COMMISSIONER OF INCOME-TAX U.P. LUCKNOW versus THE MAHESHWARI DEVI JUTE MILLS LTD. KANPUR

Citation: [1965] 3 S.C.R. 765 · Decided: 15-04-1965 · Supreme Court of India · Bench: K. SUBBA RAO · Disposal: Dismissed

Judgment (excerpt)

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COMMISSIONER OF INCOME-TAX U.P. LUCKNOW 
v. 
THE MAHESHWARI DEVI JUTE MILLS LTD. KANPUR 
April 15, 1965 
JK. SuBBA RAO, J. C. SHAH ANDS. M. SIKRI, JJ.J 
J11c0Jne-ta.J..'-Salf of asset--Capit(il. receipt _or income. 
To protect the interests of its members against loss resulting 
from over ·production, the Jute Mills Association provided that the 
members shall work their looms for a fixed number of hours and 
gave to its members facility of transferring "loom-ho.ui"S", that is, 
the number of hours for which the members were enhtled to work 
their factories. A member of the Association v.1as thereby permit-
ted. in addition to the ''loom hours" allotted to that member, to work 
its factory for such "loom hours" as were transferred to it by another 
member. The respondent-assessee had transferred its surplus "loom 
hours'' whic.h it could not utilize during the assessment years, and 
received certain sums of money as consideration, \Vhich the Income-
tax Officer included in the respondent's total income liable for pay-
ment of income-tax. That order was confirmed by the Appellate As-
sistant Commissioner and the Tribunal, but the High Court on a re-
ference, held in favour of· the assessee. 
In his appeal to this Court, the Commissioner contended that: 
The right to work for the allotted number of hours was an asset of 
the assessee capable of being transferred, and where it was 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 con-
cern or by letting it out to others, the consideration received for 
allowing the transferee to use that asset was income received from 
business and chargeable to income tax. 
HELD: The High Court was right in holding that the receipts 
from sale of "loom-hours
11 were in the nature of capital receipts and 
were not taxable. (770 EJ 
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. Sale of stock-in-trade or circulating capital or 
rendering service in the course of trading results in a trading re-
ceipt; sale. of assets which the assessee uses as fixed capital to enable 
him to carry on his business results in capital receipt. The "loom-
hours" v.1ere the asset of the respondent, but their temporary user 
could not be granted. The transaction was therefore a sale of "loom-
hours", and 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. (769 E, Fl 
Commissioner of Excess Profits Tax, Bombay City v. Sri Lakshmi 
Silk Mills, (1952] S.C.R. 1, distinguished. 
Maheshwari Devi Jute Mills v. Commissioner of Income-tax U.P. 
LT. Misc. Case. decided on 13th September 1962, overruled. 
76.5 
766 
~UPltEMli: 
COURT 
AEPOR1'.< 
(196.~] 3 ii.C.R. 
CIVIL APPELLATE J URISDICflON: Civil Appeals Nos. 66 and 
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67 of 1964. 
Appeals from the judgment and decree March 28, 1961 of the 
Allahabad High Court in Income-tax Reference No. 165 of 1954. 
S. V. G·upte, Solicit<;r-General, R. Ganapathy Iyer and R. N. 
Sad1they, for the appellant (in both the appeals). 
B 
A. V. Vfawanatha Sastri, S. Murthy and B. P. Maheshwari, 
for the respondent (in both the' appeals). 
The Judgment of the Court was delivered by • 
Shah, J. The Maheshwari Devi Jute Mills Ltd. carries on the 
business of manufacturing jute goods and is a member oi the Jute 
Mills Association. To protect the members against loss resulting 
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from overproduction, members of the Association entered into an 
agreement dated January 9, 1932 called "the First Working Time 
Agreement" restricting hours of work. That agreement ·was 
to 
expire on December 11, 1944. With a view to continue the arrange-
ment, a fresh agreement was d.ecuted on June 12, 1944. The 
preamble of the agreement was: 
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"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 emp-
loyees and of the association and the jute industry and 
trade in general etc ...................... have 
determined 
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that provisions similar to those contained in the Work-
ing Time Agreement should be ·entered into and con-
tinued in manner hereinafter appearing". 
By cl. 4 of the agreement, the association imposed restrictions 
upon the hours of work of 

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