Judgment:
1. This appeal by the assessee is directed against the order dt. 4th Sept., 1998, passed by the learned CIT(A)-(C) on the following effective ground : "That the learned CIT(A) has erred in law and on facts while upholding the addition of Rs. 7.80 lakhs on account of front-end fee paid by the assessee company at the time of execution of the lease agreement." 2. Brief facts of the case are that the assessee, a limited company, derived income from the manufacture and sale of sugar. The AO during the course of assessment proceedings found that the assessee-company had purchased a boiler and turbine for Rs. 8 crores from M/s ITC Classic Financial Company. In addition to lease rent, the company agreed to pay a fee @ 1 per cent of Rs. 8 crores as management fee. The AO observed that the amount of Rs. 8 crores paid was relatable to the entire lease period of 60 months and as such the deduction was to be spread over a period of 5 years. He accordingly allowed a deduction of Rs. 20,000 and disallowed the remaining amount of Rs. 7.80 lakhs.
3. Before the CIT(A), it was submitted that there was no justification for making the impugned disallowance as the expenditure was incurred in connection with the lease of the machinery and without the payment of this fee, it would not have been possible for the company to obtain the machinery on lease. Since the payment was directly related to the execution of the lease deed and the lease rent had been debited as revenue expenditure, there could not have been any problem in allowing the front-end, fee as revenue expenditure. The CIT(A) after considering the above submissions observed that the assessee had failed to clarify the nature of the payment. He further observed that without the payment of front-end fee, it could not have been possible to obtain the machinery on lease. It showed that the expenditure in question was not related to the execution of the lease deed but it related to overall agreement for giving machinery on lease for a period of 5 years. It was also observed that if for any reason the lease was not terminated before 5 years, the fee could also be spread over the entire period of 5 years. Based on the above observations, the CIT(A) confirmed the impugned disallowance.
4. Before us, learned Authorised Representative strongly opposed the orders of the tax authorities and submitted that while calculating deduction of Rs. 8 crores after giving a credit of Rs. 20,000 per month instead of Rs. 26,660 as the lease period was for 60 months and not 80 months. It was pointed out by the learned Authorised Representative that front-end fee paid by the assessee was non-refundable and in case of termination of lease the whole amount could had been retained by the lessor. Learned Authorised Representative also filed a copy of the agreement entered into by the assessee with the lessor and submitted that such payment was to be held to be revenue in nature and not capital, as held by various Courts. He placed reliance on the following decisions : (iii) CIT v. Bombay Cycle & Motor Agency Ltd. (1979) 118 ITR 42 (Bom) (iv) CIT v. Hoechest Pharmaceutical Ltd. (1978) 113 ITR 877 (Bom) and It was, therefore, argued by the learned Authorised Representative that the orders of the tax authorities ought to be set aside. On the other hand, learned Departmental Representative relied on the orders of the tax authorities.
5. We have heard the rival submissions, perused the orders of the tax authorities and gone through the material available on record including the paper book as well as the case law cited by the assessee. We find that in this case the main issue is whether one time front-end fee paid by the assessee to the lessor is capital or revenue in nature. Prom perusal of the agreement, it is evident from para 1.8 that the lease management fee means sand includes any non-refundable payment received by the lessor by way of a one time non-refundable fee. However, it is also a fact that the assessee will be enjoying the benefit of the machine taken on lease for a period of five years, i.e., 60 months. The claim of the assessee that non-refundable front-end fee will not be returned in case of termination of lease deed at an earlier stage, therefore, the same should be allowed but, in our opinion, the same is not tenable as allowing the whole front-end fee paid during the year will always tantamount to draw an opinion that the lease agreement had all chances to be terminated in the midway. We feel that such a hypothetical presumption is not warranted as the assessee will be availing the benefit of such machine during the lease period by enjoying the benefit of machine taken on lease and in case of termination of lease in the midway, the rest front-end fee may be claimed in the year of termination of lease. We have also considered the case law relied upon by the assessee but these are not applicable to the facts of the case as in these case law one time registration fee is allowable as revenue expenditure and not on one time management fee as claimed in the present case. We are, therefore, of the opinion that the tax authorities have rightly spread over non-refundable fee over 60 months. We have also considered the submission of the assessee that such spread over of front-end fee should be Rs. 26,660 per month against Rs. 20,000 calculated by the tax authorities. We, therefore, based on our above observations and looking to the facts of the case, are of the opinion that the tax authorities are justified in allowing the expenditure proportionately by spreading over the non-refundable over the lease period; i.e., 60 months. But the same should be Rs. 26,660 per month and not Rs. 20,000 as front-end fee is spread over 60 months and not 80 months. We order accordingly. We, therefore, partly accept the ground.