1994 (12) TMI 40 - HC - Income Tax

Route Permit Compensation Not Deductible as Revenue: Court Rules in Favor of Tax Department

The court held that compensation for route permits is capital expenditure, not deductible as revenue expenditure. Depreciation is allowed only on the ... Actual Cost, Capital Expenditure, Revenue Expenditure, Route Permits Issues Involved:1. Whether the compensation for route permits is deductible as revenue expenditure.2. Whether the compensation for route permits should be added to the cost of stage carriages for depreciation purposes.Summary:Issue 1: Deduction of Compensation for Route Permits as Revenue ExpenditureThe assessees, Cheran Transport Corporation Ltd. and Cholan Roadways Corporation, claimed deductions for compensation paid for route permits as revenue expenditure. The Income-tax Officer rejected these claims, treating the compensation as capital expenditure. The Commissioner of Income-tax (Appeals) allowed the deductions, but the Appellate Tribunal reversed this decision, treating the compensation as capital in nature and directing the Income-tax Officer to allow depreciation.The court examined precedents, including 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), which held that compensation paid for acquiring unexpired route permits is capital expenditure. The court distinguished the case from Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC), where the expenditure was for operating profit-making apparatus. The court concluded that the compensation paid by the assessees was for acquiring assets of enduring nature, thus capital in nature. The questions referred at the instance of the assessees were answered in the negative and against the assessees.Issue 2: Depreciation on Compensation for Route PermitsThe Department contended that no depreciation should be allowed on the value of route permits, while depreciation on the value of buses was permissible. The Tribunal held that the value of buses and route permits were intertwined, thus allowing depreciation on both.The court referred to G. Vijayaranga Mudaliar v. CIT [1963] 47 ITR 853 (Mad), which held that depreciation is allowable on buses but not on route permits, and Sitalpur Sugar Works Ltd. v. CIT [1963] 49 ITR 160 (SC), which emphasized that depreciation requires tangible assets. The court concluded that depreciation is allowable only on the value of buses, not on route permits, as they are intangible assets. The question referred at the instance of the Department was answered in the negative and in favor of the Department.Conclusion:The court held that the compensation for route permits is capital expenditure and not deductible as revenue expenditure. Depreciation is allowable only on the value of buses, not on route permits. Both questions were answered in favor of the Department. No order as to costs, and counsel's fee was fixed at Rs. 1,000.