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PETITIONER: COMMISSIONER OF INCOME-TAX U.P. LUCKNOW

       Vs.

RESPONDENT: THE MAHESHWARI DEVI JUTE MILLS LTD. KANPUR

DATE OF JUDGMENT: 15/04/1965

BENCH: SHAH, J.C. BENCH: SHAH, J.C. SUBBARAO, K. SIKRI, S.M.

CITATION:  1965 AIR 1974            1965 SCR  (3) 765  CITATOR INFO :  D          1980 SC1946  (6)

ACT: Income-taw--Sale of asset--Capital receipt or income.

HEADNOTE:     To  protect  the interests of its members  against  loss resulting  from over production, the Jute Mills  Association provided that the members shall work their looms for a fixed number  of  hours  and  gave  to  its  members  facility  of transferring  "loom-hours",  that the number  of  hours  for which  the members were entitled to work their factories.  A member of the Association was thereby permitted, in addition to  the  "loom hours" allotted to that member, to  work  its factory  for such "loom hours" as were transferred to it  by another member. The respondent-assessee had transferred  its surplus  "loom hours" which it could not utilize during  the assessment  years,   and received certain sums of  money  as consideration, which the Income-tax Officer included in  the respondent’s total, income liable for payment of income-tax. That   order  was  confirmed  by  the   Appellate   Asistant Commissioner  and  the  Tribunal, but the High  Court  on  a reference, held in favour of the assessee.     In his appeal to this Court, the Commissioner  contended that: The right to work for the allotted number of hours was an  asset of the assessee capable of being transferred,  and where it was a part of the normal activity of the assessee’s business to earn profit by making use of its asset by either employing it in its own manufacturing concern or by  letting it  out to others, the consideration received  for  allowing the  transferee to use that asset was income  received  from business and chargeable to income tax.     HELD:  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.  [770 E]     Distinction  between revenue and capital in the  law  of income-tax  is fundamental. Tax is ordinarily not levied  on capital  profits: it is levied on income. Sale of  stock-in- trade  or circulating capital  or rendering service  in  the course  of  trading results in a trading  receipt;  sale  of assets  which the assessee uses as fixed capital  to  enable

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him  to  carry on his business results in  capital  receipt. The "loom-hours" were the asset of the respondent, but their temporary  user  could not be granted. The  transaction  was therefore  a  sale of "loom-hours", and when  a  businessman disposes of his capital for whatever reason, unless it is  a part  of his circulating capital, the  receipt   is  capital and not income which is taxable. [769 E, F]     Commissioner  of Excess Profits Tax, Bombay City v.  Sri Lakshmi Silk Mills, [1952] S.C.R. 1, distinguished.     Maheshwari Devi Jute Mills v. Commissioner of Income-tax U.P.  I.T.  Misc.  Case, decided  on  13th  September  1962, overruled. 766

JUDGMENT: CIVIL APPELLATE JURISDIVTION: Civil Appeals Nos. 66 and 67 of 1964. Appeals from the judgment and decree March 28, 1961 of the Allahabad  High  Court in Income-tax Reference  No.  165  of 1954. S.V. Gupte, Solicitor-General, R.  Ganapathy lyer and R.N. Sachthey, for the appellant (in both the appeals).    A.V. Viswanatha Sastri, S. Murthy and B.P. Maheshwari, for the respondent (in both the appeals).     The Judgment of the Court was delivered by Shah, J.  The Maheshwari  Devi Jute Mills Ltd. carries on the business  of manufacturing  jute goods and is a member of the Jute  Mills Association.  To protect the members against loss  resulting from overproduction, members of the Association entered into an agreement dated January 9, 1932 called "the First Working Time  Agreement" restricting hours of work.  That  agreement was  to expire on December 11, 1944. With a view to continue the  arrangement,  a fresh agreement was  executed  on  June 12,  1944. The preamble of the agreement was:                  "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               etc   ...................... have   determined               that provisions similar to those contained  in               the  Working Time Agreement should be  entered               into  and  continued  in  manner   hereinafter               appearing".     By  cl.  4  of the agreement,  the  association  imposed restrictions  upon  the hours of work of  its  members.  The number of hours for which the members were entitled to  work their  factories  were  called  "loom-hours".  Allotment  of "loom-hours"  depended  upon  the number of looms  installed in the factory of each member. By cl. 5 it was provided that the  number  of  working  hours per  week  set  out  in  the agreement represented the total number of hours for which  a member  was  entitled to work.its registered  complement  of looms.   Clause  10  prescribed  the  maximum   number    of "loom-hours"  for  a  mill  with  a  complement  of    looms exceeding 220. Clause 13 provided for registration of "loom- hours"  of each member of the association. Clause 6  of  the agreement enabled members to be grouped if they happened  to be under the control of the same managing agents or who were combined by any arrangement or agreement for registration as "Group Mills". It was open to a member of the Group Mills so

