Case: M/s. Empire Jute Company Limited Vs. Commissioner of Income Tax

The answer to the question here is fairly clear. But first l et us state the necessaryassessee 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 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 relevantfirst 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 all owed 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 en titled 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 m ember 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 t hat 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, asto the provisions of(i) to (iv)... signatories to this agreement shall be entitled to transfer in 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 sowere 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 asNo hours of work shall be transferred unless 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 Committees 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 transfertransaction 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 h ours 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 w eek 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 yearfor 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 theoff icer 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 or working it with a view to producingprofits 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 b y 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.

Reasoning: 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 relevantmore 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 Incometax 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 di d 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 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 business 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 anyhypothesis, 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 firstis 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 itsallotment 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 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 t he expenditure has beenis 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 assessees trading operations or enabling the management and conduct of the assessees 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 thetest 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 capitalit is 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 w as 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 profitearning 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,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 thestructure. On the same analogy payment made for purchase of loom hours which would enable the assessee to operate thestructure 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 inquestion 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 ma y be regarded as an integral part of theprocess 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 a s revenue expenditure.