1. This is a reference under Section 21, Excess Profits Tax Act, read with Section 66(1), Income-tax Act, of a short question of law to which the thirdproviso to Rule 5A of Schedule I to the former Act has given rise. The question reads as follows: 'Whether on the facts and in the circumstances, of this case, the amount of pronts of the standard period as fixed by the central Board of Revenue under Section 26(1), 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 apportionabie to the standard period on deferred snare capital, later on treateu as borrowings even though such interest had not been charged to the profit and loss-account in the standard period.'
2. The facts are simple. The assessee is a limited company and it appears that in 1937 it issued 1,45,000 deferred shares and obtained some money from those who took them up. Subsequently, the validity of the issue of those shares came to be disputed and upon a suit being brought, this. Court, by an order dated 16th July 1941, held that the resolution deciding on the issue of the shares, and the allotment of them thereby was of no effect, and that the Share Register of the company should be rectified by elimination of the entries relating, to those shares. The assessee was further directed to refund the amount it had obtained on the deferred shares and the amount directed to be refunded was Re. 1/14/- per share and a further sum of -/8/- annas 'as interest on account of user of money had and received' also to be paid per share. Apparently what had been received on, account of each share was a sum of Rs. 2/- because the order directs Re. 1/14/- to be paid in respect of each share after deducting annas 2 paid as dividend. Tne total amount of interest so directed to be paid was Rs. 72,500/-.
3. The order having been passed in 1941, the amount was paid in that year and it was to the interest account of the assessee for that year that it was debited. The whole of the amount was claimed as a deduction in the Income-tax assessment for 1942-43 and the whole claim was allowed.
4. Thereafter assessment of the assessee for purposes of the Excess Profits Tax was taken up ana 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 23-9-1942 by which it fixed the standard profit of the assessee company at Rs. 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 Rs. 86,542/-and Rs. 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.
5. 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 Rs. 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 accruing year after year and therefore it was reasonably and properly distributable between the several years comprised within the period during which the principal money remained unpaid. The only two sums with which the present case is concerned are a sum of Rs. 6,797/- attributed to the year ending on 31st December 1937, and a sum of Rs. 18,1257- attributed to the year ending on 31st December 1938. The chargeable accounting periods with which the present Reference is concerned are those ending on 31st December 1945 and31st December 1946, and it is thus plain that no interest on account of the deferred shares was due or was actually paid during the chargeable account ing periods now in question. The point raised however, is still of importance, because the computation of the average capital and the standard profits was relevant for the purposes of the Excess Profits Tax assessment for these chargeable accounting periods as well.
6. The assessee made a claim in the course of the assessment proceedings that it was entitled to the benefit of the third proviso to Rule 5A of Schedule I to the Act and submitted that under the provisions of that Rule, the standard profit fixed by theCentral Board of Revenue should be increased by the amount of interest, which had been paid during the standard period on the amount obtained lor the deferred shares. The proviso is expressed in the following language:
'Provided further that where a direction has been given by a Board of Referees under Sub-section (3) of Section 6, or by the Central Board of Revenue under Sub-section (1) of Section 26 of this Act, that the standard profits shall be computed as if the profits during the standard period were such greater amount as it thinks just, such amount shall be increased by the amount of the interest on or other consideration for the borrowed money during the standard period.'
The assessee's contention was that the Central Board of Revenue had given a direction under Sub-section (1) of Section 28 and interest on borrowed money had been incurred during the standard period. In those circumstances it was submitted that the provisions of the proviso were plainly attracted and the assessee was entitled to add the two sums of Rs. 6,797/- and Rs. 18,125/- to the amount fixed as its standard profits by the Central Board of Revenue.
7. Up to the 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 concened, 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 twice. This argument which prevailed with the Appellate Assistant Commissioner did not find favour with the Tribunal.
8. The Tribunal referred to the argument advanced before the Appellate Assistant Commissioner which was repeated before it, but apparently thought it unnecessary to deal with it, in view of what it considered to be the mandatory direction contained in the third proviso to Rule 5A of Schedule I. According to the Tribunal the proviso imperatively required that the amount of standard profits fixed under Section 26 (1) must be increased by the amount of interest paid on borrowings andthe Tribunal thought that in the face of that definite provision, it could not attach any importance to the contention advanced by the Department that if the Central Board of Revenue had known that the actual profits were really lower than those shown by the accounts, they would have fixed a lower standard profit. In other words, the Tribunal considered it irrelevant to examine the actual effect of adding the amounts, since in its view the provisions of the third proviso to Rule 5A left no alternative to the amounts being added.
