Commissioner of Income Tax vs Ennar Steel and Alloy (P) Ltd.

R. Jayasimha Babu, J.—The questions referred at the instance of the Revenue are :

(1) Whether, on the facts and in the circumstances of the case, the Tribunal having held that the expenses on management fees and lease rent were

incurred before the commencement of production was right in directing the AO 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 Tribunal was right in allowing the expenditure to be allowed on a spread over

basis when there is no specific provision under the IT Act to allow such expenditure ?

(3) Whether, on the facts and in the circumstances of the case, the 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 ?

The asst. yrs. are 1988-89 and 1989-90. The assessee is a company. After it has 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.

The claim so made by the assessee was initially allowed by the AO. The assessment so made was revised by the CIT u/s 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.

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 expenses and, therefore, should be allowed to be amortised over a period

of ten years.

Counsel for the Revenue rightly submits that what has been done by the Tribunal is to practically rewrite the statute and include u/s 35D items

which have not been included therein. The preliminary expenses in respect of which benefit had been claimed u/s 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 the

Parliament.

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.

The question referred to us is, therefore, answered against the assessee and in favour of the Revenue.