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EMPIRE JUTE CO. LTD. V. C.I.T. (1980) 4 SCC 25

 

EMPIRE JUTE CO. LTD. V. C.I.T. (1980) 4 SCC 25

FACTS

  • Empire Jute Co. Ltd., a member of the Indian Jute Mills Association, purchased loom hours from other members for Rs 2,03,255.
  • These purchases were made under the fourth working time (Five years from December 12, 1954) agreement, which regulated working hours for jute mills.
  • The company claimed this amount as revenue expenditure, arguing it was part of operating costs.
  • Initially, the claim was disallowed by the Income Tax Officer, but the Appellate Assistant Commissioner allowed it on appeal.
  • The Revenue appealed to the Tribunal, which upheld the decision, considering the expenditure as revenue in nature.
  • The High Court initially inclined towards the Tribunal's view but reversed its decision citing C. I. T. v. Maheshwari Devi Jute Mills Ltd. [(1965) 57 ITR 36], ruling the amount paid for purchasing loom hours as capital expenditure.
  • Hence, the present appeal in SC.

ISSUE

  • Whether the payment made by the assessee for the purchase of loom hours should be considered as capital expenditure or revenue expenditure for the purpose of taxation? (Reference Sec 37(1) of Income Tax Act 1961)

RULE

  • Expenditure should be considered revenue expenditure if it is laid out as part of the profit-earning process and is not for the acquisition of a permanent asset or right essential for carrying on the business.

HELD

  • The court noted that the payment was not contested to have been made exclusively for the business's purpose but was argued to be capital expenditure by the Revenue.
  • The court examined the Maheshwari Devi Jute Mills case, which dealt with a similar issue but on the sale side (i.e., receiver) of loom hours, and clarified that what may be a capital receipt for the recipient does not necessarily make the payment capital expenditure for the payer.
  • It was highlighted that the case of Maheshwari Devi Jute Mills proceeded on the basis that loom hours were considered a capital asset, and the debate centered around whether the transaction constituted sale or exploitation of the asset.
  • The court emphasized that the purchase of loom hours did not create a new asset but merely enabled the operation of the profit-making apparatus for longer hours, thus enhancing productivity.
  • In Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd, [1964 AC 948], The analogy drawn from this case supported the view that the expenditure incurred for the purchase of loom hours was revenue expenditure, as it was related to enhancing the profitability of the business's operations.
  • In Commissioner of Taxes v. Canon Company [45 TC 10] the expenditure for the purchase of loom hours, aimed at removing restrictions on working hours to increase profits, was also considered revenue expenditure.
  • The court held that the payment for the purchase of loom hours constituted revenue expenditure and was allowable as a deduction under Section 10(2)(xv) of the Income Tax Act.
  • Appeal allowed. In favour of assessee.

 

COMMENTARIES RATIO/NOTE

  • 141.2-1 GENERAL PRINCIPLES - To decide whether an expenditure is capital or revenue in nature, the following points of distinction should also be kept in mind:
  • Acquisition of fixed assets v. Routine expenditure - Capital expenditure is incurred in acquiring extending or improving a fixed asset, whereas revenue expenditure is incurred in the normal course of business as a routine business expenditure.
  • Several previous years v. One previous year - Capital expenditure produces benefits for several previous years, whereas revenue expenditure is consumed within a previous year.
  • Improvements v. Maintenance - Capital expenditure makes improvements in earning capacity of a business. Revenue expenditure, on the other hand, maintains the profit-making capacity of a business.
  • Non-recurring v. Recurring - Usually capital expenditure is a non-recurring outlay, whereas revenue expenditure is normally a recurring outlay.
  • Lump sum payment v. Periodic payment-In order to determine whether an expenditure is capital or revenue in nature, the fact that it is a lump sum payment or periodic payment is not important. 
  • Expenditure out of capital v. Expenditure out of revenue-For determining whether expenditure is of capital or revenue nature, it is immaterial whether expenditure is made out of money withdrawn from capital or out of profits-Schenectady Beck India Ltd. v. CIT [2004] 91 ITD 23 (Mum.) (TM).