Commissioner of Income-tax U.P. Lucknow v. the Maheshwari Devi Jute Mills Ltd. Kanpur
Shah, J. The Maheshwari Devi Jute Mills Ltd. carries on the
business of manufacturing jute goods and is a member oi the Jute
Mills Association. To protect the members against loss resulting C
from overproduction, members of the Association entered into an
agreement dated January 9, 1932 called "the First Working Time
Agreement" restricting hours of work. That agreement ·was to
expire on December 11, 1944. With a view to continue the arrange
ment, a fresh agreement was d.ecuted on June 12, 1944. The
preamble of the agreement was: D
"Whereas the signatories generally as a consequence of
over-production having been put to considerable losses
and in general interests of the Members and their emp
loyees and of the association and the jute industry and
trade in general etc ...................... have determined E
that provisions similar to those contained in the Work-
ing Time Agreement should be ·entered into and con
tinued in manner hereinafter appearing".
By cl. 4 of the agreement, the association imposed restrictions
upon the hours of work of its members. The number of hours for
which the members were entitled \o work their factories were called F
"loom-hours". Allotment of "loom-hours" depended upon the
number of looms installed in the factory of each member. By cl.
5 it was' provided that the number of working hours per week set
out in the agreement represented the total number 'Of hours for
which a member was entitled to work its registered complement of
looms. Clause 10 prescribed the maximum number of "loom- G
hours" for a mill with a complement of looms .exceeding 220.
Clause 13 provided for registration of "loom-hours" of each mem-
ber of the association. Clause 6 of the agreement enabled members
to be grouped if they happened to be under the control of the same
ma:naging agents or who were combined by any arrangement or
agreement for registration as ~'Group Mills". It was open to a mem- H
ber of the Group Mills so registered te utilise the allotment of hours
of work per week of other members in the same group who wern not
fully utilising the hours of work allowed to them. By sub-cl. lbl a
member was also entitled to transfer his surplus "loom-hours" to
another member and upon suc,h transfer being duly effected and re
gistered with the Association; the transferee was entitled. subject
to certain conditi011s. to utilise "loom-hours" so 'transferred.
I
1
(',J,T. 1'. MAHRSHWARI Mn,1,s (Shah, J.)
The respondent was under the agreement allotted 220 x 7l
hours per week. In the account year corresponding to the assess
ment yeu 1949-50, the preparatory section ·of the factory of the
respondent was unable to work the looms for more than 48 hours
a week, and with the sanction of the Association the respondent
sold 220 x 24 "loom-hours" to the Nasl:.arpara Jute Mills and as
consideration of the sale received Rs. 53,460/-. In the account
year corresponding to the assessment year 1950-51 the respon
dent received from the Birla Jute Mills and Hanuman Jute Mills
a total amount of Rs. 1,85,230/- for sale of surplus loom-hours.
In proceedings for assessment for the assessment years 1949-50
and 1950-51 the Income-tax Officer included in lhc total income
of the respondent the amounts received by sale of "loom-hours"
as revenue receipts liable to tax. The order of the Income-tax Offi
cer was confirmed by the Appellate Assistant Cornmi,;sioner and.
the Income-lax Appellate Tribunal. At the instance of the res
pondent, the Tribunal referred the following questicrn to the High
Court of Judicature at Allahabad:
"Whether on the facts and in the circumstances of lhe case
lhe receipts of the assessee by the ,.ale of loom-hours
amountin~ to Rs. 53,460/- anJ Rs. 1,85,230 I- in the
assessme11t years 1949-50 and 1950-51 respectively
were revenue receipts liable to tax under ihc Indian
Income-tax Act?"
The High Court answered the question in the negative. The
Commissioner of Income-tax has preferred these appeals with cer
tificate granted by the High Court under s. 66-A (2) of the Indian
l ncome-tax Act.
The Tribunal held that the receipts in question were not ca
pital receipts, nor were they of a casual or non-recurring nature.
The plea of the respondent that the receipts for sale of loom-hours
arc not chargeable to tax because they arc, within the meaning of
s. 4(3) (vii), casual and non-recurring, hlIS no substance. By cl. (3)
(vii) of s. 4 receipts which are not capital gains chargeable accord
ing to the provisions of s. I 2B and whi~h are not arising from busi
ness or the exercise of a profession, vocation or occupation or by
way of addition to the remuneration of an employee are exempt
from tax, if they are of a casual and non-recurring nature. But a
receipt in the ordinary course of the assessee's business, even
ll though it is casual br non-recurring. is by the express words used
by the Legislature, taxable.
It is not the case of the Department that a business in "loom
hours" was carried on by the respondent. It is also common ground
that for imposing restrictions upon the number of working hours.
