# The Supreme Court Reports. COMMISSIONER OF EXCESS PROFIT TAX BOMBAY CITY v. SRI LAKSHMI SILK MILLS LTD

- **Citation:** [1952] 1 S.C.R. 1
- **Court:** Supreme Court of India
- **Decided:** 1952
- **Case number:** Civil Appeal No. 46 of 1950
- **Bench:** Saiyid Fazl Ali, Mehr Chand Mahajan, MuKHERJEA
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/the-supreme-court-reports-commissioner-of-excess-profit-tax-bombay-city-v-sri-233
- **Pages:** 21

## Headnote

Excess Profits Tax Act (XV of 1940), s. 2 (5)-"lncome from
business"-Manufacturing company-Rent o:f plant and machin·
ery let out to others-Whether income from business.
The respondent, a company formed for the purpose of manufacturing silk cloth, installed a plant for dyeing silk yarn as
a
part of its business.
During the chargeable accounting
period
(1st January, 1943, to 31st Decembell, 1943) owing to difficulty in
obtaining silk yarn on account of the war, it could make no use
of this plant and it remained idle for some time. In August, 1943,
the pl_ant was let out to' another company on a monthly rent.
The question being whether the income received by the respondent company in the year 1943 by way of rent of this plant was
income from business and assessable to excess profits tax, the
High Court of Bombay held that, as the assessee was not able to
use the plant as a commercial asset, it had ceased to be a commercial asset. in the assessee's hands and the rent
received
was
not income from business. On appeal:
Held, that an asset which was acquired and used for the pur-
. pose of the business by a company formed for carrying on
business and earning profits, does not cease to be . a commercial asset
of that business as soon as it is temporarily put out of use or let
out to another person for use in his business or trade ; the income
from the asset would be profit of the business irrespective of the
manner in which that asset is exploited by the owner, and the
rent in question was therefore income from business and assessable to excess profits tax.
No general principle, however, can be
laid down which is applicable to all cases.
Each case has to be
decided on its own circumstances.
.
Sutherland v. Commissioners of Inland Revenue [1918] 12 Tax
Cas. 63 relied on.
Inland Revenue Commissioners v. Iles (1_?47] 1 A.E.R. 798, Croft
v. Sywell Aerodrome Co., Ltd. [1942] 1 A.E.R. 110, Inland Revenue
Commissioners v. Broadway
Car Co., Ltd.
[1946] 2 A.E.R. 609
distinguished.
Judgment of the Bombay High Court reversed.
1951
Sept. 18.
1951
Commissioner of
Excess Profits
Tax, Bombay
City
v.
Sri Lakshmi
Silk Mills Ltd.
SUPREME COURT REPORTS
[1952]
CML
APPELLATI!
J U!USDICTION :
Civil
Appeal
No. 46 of 1950.
Appeal by special leave from a judgment of the High
Court of Judicature at Bombay dated
23rd
March,
1948, (Chagla C.J. and Tendolkar J.) in Income Tax
Reference No. 16 of 1947.
M. C. Setalvad, Attorney-General for India ( Gopal
Singh, with him) for the appellant.
N. C. Chatterjee
(B. Sen, with him) for the respondent.
1951. September 18. The Judgment of the Court was
delivered by
MAHAJAN J.-The sole controversy in this appeal
centres round the point as to whether or not excess
profits tax
is payable on the sum of Rs. 20,005
received by the respondent from Messrs Parakh & Co.
by way of rent for the dyeing plant let out to them
during the chargeble accounting period.
The respondent (Sri Lakshmi Silk Mills Ltd.) is a
manufacturer of silk cloth, and as a part of its business
t
it installed a plant for dyeing silk yarn. During the
•
chargea\jle accounting
Jl<lr~od (1st January, 1943, to
31st December,
1943) owing to difficulty in obtaining
silk yarn on account of the war it could make no use
of this plant and it remained idle for some time. On
the 20th August,
1943,
it
was
let out
to
Messrs
E. Parakh & Co. on a rent of Rs. 4,001 per month.
The Excess Profits Tax Officer by his assessment order
dated 11th June, 1945, included the sum of Rs. 20,005
t
realized as rent for five months, in the
profit~ of the
business of the respondent and held that excess profits
..
tax was payable on this
amount.
This
order was
confirmed on appeal by the Appellate Assistant Commissioner and on further appeal by the Income-tax
Tribunal.
The Tribunal,
however, on
being asked
referred the following question of law to the High
Court for its opinion :
"Whether in the
circumstances of the case, the
...
assessee's income of Rs. 20,005 is profits from business
*
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## Text

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The Supreme Court Reports.
COMMISSIONER OF EXCESS PROFIT TAX
BOMBAY CITY
v.
SRI LAKSHMI SILK MILLS LTD.
[ SAIYID FAZL ALI, MEHR CHAND MAHAJAN
AND MuKHERJEA JJ.]
Excess Profits Tax Act (XV of 1940), s. 2 (5)-"lncome from
business"-Manufacturing company-Rent o:f plant and machin·
ery let out to others-Whether income from business.
The respondent, a company formed for the purpose of manufacturing silk cloth, installed a plant for dyeing silk yarn as
a
part of its business.
