TaxTMI 
TaxTMI 
1993 (9) TMI 174
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.... order contain provisions enabling Government to issue, from time to time, directions necessary to control the production of cotton textiles as the situation warranted. And the Government did issue such directions. One of the directions issued related to the pattern and profile of production of cotton and cotton blended yarn. Of relevance to the matter on hand is Notification No. CER/17/79 dated 29-6-1979 issued by the Textile Commissioner, Department of Industrial Development, Ministry of Industry, Government of India. The said Notification, which superseded the earlier Notification of 14-1-1974, stipulated, inter alia, as follows : "2. Every producer of yarn shall pack yarn for civil consumption in hank form in each quarter commencing from the July-September 1979 quarter and in every subsequent quarter in proportion of not less than fifty per cent of total yarn packed by him during each quarter for civil consumption. Provided that not less than eighty-five per cent of the yarn required to be packed in hank form shall be of counts 40s and below." The said Notification was circulated to all member mills by the Southern India Mills' Association, Coimbatore under cover of....
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....sessed under section 28(iv) of the Act. (ii) Even otherwise, the receipts having arisen in the course of the assessee's business, they are of revenue nature. (iii) No comparison can be made between the transfer of loom hours and the transfer of bank yarn obligation. Hence, the decided cases like CIT v. Clive Mills Co. Ltd. [1984] 148 ITR 14 (Cal.) referred to and relied upon by the assessee's counsel cannot apply to the facts of this case. (iv) Whereas the transfer of loom hours was contractual, the transfer of hank yarn obligation is statutory. In view of the foregoing, therefore, the CIT (Appeals) dismissed the assessee's appeals on this issue. 5. It is in these circumstances that the assessee is now before us. Shri N. Quadir Hoseyn, the learned counsel for the assessee, took us through the facts and circumstances of the case and contended that the receipts in question are very much analogous to the receipts occasioned by the transfer of loom hours and hence they are of capital nature. Consequently, the ratios of (i) the Supreme Court case of CIT v. Maheshwari Devi Jute Mills Ltd. [1965] 57 ITR 36 and (ii) the Calcutta case of Clive Mills Co. Ltd. are squarely appl....
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....e to be issued as a matter of State policy and with a view to regulating the pattern and profile of cotton textile production. The said order enabled the Government to regulate, inter alia, production of cotton yarn/cotton blended yarn. It was persuant to the enabling powers vested in Government that Notification No. CER/17/79 of 29-6-1979 came to be issued. The operative part of the said Notification contains a direction to the effect : "Every producer of yarn shall pack yarn for civil consumption in hank form in each quarter commencing from the July-September 1979 quarter and in every subsequent quarter in proportion of not less than fifty per cent of total yarn packed by him during each quarter for civil consumption : Provided that not less than eighty-five per cent of the yarn required to be packed in hank form shall be of counts 40s and below." The effect of the said direction is that a spinning mill producing, say, 100 units of cotton/cotton blended yarn, will be obligated to adhere to the following production pattern : Categories of yarn Form of packing No. of units  ....
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....ce yarns of higher counts which are priced high and which are naturally more profitable. But that would have put cotton cloth beyond the reach of the weaker sections of the society. Hence the said regulatory directions. 10. This brings us on to the scheme for transfer of hank yarn obligation formulated by the Indian Cotton Mills Federation, Bombay. The Government was perhaps satisfied with the stipulated pattern of the cotton yarn production being achieved at the macro level and that the Government was not too particular in insisting upon the stipulated pattern being achieved by each and every production unit of the cotton yarn industry. Otherwise the scheme of transfer of hank yarn obligation formulated by the Federation could not be understood. Be that as it may, the Federation, it is a matter of record, did formulate such a scheme. The significance of the scheme is best understood from the perspective of the spinning mills. As already pointed out, left to themselves the mills would prefer to produce yarn of higher counts, and this will be particularly so in cases of mills specialising in the production of yarn of higher counts. The production of higher counts of yarn being....
