Commissioner Of Income Tax v. M/S Kanoria Sugar &General

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 138 / 2008 Commissioner Of Income Tax ----Appellant Versus M/S Kanoria Sugar &General ----Respondent Connected With D.B. Income Tax Appeal No. 129 / 2008 Commissioner Of Income Tax ----Appellant Versus M/S Kanoria Sugar &General ----Respondent D.B. Income Tax Appeal No. 137 / 2008 Commissioner Of Income Tax ----Appellant Versus M/S Kanoria Sugar &General ----Respondent D.B. Income Tax Appeal No. 91 / 2012 C I T Jaipur ----Appellant Versus M/S Kanoria Sugar And General Manu ----Respondent _____________________________________________________ For Appellant(s) : Mr. Anuroop Singhi with Mr. Aditya VijayFor Respondent(s) : Mr. Gunjan Pathak with Ms. Ishita Rawat _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERIHON'BLE DR. JUSTICE VIRENDRA KUMAR MATHURJudgment 23/05/2017 1In all these appeals identical questions of law and facts arisetherefore they are decided by the common judgment. 2.By way of these appeals, the appellant-department haschallenged the judgment of the Tribunal whereby the Tribunal hasdismissed the appeal of the Department and also cross-objectionsof the assessee. 3.While admitting the appeals, this Court framed the following substantial question of law: Appeal No. 138 / 2008 “(i) Whether the ITAT was right and justifiedin treating the payment of interest ofRs.3,10,13,781/- as revenue expenditureeven when the capital borrowed was used forpurchase of capital assets? (ii) Whether the ITAT was justified in holdingthat Explanation 1 to Section 41(1) of the Actwas not retrospective in nature and thus, wasnot applicable to the present assessmentyear? (iii) Whether the ITAT was right and justifiedin treating the payment of expensesamounting to Rs. 4,50,84,615/- as revenueexpenditure even when the same werecapitalized and entered as pre-operativeexpenses by the assessee itself in its books ofaccounts? (iv) Whether the ITAT was justified in deletingthe addition of Rs. 16,00,000/-, being liabilityin respect of leave and licence fees payable toKanoria Industries Ltd. written back by theassessee, inspite of the specific provisions ofSection 41(1) and its Explanations? (v) Whether the ITAT was justified in allowingthe expenses of Rs. 50,000/-, as LabourWelfare expenses even when the assesseehas failed to show that the said amount waswholly and exclusively utilized for businesspurposes? (iv) Whether the ITAT was justified in deletingthe disallowance of Rs. 43,032/-, being 1/5thof depreciation on vehicle, disallowed onaccount of personal use, even when nojustification was provided by the assessee?’’ Appeal No. 129 / 2008 “(i) Whether the ITAT was right and justifiedin treating the payment of interest of Rs.1,50,37,292/-, as revenue expenditure evenwhen the capital borrowed was used forpurpose of capital assets? (ii) Whether the ITAT was justified in deletingthe addition of Rs. 24,53,779/- being liabilityin respect of leave and licence fees payable toKanoria Industries Ltd. Written back by theassessee, inspite of the specific provisions ofSection 41(1) and its Explanations? (iii) Whether the ITAT was right and justifiedin treating the payment of upfront fees toIDBI of Rs.5,51,250/- as revenue expenditureeven when the capital borrowed was used forpurchase of capital assets?” Appeal No. 137 / 2008 “(i) Whether the ITAT was right and justifiedin holding the amount of Rs.24,72,912/-,being incentive received on sugar quotaallocated for free sale, as capital receiptignoring the fact that receipt earned duringbusiness operations through higher price salecan only be termed as revenue receipt” (iii) Whether the ITAT was right and justifiedin treating the payment of upfront fees toIDBI of Rs.5,51,250/- as revenue expenditureeven when the capital borrowed was used forpurchase of capital assets?” Appeal No. 137 / 2008 “(i) Whether the ITAT was right and justifiedin holding the amount of Rs.24,72,912/-,being incentive received on sugar quotaallocated for free sale, as capital receiptignoring the fact that receipt earned duringbusiness operations through higher price salecan only be termed as revenue receipt” (ii) Whether the ITAT was justified in deletingthe addition of Rs.1,27,76,000/- andRs.2,28,08,000/-, being liabilities in respectof interest on sugar and cane price differencerespectively, written back by the assesseeinspite of the specific provisions of Section41(1) and its Explanations?” Appeal No. 91 / 2008 “(i) Whether the ITAT was right and justifiedin treating the payment of interest ofRs.22,53,267/- as revenue expenditure evenwhen the capital borrowed was used forpurpose of capital assets? (ii) Whether the ITAT was right and justified intreating the payment of Rs. 2,71,87,089/- asrevenue expenditure?” These questions if taken in tabular form reads as under: Serial No.Issues1.Incentive received on sugar quota2.Issues regarding the unilateral write of liabilities (Section 41(1) of the Income Tax Act, 1961)3.Payment of interest used for purchase of capital assets4.Pre-operative expenses5.Labour welfare expenses6.Depreciation on vehicle 3Heard learned counsel for the parties. 