TMI Blog1953 (5) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... pplication were, at the time of the hearing of the applications, withdrawn by the departmental representative on behalf of the applicant. These questions refer to a claim of bad debt by the assessee which was for some time resisted by the department. Question No. 5 in the first application also covers the same point and we understand that it has not been specifically withdrawn through oversight. So, the only questions suggested by the applicant for reference are question No. 6 in the first application and question No. 2 in the second application. 4. The facts of the case are that the assessee company issued some deferred shares and obtained money from the subscribers of these shares in the year 1937. In the year 1941 the issue of these shares was held to be illegal by an order of the Calcutta High Court and the company was directed to refund the money with interest. The amount of interest due on this money was ₹ 72,500 for the entire period, 1937 to 1941. The entire sum was charged in the assessee's books to interest account for the year 1941 and was fully allowed as an expense in making the income-tax assessment for that accounting year. In making the excess profits t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the amount of the interest on or other consideration for the borrowed money during the standard period. The Excess Profits Tax Officer and the Appellate Assistant Commissioner did not allow the assessee's claim on the ground that at the time of the consideration of the application under Section 26(1), there was no charge or liability against the assessee company on account of this interest. The Appellate Tribunal on appeal accepted the assessee's claim because of the above mentioned specific provision for it under the Act. 8. We refer the following question to the High Court:- Whether on the facts and in the circumstances of this case, the amount of profits of the standard period as fixed by the Central Board of Revenue under Section 26(1) of the Excess Profits Tax Act, 1940, requires to be increased under the third proviso to Rule 5A of Schedule I of the said Act by the amount of interest apportionable to the standard period on deferred share capital later on treated as borrowings even though such interest had not been charged to the profit and loss account in the standard period. The statement of case was placed before the parties for sugges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. Thereafter, assessment of the assessee for purposes of the excess profits tax was taken up and it appears that the assessee approached the Central Board of Revenue for an order under Section 26(1) of the Act. The Central Board of Revenue made an order on 23rd September, 1942, by which it fixed the standard profit of the assessee company at ₹ 2,40,000. I have forgotten to mention that the assessee chose the years ending on 31st December, 1937, and 31st December, 1938, as the standard period. The actual profits computed for those years for purposes of income-tax were ₹ 86,542 and ₹ 79,597 respectively, but the special standard profit fixed by the Central Board of Revenue was, as will be seen, at a much higher figure. In course of the assessment proceedings for the chargeable accounting period ending on 31st December, 1941, the Excess Profits Tax Officer had occasion to deal with the sum of ₹ 72,500 under Rule 11 of Schedule I and what he did was to distribute it between the years 1937 to 1941. This he did obviously on the basis that in view of the terms of the High Court's order, the interest must be deemed to have accrued from 1937, and gone on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Appellate Assistant Commissioner, the department seems to have resisted the assessee's claim on a simple ground. It appears to have been contended that the third proviso to Rule 5A, and in fact the whole rule, presupposed that interest on the borrowed money in question had actually been debited to the profit and loss account in the usual course and consequently where it had not been so debited, no claim for adding any interest to the amount of profits determined by the Central Board of Revenue could possibly be made and sustained. It was further contended that not only had no interest been debited to the profit and loss account, but no interest had actually been incurred at all or suffered prior to 1941, and, therefore, so far as the previous years were concerned, no claim based on the payment of that interest could be justifiable. It appears, lastly, to have been contended that the Central Board of Revenue had not deducted the amount of interest concerned in determining the standard profits, and therefore the assessee had already got the benefit of its inclusion and if it was going to be included again under the third proviso to rule 5A, the assessee would, in fact, benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seems to me that if interest is incurred, the language of the proviso which is interest on the borrowed money is satisfied. Mr. Meyer referred to sub-rule (2) of Rule 5A for the true meaning of borrowed money and on the basis of the so-called definition there given, contended that an actual debit in the books of account was clearly intended. He, however, had soon to concede that the definition, defining borrowed money by itself, could be of no real assistance in ascertaining what the true intention of the framers of the rule had been. Sub-rule (2) of Rule 5A says that in Rule 5A of the First Schedule and also Rule 2A of the Second Schedule, 'borrowed money' means borrowed money which, apart from the provisions of the said rule 2A, would have been deductible in computing capital. It was sought to be suggested that since there was a reference to the amount being deductible in the computation of capital without reference to the provisions of Rule 2A, the well-known requirement of both accounting and assessment proceedings, namely, an entry in the books of account, was obviously contemplated. But the difficulty of spelling out any such intention from the language of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained. The