Commissioner of Income-Tax U.P.
Lucknow Vs. The Maheshwari Devi Jute Mills Ltd. Kanpur  INSC 109 (15
15/04/1965 SHAH, J.C.
CITATION: 1965 AIR 1974 1965 SCR (3) 765
D 1980 SC1946 (6)
Income-taw--Sale of asset--Capital receipt or
To protect the interests of its members
against loss resulting from over production, the Jute Mills Association
provided that the members shall work their looms for a fixed number of hours
and gave to its members facility of transferring "loom-hours", that
the number of hours for which the members were entitled to work their
factories. A member of the Association was thereby permitted, in addition to
the "loom hours" allotted to that member, to work its factory for
such "loom hours" as were transferred to it by another member. The
respondent-assessee had transferred its surplus "loom hours" which it
could not utilize during the assessment years, and received certain sums of
money as consideration, which the Income-tax Officer included in the
respondent's total, income liable for payment of income-tax.
That order was confirmed by the Appellate
Asistant Commissioner and the Tribunal, but the High Court on a reference, held
in favour of the assessee.
In his appeal to this Court, the Commissioner
contended that: The right to work for the allotted number of hours was an asset
of the assessee capable of being transferred, and where it was 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 manufacturing concern or by letting it
out to others, the consideration received for allowing the transferee to use
that asset was income received from business and chargeable to income tax.
HELD: The 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. [770 E] Distinction between revenue and
capital in the law of income-tax is fundamental. Tax is ordinarily not levied
on capital profits: it is levied on income. 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.
The "loom-hours" were the asset of
the respondent, but their temporary user could not be granted. The transaction
was therefore a sale of "loom-hours", and when a businessman disposes
of his capital for whatever reason, unless it is a part of his circulating
capital, the receipt is capital and not income which is taxable. [769 E, F]
Commissioner of Excess Profits Tax, Bombay City v. Sri Lakshmi Silk Mills,
 S.C.R. 1, distinguished.
Maheshwari Devi Jute Mills v. Commissioner of
Income-tax U.P. I.T. Misc. Case, decided on 13th September 1962, overruled.
CIVIL APPELLATE JURISDIVTION: Civil Appeals
Nos. 66 and 67 of 1964.
Appeals from the judgment and decree March
28, 1961 of the Allahabad High Court in Income-tax Reference No. 165 of 1954.
S.V. Gupte, Solicitor-General, R. Ganapathy
lyer and R.N.
Sachthey, for the appellant (in both the
A.V. Viswanatha Sastri, S. Murthy and B.P.
Maheshwari, for the respondent (in both the appeals).
The Judgment of the Court was delivered by
Shah, J. The Maheshwari Devi Jute Mills Ltd. carries on the business of
manufacturing jute goods and is a member of the Jute Mills Association. To
protect the members against loss resulting 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 arrangement, a
fresh agreement was executed on June 12, 1944. The preamble of the agreement
"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 employees and of the association and
the jute industry and trade in general etc ...................... have
determined that provisions similar to those contained in the Working Time
Agreement should be entered into and continued in manner hereinafter
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 to work their factories were called
"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-hours" for a mill with a complement of looms exceeding 220.
Clause 13 provided for registration of "loom- hours" of each member
of the association. Clause 6 of the agreement enabled members to be grouped if
they happened to be under the control of the same managing agents or who were
combined by any arrangement or agreement for registration as "Group
Mills". It was open to a member of the Group 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 allowed to them. By
sub-cl. (b) a member was also entitled to transfer his surplus "loom-
hours" to another member and upon such transfer being duly effected and
registered with the Association, the transferee was entitled, subject to
certain conditions, to utilise "loom-hours" so transferred.
767 The respondent was under the agreement
allotted 220 x 72 hours per week. In the account year corresponding to the
assessment year 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 Naskarpara Jute Mills and as consideration of. the
sale received Rs. 53,460/-. In the account year corresponding to the assessment
year 1950-51 the respondent 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 the 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 Officer was confirmed by the Appellate Assistant
Commissioner and the Income-tax Appellate Tribunal. At the instance of the
respondent, the Tribunal referred 'the following question to the High Court of
Judicature at Allahabad:
"Whether on the facts and in the
circumstances of the case the receipts of the assessee by the sale of
loom-hours amounting to Rs. 53,460/- and Rs. 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?" The High Court answered the question in the
The Commissioner of Income-tax has preferred
these appeals with certificate granted by the High Court under s. 66-A (2) of
the Indian Income-tax Act.
The Tribunal held that the receipts in
question were not capital receipts, nor were they of a casual or non- recurring
nature. The plea of the respondent that the receipts for sale of loom-hours are
not chargeable to tax because they are, within the meaning of s. 4(3) (vii),
casual and non-recurring, has no substance. By el. (3) (vii) of s. 4 receipts
which are not capital gains chargeable according to the provisions of s. 12B
and which are not arising from business 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 though it is
casual or non-recurring, is by the express words used by the Legislature,
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 members by the association or by any other body:
if it were, such compensation being paid for agreeing to restraint on trade
would be capital. To protect the 768 interests of its members the Association
provided that the members 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 such
"loom- hours" as were transferred to it by another member of the
Association. In the proceedings before the Income-tax auhorities the Tribunal
and the High Court, these "loom- hours" have been regarded as an
asset belong to each member and in considering these appeals we do not think we
would be justified 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 considered on the
footing that by virtue of the covenant incorporated' 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
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
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 manufacturing concern Dr by letting it out to others,
consideration received for allowing the transferee to use that asset is income
received 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.(1). In Shri Lakshmi
Silk Mills Ltd. case the assessee Company was a manufacturing concern and had
for the 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
chargeable to excess profits tax. It was held by this Court that if a commercial
asset is incapable of being used as such, rent received 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 (1)  S.C.R. 1.20 I.T.R. ,451.
769 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 commercial 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.
What was let out in Lakshmi Silk Mills'
case(1) 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 lesser
of its use would undoubtedly be income, 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
received for permitting such user would be income. But the distinction between
that case and the present case arises from the peculiar 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 transaction in this case is
of sale of "loom-hours". There is no doubt that when a businessman
disposes of his capital for whatever reason, unless it is a part of his
circulating capital, the receipt is capital and not income which is taxable.
Distinction between revenue and capital in
the law of income-tax is fundamental. Tax is ordinarily not levied on capital
profits: 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.
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(2) in which a Division Bench of the Allahabad High
Court answered a similar question relating to taxability of payments received
for sale of "loom-hours" by the respondent in an assessment year with
which we are not concerned in these appeals. The Court in that case ignoring
the view in the judgments 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 multiplied by
the number of hours per week for which the machinery (1)  S.C.R. 1; 20
(2) I.T. Misc. Case No. 177 of 1960 decided
on September 13, 1962.
770 was entitled to work. The
"loom-hours" had in the view of the Court nothing to do with the
capital structure of the business and there was nothing to show that the defect
in the preparatory section which rendered the "loom-hours"
unutilisable was permanent. It was always open to the respondent to acquire the
necessary yarn from outside and thereby utilise the remaining quota of
"loom-hours" in manufacturing jute, and if the respondent preferred
not 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 irrespective 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 entitled to exploit the asset to its
best advantage: it may do so either by utilising it personally or by letting it
but 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 therefrom was income. We are unable to agree with this view.
The surplus "loom-hours" were disposed of and no interest remained
therein with the respondent:
there Was no exploitation of the
"loom-hours" by permitting user while retaining ownership. Receipt by
sale of "loom-hours" must therefore be regarded in this case as 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 receipts and were not taxable. The appeals fail and are
dismissed with costs.