During the chargeable accounting
period
(1st January, 1943, to 31st Decembell, 1943) owing to difficulty in
obtaining silk yarn on account of the war, it could make no use
of this plant and it remained idle for some time. In August, 1943,
the pl_ant was let out to' another company on a monthly rent.
The question being whether the income received by the respondent company in the year 1943 by way of rent of this plant was
income from business and assessable to excess profits tax, the
High Court of Bombay held that, as the assessee was not able to
use the plant as a commercial asset, it had ceased to be a commercial asset. in the assessee's hands and the rent
received
was
not income from business. On appeal:
Held, that an asset which was acquired and used for the pur-
. pose of the business by a company formed for carrying on
business and earning profits, does not cease to be . a commercial asset
of that business as soon as it is temporarily put out of use or let
out to another person for use in his business or trade ; the income
from the asset would be profit of the business irrespective of the
manner in which that asset is exploited by the owner, and the
rent in question was therefore income from business and assessable to excess profits tax.
No general principle, however, can be
laid down which is applicable to all cases.
Each case has to be
decided on its own circumstances.
.
Sutherland v. Commissioners of Inland Revenue [1918] 12 Tax
Cas. 63 relied on.
Inland Revenue Commissioners v. Iles (1_?47] 1 A.E.R. 798, Croft
v. Sywell Aerodrome Co., Ltd. [1942] 1 A.E.R. 110, Inland Revenue
Commissioners v. Broadway
Car Co., Ltd.
[1946] 2 A.E.R. 609
distinguished.
Judgment of the Bombay High Court reversed.
1951
Sept. 18.
1951
Commissioner of
Excess Profits
Tax, Bombay
City
v.
Sri Lakshmi
Silk Mills Ltd.
SUPREME COURT REPORTS
[1952]
CML
APPELLATI!
J U!USDICTION :
Civil
Appeal
No. 46 of 1950.
Appeal by special leave from a judgment of the High
Court of Judicature at Bombay dated
23rd
March,
1948, (Chagla C.J. and Tendolkar J.) in Income Tax
Reference No. 16 of 1947.
M. C. Setalvad, Attorney-General for India ( Gopal
Singh, with him) for the appellant.
N. C. Chatterjee
(B. Sen, with him) for the respondent.
1951. September 18. The Judgment of the Court was
delivered by
MAHAJAN J.-The sole controversy in this appeal
centres round the point as to whether or not excess
profits tax
is payable on the sum of Rs. 20,005
received by the respondent from Messrs Parakh & Co.
by way of rent for the dyeing plant let out to them
during the chargeble accounting period.
The respondent (Sri Lakshmi Silk Mills Ltd.) is a
manufacturer of silk cloth, and as a part of its business
t
it installed a plant for dyeing silk yarn. During the
•
chargea\jle accounting
Jl<lr~od (1st January, 1943, to
31st December,
1943) owing to difficulty in obtaining
silk yarn on account of the war it could make no use
of this plant and it remained idle for some time. On
the 20th August,
1943,
it
was
let out
to
Messrs
E. Parakh & Co. on a rent of Rs. 4,001 per month.
The Excess Profits Tax Officer by his assessment order
dated 11th June, 1945, included the sum of Rs. 20,005
t
realized as rent for five months, in the
profit~ of the
business of the respondent and held that excess profits
..
tax was payable on this
amount.
This
order was
confirmed on appeal by the Appellate Assistant Commissioner and on further appeal by the Income-tax
Tribunal.
The Tribunal,
however, on
being asked
referred the following question of law to the High
Court for its opinion :
"Whether in the
circumstances of the case, the
...
assessee's income of Rs. 20,005 is profits from business
*
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.S.C.R.-
SUPREME COURT REPORTS
_3
.within the meaning of section
Profits Tax Act and therefore
2 (5) of the Excess
1951
pay excess profits tax?"
or otherwise liable to_ .,.
. .
_ /
-
. "ommzsszoner o
'
1~ 1 • Excess Profits
--The
High
Court
negative.
This is an
this decision.
aiiswered the question 'in the
Tax, ~ombay
appeal by
special leave from
City
It · was contended on behal£ of the Commissioner
before the High Court that the dyeing plant was a
commercial asset of the assessee' s business for the
purpose of earning profit and if this commercial asset
yielded income to him in .any particular manner, it
was income from the assessee's business for the purpose
of the Exces15 Profits Tax Act. It was said that it
_was immaterial
whether
a
commercial
asset yields
income by use of the assessee himself or its being us~d
by someone else.
This contention was disposed of by
the learned Chief Justice in these words:-
"Mr. Joshi seems to be right but with this qualification that the commercial asset must be at the time
it was let out in a condition to be used as a commercial
asset by the assessee. If it has ceased to be a commercial asset, if its use as a commercial asset has been
discontinued, then if the assessee lets it out, he is not
putting to use something which is a commercial asset
at the time ..
