UPADHYA J. - (1.) THE question referred for the opinion of this court is : 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 1949-51 respectively were revenue receipts liable to tax under the Indian Income-tax Act ?
(2.) THE assessee, Messrs. Maheshwari Devi Jute Mills Co. Ltd., Kanpur, is assessed to tax in the status of a company. This company runs a jute mill and is a member of the Jute Mills Association, which is an association of jute mills formed with several objects including the protection of the jute mills and the defence of the trade of its members and in that behalf to impose restrictions, conditions and to adjust the production of the signatories. With this object in view the members of the association entered into an agreement dated January 9, 1932, called the First Working Time Agreement. That agreement was to expire on December 11, 1944. THE members therefore entered into another Working Time Agreement on June 12, 1944. THE preamble of this Working Time Agreement was as under : And 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......... By clause (4) of this agreement the association restricted the hours of working the looms of the jute mills which were the members of the association. THEse hours of working were popularly known as loom hours. THE number of hours of working allotted to the different mills depended upon the loomage capacity of mills. Clause (5) of the working Time Agreement stated that the number of working hours per week mentioned in that agreement represented the extent of hours to which the signatories were entitled in each week to work their registered complement of looms as determined under clause (13) thereof on the basis that they used the full complements of their loomage as registered and certified by the committee as provided for in clauses (12) and (13) thereof. Clause (10) provided for the maximum number of loom hours for a mill with complements of looms exceeding 220 in number and those not exceeding them. Clause (13) of the agreement related to the registration of loom hours of each member of the association. Clause (8) of the agreement provided as under : (a) signatories to this agreement, who are under the control of the same managing agents or who are combined by any arrangement or agreement may apply for registration by the committee as being of a group mills and if they are (in the discretion of the committee) so registered it shall be open to any one or more of the signatories in the group mills so registered to utilise the allotment of hours of work per week of other signatories in the same group who are not fully utilising the hours of work allowable to them with the intention that if a signatory or signatories belonging to a group of mills do not work the full complement of hours for the time being allowable, it shall be lawful and permissible for another or other signatory mills in the same mill group to work (additionally to their own complement) to the extent only the number of hours of work per week as have not been or are not to be utilised by the signatory or signatories of the same group. Sub-clause (b) of the said clause provided that in addition to the aforesaid rights and subject to the provisions contained in clauses (i) and (iv), the members would be entitled to transfer in part or wholly their hours of work per week to one or more of the other members and upon such transfer being duly effected and registered a certificate issued by the committee to the members to whom the allotment of working hours had been transferred would be entitled to utilise the hours of work so transferred per week. Clause (11) deals with contingencies such as strike of workers, shortage of coal, failure of electric supply on which such mill relies for its motive power etc., and says that if there is a complete stoppage of machinery in a mill on account of any contingencies mentioned in that clause the mills would be at liberty to make up hours of work lost by such contingencies. THE clause further provides as follows : And further all such hours of work per week lost which have been permitted to be made up both under this clause and under clause (11) of the First Working Time Agreement may under clause (6) hereof be utilised by other signatories in the same group and also be transferred subject to the conditions of that clause. A copy of the Working Time Agreement is annexed to the statement of the case sent by the Tribunal. The assessee company was allotted 72 hours of work per week as the complement of the looms of the assessee consisted of 220 looms. On September 18, 1947, the assessee company wrote to the Secretary, Indian Jute Mills Association, Calcutta, that although the assessee was entitled to work the complement of 220 looms for 72 hours per week due to shortage of its preparatory section the assessee was in a position to run the loom only 48 hours per week and the surplus hours which they were entitled to sell were 5,280(24 X 220) loom hours per week. By that letter the company also informed the Jute Mills Association that Messrs. Naskarpara Jute Mills had agreed to buy form the assessee 3,960 loom hours per week for a period of six months and that the sanction of the committee for the sale of the loom hours should be accorded at an early date. By a similar letter dated October 7, 1947, the assessee company sought permission to sell the balance of 1,320 loom hours per week to Messrs. Naskarpara Jute Mills and by its letter dated October 20, 1947, the Indian Jute Mills Association granted the necessary permission to the assessee to sell 3,960 and 1,320 loom hours to the Naskarpara Jute Mills with effect from September 15, 1947, and October 6, 1947, respectively, as requested in the two letters mentioned above. As a