9. The Commissioner of Excess Profits Tax, Central, Calcutta, then made an application to the Tribunal for a Reference to his Court and in pursuance of that application the present Reference was made.
10. Mr. Meyer appearing for the Commissioner of Excess Profits Tax contended that the question referred to us must be answered in the negative and that for two reasons. The reasons were there was no 'borrowed money' here at all and secondly that no interest having been actually suffered or debited to the profit and loss account during the two years of the standard period in question, there was nothing by which the standard profits fixed by the Central Board of Revenue could be increased.
11. I may say at once that the second ground taken by Mr. Meyer is not sustainable. It is true that no interest was actually paid during tile two years in question. It is equally true that in the accounts for those two years no interest was debited. But in the first place, what the proviso speaks of is only 'interest on ..... the borrowedmoney during the standard period'. The proviso does not seem to require that the amount of interest must actually be paid during the period in question, nor that it must be debited in the relevant books of account. It 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 Schedule 1 and also Rule 2A of Schedule 2 ''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 the definition is that, according to it 'borrowed money' means 'borrowed money'. The result, therefore, is that what the definition seems to contemplate is a genus which might be called 'borrowed money' and within that genus it defines a species which Is also 'borrowed money'' and which according to the definition must possess certain characteristics. But it is clear that that manner of defining the term creates the difficulty that what is left of the genus 'borrowed money' after the species has been marked off, is also 'borrowed money' and therefore in the end one gets nowhere.
I am, therefore, of opinion that Sub-rule (2) of Rule 5A does not aid the second contention of Mr. Meyer and that in view of the language in which the third proviso to Rule 5A is expressed, it cannot be said that the interest contemplated by it must be interest actually paid, during or actually debited in the accounts for the standard period concerned. The effect of the order of the High Court in the present case was to attach the interest liability to the amount, received on the deferred shares from the beginning and to keep it alive so long as the money was not paid back and therefore, there was 'interest during the standard period' within the meaning of the third proviso to Rule 5A. The Second reason relied upon by Mr. Meyer, must, therefore, be rejected.
12. The first reason relied upon by Mr. Meyer raises a substantial question of some interest and importance. He contended that in order that the third proviso to Rule 5A might be attracted it was necessary that there should be 'borrowed money', but in the facts of the present case there was none. In aid of that contention he referred to the terms of the order passed by this Court, to the general nature of 'borrowed money' & to two decided cases,one of the Supreme Court and another of the Court of Appeal in England. The contention was that in actual fact the money in question in the present case had been obtained by the issue of shares and the utmost that the order of this Court could be said to have done was to make it 'money had and received' as the order said which was very different from 'borrowed money'. In order that there could be 'borrowed money' it was necessary, so it was contended that there must be a relationship of borrower and lender between the person who obtained the money and the person from whom it was obtained. The money, it was further contended, was required to be advanced asa 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.
13. 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 moneyin the present case had to be treated as 'money had and received', it was still in essence 'borrowed money', since the basis on which actions for the recovery 'for money had and received' ultimately rested was a promise to pay. If there was a promise to pay on the part of the person who had had the money and received it and if the cause of action was his not keeping that promise, it was clear that the law regarded 'money had and received' in a way by no means different from the way in which 'borrowed money' was regarded. 'Money had and received' was therefore, in substance also 'borrowed money.' and accordingly the amountsin question in the present case fell within the ambit of the third proviso to Rule 5A.
In support of his contention Mr. Chaudhuri referred to the decision of the House of Lords in the case of -- 'Sinclair v. Brougham', (1914) A. C. 398 (A) and a decision of the Court of Appeal in -- 'In re Simms; Ex parte Trustee', (1934) Ch. 1 (B).
