EMPIRE JUTE CO. LID.

COMMISSIONER OF INCOME TAX

May 9, 1980

[P .. N. BHAGWATI, v. D. TuLZAPURKAR AND R s. PATHAK, JJ.]

Allowing deduction under section 10(2>(xv) of the Income Tax Act- Revenue expenditure and Capital expendituret--Membt:r of the Jute Mill Ass0t:iation entering into a working time agreement restricting the number o/ lt•orking 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 Croup 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. '

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 dema.nd

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 restric:ing the number of working hours per week, for which the mills shall be entitled to work their looms. The fourth working time Agreement was en:ered 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 te fourth working time Agreement no signatory shall work ' t 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 al'a to the provision of clause (10) and under that clause, a joint and several ag~ ment 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 "Group of Mills" if they happened to be under the control of the same managing agents or were combined bv eny ... 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 mem-J hers 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 "i prescn"bed three other conditions precedent subject to which the allotment of .. hours of work transferred by one membor 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 wilh

an explanation to the Committee and Committee's decision ... whether the ... transfer shall be allowed sball be final and conclusive and (iD If the Committee sanctions the transfer, it shall be a condition prec.edent to its utffisation that a certificate be issued and the transfer registered.

This transaction of tramfer of allotment of hours of wort per week was commooly referrod to as sale of looms hour> by otle member to anotber. The consequence of. oacb"

:-.: "-~

EMPIRE JUTE CO. V. COMMISSIONER OF INCOME TAX 1371

uansfer was that the hours of work per week transferred by a member wero A 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 euch transfer was made entitled to utilise the number of working hours per ,4. week tramferred 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.

AugllSt 1958 to 31st July 1959. ln 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 zevenue expenditure on the ground that it was part of the cost of operating thC loom<1 which constituted the profit making apparatus of the assessee. The cleim was disallowed by the lncome Tax Officer, but on appeal, the Appellate Assistant Commissioner accepted the claim and allowed the deduction on the view that the MSCSSee did not acquire any capital as.set 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 Jost 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 lncome1 Tax v.

Maheshwari Devi Jute Mills Ud., [19661 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 W8'JI therefore not deductible under section 10(2) (J<V) of the lncome 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 requiremenit, it is not enongh it must further be of revenue as 'distinguished from capital nature. ' .

(1378 IJ..E]

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 l In 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 tax .. able. The decision in Maheshwari Devi lute Mills' case cannot on this account l>e regarded as an authority for the proposition that payment made by an asoessee for purchase of loom hours woold be capital expenditure, because it is not a universally true proposition that what may be capital receipt in the llands of the payee must nece<sarily 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 pavlD"'nt is revenue or capital disbursement qua the payer. Whether it is capital .. x~-ri llitnre or revenue expenditure would have to be determined having re1111rd to the nature of the tranSaction and other relevant factors. (1378 G-H, 1379 A-DJ

Raet Course Betting-Control Board v. Wild, 22 Tax Cases 182, quoled 1rith approval.

3. Again, Maheshwari Devi lute Mills' Case proeeeded on the. a"""l*d basis that loom hours were a capital asset and tbe only issue debated waa whether tbe transaction in question constituted sale of this asset or it represented exploitation of tbe asset by permitting its user by anotber while retain• ing ownenhip. No question was nUsed before tbe Court as to whetber the loom hours were an asset at all nor was any argument advanced as to what was tbe true nature of tbe transaction. This question is res integra and therefore this d<cision cannot be regarded as an authority for tbe proposition that Ille amount paid for purchase of loom hours was capital and not revOllW> expenditure._ 11379 E, 1380 C-Fl

4. It is quite clear from the terms of the working time agreement that tbe allotment of loom hours to different mills constituted merely a contraclual restriction on tbe right of every mill under the general law to work its looms to tbeir full capacity. If there had been no working time agreement, each mill would have been entitled to work its looms uninterruptedly for twenty four "'I' hours a day throughout the week, but tbat would have resulted in production ./\.__ of jute very mncli in excess of the demand in tbe world market, leading to unfair competition and precipitous fall in jute price and in tbe process, preju dicially affecting all tbe mills and tberefore with a view to protecting tho interest of the mills who were members of tbe Association, tbe working agreement was entered into restricting the number of working hours per wee!< for which each mill could work its looms. The allotment of working hours per week und01C the working time agreement was clearly not a right conferred on a mill, signatory to tbe working time agreement. It was ratber a restriction voluntarily accepted by each still with a view to adjusting the production to tbe demand in the world market and this restriction conld not possibly be regarded as an asset of such mill> This rostriction necessan1y bad tbe effect of limiting tbe production of the mill and consequentially also tbe profit which tbe mill could otherwise make by working full looms hours. But a proviaion was made in clause 6(b) of tbe working time agreement tbat tbe 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 montbs and if such transfer was approved and registered by the Committee of tbe Association, tbe transferee mill wool4' be entitled to utilise tbe number of worl<ing hours per week transferred to it

