1965 (4) TMI 10 - SC - Income Tax

Whether, on the facts and in the circumstances of the case, the receipts of the assessee by the sale of loom-hours amounting to ₹ 53,460 and ₹ 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? Held that - 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. Appeal dismissed.

Summary

Issues:
Interpretation of tax liability on receipts from the sale of "loom-hours" under the Indian Income-tax Act.

Analysis:
The case involved a dispute regarding the taxability of receipts from the sale of "loom-hours" by a jute mill under the Indian Income-tax Act. The jute mill, a member of the Jute Mills Association, had entered into agreements restricting working hours to prevent over-production. The mill sold surplus "loom-hours" to other mills and received substantial amounts in consideration. The tax authorities treated these receipts as revenue liable to tax. The Tribunal held that the receipts were not capital receipts and were not casual or non-recurring. The High Court, however, ruled in favor of the jute mill, holding the receipts to be capital in nature and not taxable.

The key legal issue revolved around whether the receipts from the sale of "loom-hours" constituted income or capital receipts for tax purposes. The Tribunal argued that since the receipts were part of the normal business activity of the jute mill, they should be considered income. However, the High Court disagreed, emphasizing that the sale of "loom-hours" did not involve the temporary use of an asset but rather the disposal of the asset itself. The court held that the receipts were capital in nature and not taxable as income.

The judgment also referred to a previous decision by the Allahabad High Court on a similar issue, where it was held that "loom-hours" did not form part of the fixed profit-making structure of the business and that selling surplus "loom-hours" constituted exploitation of a capital asset. The Supreme Court disagreed with this view, stating that the sale of "loom-hours" resulted in the disposal of the asset without retaining any interest, making it a capital receipt.

Ultimately, the Supreme Court upheld the decision of the High Court, ruling that the receipts from the sale of "loom-hours" were capital receipts and not taxable as income. The appeals filed by the Commissioner of Income-tax were dismissed, and the jute mill was not liable to pay tax on the amounts received from the sale of "loom-hours."