"Now, on the facts found by the Tribunal, it is clear
that when the assessee let out this dyeing plant, it had
remained idle for some time. He could. not obtain
silk yarn on account of the war and therefore it was
not possible to make use of it as a commercial
asset
as far as the assessee himself was concerned and it was
only for that reason that he let i:t out to Messrs
E. Parakh & Co. I can understand the
principle for
which Mr. Joshi is contending that it -makes no difference what an assessee does
with
commercial asset
belonging to him. He may use it as he likes. So long as
it yields income it is ~he income of his business. Various
cases have been cited at the Bar and I think that those
cases
though
apparently conflicting are reconcilable
if we accept this principle to be the correct prin<;iplc
. v.
Sri Lakshmi
Silk. Mills Ltd.
Mahajan /.
1951
Commissioner of
Excess Profits
Tax, Bombay
City
v.
Sri Lakshmi
Silk Mills Ltd.
Mahajan /.
4
SUPREME COURT REPORTS
[1952]
and apply this ratio as 'the ratio emerging from these
cases and I will state the principle and the ratio again
that if an assessee derives
income from a commercial
asset which is capable at the time of being used as a
commercial asset, then it is income from his business,
whether he uses that commercial asset himself or lets
it out to somebody else to be used. But if the
commercial asset is not capable of being used as such,
then its being let ou~ does not res.ult in an income
which is the income of the business."
Mr. Justice Tendolkar concurred in this view and
observed as follows:-
"The ratio of all these cases to my mind is that if
there is a commercial asset which is capable of being
worked by the assessee himself for the purpose of
earning profits and the assessee instead of doing so,
either voluntarily allows someone else to use it
on
payment of a certain sum or is compelled by law to
allow it to be used in such manner, then what he
receives is income from business.
But if the commercial asset has ceased to be a commercial asset in
,the hands of the assessee and thereafter he gets what
he can out of it by letting it out to be used by others,
then the rent he receives is not income from any business that he carried on."
•
The learned Attorney-General pointed out that the
nature of a commercial asset is not changed because a
particular person is unable to use it.
The inability
of the assessee to make use of it in certain circumstances
does not in any way affect the nature of tlhe asset and
cause an infirmity in the asset itself.
It was contended that when the dyeing plant became idle for a short
time during the chargeable accounting period it did
not cease to be a commercial asset of the respondent
for it had no other business; that all the assets of the
respondent including the dyeing plant were the assets
of the business, that whatever income was derived by
the use of these assets including the income that an
asset
fetched by
itS being
!en out was the business
income of the assessee, and that there was no warrant
' '•
S.C.R.
SUPREME COURT REPORTS
5
in law for the proposition that a commercial asset
which yields income must be used as an asset by the
respondent himself before its income becomes charge-
. able to tax.
The learned counsel for the respondent urged that
as soon as the assessee found difficulty in obtaining
yarn the dyeing plant bec:me redundant for its business
and
ceased to be an
asset of its
business
and any
income derived from the rent by letting out this asset
was income
received
by
the
assessee
from other
sources and therefore was
not
chargeable to excess
profits tax.
In our opinion, the contention raised by the learned
Attorney-General is sound. The High · Court was in
error in engrafting a proviso on the rule deduced by it
from the authorities considered by it, to the effect that
a commercial asset of a business concern which yields
income must at the time it was let out be in a condition to
be used
as a commercial asset
by
the
assessee
himself.
We
respectfu1ly
concur
in
the
op11110n of the learned Chief
Justice
that
if
the
commercial asset
is
not
capable
of
being
used
as such, then its being let out to others does not result
in an income which is the income of the business,
but we cannot accept the view that an asset which was
acquired and used for the purpose of the business
ceased to be a commercial asset of that business as
soon as it was temporarily put out of use or let out to
another person for use in his business or trade. The
yield of income by a commercial asset is the profit of
the business irrespective of the manner in which that
asset is exploited by the owner of the business. He is
entitled to exploit it to his best advantage and he may
do so either by using it himself personally
or by
letting it out to somebody else. · Suppose, for instance,
in a manufacturing concern the use of its plant
and
machinery can advantageously
be made
owing to
paucity_ of raw materials only for six hours in a working
day, and in order to get the best yield out of it, another
person
who has got the requisite raw materials is
allowed to use it as a licensee on payment of certain
1951
Commissioner of
Excess Profits
Tax, Bombay
City
v.
Sri Lakshmi
Silk Mills Ltd.
Mahajan f.
~
1951
'Commissioner of
Ercess Profits
T•r, Bombay
City
v.
Sri l..llk_shmi
Silk_ Mills Lttl.
M•h•i•n f.
6
SUPREME COURT REPORTS
[1952)
consideration for three hours; can it be said in such a
situation
with
any
justification
that
the
amount
realized from the licensee is not a part of the business
income of the licensor. In this case the company was
incorporated purely as a manufacturing concern with
the object of
making
profit.
It installed plant and
machinery for the purpose of its business, and it was
open to it if at any time it found that any part of its
plant "for the time being" could
not be advantageously employed for earning
profit by the
company
itself, to earn profit by leasi1Ilg it to somebody else. It
is difficult to hold that the income thus earned by the
commercial asset is not
income from the business of
the company that has been solely incorporated for the
purpose of doing business and earning profits.
There
is no material whatever for taking the view that the
assessee
company
was
incorporated with
any other
object than of carrying on business or trade. Owning
properties and letting them was not a purpose for which
it was formed and that being so, the disputed income
cannot be said- to fall under any section of the Indian
Income-tax
Act
other
than
section 10.
