Full Judgment Text
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PETITIONER:
EMPIRE JUTE CO. LTD.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX
DATE OF JUDGMENT09/05/1980
BENCH:
BHAGWATI, P.N.
BENCH:
BHAGWATI, P.N.
TULZAPURKAR, V.D.
PATHAK, R.S.
CITATION:
1980 AIR 1946 1980 SCR (3)1370
1980 SCC (4) 25
CITATOR INFO :
E 1981 SC 395 (3)
RF 1987 SC 798 (11)
R 1989 SC1913 (14)
F 1991 SC 227 (12)
ACT:
Allowing deduction under section 10(2) (xv) of the
Income Tax Act-Revenue expenditure and Capital expenditure-
Member of the Jute Mill Association entering into a working
time agreement restricting the number of working hours per
week for which the mills shall be entitled to work their
looms, and also providing for transfer of such working hours
between one mill and another amongst a particular group of
Mills-Transfer styled as sale of loom hours-Whether the
purchase revenue expenditure or capital expenditure for the
purposes of Section 10(2) (xv) of the Act.
HEADNOTE:
Right from 1939, the demand of jute in the world market
was rather lean and with a view to adjusting the production
of the jute mills to the demand of the world market, various
jute mills formed an Association styled as Indian Jute Mills
Association and the appellant is one such member of the said
Association. As per the objects of the Association a
quinquenniel working time agreement was entered into between
the members of the Association restricting the number of
working hours per week, for which the mills shall be
entitled to work their looms. The fourth working time
Agreement was entered into between the members of the
Association on 9th December, 1954 and it was to remain in
force for a period of five years from 12th December 1954. As
per the first clause of the fourth working time Agreement no
signatory shall work more than forty five hours of work per
week subject to alteration in accordance with the provisions
of clauses 7(1)(2) and (3) and further subject inter alia to
the provision of clause (10) and under that clause, a joint
and several agreement could be made providing that
throughout the duration of the working time agreement,
members with registered complements of loom not exceeding
220 shall be entitled to work upto seventy two hours per
week. Clause 6(a) enabled members to be registered as a
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"Group of Mills" if they happened to be under the control of
the same managing agents or were combined by any arrangement
or agreement and it was open to any member of the Group
Mills so registered to utilise the allotment of hours of
work per week of other members in the same group who were
not fully utilising the hours of work allowable to them
under the working time agreement, provided such transfer of
hours of work was for a period not less than six months.
Clause 6(b) further (J prescribed three other conditions
precedent subject to which the allotment of hours of work
transferred by one member to another could be utilised by
the latter and two of them were: (i) All agreements to
transfer shall, as a condition precedent to any rights being
obtained by transferee, be submitted with an explanation to
the Committee and Committee’s decision . . . whether the
transfer shall be allowed shall be final and conclusive and
(ii) If the Committee sanctions the transfer, it shall be a
condition precedent to its utilisation that a certificate be
issued and the transfer registered. This transaction of
transfer of allotment of hours of work per week was commonly
referred to as sale of looms hours by one member to another.
The consequence of such
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transfer was that the hours of work per week transferred by
a member were liable to be deducted from the working hours
per week allowed to such member under the working time
agreement and the member in whose favour such transfer was
made entitled to utilise the number of working hours per
week transferred to him in addition to the working hours per
week allowed to him under the working time agreement.
The assessee, under this clause purchased loom hours
from four different jute manufacturing concerns which were
signatories to the working time agreement, for the aggregate
sum of Rs. 2,03,255/- during the year 1st August 1958 to
31st July 1959. In the course of the assessment year 1960-61
for which the relevant accounting year was the previous year
1st August 1958 to 31st July 1959, the assessee claimed this
amount of Rs. 2,03,255/- as revenue expenditure on the
ground that it was part of the cost of operating the looms
which constituted the profit making apparatus of the
assessee. The. claim was disallowed by the Income Tax
officer, but on appeal, the Appellate Assistant Commissioner
accepted the claim and allowed the deduction on the view
that the assessee did not acquire any capital asset when it
purchased the loom hours and the amount spent by it was
incurred for running the business of working it with a view
to producing day-to-day profits and it was part of operating
cost or revenue cost of production. The Revenue preferred an
appeal to the Tribunal, and, having lost before it, carried
the matter before the High Court by a reference. The High
Court, following the decision of the Supreme Court in
Commissioner of Income Tax v. Maheshwari Devi Jute Mills
Ltd., [1966] 57 ITR 36 held that the amount paid by the
assessee for purchase of the loom hours was in the nature of
capital expenditure and was therefore not deductible under
section 10(2) (xv) of the Income Tax Act. Hence the appeal
by assessee by special leave.
