JUDGMENT UPADHYA J. - 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 ?"
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.
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 & sons. 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. 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..."
In the instant case also the assessee could not use the looms for all the hours to which it was entitled under the agreement because its preparatory section could not supply the necessary jute yarn for being woven on the looms. The right, therefore, which the assessee had of working the looms was in excess of that which it could avail of. The loom hours which were transferred were, therefore, assets which the assessee could not use and as observed by the Supreme Court in the case mentioned above the receipt could not be taken to be a receipt from business. Learned counsel relied on a decision of the Privy Council in British south Africa Co. v. Commissioner of Income-tax to support his contention that the assessee parted with the loom hours for good and it could not be said that while it allowed the transferee mills to use those loom hours it retained the ownership of those loom hours itself. In fact the loom hours were exhausted when they were utilised by the transferee mills. The assessees business was to urn the jute mill and was not to deal in loom hours and learned counsel contended that it would be wholly wrong to say that the sale of loom hours was made in the course of the assessees business.
We cannot overlook the fact that with the development of science and the introduction of essentially new commercial conceptions, assets of ntangible character are increasingly coming into existence and the mere fact that the loom hours were not the same as looms or machinery would not justify the view that they were not assets of a capital nature. In Moriarty v. Evans Medical Supplies Ltd., the Hours of Lords had occasion to consider if the money received by the respondent for transferring its "know how" relating to its manufacturing business was a receipt of a capital nature or a business income. The assessee in that case was a leading pharmaceutical company with a world wide trade. In 1953 the Burmese Government decided to build a factory and laboratories in Burma for the purpose of establishing an industry there for the production of pharmaceutical and other products. Accordingly the Burmese Government dispatched a trade mission to Europe with a view to inducing some leading firm of manufacturing chemists to advise as to the erection of such a factory, the supply of equipment of manufacture, and to impart to them the processes, formulae, and knowledge necessary to the production and manufacture of pharmaceutical products in Burma. The said trade mission got into touch with firms of wholesale manufacturing chemists on the continent of Europe, and also through the medium of United Kingdom Government Departments, with the Association of the British Pharmaceutical Industry and finally contacted three leading firms in England including the assessee. There was keen competition with several continental firms and the British Government was anxious that a British firm should come to terms with the Burmese Government. Negotiations were opened and the company at first suggested a lump sum of 35,000 for the sale of drawings, designs, plans, technical and other data and "know how" necessary for the establishment, erection and installation of the factory and the commencement of the production and for management service for a period of years. An agreement was entered into which is not necessary to mention but under that agreement a sum of 100,000 was received by the company. The company was taxed on this amount as income. The House of Lords took the view that the money was not received in the course of trade or business and the money received in the circumstances of the case was not income from the assessees business. This decision of the House of Lords was relied on in Jeffery v. Rolls Royce Ltd. In that case the taxpayer company which initially carried on the work of automobile manufacture had started manufacturing and sale of aircraft engines for the purpose of their trade. The taxpayers were engaged in metallurgical research and the discovery and development of engineering technique and secret processes and in the result they acquired a fund of technical knowledge of which only a comparatively small part was capable of forming the subject-matter of patent rights. This technical knowledge is commonly called "know how". The taxpayers entered into certain agreements with governments or companies in China, France, Argentina, the United States of America, Belgium, Australia and Sweden under which agreement they parted with their technical knowledge and received certain lump sum payments, in addition to some payments in the nature of royalty or technical liaison fee. Discussing the nature of the "know how" and the money received for it the learned nudge observed that in the course of business they had acquired a vast store of knowledge and secret information relating to secret processes of manufacture referred to throughout the case as know how which represented a fixed capital asset of the tax-payers trade, but it had never been any part of the policy of the taxpayers to make inventions and discover secret processes with a view to the earning of profits by realising their rights in those inventions and processes. After concluding that "know how" or the technical knowledge was in the nature of a capital asset the learned judge observed that it was open to the taxpayer either to exploit it by using it himself in the process of his own trade or by communicating it to others. He observed : "It may be possible for the trader to a limited extent to retain the asset intact and to exploit it by rendering services to others in the way of imparting information or rendering assistance to them".
