Case: Commissioner Of Income-Tax U.P. Lucknow Vs. The Maheshwari Devi Jute Mills Ltd. Kanpur

1. The Maheshwari Devi Jute Mills Ltd., carries on the business of manufacturing jute goods and is a member of the Jute Mills Association. To protect the members against loss resulting from overproduction, members of the Association entered into an agreement dated January 9, 1932 called "the First Working Time Agreement" restricting hours of work. That agreement was to expire on December 11, 1944. With a view to continue the arrangement, a fresh agreement was executed on June 12, 1944. The preamble of the agreement was:"Whereas the signatories generally as a consequence of over-production having been put to considerable losses and in general interests of the Members and their employees and of the association and the jute industry and trade in general etc. ------have determined that provisions similar to those contained in the Working Time Agreement should be entered into and continued in manner hereinafter appearing."By Cl. 4 of the agreement, the association imposed restrictions upon the hours of work of its members. The number of hours for which the members were entitled to work their factories were called "loom-hours". Allotment of "loomhours" depended upon the number of looms installed in the factory of each member. By Cl. 5 it was provided that the number of working hours per week set out in the agreement represented the total number of hours for which a member was entitled to work its registered complement of looms. Clause 10 prescribed the maximum number of "loom-hours" for a mill with a complement of looms exceeding 220. Clause 13 provided for registration of "loomhours" of each member of the association. Clause 6 of the agreement enables members to be grouped if they happened to be under the control of the same managing agents or who were combined by any arrangement or agreement for registration as "Group Mills". It was open to a 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 allowed to them. By sub-clause (b) a member was also entitled to transfer his surplus "loom-hours" to another member and upon such transfer being duly effected and registered with the Association, the transferee was entitled, subject to certain conditions, to utilise "loomhours" so transferred.      2. The respondent was under the agreement allotted 220 x 72 hours per week. In the account year corresponding to the assessment year 1949-50, the preparatory section of the factory of the respondent was unable to work the looms for more than 48 hours a week, and with the sanction of the Association the respondent sold 220 x 24 "loom-hours" to the Naskarpara Jute Mills and as consideration of the sale received Rs. 53,460. In the account year corresponding to the assessment year 1950-51 the respondent received from the Birla Jute Mills and Hanuman Jute Mills a total amount of Rs. 1,85,230 for sale of surplus loom-hours. In proceedings for assessment for the assessment years 1949-50 and 1950-51 the Income-tax Officer included in the total income of the respondent the amount received by sale of "loom-hours as revenue receipts liable to tax. The order of the Income-tax Officer was confirmed by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. At the instance of the respondent, the Tribunal referred the following question to the High Court of Judicature at Allahabad"Whether on the facts and in the circumstances of the cases the receipts of the assessee by the sale of loom-hours amounting to Rs. 53,460 and Rs. 1,85,230 in the "assessment years 1949-50 and 1950-51 respectively were revenue receipts liable to tax under the Indian Income-tax Act?"The High Court answered the question in the negative. The Commissioner of Income-tax has preferred these appeals with certificate granted by the High Court under S. 66-A(2) of the Indian Income-tax Act.      3. The Tribunal held that the receipts in question were not capital receipts, nor were they of a casual or non-recurring nature. The plea of the respondent that the receipts for sale of loomhours are not chargeable to tax because they are, within the meaning of S. 4(3)(vii), casual and non-recurring, has no substance. By Cl.(3)(vii) of S. 4 receipts which are not capital gains chargeable according to the provisions of S. 12B and which are not arising from business or the exercise of a profession, vocation or occupation or by way of addition to the remuneration of an employee are exempt from tax, if they are of a casual and non-recurring nature. But a receipt in the ordinary course of the assessees business, even though it is casual or non-recurring, is by the express words used by the Legislature, taxable.

Reasoning: 6. Distinction between revenue and capital in the law of income-tax is fundamental. Tax is ordinarily not levied on capital profits; it is levied on income. It is well settled that sale of stock-in-trade or circulating capital or rendering service in the course of trading results in a trading receipt; sale of assets which the assessee uses as fixed capital to enable him to carry on his business results in capital receipt7. Our attention was invited to a judgment of the Allahabad High Court in Maheshwari Devi Jute Mills v. Commissioner of Income-tax, U. P. Lucknow, I.T. Misc. Case No. 177 of 1960 dated 13-9-1962 (All) in which a Division Bench of the Allahabad High Court answered a similar question relating to taxability of payments received for sale of "loom-hours" by the respondent in an assessment year with which we are not concerned in these appeals. The Court in that case ignoring the view in the judgments under appeal held that "loom hours" did not form the fixed profit-making structure of the respondent and it was not correct to say that the capital structure of the business was 220 looms multiplied by the number of hours per week for which the machinery was entitled to work. The "loom-hours" had in the view of the Court nothing to do with the capital structure of the business and there was nothing to show that the defect in the preparatory section which rendered the "loom hours" unutilisable was permanent. It was always open to the respondent to acquire the necessary yarn from outside and thereby utilise the remaining quota of "loom-hours" in manufacturing jute, and if the respondent preferred not to procure yarn and chose to sell the surplus "loomhours" and thus ensure profit for itself without incuring any risk, the receipt by disposal of a commercial asset was profit of the business irrespective of the manner in which that asset was exploited by the owner of the business. In the view of the High Court the respondent was entitled to exploit the asset to its best advantage; it may do so either by utilising it personally or by letting it out to somebody else, and the sale of a part of its quota of "loom-hours" amounted to exploitation of its capital asset and the receipt obtained therefrom was income. The surplus "loom-hours" were disposed of and no interest remained therein with the respondent there was no exploitation of the "loom-hours" by permitting user while retaining ownership. Receipt by sale of "loom-hours" must therefore be regarded in this case as a capital receipt and not income8. in our judgment the High Court was right in holding that the receipts from sale of "loomhours" were in the nature of capital receipts and were not taxable.