Deprivation compensation as revenue expenditure; acquisition price remains capital in nature under income-tax treatment

Compensation paid for deprivation of management and possession during the intervening period before acquisition was treated as revenue expenditure because it was a compensatory payment for loss suffered, not part of the consideration for transfer of title or ownership. The payment attributable to acquisition of the undertaking was capital expenditure. Accordingly, only the acquisition component was capital in nature, while the deprivation charges were allowable as revenue expenditure.

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Issues: Whether the sum paid to Metal Corporation of India for deprivation of management and possession during the intervening period before acquisition was capital expenditure or revenue expenditure deductible under the Income-tax Act, 1961.

Analysis: The compensation was bifurcated into two distinct components: one part represented the price for acquisition of the undertaking, which was capital in nature, while the other part represented deprivation charges for the period during which the owner was kept out of management and possession. The latter payment was not shown to be part of the consideration for transfer of title or ownership. It was a compensatory payment for loss suffered during the intervening period and would retain that character even if the acquisition had not ultimately gone through.

Conclusion: The amount attributable to deprivation of management and possession was revenue expenditure and was allowable; only the amount paid for acquisition of the undertaking was capital expenditure.

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