14. It is perfectly true that in the first of the cases cited by Mr. Chaudhuri the noble and learned Lords, particularly, Viscount Haldane, explained the true nature of an action for money had and received and it is also true that those of their Lordships who pronounced on the subject expressed the view that there could not be an action for money had and received against a defendant to whom the law could not impute a promise to pay. The speeches to be found in that case, notably those of Viscount Haldane and Lord Sumner are extremely illuminating and do give an instructive historical account of the various forms of action which have been developed in England for the recovery of one man's money from another. I do not, however, see that the case assists Mr. Chau-dhuri's contention to a substantial or any extent.
The case was one where a building society, empowered by its rules to borrow to an unlimited extent, had started and developed a banking business. When ultimately it was ordered to be wound up, question of priority arose between the outside creditors, the unadvanced shareholders and the customers on the current and deposit accounts. It was in that connection that the Court had to consider whether the depositors could get back the money obtained from them by way of recovering borrowed money and it was held that they could not do so inasmuch as the kind of borrowing in which the Society had indulged was in excess of its powers. 'If 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 maintain an action for recovery of borrowed money was held to make it impossible for them to maintain an action for the recovery of money had and received, because the Court could not 'impute the fiction of a promise to pay where it would have been ultra vires to give it'. The reason, therefore, was that the first form of action was not maintainable because the company not being authorised by its memorandum to borrow in the manner it had done, could not be sued on the basis that it had validly borrowed and the second form of action was held to be not maintainable because such an action was based on a promise to pay which a partyincapable of undertaking the particular kind of contractual liability could, not give.
The House then proceeded to suggest to what extent a person aggrieved could obtain relief and on what basis, but with those matters I am not here concerned. What I desire to point out is that even in the case on which Mr. Chaudhuri relied, their Lordships made a distinction between 'borrowed money' and 'money had and received', because if 'money had ana received' were in essence 'borrowed money', the first answer given fay them for holding that no action could be maintained for the recovery of 'borrowed money' would have covered the case of 'money had & received' as well. While, therefore, the case does establish that the basis of an action for money had and received is a promise to pay, it does not in my view establish that money had and received is not in essence different from borrowed money. The second decision relied upon Mr. Chaudhuri does not require separate treatment because its only value is that it is a comparatively modern instance where the principles laid down by the House of Lords in the earlier case were reiterated.
15. Indeed, it appears to me that it is a mistake in method to try to interpret the provisions of the Rules in the Schedule to the Excess Profits Tax Act by reference to legal fictions or implied promises. The Rules, in my view, have a practical object and are intended to deal with matters as they appear and exist in fact and not with what they can.be made out to be by the application of some abstruse doctrine.
The whole object of the Excess Profits Tax Act was to collect a special tax from the people during a period of emergency and the provisions or the Act and the Rules of the Schedule both aim at leaving the earners of profits with, only a small and definite percentage of their earnings and 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 expression 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 sense 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.
16. 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. Comm. of Excess Profits Tax, Central, Bombay', : 23ITR120(SC) (C). The facts in that case are undoubtedly different, but I cannot agree with Mr. Chaudhuri that the observations of their Lordships furnish us no guidance in answering the question in the present case. That also was a case where one of the questions to be decided was the meaning of 'borrowed money' in the context no doubt of certain special facts.
The facts were that the managing agents of a particular company were entitled to some commission which was, under the terms of an agreement, payable immediately after the annual accounts of the company had been passed. Instead of drawingthe commission immediately after it had become due the managing agents left it lying with the assessee company for some time and the question was whether the money so left could be treated as 'borrowed money' in the hands, of the company. To be more precise, the actual question was whether the leaving of the money with the company which the company allowed consitituted borrowing by the company within the meaning of Rule 2A of Schedule II. The Supreme Court held that there had been no borrowing and in coming to that conclusion had occasion to deal with the nature of borrowing and a loan.
'Of course,''observed Bose J. who delivered the judgment of the Court,'money so left could by a proper agreement between the parties be convened into a loan but in the absence of an agreement mere inaction on the part of the managing agents cannot convert the money, duo to them and not withdrawn, into a loan. A loan imports positive act of lending coupled with an acceptance by the other side of the money as a loan,'
It is true that the question which fell to be decided in that case was whether the act of leaving the commission money with the company was lending or, to put it conversely, whether being left with the money was borrowing on the part of the company. The question in the present case is un-doubtedly different on the facts for the question is whether the obtaining of money by the issue of deferred shares was borrowing. But in spite of that difference in the facts, it is clear that the requisites of a loan which are obviously the same as the requisites of borrowed money, as explained by the Supreme Court, would be essential requisites in, the present case as well. In my view, if the test, laid down by the Supreme Court be applied, the money in the present case cannot be held to be 'borrowed money'.
