A.N. Sen, J.
1. In this reference under Section 66(1) of the Indian Income-tax Act, 1922, the following question of law has been referred to this court:
'Whether, on the facts and in the circumstances of case, the Tribunal was right in holding that the sum of Rs. 2,03,255 paid by the assessee for the purchase of loom hours was revenue expenditure and hence deductible under Section 10(2)(xv) of the Indian Income-tax Act, 1922 ?'
2. The facts of the case have been full)'' set out in the statement of the case and they may be briefly indicated.
3. The respondent, assessee-company, carries on business of jute manufacture and is a member of the Indian Jute Mills Association, The Indian Jute Mills Association is registered under the Indian Trade Unions Act (Act XVI of 1926) with its registered office at Calcutta. The objects of the association, inter alia, are :
1. (a) to protect, forward and defend the trade of members of the association;
(b) to impose restrictive conditions on the conduct of the trade ;
(c) to adjust the production of the mills in the membership of the association to the demand in world market;
(d) to arbitrate on matters in dispute.
2. (a) to protect the members of the association against competition ;
(b) to secure the enactment of legislation beneficial to the trade;
(c) to secure the repeal of any legislation or prevent the passing of legislation which is damaging or may in any way damage the trade.
4. It will, therefore, appear that the Indian Jute Mills Association (hereinafter referred to as 'the association') was formed in the interest of the various companies who carried on the trade of manufacturing jute and who become the members of the association and one of the main objects of the association was to adjust the production of the mills to the demand of jute and other products in the world market and to impose restrictive conditions on the conduct of the trade for this purpose. In common interest of the members of the association and in furtherance of the main objects of the association the members of the association entered into agreements, amongst themselves, known as 'working time agreements' from time to time. The first 'working time agreement' was executed in 1939. The said agreement was replaced by fresh agreements in 1944, 1949, 1954 and 1959. These agreements are more or less in similar terms and they appear to have been in operation for periods of 5 years each. The agreement with which the present case is concerned is the agreement of 1954 which was executed on December 9, 1954. It is necessary to consider the slid agreement of December 9, 1954, in some detail, as the question involved in the present case has some bearing on the said agreement and its interpretation. The recitals contained in the said agreement, inter alia, run as follows:
'Whereas the signatories are members of the Indian Jute Mills' Association (hereinafter called 'the association') and whereas the objects of the association are, inter alia, to protect and defend the trade of the members and in that behalf to impose restrictive conditions and to adjust the production of the signatories and whereas the signatories in the general interest of the members and their employees and of the association and the jute industry and trade in general have entered into an agreement dated the 9th January, 1939 (hereinafter called the first 'working time agreement')......
And whereas the signatories have for reasons aforesaid determined that provisions similar to those contained in the first and second and third and fourth working time agreements should be entered into and continued in the manner hereinafter appearing. Now this agreement witnesseth and the signatories hereto hereby jointly and severally agree each with the other both as signatories to the agreement and as members of the association.'
5. Under Clause (1) of the agreement it is to continue for a period of 5 years from December 12, 1959. Clause (4), which is important, is as follows:
'Subject to the provisions of Clauses (10) and (11) hereof no signatory shall work more than 45 hours of work per week and such restrictions of hours of work per week shall continue in force until the number of working hours allowed shall be altered in accordance with the provisions of Clauses 7(1), (2) and (3) hereof.'
6. Clause (5) of the agreement provides :
'The number of working hours per week when mentioned in this agreement represents the extent of hours to which signatories are in all entitled in each week to work their registered complement of looms as determined under Clause (13) hereof on the basis that the use of full complement of their loomage as registered with and certified by the committee as provided for in Clauses (12) and (13) hereof and it is generally and mutually agreed that any signatory may during periods in which his loomage is reduced (notice in writing and registration and certification by the committee and the seal of looms to be a condition precedent to the operation of this clause) increase the number of working hours per week allowed to him by virtue of the agreement in the ratio of the degrees in loomage in accordance with the following formula:
Let X--The hours of work per week with the full complement of loomage.
Y--The total full registered loomage, and
Z--The total loomage after reduction, then the hours of work per week allowable to the signatory over periods in which the loomage is reduced shall be X x Y--------------------.2
7. The expression 'hours of work per week' or 'working hours per week' or their equivalent shall, throughout this agreement or in variation of its terms, be governed by the terms of this clause and it is expressly agreed that (except with the hours of work per week which may be increased under the terms of Clause (4), 6(a), (b) and (11) of this agreement) the hours of work allowed to be utilised in each week shall cease at the end of that week and shall not be carried forward. It is further provided that the limitation in hours of work per week under this agreement shall have no relation to any portion of the mills' establishment other than looms; provided always that no signatory shall work his mill machinery longer hours of work in any week than those hours to which he is entitled to work the looms or which are necessary to keep fully employed the looms working in accordance with loomage and hours of work per week to which the particular signatory under the agreement is entitled whichever period is longer ; and it shall be a condition precedent to the working of longer hours of such mill machinery that the signatory shall give to the committee prior notice of their intention to do so.
8. Signatories whose mills are situate in West Bengal and whose registered complement of looms, as certified under Clause (13) hereof exceeds 220 shall with effect from the 12th of December, 1954, and until such date or dates as the committee of the association shall in its sole discretion determine, keep close down and seal the equivalent of 12 1/2% of such registered complement of their looms.' Clause (6) provides :
'6, (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 of 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 of 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 to the intent 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's mills in the same 'mill group' to work (additional 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; provided always that the inter-change of hours of work per week contemplated in the foregoing shall not take place unlessthe committee has been advised and unless the utilised hours of work per week of the signatory mill within the 'mill group' which it is proposed to utilise in another signatory mill or mills cover hours of work per week for a period of not less than six months.
