1969 (7) TMI 12 - HC - Income Tax

Compensation paid for acquiring certain unexpired permits to carry on business free from competition - such expenditure is of a capital nature

Summary

Issues:
Whether the compensation paid to ex-operators for taking over their bus routes was expenditure of capital nature?

Analysis:
The case involved a road transport company where the majority shares were held by the State of Orissa and the Central Government. The company acquired permits for unexpired periods by paying compensation under the Orissa Motor Vehicles Act. The compensation paid to private operators for taking over their bus routes was claimed as revenue expenditure by the assessee under section 10(2)(xv) of the Income-tax Act, 1922. The department consistently disallowed this claim, leading to the question of whether the compensation paid was of capital or revenue nature.

The court referred to section 10(2)(xv) of the Income-tax Act, which allows deductions for expenditure laid out wholly and exclusively for the purpose of the business, not being in the nature of capital expenditure. The distinction between capital and revenue expenditure depends on the nature of the expenditure and its impact on the business. If the expenditure is to acquire a business and free it from competition, it is considered capital expenditure. The court cited the Assam Bengal Cement Co. case, emphasizing that the nature of the asset acquired determines the nature of the payment.

In this case, the compensation paid by the assessee to acquire unexpired permits and eliminate competition from private operators was deemed to be of capital nature. By acquiring the permits, the company freed its business from external competition, making it a capital investment. Therefore, the Tribunal's decision that the expenditure was of a capital nature was upheld by the court. Consequently, the amount was rightly not allowed as a deduction under the Income-tax Act.

Both judges, G. K. Mishra and R. N. Mishra, concurred with the decision that the compensation paid for acquiring the permits was of a capital nature. As a result, the references were answered in favor of considering the expenditure as capital, and no costs were awarded in the case.