EMPIRE JUTE CO. LID. v. COMMISSIONER OF INCOME TAX

Citation: [1980] 3 S.C.R. 1370

Court: Supreme Court of India

Bench: P.N. BHAGWATI, V.D. TULZAPURKAR, R.S. PATHAK

Case summary

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....

Judgment text

' EMPIRE JUTE CO. LID. v. 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 'C 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 t~e 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" ,. :-. : "-~ uansfer was that the hours of work per week transferred by a member wero 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 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 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! 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 peration in respect of whicll the expM1diture has been incurred. Two of . 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 consi~r is the nature of tile advantage in 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 F. 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 Re~nue 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 mere- ( ly 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 R 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 'f 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 millto 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 paren- /, ' thetical clause shows, must yield where there are special circumstances lea - 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 w • 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 , . . / ·F of hours and produce more goods than what the assessee would other:-,r 1 wise be entitled to do, must be held to be of revenue character. / ·' The decision in Commissioner of Taxes v. Carron Company(') also bears comparison with the present case.

There certain expendi- /• ture 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 assesll see company in the development of its trading activities. The House (I) 45 Tax Cases 18. (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) 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. ( ' • •