K. M. S. LAKSHMANIER AND SONS vs. COMMISSIONER OF INCOME TAX AND EXCESS PROFITS TAX, MADRAS

CIVIL APPEAL No. 71/1952Supreme Court[1953] 1 S.C.R. 105723 January 1953Bench: 5 JudgesAuthor: M. PATANJALI SASTRI, BIJAN KUMAR MUKHERJEA, N. CHANDRASEKHARA AIYAR, VIVIAN BOSE, GHULAM HASAN SUPREME COURT REPORTS K. M. S. LAKSHMANIER AND SONS12 pages
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What were the facts?

The assessee, K. M. S. Lakshmanier and Sons, acted as sole selling agents for yarn and received advance payments from constituents under forward contracts. Initially, these were credited to a 'contract deposit account' and adjusted against yarn prices upon delivery. From May 5, 1944, these advances were termed 'Contracts Advance Fixed Deposit Account,' to be returned after contract completion. On December 5, 1944, this became 'Security Deposit' account. By February 14, 1945, the arrangement was modified to demand a specific sum as a security deposit, held for the duration of the business connection, with interest paid on it. The dispute concerns whether these deposits constitute 'borrowed capital' under Rule 2-A of the Excess Profits Tax Act, 1940, for the chargeable accounting period of May 13, 1944, to April 12, 1945. The Excess Profits Tax Officer rejected the assessee's claim, leading to an assessment of Rs. 25,404. Appeals to higher authorities failed.

What did the Supreme Court hold?

The Tribunal held that the advance amounts received before May 5, 1944, were merely advance payments of price, to be adjusted on delivery, and thus not borrowed money. Amounts received between May 5, 1944, and February 14, 1945, were considered more akin to trading receipts or advance payments for specific contracts, providing for adjustment of mutual obligations upon contract completion, and therefore not borrowed money under Rule 2-A. However, the method of dealing adopted after February 14, 1945, exhibited all essential elements of a loan transaction. These deposits were not related to the price of goods, the price was to be paid in full, the assessee could use the money for business while paying interest, and the amounts were only returnable at the end of the business connection. Thus, deposits received after February 14, 1945, were considered 'borrowed money' for the purposes of Rule 2-A. The Tribunal set aside the lower court's order and answered the referred question affirmatively for the period February 14, 1945, to April 12, 1945, and negatively for the rest of the chargeable accounting period.

What were the issues?

1. Whether advance amounts received by the assessee before May 5, 1944, were 'borrowed money' within the meaning of Rule 2-A of the Second Schedule to the Excess Profits Tax Act, 1940? 2. Whether amounts received between May 5, 1944, and February 14, 1945, were 'borrowed money' under Rule 2-A? 3. Whether deposits received after February 14, 1945, were 'borrowed money' under Rule 2-A? Assessee's contention: The assessee argued that all these advance amounts, particularly those designated as security deposits, constituted 'borrowed money' and should not be deducted in computing average capital, thus reducing excess profits tax liability. They relied on the substance of the transactions as loans. Revenue's contention: The revenue contended that the nature of the deposits varied over time and that not all of them qualified as 'borrowed money' as defined by Rule 2-A. They argued that some were advance payments for goods and not true loans.

Which sections of the Income-tax Act were involved?

Section 21

AI-generated summary — verify with the full judgment below

s.c.R. SUPREME COURT REPORTS K. M. S. LAKSHMANIER AND SONS v. COMMISSIONER OF INCOME TAX AND EXCESS PROFITS TAX, MADRAS. 1057 [PATANJALI SASTRI C.J., MuKHEl~JEA, CHANDRA- SEKHARA AIYAR, VIVIAN BosE and GmcLAM HASAN J.J.] Excess Profits Tax Act (XV of 1940)-Riiles under Sche- dule II, R, 2-A-Computation of average ca.pital ·-Secnrity deposit received fronb ci1istoniers-Whether ''borrowed capital"-" Depo$it" and "Loan" -Essentials of.

The assessees, who were the sole selling agents of a yarn manufacturing company a,nd 'vbo distributed yarn to several constituents under forward contracts, kept two accounts for each constituent, vi.~., a "contract deposit account" and a "current yarn account", crediting the mone)'S 'vhich they recejved in advance from the constituents in the former account and trans· ferring them to the current yarn account in adjustment of the price of the bales supplie<i tben ancl tbere, that is to say, when deliveries were made uncler the contract.

On the 5th May, 1944, they decided to keep the advance amounts under a new heading "Con- tracts Adv.nee Fixed Deposit Account" and to return the advance amounts in full after the completion of each

The order continues below.

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