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Petitioner: COMMISSIONER OF INCOME-TAX, DACCA VS Respondent: TANGAIL GENERAL TRADING & TRANSPORT CORPORATION LTD
P L D 1962 Dacca 86
P L D 1962 Dacca 86
Before I. H. Chowdhury, C. J. and A. S. Chowdhury, J
COMMISSIONER OF INCOME‑TAX, DACCA
Versus
TANGAIL GENERAL TRADING & TRANSPORT CORPORATION LTD., MYMENSINGH
Reference Case No. 9 of 1960, decided on 17th August 1961.
Income‑tax Act (XI of 1922), S. 10 (2) (xvi)‑Transport Com pany‑Monthly premium paid to postal authorities for obtaining sanction for addition to number of trips‑Capital or revenue expenditure ‑Test‑Case‑law discussed.
The assessee company carrying on business of motor transport, in order to secure sanction for addition to number of trips, entered into a contract with postal authorities for carrying their mails and thus paid monthly premium.
The Income‑tax Officer disallowed the expenditure paid as premium on the ground that it was of a capital nature as it was incurred to get the contract and for the purchase of oppor tunity for earning from larger number of trips and that it did not form part of the working expenditure. On appeal, the Appellate Assistant Commissioner confirmed the assessment order holding further that the expenditure was incurred not for the purpose of conducting the business but for acquiring exclusive right to carry the postal mails and also to ply buses during appointed time attract ing more passengers, resulting in more profits. The Appellate Tribunal held that the payment of per month was a revenue expenditure incurred wholly and exclusively for the purpose of the busi ness. On reference: ‑
Held, that the payment on account of monthly premium was not for acquisition of any advantage or any asset but for the pur pose of earning profits in the conduct of the business and was a revenue expenditure and not a capital expenditure; the assessee did not acquire any asset or any advantage of enduring benefit having the element of permanency. The agreement with the postal authorities did not create any right for carrying passengers in these mail carrying buses but that was on account of the license already obtain ed from the Regional Transport Authority, and the payment was made by the assessee for the purpose of the business to earn larger profits that could otherwise. be realised and formed part of his trade.
Commissioner of Income‑tax, East Pakistan v. Luxmi Narayan Cotton Mills Ltd. 1960 P T D 855; Pingle Industries Ltd. v. Commissioner of Income‑tax, Hyderabad 1960 P T D 1256; Jagat Bus Service v. The Commissioner of Income‑ tax, U. P. and Ajmere Merwara, Lucknow (1950) 18 1 T R 13 and R. S. Munshi Gulab Singh & Sons v. Commissioner of Income‑tax, Lahore A I R 1947 Lah. 82 rel.
Pyrah (Inspector of Taxes) v. Annis & Co. Ltd. (1957) 31 I T R 517 distinguished.
Commissioner of Income‑tax v. Sir Homi M. Mehta (1943) 11 I T R 142; Tata Hydro‑Electric Agencies Ltd. v. Commissioner of income‑tax (1937) 5 I T R 202; Assam Bengal Cement Co. Ltd. v. The Commissioner of Income‑tax (1952) 21 I T R 38 ; (1955) 27 I T R 34 ; Vithaldas Thakor Das & Co. v. Commissioner of Income‑tax, Bombay (1946) 14 I T R 822; Commissioner of Income‑tax, Dacca v. Gurudayal Sarkar & others (1960) 10 P L R 122 Dacca; Abdul Kayoom and Hussain Sahib v. Commissioner of Income‑tax, Madras (1953) 24 I T R 116 ; Anglo‑Persian Oil Co. v. Dale (1932) I K B 124; Commissioners of Inland Revenue v. The Granite City Steamship Co. Ltd. (1937) 13 T C 1 and Mohanlal Hargovind of Jabbalpur v. Commissioner of Income‑tax 1960 P T D 84b ref.
