1953 (1) TMI 4 - SC - Income Tax

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 ? Held that - Set aside the order of the court below and answer the question referred in the affirmative with reference to the last part of the chargeable accounting period namely 14th February 1945 to 12th April 1945 and in the negative with reference to the rest of that period.

Summary

Issues Involved:
1. Whether 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.

Issue-wise Detailed Analysis:

1. Nature of Security Deposits:
The appellants, merchants in yarn, received sums from customers amounting to Rs. 7,69,569 during the chargeable accounting period (13th May, 1944, to 12th April, 1945). They claimed that these sums should be treated as "borrowed money" under Rule 2A of the Second Schedule to the Excess Profits Tax Act, 1940, which would exempt them from excess profits tax. The Excess Profits Tax Officer rejected this claim, stating that the sums could not legally be regarded as "borrowed money." Appeals to the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal also failed, leading to a reference to the High Court at Madras. The High Court decided against the appellants, but granted leave to appeal to the Supreme Court.

2. Legal Character of Security Deposits:
The sums in question were received under three different arrangements evidenced by circulars issued to the customers. The first circular (5th May, 1944) indicated that advance amounts would be kept under a "Contracts Advance Fixed Deposit Account" and returned after the completion of contracts. The second circular (5th December, 1944) changed the heading to "Security Deposit" account. The third circular (14th February, 1945) stated that a fixed sum would be kept as a security deposit, with interest paid at 3% per annum, to be held as long as the business connection continued.

3. Analysis of Different Periods:
- Before 5th May, 1944: The amounts were advance payments adjusted against the value of bales supplied. These could not be regarded as borrowed money.
- 5th May, 1944, to 14th February, 1945: The amounts received during this period were treated as advance payments related to each contract number and were adjusted against mutual obligations upon contract completion. These were more in the nature of trading receipts than security deposits and could not be regarded as borrowed money.
- 14th February, 1945, to 12th April, 1945: The amounts deposited were held as security for the due performance of contracts and were to be repaid at the end of the business connection. The transaction had the essential elements of a contract of loan, and thus, the deposits received under this arrangement constituted borrowed money for the purpose of Rule 2A.

4. Judicial Precedents and Arguments:
The Attorney-General argued that the deposits were made to induce dealings and were held as security for contract performance, distinguishing them from real borrowing or lending. However, the Court held that the essential character of the transaction was that of a loan, as the appellants agreed to return an equivalent amount, making it borrowed money. The Court referred to English cases like Inland Revenue Commissioners v. Port of London Authority and Inland Revenue Commissioners v. Rowntree & Co. Ltd., but found them less applicable. Instead, the Court found support in the decision of Davies v. The Shell Company of China, where similar security deposits were considered loans.

5. Division of Chargeable Accounting Period:
The Court rejected the suggestion that no distinction should be made between different parts of the chargeable accounting period. It held that if amounts received under different agreements are borrowed moneys, the computation of average capital must account for the different character of sums received under each agreement.

Conclusion:
The Supreme Court set aside the order of the lower court, answering the reference in the affirmative for the period from 14th February, 1945, to 12th April, 1945, and in the negative for the rest of the period. The reference was answered accordingly, with no order as to costs.