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PETITIONER: EMPIRE JUTE CO. LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX

DATE OF JUDGMENT09/05/1980

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

CITATION:  1980 AIR 1946            1980 SCR  (3)1370  1980 SCC  (4)  25  CITATOR INFO :  E          1981 SC 395  (3)  RF         1987 SC 798  (11)  R          1989 SC1913  (14)  F          1991 SC 227  (12)

ACT:      Allowing deduction  under section  10(2)  (xv)  of  the Income Tax  Act-Revenue expenditure and Capital expenditure- Member of  the Jute Mill Association entering into a working time agreement  restricting the  number of working 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 and  another amongst a particular group 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.

HEADNOTE:      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 demand 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 restricting  the number  of working hours  per  week,  for  which  the  mills  shall  be entitled to  work  their  looms.  The  fourth  working  time Agreement was  entered  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 the fourth working time Agreement no signatory shall  work 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 alia to the provision  of clause (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 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

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"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 Mills so  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 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 (J  prescribed three  other  conditions precedent subject  to which  the allotment  of hours of work transferred by  one member  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 with an explanation to the Committee  and Committee’s  decision .  . .  whether the transfer shall  be allowed shall be final and conclusive and (ii) If  the Committee sanctions the transfer, it shall be a condition precedent to its utilisation that a certificate be issued and  the transfer  registered.  This  transaction  of transfer of allotment of hours of work per week was commonly referred to as sale of looms hours by one member to another. The consequence of such 1371 transfer was  that the hours of work per week transferred by a member  were 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 such transfer was made entitled  to utilise  the number  of working  hours per week transferred 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  August 1958 to 31st July 1959. In 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  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  Income  Tax officer, but on appeal, the Appellate Assistant Commissioner 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 of 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, and, having lost before it, carried the matter  before the  High Court  by a reference. The High Court, following  the  decision  of  the  Supreme  Court  in Commissioner of  Income Tax  v. Maheshwari  Devi Jute  Mills Ltd., [1966]  57 ITR  36 held  that the  amount paid  by the assessee for purchase of the loom hours was in the nature of capital expenditure  and was  therefore not deductible under section 10(2)  (xv) of  the Income Tax Act. Hence the appeal by assessee by special leave.      Allowing the appeal, the Court ^      HELD: 1.  An expenditure  incurred by  an assessee  can qualify for  deduction under section 10(2)(xv) only if it is incurred wholly  and exclusively  for  the  purpose  of  his business, but  even if  it fulfills  this requirement, it is nob enough;  it must  further be of revenue as distinguished from capital nature

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    2. Maheshwari Devi Jute Mills’ case was a converse case where the  question was  whether an  amount received  by the assessee for  sale of loom hours was m the nature of capital receipt or  revenue receipt  and the  Supreme Court took the view that  it was in the nature of capital receipt and hence not taxable.  The decision  in Maheshwari  Devi Jute  Mills’ case cannot  on this account be regarded as an authority for the  proposition  that  payment  made  by  an  assessee  for purchase of loom hours would be capital expenditure, because it is  not a  universally true  proposition that what may be capital receipt  in the  hands 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  a recipient is not material in determining whether the  payment is  revenue or capital disbursement qua the payer.  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. [1378 G-H, 1379 A-D] H      Race Course Betting Control Board v. Wild, 22 Tax Cases 182. quoted with approval. 1372      3. Again, Maheshwari Devi Jute Mills’ Case proceeded on the accepted  basis that loom hours were a capital asset and the only  issue  debated  was  whether  the  transaction  in question constituted  sale of  this asset  or it represented exploitation of  the asset by permitting its user by another while retaining ownership. No question was raised before the Court as  to whether tho loom hours were an asset at all nor was any  argument advanced as to what was the true nature of the transaction.  This question is res integra and therefore this decision  cannot be  regarded as  an authority  for the proposition that  The amount paid for purchase of loom hours was capital and not revenue expenditure. [1379 E, 1380 F]      4. 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 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. 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 still 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 looms 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 mill to another for a period of not less than six months and if such transfer was approved and registered by the Committee of the Association,  the  transferee  mill  would  be  entitled  to