(b) Additional to the signatories' rights under Clause (a) above, but subject to the provisions of Sub-clauses (i) to (iv) below, signatories to this agreement shall be entitled to transfer in part or wholly, their allotment of hours of work per week to any one or more of the other signatories; and upon such transfer being duly effected and registered and a certificate issued by the committee, the signatory or signatories to whom the allotment of working hours has been transferred shall be entitled to utilise the allotment of hours of work per week so transferred.
The conditions precedent under which the allotments transferred shall be utilised by the signatories are :
(i) No hours of work shall be transferred unless the transfer covers hours of work per week for a period of not less than six months.
(ii) All agreements to transfer shall, as a condition precedent to any rights being obtained by transferees, be submitted with an explanation to the committee and the committee's decision (subject to the rules of the association relating to its advisory board) whether the transfer allowed, shall be final and conclusive.
(iii) If the committee sanctions the transfer, it shall be a condition precedent to its utilisation that a certificate be issued and the transfer registered.
(iv) The allotment shall be utilised subject to the control of the committee and also to such terms, qualifications or conditions as may be imposed by the committee.
It shall be a condition precedent to all transfers that no allotments allowed to be transferred by the committee shall be deducted from the working hours per week allowed under the agreement to the transferor who shall not be entitled to utilise them or any part thereof.
For the purpose of this clause the expression (allotment of hours of work per week) shall include hours of work lost either during the continuance of this agreement or during the continuance of the first or second or third working time agreements which the committee shall have permitted a signatory to make up either under the provision of Clause (11) hereof or under Clause (ii) of the first as also of the second and third working time agreements.'
9. Clauses 7, 10, 11, 14 and 23 of the agreement may be set out i Clause 7:
'....The hours of work per week provided for in Clause (4) shall continue throughout the period of the agreement subject nevertheless to the following provisions:
(1) The committee may suo moto and shall, if 75% of the voting powers of the members make written application, consider proposal for a decrease in the number of hours per week and if it is satisfied that any such proposal made, or decides, in consequence of such proposal or of its own volition, that the number of hours of work per week shall be decreased, this proposal shall be circulated at least one month prior to the date on which the proposed change is to take effect and shall be placed before a special meeting of the association calling the parties. The change shall take effect only if 75% of the voting powers of the members support the committee's recommendation. If the requisite resolution is passed by 75% of the voting strength of the members, the hours of work per week so allowed shall be deemed to take the place of 45 hours of work per week mentioned in Clause (4) of this agreement.
(2) The committee may suo moto and shall, if 51% of the total voting strength of the members requisition in writing, consider proposals for an increase in the number of hours of work per week and if the committee should recommend such proposal or any modification thereof or make its own recommendations as to an increase, the signatories shall be circulated. Any recommendation of the committee or any proposal (whether recommended or not by the committee) approved by not less than 51 % of the voting strength of the members at a special meeting of the association (which may be convened by the committee's direction or at the instance of 51% of the voting strength of the members) shall be accepted and binding upon, all signatories against allowed hours of work per week named by a requisite resolution shall be deemed to take the place of hours of work per week then binding on signatories under this agreement.
(3) The foregoing sub-clauses shall nevertheless be subject to the agreement between the signatories that during the whole period of this agreement the hours of work per week shall never be less than 45 hours in all except 50 hours ; provided nevertheless that should 51% of the total voting strength of the signatory mills requisition the committee in writing for an increase in the hours of work per week from 54 hours, the committee shall, should the increased demand be occasioned by an extra ordinary cycle of prosperity or war or be necessary to meet the change of the projection or construction or starting of new mills or like causes or other unforeseen circumstances (the decision of the advisory' board as to which shall be final), be empowered to recommend an increase in figure of hours of work per week it shall consider fit; and provided such recommendation or any proposal of members whether recommended by the committee or not is passed by resolution at a special meeting of the association by not less than 51% of the total voting strength of members. Such figures as may be passed by such resolution shall be binding on all signatoriesand shall take the place of the hours of work per week then in force under the agreement. Nothing in this clause contained shall lessen or affect the committee's duties and powers under the association's rules to take such action as is considered fit to meet threat of actual completion, which shall be additional to and not derogatory from the signatories' right thereunder.'
10. Clause (10):
'The provisions in Clause (4) hereof shall be subject to the signatories' joint and several agreements between themselves that during the duration of this agreement signatories with registered complements of looms not exceeding 220 shall be entitled to work up to 72 hours of work per week ; but none of such signatories shall at any time exceed such periods save in case where the hours of work per week shall be increased beyond 72 hours of work per week in pursuance of Clause 7(3) hereof, in which event hours of work per week shall be same for all signatories to this agreement, provided always that the committee shall at any time be entitled in its sole discretion to allot hours of work per week (but not exceeding 54 hours per week in all for mills with a complement of looms exceeding 220 and not to exceed 72 hours of work per week in all for mills with a complement of looms not exceeding 220) to looms situate outside the province of West Bengal who are not members or who may hereafter become members of the association. The committee's certificate as to the looms to be allowed to the mills situate outside West Bengal shall be final and conclusive of them ; provided always that no mill with a complement of looms as certified under Clause (13) greater than 220 shall at any time during the agreement and irrespective of any other restrictive agreements whether supplementary to this agreement or otherwise be compelled to work less than a total number of hours of work per week as a mill whose registered complement of looms is 220 would from time to time be entitled to work under the provision of this clause.'