in addition to tbe working hours per week allowed to it under tbe worl<ing time agreement, while tbc transferor mill could cease to be entitled to avail of the number of working hours per week so transferred and tbose wonld be { liable to be deducted from tbe number of working hours per week otberwise.

allotted to it. The purchase of loom hours by a mill had therefore tbe etl'ect of relaxing tbe restriction on the op""8tion of looms to tbe extent of tbe munber of working hours per week transferred to it, so tbat tbe transf01Cee mill could work its looms for looger boors tban permitted under the working thne agreement and increase its profitability.

The amount spent on purchase of looms hours tbus repreoented consideration paid for being able to worlc the looms for a longer number of. boors. Such payment for tbe purchase of loom

boors cannot be regarded as expenditure on capital account. -'<t • [1380 F-H, 1381 Al

6. The decided cases have, from time to time, O'Volved various tests for distinguishing between capital and revenue expenditure but no test is po.171mount or conclusive. There is no all embracing formula which csn provide a ready solution to tbe problem; no touchstone bas been devised. Every case lw

to be decided oo its own facts keeping in mind the broad picture of the wtioi..

ii !!

EMP!llE JUTE CO. V. COMMISSIONER OF INCOME TAX. 1373

<>peration in respect of whicll the expM1diture has been incurred. Two of A .these tests are :

(a) The test of enduring benefit as laid down in British Insulated and B.Uby Cables Ltd. v. Atherton, 10 Tax Cases 155. Even this test must yield

whore there are special circumstances leading to a contrary decision.

There .may be aises where expenditure, even if incurred for obtaining advantage of

enduring benefit, may, noDe-the-less, be ODJ revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an a.sessee that brmgs the case within tho principle laid down

in this test. What is material to consir is the nature of tile advantage in a <:01D111ercial sense that 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'o trading operalions or ernibliJI@ the management and conduct of the assessee's business to be carried on more dlk:iently or more profitably while leaving the fixed capital untouched, • expenditure would be on revenue account, even though tho advantage may endure for an indefinit.e future. The test of enduring bendil is therefore not a certain or conclusive test and it cannot be applied blindly .,.. mechanically without regard to the particular facts and circumstances all a given case. l1381 E-G, 1382 A-El

Commissioner of Taxes v. Nchangdi Consolrda1ed Copper Mines Ltd., L'l96SJ 58 ITR 241; followed.

(bl 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 the expenditure in question can be clearly referred to the acquisition of an asaetl 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 aro many forms of expenditure which do not fall easily within thfse two categories and not infrequently, the line of demarcation is difficult to draw andi leads to subtle distinctions between profit that is made "out nf' a5Bell9 andi 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 nevertheless allowable as revenue expenditure e.g. expenditure incurred in

•.~ preserving or maintaining capital assets. This test is therefore clearly not one r of univen!al application. [1383 A-Dl

Commissioner of Taxes v.

Nchanga Consolidated Coper Mines Ltd.

C. f1965]58 ITR 241; followed.

6. It is true that if disbursement iS made for acquisition of a source ol! profit or income, it would ordinarily be in the nature of capital expenditure.

But it cannot be said in the present case that the assessee acqnired a source of Jll'(lfit or income when it purchased loom hours. The source of profit or income

was the profit making apparatus and this i; emained untouched and unaltered, Thero was no enl<l.rgement of the permanent structure of which the incomil

would be the produce or fruit.

What the assessee acquiml was merely mi advantage in the nature of relaxation of restriction on working hours imposccl q the worlting time agreement, so that the _. could operate its profit. earning structure for a longer number of hours. Undonbtedly the profit earn<

A ing structure Of the assessee waa enabled to produce more goods, but that was not because of any addition or augmentatioo in the profit malting stroctme,

but because the profit making structure could be operated for longe< worf<inl!I hours. The expenditure incurred for this purpose was primarily and essentially related to the operation or working of tho looms which constitufed the prollt

earning apparatus of the usessee.