no compensation was paid to the . .1bcrs by the association or
by any other body: if it were, such compeasation being paid for
agreeing to restraint on trade would be capital. To protect the
768 SUPREME COURT RBl'ORTS [1965] 3 s.c.n.
interests of its members the Association provided that the mem· A
bers shall work their looms for a fixed number of hours and gave
to its members facility of transferring the number of "loom
hours". But by transferring "loom-hours" no interest in the looms
or the machinery of the factory was being transferred: thereby
merely a member of the Association was permitted in addition to
the "loom-hours" allotted to that member to work its factory for B
such "loom-hours" as were transferred to it by another member
of the Association. In the proceedings before the Income-tax au
thorities, the Tribunal and the High Court, these "loom-hours"
have been regarded as an asset belong to each member and in con
sidering these appeals we do not think we would be justified C
in allowing counsel to raise a contention (as was sought to
be done) that "loom-hours" were in the nature of a privilege and
were not an asset at all. The case has at all earlier stages been con
sidered on the footing that by virtue of the covenant incorporat-
ed in the agreement between the members of the Association, the
right to work for the allotted number of hours was an asset capable
of being transferred, subject to the sanction of the Association. D
The respondent was unable. on account of inefficiency of its
preparatory section, to supply the requisite material for running
the factory for 72 hours per week which it was entitled to do. It
therefore transferred a fraction of the "loom-hours" allotted to it E
to other members of the Association and in consideration of the
transfer received in the two years in question substantial sums of
money. The Solicitor-General submitted that where it is a part of
the normal activity of the assessee's business to earn profit by
making use of its asset by either employing it in its own manu
facturing concern or by Jetting it out to others, consideration re- F
cehed for allowing the transferee to use that asset is income re
ceived from business and chargeable to income-tax. In support of
his contention counsel relied upon the judgement of this Court in
Commissioner of Excess Profits, Bombay City v. Shri Lakshmi
Silk Mills Ltd.('). In Shri Lakshmi Silk Mills Ltd. case the
assessee Company was a manufacturing concern and had for the G
purpose of its business installed a plant for dyeing silk yarn. For
a part of the chargeable period the Company could not secure
silk yarn .and its plant remained idle. The Company then let out
the plant and the question arose whether rent received by the
Company was chargeable to excess profits tax as profit of the
business or was income from other sources and therefore not B
chargeable to excess profits tax. It was held by this . Court that if
a commercial asset is incapable of being used as such, rent receiv-
ed by letting it out to others is not income ·of the business. But an
asset acquired and used for the. purpose of the business does not
cease to be a commercial asset of that business as soon · as it is
(') ri902] S.C.R. l: 20 I.T.R. <151.
C.I.T. V, MAHESHWARI MILLS(Shah, J.) 769
A temporarily put out of use or is let out to another person for use
in his business or trade. Receipt by the exploitation of a commer
cial asset is the profit of the business, irrespective of the manner
in which the asset is exploited by the owner of' 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.
B What was let out in Lakshmi Silk Mills' case(') was the dyeing
plant which continued to remain the property of the Company
and it was temporarily let out when the assessee was unable to
use it. Receipt from a commercial asset when it is capable of being
used by the assessee but is not so used because of circumstances
which necessitate cesser of its use would undoubtedly be income,
0 where the asset remains the property of the assessee and user of the
asset is given to another person. If in the present case, for the hours
which the respondent was unable to use itS looms the respondent
had permitted some other person to work the looms, profits re
ceived for permitting such user would be income. But the distinc
tion between that case and the present case arises from the pecu-
D liar nature of the transaction in "loom-hours". "Loom-hours"
cannot from their very nature be let out while retaining property
in them, for there can be no grant of a temporary right to use
"loom-hours". "Loom-hours" are the asset of the respondent, but
temporary user of the "loom-hours" cannot be granted. The
E transaction in this case is of sale of "loom-hours". There is no
doubt that when .a businessman disposes of his capital for what
ever reason, unless it is a part of his circulating capital, the re
ceipt is capital and not income which is taxable.
Distinction between revenue and capital i11 the law of income
tax is fundamental. Tax is ordinarily not levied on capital profits:
F it is levied on income. It is well-settled that sale of stock-in-trade
or circulating capital or rendering service in the course of trading
results in a trading receipt: sale of assets which the assessee uses
as fixed capital to enable him to carry on his business results in
capital receipt.
G Our attention was invited to a judgment of the Allahabad
High Court in Maheshwari Devi Jute Mills v. Commissioner of
Income-tax, U.P., Lucknow(') in which a Division Bench of the
Allahabad High Court answered a similar question relating to taxa
bility of payments received for sale of "loom-hours" by the respon
dent in an assessment year with which we are not concerned in
H these appeals. The Court in that case ignoring the view in the judg
ments under appeal held that "loom-hours;, did not form the fixed
profit-making structure of the respondent and it was not correct to
say that the capital structure of the business was 220 looms multi
plied by the number of hours per week for which' the machinery
( 1) [1'152] S.C.R. I; 20 I.T.R. <51.
( 2) I.T. Misc. Case No. 177 of 1960 decided on September 13, 1962.
770 1~11: 000.T. HPOaTI [198i] 3 1.c.Jt.
was entitled to work. The "loom-hours" had in the view of the A
Court noth.ing to do with th.e capital structure of the business and
there was nothing to show that the defect in Jhe preparatory sec
tion which rendered the "loom-hours" unutiliSable was permanent.
It was always open to the respondent to acquire th.e necessary yam
'from outside and thereby utilise the remaining quota of "loom
hours" in manufacturing jute, and if the respondent preferred not B'
to procure yarn .and chose to sell the surplus "loom-hours" and thus
ensure profit for itself without incurring any risk, the receipt by
disposal of a commercial asset was profit of the business irrespec-
tive of the manner in which that asset was exploited by the owner
of the business. In the view of the High Court the respondent was
tntitled to exploit the asset to its best advantage: it may do so C
either by utilising it personally or by letting it out to somebody
else, and the sale of a part of its quota of "loom-hours" amounted
to exploitation of its capital asset and the receipt obtained there
from was income. We are .unable to agree with this view. The.sur
plus "loom-hours" were disposed of and no interest remained D
therein with the respondent: there was no exploitation of the
"loom-hours" by permitting user while retaining ownership. Re
ceipt by sale of ''loom-hours" must therefgre be regarded in this
case 1IS a capital receipt and not income.
In our judgment the High Court was right in holding that the
receipts from sale of "loom-hours" were in the nature of capital B
receipts and were not taxable. The appeals fail and are dismissed
with costs.
Appeals dismissed.
... •