Anna Transport Corporation Limited and others vs Commissioner of Income Tax

Thanikkachalam, J.—In accordance with the direction given by this court, the Tribunal referred the following questions for our opinion in the

cases of the assessees and the Department u/s 256(2) of the Income Tax Act, 1961, for the various assessment years.

The questions in all the assessees'' references are : Cheran Transport Corporation Ltd. :

Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim deduction of the compensation for the route permit

as an eligible expenditure in computing the profits and gains of the assessment years 1972-73, 1973-74 ?

Cholan Roadways Corporation :

Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim deduction of the compensation for the route permit

as an eligible expenditure in computing the profits and gains of the assessment years 1972-73, 1973-74 and 1974-75 ?

The questions in all the Departmental references are :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the compensation paid by the

Government of Tamil Nadu to the assessee in respect of the unexpired portion of the route value should be added to the cost of the stage carriage

and depreciation allowed accordingly ?

One of the assessees is Cheran Transport Corporation Limited, Coimbatore. The assessee is a company which was incorporated on February

17, 1972. On February 25, 1972, the Government of Tamil Nadu notified March 1, 1972, as the date on and from which the stage carriages

owned or operated by the Annamalai Bus Transport Private Limited, Pollachi, shall vest in the Government u/s 3(1) of the Tamil Nadu Fleet

Operators Stage Carriages (Acquisition) Act, 1971.

Thereafter, by a Government order of the same date, the stage carriages and other properties so acquired were transferred to the assessee-

corporation with effect from March 1, 1972, u/s 15(1) of that Act. Section 3 of the Act provided for the vesting of stage carriages and of other

assets of any fleet operation upon notification by the Government absolutely and free from all encumbrances and section 5 provided for

compensation for acquiring those assets. Section 15(1) provided that the stage carriages so acquired may be transferred by the Government in

favour of a corporation or a company owned by the Government. Section 15(2) provided that where any stage carriage is transferred to any

corporation ration owned by the Government, the permit in respect of the stage carriage shall be deemed to have been transferred in favour of

such corporation and remain valid for the unexpired portion thereof. In laying down the principles of compensation u/s 5 in the Schedule it was

specified that in addition to the compensation for the assets acquired, an amount of Rs. 100 for a period of less than 15 days and an amount of Rs.

200 for every completed month or part of a month exceeding 15 days of the unexpired period of the permit shall also be given. Thus, when the

Government took over the assets of Annamalai Bus Transport Corporation (P.) Ltd., the compensation payable was determined at Rs.

56,82,378.47 which included a sum of Rs. 4,23,900 representing the amount due for the unexpired portion of the route permits.

By a Government order dated January 22, 1972, the Government decided to form a separate company for the management of the bus transport

system in Coimbatore and that company is the present assessee. The Government decided that this company will take over the assets acquired

from the private companies under the Act referred to above. It was decided that while the Government will pay compensation for acquiring such

assets, the assessee-company will reimburse the amount to the Government by treating half of the amount as the Government''s share capital in the

company and the remaining half as a long-term loan. This decision was modified by treating one-third of the amount as the Government''s equity

and the remaining amount as a long-term loan. When the acquired assets were transferred by the Government to the assessee-corporation, the

balance-sheets were drawn up accordingly. In doing so, the amount of Rs. 4,23,900 which was the compensation for permits was shown as

goodwill and thus part of the fixed assets in the balance-sheet as on March 31, 1972. Out of that amount, a sum of Rs. 21,200 was written off as

depreciation and the balance of Rs. 4,02,700 was brought down as written down value as on March 31, 1972.

Thus, for the assessment year 1972-73 corresponding to the previous year ended March 31, 1972, the assessee showed a loss of Rs. 7,49,605

after the deduction of depreciation which included the said sum of Rs. 21,200 and the assessment was completed accordingly. In the balance-

sheet as on March 31, 1973, the assessee changed the head under which this amount was exhibited from fixed assets to miscellaneous

expenditure. To this sum of Rs. 4,02,700 carried over from the preceding year, a sum of Rs. 4,12,000 for the compensation for route permits

acquired from the transport units of the Nilgiris District under the Tamil Nadu Stage Carriages and Contract Carriages (Acquisition) Act, 1973,

was added to make a total of Rs. 8,14,800 out of which a sum of Rs. 3,01,100 was deducted in the profit and loss account as permit

compensation written off and the balance of Rs. 5,13,700 loss shown as compensation for permits under the miscellaneous expenditure on the

assets side of the balance-sheet. Thus, for the assessment year 1973-74 corresponding to the previous year ended March 31, 1973, the assessee

showed ""nil"" income and sought to carry forward the loss of Rs. 3,94,315.

