TMI Blog1973 (8) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... n business of jute manufacture and is a member of the Indian Jute Mills Association. The Indian jute Mills Association is registered under the Indian Trade Unions Act (Act XVI of 1926) with its registered office at Calcutta. The objects of the association, inter alia, are : 1. (a) to protect, forward and defend the trade of members of the association ; (b) to impose restrictive conditions on the conduct of the trade; (c) to adjust the production of the mills in the membership of the association to the demand in world market; (d) to arbitrate on matters in dispute. 2. (a) to protect the members of the association against competition; (b) to secure the enactment of legislation beneficial to the trade; (c) to secure the repeal of any legislation or prevent the passing of legislation which is damaging or may in any way damage the trade. It will, therefore, appear that the Indian Jute Mills Association (hereinafter referred to as " the association ") was formed in the interest of the various companies who carried on the trade of manufacturing jute and who become the members of the association and one of the main objects of the association was to adjust the production of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) hereof." Clause (5) of the agreement provides : " The number of working hours per week when mentioned in this agreement represents the extent of hours to which signatories are in all entitled in each week to work their registered complement of looms as determined under clause (13) hereof on the basis that the use of full complement of their loomage as registered with and certified by the committee as provided for in clauses (12) and (13) hereof and it is generally and mutually agreed that any signatory may during periods in which his loomage is reduced (notice in writing and registration and certification by the committee and the seal of looms to be a condition precedent to the operation of this clause) increase the number of working hours per week allowed to him by virtue of the agreement in the ratio of the degrees in loomage in accordance with the following formula: Let X--The hours of work per week with the full complement of loomage. Y--The total full registered loomage, and Z--The total loomage after reduction, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do not work the full complement of hours for the time being allowable, it shall be lawful and permissible for another or other signatory's mills in the same ' mill group ' to work (additional to their own complement) to the extent only the number of hours of work per week as have not been or are not to be utilised by the signatory or signatories of the same group; provided always that the interchange of hours of work per week contemplated in the foregoing shall not take place unless the committee has been advised and unless the utilised hours of work per week of the signatory mill within the ' mill group ' which it is proposed to utilise in another signatory mill or mills cover hours of work per week for a period of not less than six months. (b) Additional to the signatories' rights under clause (a) above, but subject to the provisions of sub-clauses (i) to (iv) below, 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 allotmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e month prior to the date on which the proposed change is to take effect and shall be placed before a special meeting of the association calling the parties. The change shall take effect only if 75% of the voting powers of the members support the committee's recommendation. If the requisite resolution is passed by 75% of the voting strength of the members, the hours of work per week so allowed shall be deemed to take the place of 45 hours of work per week mentioned in clause (4) of this agreement. (2) The committee may suo moto and shall, if 51 % of the total voting strength of the members requisition in writing, consider proposals for an increase in the number of hours of work per week and if the committee should recommend such proposal or any modification thereof or make its own recommendations as to an increase, the signatories shall be circulated. Any recommendation of the committee or any proposal (whether recommended or not by the committee) approved by not less than 51% of the voting strength of the members at a special meeting of the association (which may be convened by the committee's direction or at the instance of 51% of the voting strength of the members) shall be ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any time be entitled in its sole discretion to allot hours of work per week (but not exceeding 54 hours per week in all for mills with a complement of looms exceeding 220 and not to exceed 72 hours of work per week in all for mills with a complement of looms not exceeding 220) to looms situate outside the province of West Bengal who are not members or who may hereafter become members of the association. The committee's certificate as to the looms to be allowed to the mills situate outside West Bengal shall be final and conclusive of them; provided always that no mill with a complement of looms as certified under clause (13) greater than 220 shall at any time during the agreement and irrespective of any other restrictive agreements whether