In the case of Empire Jute Co. Ltd vs Commissioner Of Income Tax on 9 May, 1980, the Supreme Court of India was tasked with determining the nature of expenditure incurred by the Empire Jute Co. Ltd. The case revolved around the interpretation of section 10(2)(xv) of the Income Tax Act, which pertains to deductions for revenue expenditure and capital expenditure.
Facts of the Case
The Empire Jute Co. Ltd, a member of the Indian Jute Mills Association, was involved in the manufacture of jute. The Association, formed to protect the interests of its members, had entered into a working time agreement restricting the number of working hours per week for which the mills could operate their looms. This was done to adjust the production of the mills to the demand in the world market.
The Empire Jute Co. Ltd purchased loom hours from four different jute manufacturing concerns, which were signatories to the working time agreement, for the aggregate sum of Rs. 2,03,255 during the year 1st August 1958 to 31st July 1959. The company claimed this amount as revenue expenditure, arguing that it was part of the cost of operating the looms, which constituted the profit-making apparatus of the company.
Issues
The primary issue was whether the amount spent by the Empire Jute Co. Ltd for the purchase of loom hours was revenue expenditure or capital expenditure for the purposes of Section 10(2)(xv) of the Income Tax Act.
Court’s Observations
The court observed that an expenditure incurred by an assessee can qualify for deduction under section 10(2)(xv) only if it is incurred wholly and exclusively for the purpose of his business, but even if it fulfills this requirement, it is not enough; it must further be of revenue as distinguished from capital nature.
The court also noted that the payment made by the Empire Jute Co. Ltd for the purchase of loom hours was an expenditure laid out as part of the process of profit earning. It was an outlay of a business in order to carry it on and to earn profit out of the expense as an expense of carrying it on. It was part of the cost of operating the profit earning apparatus and was clearly in the nature of revenue expenditure.
Conclusion
The court concluded that the payment of Rs. 2,03,255 made by the Empire Jute Co. Ltd for the purchase of loom hours represented revenue expenditure and was allowable as a deduction under section 10(2)(xv) of the Income Tax Act. The court allowed the appeal by the Empire Jute Co. Ltd, overruling the decision of the lower courts that had classified the expenditure as capital in nature.