In the case of Cholan Roadways Corporation Limited which is also a transport company wholly owned by the Government of Tamil Nadu, the

Government transferred to it certain transport undertakings acquired under the Tamil Nadu Fleet Operators Acquisition Act. This assessee was

also paid compensation for taking over all the buses and the route permits. The assessee showed a sum of Rs. 8,16,600 under the head ""Fixed

assets"" in the balance-sheet for the year ended March 31, 1972, with the narration ""goodwill"" (compensation for permits) and after deducting

depreciation of Rs. 34,600 brought down the written down value as on March 31, 1972, at Rs. 7,82,000. However, in the balance-sheet for the

year ended March 31, 1973, the permit compensation was shown (under the head ""Miscellaneous expenditure"" at Rs. 3,92,500 to the extent not

written off after deduction of Rs. 3,89,500) written off in the profit and loss account. So also in the balance-sheet for the year ended March 31,

1974, the miscellaneous expenditure to the extent not written off included permit compensation to the extent of Rs. 27,800 and the profit and loss

account showed expenditure of Rs. 4,02,300 as permit compensation.

In so far as Anna Transport Corporation Limited, Madras, is concerned which is a public limited company, its assets are fully owned by the

Government of Tamil Nadu. It is carrying on its business as bus operators from January, 1973, and closing its business on March 31, every year.

In respect of the assessment years 1976-77, 1977-78 and 1978-79, the assessee debited the profit and loss account with a sum of Rs. 32,000,

Rs. 35,200 and Rs. 19,200, respectively, towards proportionate compensation. The amounts represented the compensation paid to the previous

fleet owner for the unexpired portion of the route permits taken over by the assessee.

In the assessment proceedings, the Income Tax Officer, while making the assessment, rejected the assessee''s plea for deduction of these

payments of compensation as revenue expenditure. According to the Income Tax Officer, it is to be in the nature of capital. No depreciation also

was allowed on the ground that it is not a tangible asset. Aggrieved, the assessee filed appeals before the Commissioner of Income Tax (Appeals).

However, considering the facts arising in these cases, the Commissioner of Income Tax (Appeals) allowed it as a revenue expenditure. Aggrieved,

the Department filed appeals before the Appellate Tribunal. The Tribunal held that the compensation paid by the assessee is capital in nature and

also directed the Income Tax Officer to allow depreciation as claimed by the assessee on verification of facts. Aggrieved by the order of the

Tribunal, both the assessees as well as the Department are in references before this court. The Department is aggrieved because, according to the

Department, the assessee is not entitled to depreciation. The assessee is aggrieved because the compensation should not be treated as capital but it

should be treated as revenue expenditure.

Learned counsel appearing for the assessee submitted that the compensation paid by the assessee to the fleet owners should be treated as

revenue in nature, It was submitted that by acquiring the buses along with the route permits, the assessee was not getting any benefit of enduring

nature. According to learned counsel, the assessees are also like any other private bus operators liable to get permits for running the buses on the

routes. Therefore, learned counsel for the assessee submitted that the compensation paid by the assessee to the fleet owners should be treated as

revenue expenditure. On the other hand, learned standing counsel appearing for the Department submitted that the assessee started the business

only after obtaining the unexpired period of the route permits and the buses from the fleet owners. Prior to that, the assessee was not running any

transport business. By acquiring the buses and route permits, the assessee got assets and obtained benefits which are of enduring nature. In such

circumstances, learned standing counsel for the Department submitted that the compensation paid by the assessee to the fleet owners is nothing but

capital in nature. In order to support his contention, learned standing counsel for the Department relied on a decision in ORISSA ROAD

TRANSPORT CO. LTD. Vs. COMMISSIONER OF Income Tax, BIHAR AND ORISSA., , wherein the Orissa High Court was of the view

that if an expenditure relates to the domain of running the business concern, ordinarily it would be revenue expenditure. If the expenditure is made

to acquire a certain business to free the business of the assessee from competition, then the expenditure is one of a capital nature. The Orissa High

Court further held that the compensation paid by the assessee, a road transport company, 98 per cent. of whose shares were being held by the

State of Orissa and the Central Government, to private concerns whose routes were taken over by the assessee, is of a capital nature, as the

assessee-company acquired the unexpired permits of the private concerns and, therefore, got rid of competition from private operators.