supplementary to this agreement or otherwise be compelled to work less than a total number of hours of work per week as a mill whose registered complement of looms is 220 would from time to time be entitled to work under the provision of this clause. " Clause (11) : " In the event of a complete stoppage of machinery in a mill of a signatory of not less than two consecutive working days through, (1) a strike of workers; or (2) a threat of coal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause 23(a) : " The signatories do hereby jointly and severally admit, acknowledge and declare that it was essential that the terms and conditions of the working time agreement shall have been entered upon for, inter alia, the protection of the industry in which the signatories are engaged and that the provisions are, each and everyone, reasonable and required for the benefit of the signatories both severally and collectively and that any breach of any one or more of the conditions of this agreement by any one of more of the signatories will cause damage to the association, its members and signatories which while very substantive will be difficult to value in precise terms but which are likely to exceed security deposits of each signatory, inter alia, because such breach or breaches may tend to destroy or destroy the whole basis of the association and the damage will include the undermining of the market and the existence of the association. The signatories jointly and severally expressly agree that they will truly and faithfully observe, perform and conform to all the terms and conditions of this agreement and will do nothing and/or cause nothing which may be reasonably calculate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -------------------- Name and address of the person Period which the loom hours Total amount paid from whom purchased cover Rs. -------------------------------------------------------------------------------------------------------------------------------------------------- M/s. Meghna Mills Co Ltd. Sept. to March, 1959 51,472.80 less consumed 22,176 and balance 19,008 hours. 16,536.00 The difference 31,759 valued at Rs. 16,537 ----------------------- 34,936 80 ------------------------ Eastern Manufacturing Co. Ltd, August, 1958, to July, 1959, 1,01,197 92 Alesanira Jute Mills Ltd. Sept., 1958, to Dec., 1958 35,929.44 Waverly Jute Mills Ltd January, 1959, to July, 1959 31,191.36 ------------------------ 2,03,254,52 ------------------------ -------------------------------------------------------------------------------------------------------------------------------------------------- The relevant year is the assessment year 1960-61 for which the previous year ended on 31st July, 1959. Daring the relevant assessment year the assessee claimed the said sum of Rs. 2,03,255 as revenue expenditure. The Income-tax Officer disallowed the expenditure on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ually working 750 looms only. Before the Tribunal various decisions were cited. Counsel for the revenue strongly relied on the decision of the Supreme Court in the case of Commissioner of Income-tax v. Maheshwari Devi Jute Mills Ltd. and relying on the said decision it was contended that loom hours were fixed assets of the mills and loom hours being capital assets of a jute mill, a jute mill selling the same would be receiving capital receipt and another jute mill buying the same would be buying asset by way of capital expenditure. On behalf of the assessee it was contended that the aforesaid decision of the Supreme Court did not conclude the question as in that case the Supreme Court had proceeded on the footing that " loom hours " was an asset and the Supreme Court did not permit any argument that " loom hours " was in the nature of a self-imposed restriction not to work to full capacity or for full time and it was not an asset at all but a liability. It was further submitted on behalf of the assessee that if there were no restrictive covenants no jute mills would think of exhibiting on the balance-sheet as an asset the right to work 168 hours per week (24 hours a day for 7 day ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal is contrary to the decision of the Supreme Court. Mr. Pal has submitted that the true nature of the transaction is to confer an additional right on the assessee to produce more, a right which the assessee did not otherwise have under the agreement. He has further submitted that the character of loom hours has been considered by the Allahabad High Court in the case of Maheshwari Devi jute Mills' case and has been held to be capital in nature so far-as the seller of loom hours is concerned and the decision of the Allahabad High Court has been affirmed by the Supreme Court by its decision in Commissioner of Income-tax v. Maheshwari Devi jute Mills Ltd. Mr. Pal has argued that in view of the aforesaid decision of the Supreme Court loom hours must be considered to be capital asset of the mills. He contends that though the capital receipt by the seller for sale of a capital asset may not invariably lead to the conclusion that the payment made by the buyer for purchase of a capital asset from a seller must necessarily be a capital expenditure, yet in the facts of the instant case the sum spent on the purchase of loom hours, a capital asset in the hands of the