- (1.) This appeal by the assessee is against the order of Commissioner (Appeals) for assessment year 1977-78. The appellant has agitated on various grounds which are being discussed and decided in this order.
(2.) The appellant is a public limited company engaged in mining, processing and distribution of Zinc and Lead.
(3.) Ground No. 1(i). This ground pertains to the non-allowance of expenses incurred on deprivation charges paid to M/s Metal Corporation of India for the takeover of the said undertaking. Observations of the assessing officer in this regard may be perused at page 6 para 14 of the assessment order, and those of the Commissioner (Appeals) from page 1 of his order. The facts of the case are that the Central Government appointed the appellant, Hindustan Zinc Ltd., as administrator of the undertaking known as Metal Corporation of India Ltd. from 10-1-1966 to 2-8-1976. vide Notification S.O. 526(E) dt, 3-8-1996. The notification reads as under : "S.O. 526(E)-In exercise of the powers conferred on it by sub-section 1 of section 9 of the Metal Corporation (Nationalisation and Miscellaneous provisions) Ordinance, 1976 (No. 12 of 1976), the Central Government being satisfied that Hindustan Zinc Ltd., a Government company, is willing to comply with such terms and conditions as the Central Government may think fit to impose, hereby directs that the undertaking of Metal Corporation and the right, title, and interest of the Metal Corporation in relation to its undertaking which are vested in the Central Government under sub-section (1) of section 7 of the ordinance aforesaid shall instead of continuing to vest in the Central Government vest in Hindustan Zinc Ltd. on the 3-8-1976." The appellant-company had to pay an amount of Rs. 122.79 lakhs under the said notification on account of deprivation of management of the undertaking of Metal Corporation of India for the period 10-1-1966 to 1-8-1976, and a further amount of Rs. 198 lakhs for the acquisition of the undertaking with effect from 2-8-1976. The appellant- company was directed to charge the amount payable for deprivation of management of the undertaking to revenue expenditure as the appellant-company has been appointed administrator of the said undertaking. The Ministry of Steel &; Mines issued this direction to the company vide its letter dated 7-1-1977 addressed to the chairman and managing director of Hindustan Zinc Ltd. Pursuant thereto, the expenditure was charged to P&;L a/c and treated as revenue expenditure while filing return of income-tax. The assessing officer, however, was of the opinion that the expenditure as incurred by the appellant was in the nature of capital expenditure. To this end, he relied on judgments as listed under: (i) Assam Bengal Cement Co. Ltd. v. CIT, 1955 27 ITR 34(SC) ; (ii) Regent Oil Co. Ltd. v.. Stricks (Inspector of Taxes),1969 73 ITR 301 (iii) Sun Newspapers Ltd. v. Federal Commr. of Income-tax, 72 CLR 634 Before the Commissioner (Appeals), the assessee reiterated its stand as made during assessment, making a further submission to the effect that since the assessee had not derived any benefit of an enduring nature by making the payment of Rs. 122.79 lakhs towards deprivation compensation, the same should have been allowed as revenue expenditure. It was also submitted that the amount was paid pursuant to directions from the Central Government itself with express instructions as to accounting treatment, and calculated in accordance with such directions @ Rs. 11.50 lakhs per annum. Alternatively, it was pleaded before the Commissioner (Appeals) that, should the expenditure as incurred be deemed to be capital in nature, an appropriate allowance of depreciation and investment allowance be provided as per law. A third alternative canvassed was, that in case the above two pleas were not found acceptable, all receipts pertaining to such expenditure should then be treated as capital receipt or capital loss. The Commissioner (Appeals) however, dismissed the appellant's claim, holding that by incurring the said expenditure, the assessee had derived benefit of an enduring nature. He however directed the assessing officer to look into the claim of the appellant regarding allowance of depreciation on the impugned payment, and to allow the same if found admissible as such. The claim of investment allowance was not accepted, as the conditions referred to in section 32A of the Act did not, according to the Commissioner (Appeals), appear to exist. The third alternative suggested by the assessee was not considered at all by the Commissioner (Appeals). The facts of the case are as follows : (a) The Government of India acquired M/s Metal Corporation Ltd. through special legislation, viz. The Metal Corporation of India (Acquisition of Undertaking) Act, 1965 with effect from 22-10-1965. (b) Holdings of the acquired company comprised: (i) Zawar Mines in Rajasthan. (ii) Lead Plant at Tundoo (Bihar), including Delhi &; Calcutta Office. (iii) Zinc Smelter under construction at Dabari (Rajasthan). (c) To own and manage the said undertaking, the Government in terms of section 12 of the Companies Act, 1956, formed the appellant- company. (d) Having a separate entity even after the acquisition of its undertaking, M/s Metal Corporation of India challenged the validity of the MCI Act, 1965 before the Punjab High Court, holding it to be violative of Article 31(2) of the Constitution. The Supreme Court upheld this view. (e) Following this decision of the Apex Court, a fresh Ordinance was issued on 12-9- 1966 repealing the MCI Act, 1965. This was later replaced by an Act of Parliament, the Metal Corporation of India (Acquisition of Undertaking) Act, 1966. (f) After the passing of the said Act, an offer of compensation was made to Metal Corporation