Govinda Bhat, C.J.
1. These references made under section 256(1) of the Income-tax Act, 1961, relate to the assessment years 1966-67, 1967-68 and 1968-69. The Income-tax Appellate Tribunal, Bangalore Bench, has stated a case and referred the following question of law in all the cases arising out of its common order for the opinion of this court :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was light in holding that the compensation paid under section 68G of the Motor vehicles Act in respect of 'permits' where the unexpired period was two years and less, was revenue expenditure and the balance was a capital expenditure ?'
2. In I. T. R. C. No. 50 of 1972, besides the above question, the following question has been referred for the opinion of this court and that question is numbered as question No. 2 :
'(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure incurred in shifting one out of the three workshops to new premises was of a capital nature ?'
3. The assessee is the Karnataka State Road Transport Corporation (hereinafter referred to as 'the Corporation') which is mainly engaged in transport business. Pursuant to schemes prepared by the Corporation and approved by the State Government under Chapter IVA of the Motor Vehicles Act, 1939 (hereinafter called 'the M. V. Act'), the Corporation got the monopoly of road transport business in the area over the routes to which the schemes related. For the purpose of giving effect to the approved scheme in respect of a notified area or route, the regional Transport Authority was conferred power under section 68F(2) of the M. V. Act to refuse to entertain any application for the renewal of any permit except permits granted to the Corporation and further to cancel any existing permit. Section 68G of the M. V. Act provides that where, in exercise of the powers conferred by clause (b) or clause (c) of sub-section (2) of section 68F, any existing permit is cancelled or the terms thereof are modified, there shall be paid by the State Transport undertaking to the holder of the permit compensation, the amount of which shall be determined in accordance with the provisions of sub-section (4) or sub-section (5), as the case may be. By virtue of the said provision, the Corporation paid to the existing permit holders compensation categorised as below :
------------------------------------------------------------------------Financial Assessment One year Two years Moreyear year and below and below thanbut more two Totalthan one yearsyear------------------------------------------------------------------------1 2 3 4 5 6------------------------------------------------------------------------1965-66 1966-67 33,858.47 70,198.90 16,718.18 1,20,775.501966-67 1967-68 4,047.08 6,333.33 6,109.09 16,489.501967-68 1968-69 4,948.38 3,561.20 4,275.17 12,784.70--------------------------------------------------42,853.93 80,093.43 27,102.44 1,50,049.80------------------------------------------------------------------------
4. The Corporation claimed before the Income-tax Office that deduction for the amount of compensation paid to permit holders should be allowed while computing its taxable income. During the accounting year relating to the assessment year 1966-67, the Corporation incurred and expenditure of Rs. 80,000 in shifting its regional workshop from the old premises to a new one. The expenditure so incurred was not paid to any third party but to its own employees who undertook the work of shifting the workshop The Corporation claimed deduction of the said sum of Rs. 80,000 as business expenditure in computing the income chargeable under the head 'Profit and gains of business'. Both the claims were rejected by the Income-tax Officer. The Corporation filed three appeals before the Appellate Assistant Commissioner. It was urged before him by the Corporation that the compensation amount was paid wholly and exclusively for the purpose of its business; that the Corporation already had the necessary permits to ply its buses immediately on the nationalisation of the bus routes; that the compensation was paid to holders of permits who were prevented from operating their services for the remaining period for which their permits would otherwise have been valid. It was urged that by the termination of the permits of private operators the Corporation did not secure any enduring advantage to its business. This argument of the Corporation was accepted in part. In the opinion of the Appellate Assistant Commissioner, compensation paid to private operators when the unexpired period of permits was two years or more can be considered as securing an enduring advantage to the business; but compensation paid when the unexpired period of permits was two years and less is business expenditure entitled to deduction under section 37 of the Income-tax 'Act, 1961. In regard to the expenditure of Rs. 80,000 incurred by the Corporation in shifting its regional workshop, the Appellate Assistant Commissioner noted that the Corporation had three different types of workshops and what was shifted was only the regional workshop where major repairs to vehicles were carried out; since only a part of the plant and machinery was shifted and not the entire plant and machinery of all the three workshops, the Appellate Assistant Commissioner held that the ration of the decision in Sitalpur Sugar Works Ltd. v. Commissioner of Income-tax was not applicable to the facts of the case and accordingly held that there has not been any creation of material asset, that the business of the Corporation is such that the location of the original workshop would not matter very much and in these circumstances the expenditure is of the character of revenue expenditure and, therefore, allowable.