Cases of
undertakings of
this
nature stand
on an entirely
different footing
and are
distinguishable froni cases
of individuals or companies acquiring lands or buildings
and making income by letting them on hire.
These
latter cases may
legitimately fall under the
specific
provisions of section 9 or section 12, though the High
Courts in this country are by no means unanimous on
this subject; but for the purpose of rthis case it is
unnecessary to resolve that conflict.
It may be observed that no general principle can be
laid down which is applicable to all cases, and
each
case has to be decided on its own circumstances.
Decisions
of the English
courts
given
under
the
Finance Acts, the scheme of which_ is different from the
Indian Income-tax statutes, are not always very helpful in dealing with matters arising under the Indian
-law and
analogies
and
inferences drawn from those
decisions are at times misleading.
We, however, are in
respectful agreement with the observations of Lord
,•
t -
)
i
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'
:S.C.R.
SUPREME COURT REPORTS
7
President Strathclyde in
Sutherland v. The Commissioners of Inland Revenue(1) that if a commercial asset
is susceptible of being put
to a variety of different
uses in which gain might be
acquired, whichever
of
-these uses it was put to by the appelfant, the profit
-earned was a user of the
asset of the same business.
A mere substituted use of the commercial asset
does
·not change or altered the nature of that asset. Whatever
·the commercial asset produces is income of the business
,of which 'it is an asset, the process; by which the asset
makes the income. being immaterial.
Mr. Chatterjee for the respondent stressed the point.
;that as the dyeing plant in the present case could not
be made use of by the assessee in its manufacturing
-business owning to the non-availability of yarn, it
·ceased to be a commercial asset of the business of the
:.assessee and became . redundant to that business and
:that being so, any income earned by this asset which
had
ceased to
be
a commercial asset was not an
·income of the business but must be held to have been
<derived from a source other
than
business and fell
within the ambit of section 12 of the Indian Income-
:ta{{ Act, and on this income excess profits tax was
not payable.
He contended that .the facts of this case
were analogous to the case of
Inland
Revenue Commissioners v. lles<2) and it should be similarly decided.
In that case the taxpayer carried on the business of
·sand and gravel merchant on certain land and at the
same time he granted licences to three firms to enter
his land and win gravel for themselv~ in ret:urn for
which
he
received
from
them a royalty for
each
cubic yard of gravel
taken away.
It was held
that
the royalties were not part of the profits of the business
ibecause,
in granting
the licences, the taxpayer was
<exploiting his rights of ownersh~p in the ·land and was
:not carrying on his business of a sand and gravel
-merchant. The income was held taxable as an income
from an investment and did not fall under Schedule D
which concerns profits earned from a trade. Mr. Chatterjee also laid emphasis on the observations of Lord
(1) (1918) 12 Tax Cas. 63.
(2) [1947] 1 A.E.R. 798.
1951
CommissiQner of
E%cess Profits
Ta%, Bombay
City
v.
Sri Lrikshrni
Silk Mills Ltd..
Mahajqn_ J.
1951
Commissioner of
Excess Profits
Tax, Bombay
City
v.
Sri Lakshmi
Silk Mills Ltd.
Mahajan /.
8
SUPREME COURT REPORTS
[1952J
Green M. R. in Croft v. Sywell Aerodrome Ltd. ('),
whercin the learned Master of the Rolls observed asfollows:
"I cannot myself see that a person who leases the·
land to others, or grants licences to others to come
upon it, is doing anything more than exploiting his
own rights of property, even if the ~enant or licensee
is, by the terms of the lease or licence, entitled himself
to carry on a trade on the land."
It was urged that what the assessee was doing in
this case was exploiting
his
righus of
property by
letting the dyeing plant to other persons precisely in
the same manner as the owner of land in the case cited
above was exploiting his own rights to
property
by
granting a licence to another
~o come on his land.
The argument, in our opinion,
though
attractive, is
fallacious.
The analogy between the case
of land and
of a dyeing plant for the purpose of taxing statutes is
inappropriate.
The distinction becomes apparent from
the following passage which occurs in Atkinson. J.'s
judgement in Iles's case(2) :-
"Then it was suggested by counsel for the Crown
that the case was like the Desoutter case('), where it
was held that, if you make use of a patent in your
business and also receive royaities from the use of the
patent by others licensed to
use it,
those
royalties.
cannot be regarded as receipts from an
investment ..
In other words, the door has to he eiilher open or shut.
A patent is either an investment or it is not. The
suggestion was that
freehold
land
is in
the same
position, and if you carry on business on part of it,
whatever you do with the rest by way of licensing or
letting cannot be· regarded as producing income from
investment.
That, however, is dead in the teeth of
the judgement in the Broadway Car Co. case("). Tbe
same argument was tried there, but Tucker L. J. said
he thought the Desoutter case(") had very little to do
with it, as there was a great difference between land
(1) [1942] 1 A.E.R. 110.
(2) [1947] 1 A.E.R. 798.
(3) [1946] 1 A.E.R. 58.
( 4) [1946] 2 A.E.R. 609.
\..
!
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'
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• •
S.C.R.