11. Clause (11):
'In the event of a complete stoppage of machinery in a mill of a signatory of not less than two consecutive working days through, (1) a strike of workers; or (2) a threat of coal; or (3) failure of the electric supply on which mill relies for its motive power, or alteration in motive power; or (4) a mechanical breakdown ; or (5) lock-out caused by labour, the affected mill shall, subject to the written permission of the committee, be at liberty to make up the hours of work per week lost to such extent as the committee shall in its sole discretion decide.
The operation of the foregoing provisions of this clause shall be governed by the following conditions in so far as they are applicable:
(a) The resumption of work in a mill after any of the foregoing occurrences shall be permitted without loss of loom hours only in so far as the working in portion of the mill other than the looms is concerned.
(b) Time lost on any account other than the foregoing (including holidays other than those declared by the association and observed by the mills as to which latter holidays the provisions of Clause (12) shall apply) shall not be made up in any circumstances whatsoever.'
12. Clause (14):
'During the currency of this agreement there would be no addition whatsoever to the number of looms comprising the registered complement of looms of the mill of any signatory nor shall any contract be made for looms additional to those certified under Clause (13) hereof or looms to be utilised in any way or for any purpose thereof. Additionally during the execution of this agreement, no signatories nor any person, firm or company shall take interest directly or indirectly in the control or the management of the business of any signatory nor as proprietors, agents, managing agents, or secretaries or in any capacity, shall install, erect or place orders for any productive machinery whatsoever (which expression shall specifically include process up to and including looms and twist and reeling frames) or erect any buildings therefor. Provided always that on the committee's order being obtained (and such decision on the matter shall be final and conclusive) signatories may either, (a) replace old and obsolete machinery with new or fresh machinery, or (b) install additional productive machinery (expressly excluding looms) for the purpose of keeping the signatories' looms, additionally employed with yarn and twist provided always that the 'signatories' looms ' shall be as to the number thereof, those certified by the committee under Clause (13) hereof.'
13. Clause 23(a) :
'The signatories do hereby jointly and severally admit, acknowledge and declare that it was essential that the terms and conditions of the working time agreement shall have been entered upon for, inter alia, the protection of the industry in which the signatories are engaged and that the provisions are, each and everyone, reasonable and required for the benefit of the signatories both severally and collectively and that any breach of any one or more of the conditions of this agreement by any one or more of the signatories will cause damage to the association, its members and signatories which while very substantive will be difficult to value in precise terms but which are likely to exceed security deposits of each signatory, inter alia, because such breach or breaches may tend to destroy or destroy the whole basis of the association and the damage will include the undermining of the market and the existence of the association. Thesignatories jointly and severally expressly agree that they will truly and faithfully observe, perform and conform to all the terms and conditions of this agreement and will do nothing and/or cause nothing which may be reasonably calculated to be a breach of any of the terms of this agreement and/or affect prejudicially in any way the interest of the signatories jointly and severally and/or of the association. If during the period the agreement is in force, any one or more of the signatories shall fail to abide by this agreement in the preceding sentence and/or carry out any one/more of the provisions of this agreement in any manner whatsoever, then in such a case the signatory or signatories at fault shall pay to each of the signatories other than those in breach as of liquidated damages a sum which shall not be less than Rs. 10,000 and/or such sum as may be awarded in arbitration proceedings under Clause (27) hereof and which shall be applicable hereto, provided that the damages as aforesaid and to be awarded against each and every signatory in breach shall in no signatory's case exceed a sum equivalent to Rs. 50 multiplied by the number of looms as are registered under the working agreement by the party in whose favour the award is given and provided additionally that (apart from any damages payable for breaches of contracts entered into by individual signatory with others including signatories) the aggregate of damage to be awarded for signatory in respect of breach or breaches of the rules of the association or of this agreement shall not exceed a total sum of Rs. 50 lakhs. Additionally (but subject to the provisions relating to the maximum damages referred to in the preceding sub-clause) it is further agreed and declared that any signatory in breach of any of the terms of this agreement shall indemnify and hold harmless the other signatories individually and collectively and the association and the committee and the advisory board and the members of the committee and the advisory board and the association's officers both individually and collectively from all losses, damages and consequences arising from or ancillary to any breach or breaches or to any recommendation, clauses or orders made in respect thereof.'
14. In terms of the aforesaid agreement and on the basis thereof, the assessee purchased 'loom-hours' from other mills and the assessee spent a sum of Rs. 2,03,255 in purchasing 'loom-hours' allotted to other mills as per particulars given hereunder :
Name and address of the person from whom purchasedPeriod which the loom hours coverTotal amount paid
M/s. Meghna Mills Co Ltd.Sept. to March, 1959 51,472.80 less consumed 22,176 and balance 19,008 hours. 16,536.00 The difference 31,759 valued at Rs. 16,537
Eastern .August. 1958, to July, 1959.1,01,197.92Alesanira Jute Mills Ltd.Sept., 1958, to Dec., 1958 35,929.44Waverly Jute Mills LtdJanuary, 1959, to July, 1959 31,191.36
15. The relevant year is the assessment year 1960-61 for which the previous year ended on 31st July, 1959. During the relevant assessment year the assessee claimed the said sum of Rs. 2,03,255 as revenue expenditure. The Income-tax Officer disallowed the expenditure on three grounds, namely:
(1) that the payment could not be regarded as a normal incidence of trade ;
(2) that the payment was an application or appropriation of profit; and
(3) that the purchase of loom hours constituted capital expenditure. The assessee preferred an appeal to the Appellate Assistant Commissioner and the Appellate Assistant Commissioner for reasons stated in his order held that the said sum of Rs. 2,03,255 was revenue expenditure and deductible as such and the Appellate Assistant Commissioner accordingly allowed the appeal of the assessee. The main findings of the Appellate Assistant Commissioner were as follows :
'(1) The working time agreements were quite legal and in the opinion of the trade fully justified and necessary in the true interest of the trade; after execution of the working time agreement the right to work the looms of other signatory was a limited right and any enlargement of the right required payment of the price under the very agreement.
