Loom hour transactions treated as revenue: purchase cost deductible, sale proceeds taxed as business income, and brokerage allowed.

Expenditure incurred to purchase loom hours was held to be revenue in nature because it did not create a new asset or enlarge the profit-making apparatus, but merely enabled fuller use of the existing looms by relaxing a trading restriction; the amount was therefore deductible. Receipts from sale of loom hours were treated as revenue receipts arising in the course of business, not capital gains, because no capital asset was transferred in the relevant sense. Brokerage paid on such sale was also allowable as revenue expenditure, as it related to a business transaction and was not disqualified by the character of the underlying receipt.

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Issues: (i) Whether the sums paid for purchase of loom hours were capital expenditure or revenue expenditure deductible in computing the assessee's income. (ii) Whether the receipts from sale of loom hours were assessable as capital gains or as business income. (iii) Whether brokerage paid on the sale of loom hours was admissible as revenue expenditure.

Issue (i): Whether the sums paid for purchase of loom hours were capital expenditure or revenue expenditure deductible in computing the assessee's income.

Analysis: The controlling principle applied was that purchase of loom hours did not create any new asset and did not enlarge the fixed capital or profit-making apparatus. The payment merely enabled the assessee to operate its looms by relaxing the working-time restriction, and the expenditure was incurred for the purpose of carrying on business.

Conclusion: The expenditure was revenue in nature and was allowable as a deduction. The answer is in favour of the assessee.

Issue (ii): Whether the receipts from sale of loom hours were assessable as capital gains or as business income.

Analysis: The sale of loom hours did not involve transfer of a capital asset in the relevant sense. The amount realised represented a revenue receipt arising in the course of business and was therefore taxable under the head of business income rather than as capital gains.

Conclusion: The receipts were not capital gains but revenue receipts assessable as income from business. The answer is in favour of the Revenue.

Issue (iii): Whether brokerage paid on the sale of loom hours was admissible as revenue expenditure.

Analysis: Since the receipt from sale of loom hours was treated as a revenue receipt and the expenditure was incurred in relation to that business transaction, the brokerage was not disqualified as a revenue outgoing merely because of the nature of the underlying sale.

Conclusion: The brokerage expenditure was admissible as revenue expenditure. The answer is in favour of the assessee.

Final Conclusion: The reference was answered by holding that the purchase of loom hours was deductible as revenue expenditure, the sale proceeds of loom hours were taxable as business income, and the brokerage on such sale was also allowable as revenue expenditure.

Ratio Decidendi: Expenditure incurred to acquire loom hours that merely relaxes a trading restriction is revenue expenditure, and the corresponding sale proceeds are revenue receipts assessable as business income rather than capital gains.

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