Madras High Court
Anna Transport Corporation Limited And ... vs Commissioner Of Income-Tax on 22 December, 1994
Equivalent citations: [1995]215ITR800(MAD)
JUDGMENT Thanikkachalam, J.
1. 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 under section 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. :
"1. 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 :
2. 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 ?"
2. The questions in all the Departmental references are :
"1. 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 ?"
3. 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 under section 3(1) of the Tamil Nadu Fleet Operators Stage Carriages (Acquisition) Act, 1971.
4. 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, under section 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 under section 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. 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. v. CIT [1970] 75 ITR 126 (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.
11. Another decision relied on by learned standing counsel for the Department is that in the case of Mysore State Road Transport Corporation v. CIT [1975] 99 ITR 518 (Kar). 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, under section 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 under section 68G of the Motor Vehicles Act was an expenditure of a capital nature and, as such, not entitled to deduction under section 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. v. CIT [1980] 124 ITR 1. 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.
12. In view of the foregoing decisions, especially the decision rendered in Orissa Road Transport Co. Ltd. v. CIT [1970] 75 ITR 126 (Orissa) and Mysore State Road Transport Corporation v. CIT [1975] 99 ITR 518 (Kar) 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.
13. 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.
14. 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 v. CIT [1963] 47 ITR 853 (Mad) 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."
15. Another decision relied on by learned standing counsel for the Department was that reported in the case of Sitalpur Sugar Works Ltd. v. CIT [1963] 49 ITR (SC) 160. 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 under section 10(2)(xv) of the Indian Income-tax Act, 1922, and in the alternative, that depreciation should be allowed on that amount under section 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. v. CIT 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."
16. 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 v. CIT [1963] 47 ITR 853, 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. v. CIT [1963] 49 ITR SC 160, 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.
17. 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.