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

Citation: [1953] 1 S.C.R. 1057 · Decided: 23-01-1953 · Supreme Court of India · Bench: M. PATANJALI SASTRI

Judgment (excerpt)

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 contract and payment 
of the full value of the bales supplied. 
On the 5th December, 
1944, they changed the name of this account into "Security Depo-
sit" account, and on the 14th February, 1945, the assessees decid-
ed to rnodify the arrangement further and demand a certain sum 
from each customer towards Security Deposit and keep the same 
with the assessees so long as the business connection with the 
customer under the forward contracts continued. Interest was also 
allowed on the amount of the deposit. The question being whether 
the advance amounts received by the assessees as deposit were 
"borro\ved money,'' within the meaning of Rule 2-A of the Rules 
in the Second Schedule to the Excess Profits Tax Act, 1940, and 
should not be deducted in computing the average capital used for 
the purposes of the business: 
Held, (i) that the advance amounts received before the 5th 
}!fay, 1944, were only advance payments of tbe price, to be ad-
justed on delivery, and could in no sense he regarded as borrowed 
money; 
(ii) the amounts received after the 5th )fay, 1944, up to 
14th February, 1945, were also, having regard to the terms of 
137 
• 
1953 
January 23. 
1068 
SUPREME COURT REPORTS 
[1963] 
1953 
the arrangement then in force, more in the nature of tradirig 
-
receipts than of security deposits as they were reaJly advance 
K. ~~· S. Lalcsh. payments in regard to each contr.ct, and tho transaction provided 
ma11ter and Sons in substance and effect for the adjustment of the mutual obliga-
v, 
lions on the completion of each contract; 
.The Con1imis-
(iii) the method of dealing adopted after the 14th Febru-
sioner of nc01ne 
. 
, 
d E 
ary, 1945, had all the essential elements of a transact10n of !attn, 
Ta."C an 
xcesA 
. 
d 
. t 
. d f 
h t d t 
"b 
d 
" 
P 1. T 
ancl the epos1 s receive a ter t a 
a e were 
orrowe money 
'';,t; 
ax, 
for the purposes of Rule 2-A, as the amount of deposit had no 
a ras. 
relation to the price of the goods to be delivered under each con-
tract, the price of the goods supplied was to he paid by the cnsto-
Patanjali 
1ner in full, the assessees were allowed to use the money for their 
$astri O.J. 
own business pa)-'ing interest to the customers, and the amounts 
were returnable only at the end of the business connection. 
The terms "loan" and 
11deposit" are not mutually exclusive, 
and the fact that a deposit is made with the object of inducing tho 
person with whom the deposit is made to have dealing with the 
depositor and for the specillc purpose of being held as security 
for the duo performance by the depositor of bis pMt of the 
contract, would not prevent a deposit from being really in the 
nature of a loan. 
Nawab Major Sir Mohamed Akbar Khan v. Attar Singh (L. R. 
63 I.A. 279) relied on. Inland Revenue Commissioners v. Port of 
London Anthority (L.R. [1923] A.O. 507) and Inland Revenue Com-
missioners v. Rowntree ([1948] l All E.R. 
482) distinguished. 
Davies , •. The Shell Go. of China (32 Tax Oas. 133) applied. 
CIVIL APPELLATE JURISDICTION: 
Civil Appeal 
No. 71 of 1952. 
Appeal from the Judgment dated 9th January, 1950, 
of the High Court of Judicature at Madras (Satya. 
narayana Rao and Viswanatha Sastri JJ.) in Case 
Referred No. 67 of 1947. 
G. S. Pathak (G. R. Jaga,disan, with him) for

Excerpt shown. Read the full judgment & AI analysis in Lexace.