(2) The payment could not be described as an appropriation of profits.
(3) The loom hours purchased by the company were to be utilised within a very short time and there was no question of this being an asset or an advantage of an enduring nature. It was not a capital asset and the expenditure was similar to the purchase of raw materials and was incurred for the running of the business or working it with a view to producing day to day profits or an operating cost or revenue cost of production.'
16. Against the said decision of the Appellate Assistant Commissioner the department went up on appeal before the Appellate Tribunal.
17. The Tribunal in its order observed :
'It is necessary to have a clear idea of what is referred to as 'loom hours' by the jute trade and finds place also in the accounts of jute companies. 'Loom hours' can be referred to as a measure of quantity of work which one loom, working for one hour, is potentially capable of turning out. Thus, if a mill has one mill and works for 24 hours it can turn out 24 loom hours of work. Similarly 24 loom hours can be turned out by 24 looms working one hour. Under Clause (4) of the agreement a mill is entitled to work 45 hours per week. Thus, if a mill has a complement of 1,000 looms it can turn out in one week work equivalent to 45,000 loom hours. Theoretically the mill with 1,000 looms could well work, say 60 hours actually working 750 looms only.
Before the Tribunal various decisions were cited. Counsel for the revenue strongly relied on the decision of the Supreme Court in the case of Commissioner of Income-tax v. Maheshwari Devi Jute Mills Ltd., : 57ITR36(SC) and relying on the said decision it was contended that loom hours were fixed assets of the mills and loom hours being capital assets of a jute mill, a jute mill selling the same would be receiving capital receipt and another jute mill buying the same would be buying asset by way of capital expenditure. On behalf of the assessee it was contended that the aforesaid decision of the Supreme Court did not conclude the question as in that case the Supreme Court had proceeded on the footing that 'loom hours' was an asset and the Supreme Court did not permit any argument that 'loom hours' was in the nature of a self-imposed restriction not to work to full capacity or for full time and it was not an asset at all but a liability. It was further submitted on behalf of the assessee that if there were no restrictive covenants no jute mills would think of exhibiting on the balance-sheet as an asset the right to work 168 hours per week (24 hours a day for 7 days.) much less could it be said that the mills' liability to work a lesser number of loom hours would be an asset which could appear on the balance-sheet as such. Various decisions were also referred to in support of the contention that the payment in question for purchase of loom hours could not be considered to be a capital expenditure, On a consideration of the submissions made and the decisions cited the Tribunal held:
'(1) The loom hours of another mill have been acquired for periods of about six months and in any case for not more than a year.
(2) The benefit of the loom hours purchased exhausts itself after the expiry of six months or within a year.
(3) The assessee by voluntary agreement with other members of the jute mills association has cut down the hours of work to 45 hours per week and is permitted to work a few hours more, by arrangement with another mill which forgoes its own right correspondingly. This arrangement is more akin to a pooling arrangement whereby one mill can work extra hours and pay another mill for loss of profit to the extent the latter's hours of work are curtailed.
(4) The right to work extra hours is no doubt an advantage but its durability is limited to 12 months or less.
(5) The benefit of loom hours is not directly connected with fixed capital. It is more related to circulating capital being connected with hours of work during which goods could be produced. .
(6) In a business sense the payment is an operating cost and enters into the profit and loss account as influencing the output and the cost of production.'
18. On the basis of the aforesaid findings the Tribunal observed :
'We, therefore, hold that the sum of Rs. 2,03,255 is allowable as revenue expenditure deductible under Section 10(2)(xv) of the Indian Income-tax Act, 1922, since it is not in dispute that the expenditure has been incurred wholly and exclusively for the purpose of the business.'
19. Against the said decision of the Tribunal the department applied for a reference to this court and the Tribunal under Section 66(1) of the Indian Income-tax Act, 1922, has referred the question set out earlier. Mr. B. L. Pal, learned counsel for the revenue, has contended that the decision of the Tribunal is clearly erroneous as the Tribunal has failed to appreciate the decision of the Supreme Court in Maheshwari Devi Jute Mills' case and the decision of the Tribunal is contrary to the decision of the Supreme Court. Mr. Pal has submitted that the true nature of the transaction is to confer an additional right on the assessee to produce more, a right which the assessee did not otherwise have under the agreement. He has further submitted that the character of loom hours has been considered by the Allahabad High Court in the case of Maheshwari Devi Jute Mills' case and has been held to be capital in nature so far as the seller of loom hours is concerned and the decision of the Allahabad High Court has been affirmed by the Supreme Court by its decision in Commissioner of Income-tax v. Maheshwari Devi Jute Mills Ltd. Mr. Pal has argued that in view of the aforesaid decision of the Supreme Court loom hours must be considered to be capital asset of the mills. He contends that though the capital receipt by the seller for sale of a capital asset may not invariably lead to the conclusion that the payment made by the buyer for purchase of a capital asset from a seller must necessarily be a capital expenditure, yet in the facts of the instant case the sum spent on the purchase of loom hours, a capital asset in the hands of the seller, results in acquisition of a capital asset in the hands of the buyer and the sums spent, therefore, must be considered to be a capital expenditure. It is the contention of Mr. Pal that the character of loom hours remains the same and does not change when it passes from the buyer to the seller and in the hands of the buyer it retains the character of a capital asset in view of the nature of the agreement and as the seller and the buyer are both members of the association and as both run jute mills. Mr. Pal has argued that the loom hours really form a part of the profit making structure and the said character is retained in the hands of the mill who sells loom hours and also in the hands of the mill who buys them as both the seller and the buyer run jute mills, are members of the same association and are governed by the said agreement and they, therefore, stand on the same footing. In support of his submission Mr. Pal has strongly relied on the decision of the Allahabad High Court in Maheshwari Devi Jute Mills Ltd. v. Commissioner of Income-tax,  43 I.T.R 254 (All.), which has been affirmed by the decision of the Supreme Court in Commissioner of Income-tax v, Maheshwari Devi Jute Mills Ltd. Mr. Pal has submitted that whether a particular expenditure is revenue or capital in nature must necessarily depend on the facts of each particular case. He has commented that though various tests have been laid down in very many cases and such tests may be useful in appropriate cases, yet in the facts of the instant case the other decisions cannot be considered to be of any particular importance in view of the decision of the Supreme Court on an identical question.
