2004 (7) TMI 290 - AT - Income Tax

Summary

Issues:
1. Whether the one-time front-end fee paid by the assessee to the lessor is capital or revenue in nature.

Analysis:

Issue 1: Whether the one-time front-end fee paid by the assessee to the lessor is capital or revenue in nature.

The case involved an appeal by the assessee against the order of the CIT(A) upholding the addition of Rs. 7.80 lakhs on account of a front-end fee paid by the assessee company at the time of executing a lease agreement. The assessee, a limited company engaged in sugar manufacturing, had purchased a boiler and turbine for Rs. 8 crores from a financial company, agreeing to pay a management fee of 1% of the total amount. The AO disallowed Rs. 7.80 lakhs of this amount, stating it should be spread over the 5-year lease period. The CIT(A) also confirmed this disallowance, noting that the fee was not directly related to the lease deed but to the overall agreement for leasing the machinery for 5 years.

The tribunal analyzed the nature of the one-time front-end fee, considering the lease agreement terms and the benefit derived by the assessee over the 60-month lease period. The tribunal noted that the fee was non-refundable and would not be returned in case of early lease termination. While the assessee argued for the fee to be treated as revenue expenditure based on case law examples, the tribunal disagreed, stating that allowing the entire fee upfront would imply a possibility of lease termination midway, which was not warranted. The tribunal upheld the tax authorities' decision to spread the fee over 60 months but adjusted the monthly amount to Rs. 26,660 instead of Rs. 20,000, aligning with the lease period.

In conclusion, the tribunal partly allowed the appeal, affirming the capital nature of the one-time front-end fee and directing its spread over the lease period at Rs. 26,660 per month, resulting in the acceptance of the ground in part.

This comprehensive analysis of the judgment highlights the key issues, arguments presented, and the tribunal's decision, ensuring a thorough understanding of the legal reasoning and outcome of the case.