4. Regarding question No. 1 which has arisen in tax appeal No. 137/2008 in our considered opinion the tribunal has rightlyobserved that the addition made by the AO is required to bedeleted in view of the fact that the same is incentive which hasbeen received by the assessee. The Tribunal in para 11.4 observedas under. “11.4 Considering the arguments advanced by theparties in view of the orders of the lowerauthorities, material available on record as well asthe decision relied on by the Ld. AR, we are notinclined to interfere with the first appellate order,as the ld. CIT (A) has rightly deleted the additionparties in view of the orders of the lowerauthorities, material available on record as well asthe decision relied on by the Ld. AR, we are notinclined to interfere with the first appellate order,as the ld. CIT (A) has rightly deleted the addition with the observation and finding on the issue atpage no. 6 and 7 of the first appellate order,relevant extract of which are being reproducedhereunder for a ready reference. “………. According to this incentive schemethe incentive was given in sugar projects to makethem viable, the repayment of loan has to be bysurplus funds generated through higher free sale oflevy sugar the extra amount collected is meant tobe utilized for repayment of loan. The submissionof the appellant is that he is collecting this amountwith an obligation to make repayment of term loanadvanced by Central Financial Institutions &therefore it cannot be treated as part of hisincome. He relied on SC case in CIT Vs. BijaliCotton Mills P. Ltd. 116 ITR 60 & also in CIT Vs.V.P.J. Chemicals 210 ITR 830. According, toassessee this is an amount which ultimately is tobe utilized to encourage the entrepreneur to opt forextension. This similar issue came up forconsideration by ITAT, “A” Bench Calcutta in ITA No.2032 &2033 in case of CIT Vs. Balrampur ChiniMills Ltd. where it was held that realization throughadditional free sale of sugar quota under theSampat Incentive Similarly in case of CIT (Spl.Range) Ghaziabad of M/s Simbhaoli Sugar Mill Ltd.the Delhi Bench in a Third member decisions in ITANo. 1439/D/90 also held that incentive by theappellant under the Sampat Incentive Schemerelating to expansion of project was in the natureof capital receipt & the addition made by Ld. AO ofRs. 24,72,912/- is directed to be deleted.” In the case of CIT Vs. Ponni Sugars & ChemicalsLtd. (Supra) it is held that if the true character ofthe incentive is to enable the assessee to meet thecapital cost, then that true character should havebeen given full recognition and the fact that thereceipt is subsequent to the commencement ofproduction is not to be allowed to stand in the wayof its proper treatment as a receipt in the capitalfiled meant to meet a capital cost. In the case of CIT Vs. Balrampur Chini Ltd. (supra)the Hon’ble Calcutta High Court approved the orderof ITAT PB 53 to 60, by holding that concessiongiven for additional capacity either in existingfactories or new factories alongwith additional freesale quota under the Sampath Incentive Schemeon condition that realization should be used forrepaying loans taken for financial institutions is acapital receipt not liable to tax. In the case of CIT Vs. Maduran Tankan C-operative Sugar Mills Ltd. (supra) it was held that incentivereceived by way of rebate on excise duty payableand increased percentage of levy free quota ofsugar is not assessable as income of the assessee.We thus uphold the first appellat order. The GroundNo. 3 is rejected.” 