Allowing the appeal, the Court
^
HELD: 1. An expenditure incurred by an assessee can
qualify for deduction under section 10(2)(xv) only if it is
incurred wholly and exclusively for the purpose of his
business, but even if it fulfills this requirement, it is
nob enough; it must further be of revenue as distinguished
from capital nature
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2. Maheshwari Devi Jute Mills’ case was a converse case
where the question was whether an amount received by the
assessee for sale of loom hours was m the nature of capital
receipt or revenue receipt and the Supreme Court took the
view that it was in the nature of capital receipt and hence
not taxable. The decision in Maheshwari Devi Jute Mills’
case cannot on this account be regarded as an authority for
the proposition that payment made by an assessee for
purchase of loom hours would be capital expenditure, because
it is not a universally true proposition that what may be
capital receipt in the hands of the payee must necessarily
be capital expenditure in relation to the payer. The fact
that a certain payment constitutes income or capital receipt
in the hands of a recipient is not material in determining
whether the payment is revenue or capital disbursement qua
the payer. Whether it is capital expenditure or revenue
expenditure would have to be determined having regard to the
nature of the transaction and other relevant factors. [1378
G-H, 1379 A-D] H
Race Course Betting Control Board v. Wild, 22 Tax Cases
182. quoted with approval.
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3. Again, Maheshwari Devi Jute Mills’ Case proceeded on
the accepted basis that loom hours were a capital asset and
the only issue debated was whether the transaction in
question constituted sale of this asset or it represented
exploitation of the asset by permitting its user by another
while retaining ownership. No question was raised before the
Court as to whether tho loom hours were an asset at all nor
was any argument advanced as to what was the true nature of
the transaction. This question is res integra and therefore
this decision cannot be regarded as an authority for the
proposition that The amount paid for purchase of loom hours
was capital and not revenue expenditure. [1379 E, 1380 F]
4. It is quite clear from the terms of the working time
agreement that the allotment of loom hours to different
mills constituted merely a contractual restriction on the
right of every mill under the general law to work its looms
to their full capacity. If there had been no working time
agreement, each mill would have been entitled to work its
looms uninterruptedly for twenty four hours a day throughout
the week, but that would have resulted in production of jute
very much in excess of the demand in the world market,
leading to unfair competition and precipitous fall in jute
price and in the process, prejudicially affecting all the
mills and therefore with a view to protecting the interest
of the mills who were members of the Association, the
working time agreement was entered into restricting the
number of working hours per week for which each mill could
work its looms. The allotment of working hours per week
under the working time agreement was clearly not a right
conferred on a mill, signatory to the working time
agreement. It was rather a restriction voluntarily accepted
by each still with a view to adjusting the production to the
demand in the world market and this restriction could not
possibly be regarded as an asset of such mill. This
restriction necessarily had the effect of limiting the
production of the mill and consequentially also the profit
which the mill could otherwise make by working full looms
hours. But a provision was made in clause 6(b) of the
working time agreement that the whole or a part of the
working hours per week could be transferred by one mill to
another for a period of not less than six months and if such
transfer was approved and registered by the Committee of the
Association, the transferee mill would be entitled to
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utilise the number of working hours per week transferred to
it in addition to the working hours per week allowed to it
under the working time agreement, while the transferor mill
could cease to be entitled to avail of the number of working
hours per week so transferred and those would be liable to
be deducted from the number of working hours per week
otherwise allotted to it. The purchase of loom hours by a
mill had therefore the effect of relating the restriction on
the operation of looms to the extent of the number of
working hours per week transferred to it, so that the
transferer mill could work its looms for longer hours than
permitted under the working time agreement and increase is
profitability. The amount spent on purchase of looms hours
thus represented consideration paid for being able to work
the looms for a longer number of hours. Such payment for the
purchase of loom hours cannot be regarded as expenditure on
capital account. [1380 F-H, 1381 A-E]
6. The decided cases have, from time to time, evolved
various tests for distinguishing between capital and revenue
expenditure but no test is amount or conclusive. There is no
all embracing formula which can provide a ready solution to
the problem; no touchstone has been devised. Every case has
to be decided on its own facts keeping in mind the broad
picture of the whole
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Operation in respect of which the expenditure has been
incurred. Two of these tests are:
(a) The test of enduring benefit as laid down in
British Insulated and . Helsby Cables Ltd. v. Atherton, 10
Tax Cases 155. Even this test must yield were there are
special circumstances leading to a contrary decision There
may be cases where expenditure, even if incurred for
obtaining advantage of enduring benefit, may, none-the-less,
be on revenue account and the test one during benefit may
break down. It is not every advantage of enduring nature
acquired by an assesses that brings the case within the
principle laid down in this test. What is material to
consider is the nature of the advantage in a commercial
sense. that it is only where the advantage is in the capital
field that the expenditure would be disavowable on an
application of this test. If the advantage consists merely
in facilitating the assesses’s trading operations or
enabling the management and conduct of the assesses’s
business to be carried on more efficiently or more
profitably while leaving the filed capital untouched. the
expenditure would be on revenue account, even though tho
advantage may endure for an indefinite future. The test of
enduring benefit in therefore not a certain or conclusive
test and it cannot be applied blindly and mechanically
without regard to the particular facts and circumstances off
a given case. [1381 E-G, 1382 A-E]
commissioner of Taxes v. Nchanga Consolidated Copper
Mines Ltd., [1965] 58 ITR 241 followed.
(b) The test based on distinction between fixed and
circulating capital as applied in John Smith and Sons v.