SUPREME COURT REPORTS
I
and a patent,
and he did
not
think
the Desoutter
1951
case(') threw any light on the matter ...... A patent is
quite different from freehold land."
These observations appositely apply to the case of a
company incorporated for ·the purpose of doing business and . earning profit by the process of manufacture.
Letting out a part of its machinery in a certain situation in order to make the business advantageous as a
whole does not alter the nature of the income. The case
Commissioner of
Excess Profits
Tax, Bombay
City
v.
Sri Lakshmi
Silk. Mills Ltd.
of an owner of land letting out his land and carrying on
exploitation of part of that land by selling gravel out \.
of it, as at present advised, in our opinion, would fall
under
section
9
of · the Indian Income-tax Act, as
income earned, no matter by whatever method, from
land, ai1d specifically dealt with by that section. The
observations therefore made in Iles's case(2) can have
no apposite application to the case of a manufacturing
concern letting out a part of its machinery temporarily
which it cannot advantageously use itself.
Mr. Chatterjee also Bid stress on the decision of the
Court of Appeal in Inland Revenue Commissioners v.
Broadway Car Co. Ltd.(3).
In this case the company
carried on the business of motor car agents and
repairers on land held on lease from 1935 to 1956 at
an annual rent of £750.
By
1940 the company's
business had wdindled under war conditions to such an
extent that no more than one third of the land was
required. In those circumstances the remainder was
sublet for fourteen years at an annual rent of £1,150.
The general commissioners of income-tax decided that
the difference of £400 between the outgoing of £750 for
the land retained and the incoming of £1,150 for the
land disposed of was "income received from an investment," and, the business not being one within the special
categories mentioned in the Finance Act, 1939, that
£400 was n{)lt taxable.
It was held that the word "investment" must be construed in the ordinary, popular
sense of the word as used by businessmen and not as a
( 1) ! 1946] 1 A.E.R. 58.
(2) 11947] 1 A.E.R. 798 .
(3) [1946] 2 A.E.R. 609.
Mahajan /.
1951
Commissioner of
Excess Profits
Tax, Bombay
City
v.
Sri Lakshmi
Silk Mills Ltd.
Mahajan/.
10
SUPREME COURT REPORTS
[1952]
term of art having a defined or technical meaning and
that it was impossible to say that the commissioners
had erred in law in coming to the conclusion that the
transaction
resulted in an investment.
Scott. L. J. in
delivering his judgment laid emphasis on the point that
after the business of the company had dwindled, it
partitioned part of the land from the rest and sublet it
by installing a heating apparatus for the suh-lessee.
It was found that war conditions had reduced the company's business to very small proportions and they cut
their loss by gomg out of business in respect of the
major part of their land and put it out of their power
for 14 years to resume business there. In this situation
it was observed
that m that case they were dealing
with part of the property of the company which had
become redundant and was sublet purely to produce
income-a transaction quite apait from the ordinary
business activities of the company. It was pointed out
that the question whether a particular source of income
was income or not must be decided, as it could be,
according to ordinary commensense principles.
The short question to decide in this case is whether
on the facts found, it could be said reasonably that the
dyeing plant had become redundant for its business as
a silk manufacturing concern, simply by the circumstance that for the time being it could not be used by
it personally for the purpose of dyeing silk yarn owing
to the non-availability of yarn. It 1s difficult to conceive that the company would not have immediately
started dyeing
yarn as soon as it
became available.
Instead of dyeing yarn, another person was allowed to
dye jute (we are told), the assessee company making
income out of its use as a
commercial asset.
In this
situation it is not possible to hold that the income thus
earned was not a part of the income of the business and
was not
earned
for the business by its commercial
asset or that this commercial asset had become redundant to the company's business of manufacture of silk.
The analogy of Broadway Car Co. Ltd.(') therefore does
not hold good for the decision of the present matter.
(!) [1946] 2 A.E.R. 609.
., ti
•
S.C.R.
SUPREME COURT REPORTS
11
1951
-·-
We are therefore of the opinion that it was a pan of
the normal activtties of the assessee's business to earn
money by making use of its machinery by either employing it in its own manufacturing concern or temporarily letting it to others for making profit for that
business when for the time being it could not itself run
it. The High Court therefore was in error in holding
that the dyeing plant had ceased to be a commercial
asset of the assessee and the income earned by it and
received from the lessee, Messrs Parakh & Co., was not
Commissioner of
Excess Profits
Tax, Bombay
· chargeable to excess profits tax.
The result therefore
is that we hold that the answer returned by the High
Court to the question referred to it by the
Tribunal
was wrong ;:ind that the correct answer to the question
would be in the affirmative and not in the nagative.
The appeal is allowed, but in the circumstances of
the case we make no order as to costs.
We have not
thought it necessary to refer to all the cases cited as
the Bar as none of them really is in point on the short
question that we were called upon to decide and analogies drawn from them would not be helpful in arriving
at our decision.
Appeal, a/,lowed.
Agent for the appelant : P. A. Mehta.
Agent for the respondent : P. K. Chatterjee.
COMMISSIONER OF INCOME TAX, BOMBAY
v.
FINLAY MILLS LTD.