5.Therefore the view taken by the Tribunal is just and proper.No interference is called for. 6.Second issue regarding the liabilities under Section 41 of theIncome Tax Act, 1961. The issue is squarely covered by thedecision of Supreme Court in the case of Commissioner of IncomeTax Vs. Sugauli Sugar Works (P) LTD: (1999) 236 ITR 0518,holding as under: 3. It will be seen that the following words in thesection are important "the assessee had obtained,whether in cash or in any other manner whatsoeverany amount in respect of such loss or expenditureor some benefit in respect of such trading liabilityby way of remission or cessation thereof, theamount obtained by him". Thus, the sectioncontemplates the obtaining by the assessee of anamount either in cash or in any other mannerwhatsoever or a benefit by way of remission orcessation and it should be of a particular amountobtained by him. Thus, the obtaining by theassessee of a benefit by virtue of remission orcessation is sine qua non for the application of thissection. The mere fact that the assessee has madean entry of transfer in his accounts unilaterally willnot enable the department to say that section 41would apply and the amount should be included inthe total income of the assessee. The reasoning ofthe High Court is correct and we are in agreementwith the same. 6. Learned counsel also referred to the judgment ofthe Bombay High Court in CIT v. Bennett Coleman &Co. Ltd. The Bench held that it was difficult toaccept the contention of the assessee that cessationof liability can take place only as a result of abilateral act, but it will depend upon the facts ofeach case. The Bench pointed out that there may becases where the liability is not barred by operation 6. Learned counsel also referred to the judgment ofthe Bombay High Court in CIT v. Bennett Coleman &Co. Ltd. The Bench held that it was difficult toaccept the contention of the assessee that cessationof liability can take place only as a result of abilateral act, but it will depend upon the facts ofeach case. The Bench pointed out that there may becases where the liability is not barred by operation of law, but in such cases bilateral act of the partieswill be necessary to bring about cessation ofliability. According to the Bench, if the recovery hadbecome barred by limitation by operation of law,unilateral expression of intention of the debtor notto treat the amount any more as liability might besufficient to bring about a cessation of the liability.The Bench also accepted the alternative argumentthat where an assessee had written off his timebarred liability from his accounts and transferredthe amount to his profit and loss account therebytreating it as his income, he could not be permittedto turn round when the question of inclusion of suchamount in his income under section 41(1) of the actarose. The Bench distinguished the judgment inKohinoor Mills Co. Ltd. v. CIT, by observing thatthere was no cessation of liability in that casedespite the expiry of period of limitation to enforcethe same. The Bench said that the assessee couldnot get rid of his liability when called upon to meeteither by the employees under the IndustrialDisputes act or by the government under theBombay Welfare Fund act on account of the specialprovisions of those Acts. We are unable to acceptthe reasoning of the Bombay High Court in thatcase. Just because an assessee makes an entry inhis books of account unilaterally, he cannot get ridof his liability. The question whether the liability isactually barred by limitation is not a matter whichcan be decided by considering the assessee's casealone but it is a matter which has to be decided onlyif the creditor is before the concerned authority. Inthe absence of the creditor, it is not possible for theauthority to come to a conclusion that the debt isbarred and has become unenforceable. There maybe circumstances which may enable the creditor tocome with a proceeding for enforcement of the debteven after expiry of the normal period of limitationas provided in the Limitation Act. 10. The principle that expiry of period of limitationprescribed under the Limitation act could notextinguish the debt but it would only prevent thecreditor from enforcing the debt, has been wellsettled. It is enough to refer to the decision of thiscourt in Bombay Dyeing & Manufacturing Co. Ltd. v.State of Bombay & Ors. 1958 SCR 1122. If thatprinciple is applied, it is clear that mere entry in thebooks of account of the debtor made unilaterallywithout any act on the part of the creditor will notenable the debtor to say that the liability has cometo an end. Apart from that, that will not by itselfconfer any benefit on the debtor as contemplated by the section.” 7.Other decision on the issue is reported in ChiefCommissioner of Income Tax Vs. Kesaria Tea Co. LTD.: (2002) 254ITR 0434, wherein it has been observed as under: by the section.” 