Moore, 12 Tax Cases, 266. So long as tho expenditure in
question can be clearly referred to the acquisition of an
asset which falls within one or the other of these two
categories such a test would be a critical one. But this
test also sometimes breaks down because there are many forms
of expenditure which do not fall easily within these two
categories and not infrequently, the line of demarcation is
difficult to draw and leads to subtle distinctions between
profit that is made "out of" assets and profit that is made
"upon" assets or "with" assets. Moreover, there may be cases
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where expenditure though referable to or in connection with
fixed capital is nevertheless allowable as revenue
expenditure e.g. expenditure incurred in preserving or
maintaining capital assets. This test is therefore clearly
not one of universal application. [1383 A-D]
Commissioner of Taxes v. Nchanga Consolidated Copper
Mines LTD [1965]58 ITR 241; followed.
6. It is true that if disbursement is made for
acquisition of a source of profit or income, it would
ordinarily be in the nature of capital expenditure But it
cannot be said in the present case that the assesses
acquired a source d profit or income when it purchased loom
hours. The source of profit or income was the profit making
apparatus and this remained untouched and unaltered, There
was no enlargement of the permanent structure of which the
income would be the produce or fruit. What the assesses
acquired wag merely an advantage in the nature of relation
of restriction on working hours imposed by the working time
agreement, so that the assesses could operate its profit
earning structure for a longer number of hours. Undoubtedly
the profit earn-
1374
ing structure of the assesses was enabled to produce more
goods, but that was not because of any addition or
augmentation in the profit making structure but because the
profit making structure could be operated for longer working
hours. The expenditure incurred for this purpose was
primarily and essentially related to the operation or
working of the looms which constituted the profit earning
apparatus of the assesses. It was an expenditure for
operating or working the looms for longer working hours with
a view to producing a larger quantity of goods and earning
more income and was therefore in the nature of revenue
expenditure. [1384 A-D]
7. When dealing with cases where the question is
whether expenditure incurred by an assesses is capital or
revenue expenditure, the question must be viewed in the
larger context of business necessity or expediency. If the
outgoing expenditure is so related to the carrying on or the
conduct of the business that it may be regarded as an
internal part of the profit-earning process and not for
acquisition of an asset or a right of a permanent character.
the possession of which is a condition of the carrying on of
the business, the expenditure may be regarded as revenue
expenditure. [1384 H, 1385 A-C
Nelletroms’ Property Ltd. v. Federal Commr. Of
Taxation, 72 CLR 634; Robert Addis & Sons Collieries Ltd. v.
Inland Revenue 8 Tax Case, 671 quoted with approval.
Bombay Steam Navigation Co. P. Ltd. v. Commissioner of
Income Tax, [1953] 55 ITR 52; followed.
9. In the instant case
(a) the payment made by the assesses for the purchase
of loom hours was expenditure laid out as part of the
process of profit earning. It was an outlay of a business in
order to carry it on and to earn profit out of the expense
as an expense of carrying it on. It was part of the cost of
operating the profit earning apparatus and was clearly in
the nature of revenue expenditure; and [1385 D-E
(b) the payment of Rs. 2,03,255/- made by the assesses
for purchase of loom hours represented Revenue expenditure
and was allowable as a deduction under section 10(2) (xv) of
the Income Tax Act. [1387 C-D]
Commissioner of Income Tax v Nchanga Consolidated
Copper Mines ltd.. [1965] 58 ITR 241; Commissioner of Taxes
v. Curron Company 45 Tax Cases 18; followed.
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JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1 197
(NT) of 1974.
Appeal by Special Leave from the Judgment and order
dated 3-8-1973 of the Calcutta High Court in Income Tax
Reference No. 109 of 1968.
D. Pal, T. A. Ramachandran & D. N. Gupta for the
Appellant.
S. T. Desai, B. B. Ahuja & Miss A. Subhashini for the
Respondent.
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The Judgment of the Court was delivered by
BHAGWATI, J.-This appeal by special leave raises the
vexed question whether a particular expenditure incurred by
the assessee is of capital or revenue nature. This question
has always presented a difficult problem and continually
baffled the courts, because it has not been possible,
despite occasional judicial valour, to formulate a test for
distinguishing between capital and revenue expenditure which
will provide an infallible answer in all situations. There
have been numerous decisions where this question has been
debated but it is not possible to reconcile the reasons
given in all of them, since each decision has turned upon
some particular aspect which has been regarded as crucial
and no general principle can be deduced from any decision
and applied blindly to a different kind of case where the
constellation of facts may be dissimilar and other factors
may be present which may give a different hue to the case.
Often cases fall in the border line and in such cases, as
observed by Lord M. R. in Inland Revenue v. British Salmon
Ero Engines Ltd.(1) "the spin of coin would decide The
matter almost as satisfactorily as an attempt to find
persons." But this is not one of those border line cases.
The answer to the question here is fairly clear. But first
let us state the necessary facts.