5. Against the order of the Appellate Assistant Commissioner, the department as well as the Corporation preferred appeals and cross-objections respectively before the Income-tax Appellate Tribunal which made a common order in all the appeals relating to the three assessment years. The Tribunal agreed with the view of the Appellate Assistant Commissioner except in regard to the claim for deduction of Rs. 80,000. In the result, the Tribunal held that the claim for deduction of the amount of compensation paid has to be disallowed to the extent of Rs. 27,102.44 for all the three assessment years. In regard to the claim for deduction of the sum of Rs. 80,000 the Tribunal was of the opinion that the ratio of the decision in Sitalpur sugar Works Ltd. v. commissioner of Income-tax, is applicable to the facts of the case and, therefore, that claim has to be disallowed. Both parties aggrieved by the order of the Tribunal have sought a reference to this court under section 256(1) of the Income-tax Act, 1961.
6. Sri Sarangan, learned counsel for the Corporation, submitted that the entire claim in respect of the amount of compensation paid irrespective of the period of unexpired permits of private operators as also the sum of Rs. 80,000 claimed as expenditure for shifting the workshop should have been allowed as admissible revenue expenditure. Sri Rajasekhara Murthy, learned counsel for the department, contended that the entire claim of the Corporation for deduction under section 37 of the Income-tax Act should have been disallowed.
7. We will take up question No. 2 which relates to the assessment year 1966-67. The Corporation had three workshops for carrying out repairs to its vehicles. The regional workshop alone was shifted from its old premises to its new premises. The contention of the Corporation is that the expenditure has not brought any advantage of any enduring nature; that for lack of space part of the regional workshop was shifted; that the shifting was done departmentally and only book adjustments were made. Therefore, it was argued that the said claim ought to have been allowed as business expenditure.
8. In our opinion, question No. 2 is concluded by the decision of the Supreme Court in Sitalpur Sugar Works Ltd. v. Commissioner of Income-tax. In that case, the assessee 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 sugar-cane was not available in sufficient quantity. With a view to improving its business, the assessee shifted its 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. The assessee claimed that the said amount was a permissible deduction under section 10(2) (xv) of the Indian Income-tax Act, 1922. The Supreme Court rejected that claim holding 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 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, therefore, it was capital expenditure. This is what Sarkar J. (as he then was) said :
Considering the matter apart from the authorities, it seems to us impossible that the expenditure could be revenue expenditure. It was clearly not incurred for the purpose of carrying on the concern but it 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 any profit but only for putting its factory, that is its capital, in better shape so that it might produce larger profits, when worked. It really went towards effecting a permanent improvement in the profit-making machinery, that is, in the capital assets. It was, therefore, a capital expenditure and not a revenue expenditure.'
9. In Granite Supply Association Ltd v. Kitton, the assessee had altered the premises of its business. The expenditure for shifting the premises was claimed as admissible expenditure. That claim was rejected and while doing so, this is what Lord McLaren said :
'I think that the cost of transferring plant from one set of premises to another more commodious set of premises is not an expense incurred for the year in which the thing is done, but for the general interests of the business. It is said, no doubt, that this transference does not add to the capital value of the plant, but I think that it is not the criterion. There are costs that would not properly be set against the income of the year, and which yet may not add to the capital value. Suppose a person is imprudent enough not to insure his premises or his goods, which can be insured, and they are burned down, and he has to replace the building, he could not be allowed to charge the new building against the income of the year, although the putting of it up does not add to the value of his property, but merely enables it to maintain its original value. I agree, therefore, that the cost of re-erecting the cranes and the cartage of materials, being a thing not done for the benefit of the one year, is not a proper deduction from income.'