7.Other decision on the issue is reported in ChiefCommissioner of Income Tax Vs. Kesaria Tea Co. LTD.: (2002) 254ITR 0434, wherein it has been observed as under: “4. It may be noted that the provision was made inthe books of account towards purchase tax whichwas under dispute and the benefit of deduction frombusiness income was availed of in the past years inrelation thereto. The same was sought to bereversed by the assessee during the year ending on31.3.1985 for whatever reason it be. The question iswhether the circumstances contemplated by Section41(1) exists so as to enable the Revenue to takeback what has been allowed earlier as businessexpenditure and to include such amount in theincome of the relevant assessment year i.e. 1985-86. In order to apply Section 41(1) in the context ofthe facts obtaining in the present case, the followingpoints are to be kept in view : (1) In the course ofassessment for an earlier year, allowance ordeduction has been made in respect of tradingliability incurred by the assessee; (2) Subsequently,a benefit is obtained in respect of such tradingliability by way of remission or cessation thereofduring the year in which such event occurred; (3) inthat situation the value of benefit accruing to theassessee is deemed to be the profit and gains ofbusiness which otherwise would not be his income;and “(4) such value of benefit is made chargeable toincome tax as the income of the previous yearwherein such benefit was obtained. The High Court,agreeing with the Tribunal, rightly held that theresort to Section 41(1) could arise only if the liabilityof the assessee can be said to have ceased finallywithout the possibility of reviving it. On the factsfound by the Tribunal, the Tribunal as well as theHigh Court were well justified in coming to theconclusion that the purchase tax liability of theassessee had not ceased finally during the year inquestion. Despite the finality attained by thejudgment in Neroth Oil Mills'case, the other issueshaving bearing on the exigibility of purchase tax stillremained and the dispute between the assessee andthe sales-tax department was still going on. There isno material on record to rebut these factualobservations made by the Tribunal. Nor can it besaid that the reasons given by the Tribunal are irrelevant. 5. The learned senior counsel appearing for theIncome Tax Department has contended that theassessee itself took steps to write-off the liability onaccount of purchase tax by making necessaryadjustments in the books, which itself is indicative ofthe fact that the liability ceased for all practicalpurposes and therefore, the addition of amount ofRs. 3,20,758/- deeming the same as income of theyear 1985-86 under Section 41(1) is well justified ofthe Act. But, what the assessee has done is notconclusive. As observed by the Tribunal, anunilateral action on the part of the assessee by wayof writing-off the liability in its accounts does notnecessarily mean that the liability ceased in the eyeof law. In fact, this is the view taken by this Court inCITv.SuguliSugarWorks(P)Ltd.:[1999]236ITR518(SC) . We, therefore, find nosubstance in the contention advanced on behalf ofthe appellant. Incidentally, we may mention that thecontroversy relates to the period anterior to theintroduction of Explanation 1 to Section 41(1).” 8.Therefore the issue is answered in favour of assesssee and against the department 9.Issue No. 3 : It relates to payment of interest used forpurchased of capital assets. The same is squarely covered by thedecision of Supreme Court in the case of Empire Jute Co. LTD. Vs.Commissioner of Income Tax: (1980) 124 ITR 0001, wherein ithas been held as under: 8.Therefore the issue is answered in favour of assesssee and against the department 9.Issue No. 3 : It relates to payment of interest used forpurchased of capital assets. The same is squarely covered by thedecision of Supreme Court in the case of Empire Jute Co. LTD. Vs.Commissioner of Income Tax: (1980) 124 ITR 0001, wherein ithas been held as under: “4. In the first place it is not a universally trueproposition that what may be a capital receipt in thehands of the payee must necessarily be capitalexpenditure in relation to the payer. The fact that acertain payment constitutes income or capital receiptin the hands of the recipient is not material indetermining whether the payment is revenue orcapital disbursement qua the payer. It was felicitouslypointed out by Macnaghten, J. in Race Course BettingControl Board v. Wild 22 TC 182 that a "paymentmay be a revenue payment from the point of view ofthe payer and a capital payment from the point ofview of the receiver and vice versa. Therefore, the decision in Maheshwari Devi Jute Mills' case (supra)cannot be regarded as an authority for theproposition that payment made by an assessee forpurchase of loom hours would be capital expenditure.Whether it is capital expenditure would have to bedetermined having regard to the nature of thetransaction and other relevant factors. But, more importantly, it may be pointed out thatMaheshwari Devi Jute Mills' case (supra) proceededon