20. Mr. K. Roy, learned counsel appearing on behalf of the assessee, has submitted that the decision of the Supreme Court in the case of Maheshwari Devi Jute Mills Ltd. does not conclude the question involved in the present case. Mr. Roy has submitted that in the said decision the Supreme Court did not decide the question as to whether the loom hours allotted to Maheshwari Devi Jute Mills under the working time agreement entered into by it were its capital assets and the Supreme Court, proceeding on the basis that such loom hours were its capital assets, decided that the sums received by it in respect of portions of such loom hours transferred to other mills were of a capital nature. It is the submission of Mr. Roy that, as the decision of the Supreme Court has proceeded on the basis of the assumption that loom hours are capital assets of the mills without deciding the said question and without allowing the said question to be urged, the said decision cannot be said to conclude the question as to the character of loom hours in the instant case and it is open to the assessee to urge that the loom hours do not form any part of the capital assets of the mills. Mr. Roy has further submitted that the decision of the Supreme Court was concerned with the question of the character of the receipt of the sum in the hands of the transferor by transfer of its loom hours and was not concerned with the question of the character of payment made by a mill for obtaining the necessary transfer of the loom hours by the transferee mill. Mr. Roy contends that the nature of payments made by the assessee in the instant case must, therefore, be decided independently of the said decision of the Supreme Court in the context of the assessee's own business and on the basis of the principles laid down by cases which have to deal with the question whether a particular expenditure is of a revenue character or is capital in nature. Mr. Roy has argued that even assuming that the portions of loom hours which were sold by mills were capital assets in the hands of the sellers which were jute mills, it would not follow that these loom hours became capital assets in the hands of the buyer by reason only of the fact that the buyer was also a jute mill. Mr. Roy argues that in so far as the sellers are concerned, the loom hours sold by them were related to and originated from the number of looms owned by them which were indisputably their capital assets and the loom hours sold by them were not 'turned over' or utilised by them in the course of carrying on their business in order to earn profits thereby, but were disposed of by them for a consideration. But, so far as the buyers are concerned, it is the argument of Mr. Roy that the loom hours purchased by them were wholly unrelated to the number of their own looms, the hours purchased by them were turned over by it for carrying on its own business in order to earn profits, the hours so purchased by them did not endure beyond the week, the advantage gained was exhausted and it was created to be exhausted during the week and by the operation of the aforesaid exhaustion of the loom hours purchased in its trade, stock-in-trade was produced and the same contributed to its revenue. Mr. Roy contends that by purchasing the loom hours from other mills, the assessee only purchased some hours for operating and working its existing looms in accordance with the provisions of the working time agreement. Mr. Roy has submitted that working time agreements entered into by the assessee and the other members of the association in the instant case cannot be considered to be part of the profit making structure of the assessee or the other mills. Mr. Roy argues that the profit-making structure of the assessees remains the same and there is no increase in the number of looms or in any part of this profit-making structure. It is his argument that the payment made by the assessee in purchasing the loom hours from other mills only allowed the assessee to work its existing looms for extra hours beyond the hours allotted to the assessee. According to Mr. Roy, the nature of the expenditure incurred is in essence the same as payment made by way of overtime to staff for working beyond fixed hours. Mr. Roy contends that working the looms for more hours by virtue of the purchaseof the loom hours of other mills enable the assessee to produce more and the expenditure incurred to enable the assessee to work its looms for the extra hours results in larger production enabling the assessee to make more profits. The expenditure incurred by the assessee, according to Mr. Roy, therefore, relates to the cost of operating the profit earning apparatus and does not relate to the acquisition of any part of the profit-earning apparatus. According to Mr. Roy, the expenditure incurred by the assessee goes to fill the hole in its profits which might otherwise have been affected by the restriction as to hours of working imposed and the said expenditure does not go to fill any hole in the profit-making apparatus which has remained the same and has not in any way been affected. In support of his submissions Mr. Roy has referred to the following decisions : Commissioner of Income-tax v. Vazir Sultan & Sons, : 36ITR175(SC) , India Cements Ltd. v. Commissioner of Income-tax, : 60ITR52(SC) , Van den Bergs Ltd. v. Clark, H.M. Inspector of Taxes,  3 I.T.R. (Eng. Cas.) 17 (H L.), Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd., : 20ITR451(SC) , Burmah Steamship Co. Ltd. v. Commissioners of Inland Revenue,  16 T.C. 67 (C. Sess.), Anglo-Persian Oil Co. Ltd. v. Dale (H. M. Inspector of Taxes),  16 T.C. 253 (C.A.), Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd.,  58 I.T.R. 241 (P.C.), Commissioner of Income-tax v. Finlay Mills Ltd.,  20 I.T.R. 475 (S.C ), Commissioner of Income-tax v. Coal Shipments P. Ltd., : 82ITR902(SC) , Kalyanji Mavji & Co. v. Commissioner of Income-tax, : 87ITR228(Cal) and Strick v. Regent Oil Co. Ltd.,  73 I.T.R. 301,  43 T.C. 1, 29 (H.L.)
