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  • V. Ramaswami
  • V. Ratnam, JJ.
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  • V. Ramaswami
  • V. Ratnam, JJ.
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Smart Summary

Judgment Summary — Reference under section 256(2) of the Income-tax Act, 1961

Factual and Procedural Background

This reference was made under section 256(2) of the Income-tax Act, 1961, pursuant to a direction of this Court in T.C.P. No. 410 of 1977 dated 10 February 1978. The three specific questions referred are set out in the opinion.

The assessee conducted a bus plying business in Coimbatore District with permits issued by the Road Transport Authority. In the previous year relevant to assessment year 1973–74 the assessee sold four of six buses for a composite consideration of Rs. 1,49,990. The assessee claimed that Rs. 94,000 of that sum represented consideration for transfer of the route permits and that such consideration for transfer of permits was a capital receipt not taxable as business income.

The Income-tax Officer (ITO) held, following his reasoning in the earlier assessment year 1972–73, that the route permits had no value and that the entire sale price represented the consideration for transfer of the vehicles; he therefore computed profits under section 41(2) treating the whole amount as sale value of the buses. The assessee appealed to the Appellate Assistant Commissioner (AAC). The AAC, relying on the decision of this Court in G. Vijayaranga Mudaliar v. Commissioner of Income-Tax, Madras ([1963] 47 ITR 853), accepted that a portion of the sale price represented consideration for route permits and accepted the allocation made by the assessee. The Revenue appealed to the Tribunal.

The Tribunal rejected the Revenue's contention, accepted that the sale was of both buses and route permits, but held that because the parties had not fixed separate prices in the agreement the AAC could not permissibly separately fix values for the buses and the permits and assess accordingly. The Tribunal therefore did not accept the allocation made by the assessee for assessment purposes. The present reference arises from that sequence of decisions.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the entire sale proceeds represented the sale price of the buses only?
  2. Whether the Tribunal had sufficient material to hold that there was no case for apportioning the sale price as between the buses and the route permits?
  3. Whether the Tribunal was right in holding that the assessee cannot be permitted to make an apportionment between the price of the buses and the route rights?

Arguments of the Parties

Assessee's Arguments

  • The sale of four buses for Rs. 1,49,990 was a composite sale that included transfer of route permits; the assessee allocated Rs. 94,000 of the total consideration as consideration for transfer of route permits.
  • The consideration received for transfer of route permits was a capital receipt and not taxable as business income.
  • Where the agreement shows sale of both the bus and permit (for example by clauses requiring joint application to the Regional Transport Authority and transfer of management and collections to the transferee), absence of an explicit numerical allocation in the agreement is not a ground to reject the assessee's claimed apportionment.

Revenue's Arguments

  • The Income-tax Officer maintained that the route permits had no value and that the entire sale consideration represented the vehicles alone and should be treated as such for assessment under section 41(2).
  • Before the Tribunal the Revenue argued that because the agreement did not fix separate prices for the buses and the route permits, an allocation was not permissible and the whole price should be treated as price of the buses.
  • At a later stage the Revenue's counsel contended that the matter should be remitted to the Tribunal for allocation of the consideration.

Appellate Assistant Commissioner's / Tribunal's Positions

  • The Appellate Assistant Commissioner, relying on G. Vijayaranga Mudaliar v. Commissioner of Income-Tax, accepted that a portion of the sale price could represent consideration for transfer of route permits and accepted the assessee's allocation.
  • The Tribunal accepted that the sale comprised both buses and route permits but held that because the agreement did not set out separate prices, it was not permissible for the AAC to separately fix values and assess accordingly; effectively the Tribunal declined to accept the assessee's apportionment on that procedural ground.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
G. Vijayaranga Mudaliar v. Commissioner Of Income-Tax, Madras, [1963] 47 ITR 853 (Mad) The consolidated consideration in a sale of buses can include a component attributable to the value of route permits; absence of an explicit allocation in the sale agreement does not prevent the tax authorities or a court from recognising and attributing part of the consideration to the “route value”. The permit, and the earning capacity attached to the route, often forms part of the price of a transferred vehicle. The Court relied on this authority to conclude that a sale of buses with permits normally carries a route-value component and that the assessee's allocation of consideration between buses and permits could be accepted even though the agreement did not state separate amounts. The precedent supported rejecting the Revenue's contention that the entire price must be treated as price of the buses.