of India Ltd. The company rejected the offer, also challenging the vires of the 1966 Act. (g) After the judgment in this case, a fresh offer of compensation was made to Metal Corporation Ltd. in April, 1971, which was again not accepted. (h) The Committee on Undertakings (Fifth Lok Sabha) studying the question, recommended to the Government, the payment of an amount not more than the net assets as standing in the books of the company at the time of take over. (i) The Solicitor General of India and the Ministry of Law, whose views were canvassed, recommended the payment of a fixed sum to avoid litigation. (j) A fresh Ordinance dated 2-8-1976 was thereafter issued and subsequently replaced by another Act of Parliament, the Metal Corporation (Nationalisation and Miscellaneous provisions) Act, 1976. The Act provided for the taking over of Metal Corporation's management and the subsequentacquisition of the undertaking so as to enable the Central Government to, in order to maximise public interest, best exploit the zinc and lead deposits hitherto under control of Metal Corporation of India Ltd. (k) Relevant provisions of the 1976 Act are as under : Section 3 It has inter alia, been laid down that the undertaking of Metal Corporation shall be deemed to include all borrowings, liabilities, and obligations of whatever kind of the Metal Corporation in relation to its undertaking. Section 7(1) It has been laid down that "on the appointed day, the undertaking of the Metal Corporation and the right, title, and interest of the Metal Corporation in relation to its undertaking shall stand transferred to and shall vest absolutely in the Central Government". (1) As laid down in section 10 and 11 of the 1976 Act, Metal Corporation was paid Rs. 320 lakhs as compensation by the Central Government for acquiring the undertaking, as per the following details : (i) For the deprivation of the management of Metal 122.79 Corporation of India from 22-10-1965 to 2-8-1976 @ Rs. 11.39 lakhs per annum (ii) For the acquisition of the undertaking of Metal 198.00 Corporation of India (Rupees in lakhs) 320.79 (m) The amount of deprivation was computed on the basis of profits MCI would have earned from 22-10-1965 to 2-8-1976. Though the undertaking was vested in MCI itself, it was deprived of its management, being under appointed administrators such as Mr. Chhedi Lal (Jt. Secretary, Ministry of Mines and Minerals) from 22-10-1965 to 9-1-1966, and the appellant, Hindustan Zinc Ltd. from 10-1-1966 to 2-8-1976 vide Government notification. (n) During this period of appointment, the appellant put assets of MCI to use in its business activity and earned profit/losses thereupon. These have been accounted for in books of account and tax paid wherever payable thereon. Both the authorities below, it is submitted, have failed to correctly appreciate the factual position in this matter. It is also submitted, that case laws as relied upon by the assessing officer are clearly distinguishable on facts. In the Assam Bengal Cement case (supra), the issue before the Hon'ble Supreme Court was regarding acquisition of lease rights which certainly were acquired as capital assets. In the aforementioned case of Regent Oil Company (supra), the House of Lords adjudicated upon payments made to secure exclusive sales stations. Such acquisition was held to be a permanent asset therein. Facts therefore, do not harmonise with those of the appellant. The assessing officer has referred to approval of principles laid down in the case of Sun Newspapers Ltd. (supra). There is no dispute in the broad principles laid down in the said judgment. However, the facts do not match. From a perusal of the facts enumerated before us, it would be discerned that the appellant-company had made payment amounting to Rs. 1,22,79,000 to Metal Corporation of India as deprivation charges, since MCI was deprived of profits of their undertaking during the period in litigation. During such period, the appellant-company earned income through application of assets of Metal Corporation which were ultimately acquired. Such expenses were, therefore, charged to P&;L a/c as directed by the Central Government. It is therefore submitted, that this payment cannot be held or termed as having been incurred for securing any enduring benefit. At the most, it could be said to have augmented the profit-making structure of the appellant- company. Authorities below, it is respectfully submitted, have erred in linking the payment of deprivation compensation to the amount paid for the acquisition of Metal Corporation of India, especially in the light of the fact that a sum of Rs. 198 lakhs has been paid separately for the express purpose of acquisition. Further, neither authority has recorded a finding to the effect that both these payments, viz., of Rs. 198 lakhs for acquisition of Metal Corporation of India, and Rs. 122.79 lakhs for deprivation of management, are identical in nature to fulfil the same purpose. It is therefore, respectfully submitted that the compensation amount as paid for deprivation of the management of Metal Corporation of India cannot be termed as having been incurred to gain ownership right upon the company. It has a direct nexus with the carrying on of business of the appellant. In this context, attention was invited to the observations made by the Apex Court in the case of Empire Jute Co. Ltd. v. CIT, 1980 124 ITR 1(SC) from where it is quoted : ........... "What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than the juristic classification of the legal rights, if any secured, employed, or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency. In the light of these facts, it is earnestly prayed that the appellant's plea for grant of such expenditure to revenue account be accepted.;