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registered  to  utilise the allotment of hours of  work  per week  of other members in the same group who were not  fully utilising the hours of work allowed to them. By sub-cl.  (b) a  member was also entitled to transfer his  surplus  "loom- hours"  to another member and upon such transfer being  duly effected and registered with the Association, the transferee was  entitled,  subject to certain  conditions,  to  utilise "loom-hours" so transferred. 767      The  respondent was under the agreement allotted 220  x 72 hours per week. In the account year corresponding to  the assessment  year  1949-50, the preparatory  section  of  the factory  of the respondent was unable to work the looms  for more  than  48 hours a week, and’ with the sanction  of  the Association the respondent sold 220 x 24 "loom-hours" to the Naskarpara  Jute  Mills and as consideration  of.  the  sale received  Rs. 53,460/-. In  the  account year  corresponding to  the assessment year 1950-51  the   respontdent  received from  the  Birla Jute Mills and Hanuman Jute Mills  a  total amount of Rs. 1,85,230/- for sale of surplus loom-hours.  In proceedings for assessment for the assessment years  1949-50 and  1950-51  the Income-tax Officer included in  the  total income:  of the respondent the amounts received by  sale  of "loom-hours" as revenue receipts liable to tax. The order of the  Income-tax  Officer  was  confirmed  by  the  Appellate Assistant   Commissioner   and  the   Income-tax   Appellate Tribunal. At the instance of  the  respondent, the  Tribunal referred  ’the  following  question to  the  High  Court  of Judicature at Allahabad:                    "Whether   on  the  facts  and   in   the               circumstances of the case the receipts of  the               assessee  by the sale of loom-hours  amounting               to  Rs.  53,460/- and Rs.  1,85,230/-  in  the               assessment    years   1949-50   and    1950-51               respectively  were revenue receipts liable  to               tax under the Indian Income-tax Act?"      The  High Court answered the question in the  negative. The  Commissioner of Income-tax has preferred these  appeals with certificate granted by the High Court under s. 66-A (2) of the Indian Income-tax Act.      The  Tribunal held that the receipts in  question  were not  capital  receipts, nor were they of a  casual  or  non- recurring  nature.  The  plea of  the  respondent  that  the receipts  for sale of loom-hours are not chargeable  to  tax because  they  are,  within the meaning of  s.  4(3)  (vii), casual and non-recurring, has no substance. By el. (3) (vii) of  s.  4 receipts which are not  capital  gains  chargeable according  to  the provisions of s. 12B and  which  are  not arising  from  business  or the exercise  of  a  profession, vocation  or  occupation  or  by  way  of  addition  to  the remuneration of an employee are exempt from tax, if they are of a casual and non-recurring nature.  But a receipt in  the ordinary  course of the  assessee’s  business,  even  though it is casual or non-recurring, is by the express words  used by the Legislature, taxable.      It is not the case of the Department that a business in "loom-hours"  was carried on by the respondent. It  is  also common ground that for imposing restrictions upon the number of working hours, no compensation was paid to the members by the  association  or  by any other body: if  it  were,  such compensation  being paid for agreeing to restraint on  trade would be capital. To protect the 768 interests  of its members the Association provided that  the members shall ,work their looms for a fixed number of  hours

