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Judgment
Thanikkachalam, J.—At the instance of the assessee as well as the Department, the Tribunal referred the following questions u/s 256(1) of
the Income Tax Act, 1961 (hereinafter referred to as ""the Act"") for our opinion :
Questions referred to us in Tax Cases Nos. 1150 and 1151 of 1981 :
Whether the Tribunal was right in law in holding that the acquisition of the transport division of fleet operators under the Tamil Nadu Acquisition
Act XXXVII of 1971 (hereinafter referred to as ''Acquisition Act''), is a compulsory acquisition and can be termed as acquisition under a ''law for
the time being in force'' ?
Whether the Tribunal was right in holding that as the acquisition took place in the previous year relevant to the assessment year 1972-73, the
fact that the compensation was determined in the subsequent assessment year will not affect the assessability in the year in which acquisition took
place, viz., 1972-73 ?
Whether the Tribunal was right in holding that notwithstanding that section 3 of the Acquisition Act itself does not make any mention of permits
while listing the assets that vest with the Government yet there was a transfer of unexpired permit within the meaning of section 2(47) ?
Whether the Tribunal was right in its conclusion that the compensation of Rs. 56,82,378.47 determined in subsequent previous year as payable
to the assessee for the vesting of the undertaken with the Government should be taken as the full value of consideration for computation of capital
gains u/s 48 and other purposes and that the deduction made for gratuity liability therefrom should be ignored ?
Whether the Tribunal was right in holding that the sum of Rs. 14,714 representing the excess value of stores and cost had been correctly
assessed to capital gains in the assessment year 1972-73 ?
Question referred to us in Tax Case No. 1301 of 1981 :
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the application fees and other
incidental expenses incurred in connection with the acquisition of route permits cannot be treated as the expenditure which constituted the cost of
acquisition of the route permits and hence no capital gains could be brought to tax on the transfer of such route permits ?
These references relate to the assessment years 1972-73 and 1973-74 corresponding to the financial years 1971-73 and 1972-73. The
assessee-company was carrying on mainly transport business and up to March 1, 1972, the assessee had both passenger transport and goods
transport business. By virtue of the Tamil Nadu Fleet Operators Stage Carriages (Acquisition) Act, 1971 (Acquisition Act XXXVII of 1971)
(hereinafter referred to as the Tamil Nadu Acquisition Act), the Government of Tamil Nadu nationalised many of the important passenger and
transport routes. Under G.O. No. 213 dated March 15, 1972, the Government of Tamil Nadu acquired the assessee''s bus transport business
under the provisions of section 3(4) of the Tamil Nadu Acquisition Act and paid a total compensation of Rs. 39,77,212. The assessee before the
Income Tax Officer contended that the compensation was determined and paid by the Government only in the subsequent assessment years and
section 41(2) profits can be assessed in the assessment year under appeal (1972-73). The Income Tax Officer rejected this contention and held
that the buses were taken over by the Government Notification No. 101(c) of 1972 dated February 28, 1972, and the vesting of the buses with
the Government had taken place for the accounting year relevant to the assessment year under appeal. Accordingly, the Income Tax Officer
computed the profits.
Before the Appellate Assistant Commissioner, the assessee contended that the amount received by way of compensation for the buses taken
over by the Tamil Nadu Government was a casual and non-recurring receipt and hence section 41(2) profits will not arise. It was further
contended that the taking over of the buses cannot be considered as sale the and the amount of compensation was not determined or become
payable during the accounting year and hence there was no liability to section 41(2) profits for the year under appeal. The Appellate Assistant
Commissioner rejected all these contentions and held that the buses and other assets were taken over by the Government under Notification No.
101(c) of 1972 dated February 28, 1972, and since the assets have been transferred to the Government on February 28, 1972 which falls within
the accounting year, section 41(2) profits have been correctly assessed by the Income Tax Officer.