21. Whether a particular expenditure is revenue or capital in nature necessarily depends on the facts and circumstances of each particular case. The decisions which have been referred to turn on the peculiar facts of those cases. The authorities cited seek to lay down and illustrate various principles in deciding the cases on their peculiar facts. Though various principles covering the question whether a particular expenditure or receipt is revenue or capital have been enunciated, the real difficulty mainly arises in seeking to apply the principles to the facts of a given case and the question in many cases poses a difficult problem. As Lord Reid observes in the case of Strick v. Regent Oil Company Ltd. :
'Whether a particular outlay by a trader can be set against income or must be regarded as a capital outlay has proved to be a difficult question. It may be possible to reconcile all the decisions, but it is certainly not possible to reconcile all the reasons given for them. I think that much of the difficulty has arisen from taking too literally general statements made in earlier cases and seeking to apply them to a different kind of case which their authors almost certainly did not have in mind--in seeking to treat expressions of judicial opinion as if they were words in an Act of Parliament. And a further source of difficulty has been a tendency in some cases to treat some one criterion as paramount and to press it to its logical conclusion without proper regard to other factors in the case.'
22. It is interesting to note the observations of Lord Upjohn in the very same case at page 51 : 'I suppose that no part of our law of taxation presents such almost insoluble conundrums as the decision whether a receipt or outgoing is capital or income for tax purposes. Parliament, wisely, has never given any general statutory guidance in this matter. It has been content to leave the determination of these difficult matters to the commonsense of the tribunals and judges before whom these matters are brought.'
23. The noble Lord further observes at pages 52-53 :
'How, then, is this problem to be solved My Lords, there is one matter upon which counsel on both sides are agreed: that it is the duty of the court to consider every relevant fact, giving its due weight, and then to reach a conclusion upon the whole matter. I cannot but recall the observation of Sir Wilfrid Greene M. R. in Commissioners of Inland Revenue v. British Salmson Aero Engines Ltd., [1939) 7 I.T.R. 245,  2 K.B. 482 (C.A.), where he said :
'There have been many cases which fall on the borderline. Indeed, in many cases it is almost true to say that the spin of a coin would decide the matter almost as satisfactorily as an attempt to find reasons.'
Somewhat cynical, but true, it is a question of fact and degree and above all judicial commonsense in all the circumstances of the case, and, while no one regrets it more than I, I do not believe it is possible to lay down any principle, when dealing with trading contracts, which would be of any guidance alike to Crown and subject in future cases.'
24. The nature, capital or revenue, of the expenditure is mainly to be judged from a consideration of the transaction in respect of which it was made.
25. In the instant case the payment was made for purchase of loom hours. The nature and character of loom hours has mainly to be considered and ascertained on a trade construction of the agreement against the general commercial background of the assessee's trading business. The nature and character of the loom hours on the basis of an identical agreement came up for consideration before the Allahabad High Court in the case of Maheshwari Devi Jute Mills Ltd. v. Commissioner of Income-tax*. The decision of the Allahabad High Court was affirmed on appeal by the Supreme Court and the decision of the Supreme Court is Commissioner of Income-tax v. Maheshwari Devi Jute Mills Ltd. The Allahabad High Court was, of course, concerned with the question of receipt of money by sale of 'loom hours' by a mill to another mill in terms of and on the basis of the identical agreement. While deciding the question of the nature of the sum received by the selling mill from the buying mill in the hands of the selling mill, the Allahabad High Court considered the nature and character of 'loom hours' and the transaction of sale in relation thereto. On a construction of the agreement and on a consideration of the relevant materials the Allahabad High Court held that loom hours were assets of a capital nature and formed part of the profit-making apparatus of the assessee and the sum received by sale thereof was, therefore, capital receipt and was not revenue in character. The Allahabad High Court observed at pages 264-265 :
'The mere fact that the loom hours are not a tangible asset would not justify the view, that they are anything of the nature of a product of the assessee's business or that they are in any way different from a part of the profit-making structure of the assessee. It has often been a problem for judges to distinguish between capital and income in cases which fall on what may be called the borderline. 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 these 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 100 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 voluntaryagreement 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 assessee's 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.'
26. The court further observed at page 266 :
'We cannot overlook the fact that with the development of science and the introduction of essentially new commercial conceptions, assets of intangible 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.'
27. The court held at page 268 :
'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.'
28. Against the said decision of the Allahabad High Court the department preferred an appeal to the Supreme Court, The Supreme Court by its judgment in Commissioner of Income-lax v. Maheshwari Devi Jute Mills Ltd. upheld the decision of the Allahabad High Court and dismissed the said appeal. It appears that before the Supreme Court a contention was sought to be raised that loom hours were in the nature of a privilege and were not an asset at all and the Supreme Court did not allow the said contention to be raised. The Supreme Court observed at page 39:
'In the proceedings before the income-tax authorities, the Tribunal and the High Court, these 'loom hours' have been regarded as an asset belonging to each member and in considering these appeals we do not think we would be justified 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 considered on the footing that by virtue of the covenant incorporated in the agreements 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.'
