1973 (8) TMI 31 - HC - Income Tax

Whether on the facts and in the circumstances of case the Tribunal was right in holding that the sum of Rs. 2, 03, 255 paid by the assessee for the purchase of loom hours was revenue expenditure and hence deductible under section 10(2)(xv) of the Indian Income-tax Act 1922 ? - question has to be answered in the negative in favour of the revenue and against the assessee

Issues Involved:
1. Whether the sum of Rs. 2,03,255 paid by the assessee for the purchase of loom hours was revenue expenditure and hence deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Nature of Loom Hours and Their Classification:
The primary issue revolves around whether the expenditure incurred for purchasing loom hours qualifies as revenue expenditure or capital expenditure. The respondent, an assessee-company engaged in jute manufacturing, purchased loom hours from other mills and claimed this expenditure as revenue expenditure deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922.

The Indian Jute Mills Association, of which the assessee is a member, had agreements known as "working time agreements" that regulated the production hours of looms. The agreement in question, executed in 1954, restricted the working hours to 45 hours per week but allowed for the transfer and purchase of loom hours among members.

2. Tribunal's Findings:
The Tribunal held that the expenditure on loom hours was revenue in nature, considering the following:
- The loom hours purchased were for short periods (about six months to a year).
- The benefit of the loom hours exhausted within the year.
- The purchase was akin to a pooling arrangement, allowing one mill to work extra hours by compensating another mill.
- The right to work extra hours was a temporary advantage.
- The benefit was related to circulating capital and influenced the output and cost of production.
- The expenditure was an operating cost and entered into the profit and loss account.

3. Revenue's Argument:
The revenue contended that the Tribunal's decision was erroneous and contrary to the Supreme Court's decision in Commissioner of Income-tax v. Maheshwari Devi Jute Mills Ltd., which held that loom hours were capital assets. The revenue argued:
- The transaction conferred an additional right to produce more, which was a capital asset.
- The character of loom hours remained the same, whether in the hands of the seller or the buyer.
- The loom hours were part of the profit-making structure and hence capital in nature.

4. Assessee's Argument:
The assessee argued that the Supreme Court's decision did not conclude the question as it proceeded on the assumption that loom hours were capital assets. The assessee contended:
- The loom hours purchased were unrelated to the number of looms owned.
- The hours purchased were turned over for carrying on business to earn profits.
- The expenditure was similar to paying overtime to staff for extra work.
- The payment was for operating the profit-earning apparatus, not for acquiring a new asset.

5. High Court's Analysis:
The High Court examined the nature of the transaction and the agreement. It noted:
- The Supreme Court in Maheshwari Devi Jute Mills Ltd. held that loom hours were capital assets and the sum received from their sale was capital receipt.
- The nature and character of loom hours remained unchanged when transferred from one mill to another.
- The payment for loom hours was for acquiring a part of the profit-making structure, making it capital expenditure.

6. Conclusion:
The High Court concluded that the Tribunal failed to appreciate the Supreme Court's decision correctly. It held that the expenditure on loom hours was capital in nature and not deductible as revenue expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. The question was answered in the negative, in favor of the revenue and against the assessee. Each party was ordered to bear its own costs.

← Previous Next →