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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 could cease to be entitled to avail of the number of working hours per  week so  transferred and those 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 relating the restriction on the operation  of looms  to the  extent  of  the  number  of working hours  per week  transferred  to  it,  so  that  the transferer mill  could work  its looms for longer hours than permitted under  the working  time agreement and increase is profitability. The  amount spent  on purchase of looms hours thus represented  consideration paid  for being able to work the looms for a longer number of hours. Such payment for the purchase of  loom hours cannot be regarded as expenditure on capital account. [1380 F-H, 1381 A-E]      6. The  decided cases  have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is amount 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 1373 Operation in  respect of  which  the  expenditure  has  been incurred. Two of these tests are:      (a) The  test of  enduring  benefit  as  laid  down  in British Insulated  and .  Helsby Cables Ltd. v. Atherton, 10 Tax Cases  155. Even  this test  must yield  were there  are special circumstances  leading to  a contrary decision There may  be  cases  where  expenditure,  even  if  incurred  for obtaining advantage of enduring benefit, may, none-the-less, be on  revenue account  and the  test one during benefit may break down.  It is  not every  advantage of  enduring nature acquired by  an assesses  that brings  the case  within  the principle laid  down in  this  test.  What  is  material  to consider is  the nature  of the  advantage in  a  commercial sense. that it is only where the advantage is in the capital field that  the  expenditure  would  be  disavowable  on  an application of  this test.  If the advantage consists merely in  facilitating   the  assesses’s   trading  operations  or enabling  the  management  and  conduct  of  the  assesses’s business  to   be  carried   on  more  efficiently  or  more profitably while  leaving the  filed capital  untouched. the expenditure would  be on  revenue account,  even though  tho advantage may  endure for  an indefinite future. The test of enduring benefit  in therefore  not a  certain or conclusive test and  it cannot  be  applied  blindly  and  mechanically without regard to the particular facts and circumstances off a given case. [1381 E-G, 1382 A-E]      commissioner of  Taxes v.  Nchanga Consolidated  Copper Mines Ltd., [1965] 58 ITR 241 followed.      (b) The  test based  on distinction  between fixed  and circulating capital  as applied  in John  Smith and  Sons v. Moore, 12  Tax Cases,  266. So  long as  tho 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, 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. Moreover, there may be cases

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where expenditure  though referable to or in connection with fixed  capital   is  nevertheless   allowable   as   revenue expenditure  e.g.  expenditure  incurred  in  preserving  or maintaining capital  assets. This  test is therefore clearly not one of universal application. [1383 A-D]      Commissioner of  Taxes v.  Nchanga Consolidated  Copper Mines LTD [1965]58 ITR 241; followed.      6.  It  is  true  that  if  disbursement  is  made  for acquisition of  a source  of  profit  or  income,  it  would ordinarily be  in the  nature of  capital expenditure But it cannot be  said  in  the  present  case  that  the  assesses acquired a  source d profit or income when it purchased loom hours. The  source of profit or income was the profit making apparatus and  this remained  untouched and unaltered, There was no  enlargement of  the permanent structure of which the income would  be the  produce or  fruit. What  the  assesses acquired wag  merely an  advantage in the nature of relation of restriction  on working hours imposed by the working time agreement, so  that the  assesses could  operate its  profit earning structure  for a longer number of hours. Undoubtedly the profit earn- 1374 ing structure  of the  assesses 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  assesses.  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. [1384 A-D]      7. When  dealing  with  cases  where  the  question  is whether expenditure  incurred by  an assesses  is capital or revenue expenditure,  the question  must be  viewed  in  the larger context  of business  necessity or expediency. If the outgoing expenditure is so related to the carrying on or the conduct of  the business  that it  may  be  regarded  as  an internal part  of the  profit-earning process  and  not  for acquisition of an asset or a right of a permanent character. the possession of which is a condition of the carrying on of the business,  the expenditure  may be  regarded as  revenue expenditure. [1384 H, 1385 A-C      Nelletroms’  Property   Ltd.  v.   Federal  Commr.   Of Taxation, 72 CLR 634; Robert Addis & Sons Collieries Ltd. v. Inland Revenue 8 Tax Case, 671 quoted with approval.      Bombay Steam  Navigation Co. P. Ltd. v. Commissioner of Income Tax, [1953] 55 ITR 52; followed.      9. In the instant case      (a) the  payment made  by the assesses for the purchase of loom  hours was  expenditure laid  out  as  part  of  the process of profit earning. It was an outlay of a business in order to  carry it  on and to earn profit out of the expense as an  expense of carrying it on. It was part of the cost of operating the  profit earning  apparatus and  was clearly in the nature of revenue expenditure; and [1385 D-E      (b) the  payment of Rs. 2,03,255/- made by the assesses for purchase  of loom  hours represented Revenue expenditure and was allowable as a deduction under section 10(2) (xv) of the Income Tax Act. [1387 C-D]      Commissioner  of  Income  Tax  v  Nchanga  Consolidated Copper Mines  ltd.. [1965] 58 ITR 241; Commissioner of Taxes v. Curron Company 45 Tax Cases 18; followed.