the basis that loom hours were a capital asset andthe case was decided on that basis. It was commonground between the parties throughout theproceedings, right from the stage of the Income-taxOfficer upto the High Court, that the right to work thelooms for the allotted hours of work was an assetcapable of being transferred and this Court thereforedid not allow counsel on behalf of the Revenue toraise a contention that loom hours were in the natureof a privilege and were not an asset at all. Since itwas a commonly accepted basis that loom hourswere an asset of the assessee, the only argumentwhich could be advanced on behalf of the Revenuewas that when the assessee transferred a part of itshours of work per week to another member, thetransaction did not amount to sale of an assetbelonging to the assessee, but it was merely theturning of an asset to account by permitting thetransferee to use that asset and hence the amountreceived by the assessee was income from business.The Revenue submitted that "where it is a part of thenormal activity of the assessee's business to earnprofit by making use of its asset by either employingit in its own manufacturing concern or by letting itout to others, consideration received for allowing thetransferee to use that asset is income received frombusiness and chargeable to income tax". Theprinciple invoked by the Revenue was that "receipt bythe exploitation of a commercial asset is the profit ofthe business irrespective of the manner in which theasset is exploited by the owner in the business, forthe owner is entitled to exploit it to his bestadvantage either by using it himself personally or byletting it out to somebody else." This principle,supported as it was by numerous decisions, wasaccepted by the court as a valid principle, but it waspointed out that it had no application in the casebefore the court, because though loom hours were anasset, they could not from their very nature be letout while retaining property in them and there couldbe no grant of temporary right to use them. Thecourt therefore concluded that this was really a caseof sale of loom hours and not of exploitation of loom hours by permitting user while retaining ownershipand, in the circumstances, the amount received bythe assessee from sale of loom hours was liable to beregarded as capital receipt and not income. It willthus be seen that the entire case proceeded on thecommonly accepted basis that loom hours were anasset and the only issue debated was whether thetransaction in question constituted sale of this assetor it represented merely exploitation of the asset bypermitting its user by another while retainingownership. No question was raised before the courtas to whether loom hours were an asset at all norwas any argument advanced as to what was the truenature of the transaction. It is quite possible that ifthe question had been examined fully on principle,unhampered by any pre-determined hypothesis, thecourt might have come to a different conclusion. Thisdecision cannot, therefore, be regarded as anauthority compelling us to take the view that theamount paid for purchase of loom hours was capitaland not revenue expenditure. The question is resIntegra and we must proceed to examine it on firstprinciple. 5. It is quite clear from the terms of the working timeagreement that the allotment of loom hours todifferent mills constituted merely a contractualrestriction on the right of every mill under thegeneral law to work its looms to their full capacity. Ifthere had been no working time agreement, each millwould have been entitled to work its loomsuninterruptedly for twenty four hours a daythroughout the week, but that would have resulted inproduction of jute very much in excess of thedemand in the world market, leading to unfaircompetition and precipitous fall in jute price and inthe process, prejudicially affecting all the mills andtherefore with a view to protecting the interest of themills who were members of the Association, theworking time agreement was entered into restrictingthe number of working hours per week for whicheach mill could work its looms. The allotment ofworking hours per week under the working timeagreement was clearly not a right conferred on a mill,signatory to the working time agreement. It wasrather a restriction voluntarily accepted by each millwith a view to adjusting the production to thedemand in the world market and this restriction couldnot possibly be regarded as an asset of such mill.This restriction necessarily had the effect of limitingthe production of the mill and consequentially alsothe profit which the mill Could otherwise make by working full loom hours. But