G. K. MISRA C.J. - The following question of law has been referred to the High Court for its opinion, under section 256(1) of the Income-tax Act, 1961 :
'Whether, in the facts and circumstances of the case, the Tribunal was right in holding that the compensation paid to ex-operators for taking over their bus routes was expenditure of capital nature ?'
The facts, on the basis of which the reference has been made, have been very clearly put in paragraph 2 of the order of reference. The relevant assessment years are 1953-54, 1954-55 and 1955-56.
The assessee is a road transport company. 98 per cent. of the companys shares are held by the State of Orissa and the Central Government. Stage carriage permits are usually issued for a period of three years. Under the Orissa Motor Vehicles (Regulation of Stage Carriages and Public Carriers Services) Act, 1947 (Orissa Act 36 of 1947), permits can be acquired for unexpired periods on payment of compensation. Some of the routes Worked by private concerns were taken over by the assessee-company with the assistance of the State Government. During the three accounting years relevant to the three assessment years the routes of various private operators had been taken over by the assessee-company. The total compensation paid was distributed over the three years and the amount paid has been mentioned in the order of reference. The amount so paid by way of compensation was claimed by the assessee-company as amounting to 'revenue expenditure' and accordingly deduction was consistently disallowed by the department up to the stage of the Tribunal and accordingly the aforesaid question of law has been referred to this court.
Section 10(2) (xv) of the Income-tax Act, 1922, runs thus :
'10. (2) Such profits of gains shall be computed after making the following allowances, namely :- ......
(xv) any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.'
The short question for answer is whether the compensation paid for acquiring certain unexpired permits to carry on the business free from competition, is a capital or revenue expenditure.
It was now well settled that it is difficult to lay down exhaustive tests which will demarcate the field between the two types of expenditure, capital and revenue. It would depend upon the facts and circumstances of each case. One test is however clear, that is, if the expenditure relates to the domain of running the business concern, then, ordinarily, it would be revenue expenditure. If, on the other hand, the expenditure is made to acquire a certain business to free the business of the assessee from competition, would depend on the character of the expenditure. The position of law has been very succinctly put in Assam Bengal Cement Co. v. Commissioner of Income-tax. In paragraph 30, their Lordships observed thus :
'The fact, however, that it was a recurring payment was immaterial, because one had got to look to the nature of the payment which, in its turn, was determined by the nature of the asset which the company had acquired. The asset which the company had acquired in consideration of this recurring payment was in the nature of a capital asset, the right to carry on its business unfettered by any competition from outsiders within the area.'
The aforesaid principle applies, in terms, to the present case. The assessee-company acquired the unexpired permits and thereby got rid of competition from private operators who were on the field prior to the acquisition. The investment was clearly one of a capital nature. The Tribunal correctly answered the question of law.
We would accordingly answer the question referred by saying that the expenditure was of a capital nature. That being the conclusion, the amount was rightly not allowed as a deduction.
The references are answered accordingly. In the circumstances, there will be no order as to costs.
R. N. MISRA J. - I agree.