[HARILAL KANIA c. J., MEHR CHAND MAHAJAN AND
CHANDRASEKHARA AIYAR JJ.]
Indian Income-tax Act (XI of 1922), s. 10(2) (xv)-Expenditure
incurred for
registration of trade
mark-Whether business expenditure-Effect of registration.
The expenditure incurred by a company carrying on the manufacture and sale of textile goods in registering for the first time
its trade. marks which were not in use prior to the 25th January,,
. City
v.
Sri Lakshmi
Silk Mills Ltd.
Mahajan /.
1951
Oct. I.
1951
.Commissioner of
Income Tax,
Bombay
v •
. Finlay Mills
Ltd.
12
SUPREME COURT REPORTS
[ 1952]
1937, is revenue
expenditure
and an allowable
deduction under
Sec. 10 (2) (xv) of the Indian Income-tax Act. The fact that a
trade mark after registration could be separately assigned and not
as a part of the goodwill of the business only, does not n1ake the
expenditure for
registration
capital
expenditure.
It is
only an
additional and incidental
facility given to the
owner of the trade
mark; it adds nothing to the trade mark itself.
Judgment of the Bombay High Court affirmed.
Commissioner of lncome~tax, Bonibay v. The Century Spinning
and Weaving and Manufacturing Co. Ltd. ([1947] 15 l.T.R. 105)
approved. British
Insulated and Helsby
Cables Ltd. v. Atherton
'
([1926] A. C. 205), Southern v. Borax Consolidated Ltd. ([1942] 10
l.T.R. Supp. 1), Henriksen v. Grafton Hotel Ltd. ([1942] 2 K. B.
'
184) referred to.
Civ1L
APPELLATE
JuR1smcTioN :
Civil Appeal
No. 103 of 1950.
Appeal from a Judgment of the Bombay High Court
(Chagla C. J. and Tendolkar J.) dated 25th March,
1949, in Income Tax Reference No. 31 of 1948.
M.
C.
Setalvad,
Attorney-General
for
India
( G. N. Joshi, with him) for the appellant.
R. /. Kolah, for the respondent.
1951. Oct. 1. The
Judgment
of
the
Court was
delivered by
KANIA C. J .-This is an appeal from a judgment of
the High Court at Bombay and it arises out of the
opinion expressed by the High Court in respect of a
question submitted to it by the Income-tax Tribunal.
The material facts are these. The respondent is a textile mills company carrying on the business of manufacturing and selling textile goods. . For the assessment
years 1943-44 and
1944-45, covering the
accounting
periods ending with the calendar years 1941, 1942 and
1943, the respondent claimed the expenditure incurred
by it in registering for the first time its trade marks
which were not in use prior tp the 25th February, 1937,
as revenue expenditure and an allowable deduction out
of its income for the said periods, under section 10(2)
(xv) of the Indian Income-tax
Act.
Following the
decision
of
the Bombay H'igh Court in Commis-
$ioner of Income-tax, Bombay v. The Century Spinning
'
t
t -
$.C.R.
SUPREME COURT REPORTS
13
,and Weaving and Manufacturing Co. Ltd.(1), the Tribunal allowed the claim of the assessee.
At the desire
:of the appellant, the Tribunal submitted the following
;.question for the opinion of the High Court :-
"Whether, on the facts of the case, the expenditure incurred by the assessee company in Jegistering
for the first time its trade marks which were not in
use prior to the 25th February, 1937, is revenue expen-
;diture and an allowable deduction under section 10(2)
,{xv) of the Indian Income-tax Act?"
The High Court, following its previous decision and
finding that the fact of the trade marks having come
into use after the 25th of February, 1937, made no
... d'ifference in the result, answered the question in the
affirmative.
The Commissioner of Income-tax, Bom-
-·bay, has come on appeal to us.
· It was argued on behalf of the appellant that the
_question whether
a
certain
disbursement was of a
• capital or revenue nature, has to be decided according
-to the principle laid down in British Insulated and
J Helsby Cables Ltd. v. Atherton(2). In that case the com-
"'
: pany which carried on the business of manufacturers of
· 1nsulated cables established a pension fund for its clerical
and technical salaries staff.
The fund was
constituted
· by a trust deed which provided that members should
_,contribute a percentage of their salaries to the fond
and that the company should contribute an amount
~equal to half the contributions of the members;
and
further that the company should contribute a sum of
· ,£31,784 to form the nucleus of the fund and to prov~de
the amount necessary in order that past years of service
-+ _.of the then existing staff should rank for pension. That
. sum was arrived at by an actuarial calculation on the
···basis that
the
sum would ultimately be exhausted
. when the object for which it was paid was attained.
· The House of Lords held that this payment was in the
nature of capital expenditure and was
therefore not an
, .admissible deduction. Although in the opinions ex1;Pressed by the different members of the House of Lords
~.
·. , .
.;1-
.
(1) [1?47] 15 I.T.R. 105.
(2) [1926] A.C. 205.
1951
Commissioner of
I ncorne Tax,
Bombay
v.
Finluy Mills
Ltd.
Kania.C. f.
1951
Commissioner of
Income· Tax,
Bombay
v.
Finlay Mills
Ltd.
Kania C. /.