It waa an expenditure for operating "" working the fooms for longer working hours with a view to producing a B larger quantity of goods and earning moro income and was therefore in the nature of revenue expenditure. [1384 ADl

7. When dealing with cases where the question is whether expendi1Dre incurred by an as.sessee is capital or revenue expenditure, the question must be viewed in the larger context of business necessity or expediency. If tile

outgoing expenditure is so related to the carrying on or the cooduct of the ~, . • C business that it may be regarded as an integral part of the profit-earning pm- _ cess and not foc acquisition of an asset or a right of a permanent charactec.

the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure.

U384 H, 1385 A.0

Nelletrorm' Property Ltd. v. Federal Commr. of Taxation, 72 CLR 634; Robert Addis & Sons Collieries Ltd. v. Inland Revenue 8 Tax Cases, 671 D quoted with approval.

Bombay Steam N_avigation Co. P. Ltd. v. Commissioner of Income Tax,. [19531 55 ITR 52; followed.

9. Jn the instant case

(a) the payment made by tho assessee for the purchase of loom hours E was expenditure laid out as part of the prooess of profit earning. It was mr outlay of " business in onler to carry it on and to earn 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 wa'i clearly in the nature of revenue expenditure; and C1385 D-EJ

(b) the payment of Rs. 2,03,255/- made by the assesace for purchase of loom hours represented Revenue expenditure and was allowable as a dednctiDR under section 10(2) (xv) of the Incomo Tax Act.

[1387 CD]

Commissioner of Income Tax vi Nchanga Consolidated Copper Mines Ltd .• [19651 58 ITR 241; Commissioner of Taxe9 v. Curron Company, 45 Tax Cases 18; followed.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1197 (NT) of

1n~ \

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.

' BMPIRI! JUTI! CO. V. COMMI&'SIONl!R OF INCOMB TAX

(Bhagwati, J.) 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 baffied the courts, because it has not been possible, despite occasional judicial valour, to fonnulate a test for distinguillhing 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 reconclle the reasons given in all of them, since each decision has tum- ·"6r ed upon some particular aspect which has been regarded as cru.cial and "-.no general principle can be deduced from any decision and applied - blindly to a different kind of case where the con5tellation of facts may 1" dissimilar and other factors may be present which may give a different hue to the case. Often cases fall on the border line and in such cases, as observed by Lord M. R. in Inland Revenue v. British Salmon 'iiro Engines Ltd.(') "the spin of coin would decide th~ 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 fonned with a view to protecting the interests of the members.

The obj!lcts of the Association, inter alia, are (i) to protect, focward and defend 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 ra, t; her lean and with a view to adjusting the production of the mills to the demand in the world market, a working time agreement

W3.!i lllllered into between the members of the Association restricting tll(l number of working hours per week, for which the mills shall be entitled to work their looms.

The first working time agreement was

~ ,,_ ente(ed into on 9th January 1939 and it was for a duration of five years and on its expiration, the second and thereafter the !ltird working time agreements, each for a period of five years and in more O£ less similar t.erms, were entered into on 12th I une, 1944 and 25th November 1949 respectively.

The thiid working time agreemmt was about to expire on 1 lth December, 1954 and since it

(I) 22 Tax Cases 29.

1376 SUPllEME COURT REPORTS

11980) 3 S.C.Jt,

was elt that the necessity to restrict the number of working boutl per week still continued, a foorth wprking time agreement was entered into between the members of the Association on 9th December 1954 lllld it Ji. 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 ..i,

11 and 12, " ............ no signatory shall work more than forty A five hours of work per week and such restriction of hours of wed 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 reJ)-

resented 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 redaction 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 num• ber 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 work- / ing time agreement, members with registered complements of not exceeding 220 shall be entitled to work upto 72 hours per weekl

Clause 6 (a) enabled members to be registered as a "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 of Mills. so registered to utilise the aRotment 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 llnder 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-claUS'eS (i) to (iv) ... signatories to this agreement shall be entitled to transfer in

EMPIRE JUTE CO. V. COMMISSIONER OF INCOME TAX 1377 (Bhagwati, J.) ; part or wholly their allotment of hours of work per week to

any one or more of the other signatories; and upon iruch 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 sha.11 be entitled. to utilise the allotment of hours of work per week so transferred."