A. F. M. Mesbahuddin with A. M. Khan Chowdhury for Applicant.
Shaukat Ali Khan with Shamsul Haq Chowdhury for Respondent
JUDGMENT
I. H. CHOWDHRY, C. J.‑-This is a Reference under sec tion 66 (1) of the Income‑tax Act at the instance of the Commis sioner of Incomer‑tax for decision by this Court of the question of law formulated by the Tribunal and referred to this Court which runs as follows :‑
"Whether on the facts and in the circumstances of the case and the agreement, between the assessee and Vie Po3tal Department, the monthly premium pail by the assessee for carrying mails is a revenue expenditure allowable under section 10 (2) (xvi) of the Income‑tax Act, 1922 ? "
Facts stated in the letter of reference are as follows:
The assessee, Messrs Tangail General Trading & Transport Corporation Ltd. are a public limited company carrying on business of motor transport between Mymensingh and Tangail among other places. The Postal Department granted them a mail-carrying contract for a specified period on payment of premium to the Postal Department for carrying mails between Mymensingh and Tangail everyday. The carrying of mail is associated with extra trips. Ordinarily each passenger bus gets only 10 trips up and down per month (up and down trips of one bus taken as one trip), but the mail carrying bus out of necessity will get 30 trips per month which means 20 trips more than an ordinary non‑mail carrying passenger bus. The mail carrying bus carries the usual full load of passengers in addition to carrying Postal mails. As the mail carrying bus has to run punctually it attracts more passengers than the ordinary non‑mail passenger bus. The assessee entered into a contract for carrying the mail for a period of three years. The monthly premium payable by the assessee to the Postal Department was Rs. 5,000. After the termi nation of the contract of the assessee, another transport Com pany‑Messrs Sannyal Transport Company Limited were the con tractors on a monthly premium of Rs. 2,325. After their term was over, the assessee again entered into a fresh contract with the Postal Department under a new tender on a monthly premium of Rs. 2,325.
The disputed contract was entered into on the 10th of January 1952 to take effect from the 1st December 1951 for a period of three years ending on the 30th November 1954. Under the terms of the contract, the contractor is to deposit a sum of Rs. 15,000 as security and the contract for three years is determinable by 4 months' notice on either side or otherwise in due course of law; that the contractor is permitted to carry passengers in the mail bus for which he is responsible for obtaining necessary permits, licenses etc., from the local authorities ; that the contractor is liable to pay penalties varying from Rs. 2 to Rs. 25 in case of delay or failures in the journeys ; that the contractor is responsible abso lutely for due and safe custody and delivery of mail and other articles and liable for damages for all losses and injuries except caused by an act of God, violence of an army or a mob or other irresponsible forces ; that vehicles to be used for the purpose of mail carrying to be approved by the Postal Authorities ; that the contractor is to pay a monthly premium of Rs. 5,000 in advance on the 1st day of each month for permitting him to carry mail in that month ; that the entire security of Rs. 15,000 is liable to be forfeited for breach of any of the covenants by the contrac tor ; and last of all the Postal authorities have got the right to rescind or determine the agreement forthwith without any notice to the contractor for failure to perform and observe any of the stipulations and conditions in the contract.
The Income‑tax Officer disallowed the expenditure of Rs. 5,000 paid as a premium for the month of December 1952 and for the first assessment year 1952‑53 and Rs. 57,333 for 11 months of the next year, that is, the assessment year 1953‑54, the contract having been terminated at the instance of the assessee. In the opinion of the Income‑tax Officer the expenditure was of capital nature as it was incurred for getting the contract and it also represented purchase price of the goodwill for carrying Government mail and definite, secured and advantageous trips, or in other words, for the purchase of opportunity for earning from larger number of trips and that it did not form part of the work ing expenditure.
The Appellate Assistant Commissioner affirmed the view of the income‑tax Officer holding further that the expenditure was incur red not for the purpose of conducting the business but for acquir ing exclusive right to carry the Postal mails and also to ply buses during appointed time attracting more passengers resulting in more profits.
The question, whether a particular item of expenditure is to be treated as capital or revenue is a question of fact depending on the particular facts and circumstances of each case as has been held both in English and Indian decisions, It has also been held that the principle enunciated in one case cannot fully be applied to the facts of another case. The decisions, however, provide guidance for arriving at a reasonable conclusion on a particular facts of each case.