The assessee is a limited company carrying on business
of manufacture of jute. It has a factory with a certain
number of looms situate in West Bengal. It is a member of
the Indian Jute Mills Association (hereinafter referred to
as the Association). The Association consists of various
jute manufacturing mills as its members and it has been
formed with a view to protecting the interests of the
members. The objects of the Association, inter alia, are (i)
to protect, forward and defeat the trade of members; (ii) to
impose restrictive conditions on the conduct of the trade;
and (iii) to adjust the production of the Mills in the
membership of the Association to the demand of the world
market. It appears that right from 1939, the demand of jute
in the world market was rather lean and with a view to
adjusting the production of the mills to the demand in the
world market, a working time agreement was entered into
between the members of the Association restricting the
number of working hours per week, for which the mills shall
be entitled to work their looms. The first working time
agreement was entered into on 9th January 1939 and it was
for a duration of five years and on its expiration, the
second and thereafter the third working time agreements,
each for a period of five years and in . more or less
similar terms, were entered into on 12th June, 1944 and 25th
November 1949 respectively. The third working time agreement
was about to expire on 11th December, 1954 and since it
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was felt that the necessity to restrict the number of
working hours per week still continued, a fourth working
time agreement was entered into between the members of the
Association on 9th December 1954 and it was to remain in
force for a period of five years from 12th December 1954. We
are concerned in this appeal with the fourth working time
agreement and since the decision of the controversy before
us turns upon the interpretation of its true nature and
effect, we shall refer to some of its relevant provisions.
The first clause of the fourth working time agreement
(hereinafter referred to as the "working time agreement") to
which we must refer is clause (4) which provided that,
subject to the provisions of clauses 11 and 12, "..... no
signatory shall work more than forty five hours of work per
week and such restriction of hours of work per week shall
continue in force until the number of working hours allowed
shall be altered in accordance with the provisions of
Clauses 7(1), (2) and (3)." Clause (5) then proceeded to
explain that the number of working hours per week mentioned
in the working time agreement represented the extent of
hours to which signatories were in all entitled in each week
to work their registered complement of looms as determined
under clause (13) on the basis that they used the full
complement of their loomage as registered with and certified
by the committee. This clause also contained a provision for
increase of the number of working hours per week allowed to
a signatory in the event of any reduction in his loomage. It
was also stipulated in this clause that the hours of work
allowed to be utilised in each week shall cease at the end
of that week and shall not be allowed to be carried forward.
The number of working hours per week prescribed by clause
(4) was, as indicated in the opening part of that clause,
subject inter alia to the provision of clause (10) and under
that clause, a joint and several agreement could be made
providing that throughout the duration of the working time
agreement, members with registered complements of looms not
exceeding 220 shall be entitled to work upto 72 hours per
week. Clause 6(a) enabled members to be registered as a
"Group of Mills" if the happened to be under the control of
the same managing agents or were combined by any arrangement
or agreement and it was open to any member of the Group of
Mills so registered to utilise the allotment of hours of
work per week of other members in the same group who were
not fully utilising the hours of work allowable to them
under the working time agreement, provided that such
transfer of hours of work was for a period of not less than
six months. Then followed clause 6(b) which is very material
and it provided, inter alia, as follows:-
"Subject to the provisions of sub-clauses (i) to
(iv)... signatories to this agreement shall be entitled
to transfer in
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part or wholly their allotment of hours of work per
week to any one or more of the other signatories; and
upon such transfer being duly effected and registered
and a certificate issued by the committee, the
signatory or signatories to whom the allotment of
working hours has been transferred shall be entitled to
utilise the allotment of hours of work per week so
transferred."
There were four conditions precedent subject to which the
allotment of hours of work transferred by one member to
another could be utilised by the latter and those of them
were as under:
"(1) No hours of work shall be transferred unless
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The transfer covers hours of work per week
for a period of not less than six months;
(ii) All agreements to transfer shall, as a
condition precedent to any rights being
obtained by transferees, be submitted with an
explanation to the Committee and the
Committee’s decision.. whether the transfer
shall be allowed shall be final and
conclusive.
(iii) If the Committee sanctions the transfer, it
shall be a condition precedent to its
utilisation that a certificate be issued and
the transfer registered."
This, transaction of transfer of allotment of hours of work
per week was commonly referred to as sale of looms hours by
one member to another. The consequence of such transfer was
that the hours of work per week transferred by a member were
liable to be deducted from the working hours per week
allowed to such member under the working time agreement and
the member in whose favour such transfer was made was
entitled to utilise the number of working hours per week
transferred to him in addition to the working hours per week
allowed to him under the working time agreement. It was
under this clause that the assessee purchased loom hours
from four different jute manufacturing concerns which were
signatories to the working time agreement, for the aggregate
sum of Rs. 2,03,255/- during the year 1st August 1958 to
31st July 1959. In the course of assessment for the
assessment year 1960-61 for which the relevant accounting
year was the previous year 1st August 1958 to 31st July
1959, the assessee claimed to deduct this amount of Rs.
