2003 (8) TMI 171 - AT - Income Tax

Tribunal classifies payment for training materials as capital expenditure over revenue expenditure.

The Tribunal held that the payment of Rs. 2 lakhs made by the assessee to M/s. Wise Men's Consultancy Co. (P.) Ltd. for training materials and tools ... Business Expenditure Issues Involved:1. Whether the payment of Rs. 2 lakhs made by the assessee to M/s. Wise Men's Consultancy Co. (P.) Ltd. should be considered as revenue expenditure or capital expenditure.Issue-wise Detailed Analysis:1. Nature of Expenditure (Revenue vs. Capital):Background and Arguments:The primary issue in this case is whether the payment of Rs. 2 lakhs made by the assessee to M/s. Wise Men's Consultancy Co. (P.) Ltd. (hereinafter referred to as Wisemen) should be treated as revenue expenditure or capital expenditure. The assessee argued that the payment was for acquiring training materials, contact databases, software, and other training aids, which should be considered as revenue expenditure. The Assessing Officer, however, viewed this payment as capital expenditure, reasoning that the assessee acquired the right to conduct the commercial activities of another company for an indefinite period, thus creating an enduring benefit.Tribunal's Findings:The Tribunal, after hearing both parties and examining the agreement, noted that the payment of Rs. 2 lakhs was made for obtaining references, training materials, manuals, and other tools necessary for conducting training courses. The Tribunal concluded that these components did not create any capital assets. The Tribunal emphasized that such expenditure is normal and recurring in nature for carrying out the assessee's business. The Tribunal also noted that expenditure on software is generally considered revenue expenditure. Consequently, the Tribunal held that the CIT(A) erred in not allowing the amount as revenue expenditure and deleted the disallowance.Separate Opinion by Judicial Member:The Judicial Member disagreed with the Accountant Member's conclusion, arguing that the payment was for acquiring a right to conduct the commercial activities of another company for an indefinite period, which should be treated as capital expenditure. The Judicial Member referred to various legal precedents, including the Supreme Court's decision in CIT v. Ashok Leyland Ltd., to support the view that capital expenditure is closely related to securing an asset or advantage of enduring benefit.Third Member's Decision:Due to the difference of opinion between the Accountant Member and the Judicial Member, the matter was referred to the Hon'ble President of ITAT, who nominated a Third Member to resolve the issue. The Third Member, after examining the facts and the agreement, concluded that the essence of the agreement was to take over all the business activities of Wisemen, thus avoiding competition. The Third Member emphasized that the expenditure incurred to avoid competition and acquire an enduring benefit is of capital nature, as held by the Supreme Court in the case of Coal Shipments (P.) Ltd. The Third Member concurred with the Judicial Member's view that the payment of Rs. 2 lakhs was capital expenditure.Final Judgment:In view of the majority decision, the assessee's appeal was dismissed, and the payment of Rs. 2 lakhs was held to be capital expenditure.