2002 (9) TMI 38 - HC - Income Tax

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 ? - 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. Question is answered in negative

Summary

Issues:
1. Allowance of expenses on management fees and lease rent incurred before the commencement of production.
2. Applicability of spread over basis for allowing expenditure without specific provision under the Income-tax Act.
3. Application of real income theory to allow expenditure on management fees and lease rent incurred prior to production.

Analysis:
1. The case involved the assessment years 1988-89 and 1989-90, where the assessee, a company, incurred expenses on management fees and lease rent before the commencement of production. Initially, the Assessing Officer allowed the expenses as capital expenditure. However, the Commissioner revised the assessment under section 263, stating that the expenses could not be considered revenue expenditure.

2. Upon appeal by the assessee, the Tribunal acknowledged that the expenses could not be treated as revenue expenditure or covered under section 35D of the Act. Despite this, the Tribunal allowed the expenses to be amortized over ten years, considering them as preliminary expenses. The Revenue argued that the Tribunal effectively amended the statute by including items not specified under section 35D, emphasizing that the Act must be applied as it stands without allowing amortization for expenses not provided for in the Act.

3. The Tribunal's decision to allow amortization for expenses not explicitly covered under the Act was deemed impermissible, as the power to include additional expenses under section 35D was not exercised by the relevant authority. The Tribunal was criticized for attempting to extend the scope of section 35D beyond its legislative intent, highlighting that deductions under the Act must align with its provisions. Consequently, the judgment favored the Revenue, rejecting the allowance of amortization for expenses not specified in the Act.