1979 (9) TMI 113 - AT - Income Tax

Summary

Issues Involved:

1. Whether compensation for unexpired periods of route permits acquired by the transport corporation can be treated as revenue expenditure.
2. Whether the compensation paid for permits is capital expenditure and if it qualifies for depreciation.

Detailed Analysis:

1. Revenue vs. Capital Expenditure:

The primary issue is whether the compensation for unexpired periods of route permits can be treated as revenue expenditure in computing profit and gains from the transport business. The assessee, a company incorporated on 17th Feb 1972, took over assets from private companies under the Tamil Nadu Fleet Operators Stage Carriage (Acquisition) Act, 1971. The compensation included Rs. 4,23,900 for unexpired route permits. Initially, the assessee treated this amount as goodwill and part of fixed assets, writing off Rs. 21,200 as depreciation. However, the Income Tax Officer (ITO) later viewed the permit compensation as capital expenditure, disallowing it as a deduction and reopening the assessment for the previous year.

The Appellate Assistant Commissioner (AAC) held differing views for different assessment years. For 1973-74, the AAC considered the payment for permits as business expenditure, thus allowable as a deduction. However, for 1972-73, the AAC viewed the payment as capital expenditure, not qualifying for depreciation under s. 32(1) of the Act.

2. Nature of Expenditure and Depreciation:

The assessee contended that the nature of the asset, not its balance-sheet classification, determines whether the expenditure is revenue or capital. The route permits were for a short period and necessary for running the business, thus should be treated as revenue expenditure. The assessee cited various Supreme Court decisions to support this, arguing that obtaining a license to run the bus is part of business expenditure. Alternatively, the assessee claimed entitlement to depreciation if the payments were considered capital in nature.

The Revenue argued that the expenditure was capital in nature, forming part of fixed capital and not circulating capital. The expenditure was incurred while setting up the corporation, providing an enduring benefit. The Revenue relied on several judicial decisions to argue that route permits are capital assets and the compensation paid for acquiring them is capital expenditure.

3. Analysis of Transaction and Legal Interpretation:

The Tribunal analyzed the transaction and found no direct privity of contract between the assessee and the erstwhile fleet owners for acquiring the permits. The Government of Tamil Nadu first acquired the stage carriages and other assets, paying compensation to the fleet owners. The unexpired permits were transferred to the assessee corporation by operation of law, not by direct acquisition. Therefore, the assessee did not incur expenditure directly for acquiring the permits.

The Tribunal concluded that the compensation for unexpired permits was part of the overall payment for acquiring the stage carriages and other assets. A stage carriage without a permit is commercially non-viable, making the permit and carriage closely inter-twined. Thus, the value of the unexpired permits should be considered part of the capital asset (stage carriages), qualifying for depreciation.

Conclusion:

The Tribunal set aside the orders of the authorities below and restored the matter to the ITO to recompute the total income after allowing the admissible depreciation. The appeals were treated as allowed, recognizing the compensation for unexpired permits as part of the capital asset, thus qualifying for depreciation.