TMI Blog1953 (1) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... nafter referred to as the Act). The appellants are merchants carrying on business in yarn in Madura and are the sole selling agents for yarn manufactured by the Madura Mills Co., Ltd., distributing yarn to several constituents under forward contracts in respect of which they obtained advances of moneys from their constituents. During the chargeable accounting period (13th May, 1944, to 12th April, 1945) the appellants received from their customers sums amounting to Rs. 7,69,569 and they claimed before the Excess Profits Tax Officer that the said sum should be treated as " borrowed 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 Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital employed in the chargeable accounting period would be much greater than what it has been computed to be, if the security deposits received, which were all used for the appellants' business, were treated as borrowed money and part of the average capital of their business for the chargeable accounting period, and that, as stated above, would result in a considerable reduction of the excess profits as now assessed. What then is the true legal character of these security deposits ? The sums in question were received by the appellants under three different arrangements with 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either in instalments or in full. It is clear that the amounts received from the customers under this arrangement were merely advance payments of the price which were to be adjusted against the value of the bales supplied from time to time under the forward contracts and they can in no sense be regarded as borrowed money. This indeed was not disputed by Mr. Pathak. It was also ronceded by him that the circular of 5th December, 1944, which merely changed the heading of the account in which the moneys received were credited did not alter the legal position as it then stood. Accordingly, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfined to a bailment of specific currency to be returned in specie. As in the case of a deposit with a banker, it does not necessarily involve the creation of a trust but may involve only the creation of the relation of debtor and creditor, a loan under conditions." The fact that one of the conditions is that it is to be adjusted against a claim arising out of a possible default of the depositor cannot alter the character of the transaction. Nor can the fact that the purpose for which the deposit is made is to provide a security for the due performance of a collateral contract 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r between A and C. In the present case, the relationship of lender and borrower in all its essential features is plainly recognisable between the depositors and the appellants, and that decision does not affect the matter one way or the other. On the other hand, a more recent decision of the English Court of Appeal in Davies v. The Shell Company of China, which Mr. Pathak brought to our notice, is more in point. A British company, which sold petroleum products in China through Chinese agents, required the latter to deposit with the company a sum of money in Chinese dollars to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effect for the adjustment of the mutual obligations on the completion of the contract. We hold accordingly that the sums received during this period cannot be regarded as borrowed money for the purposes of Rule 2A. Lastly, Mr. Pathak suggested that the case having proceeded both before the Excess Profits Tax authorities and the High Court on the footing that if the sums received from the customers during any part of the chargeable accounting period was held to be borrowed money, they must be included in the computation of the average profits for the whole of the chargeable accounting period, no distinction should now be made between one part of the period and another for this purpose. We cannot accept that view. It is true to say that no such distinction was in fact made at any stage so far, but that is because it was held that none of the sums received under any of the arrangements was borrowed money within the meaning of Rule 2A. But, if it be held that the amounts received under one or more, but not all, of the agreements are borrowed moneys, then, obviously, the computation of average capital in accordance with Rule 2A must take into account the different character of the su ..... 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