10. The above statement of law is a clear answer to the contention of the Corporation. The cost of transferring the regional workshop to new premises is not an item of expenditure incurred for the year in which the shifting was done, but for the general interests of the business of the Corporation and its enduring benefit to the Corporation and, therefore, is not a proper deduction from income. The Tribunal, therefore, was right in the view it has taken that the said amount of Rs. 80,000 is not allowable as deduction.
11. We shall now deal with question No. 1. In order to appreciate the rival contentions, it is necessary to refer to the relevant provisions of the M. V. Act. The provisions relating to State Transport undertakings are contained in Chapter IVA of the M. V. Act introduced by Central Act 100 of 1956 which came into force on February 16, 1957. The object of introducing Chapter IVA was that it is necessary in the public interest that road transport services in general or particular class of such service in relation to any area or route or portion thereof should be run and operated by the State Transport undertaking, whether to the exclusion, complete or partial, of private operator. That object is sought to be achieved by the State Transport undertaking preparing a scheme and submitting the same to the State Government for approval. Any person affected by the scheme published is given the right of filing objections thereto before the State Government. The State Government has then to consider those objections after hearing the representations made by persons affected by the scheme. The scheme as approved or modified by the State Government is published in the Official Gazette by the State Government and when that is done, the scheme becomes final and it is called the approved scheme. When the approved scheme comes into force the State Transport undertaking secures the monopoly of transport business in the area or route to which the scheme relates.
Sub-section (2) of section 68F of the M. V. Act provides :
'For the purpose of giving effect to the approved scheme in respect of a notified area or notified route, the Regional Transport Authority may, by order, -
(a) refuse to entertain any application for the renewal of any other permit;
(b) cancel any existing permit;
(c) modify the terms of any existing permit so as to -
(i) render the permit ineffective beyond a specified date;
(ii) reduce the number of vehicles authorised to be used under the permit;
(iii) curtail the area or route covered by the permit in so far as such permit relates to the notified area or notified route.
Section 68G(1) provides : 'When, in exercise of the powers conferred by clause (b) or clause (c) of sub-section (2) of section 68F, any existing permit is cancelled or the terms thereof are modified, there shall be paid by the State transport undertaking to the holder of the permit compensation the amount of which shall be determined in accordance with the provisions of sub-section (4) or sub-section (5), as the case may be.'
12. Compensation is paid to the existing permit holders for the extinction of their right to operate their services for the unexpired period of the permits in existence. Under the provisions of Chapter IVA the Corporation does not acquire the permits of private operators. The State Transport undertaking secures the monopoly of transport business when the State Government gives its approval to the scheme proposed by the State Transport undertaking. To give effect to the approved scheme, the Regional Transport authority is empowered to cancel an existing permit or modify the terms of an existing permit. For the extinction of that right provision is made for payment of compensation by the State Transport undertaking. The provision for payment of compensation is an integral part of the scheme of nationalisation of road transport services whereby the State transport undertaking gets a monopoly of the transport business. The State Transport undertaking is not a transferee of the existing permits of the private operators. The scheme of Chapter IVA is that, in order to secure monopoly of transport business in respect of any area or route, the State Transport undertaking shall pay compensation in the manner provided by the M. V. Act.
13. In this context it may not be out of place to refer to the amendment to article 19(6) of the Constitution. The monopoly of road transport business granted by schemes was challenged by private operators as being violative of the fundamental rights guaranteed under article 19(1)(g) of the Constitution. The result of the Fourth Amendment of the Constitution is that the State is not required to justify its action as reasonable at all in a court of law and no objection can be taken to it on the ground that the monopoly conferred by the scheme is an infringement of the right guaranteed under article 19(1)(g) of the Constitution.
14. Section 37 of the Income-tax Act provides that any expenditure not being in the nature of capital or personal expenses of the assessee, laid out or expended wholly and exclusively for the purpose of the business shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'. The question is whether the compensation amount paid by the Corporation to the existing permit holders on the basis of the period of the unexpired permits is a capital expenditure or revenue expenditure If it is revenue expenditure, it is liable to deduction.