There were four conditions precedent subject to which the allotment -0f iloors of work trnsferred by one member to another could be utilis- £d by the latter and those of them were as under :

" ( 1) No 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 Committee's decision ......... whether the transfer shall be allowed shall be final and conclusive.

(iii) If the Committee sanctions the transfer, it shall he a condition precedent to its utilisation that a certificate be -issued and the transfer registered." E

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 thl: number of working hours per

week IJ'am; ferred 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

JD3llufacturing concerns which were signatories to the working time agreement, for the aggregate sum of Rs. 2,03,255 /- during the yeirr

ht August 1958 to 31st July 1959. In the course of assessment for the assessment year 1960-61 for which the relevant accounting yi:ar 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 df operating the looms wflich constituted the profit making apparatus of the assessee.

The daim was disallowed by the Income-tax Officer but on appeal, the

Appellate Assistant CommiS§ioner accepted the claim and allowed the deduction on 11he 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 Tn"bunal 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.

Thls view taken by the Tribunal was chAflenged in a reference made to the Higb Court at the instance of the Revenue.

The Higb 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 dednctible 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 ff it is incurred wholly and aclusively for t)le purpose of his business, but even if it fUlfils this requirement, it is not enough; it must further be of revenue as distinguished from capital nature.

Here in the present case it was not contended on behalf of the Revenue that the sum of Rs. 2,03,255/- wa5 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 mnst refer to the decision of this Court in Maheshwari Devi Jute Mi11s case ( snpra) since that is the decision which weighed heavily with the Higb Court in fact, cmnpelled it to negative the claim of the assessee and held the expenditure to be on capital account. That was a con-

Vet'se case where the question was whether an amaunt received by the

as&essee 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:

(\) [1965) 57 l.T.ll. 36.

r 4

EMPIRE JUTE CO. V. COMMISSIONER OF INCOME TAX 13 7~ (Bhagwati, l.) nature of capital receipt and hence not taxable. It was contended on A be.half a( the Revenue, relying on this decision, that just as the amount ..._ reillised 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 univel'Sally true proposition that what may be a capital receipt in the hands of the payee must necessarily be cajlital 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 !, he payment is revenue '6 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 lute 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 woold 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 lute Mills' case (supra) proceeded on the basis that loom liours

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 Incom6-tax Officer upto the High Court, that the

ri&bt to work the looms for the allotted hours of work was an asset capable of being transferred and thi' 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. t Since it was a co=only accepted basis that loom hours were an asset of _the assessee, the only argument which could be advanced on behalf of the Renue 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 Iilaking use of its asset by either empl?ying it in its O'Wn manufacturing concern or by letting it out to others, consideration received for allowing the transferee to use that asset is income received from busi- -------- - (I) 22 Tax Cases 182.

:,-,,.

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 himoo1f personally or. by letting it out to somebody else." This principle, supported as it was by numerous decisions, was accepted by the comt . 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 as8et, they could not from their very nature be let out while retaining property jn them and there could be no grant of temporary right to me them.

The court therefore concluded that this wiis really a case of '"1r sale of loom hours and not of exploitation of loom hours by pennitt- _/\_ ing user while retaining ownership and, in the cirCllrnstances, 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 acceped 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 whDe 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 narure 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, therefroe, 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 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.

EMPIRE JUTJ; l CO. V. COMMISSIONER OF INCOME TAX 1381 (Bhagwati, /.)

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 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 consequentially 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 ....._ r less than six months and if such trans.fer 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 transferor 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 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 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 pennltted un_der the working time

agreement and increase its profitability.

The amotlnt 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 l!_ow 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 -'i embracing formula which can provide a ready solution to the problem;

t110 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 f.ew tests formulated by the conrt 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(') 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

(I) 10 Tax Cases !SS at 189.

good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attr; butable not to revenue but to capital." This test, as the parenthetical clause shows, must yield where there are special circumstances lea<ling to a contrary conclusion and, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd.,(') 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-t!Je.-less, be on revenue account and the test of enduring benefit may break down. It ., j' 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 i~ 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 !e6t.

If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee'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 ol enduring benefit is therefore not a certain or conclusive test and it cannot be applied blindly and mechanically

bout 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 linrited 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

(I) iI96S] SS I. T. R. 241.

