TMI Blog1961 (3) TMI 127X X X X Extracts X X X X X X X X Extracts X X X X ..... ime Agreement . That agreement was to expire on December 11, 1944. The members therefore entered into another Working Time Agreement on June 12, 1944. The preamble of this Working Time Agreement was as under : And 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 .. By clause (4) of this agreement the association restricted the hours of working the looms of the jute mills which were the members of the association. These hours of working were popularly known as loom hours . The number of hours of working allotted to the different mills depended upon the loomage capacity of the mills. Clause (5) of the Working Time Agreement stated that the number of working hours per week mentioned in that agreement represented the extent of hours to which the signatories were entitled in each week to work their registered complement of looms as determined under clause (13) thereof on the basis that they used the full complements of their loomage as registered and certified by the committee as provided for i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he First Working Time Agreement may under clause (6) hereof be utilised by other signatories in the same group and also be transferred subject to the conditions of that clause. A copy of the Working Time Agreement is annexed to the statement of the case sent by the Tribunal. The assessee company was allotted 72 hours of work per week as the complement of the looms of the assessee consisted of 220 looms. On September 18, 1947, the assessee company wrote to the Secretary, Indian Jute Mills Association, Calcutta, that although the assessee was entitled to work the complement of 220 looms for 72 hours per week due to shortage of its preparatory section the assessee was in a position to run the loom only 48 hours per week and the surplus hours which they were entitled to sell were 5,280 (24 x 220) loom hours per week, By that letter the company also informed the Jute Mills Association that Messrs. Naskarpara Jute Mills had agreed to buy from the assessee 3,960 loom hours per week for a period of six months and that the sanction of the committee for the sale of the loom hours should be accorded at an early date. By a similar letter dated October 7, 1947, the assessee company sought p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-tax. Appeals were then preferred to the Income-tax Appellate Tribunal. It was urged by the assessee that the receipts were either capital receipts or were receipts of a casual and non-recurring nature not arising out of the business of the assessee and, therefore, exempt from income-tax under section 4(3)(vii) of the Income-tax Act. The Tribunal did not accept the assessee's contention and held that these receipts were neither of a capital nature nor were they exempt from income-tax under section 4(3)(vii) of the Income-tax Act, as being of a casual and non-recurring nature not arising from the business in exercise of a profession, vocation or occupation. The Tribunal held that the sale of the loom hours was a transfer of a commercial asset during the course of the carrying on of the business of the assessee. The Tribunal further held that the transfer of the surplus loom hours of the assessee had become a normal feature of the business and it could not, therefore, be said that there was a receipt of a casual or non-recurring nature. The Tribunal also expressed the opinion that it was not possible to dissociate the receipt from the assessee's main business of using th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement mentioned in the statement of the case which brought into existence the loom hours had been entered into by the company in the course of its business. The loom hours were, therefore, incidental to the assessee's business and the money received by the assessee for parting with the loom hours could only be said to have been received in the course of the assessee's business and the receipts were incidental to the assessee's business. It was further argued that no capital asset was in fact transferred. The looms themselves remained with the assessee. The assessee was entitled to work those looms all the 24 hours if he liked but it chose voluntarily to enter into an agreement whereunder its rights to work the looms were restricted to a certain number of hours. The assessee could have run during those loom hours and if it had done so the activity would have resulted in profits. If the assessee adopted the alternative course of not working those looms itself and allowed others to run their own looms in lieu of payment the money received was only a substitute for the profits which the assessee had deliberately refrained from making. Being a substitute of the profits whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business or the carrying on of business. The result of the exercise or use of the means or implements may be considered to be the income of the business. It may, therefore, be said that if an asset comes 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 those 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 hundred 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that the assessee parted with the loom hours for good and it could not be said that while it allowed the transferee mills to use those loom hours it retained the ownership of those loom hours itself. In fact the loom hours were exhausted when they were utilised by the transferee mills. The assessee's business was to run the jute mill and was not to deal in loom hours and learned counsel contended that it would be wholly wrong to say that the sale of loom hours was made in the course of the assessee's business. We cannot overlook the fact that with the development of science and the introduction of essentially new commercial conceptions, assets of intangible character are increasingly coming into existence and the mere fact that the loom hours were not the same as looms or machinery would not justify the view that they were not assets of a capital nature. In Moriarty v. Evans Medical Supplies Ltd. [1959] 35 ITR 707 (HL) the House of Lords had occasion to consider if the money received by the respondent for transferring its know how relating to its manufacturing business was a receipt of a capital nature or a business income. The assessee in that case was a leading p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able of forming the subject-matter of patent rights. This technical knowledge is commonly called know how . The taxpayers entered into certain agreements with governments or companies in China, France, Argentina, the United States of America, Belgium, Australia and Sweden under which agreement they parted with their technical knowledge and received certain lump sum payments, in addition to some payments in the nature of royalty or technical liaison fee. Discussing the nature of the know how and the money received for it the learned judge observed that in the course of business they had acquired a vast store of knowledge and secret information relating to secret processes of manufacture referred to throughout the case as ' know how ' which represented a fixed capital asset of the taxpayer's trade, but it had never been any part of the policy of the taxpayers to make inventions and discover secret processes with a view to the earning of profits by realising their rights in those inventions and processes. After concluding that know how or the technical knowledge was in the nature of a capital asset the learned judge observed that it was open to the taxpayer either t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 57,435 towards the claim of the respondent on account of compulsory vacation of the premises, disturbance and loss of business. The question was whether this sum was a receipt liable to tax. Their Lordships held on the facts that the amount was not received by the assessee for any injury to its capital assets, but it was received as compensation for loss of profits and was therefore a revenue receipt. Sarkar J. observed: It is clear that the requisition did not cause any injury to any of the tangible capital assets of the respondent's business. Indeed it is not contended that there was any injury to any of them. What is said on behalf of the respondent is that there was injury to its profit-making apparatus. By that it is not suggested that the respondent's business had a profit-making apparatus, apart from his tangible capital assets, of the kind found to have been in existence in Van den Berghs Ltd. v. Clark [1935] AC 431 ; 3 ITR (Eng. Cas.) 17 (HL). The fact that the amounts in question were entered in the profit and loss accounts could not determine their real character or liability to tax. As observed by Lord Simon in his work on Income Tax (volume 1, page 31 ..... 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