Another decision relied on by learned standing counsel for the Department is that in the case of Mysore State Road Transport Corporation Vs.

Commissioner of Income Tax, Mysore, . According to the facts arisen in that case, pursuant to schemes approved by the State Government under

Chapter IV-A of the Motor Vehicles Act, 1939, the assessee-corporation got the monopoly of the road transport business in the area over the

routes to which the schemes relate. The Corporation paid, u/s 68G of the Motor Vehicles Act, compensation to permit holders whose permits

were cancelled. The question arose whether such payment was a capital expenditure or revenue expenditure. While answering this question, the

Karnataka High Court held that the payments made to private operators by the corporation in the manner provided for u/s 68G of the Motor

Vehicles Act was an expenditure of a capital nature and, as such, not entitled to deduction u/s 37 of the Income Tax Act, 1961. On the other

hand, learned counsel appearing for the assessee, in order to support his contention that the compensation paid by the assessee was of revenue

nature, relied upon a decision of the Supreme Court in Empire Jute Co. Ltd. Vs. Commissioner of Income Tax, . According to the facts arising in

that case, the assessee purchased ""loom hours"" from four other mills for the aggregate sum of Rs. 2,03,255 during the previous year relevant to the

assessment year 1960-61 and claimed to deduct that amount as revenue expenditure. On these facts, the Supreme Court held that the expenditure

incurred for the purpose of operating the looms for longer working hours was primarily and essentially related to the operation or working of the

looms which constituted the profit-making apparatus of the appellant and was 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 a profit out of this expenditure as an expense of carrying it on; it was part of the cost of

operating the profit-earning apparatus and was dearly in the nature of revenue expenditure. But, according to the facts arising in this case, the

assessee has not paid the compensation for the purpose of profit-earning from the existing business, further the expenditure was also not for

operating the profit-making apparatus as pointed out by the Supreme Court. In fact, it is only after obtaining the assets the assessee herein started

his business. Therefore, the abovesaid decision of the Supreme Court would not render any assistance to the assessee to contend that the

compensation paid was of revenue nature.

In view of the foregoing decisions, especially the decision rendered in ORISSA ROAD TRANSPORT CO. LTD. Vs. COMMISSIONER

OF Income Tax, BIHAR AND ORISSA., and Mysore State Road Transport Corporation Vs. Commissioner of Income Tax, Mysore, stated

supra, we have to hold that the compensation paid by the assessee for obtaining the buses along with route permits would be capital in nature. In

that view of the matter, the question referred to us at the instance of the assessees for all the assessment years under consideration are answered in

the negative and against the assessee.

So far as the question referred at the instance of the Department is concerned, learned standing counsel appearing for the Department

submitted that the assessees are not entitled to depreciation. Since, according to learned standing counsel, even though on the value of the buses,

the assessees were entitled to depreciation, on the value of the route permits the assessees are not entitled to claim depreciation. The Income Tax

Officer disallowed depreciation on the value of the route permits. On appeal, the Commissioner of Income Tax (Appeals) allowed depreciation

both on the value of the buses as well as on the value of the route permits treating that the compensation paid by the assessees were of revenue

nature. On further appeal, the Tribunal held that the value paid for the buses and the value paid for the route permits are one and the same since

they are clearly inter-twined. Therefore, according to the Tribunal, the value of the buses and the value of the route permits are capital in nature on

which the assessee is entitled to depreciation.

As already pointed out, the case of the Department was that no depreciation can be allowed on the value of the route permits, while

depreciation is permissible on the value of the buses. Learned counsel appearing for the assessee contended that the assessee is also entitled to

claim depreciation on the value of the route permits. In order to support this contention, learned counsel appearing for the assessee submitted that

inasmuch as the value paid for the route permit and the buses are intertwined the same is capital in nature and the assessee is entitled to get

depreciation on the capital asset. However, learned standing counsel for the Department relied on a decision in G. Vijayaranga Mudaliar Vs.

