Satyanarayana Rao, J.
1. Under Section 66(1) Income-tax Act, 1922 read with Section 21, Excess Profits Tax Act, the following question is referred to us by the Appellate Tribunal for decision, namely :
'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 Schedule II, 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 only question that arises for decision, therefore, relates to capital computation. The assessees are the selling agents for yarn of Madura Mills Co., Ltd. During the chargeable account period, 13th April 1944 to 12th April 1945, they received from their customers a sum of rupees 7,69,569 as security deposits and the question that has to be decided is whether this sum is 'borrowed money' within the meaning of Rule 2A of Schedule II, Excess Profits Tax Act, 1940. The assessees claim that it is borrowed money while on behalf of the Income-tax Commissioner it is urged that it is merely a business liability and not borrowed money and that, therefore, Rule 2A does not help the assessees. The circumstances under which these security deposits were made by the customers of the assessees have been explained by three letters which have been put in evidence. Up to 5th May 1944, the system of sales adopted by the assessees in selling yarn to customers was to obtain an advance of an amount in respect of forward contracts under which the assessees agreed to supply yarn to their customers. This was roughly about 80 per cent. of the sale price and when the goods were delivered this payment was adjusted towards the purchase price after receiving from the customers the balance of 20 per cent. On 5th May 1944, the assessees issued a circular to all the customers in the following terms:
'You are quite aware of the fact that we are, and will be so long as the existing contracts of 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 connexion 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.'
A further circular was sent on 5th December 1944 in which there was a further modification in the system of the dealings between the asses-sees and the customers. That circular is in these terms:
'This is to inform you that we have changed the heading of your 'Contract Advance Fixed Deposit' account into 'Security Deposit' account. As such, we have transferred the amount which is to your credit in the former to the credit of your latter account. This is with effect from 1st November 1944. Kindly note.'
The assessees apparently were not satisfied for some reasons even with this arrangement and there was yet a further modification which was communicated to the customers by the assessees by their circular dated 14th February 1945. This is the final arrangement the proper interpretation of which is the important question for decision in the case. That circular is in these terms:
'Instead of calling for amounts from you towards 'security deposit' due to bales for which we are entering into forward contracts with you and returning the same to you from the said deposit then and there, as we are doing now, and in order to make it feasible, we have decided to demand from you a certain sum towards security deposit and keep the same with us so long as our business connexion under forward contracts will continue with you.
In your case, we have fixed a sum of Rs. ...... for the said deposit, which amount we have to keep with us on your approval. Against the said amount, a sum of Rs. ......, stands credit with us now in the said deposit. Therefore, the balance of Rs..... due by you--to you is to be remitted will be returned. Kindly let us have your reply immediately in this connexion.
Please note that an interest of 3 per cent. per annum will be allowed as usual to the said deposit amounts until further notice.'
From a perusal of these three letters, it will be seen that to start with an advance under each contract was obtained towards the purchase price which was to be adjusted at the time of the delivery of the goods towards the final payment of the purchase price. It was later altered into a deposit with reference to each contract variously described as 'Contracts Advance Fixed Deposit Account' and 'Security Deposit' account. Finally, under the last of the circulars an amount roughly of 30 per cent. of the average of the dealings between a customer and the assessees was demanded as a security for the entire dealings between the assessees and the customer and he was called upon to make good the balance of the amount. The amount to be deposited was also fixed by the assessees themselves and the arrangement was to treat the amount as 'Security Deposit' towards the dealings relating to the forward contract between the customer and the assessees which in plain language means that if there was a breach during the course of the dealings on the part of the customer the assessees would be entitled to deduct out of the deposit amount the amount that may be found to be due to them in respect of any breach of all or any of the terms of the contract. The circular no doubt entitles the customer to get an interest of 3 per cent. per annum on the amount deposited.
2. The Excess Profits Tax Officer and the Appellate Tribunal construed these documents as not constituting a borrowing of money by the assessees from their customers and, therefore, re-fused to allow this amount of 7 lakhs and odd to be treated as part of the capital during the chargeable accounting period. We think that the conclusion arrived at by the Appellate Tribunal is correct. Borrowing implies a loan and it must be a real borrowing and a real loan. That is how it was interpreted by the English. Court of Appeal in the case of Inland Revenue Commissioners v. Rowntree Co. Ltd., (1948) 1 ALL E. R. 482, a case relating to the raising of money by the assessee by discounting bills. It was there held that it was not every raising of money by any means that constituted borrowing and though money was in fact, raised in that case by the assesses by an arrangement with an acceptance house by having the bills discounted the amount so obtained was not money borrowed within the meaning of Para. (2) of part 2 of Schedule VII to the Finance No. 2 Act, 1939, for purposes of computation of capital for assessment to Excess Profits Tax Act. 'Borrowing' in the Statute under consideration before the Court of Appeal, it was held, was not used in the sense of Bullen and Leake meaning thereby the description of an action which would have been Said on the facts of the case but must be looked at from the point of view of a commercial transaction. 'Borrowing of money' is used, therefore, according to the learned Lord Justice in a 'commercial sense' and not in a technical legal sense. The words 'borrowed money,' observed Tucker L. J. require :
'The existence of a borrower and lender, and that there must be a real borrowing in the legal sense of the word. I find it difficult, if not impossible, to appreciate how there can be borrowed money unless the legal relationship of lender and borrower exists between A and B. After all, the words 'borrow' and 'lend' are not words of narrow legal meaning. They represent a transaction well known to business people which has taken its place in the law as a result of commercial transactions among the merchants of this country, and when the law, under the Bills of Exchange Act or elsewhere has to deal with matters of this kind, it is dealing with commercial transactions. As Somervell L. J. put it during the argument, whether the words are to be looked at from the point of view of Bullen and Leake or whether they are to be looked at from the point of view of a commercial transaction in the City of London, one arrives at the same result, that for there to be borrowed money there must be the legal relationship of lender and borrower, and I find it impossible to discover that there was such a relationship existing either between the company and Erlangers (the acceptance house) or between the company and the discounting houses.'