Court's Reasoning and Analysis

The Court proceeded step-by-step from the factual findings and precedent to its conclusion:

  1. The Tribunal itself had accepted that the consideration paid was for both the buses and the transfer of route permits; the point in dispute was allocation of the composite price.
  2. The Court examined the decision in G. Vijayaranga Mudaliar, which held that although the sale was for a consolidated sum, a portion of the consideration could represent the value of route permits and that it was not impermissible to attribute part of the price to route value. The Court drew from that ratio the principle that a consolidated price often includes a “route value” and that courts can take judicial notice of this commercial reality.
  3. The Court inspected the sale agreement filed in the present case and noted specific clauses (clause (9) requiring joint application to the Regional Transport Authority for transfer of the permit and clause (7) conferring the right to manage operations and collect monies) which, in the Court's view, showed the sale was both of the bus and of the route permit.
  4. While acknowledging there was no numerical split in the agreement between price of the bus and price for the permit, the Court held that absence of express allocation in the agreement is not a valid ground to refuse the assessee's apportionment where the agreement itself evidences a composite sale. If the allocation were incorrect or unreasonable, the proper course would have been for the Income-tax Officer to determine an alternative allocation; the Officer cannot simply refuse to apportion and treat the entire amount as price of the buses.
  5. The Revenue sought remand to the Tribunal for fresh allocation. The Court rejected remand because the Revenue had never argued at any stage that the allocation made by the assessee was unreasonable or arbitrary; the Revenue's case had been limited to contending that allocation was not possible and that the entire amount was for the bus (i.e., the route permits had no value). Since that contention was repelled and no alternative allocation was advanced by the Revenue, it was not permissible at this late stage to remit the matter for allocation.
  6. Consequently, the Court accepted the assessee's apportionment as correct and answered the referred questions accordingly in favour of the assessee.

Holding and Implications

Holding: The Court answered the three referred questions in favour of the assessee:

  • Question 1: Answered in the negative and in favour of the assessee (the Tribunal was not right to hold that the entire sale proceeds represented the sale price of the buses only).
  • Question 2: Answered in the negative and in favour of the assessee (the Tribunal did not have sufficient basis to hold that there was no case for apportioning the sale price between buses and route permits).
  • Question 3: Answered in favour of the assessee and against the Revenue (the assessee could be permitted to make an apportionment between the price of the buses and the route rights).

Direct consequences recorded by the Court: the allocation made by the assessee is to be accepted; the assessee is entitled to costs and a counsel's fee of Rs. 500.

Implications: The opinion enforces the principle, as applied in earlier precedent, that a consolidated sale of a bus with a route permit can include a component attributable to the route permit and that absence of a numerical allocation in the agreement does not automatically preclude recognition of that component. The opinion does not purport to lay down a broader new precedent beyond applying existing authority and resolving the questions referred; it confines itself to accepting the specific allocation in this case and declining a remand for fresh allocation.

Show full summary ...

    City Transports Pvt. Ltd. v. Commissioner Of Income-Tax

    Ramaswami, J.:— This reference has been made under section 256(2) of the Income-tax Act, 1961, in pursuance of a direction of this court in T.C.P No. 410 of 1977 dated February 10, 1978. The questions referred are:

    “1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the entire sale proceeds represented the sale price of the buses only?

    2. Whether the Tribunal had sufficient material to hold that there was no case for apportioning the sale price as between the buses and the route permits?

    3. Whether the Tribunal was right in holding that the assessee cannot be permitted to make an apportionment between the price of the buses and the route rights?”