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and  gave  to  its members  facility  of  transferring   the number   of  "loom-hours". But by transferring  "loom-hours" no interest in the looms or the machinery of the factory was being   transferred:   thereby  merely  a  member   of   the Association  was permitted in addition to  the  "loom-hours" allotted to that member to work its factory for such  "loom- hours"  as were transferred to it by another member  of  the Association.  In  the  proceedings  before  the   Income-tax auhorities  the Tribunal and the High Court,  these   "loom- hours" have been regarded as an asset belong to each  member and in considering these appeals we do not think we would be justified  allowing  counsel to raise a contention  (as  was sought to be-done) that "loom-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 agreement 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.     The respondent was unable, on account of inefficiency of its  preparatory section, to supply the  requisite  material for  running the factory for 72 hours per week which it  was entitled  to do. It therefore transferred a fraction of  the "loom’hours"  allotted  to  it  to  other  members  of   the Association and in consideration of the transfer received in the  two  years in question substantial sums of  money.  The Solicitor-General  submitted that where it is a part of  the normal activity of the assessee’s business to earn profit by making  use of its asset by either employing it in  its  own manufacturing  concern  Dr  by letting  it  out  to  others, consideration  received for allowing the transferee  to  use that  asset is income received from business and  chargeable to  income-tax. In support of his contention counsel  relied upon  the judgement of this Court in Commissioner of  Excess Profits, Bombay City v. Shri Lakshmi Silk Mills Ltd.(1).  In Shri Lakshmi Silk Mills Ltd. case the assessee Company was a manufacturing  concern  and  had  for  the  purpose  of  its business installed a plant for dyeing silk yarn. For a  part of the chargeable period the Company could not  secure  silk yarn  and its plant remained idle. The Company then let  out the  plant and the question arose whether rent received   by the  Company was chargeable to excess profits tax as  profit of  the  business  or  was income  from  other  sources  and therefore  not chargeable to excess profits tax. It was held by  this  Court that if a commercial asset is  incapable  of being  used  as such, rent received  by letting  it  out  to others is not income of the business. But an asset  acquired and used’ for the purpose of the business does not cease  to be a commercial asset of that business as soon as it is (1) [1952] S.C.R. 1.20 I.T.R. ,451. 769 temporarily  put out of use or is let out to another  person for   use  in  his  business  or  trade.  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 of the business,  for the  owner  is entitled to exploit it to his best advantage either by using it himself personally or by letting it out to somebody else. What  was  let out in Lakshmi Silk Mills’  case(1)  was  the dyeing  plant which continued to remain the property of  the Company and it was temporarily let out when the assessee was unable to use it. Receipt from a commercial asset when it is capable  of  being used by the assessee but is not  so  used because of circumstances which necessitate lesser of its use would  undoubtedly  be income, where the asset  remains  the

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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 nature be  let out  while retaining property in them, for there can  be  no grant of a temporary right to use "loom-hours". "Loom-hours" are  the asset of the respondent, but temporary user of  the "loom-hours"  cannot  be granted.  The transaction  in  this case is of sale of "loom-hours". There is no doubt that when a  businessman disposes of his capital for whatever  reason, unless it is a part of his circulating  capital, the receipt is capital and not income which is taxable.     Distinction  between revenue and capital in the  law  of income-tax  is fundamental. Tax is ordinarily not levied  on capital profits: it is levied on income. It is  well-settLed that  sale  of  stock-in-trade  or  circulating  capital  or rendering  service  in the course of trading  results  in  a trading  receipt: sale of assets which the assessee uses  as fixed capital to enable him to carry on his business results in capital receipt.     Our attention was invited to a judgment of the Allahabad High  Court in Maheshwari Devi Jute Mills  v.   Commissioner of Income-tax, U.P., Lucknow(2) in which a Division Bench of the  Allahabad  High  Court  answered  a  similar   question relating  to  taxability of payments received  for  sale  of "loom-hours"  by the respondent in an assessment  year  with which  we are not concerned in these appeals. The  Court  in that  case ignoring the view in the judgments  under  appeal held that "loom-hours" did not form the fixed  profit-making structure  of the respondent and it was not correct  to  say that  the  capital structure of the business was  220  looms multiplied  by  the number of hours per week for  which  the machinery (1) [1952] S.C.R. 1; 20 I.T.R,. (2) I.T. Misc. Case No. 177 of 1960 decided on September 13, 1962. 770 was  entitled to work. The "loom-hours" had in the  view  of the  Court nothing to do with the capital structure  of  the business  and there was nothing to show that the  defect  in the  preparatory  section which  rendered  the  "loom-hours" unutilisable  was  permanent.  It was  always  open  to  the respondent  to acquire the necessary yarn from  outside  and thereby  utilise  the  remaining quota  of  "loom-hours"  in manufacturing  jute, and if the respondent preferred not  to procure yarn and chose to sell the surplus "loom-hours"  and thus  ensure profit for itself without incurring  any  risk, the receipt  by disposal of a commercial asset was profit of the business irrespective of the manner in which that  asset was  exploited by the owner of the business. In the view  of the  High Court 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 but  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

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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. The appeals fail  and are dismissed with costs. Appeals dismissed. 771