On behalf of the Income‑tax Department, the following cases were relied on, namely, The Commissioner of Income‑tax v. Sir Homi M. Mehta ((1943) 11 I T R 142), Tata Hydro‑Electric Co. v. Commissioner of Income‑tax ((1937) 5 I T R 202) and Assam‑Bengal Cement Co. v. Commissioner of Income‑tax ((1952) 21 I T R 38), confirmed by the Supreme Court of India, reported in (1955): 27 I T R 34. On the other hand, the assessee -appellant relied on the following decisions in the cases of The Jagat Bus Service v. Commissioner of Income‑tax, U. P. Ajmer Merwara ((1950) 18 I T R 13), and Vithaidas Thakurdas & Co v. Commissioner of Income‑tax, Bombay ((1946) 14 I T R 822),
The Tribunal after discussing the decisions in the above cases referred to by both sides and also considering the recent decision of the Dacca High Court in the case of Commissioner of Income‑tax, Dacca v. Gurudayal Sarkar and others ((1960) 10 P L R 122), has come to the conclusion on the facts of the present case and on applica tion of the law discussed in the above cases:
Now on the facts of the present case already set out, the law as enunciated in the cases cited by both sides and stated by us as above has to be, applied. Even according to the dictum laid down by Viscount Cave it was not a decisive test applicable in ever‑, case. Expenditure made once and for all with a view to bringing into existence an asset or advantage for the enduring benefit of a trade is to be treated as capital in the absence of any special circumstance leading to an opposite conclusion. In the present case the benefit according to the terms of the agreement will last for a maximum period of three years with an option for either side to terminate on four months' notice. So not to speak of any lasting or per manent benefit the contract period had its shortest life for only four months and longest for three cars. In fact, the assessee terminated the contract after 2 months' duration which period can by no stretch of imagination be called as bringing into existence an advantage of enduring or lasting benefit. There is no element of permanency in the contract. On the other hand the terms of the contract are so stringent against the assessee that even for the slightest infringement of any of the terms, the agreement can be determined forthwith without notice and the whole amount of security deposit forfeited in addition to all other penalties and forfeiture provided for in the agreement."
As to the question of goodwill, in the light of the decision in the case of Vithaldas Thakurdas & Co. v. Commissioner of Income‑tax, U. P. Ajmer‑Merwara (14 I T R 822) where it has been held that the payment of Rs. 5,059 for the use of the goodwill was a revenue expenditure incurred wholly and exclusively for the purpose of the business, the Tribunal held that the payment of Rs. 5,000 per month for carrying mail cannot be treated differently from that of the case reported in (14 I T R 822). Hence this reference at the instance of the Commissioner of Income‑tax.
Before we take up the question for consideration, we must point out, in view of the observation of the Supreme Court of Pakistan in the case of Commissioner of Income‑tax, East Pakistan v. Luxmi Narayan Cotton Mills Limited, reported in (1960 P T D 855) that whether a particular item of expenditure is to be treated as capital or revenue expenditure is not purely a question of fact depending on the particular facts and circumstances of each case, as observed by the Tribunal in the letter of reference, because it essentially involves construction of the relevant provi sions of the statute and consequently is at least a mixed question of fact and law, "for it is by no means clear that everything which may fall within the meaning of the expression 'capital expenditure' for the purpose of the income‑tax Act, must necessarily fall within the meaning of the word 'capital' and equally, must be excluded from the meaning of the word 'investment' for the purpose of the Business Profits Tax Act. While the facts in the present case are so clear that the applica tion of the distinction between capital and investment admits of no doubt, the requirements of business of different kinds are so varied that cases may well arise in which sums laid out by a company for the protection of its interest may be treated as capital expenditure for the purposes of the Income‑tax Act as held in the Assam‑Bengal Cement Company Limited case (21 I T R 38) but sums spent for a similar purpose in a different manner may not qualify for abatement as capital under a statute relating to taxation of excess profits (vide the Gas Lighting Improve ment Company's case (1923 A C 723) cited above. The point raised by the reference was a difficult one, and it might have been expected to engage the thoughtful attention of the Division Bench to a far greater extent than it succeeded in doing."