2,03,255/- as revenue expenditure on the ground that it was
part of the cost of operating the looms which constituted
the profit making apparatus of the assessee. The claim was
disallowed by the Income-tax officer but on appeal, the
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Appellate Assistant Commissioner accepted the claim and
allowed the deduction on the view that the assessee did not
acquire any capital asset when it purchased the loom hours
and the amount spent by it was incurred for running the
business or working it with a view to producing day-to-day
profits and it was part of operating cost or revenue cost of
production. The Revenue preferred an appeal to the Tribunal
but the appeal was unsuccessful and the Tribunal taking the
same view as the Appellate Assistant Commissioner, held that
the expenditure incurred by the assessee was in the nature
of revenue expenditure and hence deductible in computing the
profits and gains of business of the assessee. This view
taken by the Tribunal was challenged in a reference made to
the High Court at the instance of the Revenue. The High
Court too was inclined to take the same view as the
Tribunal, but it felt compelled by the decision of this
Court in Commissioner of Income Tax v. Maheshwari Devi Jute
Mills Ltd.(’) to decide in favour of the Revenue and on that
view it overturned the decision of the Tribunal and held
that the amount paid by the assessee for purchase of the
loom hours was in the nature of capital expenditure and was,
therefore, not deductible under section 10(2) (xv) of the
Act. The assessee thereupon preferred the present appeal by
special leave obtained from this Court.
Now an expenditure incurred by an assessee can qualify
for deduction under section 10(2) (xv) only if it is
incurred wholly and exclusively for the purpose of his
business, but even if it fulfils this requirement, it is not
enough; it must further be of revenue as distinguished from
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capital nature. Here in the present case it was not
contended on behalf of the Revenue that the sum of Rs.
2,03,255/- was not laid out wholly and exclusively for the
purpose of the assessee’s business but the only argument was
and this argument found favour with the High Court, that it
represented capital expenditure and was hence not deductible
under section 10(2)(xv). The sole question which therefore
arises for determination in the appeal is whether the sum of
Rs. 2,03,255/- paid by the assessee represented capital
expenditure or revenue expenditure. We shall have to examine
this question on principle but before we do so, we must
refer to the decision of this Court in Maheshwari Devi Jute
Mills case (supra) since that is the decision which weighed
heavily with the High Court in fact, compelled it to
negative the claim of the assessed and held the expenditure
to be on capital account. That was a converse case where the
question was whether an amount received by the assessee for
sale of loom hours was in the nature of capital receipt or
revenue receipt. The view taken by this Court was that it
was in the.
1379
nature of capital receipt and hence not taxable. It was
contended on A behalf of the Revenue, relying on this
decision, that just as the amount realised for sale of loom
hours was held to be capital receipt, so also the amount
paid for purchase of loom hours must be held to be of
capital nature. But this argument suffers from a double
fallacy.
In the first place it is not a universally true
proposition that what may be a capital receipt in the hands
of the payee must necessarily be capital expenditure in
relation to the payer. The fact that a certain payment
constitutes income or capital receipt in the hands of the
recipient is not material in determining whether the payment
is revenue or capital disbursement qua the payer. It was
felicitously pointed out by Macnaghten, J. in Race Course
Betting Control Board v. Wild(’) that a "payment may be a
revenue payment from the point of view of the payer and a
capital payment from the point of view of the receiver and
vice versa. Therefore, the decision in Maheshwari Devi Jute
Mills’ case (supra) cannot be regarded as an authority for
the proposition that payment made by an assessee for
purchase of loom hours would be capital expenditure. Whether
it is capital expenditure would have to be determined having
regard to the nature of the trans action and other relevant
factors.
But, more importantly, it may be pointed out that
Maheshwari Devi Jute Mills’ case (supra) proceeded on the
basis that loom hours were a capital asset and the case was
decided on that basis. It was common ground between the
parties throughout the proceedings, right from the stage of
the Income- tax officer upto the High Court, that the right
to work the looms for the allotted hours of work was an
asset capable of being transferred and this Court therefore
did not allow counsel on behalf of the Revenue to raise a
contention that loom hours were in the nature of a privilege
and were not an asset at all. Since it was a commonly
accepted basis that loom hours were an asset or the
assessee, the only argument which could be advanced on
behalf of the Revenue was that when the assessee transferred
a part of its hours of work per week to another member, the
transaction did not amount to sale of an asset belonging to
the assessee, but it was merely the turning of an asset to
account by permitting the transferee to use that asset and
hence the amount received by the assessee was income from
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business. The Revenue submitted that "where it is a part of
the normal activity of the assessee’s business to earn
profit by king use of its asset by either employing it in
its own manufacturing concern or by letting it out to
others, consideration received for allowing the transferee
to use that asset is income received from busi-
1380
ness and chargeable to income tax". The principle invoked by
the Revenue was that "receipt by the exploitation of a
commercial asset is the profit of the business irrespective
of the manner in which the asset is exploited by the owner
in the business, for the owner is entitled to exploit it to
his best advantage either by using it himself personally or
by letting it out to somebody else." This principle, sup
ported as it was by numerous decisions, was accepted by the
court as a valid principle, but it was pointed out that it
had no application in the case before the court, because
though loom hours were an asset, they could not from their
very nature be let out while retaining property in them and
there could be no grant of temporary right to use them. The
court therefore concluded that this was really a case of
sale of loom hours and not of exploitation of loom hours by
permitting user while retaining ownership and, in the
circumstances, the amount received by the assessee from sale
of loom hours was liable to be regarded as capital receipt
and not income. It will thus be seen that the entire case
proceeded on the commonly accepted basis that loom hours
were an asset and the only issue debated was whether the
transaction in question constituted sale of this asset or it
represented merely exploitation of the asset by permitting
its user by another while retaining ownership. No question
was raised before the court as to whether loom hours were an
asset at all nor was any argument advanced as to what was
the true nature of the transaction. It is quite possible
that if the question had been examined fully on principle,
unhampered by any pre-determined hypothesis, the court might
have come to a different conclusion. This decision cannot,
therefore, be regarded as an authority compelling us to take
the view that the amount paid for purchase of loom hours was
capital and not. revenue expenditure. The question is res
integra and we must proceed to examine it on first
principle.