seller, results in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court has proceeded on the basis of the assumption that loom hours are capital assets of the mills without deciding the said question and without allowing the said question to be urged, the said decision cannot be said to conclude the question as to the character of loom hours in the instant case and it is open to the assessee to urge that the loom hours do not form any part of the capital assets of the mills. Mr. Roy has further submitted that the decision of the Supreme Court was concerned with the question of the character of the receipt of the sum in the hands of the transferor by transfer of its loom hours and was not concerned with the question of the character of payment made by a mill for obtaining the necessary transfer of the loom hours by the transferee mill. Mr. Roy contends that the nature of payments made by the assessee in the instant case must, therefore, be decided independently of the said decision of the Supreme Court in the context of the assessee's own business and on the basis of the principles' laid down by cases which have to deal with the question whether a particular expenditure is of a revenue character or is capital in nature. Mr. Roy has argued that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of other mills enable the assessee to produce more and the expenditure incurred to enable the assessee to work its looms for the extra hours results in larger production enabling the assessee to make more profits. The expenditure incurred by the assessee, according to Mr. Roy, therefore, relates to the cost of operating the profit earning apparatus and does not relate to the acquisition of any part of the profit-earning apparatus. According to Mr. Roy, the expenditure incurred by the assessee goes to fill the hole in its profits which might otherwise have been affected by the restriction as to hours of working imposed and the said expenditure does not go to fill any hole in the profit-making apparatus which has remained the same and has not in any way been affected. In support of his submissions Mr.Roy has referred to the following decisions: Commissioner of Income-tax v. Vazir Sultan Sons, India Cements Ltd. v. Commissioner of Income-tax , Van den Bergs Ltd. v. Clark (H. M. Inspector of Taxes) Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd., Burmah Steamship Co. Ltd. v. Commissioners of Inland Revenue , Anglo-Persian Oil Co. Ltd. v. Dale (H. M. Inspector of Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , there is one matter upon which counsel on both sides are agreed: that it is the duty of the court to consider every relevant fact, giving its due weight, and then to reach a conclusion upon the whole matter. I cannot but recall the observation of Sir Wilfrid Greene M. R. in Commissioners of Inland Revenue v. British Salmson Aero Engines Ltd., where he said : ' There have been many cases which fall on the borderline. Indeed, in many cases it is almost true to say that the spin of a coin would decide the matter almost as satisfactorily as an attempt to find reasons.' Somewhat cynical, but true, it is a question of fact and degree and above all judicial commonsense in all the circumstances of the case, and, while no one regrets it more than I, I do not believe it is pos sible to lay down any principle, when dealing with trading contracts, which would be of any guidance alike to Crown and subject in future cases." The nature, capital or revenue, of the expenditure is mainly to be judged from a consideration of the transaction in respect of which it was made. In the instant case the payment was made for purchase of loom hours. The nature and character of loom hours has mainly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into existence as a product of the business itself, it is a stock-in-trade or a revenue gain. In the instant case, besides the land, building and machinery including the looms which the assessee company had as a result of the agreement referred to above, the business activities of the assessee were restricted and had to be conducted in a particular manner. Profits could be made by carrying on the business under these restrictions and by putting the tangible capital assets to use in accordance with the conditions under which the business had to be carried on. If a mill has a hundred looms nobody would deny that those 100 looms are its capital assets. If the mill is able to increase the number of its looms to 200 the addition would be evidently an addition to its capital asset. This ownership of the looms would normally entitle the mill to use them all the 24 hours and earn profits. The profit-making structure would'in such a case be the possession of 200 looms which may be worked for 24 hours. If for certain reasons, which may be a voluntary agreement or a restraint imposed by the State, the mill may be worked only for 16 hours or two shifts; the profit-making structure would be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om hours ' were in the nature of a privilege and were not an asset at all. The case has at all earlier stages been considered on the footing that by virtue of the covenant incorporated in the agreements between the members of the association, the right to work for the allotted number of hours was an asset capable of being transferred, subject