Disallowance of courseware development expenses for training centre; depreciation allowed once assets are put to use.

Disallowance of expenses incurred for expansion of a training centre was upheld because the assessee did not establish that the institute commenced training activity for the counterparty; consequently those costs could not be treated as revenue expenditure and were disallowed. The tribunal agreed that amounts shown as capital work in progress should be capitalised and directed the Assessing Officer to allow depreciation on the total capital cost from the year the assets are put to use. The appeal was partly allowed to the extent of permitting depreciation when the assets become operational.

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Issues: Whether the expenditure of Rs. 65,73,917 incurred for development of courseware/training centre is revenue deductible under Section 37(1) of the Income-tax Act, 1961 or is capital expenditure (capital work in progress) and whether depreciation should be allowed.

Analysis: The expenditure was recorded in the assessee's financial statements as capital work in progress and auditor's note indicated the activity was a new line of business requiring accreditation from National Skill Development Corporation with revenue expected in a subsequent year. The assessee could not establish that training activity for Rama Krishna Mission had commenced in the year under appeal or that the receipts of Rs. 4,08,854 were from that source. Given lack of evidence that the training institute was established and put to use during the year, the nature of the payments aligns with creation of a capital asset (new training facilities) rather than normal revenue expenditure. However, once the asset is put to use as a training institute, depreciation should be available on the capitalised cost at prescribed rates.

Conclusion: The disallowance of Rs. 65,73,917 is confirmed (against the assessee). Depreciation on the capitalised expenditure is to be allowed from the year in which the training facilities are put to use (in favour of the assessee). All grounds of appeal are partly allowed.

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