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JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil  Appeal No.  1 197 (NT) of 1974.      Appeal by  Special Leave  from the  Judgment and  order dated 3-8-1973  of the  Calcutta High  Court in  Income  Tax Reference No. 109 of 1968.      D. Pal,  T. A.  Ramachandran &  D.  N.  Gupta  for  the Appellant.      S. T.  Desai, B.  B. Ahuja & Miss A. Subhashini for the Respondent. 1375      The Judgment of the Court was delivered by      BHAGWATI, J.-This  appeal by  special leave  raises the vexed question  whether a particular expenditure incurred by the assessee  is of capital or revenue nature. This question has always  presented a  difficult problem  and  continually baffled the  courts,  because  it  has  not  been  possible, despite occasional  judicial valour, to formulate a test for distinguishing between capital and revenue expenditure which will provide  an infallible  answer in all situations. There have been  numerous decisions  where this  question has been debated but  it is  not possible  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 in  the border  line and in such cases, as observed by  Lord M.  R. in Inland Revenue v. British Salmon Ero Engines  Ltd.(1) "the  spin of  coin  would  decide  The matter almost  as  satisfactorily  as  an  attempt  to  find persons." 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 objects of the Association, inter alia, are (i) to protect, forward and defeat the trade of members; (ii) to impose restrictive  conditions on  the conduct of the trade; and (iii)  to adjust  the production  of the  Mills  in  the membership of  the Association  to the  demand of  the world market. It  appears that right from 1939, the demand of jute in the  world market  was rather  lean and  with a  view  to adjusting the  production of  the mills to the demand in the world market,  a working  time agreement  was  entered  into between the  members  of  the  Association  restricting  the number of  working hours per week, for which the mills shall be entitled  to work  their looms.  The first  working  time agreement was  entered into  on 9th  January 1939 and it was for a  duration of  five years  and on  its expiration,  the second and  thereafter the  third working  time  agreements, each for  a period  of five  years and  in .  more  or  less similar terms, were entered into on 12th June, 1944 and 25th November 1949 respectively. The third working time agreement was about to expire on 11th December, 1954 and since it 1376

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was felt  that the  necessity  to  restrict  the  number  of working hours  per week  still continued,  a fourth  working time agreement  was entered  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. We are concerned  in this  appeal with  the fourth working time agreement and  since the  decision of the controversy before us turns  upon the  interpretation of  its true  nature  and effect, we shall refer to some of its relevant provisions.      The first  clause of  the fourth working time agreement (hereinafter referred to as the "working time agreement") to which we  must refer  is clause  (4)  which  provided  that, subject to  the provisions  of clauses  11 and 12, "..... no signatory shall  work more than forty five hours of work per week and  such restriction  of hours  of work 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)." Clause  (5) then  proceeded to explain that  the number of working hours per week mentioned in the  working time  agreement represented  the  extent  of hours to which signatories were in all entitled in each week to work  their registered  complement of looms as determined under clause  (13) on  the basis  that they  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 clause (4) was,  as indicated  in the  opening part of that clause, subject inter alia to the provision of clause (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 upto 72 hours per week. Clause  6(a) enabled  members to  be registered  as  a "Group of  Mills" if the 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 not fully  utilising the  hours of  work allowable  to  them under  the   working  time  agreement,  provided  that  such transfer of  hours of work was for a period of not less than six months. Then followed clause 6(b) which is very material and it provided, inter alia, as follows:-           "Subject to the provisions of sub-clauses (i) to      (iv)... signatories to this agreement shall be entitled      to transfer in 1377      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  allotment  of      working hours has been transferred shall be entitled to      utilise the  allotment of  hours of  work per  week  so      transferred." There were  four conditions  precedent subject  to which the allotment of  hours of  work transferred  by one  member  to another could  be utilised  by the  latter and those of them were as under:           "(1) No  hours of work shall be transferred unless