Aggrieved the assessee field an appeal before the Tribunal. The Tribunal held that whether the acquisition is acquisition or compulsory
acquisition the legal consequences are the same. The second contention of the assessee that there is no compulsory acquisition ""under any law for
the time being in force"" is rejected. The Tribunal held that the compensation was not a lump sum payment but attributable to each and every item of
stock-in-trade of the assessee. Since the compensation was determined and paid for each and every item of the assets belonging to the transport
business of the assessee the decision of the Supreme Court reported in 57 ITR 298 will not apply to the present case. According to the Tribunal,
in the present case, the assets sold are those in respect of which depreciation allowance has been granted and the other requirements u/s 41(2) are
also satisfied. Hence, section 41(2) profits have been correctly assessed. The Tribunal also held that in the present case the acquisition took place
in the accounting year relevant to the assessment year 1972-73 and the fact that the compensation was determined and a part of it was paid for the
subsequent assessment year will not affect the assessability of the amount in the year in which the acquisition took place, viz., 1972-73. Since the
compulsory acquisition took place in the assessment year 1972-73, the capital gains have been correctly assessed by the Income Tax Officer. The
Tribunal was also of the view that route permits are capital assets and the profit arising on the transfer of route permits is liable to capital gains tax.
According to Tribunal since transfer includes extinguishment which had widest amplitude there is extinguishment of the rights of the assessee for the
unexpired permits when the Government issued the notification and paid compensation to the assessee and hence there is a liability to capital gains
tax. Moreover section 15(2) of the Tamil Nadu Acquisition Act provides transfer of unexpired permits to Government on acquisition.
The next contention before the Tribunal was that even granting that the route permit is property there being no cost of acquisition for obtaining
the route permits in view of the decision of this court in COMMISSIONER OF Income Tax, MADRAS Vs. K. RATHNAM NADAR., , there is
no liability to capital gains tax. In answering the question whether there was cost of acquisition for acquiring the route permit the Tribunal held that
the application fees and other incidental expenses incurred in connection with the acquisition of the route permit cannot be treated as the
expenditure which constituted the cost of acquisition of the route permit, and hence no capital gains could be brought to tax on the transfer of such
route permits.
While considering the full value of consideration accruing in section 48 of the Act, the Tribunal held that the compensation payable for
transferring the capital assets to the Government was fixed at Rs. 56,82,378.47 by agreement between the parties. What the assessee received in
view of the assets it had parted with war Rs. 56,82,378.47 and that alone should be taken as the full value of the consideration for computation of
capital gains u/s 48 of the Act. The Tribunal further pointed out that the compensation received by the assessee for transferring the capital assets to
the Government without allowing any deduction represents the full value of the consideration. The Tribunal held that the gratuity liability amounting
to Rs. 3,30,547 cannot be deducted from the compensation of Rs. 56,82,378.47 while arriving at the full value of the consideration.
On acquisition the value received for stores amounted to Rs. 3,97,836 while the cost to the assessee was Rs. 3,82,122. The difference between
these two amounts amounting to Rs. 15,714 was assessed to capital gains tax. Before the Tribunal, the assessee contended that the compensation
payable to the assessee was not determined in the accounting year relevant to the assessment year 1972-73 and consequently the capital gains on
the value of stores is not assessable to tax for the assessment year 1972-73. However, the Tribunal held that the sum of Rs. 15,714 is assessable
under the head ""Capital gains"" for the assessment year 1972-73.
We will consider first the question referred to us at the instance of the Department in Tax Case No. 1301 of 1981. According to the Revenue,
the Appellate Tribunal was not right in law in holding that the application fees and other incidental expenses incurred in connection with the
acquisition of route permits cannot be treated as the expenditure which constituted the cost of acquisition of the route permits and hence no capital
gains could be brought to tax on the transfer of such route permits. It is contended by learned standing counsel appearing for the Revenue that
route permits are obtained by making the necessary application to the road transport authorities and by paying the prescribed fees and also
incurring expenditure for processing the application by engaging counsel and it cannot therefore be stated that there was no cost of acquisition
involved in acquiring the route permits. It was therefore, contended that the entire establishment of the assessee was working to secure the route
permits and the establishment of the assessee was working to secure the route permits and the establishment expenses should be taken as the cost
of acquisition for the route permits. On behalf of the Revenue. Reliance was placed upon a decision of this court in the case of S.