This view was concurred in by Somervell and Cohen L. JJ. Somervell L. J. at p. 487 stated the legal effect of the transaction in that case in these words :
'It seems to me that this case brings out very well that there are two ways at least (there may be more) of raising money. One is by borrowing it and the other is by discounting a bill of exchange. They are both quite well known methods. One is borrowing and the other is discounting a bill. The fact that in many cases they produce the same result of providing financial resources for carrying on a business does not mean that words which are apt to describe one must be construed as covering the other. The way of putting the case, which in the course of the argument, attracted me at one time, was that, in the strict construction of the words in their context, this money might be said to be money borrowed from the money market though not borrowed from the accepting house or from the houses which discounted the bill, but, on consideration, I think that that approach lands one back in exactly the same difficulty as I felt during the earlier part of the argument. 'Borrowing' as Tucker L. J. said, is a familiar word. '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.'
Cohen L. J. expressed his opinion at p. 487 in these words :
'The contract in question in this case, to my mind, is not a contract of loan, but merely a contract or a series of bill transactions, and it does not in essence differ in legal effect from a contract limited to a single transaction. If this be the case, agreeing as I do wife with my brothers that we have to look at the matter from the legal point of view and give to the expression-'borrowed money' the sense which in law it would naturally bear, this is enough to dispose of the matter, but, assuming that the Solicitor-General was right when he said that we must construe the expression 'borrowed money' in relation to its context and the subject-matter with which the Legislature was dealing, and that, approaching the matter from this angle, we must construe it in accordance with comercial usage, even so, I think, the Grown would fail. The Commissioners took the view that, although the transaction had some of the incidents of borrowing money, the money obtained from it was not, comercially speaking, borrowed money.'
In that case, as appears in the facts, money was raised specifically for the purpose of financing the purchase of raw materials by the company and the credit was obtained by securing the consent of an accepting house to accept the bills which also arranged for the discounting of the bills and by that process a sum of 268232 was raised for the purpose of the business. Notwithstanding these facts, it was held that there was no borrowing of money in the commercial sense though actually money was forthcoming into the business of the assessee. In our opinion, this decision of the Court of Appeal throws light on the interpretation of the expression 'borrowed money' occurring in Rule 2-A which provision is analogous to the provision which was under consideration before the Court of Appeal.
3. What is it that we have in the case now before us to constitute a borrowing of money from the customers It was argued on behalf of the assessees that even though it was called a deposit it was in substance and in effect a loan by which money was made available to the assessees for purposes of their business. No doubt for some purposes and in essence a deposit does imply a loan. It is not that phase of the transactions that we are now concerned with but to find out whether in the commercial sense the transactions could be described as loans from the customers. The letter of 14th February 1945 clearly indicates that no loan was intended to be raised under the cover of this 'Security Deposit.' The transaction started as advance payment of purchase money and ultimately it was changed into security deposit for the due performance of the forward contracts of the customers. The assessees themselves decided to demand from the customers a certain amount as security deposit and the amount itself was fixed by the assessees. These two incidents clearly negative any idea of any lending and borrowing by the assessees from the customers. Further how is this money to be repaid If there was breach of contract on the part of a customer the assessees would be entitled to deduct from this deposit the amount that would be due to them as purchase price or as damages for breach of the contract on the part of the customer. How much amount is to be paid is determined by the various contingencies and the assessees are not bound under the terms of the contract to return the entire amount but are entitled to keep it so long as the transactions in forward contracts continued between the assessees and the customer. The mere fact that money was made available or a deposit partakes the character of a loan on an ultimate analysis would not convert the money made available by the customers to the assessees as security deposit a borrowing or make the money 'borrowed money' within the meaning of the rule. The transaction itself is described as security deposit and in law a distinction is drawn always between a loan simpliciter and a deposit. In the light of the decision of the Court of Appeal and in view of the facts and circumstances of this case we have no hesitation in agreeing with the conclusion of the Appellate Tribunal that these security deposits are not borrowed money within the meaning of Rule 2A of Schedule 2, Excess Profits Tax Act. The question referred to us must, therefore, be answered in the negative and against the assessees and the Commissioner of Income-tax is entitled to his costs of this reference which we fix at Rs. 250.