to the sanction of the association." Distinguishing the case of Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd., the Supreme Court observed at page 40: " Receipt from a commercial asset when it is capable of being used by the assessee but it is not so used because of circumstances which necessitate the cesser of its use would undoubtedly be income, where the asset remains property of the assessee and user of the asset is given to another person. If in the present case, for the hours which the respondent was unable to use its looms, the respondent had permitted some other person to work the looms, profits received for permitting such user would be income. But the distinction between that case and the present case arises from the peculiar nature of the transaction in ' loom hours '. ' Loom hours ' cannot from their very na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. We are unable to agree with this view. 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 income. In our judgment the High Court was right in holding that the receipts from sale of ' loom hours ' were in the nature of capital receipts and were not taxable. Relying on the fact that the Supreme Court had not allowed the contention that " loom hours was in the nature of privilege and was not an asset at all " to be raised before the Supreme Court, Mr. Roy has argued that, as the said contention before the Supreme Court was not at all raised, it cannot be said that the Supreme Court decided that " loom hours " were capital assets. Relying o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Mills Ltd. in which such receipt was held to be income and taxable as such and the Supreme Court's upholding the decision of the Allahabad High Court in the case under appeal before them indicate, in my opinion, that the Supreme Court held the " loom hours " to form a part of its fixed asset, the profit-making structure of the assessee. As, in my opinion, the Supreme Court in the case of Maheshwari Devi Jute Mills Ltd. has held that " loom hours " form a part of the profit-making structure of the mills and is, therefore, a part of the capital asset of the company, I must hold that the said decision of the Supreme Court concludes the question of the nature and character of " loom hours ". This nature and character of the asset remain the same and are not in any way changed, when it changes hands and passes from one mill to another. The seller Who sells his " loom hours " sells a part of his fixed assets or profit-making structure and the money that he receives for the sale is capital receipt in his hands, being the sale proceeds of a capital asset. The buyer who purchases the " loom hours ", therefore, necessarily purchases a part of the profit-making structure or fixed asset and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. The purchase of " loom hours " has only enabled the assessee to work its looms for extra time. Time, in my view, should not be normally considered to be a part of the profit-earning apparatus. A day consists of 24 hours which will always remain fixed. A particular businessman may run his factory for 24 hours and thereby utilise the full period. Another person may not be in a position to work his factory for more than 12 hours and others may work their factory for shorter or longer periods. Effective and proper utilisation of time in running the factory is concerned with the working of the factory and it may yield larger profits. It relates essentially to the operation of the profit-earning apparatus for earning better profits. The profit-earning apparatus remains the same and by working the apparatus for a longer period, it cannot, in my opinion, be said that there has been any addition to the profit-making apparatus or to the capital structure of the business. Any expenditure incurred for working the existing profit-making apparatus for earning better profits should normally be considered to be revenue expenditure. Speaking for myself, on a construction of the working agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng its labour to work 16 hours a day for completing the said order and pays over-time or additional remuneration to its labour to secure permission and participation of its labour for and in working its mills including the looms for 16 hours a day. Can it be said that the additional expenditure incurred by the assessee for working the mills including its looms for 16 hours a day for the completion of the order will be capital expenditure of the assessee? In my opinion, such expenditure must necessarily be considered to be revenue expenditure. In examining the nature of any payment made, it is always important to consider not so much why the payment was made but for what it was made. In the case of Strick v. Regent Oil Company Ltd., Lord Wilberforce very aptly observes at pages 54-55: " In the course of numerous decisions which have distinguished between capital and revenue expenditure in relation to widely different trades and varying circumstances, certain ' tests ' have emerged. These may be useful, so long as it is recognised that they have emerged a posteriori from the facts of a given situation and that they may not always be suitable as guiding lines in other situations. I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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