money, it was further contended, was required to be advanced, as a loan and taken as such. In the present case, it could not possibly be said that the persons who had taken up the deferred shares had ever intended to grant a loan or that the company which had obtained money on the shares had ever intended to borrow. Even if it was now to be taken that the company had had with it money had and received , it was still not borrowed money , as the term was understood in law and as it had been used in the third proviso to Rule 5A. Mr. Chaudhuri, who appeared on behalf of the assessee, contended in the first place that the concept of money had and received was peculiar to the law of England and there was no warrant for importing it into India and using it for making a distinction between money had and received and borrowed money . When his attention was drawn to the provisions of the Limitation Act, which obviously contemplated both suits for the recovery of money lent and suits for the recovery of money had and received, Mr. Chaudhuri did not press his extreme contention further, but put forward a new one. The new contention was that assuming the money in the presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f it be outside the power of a statutory society, observed Viscount Haldane, to enter into the relation of debtor and creditor in a particular transaction, the only possible remedy for the person who has paid the money would on principle appear to be one in rem and not in personam, a claim to follow and recover specifically any money which could be earmarked as never having ceased to be his property. To hold that a remedy will lie in personam against a statutory society, which by hypothesis cannot in the case in question have become a debtor or entered into any contract for repayment, is to strike at the root of the doctrine of ultra vires. Having thus disposed of the question as to whether the depositors could proceed against the society by way of an action for recovery of borrowed money , the House proceeded to consider whether an action could lie on the basis of a claim for recovery of money had and received. It was held that even such an action would not lie, because the principle upon which such actions rested was a promise to pay, either actual or imputed by law. The same reason which, in the view of the House, made it impossible for the depositors to mainimpossible for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking the rest away as tax. The object of the rules, therefore, is to devise a number of readily workable formulae by which the small modicum of profits intended to be left with the earners can be isolated and set apart and the rest annexed and taken away as a levy. In my view, the expressions used in rules framed for such a purpose are not to be subjected to processes of refined analysis in order to make the terms used in them accommodate concepts which might be proper or relevant only in a legal action. In my view, the words borrowed money were used in Rule 5A of the First Schedule and Rule 2A of the Second Schedule to indicate and denote money actually borrowed as a loan in the ordinary sence and not also to indicate and denote money which, though obtained on some other basis and in some other kind of transaction, could be, on the failure of such basis and such transaction, made out to be borrowed money in essence and in law. That appears to me to have been the view taken in the two cases on which Mr. Meyer relied. The first is the decision of the Supreme Court in the case of Shree Ram Mills Ltd. v. Commissioner of Excess Profits Tax, Central, Bombay [1953] 23 I.T.R. 130 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that, originally, the money was received by the company on certain deferred shares which it had issued. Mr. Chaudhuri did not dispute, as it could not be disputed, that raising money by the issue of shares on the part of a company is something entirely different from raising money by borrowing. If the transaction is regarded in the light of the facts as they actually were at the time the money was obtained, there cannot possibly be any doubt that in obtaining this money from the persons who took up the deferred shares, the assessee company was not borrowing. A shareholder of a company is not its creditor. It may, however, be said that the transaction, as it was in fact, is no longer material and we must look at in it the form into which it must be deemed to have been converted by the order passed by this Court. That order was to the effect that the issue of the shares was of no effect and the money, which was undoubtedly obtained in fact, was only money had and received. But if it was money had and received, there was certainly no lending by the persons from whom it was obtained, because if a person himself lends money, then the money so lent cannot be in the hands of the person w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pertinent are certain observations of Somervell, L.J., who expressed his agreement with the view taken by Tucker, L.J., and added an observation to the following effect:- 'Borrowed money is a familiar phrase. It is possible that in certain contexts it might have a rather wider meaning than it would have, say, in the strict context of a legal pleading, but, looking at the transaction as a whole, I have come to the conclusion that these sums were not borrowed money in any ordinary meaning which can be given to that expression. I am referring to that observation particularly for the reason that it supports the view I have taken that to approach the problem of construing the Rules in the Schedule to the Excess Profits Tax Act from a strictly legalistic point of view, would be to make a wrong approach. The terms and expressions used in the Rules, as far as I understand them, are intended to convey ordinary concepts which are familiar and which can be readily applied in making the complicated computations which the Rules enjoin and it is that reason which induces me to hold that the framers of the Rule did not intend that fictions, such as those which Mr. C ..... 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