consideration for the transfer of the loom hours by the assessee company Messrs. Naskarpara Jute Mills gave to it a sum of Rs. 53,460 during the accounting period relevant to the assessment year 1949-50. The receipt of this amount was incorporated in the assessees books of accounts as sale of loom hours and was also shown as such in the profit and loss account. During the subsequent accounting period relevant to 1950-51 assessment the assessee company wrote similar letters to the Indian Jute Mills Association and obtained permission to sell 3,960 and 1,320 loom hours per week. The association accorded permission for sale of these loom hours to Birla Jute Manufacturing Co. Ltd. with effect from September 18 and October 9, 1948, for a period of six months and by another letter dated April 11, 1949, the association sanctioned the sale of loom hours to Messrs. Shri Hanuman Jute Mills Ltd., with effect from March 19, 1949, and April 9, 1949, for a period of six months. During this second year the assessee had also transferred 2,69,230 loom hours to Messrs. Surajmal Nagarmal and 40,000 loom hours to Messrs. Surajmal Nagarmal and Messrs. Hanuman Jute Mills were transferred in accordance with the provision of clause (11) of the Working Time Agreement mentioned. The assessee company got an aggregate sum of Rs. 1,85,230 during the period relevant to 1950-51 assessment. This sum was also shown in the profit and loss account as the sale proceeds of loom hours. These amounts received for the sale of the loom hours were not included in the computation of the total income of the assessee for the assessment years 1949-50 and 1950-51. The Income-tax Officer held that these amounts were revenue income liable to tax. This finding of the Income-tax Officer in each of the said years was confirmed by the Assistant Commissioner of Income-tax. Appeals were then preferred to the Income-tax Appellate Tribunal. It was urged by the assessee that the receipts were either capital receipts or were receipts of a casual and non-tuckering nature not arising out of the business of the assessee and, therefore, exempt from income-tax under section 4(3)(vii) of the Income-tax Act. The Tribunal did not accept the assessees contention and held that these receipts were neither of a capital nature nor were they exempt from income-tax under section 4(3)(vii) of the Income-tax Act, as being of a casual and non-recurring nature not arising from the business in exercise of a profession, vocation or occupation. The Tribunal held that the sale of the loom hours was a transfer of a commercial asset during the course of the carrying on of the business of the assessee. The Tribunal further held that the transfer of the surplus loom hours of the assessee had become a normal feature of the business and it could not, therefore, be said that there was a receipt of a casual or non-recurring nature. The Tribunal also expressed the opinion that it was not possible to dissociate the receipt from the assessees main business of using the total quota of loom hours allotted to it for the purpose of carrying on the business of a jute mill. On the assessees application under section 66(1) of the Income-tax Act, the question mentioned above has been referred to this court along with a statement of facts.
(3.) MR. Pathak, learned counsel for the assessee, contended that on the facts found or admitted it was not possible to hold that the receipts of the company for the sale of loom hours was income from business within the meaning of the law. He contended that loom hours were a part of the profit-making structure of the assessee. This part of the profit-making structure could not be used by the assessee as the preparatory section which prepared the yarn was inadequate and could not supply the necessary material for use on the looms which the assessee under the agreement was entitled to urn. In the circumstances all the loom hours available under the agreement could not be used by the assessee and it, therefore, parted with the surplus loom hours for consideration. The money received could not be said to have been received in course of the assessees business. The business of the assessee was to run a jute mill, to manufacture and sell jute products. Sale of loom hours could not in any way be called a part of the assessees business. Learned counsel, therefore, contended that the money did not partake of the character of a trading receipt. Nor could it be said to have been received in the course of the assessees business. Learned counsel contended therefore that the amount was not liable to tax. He contended that under section 4(3)(vii) of the Income-tax Act also it was not liable to tax. He further said that under section 10 of the Income-tax Act, tax could be levied only in respect of the profits or gains of any business, profession or vocation carried on by the assessee. In the instant case the money was paid to the assessee not because he carried on business but because he did not do so. MR. Pathak also contended that in no case could the amounts in dispute be said to be revenue receipts and they were only receipts of a capital nature because the sums represented price for a part of the profit-making structure of the assessee. Learned counsel for the department, however, contended that the assessee company was admittedly carrying on a business of running a jute mill, the agreement mentioned in the statement of the case which brought into existence the loom hours had been entered into by the company in the course of its business. The loom hours were, therefore, incidental to the assessees business and the money received by the assessee for parting with the loom hours could only be said to have been received in the course of the assessees business and the