17. Looking back at the facts it will be recalled that originally the money was received by the company on certain deferred shares which it. had issued. Mr. Ciiaudhuri 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 transactions as it was in fact, is no longer material and we must look at it in 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 who takes it 'money had and received.' Conversely the person who takes such money does not take it as a loan.
Although in the present case, therefore, the company might have had no lawful authority to take the money it did and although the money which it had obtained on the shares was only 'money had and received', still it was not money obtained as a loan even on the view which this Court took of the facts. That being so it appears-to me that if there has to be a positive act of lending, coupled with acceptance by the other side of the money as a loan, there was neither such lending nor such acceptance in the present case, even under the transaction as revised by this Court's order and consequently the money concerned is not 'borrowed money'.
18. The second decision relied upon by Mr. Meyer -- 'Inland Revenue Commissioners v. Rowntree & Co.', 1948 1 All ER 482 (D), lends considerable support to the view taken by the Supreme Court and also lends countenance to the view I have just expressed as regards the manner in which the Rules of the Schedule should be interpreted.
The facts of the case before the Court of Appeal were that a particular company raised money for the purposes of its business by drawing sight bills, payable at four and six months, on an acceptance house, which accepted the bills in consideration of a commission paid to them by the company and then as agents for the company, discounted them in the market and remitted the proceeds to the company. The question being whether the money so received by the company was 'borrowed money' within the meaning of the Finance (No. 2) Act, 1939 Schedule VIII Pt. II para. 2(1) either in the relation of the company to the acceptance house or in its relation to the discounters, the Court held that it was not so in either case.The leading judgment was delivered by Tucker L. J., who observed that 'the proper approach .. .. is to construe these words 'borrowed money' as words which require the existence of a borrower and lender and that there must be a real borrowing in the legal sense of the word.' Proceeding the learned Lord Justice observed: that the words 'borrow' and 'lend' were not words of narrow legal meaning and represented transactions well known to business people and that in order that there could be 'borrowed money' there had to be the legal relationship of lender and borrower.
Peculiarly 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 that 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 expression used in the Rules as far as I understand them are intended to convey ordinary concepts which are familar 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. Chaudhuri invoked should be introduced in trying to construe the Rules, although such fictions might be relevant 'in the strict context of a legal pleading'.
19. It is but fair to notice also a non-technical argument advanced by Mr. Chaudhuri. He said that whatever the transaction of 1937 might have been in form the substance of it was that the company was increasing its capital by asking for and taking from other persons money belonging tothem and doing as under an arrangement which might result in profit to those persons. If such was the nature of the transaction, it was a case of the company procuring for itself additional funds on credit, and employing such funds in its business and therefore it could well be taken to be within the intention of Rule 2A of the second Schedule that such funds should be taken into account as 'borrowed money' in computing the capital and within the intention of the third proviso to Rule 5A of the first Schedule that interest on such 'borrowed money' should be added to the standard profits, otherwise fixed.
A similar argument appears to have been advanced in the case of -- '(1948) 1 All ER 482 (D), where it was said that the company might be taken to have in substance borrowed money in the market, but it was not accepted. It cannot be accepted in the present case either, because for whatever reason it might be, the framers of the Rules have limited the concession to 'borrowed money'. As it is a special and further benefit, it must be strictly construed. On a true and natural construction of its act, the company, in 1937, was only raising money by sale of its shares and not raising it by a loan or loans.
20. For the reasons given above, I am of opinion that both in principle and on authority, as well as on the natural meaning of the language used, it must be held that the amounts in question in the present case did not come under the description 'borrowed money' as used in the third proviso to Rule 5A of Schedule I to the Excess Profits Tax Act. The answer to the question referred to must, therefore, be in the negative.
21. The Commissioner of Excess Profits Tax, Central, Calcutta, will have his costs of the Reference.
22. Certified for two counsel.
23. I agree.