-creditor relationship.

Conclusion: The amounts received during this period were not borrowed money and the answer was against the assessee.

Issue (ii): Whether the moneys received under the revised arrangement from 14 February 1945 to 12 April 1945 were borrowed money within Rule 2A of the Second Schedule to the Excess Profits Tax Act, 1940.

Analysis: Under the revised arrangement, the deposits were no longer adjusted against the contract price, interest was payable on them, they were retained during the continuance of the business connection, and repayment of an equivalent sum was contemplated subject only to any adjustment for default. These features gave the transaction the essential character of a loan, notwithstanding the label of security deposit and the collateral purpose for which the money was provided.

Conclusion: The amounts received during this period were borrowed money and the answer was in favour of the assessee.

Final Conclusion: The reference was answered by distinguishing between the two periods, with the later deposits treated as borrowed money and the earlier receipts treated as advance trading receipts.

Ratio Decidendi: A receipt will be treated as borrowed money when the arrangement creates an obligation to repay an equivalent sum and establishes the substance of a debtor-creditor relationship, even if the money is described as a security deposit and is held for a collateral purpose.

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