15. A similar question arose before the Orissa High Court in Orissa Road Transport Co. Ltd. v. Commissioner of Income-tax and it was held that compensation paid is of a capital nature. There is no other reported decision on this question. We have no information whether any appeal has been preferred against the said judgment.
16. Tests for distinguishing capital and revenue expenditure have been suggested in several judgments. They have been summarised in Simon's Taxes-B, third edition, at pages 374-378 thus :
'A test to distinguish between capital and revenue expenditure was suggested by Lord Dunedin, when he was lord President of the Court of Session in Vallambrosa Rubber Co. v. Farmer. He there drew the distinction between expenditure which is made once and for all, and expenditure which will recur year by year, and he suggested that the former would normally be capita expenditure and the latter expenditure on revenue account. But this test, like all other tests for this purpose, is subject to qualifications... Perhaps the test which has been most frequently resorted to is that which was applied by Lord Cave in British Insulated and Helsby Cables Ltd. v. Atherton : 'But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as property attributable, not to revenue, but to capital'.'
17. The above statement has now become classic. It brings in two additional but alternative considerations in dealing with the test suggested by Lord Dunedin in Vallambrosa Rubber Co. Ltd. v. Farmer. One of these additional factors suggested by Lord Cave is that the expenditure must be with a view to bring into existence an asset or an advantage. The other additional and alternative factor is that for a payment to be capital item, it has to be made for the enduring benefit of the business. A payment to get rid of an undesirable capital asset will be to the enduring benefit of fixed capital. In Collins v. Joseph Adamson & Co. it was held that a sum paid for the purpose of getting rid of an undesirable competitor was a capital payment. In Bradbury v. United Glass Bottle . Harman J., in the course of his judgment, discussed the principles in Atherton's case and put the matter like this :
'The true question is what does the company get for its expenditure. If the answer be that it is something of an enduring character... then the expenditure is a capital expenditure.'
18. In Bean v. Doncaster Amalgamated Collieries Ltd., at page 312, Viscount Simon spoke thus :
'The borderline between revenue and capital expenditure is sometimes difficult to draw, and there may be cases in which the conclusion is properly reached by the Commissioners as a question of fact which will not be disturbed. But where, as here, the Commissioners find facts which in law must lead to the conclusion that the item falls into one class and not into the other, or reach their result by misconstruing the language of a statute, the error can be corrected on appeal.'
19. In Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. the question arose in the following circumstances :
Company N, together with companies R and B, formed a group carrying on the business of copper mining, each company being independent of the others, but with overlapping directorates and each with the same deputy chairman. There was a common sales department for handling the disposal of their output; the copper itself not being sold as the specific product of anyone of the three mines. Following a steep fall in the price of copper in the word market the group, in common with other producers, the said three companies, decided voluntarily to cut their production, and did so early in 1958 by 10 per cent, which for the three companies meant a cut of 27,000 tons, and reducing the group's estimated aggregate production for the year of 270,000 tons to 243,000 tons. In effecting this cut it was agreed that company B should cease production for one year, that company N and company R should undertake between them the whole group programme for the year reduced by the overall cut of 10 per cent., and should pay a sum to company B to compensate it for the abandonment of its production for the year. The Commissioner of Taxes contended that the proportion of the compensation which company N had paid to company B was expenditure of a capital nature, that it was the cost of acquiring a source of income and, therefore, a capital asset and disallowed it as an admissible item in the computation of the taxable profit of company N for the year. It was held by the Judicial Committee of the Privy Council that the compensation paid was an allowable deduction in determining the respondent-company's taxable income. The expenditure bought only the right to have B out of production for 12 months and had no true analogy with expenditure for the purpose of acquiring a business or the benefit of a long-term or enduring contract.
20. Sri Sarangan for the Corporation placed strong reliance on this case; but, in our opinion, it is clearly distinguishable from the facts of the instant case. In Commissioner of taxes v. Nchanga Consolidated Copper Mines Ltd., all that was done was that the Company was made to shut its business down for a period of twelve months. Sri Sarangan also relied on the decision of the house of Lords in Strick (Inspector of Taxes) v. Regent Oil Co. Ltd. The House of Lords reviewed its earlier decisions and, explaining as to what is meant by 'enduring benefit' in the speech of Lord Cave, this is what Lord Reid said :
'Lastly, what is meant by 'enduring' I think that Lord Cave intended to link that with once and for all. He was thinking of a single payment for an advantage which would last for an indefinite time. I do not think he had in mind and advantage of limited duration, and I think that any decision about such an advantage must be reached without reference to or reliance on what Lord Cave said.'