14
SUPREME COURT REPORTS
[1952t
the line of approach is not completely the same, the
principle stated by Lord Cave in his speech has been
accepted as a safe test to distinguish capital expenditure from revenue expenditure.
It was recognised that
a sum of money expended, not of necessity and with a
view to a direct and immediate benefit to the trade,
but voluntarily and on the grounds of commercial expediency, and \n order indirectly to facilitate the carrying on of business, may yet be expended wholly and
exclusively for the purposes of the trade. The Lord
Chancellor observed that the question appeared to be
a question of fact which was proper to be decided by
the Commissioners upon the evidence brought before
them in each case.
The test that capital expenditure
is a thing that is going to be spent once and for all and
income expendiure 1s a thing that is going to recur
every year was considered an useful element in arriving
at the decision but was not certainly the decisive fact.
The Lord Chancellor observed as follows :-"But when
an expenditure is made, not only once and for all, but
with a view to bringing into existence an asset or an
advantage for the enduring benefit of the trade, I think
that there is very good reason for treating such an expenditure as properly attributable not to revenue but
to capital."
In order to appreciate the true position here correctly
it is next necessary to notice the relevant provisions of
the Indian Trade Marks Act, 1940. It may be noted
that before this Act there was no Trade Marks Act
in India b'ut it was recognised that .an action lay for
infringement of a trade mark independently of an action
for passing off goods. The Act opens with the preamble "whereas it is expedient to provide for the registration and more
effective protection
of trade
marks
...... " Section 2(1) of the Act defines a trade mark as
meaning "a mark used or proposed to
be. used in
relation to goods for the purpose of indicating or so as
to .indicate a connection in the course of trade between
the goods and some person having the right to use the
mark, whether with or without any indication of the
identity of that · person."
Section 14 permits
the
' '
•
,/ •
S.C.R.
SUPREME COURT REPORTS
15
proprietor of a trade mark to ·have the trade mark registered. The Attorney-General, on behalf of the appellant, relied on sections 20, 21, 28 and 29 in support of
his contention. He argued that before the Trade Marks
Act, although the proprietor of a trade mark could
maintain an action for infringement of his trade mark
and the cause of action in such a case was quite differ -
ent from the cause of action in an action for passing off
goods, by the Trade Marks Act the right oif the owner
of the trade mark is increased by section 21, and it is
made assignable independently of the goodwill under
sections 28 and 29 of the Trade Marks Act. The question thus resolves itself into whether by reason of these
two incidents· the case falls within the principle laid
down by Lord Chancellor Cave, as mentioned above.
In our opinion, the contention urged on behalf of the
appellant must fail.
It is
not contended that by the
Trade Marks Act a new assets has come into existence.
It was
contended that an advantage
of an enduring
nature had come into existence. It was argued that
just as machinery may attain a higher value by an implementation causing greater productive · capacity, in
the present case the trade mark which existed before
the Trade Marks Act acquired an advantage of an
enduring nature by reason of the Trade Marks Act and
·the fees paid for registration thereunder were in the
nature of capital
expenditure.
In our opinion,
this
analogy is fallacious.
The machinery which aquires
a greater productive capacity by reason of its improvement by the inclusion of some new invention naturally
becomes a new and altered asset by that process. So
long as the machinery lasts, the improvement continue~
to the advantage of the owner of the machinery. The
replacement of a dilapidated roof by a more substantial
roof stands on the same footing. The result however
of the Trade Marks Act is only two-fold.
By registration, the owner is absolved from the obligation to
prove his ownership of the trade mark.
It is treated
as prim a f acie proved on production of the registration certificate.
It thus merely saves him the trouble
of leading evidence, in the · e\rent of a· suit~ · in a court
2-2 S. C. india/71
•
1951
Commissioner of
Income Tax,
Bombay
v.
Finlay Mills
Ltd.
Kania C. f.
1951
C-ommissioner of
Income Tax,
Bombay
v.
Finlay Mills
Ltd.
Kania C. J.
16
SUPREME COURT REPORTS
[1952]
of law, to prove his title to the trade
mark. It has
been said that registration is in the nature of collateral
security furnishing the trader with a cheaper and more
direct remedy against inf ringers.
Cancel the registration and he has still his right enforceable at common
law to restrain the p'iracy of his trade mark.
In our
opinion, this is neither such an asset nor an advantage
as to make payment for its registration a capital
expenditure. In this connection it may be useful to
notice that expenditure incurred by a
company in
defending title to property is not considered expense
of a capital nature.
In Southern (H. M. Inspector of
Taxes) v. Borax Consolidated Limited('), it is there
stated that where a sum of money is laid out for the
~cquisition or the
improvemer.t of a fixed capital asset
1t 1s attributable to capital, but 'if no alteration is
made in the fixed capital asset by the payment, then
it is properly attributable to revenue, being in substance a matter of maintenance, the maintenance of
the capital structure or the capital asset of the company.
In our opinion, the advantage derived by the
owner of the trade mark by registration falls within
this class of expenditure.
The fact that a trade mark
after registration could be separately assigned, and not
as a pan of the goodwill of the business only, does not
also make the expenditure for registration
a capital
expenditure.