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( ... ) 'ff

EMPIRE JUI; E CO. v. COMMISSIONER OF INCOME TAX 1383 (Bhagwati, !.) Lord Haldant1 in the leading case of Jahn Smith & Son v. Moore(!) -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. lle 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 mastms." Now as long as the expenditure in question can be clearly xeferred 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 nQ.t infrequently, as pointed' out by Lord Radcliffe in Com- .missioner 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 caees 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 struc- ture of which the income is to be the produce or fruit remains the same; it is iiot 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 caplial expenditure. " .

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 Jlevenue, 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 .:inc9me therefore rented expenditure of capital nature. Now it is

(l) 12 Tax Cases 266.

SUPREME COURT REPORTS [1980] 3 S.C.lt.

A true that if disbursement is made for acquisition of a source of profit oc income, it would ordinarily, in the absence of any other couniervalling

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 relaxation 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 struc-

_..... ~' )~ v

C ture of the assessee was enabled to produce more goods, but that was

, )T' • not because of any addition or augmentation in the profit making struc- _,,.c, ture, bnt 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 asses,, ee.

It was an expenditure for operating or working the looms for looger 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 law as in life, and particularly in the field of taxation law, analogies are apt to be deceptive and misleading, but in the present context, the analogy of quota right may not be inappropriate. Take a case where acquisition of raw material is regulated by quota system and in order to obtain more raw material, the ilssessee purchases quota right of another. Now it is obviaus that by purchase of such quota right, the assessee would be abl.e to aoquire more raw material and that would increase the profitability of his profit

I.I making apparatus, bnt 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 G 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 woold

B also be part of the cost of performing the income earning operatioos and hence revenue in character.

When dealing with cases of this kind where the question is whclhei expenditure incurred by an assessee is capital or revenue expoodi(me, 1

EMPIRE JUTE CO. v. COMMISSIONER OF INCOME TAX 1385 (Bhagwati, !.) it is necessary to bear in mind what Dixon, J. said in Hal/strom's Property Limited v. Federal Commissioner of Taxation(•) : "What is an 4 outgoing of capital and what is an outgoing on acconnt of revenue depends on what the expendiure 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 possesion of which ·"\ 'l is a condition of the carrying on of the business, the expenditure may _f"iie 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 Addle & Son's Collieries Ltd. v.

Inland Revenue(8) 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 ex~ penditure 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 Soum- >- nar'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.u 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 consi- .'- dering allocation of expenditure betweeQ the capital and income ', accouuts, it is almost unavoidable to argue from analogy." Thete are

~!ways cases falling indisputably on one or the other side of the line and it is a fam"liar argument in tax courts that the case under review

~ JOlrs 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 l methoJ, the case closes to the present one that we can find is Nchanga Consolidated Copper Mines case (supra).

The facts of this case • 1- 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

(I) 72 C. L. R. 634.

(2) 56 I. T. R. 52.

(3) 8 Tax Cases 671.

25'-6IOSCI/80

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 A effect to this cut, company B should cease production for one year and that the assessee 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 compensaticm to company B for the abandonment of its production for the year. Pursuant

to this agreement the assessee paid to company B £ 1,384,565 by \\Cay 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 that the compensation paid if

by the assessee to company B in consideration of the latter agreeing tcY"\_ 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 B "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 B for acquiring an advantage by way of entitlement to produce more goods notwithstanding the cut of 80 per cent was regarded by the Privy Council as revenue expenditure, a fortiorari, 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 other:-, r

wise be entitled to do, must be held to be of revenue character. 1 / '

The decision in Commissioner of Taxes v. Carron Company(') also bears comparison with the present case.

There certain expenditure was incurred by the assessee company for the purpose of obtaining a supplementary cJ; iarter 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 contaned certain antiquated provisions and also restricted the borrowing powers of the assessee company and t.!Jese features severely handicapped the assessee company in the development of its trading activities. The House

(I) 45 Tax Cases 18.

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 EMPIRE. JUTE CO. V. COMMISSIONER OF INCOME TAX 1387 (Bhagwati, I.) of Lords held that the expenditure incurred for obtaining the reviSed charter eliminating these features which operated as impediments to tbe profitable development of the assessee company's 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 bis 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 rewnue 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, woofd also be in the nature of revenue expenditure.

We are therefore of the view that the payment of Rs. 2,03,255 /- lllllde by the assessee for purchase of loom hours represented revenue

expenditure and was allowable as a deduction under section 10(2) (xv) D of !he Act. We accordingly allow the appeal and answer the question referred by the Tribunal in favour of the assessee and against the Revenue. The Revenue will pay to the. assessee costs throughout.

s.R.

Appeal allowed.