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              The transfer  covers hours  of work  per week                for a period of not less than six months;           (ii)  All  agreements  to  transfer  shall,  as  a                condition  precedent   to  any  rights  being                obtained by transferees, be submitted with an                explanation  to   the   Committee   and   the                Committee’s decision..  whether the  transfer                shall  be   allowed  shall   be   final   and                conclusive.            (iii) If the Committee sanctions the transfer, it                shall  be   a  condition   precedent  to  its                utilisation that  a certificate be issued and                the transfer registered." This, transaction  of transfer of allotment of hours of work per week  was commonly referred to as sale of looms hours by one member  to another. The consequence of such transfer was that the hours of work per week transferred by a member were 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  such  transfer  was  made  was entitled to  utilise the  number of  working hours  per week transferred to him in addition to the working hours per week allowed to  him under  the working  time agreement.  It  was under this  clause that  the assessee  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  August 1958 to 31st  July  1959.  In  the  course  of  assessment  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  Rs. 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 Income-tax officer but on appeal, the 1378 Appellate Assistant  Commissioner  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 Appellate Assistant Commissioner, 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  the  same  view  as  the Tribunal, but  it felt  compelled by  the decision  of  this Court in  Commissioner of Income Tax v. Maheshwari Devi Jute Mills Ltd.(’) to decide in favour of the Revenue and on that view it  overturned the  decision of  the Tribunal  and held that the  amount paid  by the  assessee for  purchase of the loom hours was in the nature of capital expenditure and was, therefore, not  deductible under  section 10(2)  (xv) of the Act. The  assessee thereupon preferred the present appeal by special leave obtained from this Court.      Now an  expenditure incurred by an assessee can qualify for deduction  under  section  10(2)  (xv)  only  if  it  is incurred wholly  and exclusively  for  the  purpose  of  his business, but even if it fulfils this requirement, it is not enough; it  must further be of revenue as distinguished from

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capital  nature.  Here  in  the  present  case  it  was  not contended on  behalf of  the Revenue  that the  sum  of  Rs. 2,03,255/- was  not laid  out wholly and exclusively for the purpose of the assessee’s business but the only argument was and this  argument found favour with the High Court, that it represented capital expenditure and was hence not deductible under section  10(2)(xv). The  sole question which therefore arises for determination in the appeal is whether the sum of Rs. 2,03,255/-  paid by  the  assessee  represented  capital expenditure or revenue expenditure. We shall have to examine this question  on principle  but before  we do  so, we  must refer to  the decision of this Court in Maheshwari Devi Jute Mills case  (supra) since that is the decision which weighed heavily with  the  High  Court  in  fact,  compelled  it  to negative the  claim of the assessed and held the expenditure to be on capital account. That was a converse case where the question was whether an amount received by the  assessee for sale of  loom hours  was in the nature of capital receipt or revenue receipt.  The view  taken by  this Court was that it was in the. 1379 nature of  capital receipt  and hence  not taxable.  It  was contended on  A behalf  of  the  Revenue,  relying  on  this decision, that  just as the amount realised for sale of loom hours was  held to  be capital  receipt, so  also the amount paid for  purchase of  loom hours  must be  held  to  be  of capital nature.  But this  argument suffers  from  a  double fallacy.      In the  first  place  it  is  not  a  universally  true proposition that  what may be a capital receipt in the hands 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 Race Course Betting Control  Board v.  Wild(’) 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  (supra) 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 would have to be determined having regard to  the nature of the trans action and other relevant factors.      But, more  importantly, it  may  be  pointed  out  that Maheshwari Devi  Jute Mills’  case (supra)  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 the stage of the Income-  tax officer upto the High Court, that the right to work  the looms  for the  allotted hours  of work  was an asset capable  of being transferred and this 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. Since  it  was  a  commonly accepted  basis  that  loom  hours  were  an  asset  or  the assessee, the  only argument  which  could  be  advanced  on behalf of the Revenue 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 merely 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

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business. The  Revenue submitted that "where it is a part of the normal  activity of  the  assessee’s  business  to  earn profit by  king use  of its  asset by either employing it in its own  manufacturing concern  or  by  letting  it  out  to others, consideration  received for  allowing the transferee to use that asset is income received from busi- 1380 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 himself personally or by letting  it out  to somebody  else." This  principle, sup ported as  it was by numerous decisions, was accepted by the court 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 asset, they could not from their very nature  be let out while retaining property in them and there could  be no grant of temporary right to use them. The court therefore  concluded that  this was  really a  case of sale of  loom hours and not of exploitation of loom hours by permitting  user  while  retaining  ownership  and,  in  the circumstances, 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  accepted 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  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 pre-determined 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 principle.      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 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. 1381 The allotment  of working  hours per  week under the working time k  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

