9911796707
TMI Blog1980 (5) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... here 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 on the border line and, in such cases, as observed by Lord Greene M.R. in IRC v. British Salmson Aero Engines Ltd. [1938] 22 TC 29, 43 (CA), " the spin of a coin would decide the matter almost as satisfactorily as an attempt to find reasons ". 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 defend the trade of its 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 cl. 4 was, as indicated in the opening part of that clause, subject, inter alia, to the provision of cl. 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 up to 72 hours per week. Clause 6(a) enabled the members to be registered as a " 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 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 cl. 6(b) which is very material and it provided, inter alia, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ooms which constituted the profit-making apparatus of the assessee. The claim was disallowed by the ITO but, on appeal, the AAC 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 AAC 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 CIT v. Maheswari Devi Jute Mills Ltd. [1965] 57 ITR 36, 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 asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ITO up to 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 privil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rue 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. 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 member ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of which the expenditure has been incurred. But a few tests formulated by the courts 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 Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, 192 (HL), 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, I think that there is very 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. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the status of a definition. He said: " Fixed capital as what the owner turns to profit by keeping it in his own possession ; circulating capital as what he makes profit of by parting with it and letting it change masters. " Now so 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. [1965] 58 ITR 241 (PC), 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 nevertheless 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, 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 law as in life, and particularly in the field of taxation law, analogies are apt to be deceptive and misleading, but in the present context, the analogy of quota right may not be inappropriate. Take a case where acquisition of raw material is regulated by quota system and in order to obtain more raw material the assessee purchases the 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 mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s expenditure laid out as part of the process of profit earning. It was, to use Lord Sumner'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 ". [John Smith and Son v. Moore [1921] 12 TC 266, 296 (HL)]. 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. [1965] 58 ITR 241 (PC) 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 the 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 closest to the present one that we can find is Nchanga Consolidated Copper Mines'case [1965] 58 ITR 241 (PC). The facts of this case were that three companies which were engaged in the business of copper mining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain 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 antiquated 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 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-company's 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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