    2. The assessee is carrying on the business of plying buses in Coimbatore District with permits granted by the Road Transport Authority. During the previous year relevant to the assessment year 1973–74, the assessee had sold four out of six buses owned by it for a composite consideration of Rs. 1,49,990, out of which the assessee claimed that a sum of Rs. 94,000 represented the consideration for transfer of route permits. The assessee further claimed that the consideration received for the transfer of the route permits would represent a capital receipt and would not be taxable as income from business.

    3. The Income-tax Officer held for the reason given by him in respect of the earlier assessment year 1972–73, that the route permits had no value and that, therefore, the entire sale price represented the consideration for the transfer of the vehicles only and accordingly he computed the profits under section 41(2), treating the entire amount of Rs. 1,49,990 as sale value of the buses. The assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner, relying on the decision of this court in G. Vijayaranga Mudaliar v. Commissioner Of Income-Tax, Madras., [1963] 47 ITR 853, held that a portion of the sale price represented the consideration for the transfer of the route permits. The Appellate Assistant Commissioner also accepted the allocation of the total consideration as made by the assessee. The Department preferred an appeal before the Tribunal.

    4. The Tribunal, rejecting the contention of the Department, accepted the contention of the assessee that the sale was both of the buses, and the route permits. However, the Tribunal was of the view that the parties to the contract of sale did not fix any price separately for the buses and for the route permits and that it was not permissible for the Appellate Assistant Commissioner to separately fix the value of the buses and the route permits and assess accordingly.

    5. The assessee's method of estimating the consideration for the route permits may now be stated with reference to the illustrative case of sale of one bus out of the four, because all the other cases are similar in nature. In respect of bus No. MDB 149, which was plying on route No. 8-A, Coimbatore Town Service, the total consideration received was Rs. 46,440. The bus was purchased in the year 1965. The written down value of the bus was Rs. 7,637. However, the assessee estimated the value of the bus at Rs. 16,440 for the purpose of section 41(2). He then claimed that the balance of consideration of Rs. 30,000 represented the price for the transfer of the route permit. Similarly, in the other cases, he had estimated the value of the buses and the value of the route permits.

    6. The decision in G. Vijayaranga Mudaliar v. Commissioner Of Income-Tax, Madras., [1963] 47 ITR 853 (Mad), which was relied on by the Appellate Assistant Commissioner, related to a case of transfer of buses with permits. The assessee in that case purchased certain buses plying on the route Vellore to Gudiyattam. The sale in that case was also evidenced by a written document. He paid a consolidated consideration of Rs. 1,25,000, and the agreement did not show the price of the vehicle and the consideration paid for the transfer of the route permit separately. When he claimed depreciation in respect of these buses on the total consideration of Rs. 1,25,000 paid by him, the Income-tax Officer estimated the value of the vehicles at Rs. 85,000 and estimated the value of the route permits at Rs. 40,000 and permitted depreciation only on the value of the buses, viz., Rs. 85,000. The question for consideration was whether this allocation of the price of the bus and the price for the route permit was in order. This court held (p. 857):

    “The main contention of Mr. S. Swaminathan, learned counsel for the assessee, however, was that the entire consideration of Rs. 1,25,000 should be taken as the value of the vehicles and vehicles alone, as it is not permissible under the Motor Vehicles Act to transfer permits for pecuniary consideration. We must observe that there is a fallacy in this argument. A permit is defined under section 2(xx) of the Motor Vehicles Act as a document issued by a State or Regional Transport Authority authorising the use of a transport vehicle as a contract carriage or as a stage carriage. Section 59 of the Act states that a permit shall not be transferable from one person to another except with the permission of the transport authority which granted the permit and it also states that no person to whom the permit is transferred shall have any right to use the vehicle without such permission. The procedure for transferring a permit is governed by the rules framed under the Motor Vehicles Act. The transferor and transferee should make a joint application for transfer and that application will be notified by the Regional Transport Authority calling for objections, if any, and eventually the transfer prayed for may either be granted or refused. Neither the provisions of the statute nor the rules framed thereunder actually prohibit the receipt of consideration for a transfer of permit. It may be that the competent authorities under the Motor Vehicles Act may not allow a permit to be transferred for value lest it should encourage trafficking in permits. Buses have little value shorn of their permits to ply on particular routes. It is an open secret that when buses are transferred, the consideration paid by the purchaser of the vehicles is only commensurate with their earning capacity which is intimately connected with the routes on which they operate. But nevertheless, no transferor admits having received any consideration for transfer of the permits and the transferee also never acknowledges that he paid any amount for annexing the routes along with the buses. We must observe that this pretence of non-payment of consideration for transfer of permits is nothing short of sheer hypocrisy. We can almost take judicial notice of the fact that whenever a bus with a permit is transferred, a fair portion of the consideration would represent the value attributable to the pecuniary gain derived by operating on the route. In the instant case, we cannot say that the Department went wrong in allowing depreciation only on the amount of Rs. 85,000 as representing the value of the vehicles deducting Rs. 40,000 as representing the ‘route value’ from the total consideration of Rs. 1,25,000.”