29. Distinguishing the case of Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd., : 20ITR451(SC) , the Supreme Court observed at page 40 :
'Receipt from a commercial asset when it is capable of being used by the assessee but it is not so used because of circumstances which necessitate the cesser of its use would undoubtedly be income, where the asset remains 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.'
30. The Supreme Court did not accept as correct the decision of the Allahabad High Court in another case between Maheshwari Devi Jute Mills Ltd. v. Commissioner of Income-tax in which a Division Bench of the Allahabad High Court had held that payments received for sale of 'loom hours' was revenue in character and was taxable. Dealing with the said decision the Supreme Court observed at page 40 :
'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 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. Itwas 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 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 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.'
31. Relying on the fact that the Supreme Court had not allowed the contention that 'loom hours was in the nature of privilege and was not an asset at all' to be raised before the Supreme Court, Mr. Roy has argued that, as the said contention before the Supreme Court was not at all raised, it cannot be said that the Supreme Court decided that 'loom hours' were capital assets. Relying on the said fact, Mr. Roy has submitted that it is open to him to argue in the instant case that 'loom hours' are not assets at all and the decision of the Supreme Court cannot be said to conclude this question. I am unable to accept this submission of Mr. Roy. 'Loom hours' which are capable of being used by a mill in its own business or being transferred to another mill for a consideration must be considered to be an asset of the mill concerned. The Supreme Court was concerned with the question of the correctness or otherwise of the decision of the Allahabad High Court in holding that the sum received by sale of 'loom hours' is capital receipt and is not taxable. The nature or character of the sum received by sale of 'loom hours', whether it was capital or revenue, was the subject-matter of the appeal before the Supreme Court. In deciding the said question the Supreme Court had to consider the nature of the transaction in 'loom hours' and in considering the nature of the transaction in 'loom hours', the Supreme Court held that 'loom hours' were capital assets of the company and, in that view of the matter, the Supreme Court decided that the sum received by sale of 'loom hours' which were capital assets was capital receipt and was not revenue receipt.as with the sale of 'loom hours' the seller completely parted with ownership of the asset and the disposal of 'loom hours' could not be considered to be an exploitation of the said asset by permitting user thereof while retaining its ownership. The decision of the Supreme Court, therefore, in my opinion, concludes the question that 'loom hours' are capital assets of the mills. The decision of the Supreme Court that the sum received by disposal of the loom hours is capital receipt and not income which is taxable in the light of the Supreme Court's observation that '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', clearly indicates, to my mind, that 'loom hours' cannot be considered to be a part of the circulating capital and the Supreme Court did not consider the 'loom hours' to be a part of the circulating capital. Further, the Supreme Court's disapproval of the views expressed by the Allahabad High Court in the other case of Maheshwari Devi Jute Mills Ltd. in which such receipt was held to be income and taxable as such and the Supreme Court's upholding the decision of the Allahabad High Court in the case under appeal before them indicate, in my opinion, that the Supreme Court held the 'loom hours' to form a part of its fixed asset, the profit-making structure of the assessee. As, in my opinion, the Supreme Court in the case of Maheshwari Devi Jute Mills Ltd. has held that 'loom hours' form a part of the profit-making structure of the mills and is, therefore, a part of the capital asset of the company, I must hold that the said decision of the Supreme Court concludes the question of the nature and character of 'loom hours'. This nature and character of the asset remain the same and are not in any way changed, when it changes hands and passes from one mill to another, The seller who sells his 'loom hours' sells a part of his fixed assets or profit-making structure and the money that he receives for the sale is capital receipt in his hands, being the sale proceeds of a capital asset. The buyer who purchases the 'loom hours', therefore, necessarily purchases a part of the profit-making structure or fixed asset and the same necessarily form a part of the capital asset in the hands of the buyer, being an acquisition to the buyer's profit-making apparatus or fixed asset. The payment made by the buyer for purchasing the 'loom hours' cannot, therefore, be regarded as revenue expenditure and has to be considered to be capital expenditure. As, in my view, the decision of the Supreme Court in the case of Maheshwari Devi Jute Mills Ltd. more or less covers the question in the present case and is an authority on the question, of the nature and character of transactions in 'loom hours', the main question involved in the. present reference, I do not consider it necessary to consider the various authorities cited from the Bar. The following observations of Lord Macmillan in Van den Bergh's case, quoted by Lord Reid in the case of Strick v. Regent Oil Company Ltd., tend to lend support to this view on the nature of the agreement:
'The three agreements which the appellants consented to cancel were not ordinary commercial contracts made in the course of carrying on their trade; they were not contracts for the disposal of their products, or for the engagement of agents or other employees necessary for the conduct of their business ; nor were they merely agreements as to how their trading profits when earned should be distributed as between the contracting parties. On the contrary, the cancelled agreements related to the whole structure of the appellants' profit-making apparatus. They regulated the appellants activities, defined what they might and what they might not do, and affected the whole conduct of their business.'
32. I must, therefore, hold that the Tribunal failed to appreciate properly the decision of the Supreme Court in the case of Maheshwari Devi Jute Mills Ltd. and was in error in holding the expenditure in question to be revenue in character. I have, therefore, to answer the question in the negative in favour of the revenue and against the assessee.