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....tax as such. 12. On first principles, therefore, the hank yarn obligation premium (Rs. 3,93,171 relating to the assessment year 1983-84, and Rs. 99,753 relating to the assessment year 1984-85), going as they did to fill the hole in the assessee's profits created by the transferred obligation, are revenue receipts and are taxable as such. 13. Such then is the conclusion on first principles. Let us see whether it is sustainable on authority. 14. At the outset we may point out that neither the learned counsel for the assessee nor the learned Departmental Representative drew out attention to any decided cases in which the true nature of "hank yarn obligation premium" of the type received by the assessee was considered. Both the sides referred to and relied upon certain cases which were concerned with "loom hours". 15. First, a few words about "loom hours". Right from 1939, it would appear, the demand of jute in the world market was slack. With a view to adjusting the production of the Indian jute mills to the slackened world demand, a working arrangement was entered into by the members of the Indian Jute Mills Association for the purpose of restricting the number of working....
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....h a reverse situation. namely, purchase by the assessee of loom hours from other mills for a consideration. The question that arose for consideration was whether the price paid was revenue deductible or not. The Supreme Court held that the price paid was deductible under section 10(2)(xv)) of the Income-tax Act, 1922, because "the expenditure incurred by the appellant for the purpose of removing a restriction on the number of working hours for which it could operate its looms with a view to increasing its profits was revenue in nature and allowable as a deduction under section 10(2)(xv). By the purchase of loom hours no new asset was created and there was no addition to or expansion of the profit-making apparatus of the appellant". It is significant to note that in the said case the Tribunal had held that the expenditure incurred by the appellant was revenue in nature and hence deductible in computing the assessee's profits. On its part, the Calcutta High Court feeling that the decision of the Supreme Court in Maheshwari Devi Jute Mills Ltd.'s case concluded the matter, held that the amount paid by the assessee for purchase of loom hours was in the nature of capital expenditure ....
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.... the transaction did not amount to sale of an asset belonging to the assessee, but it was merely the turning of an asset to account by permitting the transferee to use that asset and hence the amount received by the assessee was income from business. The revenue submitted that 'where it is a part of the normal activity of the assessee's business to earn profit by making use of its asset by either employing it in its own manufacturing concern or by letting it out to others, consideration received for allowing the transferee to use that asset is income received from business and chargeable to income-tax'. The principle invoked by the revenue was that 'receipt by the exploitation of a commercial asset is the profit of the business, irrespective of the manner in which the asset is exploited buy the owner in the business, for the owner is entitled to exploit it to his best advantage either by using it himself personally or by letting it out to somebody else'. This principle, supported as it was by numerous decisions, was accepted by the court as a valid principle, but it was pointed out that it had no application in the case before the court, because though loom hours were an asset, the....
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.... to a different conclusion." In paragraphs 8 to 12 of this order we have examined the matter on first principles and have come to the conclusion that the hank yarn obligation premium received by the assessee was revenue receipt and is chargeable to tax as such. 20. In the case of Dalhousie Jute Co. Ltd. the Calcutta High Court was concerned with the sale proceeds of loom hours. Relying on the Supreme Court decision in Empire Jute Co. Ltd.'s case the Court held that the sale proceeds were revenue receipts. 21. The Calcutta case of Clive Mills Co. Ltd. needs to be noticed next. There the assessee-company, which was in liquidation, had sold loom hours for an aggregate consideration of Rs. 1,18,126. Perhaps keeping in mind the Supreme Court case of Maheshwari Devi Jute Mills Ltd., (in which it had been held that the sale proceeds of loom hours was capital in nature), the Assessing Officer treated the sale proceeds as short term capital gains. The Tribunal decided the matter in favour of the assessee on the ground that the loom hours did not cost anything in terms of money to the assessee, and that consequently the question of computing capital gains did not arise. Thereupon....
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....y section 31 are not convered by section 37(3A). The said argument found favour with the first appellate authority, who directed the Assessing Officer to exclude insurance premia and the repair expenses relating to the cars and to rework the disallowance to be made. 26. On hearing both the sides, we decline to interfere with the matter, because the decision of the first appellate authority on this issue is in consonance with the ratio of the Bombay case of CIT v. Chase Bright Steel Ltd. (No. 1) [1989] 177 ITR 124. We, accordingly, reject the related grounds. 27. (ii) Treatment of initial depreciation allowed in the earlier assessment years --- The assessee claimed aggregate depreciation allowance of Rs. 59,84,739. The Assessing Officer found that while claiming depreciation allowance in the said sum the assessee had not reduced the WDV of labour quarters by the initial depreciation allowed thereon in the assessments for the assessment years 1979-80 and 1983-84. The Assessing Officer carried out the said adjustment and allowed depreciation on the WDV as revised downward in the process of making the adjustment referred to above. The CIT(A) allowed the assessee's claim in ....