a provision was made inClause 6(b) of the working time agreement that thewhole or a part of the working hours per week couldbe transferred by one mill to another for a period ofnot less than six months and if such transfer wasapproved and registered by the Committee of theAssociation, the transferee mill would be entitled toutilise the number of working hours per weektransferred to it in addition to the working hours perweek allowed to it under the working timeagreement, while the transferor mill would cease tobe entitled to avail of the number of working hoursper week so transferred and these would be liable tobe deducted from the number of working hours perweek otherwise allotted to it. The purchase of loomhours by a mill had therefore the effect of relaxingthe restriction on the operation of looms to theextent of the number of working hours per weektransferred to it, so that the transferee mill couldwork its looms for longer hours than permitted underthe working time agreement and increase itsprofitability. The amount spent on purchase of loomhours thus represented consideration paid for beingable to work the loom for a longer number of hours.It is difficult to see how such payment could possiblybe regarded as expenditure on capital account. 6. The decided cases have, from time to time,evolved various tests distinguishing between capitaland revenue expenditure but no test is paramount orconclusive. There is no all embracing formula whichcan provide a ready solution to the problem; notouchstone has been devised. Every case has to bedecided on its own facts keeping in mind the broadpicture of the whole operation in respect of which theexpenditure has been incurred. But a few testsformulated by the court may be referred to as theymight help to arrive at a correct decision of thecontroversy between the parties. One celebrated testis that laid down by Lord Cave, L.C. in BritishInsulated and Helsby Cables Ltd. v. Atherton 10 TC155 where the learned Law Lord stated : "….When an expenditure is made, not only once andfor all, but with a view to bringing into existence anasset or an advantage for the enduring benefit of atrade, there is very good reason (in the absence ofspecial circumstances leading to an oppositeconclusion) for treating such an expenditure asproperly attributable not to revenue but to capital.'' This test, as the parenthetical clause shows, mustyield where there are special circumstances leadingto a contrary conclusion and, as pointed out by Lord Radcliffe in Commissioner of Taxes v. NchangaConsolidated Copper Mines Ltd. [1965] 58 I.T.R. 241it would be misleading to suppose that in all cases,securing a benefit for the business would be primafacie capital expenditure "so long as the benefit is notso transitory as to have no endurance at all." Theremay be cases where expenditure, even if incurred forobtaining advantage, of enduring benefit, may, none-the-less, be on revenue account and the test ofenduring benefit may break down. It is not everyadvantage of enduring nature acquired by anassesses that brings the case within the principle laiddown in this test. What is material to consider is thenature of the advantage in a commercial sense and itis only where the advantage is in the capital field thatthe expenditure would be disallowable on anapplication of this test. If the advantage consistsmerely in facilitating the assessee's tradingoperations or enabling the management and conductof the assessee's business to be carried on moreefficiently or more profitably white leaving the fixedcapital untouched, the expenditure would be onrevenue account, even though the advantage mayendure for an indefinite future. The test of enduringbenefit is therefore not a certain or conclusive testand it cannot be applied blindly and mechanicallywithout regard to the particular facts andcircumstances of a given case. But even if this testwere applied in the present case, it does not yield a conclusion in favour of the Revenue. Here, bypurchase of loom hours no new asset has beencreated. There is no addition to or expansion of theprofit making apparatus of the assessee. The incomeearning machine remains what it was prior to thepurchase of loom hours. The assessee is merelyenabled to operate the profit making structure for alonger number of hours. And this advantage is clearlynot of an enduring nature. It is limited in its durationto six months and, moreover, the additional workinghours per week transferred to the assessee have tobe utilised during the week and cannot be carriedforward to the next week. It is, therefore, notpossible to say that any advantage of enduringbenefit in the capital field was acquired