It is quite clear from the terms of the working time
agreement that the allotment of loom hours to different
mills constituted merely a contractual restriction on the
right of every mill under the general law to work its looms
to their full capacity. If there had been no working time
agreement, each mill would have been entitled to work its
looms uninterruptedly for twenty four hours a day throughout
the week, but that would have resulted in production of jute
very much in excess of the demand in the world market,
leading to unfair competition and precipitous fall in jute
price and in the process, prejudicially affecting all the
mills and therefore with a view to protecting the interest
of the mills who were members of the Association, the
working time agreement was entered into restricting the
number of working hours per week for which each mill could
work its looms.
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The allotment of working hours per week under the working
time k agreement was clearly not a right conferred on a
mill, signatory to the working time agreement. It was rather
a restriction voluntarily accepted by each mill with a view
to adjusting the production to the demand in the world
market and this restriction could not possibly be regarded
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as an asset of such mill. This restriction necessarily had
the effect of limiting the production of the mill and
consequently also the profit which the mill could otherwise
make by working full loom hours. But a provision was made in
clause 6(b) of the working time agreement that the whole or
a part of the working hours per week could be transferred by
one mill to another for a period of not less than six months
and if such transfer was approved and registered by the
Committee of the Association,, the transferee mill would be
entitled to utilise the number of working hours per week
transferred to it in addition to the working hours per week
allowed to it under the working time agreement, while the
transfer of mill would cease to be entitled to avail of the
number of working hours per week so transferred and these
would be liable to be deduced from the number of working
hours per week otherwise allotted to it. The purchase of
loom hours by a mill had therefore the effect of relaxing
the restriction on the operation of looms to the extent of
the number of working hours per week transferred to it, so
that the transferee mill could work its looms for longer
hours than permitted under the working time agreement and
increase its profitability. The amount spent on purchase of
loom hours thus represented consideration paid for being
able to work the loom for a longer number of hours. It is
difficult to see how such payment could possibly be regarded
as expenditure on capital account. The decided cases have,
from time to time, evolved various tests distinguishing
between capital and revenue expenditure but no test is
paramount or conclusive. There is no all embracing formula
which can provide a ready solution to the problem; no
touchstone has been devised. Every case has to be decided on
its own facts keeping in mind the broad picture of the whole
operation in respect of which the expenditure has been
incurred. But a few tests formulated by the court may be
referred to as they might help to arrive at a correct
decision of the controversy between the parties. One
celebrated test is that laid down by Lord Cave, L.C. in
British Insulated and Helsby Cables Ltd. v. Atherton(1)
where the learned Law Lord stated: "When an expenditure is
made, not only once and for all, but with a view to bringing
into existence an asset or an advantage for the enduring
benefit of a trade, there is very
1382
good reason (in the absence of special circumstances leading
to an opposite conclusion) for treating such an expenditure
as properly attributable not to revenue but to capital."
This test, as the parenthetical clause shows, must yield
where there are special circumstances leading to a contrary
conclusion and, as pointed out by Lord Radcliffe in
Commissioner of Taxes v. Nechanga Consolidated Copper Mines
Ltd.,(1) it would be misleading to suppose that in all
cases, securing a benefit for the business would be prima
facie capital expenditure "so long as the benefit is not so
transitory as to have no endurance at all." There may be
cases where expenditure, even if incurred for obtaining
advantage of enduring benefit, may, none-the-less, be on
revenue account and the test of enduring benefit may break
down. lt is not every advantage of enduring nature acquired
by an assessee that brings the case within the principle
laid down in this test. What is material to consider is the
nature of the advantage in a commercial sense and it is only
where the advantage is in the capital field that the
expenditure would be disallowable on an application of this
test. If the advantage consists merely in facilitating the
assessee’s trading operations or enabling the management and
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conduct of the assesse’s business to be carried on more
efficiently or more profitably while leaving the fixed
capital untouched, the expenditure would be on revenue
account, even though the advantage may endure for an
indefinite future. The test of enduring benefit is therefore
not a certain or conclusive test and it cannot be applied
blindly and mechanically without regard to the particular
facts and circumstances of a given case. But even if this
test were applied in the present case, it does not yield a
conclusion in favour of the Revenue. Here, by purchase of
loom hours no new asset has been created. There is no
addition to or expansion of the profit making apparatus of
the assessee. The income earning machine remains what it was
prior to the purchase of loom hours. The assessee is merely
enabled to operate the profit making structure for a longer
number of hours. And this advantage is clearly not of an
enduring nature. It is limited in its duration to six months
and, moreover, the additional working hours per week
transferred to the assessee have to be utilised during the
week. and cannot be carried forward to the next week. It is,
therefore, not possible to say that any advantage of
enduring benefit in the capital field was acquired by the
assessee in purchasing loom hours and the test of enduring
benefit cannot help the Revenue.