Commissioner of Income Tax, Madras, in order to support his contention that the assessee is not entitled to get depreciation on the value of the

route permits. In the abovesaid decision, this court held that (at page 858) :

Buses have little value shorn of their permits to ply on particular routes. It is an open secret that when buses are transferred the consideration paid

by the purchaser of the vehicles is only commensurate with their earning capacity which is intimately connected with the routes on which they

operate. But nevertheless no transferor admits having received any consideration for transfer of the permits and the transferee also never

acknowledges that he paid any amount for annexing the routes along with the buses. We must observe that this pretence of non-payment of

consideration for transfer of permits is nothing short of sheer hypocrisy. We can almost take judicial notice of the fact that whenever a bus with a

permit is transferred a fair portion of the consideration would represent the value attributable to the pecuniary gain derived by operating on the

route. In the instant case, we cannot say that the Department went wrong in allowing depreciation only on the amount of Rs. 85,000 as

representing the value of the vehicles deducting Rs. 40,000 representing the ''route value'' from the total consideration of Rs. 1,25,000.

Another decision relied on by learned standing counsel for the Department was that reported in the case of Sitalpur Sugar Works Ltd. Vs.

Commissioner of Income Tax, Bihar and Orissa, . According to the facts arising in that case the assessee-company carried on the business of

manufacturing sugar in its factory situated originally at Sitalpur. That place suffered from the ravages of floods and good quality sugarcane was not

available in sufficient quantities there. With a view to improving its business the assessee shifted the factory to Garaul and in the process of

dismantling the building and machinery and transporting and erecting them at Garaul incurred an expenditure of Rs. 3,19,766. In its assessment to

Income Tax, the assessee claimed that that amount was a permissible deduction u/s 10(2)(xv) of the Indian Income Tax Act, 1922, and in the

alternative, that depreciation should be allowed on that amount u/s 10(2)(vi) if it were capital expenditure. On these facts, the Supreme Court held

as under (headnote) :

(i) that the expenditure was not incurred for the purpose of carrying on the concern but was incurred in setting up the concern with a greater

advantage for the trade than it had in its previous set up. The expenditure was not incurred in earning profits, but was incurred only for putting its

factory, that is, its capital, in better shape so that it might produce larger profits when worked. The expenditure incurred in dismantling and refitting

the existing plant at a better site produced an advantage which enabled the trade to prosper and which could be expected to last for ever and was,

therefore, capital expenditure.

Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155 and Assam Bengal Cement Co. Ltd. Vs. The Commissioner of Income

Tax, West Bengal, applied; Granite Supply Association Ltd. v. Kitton [1905] 5 TC 168 (C Exch.) followed.

(ii) that no depreciation could be claimed because no tangible asset was acquired by the expenditure and no improvement was made in any capital

asset in the sense that there was an increase in the value thereof.

In order to be entitled to depreciation on ''capital expenditure .... for additions, alterations, improvements and extensions'' envisaged in column 3 of

Part V of the Form of Return prescribed by rule 19 of the Indian Income Tax Rules, 1922, there has to be an improvement of the capital asset, an

increase in its value.

According to the facts arising in the present case, the assessee has not incurred the expenditure with regard to the acquiring of route permits

after the business was started. In fact, the business was started with the acquisition of the route permit. In G. Vijayaranga Mudaliar Vs.

Commissioner of Income Tax, Madras, , this court clearly held that when the compensation amount was paid for buses and the route permits

separately, depreciation can be allowed on the value of the buses and not on the route permits. In Sitalpur Sugar Works Ltd. Vs. Commissioner of

Income Tax, Bihar and Orissa, , it was held that in order to claim depreciation the capital assets were put into use. In the present case only buses

were operated and, therefore, depreciation is allowable on the value of the buses. In so far as the value of the route permit is concerned, it cannot

have any depreciation, since it is an intangible asset. Thus, considering the view taken in the abovesaid decision cited supra, we have to hold that

the assessees are entitled to depreciation only on the value of the buses and not on the route permits. It was represented that the Assessing Officer

has already granted depreciation on the value of buses. Therefore, we are of the opinion that the Tribunal was not correct in coming to the

conclusion that the value of the route permits and the value of the buses are inter-twined and, therefore, on the value of both, depreciation should

be allowed.

In that view of the matter, we also answer the question referred at the instance of the Department in the negative and in favour of the

Department. However, there is no order as to costs. Counsel''s fee is fixed at Rs. 1,000.