In the case of the Jagat Bus Service v. Commissioner of Income‑tax, U. P. & Ajmer‑Marwara ((1950) 18 I T R 13) Malik, C. J, after considering all the cases cited before him and referred to in his judgment held
"The decision in each case, of the question, whether an item of expenditure is revenue expenditure or capital expenditure depends upon a variety of circumstances, a g., the nature of the expenditure, the source from which the money was spent, whether the payment was made once and for all or is a recurring expenditure and whether the asset acquired is going to be a source of permanent income or it exhausts itself either during the course of the year when it was acquired or within a short period thereafter. The main test is its per manency i.e. whether the value of the capital of the company or its assets or its goodwill is permanently increased by reason of such expenditure. It is impossible to lay down any test, which would meet all cases, for example, a firm carrying on the business of plying motor vehicles for hire might decide to increase its business and lay down a new road connecting two places. This would be in the nature of a capital expenditure. If, on the other hand, it spends money every year for the running repairs to the road, that might be in the nature of a revenue expen diture. Similarly, a firm dealing in machinery might buy machinery for sale, which would be revenue expenditure, while an industrial concern might buy machinery to replace worn out machinery and that would be in the nature of capital expenditure. Even In the case of an industrial concern minor repairs, which have to be frequently made and which are known as running repairs are revenue expenditure, while re placement of costly machinery is capital expenditure. It is, therefore, difficult to lay down any test, which could be applied to every case. To my mind, 'capital' means an asset which has an element of permanency about it and which is capable of being a source of Income and 'capital expenditure' must therefore, generally mean an acquisition of an asset and the asset must be intended to be of lasting value. While income or revenue expenses are generally running expenses incurred in earning profit or expenses incurred with the primary object of an immediately return or acquisition of assets which are not of lasting value and are likely to get exhausted or consumed in the process of the return or a very limited number of returns."
Therefore, to be short, the question whether a particular item of expenditure Is a capital expenditure or a revenue expenditure is a difficult question to be decided with reference to the facts and circumstances of each case, as has been observed by S. K. Das, J. of the Supreme Court of India in the case of Pingle Industries Ltd. v. Commissioner of Income‑tax, Hyderabad, reported in (1960 P T D 1256).
"This distinction between capital and revenue either on the receipt or expenditure side, is almost a perennial problem in Income‑tax law. In general the distinction is well‑recognised and is based on certain principles which are easy of applica tion in some cases; but from time to time cases arise which make the distinction difficult of application."
Therefore, it seems to us that the Tribunal is perfectly right when it has stated that the principle enunciated in one case cannot be fully applied to the facts of another case, but the decisions, however, provide guidance for arriving at a reasonable conclusion on the particular facts of each case.
In the case of Abdul Kayoom Hussain Sahib v. Commissioner of Income‑tax, Madras reported in ((1953) 24 I T R 116) referred to by the Tribunal In the letter of reference the Full Bench of the Madras High Court held; -
"It may be taken that until 1926, i.e., until the decision of Viscount Cave, Lord Chancellor, in Atherton's case (1926 A. C. 205) even a working principle for the guidance of the Courts was not firmly established., In that case, however, Viscount Cave, Lord Chancellor, formulated a test, which, with slight variation, has ever since been followed both in England and in India. The Lord Chancellor considered that the opinion of Lord Dunedin in Vallembross Rubber Co. v. Farmer (1910) 5 T C 529 that in a rough way I think it is not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year, was not a decisive test applicable to every case."
According to Viscount Cave, the test is :
"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 circumstance leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital."
In the case of, Anglo‑Persian Oil Co. v. Dale ((1932) 1 K B 124 at p. 146) referred to in the letter of reference by the Tribunal, Romer, Lord Justice observed
"It should be remembered, in connection with this passage (referring to the above passage of Viscount Cave), that the expenditure is to be attributes to capital if it be made with a view to bringing an asset or advantage into existence. It is not necessary that it should have that result. It is also to be observed, that the asset or advantage is to be for the `enduring' benefit of the trade. I agree with Rowlatt, J that by 'enduring' is meant enduring in the way that fixed capital endures. An expenditure on acquiring floating capital is not made with a view to acquiring an enduring asset. It is made with a view to acquiring an asset that may be turned over in the course of trade at a comparatively early date. Nor, of course, need the advantage be of a positive character. The advantage may consist in getting rid of an item of fixed capital that is of an onerous character, as was pointed out by this Court in Mallett v. Stavely Coal & Iron Co. (1928) 2 K B 405."