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as an  asset of  such mill. This restriction necessarily had the effect  of limiting  the  production  of  the  mill  and consequently 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 mill to another for a period of not less than six months and if  such transfer  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 transfer of  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 deduced  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  permitted under  the working  time agreement and increase its  profitability. The amount 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 how 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 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  court 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(1) 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 1382 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  by  Lord  Radcliffe  in Commissioner of  Taxes v. Nechanga Consolidated Copper Mines Ltd.,(1) it  would be  misleading to  suppose  that  in  all cases, securing  a benefit  for the  business would be prima facie capital  expenditure "so long as the benefit is not so transitory as  to have  no endurance  at all."  There may be cases where  expenditure, even  if  incurred  for  obtaining advantage of  enduring benefit,  may, none-the-less,  be  on revenue account  and the  test of enduring benefit may break down. lt  is not every advantage of enduring nature acquired by an  assessee that  brings the  case within  the principle laid down  in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the  advantage  is  in  the  capital  field  that  the expenditure would  be disallowable on an application of this test. If  the advantage  consists merely in facilitating the assessee’s trading operations or enabling the management and

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conduct of  the assesse’s  business to  be carried  on  more efficiently or  more  profitably  while  leaving  the  fixed capital untouched,  the  expenditure  would  be  on  revenue account,  even  though  the  advantage  may  endure  for  an indefinite future. The test of enduring benefit is therefore not a  certain or  conclusive test  and it cannot be applied blindly and  mechanically without  regard to  the particular facts and  circumstances of  a given  case. But even if this test were  applied in  the present case, it does not yield a conclusion in  favour of  the Revenue.  Here, by purchase of loom hours  no new  asset has  been  created.  There  is  no addition to  or expansion  of the profit making apparatus of the assessee. The income earning machine remains what it was prior to  the purchase of loom hours. The assessee is merely enabled to  operate the profit making structure for a longer number of  hours. And  this advantage  is clearly  not of an enduring nature. It is limited in its duration to six months and,  moreover,   the  additional  working  hours  per  week transferred to  the assessee  have to be utilised during the week. and cannot be carried forward to the next week. It is, therefore,  not  possible  to  say  that  any  advantage  of enduring benefit  in the  capital field  was acquired by the assessee in  purchasing loom  hours and the test of enduring benefit cannot help the Revenue.      Another test which is often applied is the one based on distinction between fixed and circulating capital. This test was applied by 1383 Lord Haldane  in the  leading case  of John  Smith &  Son v. Moore(1)   where the  learned law  Lord draw the distinction between fixed capital and circulating capital in words which have almost  acquired the  status of  a definition. He said: "Fixed capital  (is) what  the  owner  turns  to  profit  by keeping it  in his  own possession; circulating capital (is) what he  makes profit  of by  parting with it and letting it change masters."  Now as 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. (supra),  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.   Moreover,  there   may  be   cases   where expenditure, though referable to or in connection with fixed capital,  is   never-  the   less   allowable   as   revenue expenditure. An illustrative example would be of expenditure incurred in  preserving or  maintaining capital assets. This test is  therefore clearly not one of universal application. But even  if we  were to  apply this  test, it  would not be possible to  characterise the  amount paid  for purchase  of loom hours  as capital  expenditure, because  acquisition of additional loom  hours does  not add  at all  to  the  fixed capital of  the assessee.  The permanent  structure of which the income  is to  be the produce or fruit remains the same; it is  not enlarged.  We are not sure whether loom hours can be regarded  as part of circulating capital like labour, raw material, power etc., but it is clear beyond doubt that they are not part of fixed capital and hence even the application of this test does not compel the conclusion that the payment for purchase  of loom  hours was  in the  nature of  capital expenditure.