by theassessee in purchasing loom hours and the test ofenduring benefit cannot help the Revenue. Another test which is often applied is the one basedon distinction between fixed and circulating capital.This test was applied by Lord Haldane in the leadingcase of John Smith & Son v. Moore 12 TC 266 wherethe learned law Lord draw the distinction between fixed capital and circulating capital in words whichhave almost acquired the status of a definition. Hesaid : Another test which is often applied is the one basedon distinction between fixed and circulating capital.This test was applied by Lord Haldane in the leadingcase of John Smith & Son v. Moore 12 TC 266 wherethe learned law Lord draw the distinction between fixed capital and circulating capital in words whichhave almost acquired the status of a definition. Hesaid : "Fixed capital (is) what the owner turns to profit bykeeping it in his own possession; circulating capital(is) what he makes profit of by parting with it andletting it change masters." Now as long as the expenditure in question can beclearly referred to the acquisition of an asset whichfalls within one or the other of these two categories,such a test would be a critical one. But this test alsosometimes breaks down because there are manyforms of expenditure which do not fall easily withinthese two categories and not infrequently, as pointedout by Lord Radeliffe in Commissioner of Taxes v.Nchanga Consolidated Copper Mines Ltd. (supra), theline of demarcation is difficult to draw and leads tosubtle distinctions between profit that is made "outof" assets and profit that is made "upon" assets or"with" assets. Moreover, there may be cases whereexpenditure, though referable to or in connectionwith fixed capital, is never-the-less allowable asrevenue expenditure. An illustrative example wouldbe of expenditure incurred in preserving ormaintaining capital assets. This test is thereforeclearly not one of universal application. But even ifwe were to apply this test, it would not be possible tocharacterise the amount paid for purchase of loomhours as capital expenditure, because acquisition ofadditional loom hours does not add at all to the fixedcapital of the assessee. The permanent structure ofwhich the income is to be the produce or fruitremains the same; it is not enlarged. We are not surewhether loom hours can be regarded as part ofcirculating capital like labour, raw material, poweretc., but it is clear beyond doubt that they are notpart of fixed capital and hence even the application ofthis test does not compel the conclusion that thepayment for purchase of loom hours was in thenature of capital expenditure. 7. The Revenue however contended that by purchaseof loom hours the assessee acquired a right toproduce more than what it otherwise would havebeen entitled to do and this right to produceadditional quantity of goods constituted addition to oraugmentation of its profit making structure. Theassessee acquired the right to produce a largerquantity of goods and to earn more income and this,according to the Revenue, amounted to acquisition ofa source of profit or income which though intangiblewas never-the-less a source or 'spinner' of income 7. The Revenue however contended that by purchaseof loom hours the assessee acquired a right toproduce more than what it otherwise would havebeen entitled to do and this right to produceadditional quantity of goods constituted addition to oraugmentation of its profit making structure. Theassessee acquired the right to produce a largerquantity of goods and to earn more income and this,according to the Revenue, amounted to acquisition ofa source of profit or income which though intangiblewas never-the-less a source or 'spinner' of income and the amount spent on purchase of this source ofprofit or income therefore represented expenditure ofcapital nature. Now it is true that if disbursement ismade for acquisition of a source of profit or income,it would ordinarily, in the absence of any othercountervailing circumstances, be in the nature ofcapital expenditure. But we fail to see how it can atall be said in the present case that the assesseeacquired a source of profit or income when itpurchased loom hours. The source of profit or incomewas the profit making apparatus and this remaineduntouched and unaltered. There was no enlargementof the permanent structure of which the incomewould be the produce or fruit. What the assesseeacquired was merely an advantage in the nature ofrelaxation of restriction on working hours imposed bythe working time agreement, so that the assesseecould operate its profit-earning structure for a longernumber of hours. Undoubtedly, the