Another test which is often applied is the one based on
distinction between fixed and circulating capital. This test
was applied by
1383
Lord Haldane in the leading case of John Smith & Son v.
Moore(1) where the learned law Lord draw the distinction
between fixed capital and circulating capital in words which
have almost acquired the status of a definition. He said:
"Fixed capital (is) what the owner turns to profit by
keeping it in his own possession; circulating capital (is)
what he makes profit of by parting with it and letting it
change masters." Now as long as the expenditure in question
can be clearly referred to the acquisition of an asset which
falls within one or the other of these two categories, such
a test would be a critical one. But this test also sometimes
breaks down because there are many - forms of expenditure
which do not fall easily within these two categories and not
infrequently, as pointed out by Lord Radcliffe in
Commissioner of Taxes v. Nchanga Consolidated Copper Mines
Ltd. (supra), the line of demarcation is difficult to draw
and leads to subtle distinctions between profit that is made
"out of" assets and profit that is made "upon" assets or
"with" assets. Moreover, there may be cases where
expenditure, though referable to or in connection with fixed
capital, is never- the less allowable as revenue
expenditure. An illustrative example would be of expenditure
incurred in preserving or maintaining capital assets. This
test is therefore clearly not one of universal application.
But even if we were to apply this test, it would not be
possible to characterise the amount paid for purchase of
loom hours as capital expenditure, because acquisition of
additional loom hours does not add at all to the fixed
capital of the assessee. The permanent structure of which
the income is to be the produce or fruit remains the same;
it is not enlarged. We are not sure whether loom hours can
be regarded as part of circulating capital like labour, raw
material, power etc., but it is clear beyond doubt that they
are not part of fixed capital and hence even the application
of this test does not compel the conclusion that the payment
for purchase of loom hours was in the nature of capital
expenditure.
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The Revenue however contended that by purchase of loom
hours the assessee acquired a right to produce more than
what it otherwise would have been entitled to do and this
right to produce additional quantity of goods constituted
addition to or augmentation of its profit (’ making
structure. The assessee acquired the right to produce a
larger quantity of goods and to earn more income and this,
according to the Revenue, amounted to acquisition of a
source of profit or income which though intangible was
never-the-less a source or ’spinner’ of income and the
amount spent on purchase of this source of profit or income
therefore represented expenditure of capital nature. Now it
is
1384
true that if disbursement is made for acquisition of a
source of profit or income, it would ordinarily, in the
absence of any other countervailing circumstances, be in the
nature of capital expenditure. But we fail to see how it can
at all be said in the present case that the assessee
acquired a source of profit or income when it purchased loom
hours. The source of profit or income was the profit making
apparatus and this remained untouched and unaltered. There
was no enlargement of the permanent structure of which the
income would be the produce or fruit. What the assessee
acquired was merely an advantage in the nature of relation
of restriction on working hours imposed by the working time
agreement, so that the assessee could operate its profit-
earning structure for a longer number of hours. Undoubtedly,
the profit earning structure of the assessee was enabled to
produce more goods, but that was not because of any addition
or augmentation in the profit making structure, but because
the profit making structure could be operated for longer
working hours. The expenditure incurred for this purpose was
primarily and essentially related to the operation or
working of the looms which constituted the profit earning
apparatus of the assessee. It was an expenditure for
operating or working the looms for longer working hours with
a view to producing a larger quantity of goods and earning
more income and was therefore in the nature of revenue
expenditure. We are conscious that in laws in life, and
particularly in the field of taxation law, analogies-are apt
to be deceptive and misleading, but in the present content,
the analogy of quota right may not be appropriate. Take a
case where acquisition of raw material is regulated by quota
system and in order to obtain more raw material, the
assessee purchases quota right of another. Now it is obvious
that by purchase of such quota right, the assessee would be
able to acquire more raw material and that would increase
the profitability of his profit making apparatus, but the
amount paid for purchase of such quota right would
indubitably be revenue expenditure, since it is incurred for
acquiring raw material and is part of the operating cost.
Similarly, if payment has to be made for securing additional
power every week, such payment would also be part of the
cost of operating the profit making structure and hence in
the nature of revenue expenditure, even though the effect of
acquiring additional power would be to augment the
productivity of the profit-making structure. On the same
analogy payment made for purchase of loom hours which would
enable the assessee to operate the profit-making structure
for a longer number of hours than those permitted under the
working time agreement would also be part of the cost of
performing the income earning options I and hence revenue in
character.