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    The Revenue  however contended that by purchase of loom hours the  assessee acquired  a right  to produce  more than what it  otherwise would  have been  entitled to do and this right to  produce additional  quantity of  goods constituted addition  to   or  augmentation  of  its  profit  (’  making structure. The  assessee acquired  the right  to  produce  a larger quantity  of goods  and to earn more income and this, according to  the Revenue,  amounted  to  acquisition  of  a source of  profit or  income  which  though  intangible  was never-the-less a  source or  ’spinner’  of  income  and  the amount spent  on purchase of this source of profit or income therefore represented  expenditure of capital nature. Now it is 1384 true that  if disbursement  is made  for  acquisition  of  a source of  profit or  income, it  would ordinarily,  in  the absence of any other countervailing circumstances, be in the nature of capital expenditure. But we fail to see how it can at all  be said  in  the  present  case  that  the  assessee acquired a source of profit or income when it purchased loom hours. The  source of profit or income was the profit making apparatus and  this remained  untouched and unaltered. There was no  enlargement of  the permanent structure of which the income would  be the  produce or  fruit. What  the  assessee acquired was  merely an  advantage in the nature of relation of restriction  on working hours imposed 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  laws in  life,  and particularly in the field of taxation law, analogies-are apt to be  deceptive and misleading, but in the present content, the analogy  of quota  right may  not be appropriate. Take a case where acquisition of raw material is regulated by quota system and  in  order  to  obtain  more  raw  material,  the assessee purchases quota right of another. Now it is obvious that by  purchase of such quota right, the assessee would be able to  acquire more  raw material  and that would increase the profitability  of his  profit making  apparatus, but the amount  paid   for  purchase   of  such  quota  right  would indubitably be revenue expenditure, since it is incurred for acquiring raw  material and  is part  of the operating cost. Similarly, if payment has to be made for securing additional power every  week, such  payment would  also be  part of the cost of  operating the  profit making structure and hence in the nature of revenue expenditure, even though the effect of acquiring  additional   power  would   be  to   augment  the productivity of  the profit-making  structure. On  the  same analogy payment  made for purchase of loom hours which would enable the  assessee to  operate the profit-making structure for a  longer number of hours than those permitted under the working time  agreement would  also be  part of  the cost of performing the income earning options I and hence revenue in character.      When dealing with cases of this kind where the question

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is whether expenditure incurred by an assessee is capital or revenue expenditure, 1385 it is  necessary to  bear in  mind what  Dixon, J.  said  in Hallstrom’s Property  Limited  v.  Federal  Commissioner  of Taxation(1): "What  is an outgoing of capital and what is an outgoing  on   account  of   revenue  depends  on  what  the expenditure is  calculated to  effect from  a practical  and business  point   of  view  rather  than  upon  the  justice classification  of   the  legal  rights,  if  any,  secured, employed or  exhausted in the process." The question must be viewed in  the  larger  context  of  business  necessity  or expediency. If  the outgoing  expenditure. is  so related to the carrying  on or  the conduct of the business that it may be regarded  as  an  integral  part  of  the  profit-earning process and  not for acquisition of an asset or a right of a permanent character,  the possession of which is a condition of the  carrying on  of the business, the expenditure may be regarded as revenue expenditure. See Bombay Steam Navigation Co. (1953)  Pvt. Ltd.  v. Commissioner  of Income-tax(2) The same test  was formulated’  by Lord  Clyde in Robert Addze & Son’s Collieries  Ltd. v.  Inland Revenue(3) in these words: "Is it  part  of  the  company’s  working  expenses,  is  it expenditure laid  out as  part  of  the  process  of  profit earning ?  or, on the other hand, is it a capital outlay, is it expenditure  necessary for the acquisition of property or of rights of 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  Soumnar’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."  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  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  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 of the line  and must  therefore be decided in the same manner. If we  apply this method, the case closes to the present one that we  can find  is Nchanga Consolidated Copper Mines case (supra). The  facts of  this case  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 1386 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  effect to  this cut,  company should cease production  for one year and that the assesses company and company  R should undertake between them the whole group programme for  the year  reduced by the overall cut of 27000 tons  and   should  pay  compensation  to  company  for  the abandonment of its production for the year. Pursuant to this agreement the assessee paid to company  1,384,565 by way 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

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that the  compensation paid  by the  assessee to  company in consideration of the latter agreeing to 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 "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  for acquiring an advantage by way of entitlement to produce more goods notwithstanding  the cut of 80 percent was regarded by the  Privy  Council  as  revenue  expenditure,  a  fortiori; 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 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  commissioner  of  Taxes  v.  Carron Company(1) 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 anti- quoted 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 1387 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 companies  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  his  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 revenue  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, would also be in the nature of revenue expenditure.      We are  therefore of  the view  that the payment of Rs. 2,03,255/- made  by the  assessee for purchase of loom hours represented revenue  expenditure  and  was  allowable  as  a deduction  under   section  10  (2)  (xv)  of  the  Act.  We accordingly  allow   the  appeal  and  answer  the  question referred by  the Tribunal  in  favour  of  the  assesse  and against the  Revenue. The  Revenue will  pay to the assessee costs throughout. S.R.                                         Appeal allowed. 1388

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