profit earningstructure of the assessee was enabled to producemore goods, but that was not because of anyaddition or augmentation in the profit makingstructure, but because the profit making structurecould be operated for longer working hours. Theexpenditure incurred for this purpose was primarilyand essentially related to the operation or working ofthe looms which constituted the profit earningapparatus of the assessee. It was an expenditure foroperating or working the looms for longer workinghours with a view to producing a larger quantity ofgoods and earning more income and was therefore inthe nature of revenue expenditure. We are consciousthat in law as in life, and particularly in the field oftaxation law, analogies are apt to be deceptive andmisleading, but in the present context, the analogy ofquota right may not be inappropriate. Take a casewhere acquisition of raw material is regulated byquota system and in order to obtain more rawmaterial, the assessee purchases quota right ofanother. Now it is obvious that by purchase of suchquota right, the assessee would be able to acquiremore raw material and that would increase theprofitability of his profit making apparatus, but theamount paid for purchase of such quota right wouldindubitably be revenue expenditure, since it isincurred for acquiring raw material and is part of theoperating cost. Similarly, if payment has to be madefor securing additional power every week, suchpayment would also be part of the cost of operatingthe profit making structure and hence in the natureof revenue expenditure, even though the effect ofacquiring additional power would be to augment the productivity of the profit-making structure. On thesame analogy payment made for purchase of loomhours which would enable the assessee to operatethe profit-making structure for a longer number ofhours than those permitted under the working timeagreement would also be part of the cost ofperforming the income earning operations and hencerevenue in character.” 10.Issue No. 4: The issue regarding pre-operative expenses iscovered by decision of this Court in the case of CommissionerIncome Tax Vs. Smt. Jyoti Devi: (2008) 218 CTR 0264, wherein it has been observed as under: productivity of the profit-making structure. On thesame analogy payment made for purchase of loomhours which would enable the assessee to operatethe profit-making structure for a longer number ofhours than those permitted under the working timeagreement would also be part of the cost ofperforming the income earning operations and hencerevenue in character.” 10.Issue No. 4: The issue regarding pre-operative expenses iscovered by decision of this Court in the case of CommissionerIncome Tax Vs. Smt. Jyoti Devi: (2008) 218 CTR 0264, wherein it has been observed as under: “12. The precise question, therefore is, as to whetherin the present case, any subsequent information, ormaterial have come to the notice of the AO, to enablehim to form a requisite belief, that any particularincome has escaped assessment, which was liable tobe assessed, and apart from the fact, that as foundby the learned CIT(A), and the learned Tribunal, thatthere was no subsequent information, or freshmaterial, we again pointedly asked the learnedCounsel for the Revenue to point out, as to howthese findings are wrong, and to show even to us, ifthere is any material, which might have come to thenotice of the AO subsequently, but the learnedCounsel for the Revenue could not point out any one.13. That being the position, in our view, it was rightlyfound by the learned CIT(A), and the learnedTribunal, that it was merely a change of opinion onthe part of the learned AO, about admissibility ofclaim of depreciation on tractors, and in view of theJudgment of Hon'ble the Supreme Court, in CIT v.Bhanji Lavji's case (supra), the AO could not initiatereassessmentproceedings.14. In view of the above, question No. 1 is answeredagainst the Revenue, and it is held, that in thecircumstances of the case, the resort to proceedingsunder Section 147, was outcome of mere change ofopinion. So far as question No. 2 is concerned, in ourview it does not arise in the present case, because itis not a case here, that the AO has failed to makeregular assessment within the time permitted, afterassessmentunderSection143(1)(a).Thus, we do not find any force in the appeal, and thesameis,therefore,dismissed.” hence, require no interference. 12.Therefore all the issues are answered in favour of assessee and against the department. 13.All these appeals stand dismissed. 14.A copy of this judgment be placed in each of the file. (VIRENDRA KUMAR MATHUR),J. (K.S. JHAVERI),J. B.M. Gandhi/175-178