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TMI Blog1993 (9) TMI 174X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Government to issue, from time to time, directions necessary to control the production of cotton textiles as the situation warranted. And the Government did issue such directions. One of the directions issued related to the pattern and profile of production of cotton and cotton blended yarn. Of relevance to the matter on hand is Notification No. CER/17/79 dated 29-6-1979 issued by the Textile Commissioner, Department of Industrial Development, Ministry of Industry, Government of India. The said Notification, which superseded the earlier Notification of 14-1-1974, stipulated, inter alia, as follows : "2. Every producer of yarn shall pack yarn for civil consumption in hank form in each quarter commencing from the July-September 1979 quarter and in every subsequent quarter in proportion of not less than fifty per cent of total yarn packed by him during each quarter for civil consumption. Provided that not less than eighty-five per cent of the yarn required to be packed in hank form shall be of counts 40s and below." The said Notification was circulated to all member mills by the Southern India Mills' Association, Coimbatore under cover of its Circular No. 165/79, dated 23-7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Even otherwise, the receipts having arisen in the course of the assessee's business, they are of revenue nature. (iii) No comparison can be made between the transfer of loom hours and the transfer of bank yarn obligation. Hence, the decided cases like CIT v. Clive Mills Co. Ltd. [1984] 148 ITR 14 (Cal.) referred to and relied upon by the assessee's counsel cannot apply to the facts of this case. (iv) Whereas the transfer of loom hours was contractual, the transfer of hank yarn obligation is statutory. In view of the foregoing, therefore, the CIT (Appeals) dismissed the assessee's appeals on this issue. 5. It is in these circumstances that the assessee is now before us. Shri N. Quadir Hoseyn, the learned counsel for the assessee, took us through the facts and circumstances of the case and contended that the receipts in question are very much analogous to the receipts occasioned by the transfer of loom hours and hence they are of capital nature. Consequently, the ratios of (i) the Supreme Court case of CIT v. Maheshwari Devi Jute Mills Ltd. [1965] 57 ITR 36 and (ii) the Calcutta case of Clive Mills Co. Ltd. are squarely applicable to the case before us. 6. On her part, Sm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to regulating the pattern and profile of cotton textile production. The said order enabled the Government to regulate, inter alia, production of cotton yarn/cotton blended yarn. It was persuant to the enabling powers vested in Government that Notification No. CER/17/79 of 29-6-1979 came to be issued. The operative part of the said Notification contains a direction to the effect : "Every producer of yarn shall pack yarn for civil consumption in hank form in each quarter commencing from the July-September 1979 quarter and in every subsequent quarter in proportion of not less than fifty per cent of total yarn packed by him during each quarter for civil consumption : Provided that not less than eighty-five per cent of the yarn required to be packed in hank form shall be of counts 40s and below." The effect of the said direction is that a spinning mill producing, say, 100 units of cotton/cotton blended yarn, will be obligated to adhere to the following production pattern : Categories of yarn Form of packing No. of units (i) yarn of counts 40s Hanks 42.5 and below (ii) yarn of counts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-determined consideration to the transferee mills in that regard. From the point of view of the transferor mills, therefore, the consideration or to use the term employed by the assessee before us "hank yarn obligation premium" is clearly a price paid to the transferees, so as to get rid of the onerous obligation of producing yarn of lower counts. They do not mind paying the price, because it is worth their while to do so, in that thereby they are able to prevent erosion of their normal profits arising out of the production of yarn of higher counts. 11. What is the position of the transferee-mills? As pointed out earlier, under the scheme of transfer of hank yarn obligation formulated by the Federation, the transferee mills' own obligation will first be set off against its packing of yarn in hanks for civil consumption and the balance alone will be accounted against the fulfillment of the obligation undertaken by it on behalf of other mill(s). Given the fact that the discharging of hank yarn obligation cuts into the profits of the spinning mills, the transferee mill will suffer erosion of profits in the process of discharging its own hank yarn obligation, and also additionally, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be utilised each week was to cease at the end of that week. In other words, there was no provision for carry forward. There was also the further significant provision that the signatories to the agreement shall be entitled to transfer any part or whole of their allotment of work per week to any one or more of the other signatories; and that such transfer must be registered with the Association and a certificate issued by the Association in respect thereof, and that thereafter the transferee shall be entitled to utilise the allotment of hours of work per week so transferred. This transaction of transfer of hours of work per week was commonly referred to as sale of loom hours by one member to another. The consequence of such transfer was that the loom hours transferred by a member were liable to be deducted from the working hours per week allowed to the transferor and concomitantly the transferee was made entitled to utilise the transferred loom hours in addition to the working hours per week allotted to the transferee under the agreement. The transfer of loom hours was for a consideration. 16. The legal consequences, from the point of view of income-tax, of the transfer of l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 Racecourse Betting Control Board v. Wild [1938] 22 TC 182, 188 (KB), 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 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 or revenue expenditure would have to be determined having regard to the nature of the transaction and other relevant factors. But, more importantly, it may be pointed out that Maheshwari Devi Jute Mills' case proceeded on the basis that loom hours were a cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oceeded 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 predetermined 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 principles." [Emphasis supplied] 19. We may pause here for a moment to highlight the significant fact that even according to the Supreme Court, its decision in the case of Maheshwari Devi Jute Mills Ltd. proceeded on the basis of the common ground between the parties throughout the proceedings that the right to work the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y [1981] 128 ITR 294 the High Court answered the question in the negative and against the Department. 22. As we see it, there is a parallel of sorts between the said Calcutta case of Clive Mills Co. Ltd. and the Supreme Court case of Maheshwari Devi Jute Mills Ltd. In the Supreme Court case the matter proceeded on the basis of the common ground that loom hours were assets. In the Calcutta case the matter proceeded all through on the basis that the sale proceeds of the loom hours sold were capital in nature. As in the Supreme Court case, so in the Calcutta case, the question whether loom hours were an asset at all was examined; nor any argument advanced as to what was the true nature of the transaction. Following the Supreme Court phraseology in Empire Jute Co. Ltd.'s case, we may see that it is quite possible that if the issue had been examined fully on principle and if the question referred to the High Court had been so framed as to bring out the true nature of the receipt in question, the court might have held, as it had done in Dalhousie Jute Co. Ltd.'s case, that sale proceeds of loom hours are revenue receipts. 23. On authority, therefore, the legal position is that the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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