Acquisition of mining rights for long lasting source of raw material is capital expenditure

CIT Vs Zuari Industries Ltd. (Bombay High Court)

Conclusion: Since Zuari had obtained a long term captive source of the raw material by purchase of right from Texmaco for mining of limestone by operating the cement plant, therefore, the raw material was required to be won, gotten and brought to the surface and as such, could not be said to be revenue expenditure.

Held: Texmaco, which was a concern in the manufacture of cement was holding a lease from Andhra Pradesh Government for mining of limestone from vast tract of land. Texmaco had become a sick unit and a reference was pending before the Board for Industrial and Financial Reconstruction (BIFR) under Section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 and a scheme was sanctioned under Section 18(4) for its rehabilitation. However, the same could not be implemented. On Texmaco’s suggestion, a revised proposal for its rehabilitation by transfer of the cement Plant to Zuari Industries, which was a group company of Texmaco, was mooted. As an interim arrangement, prior to proposed transfer of the Cement Division under an agreement dated 5^th January 1994 between Texmaco and Zuari Industries, it was inter alia agreed that Zuari shall run and operate the Cement Plant at Yeraguntala, Andhra Pradesh for a period of three years from 1^st January 1994 and thus, it was the respondent which was operating the cement Plant under the interim arrangement. The consideration for the transfer of the cement division includes Rs.709.11 lakhs for takeover of lease, which Texmaco had with the Andhra Pradesh Government, which the respondent claimed to be incurred on revenue account. AO had considered the issue in details and has held that the amount was spent for acquiring a benefit of enduring nature and was thus on capital account. It was held that since Zuari had obtained a long term captive source of the raw material by purchase of right from Texmaco. However, at the same time the raw material was required to be won, gotten and brought to the surface and as such, could not be said to be a stock in trade as held  in the case of R.B. Seth Moolchand Suganchand. Consequently, the substantial question of law framed at was answered in the negative and in favour of the appellant.

FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT

On 23^rd June 2008, this Appeal was Admitted on the following substantial questions of law:

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