That is only an additional and incidental
facility given to the owner of the trade mark. It adds
nothing to the trade mark itself.
In the judgment of the High Court some emphasis
is laid on the fact that by reason of registration the
i
duration of the tra<le mark is only for seven years, and
it does not thus possess that
permanency which is
,.
ordinarily required of an expenditure to make it a
capital expenditure and in order to prove the existence
of a benefit of an enduring character.
The learned
Attorney-General contended that the view that as the
benefit of registration lasted for seven year., i.e., for
a limited period, it prevented the expenses of registration being treated as capital expenditure, is unsound
(1) [1942] 10 I.T.R. Suppl. 1.
)
S.C.R.
:SUP:RE,ME cou1rr REPORTS
17
.and for that contention he relied on He?Jriksei:z (Inspector of Taxes) v. Grafton Hotel Ltd.(1). In that case
ten.ants .of licensing
premises
by agreement with the
landlord paid by instalment the monopoly value fo:;ed
by the licensing j'ustices when gran11ling ':the licence
under section 14 of of the Licensing (Consolidation) Act,
1910.
These were sought to be deducted
as revenue
expenditure but were disall0wed by the Court.
Lord
Greene M. R. first considered that the payment foll
into the same class as the payment of a premium on
the grant of a lease or the expenditure on improvements to the property which justices may require to
be made as a conditiqn of granting a licence. Having
reached that conclusion he rejected the argument that
the payment not being made in one lump sum but -by
instalments made a difference in the character of the
payment.
H~ observed
as
fofilows:-"Whenever
a
licence is granted for a term, the payment is made as
on a purchase of a monopoly for that term.
When a
licence is granted for a subsequent term, the monopoly
value must be paid in respect of that term and so on.
The payments are recurrent if the licence is renewed,
they are not periodical so as to give them the quality
of payments which ought to be debited to revenue
account. The thing that is paid for is of a permanent
quality although its permanence, being conditioned by
the length of the term, is shortlived.
A payment of
this character appears to me to fall into the same
class as the payment of a premium on the grant of a
lease,
which
is
admittedly
not
deductible."
The
Attorney-General relied on these observations to point
out tha~ the permanence of the advantage was thus
not dependent · on the number of years for which it was
to enure for the benefi~ of the proprietor of the trade
mark.
In our opinion, these observations have to be
read in the context in which they have been made.
The learned Master of the Rolls was discussing only
the quest.Ion of payment .being made by instalments
as not making
any
d,i,ffere1~ce
in ,the
nature of the
(I) [1942] 2 K. B. 184.
1951
Comtp/~sion.er .qf
l11cpme T.ax,
/)o,11J.b.ay
.y.
Finlay Mills
Lt,d.
~m;i_a C. /.
1951
Commi'ssWner of
Income Tax,
Bombay
v.
Finlay Mills
Ltd.
Kania.C. /.
1951
Oct. 4
18
SUPREME COURT REPORTS
[1952]
expenditure. It was first held by him that the payment in question was of a capital nature and of the
same character as premium paid on the grant of a, lease
and was therefore
necessarily of a capital
nature.
Having come to that conclusion, he only rejected the
contention that because the premium was paid in more
instalments than one it lost its character of a capital
expenditure. In our opinion, this is an entirely different thing from stating that the 'fact of the advantage being for a limited time altered the character of
the payment in any way.
As observed by Viscount
Cave L. C. the question is always one of fact depending on the circumstances of e~h case 'individually .
•
In our opinion, the decision of
the High Court reported in Commissioner of Income-tax, Bombay v. The
Century
Spinning and Weaving and Manufacturing
Co. Ltd.(') is correct and in the present case also the
contention of the appellant
must fail.
The appeal
therefore fails and is dismissed with costs.
Appeal dismissed.
Agent for the appellant : P. A. Mehta.
Agent for the respondent : R. A. Govind.
(1) [1947] 15 I.T.R. 105.
BHIM SEN for R. S. MALIK MATHRA DAS
v.
THE STATE OF PUNJAB
UNION OF INDIA-Intervener.
PREM NATH for CH. HARBANS LAL
fl.
THE STATE OF PUNJAB
BHIM SEN for RA TT AN CHAND
fl.
THE STATE OF PUNJAB
..
S.C.R.
SUPREME COURT REPORTS
CH. HANS RAJ for KANWAR KISHORE
ti.
THE STATE OF PUNJAB
ATMA SINGH for SHANTI SAROOP
ti.
THE STATE OF PUNJAB
[HARILAL KANIA c. J., MEHR CHAND MAHAJAN
AND CHANDRASEKHAAA AIYAR JJ.J
19
Preventive Detention Act (IV of 1950), s. 3(1)-Preveniive detention for black-marketing-Order based on past activities-Validity
-Power of Court to consider sufficiency of grounds-Effect of establishment of Advisory Boards under Preventive Detention (Amending)
/let, 1951.
An order of detention
to prevent black-marketing cannot be
held to be illegal merely because in the grounds for such deten·
tion the detaining authority has referred only to the past activities of the person
detained, inasmuch as
instances of past activities may give rise to a subjective mental conviction that it is
necessary to detain such person to prevent him from indulging in
black-marketing in the future.
Under the .