Vaidyanathaswami Vs. Commissioner of Income Tax, wherein this court held that the route permit is property the liability to capital gains tax will
arise only if there was some cost of acquisition and in the absence of a specific finding regarding the cost of acquisition, the question referred as to
the liability to capital gains tax could not be arrived at and hence the Tribunal was directed to go into the question as to whether there was any cost
of acquisition and if so, what was the amount that was spent for the acquisition of the asset and if there was no cost of acquisition a direction was
given to the Tribunal to apply the principle of the decision in COMMISSIONER OF Income Tax, MADRAS Vs. K. RATHNAM NADAR., .
Learned standing counsel for the Revenue also relied upon a decision of this court in K. Balasubramania Nair Vs. Commissioner of Income Tax,
wherein it was held that ""route permit was not a self-generating asset and some cost could have been incurred for its acquisition. As the assessee
had not produced any material to show the actual cost of acquisition, the Tribunal was directed to go into the question afresh and find out the cost
of acquisition and determine the capital gains"". Another decision relied upon by learned standing counsel was that rendered in the case of
Commissioner of Income Tax Vs. Shri Venkateswara Bus Union, , wherein this court held that ""in the case of route permits, it will not be possible
to proceed on the basis that it was a self-generating asset and it will not have any cost of acquisition and hence the matter was remitted to the
Tribunal for ascertaining the cost of acquisition and determining the capital gains"".
On the other hand learned counsel appearing for the assessee, in order to support his contention relied upon a decision of the Andhra Pradesh
High Court in the case of Addl. Commissioner of Income Tax Vs. Ganapathi Raju Jegi, Sanyasi Raju, wherein it was held that ""where when the
route permit was granted, no amount was paid by the operator for the purpose of acquiring it and it is only over a number of years because of
various factors viz, the development of roads passenger traffic the frequency of the buses plying on the road that the permit acquires some value
the value of the route permit cannot be evaluated as on the date of the acquisition. In such a case where the cost of acquisition of a particular asset
is nil especially when the capital asset is the creation of the assessee by his own effort, the case will be similar to that of a sale of goodwill by the
assessee and the consideration in terms of money realised to the transfer of the said capital asset cannot be brought to capital gains tax"". This
decision of the Andhra Pradesh High Court in Addl. Commissioner of Income Tax Vs. Ganapathi Raju Jegi, Sanyasi Raju, has become the
subject-matter of the appeal before the Supreme Court in Commissioner of Income Tax (Addl.) Vs. Ganapathi Raju Jogi, . In the said appeal, by
following an earlier decision of that court in Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, , the Supreme Court affirmed the
decision of the Andhra Pradesh High Court in Addl. Commissioner of Income Tax Vs. Ganapathi Raju Jegi, Sanyasi Raju, and held that counsel
for both the parties stated that following the decision of this court in Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, , this
appeal has to be dismissed. It is accordingly dismissed. No costs"". In view of the abovesaid decision of the Supreme Court we have to hold that
consideration in terms of money realised on the transfer of the route permits cannot be brought to tax as capital gains since there is no cost of
acquisition in acquiring the route permits. In the later amendment brought out in section 45 of the Act, it was made clear that from the assessment
year 1995-96 onwards that there is no cost of acquisition for acquiring the route permit (see [1994] 208 ITR 33. In view of the foregoing legal
position, the Tribunal was correct in holding that the application fees and other incidental expenses incurred in connection with the acquisition of the
route permits cannot be treated as the expenditure which constitute the cost of acquisition of the route permits and hence no capital gains could be
brought to tax on the transfer of such route permits. Accordingly, we answer the question referred to us in Tax Case No. 1301 of 1981 in the
affirmative and against the Department.
In view of the legal position that the sale proceeds of the route permits could not be subjected to capital gains tax, the questions referred to us
at the instance of the assessee for the assessment year 1972-73 do not arise and hence they need not be answered and accordingly they are
rejected.
In that view of the matter, the question referred to us at the instance of the Department for the assessment year 1972-73 is answered in the
affirmative and against the Department So far as the questions referred to us at the instance of the assessee for the assessment year 1972-73 in
Tax Cases Nos. 1150 and 1151 of 1981 are concerned they are rejected. There will be no order as to costs. Counsel''s fee fixed at Rs. 1,000
(one set only).