Case: Ram Mills Ltd. Bombay Vs. Commissioner of Excess Profits Tax, Central, Bombay

2. The assessee is the Shree Ram Mills Limited of Bombay. The assessment year isand the accounting year is the calendar year 1944. TheOfficer assessed the profits forat Rs. 46, 18, 384 and that is not questioned.The Excess Profits Tax Officer computed the profits, for excess profits tax purposes, at Rs. 46, 94, 304. In reaching this figure he excluded certain items in the return for determining how the profits increased the capital; for example, he excluded money given away as presents and in charity etc.3. Now in order to determine the quantum of excess profits tax payable by an assessee it is necessary under the Act to compute, among other things, the average amount of capital employed by the business during a certain period. This, under Section 2(3), has to be the average amount of capital "as computed in accordance with the second Schedule." That brings in the disputed rule, Rule No. 5 in Schedule II.4. It runs as follows> "For the purpose of ascertaining the average amount of capital employed in a business during any period, the profits or losses made in that period shall excepts so far as the contrary is shown, be deemed -(a) to have accrued at an even rate throughout the period; and(b) to have resulted, as they accrued, in a corresponding increase or decrease, as the case may be, in the capital employed in the business."to have accrued at an even rate throughout the period; and(b) to have resulted, as they accrued, in a corresponding increase or decrease, as the case may be, in the capital employed in the

Court's reasoning:
We do not agree. The word "deemed" clearly governs both clauses, for the fiction which the Rule creates is not only that the profits shall be deemed to have accrued at an even rate throughout the period, but further that they must be deemed to have resulted, as they accrued, in a corresponding increase or decrease in the capital. In the same way, the words "except so far as the contrary is shown" govern both clauses and it is open to either side to rebut the artificial presumptions created by that Rule by showing that either clause does not represent the true facts. Thus, it can be shown either that the profits did not accrue at an even rate throughout the period or that the profits did not actually go to increase the capital, as for example when it was taken out of the business and handed over to charities and so forth, and if only one of the two presumptions is rebutted, the other stands.6. The High Court resettled the first question we are asked to answer as followson a true construction of Rule 5 of Schedule II of the Excess Profits Tax Act the expression so far as the contrary is shown applies only to(a) or also toWe agree with the answer given by the High Court, namely that the words "so far as the contrary is shown" apply to both clauses (a) and (b).We agree with the High Court that this is a "debt" and not a "borrowing".At bottom this is a question of fact. Of course, money so, left could, by a proper agreement between the parties, be converted into a loan, but in the absence of an agreement mere inaction on the part of the managing agents cannot convert the money due to them, and not withdrawn, into a loan. A loan imports a positive act of lending coupled with an acceptance by the other side of the money as a loan. The relationship of borrower and lender cannot ordinarily come about by mere inaction. The clause in the Articles of Agreement quoted above was relied on for the purpose of showing that there was such an agreement in the case. We are unable to construe the provisions in that way. They merely give the managing agents a right to receive their commission at a certain time. If the money is not paid in time it lies with the assessee as a debt due to the agents.We agree with the High Court that it is a debt under Rule 2 and not a borrowing under Rule 2A.