Madras High Court
Commissioner Of Income-Tax vs Ennar Steel And Alloy (P) Ltd. on 24 September, 2002
Equivalent citations: [2003]261ITR347(MAD)
Author: R. Jayasimha Babu
Bench: R. Jayasimha Babu, K. Raviraja Pandian
JUDGMENT R. Jayasimha Babu, J.
1. The questions referred at the instance of the Revenue are :
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal having held that the expenses on management fees and lease rent were incurred before the commencement of production was right in directing the Assessing Officer to allow the expenditure on a spread over basis on the same lines as in Section 35D ?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in allowing the expenditure to be allowed on a spread over basis when there is no specific provision under the Income-tax Act to allow such expenditure ?
(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in applying the real income theory to allow the expenditure on management fees and lease rent incurred prior to the commencement of production ?"
2. The assessment years are 1988-89 and 1989-90. The assessee is a company. After it had placed orders for the machinery required for the plant which it was in the process of putting up, it found that it was unable to make all the payments required to be made to the suppliers of machinery. It thereafter entered into a lease and management agreement with Dugar Investments, who paid the balance payable to the suppliers, reimbursed the assessee the amount that it had paid in part to the suppliers, acquired ownership of the machineries and leased the machineries back to the assessee. There was a time gap between that lease back and the commencement of production during which period the assessee paid the lease rent and management fees to its lessor. The assessee claimed that the lease rent and management fees paid by it to Dugar Investments during the period prior to the commencement of production was required to be regarded as a capital expenditure and allowed to be added to the cost of the plant and machinery for the purpose of claiming depreciation.
3. The claim so made by the assessee was initially allowed by the Assessing Officer. The assessment so made was revised by the Commissioner under Section 263 of the Act. He held that the expenditure incurred on management fees and lease rent prior to the commencement of production could not be regarded as revenue expenditure.
4. On appeal by the assessee, the Tribunal even while holding that the management fee and lease rent paid prior to the commencement of production could not be treated as revenue expenditure and that such expenditure was also not covered by Section 35D of the Act, nevertheless proceeded to grant relief by holding that by analogy the expenditure incurred by the assessee on the lease rental and management fee prior to the date of commencement of production was in the nature of a preliminary expense and, therefore, should be allowed to be amortised over a period of ten years.
5. Counsel for the Revenue rightly submits that what has been done by the Tribunal is to practically rewrite the statute and include under Section 35D items which have not been included therein. The preliminary expenses in respect of which benefit can be claimed under Section 35D have been spelt out in that section. The power reserved to include other items of expenditure has not been exercised by the authority who had been conferred with the power. The Tribunal cannot proceed to exercise that power and include within Section 35D items which have not been included therein by Parliament.
6. The deductions allowable under the Act have necessarily to be allowed in accordance with the provisions of the Act as it exists. The Act must be applied as one finds it and it was not open to the Tribunal to allow amortisation for expenditure for which the Act does not make provision for amortisation.
7. The question referred to us is therefore answered against the assessee and in favour of the Revenue.