TMI Blog1980 (5) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... sible 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 on the border line and, in such cases, as observed by Lord Greene M.R. in IRC v. British Salmson Aero Engines Ltd. [1938] 22 TC 29, 43 (CA), the spin of a coin would decide the matter almost as satisfactorily as an attempt to find reasons . 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey 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 cl. 4 was, as indicated in the opening part of that clause, subject, inter alia, to the provision of cl. 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 up to 72 hours per week. Clause 6(a) enabled the 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 allotment of hours of work per week of other members in the same group who were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ITO but, on appeal, the AAC 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 AAC 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds 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 Racecourse Betting Control Board v. Wild [1938] 22 TC 182, 188 (KB), 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 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 or revenue expenditure would have to be determined having regard to the nature of the transaction and other relevant factors. But, more importantly, it may be pointed out that Maheshwari Devi Jute Mills' case 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 predetermined 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 principles. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal 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 courts 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 Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, 192 (HL), 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, I think that there is very 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the distinction between fixed and circulating capital. This test was applied by Lord Haldane in the leading case of John Smith and Son v. Moore [1921] 12 TC 266, 282 (HL) where the learned law Lord drew the distinction between fixed capital and circulating capital in words which have almost acquired the status of a definition. He said: Fixed capital as what the owner turns to profit by keeping it in his own possession ; circulating capital as what he makes profit of by parting with it and letting it change masters. Now so 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. [1965] 58 ITR 241 (PC), 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. More ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed 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 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 assessee purchases the quota right of another. Now, it is obvious ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hand, is it a capital outlay ?-is it expenditure necessary for the acquisition of property or of rights of a 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 Sumner'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 . [John Smith and Son v. Moore [1921] 12 TC 266, 296 (HL)]. 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. [1965] 58 ITR 241 (PC) 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 the 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 IRC v. Carron Company [1968] 45 TC 18 (HL), 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 antiquated 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 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-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 en ..... X X X X Extracts X X X X X X X X Extracts X X X X
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