33. I, however, wish to observe that if I could have persuaded myself to hold that the Supreme Court has not decided the nature and character of 'loom hours' and has not held the same to be a capital asset of the company, as forming a part of its fixed asset, I would have hesitated in coming to the conclusion that payment for purchase of ''loom hours' by the assessee is capital expenditure and not revenue in character. The purchase of 'loom hours' has only enabled the assessee to work its looms for extra time. Time, in my view, should not be normally considered to be a part of the profit-earning apparatus. A day consists of 24 hours which will always remain fixed. A particular businessman may run his factory for 24 hours and thereby utilise the full period. Another person may not be in a position to work his factory for more than 12 hours and others may work their factory for shorter or longer periods. Effective and proper utilisation of time in running the factory is concerned with the working of the factory and it may yield larger profits. It relates essentially to the operation of the profit-earning apparatus for earning better profits. The profit-earning apparatus remains the same and by working the apparatus for a longer period, it cannot, in my opinion, be said that there has been any addition to the profit-making apparatus or to the capita] structure of the business. Any expenditure incurred for working the existing profit-making apparatus for earning better profits should normally be considered to be revenue expenditure. Speaking for myself, on a construction of the working agreement, I am of the opinion that in the interest of the members who entered into the said agreement and their trade the members have chosen to fix particular hours for working their looms to regulate production according to business needs of the market. This voluntary restraint has been imposed in the larger interest of the trade and the members carrying on the trade. The restraint creates an impediment to the working of the looms for longer periods than provided for in the said agreement. Provision has, however, also been made in- the said agreement for relaxation of the hours fixed and for transfer of 'loom hours' by one member to another. Payment made by a member for purchase of 'loom hours' is indeed in the nature of payment made to remove an impediment for operating a part of the profit-earning apparatus, namely, the looms, for longer hours to make more profits and the payment is not made for acquiring any new looms. The profit-making structure remains the same and unaltered and there is no increase in the number of looms which only work for longer hours. An expenditure incurred for removing any impediment in working the profit-making structure for earning better profits should normally be considered to be revenue expenditure. The payment by the assessee in the instant case has been made to enable the assessee to work its existing looms for longer hours by utilising the 'loom hours' purchasing from other members in accordance with the provisions of the working time agreement. Let us suppose that in the instant case there was no working time agreement imposing any restraint on the assessee's right to work its looms for any fixed hours and the assessee was free to work its looms for 24 hours, but the assessee has entered into an agreement with the union representing the labour that the assessee will not run its factory including the looms for more than 8 hours a day and the labourers will not be required to work for more than 8 hours in the course of a day. The assessee secures a very large order which is to be completed within a prescribed period and for completing the said order within the time fixed it becomes imperative for the assessee to work its mills including the looms for 16 hours every day instead of the agreed 8 hours a day. Notwithstanding the agreement with the labour fixing the hours of work to 8 hours a day the assessee succeeds in persuading its labour to work 16 hours a day for completing the said order and pays over-time or additional remuneration to its labour to secure permission and participation of its labour for and in working its mills including the looms for 16 hours a day. Can it be said that theadditional expenditure incurred by the assessee for working the mills including its looms for 16 hours a day for the completion of the order will be capital expenditure of the assessee In my opinion, such expenditure must necessarily be considered to be revenue expenditure. In examining the nature of any payment made, it is always important to consider not so much why the payment was made but for what it was made. In the case of Strick v. Regent Oil Company Ltd., Lord Wilberforce very aptly observes at pages 54-55 :
'In the course of numerous decisions which have distinguished between capital and revenue expenditure in relation to widely different trades and varying circumstances, certain 'tests' have emerged. These may be useful, so long as it is recognised that they have emerged a posteriori from the facts of a given situation and that they may not always be suitable as guiding lines in other situations. I begin by asking two questions, which may be said to be generally relevant: what is the nature of the payment and for what was the payment made These, together with a third question, namely, how that for which the payment was made was to be used, were stated by Dixon J. in his classic judgment in Sun Newspapers Ltd. v. Federal Commissioner of Taxation, 61 C.L.R. 337. There are, he said, at page 363a ' three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it ; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.' I may add to this another statement by the same learned judge in the later case of Hallstrom's Proprietary Ltd. v. Federal Commissioner of Taxation, 72 C.L.R. 634 'what is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process.' '
34. The payment in the instant case by the assessee was undoubtedly made to purchase 'loom hours' of other members for enabling the assessee to work its existing looms for longer hours. Working the looms for longer hours relates essentially to the operation of the existing looms for earning more profits. The effect of the purchase of the 'loom hours' is not to add anything to the existing looms or the capital structure of the assessee and is only to enable the assessee to earn more profits by workingits existing looms for longer hours. The right or the advantage that the assessee derives by purchase of the 'loom hours' is indeed transitory and very short-lived and the 'loom hours' purchased must be exhausted within a fixed short period. The extra profits which the assessee may make by working its looms for longer periods by utilising the 'loom hours' purchased, will undoubtedly be business income of the assessee and will be liable to be taxed as such. In the general commercial background of the assessee and from a practical and business point of view the expenditure incurred by the assessee in purchasing the loom hours for utilising the same for working its looms for longer hours for making larger production and earning more profits should be regarded as a revenue expenditure, as by incurring the said expenditure there is no addition to the capital structure of the assessee and the existing mills of the assessee does not derive any enduring benefit or advantage. The benefit is connected with the hours of work of operating the existing looms for greater production and larger profits and is related more to the circulating capital of the company.
35. However, in view of the decision of the Supreme Court and our understanding and interpretation thereof, as earlier noted, the question, as already answered, has to be answered in the negative, in favour o the revenue and against the assessee. Each party will pay and bear its own costs.
36. I agree.