receipts were incidental to the assessees business. It was further argued that no capital asset was in fact transferred. The looms themselves remained with the assessee. The assessee was entitled to work those looms all the 24 hours if he liked but it chose voluntarily to enter into an agreement where under its rights to work the looms were restricted to a certain number of hours. The assessee could have run during those loom hours and if it had done so the activity would have resulted in profits. If the assessee adopted the alternative course of not working those looms itself and allowed others to run their own looms in lieu of payment the money received was only a substitute for the profits which the assessee had deliberately refrained from making. Being a substitute of the profits which the assessee was entitled to make and which the assessee did not choose to make itself the money received was nothing but income. Learned counsel for the assessee referred us to several cases but we prefer to discuss only those cases which appear to have a direct bearing on the question raised. Learned counsel drew our attention to a decision of the Supreme Court in Commissioner of Income-tax v. Vazir Sultan and sons, AIR 1959 SC 814. In this case the assessees, a registered firm, were appointed the sole selling agents and sole distributors for the Hyderabad State and the assessees were paid a sum of Rs. 2,19,343 by way of compensation for the loss of agency for the territory outside the Hyderabad State. The question which arose was as to whether this sum of money so received was a revenue receipt assessable to income-tax or a capital receipt not so assessable. By a majority their Lordships of the Supreme Court held that the agency agreements were not entered into by the assessees in the carrying on of their business but formed a capital asset of the assessees business which was exploited by the assessees by entering into contracts with various customers and dealers in the respective territories and the payment made by the company as and by way of compensation for terminating or canceling the agreement was a capital receipt in the hands of the assessees. This decision clearly lays down that where money is received in lieu of a capital asset it is not income liable to tax. We are of opinion that this decision is fully applicable to the facts of the present case. The mere fact that the loom hours are not a tangible asset would not judges to distinguish between capital and income in cases which fall on what may be called the border-line. A large number of decisions have been given from time to time answering the question as to whether a particular asset or receipt was of a capital or of a revenue nature. But it appears that one broad distinction has been drawn in these decisions. All means or implements used for earning profits may be treated as capital. The exercise or use of those means or implements may be termed as business or the carrying on of business. The result of the exercise or use of the means or implements may be considered to be the income of the business. It may, therefore, be said that if an asset comes into existence as a product of the business itself it is a stock-in-trade or a revenue gain. In the instant case, besides the land, building and machinery including the looms which the assessee company had as a result of the agreement referred to above, the business activities of the assessee were restricted and had to be conducted in a particular manner. Profits could be made by carrying on the business under those restrictions and by putting the tangible capital assets to use in accordance with the conditions under which the business had to be carried on. If a mill has a hundred looms nobody would deny that those hundred looms are its capital assets. If the mill is able to increase the number of its looms to 200 the addition would be evidently an addition to its capital asset. This ownership of the looms would normally entitle the mill to use them all the 24 hours and earn profits. The profit-making structure would in such a case be the possession of 200 looms which may be worked for 24 hours. If for certain reasons, which may be a voluntary agreement or a restraint imposed by the State, the mill may be worked only for 16 hours or two shifts; the profit-making structure would be reduced to 200 looms workable for 16 hours. The hours for which the looms may be worked are a part of the structure which may be used to produce profits. The contention therefore urged by Mr. Pathak is that despite the fact that the conception is new and uncommon the loom hours were a part of the profit-making structure or capital asset of the company and not a product of its trading activities of business. The agreement with the Indian Jute Mills Association was entered into not as one of the items of business carried on by the assessee but it affected the assessees capacity to do business fundamentally. Therefore, the agreement cannot be compared to those agreements which are entered into in the course of trade or business and as a result of which some money is received by the assessee. Learned counsel also referred us to a decision of the Supreme Court in Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd, 1951 AIR(SC) 454. There, the company being itself unable to use its dyeing plant parted with it for a consideration and the question was whether the money received was income from business. Mahajan J., agreeing with the view taken by the Bombay High Court, observed : We respectfully concur in the opinion of the learned Chief Justice that if the commercial asset is not capable of being used as such, then its being let out to others does not result in an income which is the income of the business... ;