TaxTMI 
TaxTMI 
1953 (1) TMI 4
X X X X Extracts X X X X
X X X X Extracts X X X X
....rrowed money " within the meaning of Rule 2A of the Rules in the Second Schedule to the Act and, on that footing, no excess profits tax was payable by them for the chargeable accounting period. The Excess Profits Tax Officer rejected the claim and assessed them to excess profits tax of Rs. 25,404 holding that, having regard to the terms of the agreement under which the amounts were received, they could not in law be regarded as "borrowed money" within the meaning of that rule. Appeals to the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal having failed, the appellants applied to the Tribunal for reference of the question of law arising in the case to the High Court at Madras for its determination, and the Tribunal accordingly referred the following question :--- "Whether in the circumstances of this case, the moneys deposited by customers with the assessee firm as security deposits were 'borrowed money' within the meaning of Rule 2A of the Second Schedule to the Excess Profits Tax Act, 1940, either throughout the chargeable accounting period ended 12th April, 1945, or during any part of that chargeable accounting period ?" The reference was heard by a D....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ith their customers evidenced by the circulars issued to them. The first of these circulars issued on 5th May, 1944, was in the following terms : "You are quite aware of the fact that we are and will be, so long as the existing contracts bales are closed, transferring the Contract Advance Deposit amounts to the credit of current yarn account for the bales supplied to you then and there. Now what we have decided in this connection is not to do so as stated above, but to keep such advance amounts under the new heading 'Contracts Advance Fixed Deposit Account' and return in cash or by bank's cheque or by insured post the advance amount of the bales booked and supplied in full under certain contract number only after completion of that contract with the bank's commission, etc., expenses that may be incurred therein on your account. The value of the bales delivered or to be delivered for each and every time, should be paid in full and this system is applicable to our future booking of contracts only." This was followed by another issued on 5th December, 1944, which runs thus :--- "This is to inform you that we have changed the heading of your 'Contracts Advance Fixed Depo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rdingly, the question arises only with reference to the amounts received between 5th May, 1944, and 14th February, 1945, which covers the major part of the chargeable accounting period and those received thereafter till the end of that period. It will be convenient to deal first with the amounts received during the last part of that period, for, if we accept the view of the learned judges below that those amounts were not borrowed money, then a fortiori must amounts received during the second part be held not to be borrowed money. The circular of the 14th February, 1945, marks a clear departure from the mode of dealing followed by the parties before the 5th May, I944. The amount deposited by a customer was no longer to have any relation to the price fixed for the goods to be delivered under a forward contract---either in instalments or otherwise. Such price was to be paid by the customer in full against delivery in respect of each contract without any adjustment out of the deposit, which was to be held by the appellants as security for the due performance of his contracts by the customer so long as his dealings with the appellants by way of forward contracts continued, the ap....
X X X X Extracts X X X X
X X X X Extracts X X X X
....invest the deposit with a different character. It remains a loan of which the repayment in full is conditioned by the due fulfilment of the obligations under the collateral contract. The Attorney-General placed strong reliance, as did the learned Judges in the High Court, on the English decisions in Inland Revenue Commissioners v. Port of London Authority and Inland Revenue Commissioners v. Rowntree & Co. Ltd. In the first case it was held that the stock issued by the Port of London Authority as consideration for the acquisition of the property of certain dock companies of London, which carried interest and was redeemable after twenty years, could not be regarded as representing "borrowed money" under Rule 2 of Part III of Schedule IV of the Finance (No. 2) Act, 1915, as that expression referred to "a real borrowing and a real lending". The transaction was held to be a purchase of assets for consideration in the shape of the stock issued, though it was attended with incidents in some respects similar to those which would have ensued if there had been a borrowing. It may well be conceded that the term "borrowed money" must be construed in its natural and ordinary meaning and impl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o be held as security against possible default by the agents in payment for the products consigned to them and to be repaid when the agency came to an end. These deposits were, during the war, transferred to the United Kingdom for reasons of safety and were there held in sterling. Subsequently, when the Chinese dollar depreciated in relation to sterling, the amounts required to repay the deposits in Chinese dollars were much less than the sums held by the company as the sterling equivalents of the deposits, and the question arose whether such deposits were trading receipts or receipts of a capital nature. In holding that they were capital receipts and the profit was therefore a capital gain, Jenkins, L. J., who delivered the leading judgment, observed :--- "If the agent's deposit had in truth been a payment in advance to be applied by the company in discharging the sums from time to time due from the agent in respect of petroleum products transferred to the agent and sold by him the case might well be different and might well fall within the ratio decidendi of Landes Bros. v. Simpson and Imperial Tobacco Co. v. Kelley. But that is not the character of the deposits here in questi....