In the case of Commissioners of Inland Revenue v. The Granite City Steamship Co. Ltd. ((1927) 13 T C 1 at p. 14) Lord Sands laid down yet another test which has also been adopted in a number of cases. "Broadly speaking outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business or for a substantial replacement of equipment."
Besides these cases referred to in the letter of reference, the learned Advocates of the parties referred to other cases to justify their contention that it is a capital expenditure or a revenue expenditure.
In the case of Assam‑Bengal Cement Co. Ltd., Calcutta v. Commissioner of Income‑tax, Calcutta, reported in (A I R 1953 Cal. 368) relied can by Mr. Mesbahuddin on behalf of the Income‑tax Commissioner it has been held: -
" It is not necessary that some asset or advantage should actually be brought into existence. Expenditure is to be attributed to capital, if it is made with a view to acquiring some asset or advantage of enduring benefit; it is not further necessary that it should have that result and that
"Expenditure for the purpose of a business can only be capital or revenue expenditure and any expenditure that cannot be brought under the first category must necessarily fall under the second. One is practically the converse of the other. If a positive definition of business expenditure of a revenue character is acquired, it may perhaps be said that it must belong to the operational expenses of the business laid out either to meet a continuous business demand or to get rid of some particular trading liability or to meet the normal day‑to‑day occasions for outlay in carrying on the business, but always related to the working of the organisation for producing profits and the process of production."
In the case of Pyrah (Inspector of Taxes) v. Annis & Co. Ltd. reported in ((1957) 31 I T R 517) relied on by Mr. Mesbahuddin, a Company obtained an `A' licence for four articulated vehicles. In an endeavour to bring the number of articulated vehicles authorised by its licence up to seven the company in 1952 incurred expenses of 1,272 in applying to the appropriate authorities to vary its licence by the inclusion of a further three articulated vehicles. The company claimed that these expenses might properly be deducted from its trading profits for the purpose of computing its liability to income‑tax. In that case it was held that these expenses could not be so deducted since they were incurred in an attempt to make the company's fleet of lorries more advanta geous and were, therefore, attributable to capital expenditure.
On the other hand, Mr. Shaukat Ali, the learned Advocate for the assessee, relied on the case of Tata Hydro‑Electric Agencies Limited, Bombay v. Commissioner of Income‑tax, Bombay Residency & Adon reported in (64 I A 215=A I R 1937 (P C) 139), where it has been held that the obligation to make the payments was undertaken by the appellants in consideration of their acquisition of the right and opportunity to earn profits, that was, of the right to conduct the business, and not for the purpose of producing profits in the conduct of the business, will be a capital expenditure.
The learned Advocate also relied on the decision in the case of the Jagat Bus Service u. Commissioner of Income tax, U. P. Ajmere‑Merwara reported in (A I R 1950 All. 295=(1950) 18 I T R 13), where the question was whether a particular item of expenditure was a capital expenditure or revenue expenditure and it was held:
" Capital' means an asset which has an element of per manency about it and which is capable of being a source of income and `capital expenditure' must, therefore, generally means an acquisition of an asset and the asset must be intended to be of lasting value. Income or revenue expenses are, on the other hand, generally running expenses incurred in earning profit or expenses incurred with the primary object of an immediate return or acquisition of assets which are not of lasting value and are likely to get exhausted or consumed in the process of the return or a very limited number of returns."
Mr. Shaukat Ali also relied on the decision in the case of R. S. Munshi Gulab Singh & Sons v. Commissioner of Income tax, Lahore reported in (A I R 1947 Lah. 82), where it has been held :
"That the expenditure incurred in canvassing custom or in securing better rates than otherwise would be obtainable for the work executed, with the object of earning increased profits was not a capital expenditure but an item to be debited to revenue account according to the ordinary commercial usage and mode of drawing up a profit and loss account. The sums were paid to the competing firms by the assessee in order to keep up the prices for the printing and publishing jobs executed at the press and thus to earn larger profits than could otherwise be realised. That was the part of the business that assessee carried as the owner of a printing press and as a person who had inherited the trade as a printer and publisher. The expenditure was not made once and for all or with a view to bring into existence an asset or an advantage for the enduring benefit of the trade but was of a recurring nature and arose in the course of the trade conferring no…
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