    7. As may be seen from the ratio of this judgment, though the sale was for a consolidated sum, the price paid normally takes within it the value of the route permit, and the price paid is commensurate with the earning capacity in the route, and in almost all cases, the court can take judicial notice of the fact that whenever a bus with a permit is transferred, a portion of the consideration would represent the value attributable to the pecuniary gain derived by operating on the route. As already stated in this case, the Tribunal itself accepted that the consideration paid was both for the buses and for the transfer of the route permits. However, the only ground on which the allocation of the consideration was not accepted was that in the agreement itself there was no allocation and that, in the circumstances, it was not permissible for the assessee to estimate the price for the bus and the consideration paid for the route permit separately. Even in the decision in G. Vijayaranga Mudaliar v. Commissioner Of Income-Tax, Madras., [1963] 47 ITR 853 (Mad), which we have cited above, there was no allocation separately for the bus and the route permit. However, the Income-tax Officer estimated the value of the route permit at Rs. 40,000 which was accepted by this court. The agreement itself is filed in this case. It clearly shows that the sale was of both the bus and the route permit. In fact, clause (9) provides that the parties shall file a joint application before the Regional Transport Authority, Coimbatore, for the transfer of the permit relating to the bus and in clause (7), it is provided that the transferee will have the right to manage the plying of the bus and shall be entitled to collect all the monies. From a reading of the agreement, therefore, it may be seen that the consideration paid was not merely for the bus, but also for the route permit. It is true that there is no indication in the agreement as to the amount paid for the route permit. But that cannot be a ground for rejecting the claim of the assessee. If the allocation of the consideration relatable to the route permit was in any way incorrect or unreasonable, the Income-tax Officer should have determined the same, but he cannot refuse to allocate the consideration and make an order on that basis.

    8. Learned counsel for the Revenue contended that in the light of the view taken by the Tribunal, the Tribunal had not considered it necessary to go into the question of allocation, and that, therefore, we should remit the matter to the Tribunal for allocation. We are of the view that this is not permissible at this stage. We may state that at no stage, the Revenue contended that the allocation made by the assessee was in any way unreasonable or arbitrary. They were only contending that the allocation was not possible and the consideration paid in entirety represented the value of the bus, and there was no value for the permit. Since that contention could not be accepted and since no alternative case was put forward by the Revenue at any stage, we cannot permit the Revenue now to argue that the matter should be remanded for fresh consideration on the question of allocation of consideration. Since the sale was a composite sale of the bus and the permit and the consideration paid was for both the value of the bus and the value of the permit and since the assessee had apportioned the consideration which was not disputed at any stage, we have to take the allocation made by the assessee as correct. In these circumstances, we answer the first question in the negative and in favour of the assessee. We also answer the second question in the negative and in favour of the assessee. We answer the third question also in favour of the assessee and against the Revenue. The assessee will be entitled to its costs. Counsel's fee Rs. 500.

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    Comments

    City Transports Pvt. Ltd. v. Commissioner Of Income-Tax
    (Jun 19, 1986)