When dealing with cases of this kind where the question
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is whether expenditure incurred by an assessee is capital or
revenue expenditure,
1385
it is necessary to bear in mind what Dixon, J. said in
Hallstrom’s Property Limited v. Federal Commissioner of
Taxation(1): "What is an outgoing of capital and what is an
outgoing on account of revenue depends on what the
expenditure is calculated to effect from a practical and
business point of view rather than upon the justice
classification of the legal rights, if any, secured,
employed or exhausted in the process." The question must be
viewed in the larger context of business necessity or
expediency. If the outgoing expenditure. is so related to
the carrying on or the conduct of the business that it may
be regarded as an integral part of the profit-earning
process and not for acquisition of an asset or a right of a
permanent character, the possession of which is a condition
of the carrying on of the business, the expenditure may be
regarded as revenue expenditure. See Bombay Steam Navigation
Co. (1953) Pvt. Ltd. v. Commissioner of Income-tax(2) The
same test was formulated’ by Lord Clyde in Robert Addze &
Son’s Collieries Ltd. v. Inland Revenue(3) in these words:
"Is it part of the company’s working expenses, is it
expenditure laid out as part of the process of profit
earning ? or, on the other hand, is it a capital outlay, is
it expenditure necessary for the acquisition of property or
of rights of permanent character, the possession of which is
a condition of carrying on its trade at all ?" It is clear
from the above discussion that the payment made by the
assessee for purchase of loom hours was expenditure laid
out. as part of the process of profit- earning. It was, to
use Lord Soumnar’s words, an outlay of a business "in order
to carry it on and to earn a profit out of this expense as
an expense of carrying it on." It was part of the cost of
operating the profit earning apparatus and was clearly in
the nature of revenue expenditure.
It was pointed out by Lord Radcliffe in Commissioner of
Taxes v. Nchanga Consolidated Copper Mines Ltd. (supra) that
"in considering allocation of expenditure between the
capital and income accounts, it is almost unavoidable to
argue from analogy." There are always cases falling
indisputably on one or the other side of the line and it is
a familiar argument in tax courts that the case under review
bears close analogy to a case falling on the right side of
the line and must therefore be decided in the same manner.
If we apply this method, the case closes to the present one
that we can find is Nchanga Consolidated Copper Mines case
(supra). The facts of this case were that three companies
which were engaged in the business of copper mining formed a
group and consequent on a steep fall in- the price of copper
in the world market, this group decided voluntarily to
1386
cut its production by 10 per cent which for the three
companies together meant a cut of 27000 tons for the year in
question. It was agreed between the three companies that for
the purpose of giving effect to this cut, company should
cease production for one year and that the assesses company
and company R should undertake between them the whole group
programme for the year reduced by the overall cut of 27000
tons and should pay compensation to company for the
abandonment of its production for the year. Pursuant to this
agreement the assessee paid to company 1,384,565 by way of
its proportionate share of the compensation and the question
arose whether this payment was in the nature of capital
expenditure or revenue expenditure. The Privy Council, held
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that the compensation paid by the assessee to company in
consideration of the latter agreeing to cease production for
one year was in the nature of revenue expenditure and was
allowable as a deduction in computing the taxable income of
the assessee. Lord Radcliffe delivering the opinion of the
Privy Council observed that the assessee’s arrangement with
companies R and "out of which the expenditure arose, made it
a cost incidental to the production and sale of the output
of the mine" and as such its true analogy with an operating
cost. The payment compensation represented expenditure
incurred by the assessee for enabling it to produce more
goods despite the cut of 10 per cent and it was plainly part
of the cost of performing the income-earning operation. This
decision bears a very close analogy to the present case and
if payment made by the assessee company to company for
acquiring an advantage by way of entitlement to produce more
goods notwithstanding the cut of 80 percent was regarded by
the Privy Council as revenue expenditure, a fortiori;
expenditure incurred by the assessee in the present case for
purchase of loom hours so as to enable the assessee to work
the profit making apparatus for a longer number of hours and
produce more goods than what the assessee would otherwise be
entitled to do, must be held to be of revenue character.
The decision in commissioner of Taxes v. Carron
Company(1) also bears comparison with the present case.
There certain expenditure was incurred by the assessee
company for the purpose of obtaining a supplementary charter
altering its constitution, so that the management of the
company could be placed on a sound commercial footing and
restrictions on the borrowing powers of the assessee company
could be removed. The old charter contained certain anti-
quoted provisions and also restricted the borrowing powers
of the assessee company and these features severely
handicapped the assessee company in the development of its
trading activities. The House
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of Lords held that the expenditure incurred for obtaining
the revised charter eliminating these features which
operated as impediments to the profitable development of the
assessee companies business was. in the nature of revenue
expenditure since it was incurred for facilitating the day-
to-day trading operations of the assessee company and
enabling the management and conduct of the assessee
company’s business to be carried on more efficiently. Lord
Reid emphasised in the course of his speech that the
expenditure was incurred by the assessee company "to remove
antiquated restrictions which were preventing profits from
being earned" and on that account held the expenditure to be
of revenue character. It must follow on an analogical
reasoning that expenditure incurred by the assessee in the
present case for the purpose of removing a restriction on
the number of working hours for which it could operate the
looms, with a view to increasing its profits, would also be
in the nature of revenue expenditure.
We are therefore of the view that the payment of Rs.
2,03,255/- made by the assessee for purchase of loom hours
represented revenue expenditure and was allowable as a
deduction under section 10 (2) (xv) of the Act. We
accordingly allow the appeal and answer the question
referred by the Tribunal in favour of the assesse and
against the Revenue. The Revenue will pay to the assessee
costs throughout.
S.R. Appeal allowed.
1388
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