21. The question in the instant case is whether the Corporation acquired an enduring benefit on payment of compensation to private permit holders on the basis of the period of the unexpired portion of their permits The Tribunal committed an error wen it said that the advantage obtained is not an enduring benefit where the unexpired period of the permits was less than two years. Dealing with this question, this is what the Tribunal said :
'The main purpose for which the compensation appears to have been paid was to eliminate competition by the private operators for the unexpired period of the permit. The Appellate Assistant Commissioner has considered that in cases where the period extended beyond 2 years the Corporation has acquired an advantage of an enduring nature. For a period of less than two years the outlay has been considered as of the nature of revenue expenditure. The payment has been made to enable the assessee to extend its activities. The advantage it has acquired is to eliminate competition. In the ordinary course, the expenditure incurred to eliminate competition would be of an enduring nature; but, hereof, after the permits had lapses, the assessee, in due course of time, had the necessary monopoly. The accelerate the process it has made the compensation. It cannot be termed that the assessee has acquired an advantage of an enduring nature. The period for which the compensation has been eliminated has a material bearing to decide the nature of the expenditure. The Appellate Assistant Commissioner has considered that the assessee has not acquired an advantage of a permanent nature. As observed by Viscount Cave in Atherton's case the criterion would determine as to whether the expenditure is made not only once and for all but with a view to bringing into existence an asset or an advantage, for the enduring benefit of the trade. The payment has no doubt been once for all, but the assessee has not brought into existence an asset or an advantage of enduring benefit to the trade. In respect of the right by which the Corporation has been successful in avoiding competition for a period of more than two years, the Appellate Assistant Commissioner has rightly held that it was of an enduring nature. However, for the period of two years and less the assessee has not acquired any permanent advantage. We accordingly are of the view that the Appellate Assistant Commissioner was justified, under the circumstances of the case, to treat the compensation paid to the private operators, the period of licence whereof did not extend beyond two years, as of a revenue nature. The compensation paid to the permit holders where the period extended over two years was rightly treated as of a capital nature........'
22. The payment of compensation by the State Transport undertaking is an integral part of the scheme of nationalisation of bus routes. When once the scheme becomes final and exclusion of the private operators is complete or partial, the State transport undertaking, in our opinion, obtains an enduring benefit of monopoly of road transport business. The holders of the existing permits are not entitled to apply for renewal of their permits, which otherwise they would have been entitled to. Therefore, the advantage obtained by the Corporation of monopoly of road transport business is of an enduring nature. Without payment of compensation as provided under the M. V. Act, the Corporation could not have obtained the monopoly. The compensation paid is for securing the monopoly of road transport business and that monopoly is not of any short duration, but is of an enduring character. Viewed in this light the compensation paid is for securing an advantage for the enduring benefit of the Corporation. It is not an advantage of limited duration. Therefore, the period of the unexpired portion of the permits of private operators is not at all relevant in considering the question whether it is a capital expenditure or a revenue expenditure. The effect of the scheme is intended to endure for a long period of years. Therefore, we are of the opinion that the payments made to private operators by the corporation in the manner provided under section 68G of the M. V. Act is an expenditure of a capital nature and, as such, not entitled to deduction under section 37 of the Income-tax Act, 1961.
23. For the reasons stated above, our answer to question No. 1 in all the section 68G of the Motor Vehicles Act to private operators irrespective of the duration of the unexpired period of their permits, is not revenue expenditure entitled to deduction under section 37 of the Income-tax 1961. We answer question No. 2 in I. T. R. C. 50 of 1972 in the affirmative and against the assessee.
24. The department is entitled to its costs in these references.
25. Advocates' fee, Rs. 250 one set.