In the instant case the loom hours which were transferred by the assessee were transferred for value and no part of those loom hours which were transferred were retained by the assessee. The money therefore was nothing but a receipt in consideration of the transfer of a capital asset.
Some cases were cited by learned counsel for the department to support the contention that the money received was nothing but consideration for loss of profits which could have been made by the assessee. Learned counsel referred us to Commissioners of Inland Revenue v. Northflcet Coal and Ballast Co., where compensation received for cancellation of a contract was considered to be a profit of trade. In that case Rowlatt J. observed : "If the contract had gone forward those sums would have come into profits every year and now that they are represented by a commutation, so far as that is concerned, the point seems to be concluded by Shorts case, where a ship-building contract was terminated for a payment and it was held that the payment must come in, just as the payments for the ships, if built, would have come in." This was not a case where the commercial asset would not be availed of by the assessee at all. In the instant case as mentioned by Mr. Pathak the inadequacy of the preparatory section of the assessee mill was responsible for the fact that the assessee was incapable of using "these loom hours" which became surplus. It could not be said that if the loom hours had not been sold the assessee would have made any profit for the simple reason that the assessee could not possible use those loom hours itself. The decision of the Supreme Court in Commissioner of Income-tax v. Shamsher Printing Press was also relied upon by learned counsel for the department. There the premises in which the assessees press was housed was requisitioned by the government and the assessee had to shift its business to another place. Of the various sums paid as compensation for the respondent on account of compulsory vacation of the premises, disturbance and loss of business. The question was whether this sum was a receipt liable to tax. Their Lord-ships held on the facts that the amount was not received by the assessee for any injury to its capital assets, but it was received as compensation for "loss of profits" and was therefore a revenue receipt. Sarkar J. observed : "It is clear that the requisition did not cause any injury to any of the tangible capital assets of the respondents business. Indeed it is not contended that there was any injury to any of them. What is said on behalf of the respondent is that there was injury to its profit-making apparatus. By that it is not suggested that the respondents business had a profit-making apparatus, apart from his tangible capital assets, of the kind found to have been in existence in Van den berghs Ltd. v. Clark."
The fact that the amounts in question were entered in the profit and loss accounts could not determine their real character or liability to tax. As observed by Lord Simon in his work on Income Tax (volume 1, page 31, second edition) :
"Nomenclature is no safe guide to the intrinsic quality of a capital or revenue sum. False distinctions based on labels given to particular items may mislead, as for instance the supposed distinction between damages and interest."
If after examining the circumstances under which the amounts were received it is found that they are receipts of a capital nature, mere erroneous entry in the profit and loss account by the accountants of the company cannot alter their real character and make them attract tax liability.
In the instant case intangible capital assets namely the loom hours which were a part of the profit making apparatus of the assessee were transferred for good. The rule laid down, therefore, by the Supreme Court in Shamsher Printing Press case cannot, in our opinion, be applied to the present case.
Learned counsel referred to a decision in Raghuvanshi Mills Ltd. v. Commissioner of Income-tax. The money received from an insurance company under a "consequential loss policy" was held to be a receipt inseparably connected with the ownership and conduct of the business and arising from it. This again in our opinion is not a case which affords guidance to us in the present case.
As observed by their Lordships in this case "income" must be read with reference to the particular facts of each case. In the present case the agreement was not incidental to the carrying on of the assessees business but was one which determined initially the structure in or conditions under which the assessees business could be carried on.
In the light of the above observations we are of opinion that the question referred to this court should be answered in the negative. We would like to express our thankfulness to Mr. R. S. Pathak and Mr. Gopal Behari for the elaborate and lucid arguments they have advanced in this difficult case. The assessee will have its costs which we assess at Rs. 500. Fee of learned counsel for the department is fixed at the same amount.
Question answered in the negative.