ORDER
Pramod Kumar, A.M.
1. This appeal filed by the assessee is directed against the CIT(A)’s order for the asst. yr. 1996-97 in the matter of assessment under Section 143(3) of the IT Act, 1961.
2. Although the assessee has raised seven elaborate grounds of appeal, in substance, the solitary grievance of the assessee is that the CIT(A) erred in not allowing deduction in respect of Rs. 2 lakhs paid by the assessee to M/s Wise Men’s Consultancy Co. (P) Ltd. towards purchase of training materials, contact data base, software and other training aids.
3. Briefly stated, material facts of the case are that during the course of assessment proceedings, the AO noticed that the assessee had included the sum of Rs. 2,00,000 paid to M/s Wise Men’s Consultancy Co. (P) Ltd. (in short M/s Wise Men’s Consultancy) as seminar expenses. The AO further observed that the assessee-company took over the business of M/s Wise Men’s Consultancy of conducting training courses in the field of leasing and hire-purchases and related areas by virtue of an agreement dt. 24th May, 1996 for a consideration of Rs. 2 lakhs. The AO further noted that since the assessee-company acquired the right to conduct commercial activities of another company for an indefinite period, the consideration for acquiring such right should (sic) out of such right had enduring effect. In this backdrop, the deduction claimed by the assessee in respect of Rs. 2 lakhs paid to M/s Wise Men’s Consultancy was denied by the AO. Aggrieved, the assessee carried the matter in appeal before the CIT(A); but without any success.
4. Still aggrieved, the assessee is in further appeal before this Tribunal.
5. We have heard the rival contentions, perused the orders of the authorities, below and deliberated upon the factual matrix of the case, the applicable legal position and also the elaborate paper book filed by the assessee. On perusal of the agreement filed before us, we find that the aforesaid sum of Rs. 2 lakhs was paid by the assessee to M/s Wise Men’s Consultancy in consideration of the material set out in Clause 4 of the aforesaid agreement dt. 24th May, 1996. The said clause provides as under :
“4. The first party shall, in consideration hereof, do the following for the benefit of the second party :
(a) give references and letters of recommendation to all the first party’s existing clients for services being taken over by the second party, and if any such references come to the first party at any time in future, forward them over the second party;
(b) hand over to the second party all the training course materials, manuals, presentations, software, working, cases and other tools for conducting the training courses, as might be the property of the first party, and all such tools shall henceforth become the property of the second party;
(c) assist the second party in developing and carrying out the activities being taken over hereunder;
(d) generally ensure that the second party carries forth the brand equity for the training courses developed by the second party”.
Our careful perusal of the aforesaid clauses leads us to the conclusion that none of the components of the consideration can be said to be as in the nature of creation of any assets which are of the nature of capital assets. In other words, if the assessee were to make direct payment for any of the things set out above, admittedly, the same would have been of revenue nature. Merely because a lump sum payment is made for obtaining references and letters of recommendation, training course materials, manuals, developing and carrying out the activities of training and generally ensuring that the assessee carried on training course smoothly, the payment would not cease to be of revenue nature. In any event, there is hardly any dispute that the training materials, in the fast changing senario, are bound to be outdated within a relatively short time. These costs, in our considered view, are normal recurring costs for carrying out the assessee’s business. It is also fairly well-settled by now that expenditure on account of software is also in the nature of revenue expenditure. On appreciation of the materials before us, we are of the considered opinion that the sum of Rs. 2,00,000 paid by the assessee-company to M/s Wise Men’s Consultancy was in the nature of revenue cost as the same is associated with cost of references and recommendations, training materials, manuals, presentations, etc.; developing and carrying out the activities of training, and smooth functioning of training programmes. Merely because the amount in question is paid in a lump sum to another company, which was also carrying on business in the same line, would riot alter the character of the expenditure. Keeping all these factors in mind and the entirety of the case, we are of the opinion that the CIT(A) had erred in not allowing the amount as revenue expenditure. We accordingly delete the disallowance.
6. In the result, the appeal is allowed.
B.K. Mitra, J.M.
22nd Jan., 2003
7. I have carefully gone through the draft order authored by my learned brother. Much as I would persudade myself to agree with the conclusion arrived at by my learned brother, I am unable to concur with him for the following reasons :
7.1. The word “capital” connotes permanency and capital expenditure is, therefore, closely akin to the concept of securing something, tangible or intangible property or corporeal or incorporeal right so that they could be of a lasting or enduring benefit to the enterprise in issue. Revenue expenditure on the other hand is operational in its perspective and solely intended for the furtherance of the enterprise. In this connection, the decision of the Hon’ble Supreme Court in the case of CIT v. Ashok Leyland Ltd. (1969) 72 ITR 137 (Mad) may be referred to.
7.2. To put it differently, ordinarily ‘capital’ means an asset which has an element of permanency about it and which is capable of being a source of income and “capital expenditure” must, therefore, generally mean an acquisition of an asset and the asset must be intended to be of lasting value, while income or revenue expenses are generally running expenses incurred in earning profit or expenses incurred with the primary object of an immediate return or acquisition of assets which are not of lasting value and are likely to get exhausted or consumed in the process of the return or a very limited number of returns. In this connection the decision of the Hon’ble Allahabad High Court in the case of Jagat Bus Service v. CIT (1950) 18 ITR 13 (All) and R.S. Radha Kishan Kapoor v. CIT (1963) 47 ITR 938 (All) may be referred to.
8. In this connection, the Viscount Cove’s test may be applied in the instant case wherein it was held that “when an expenditure is made not over once and for all, but with a view to bringing into existence an asset or an advantage for an enduring benefit of a trade… such an expenditure is properly attributable not to revenue but to capital.” [In British Insulated and Helsby Cables Ltd. v. Atherton (1926) AC 205, 213 (HL)]. In this connection the decision of the Hon’ble apex Court in the case of Punjab State Industrial Development Corpn. Ltd. v. CIT (1997) 225 ITR 792 (SC) may be referred to wherein it has been held that the test laid down in Viscount Cove’s test can at best be a guide for determining whether a particular expenditure forms part of revenue expenditure or capital expenditure.
9. In the instant matter, I have noticed that the assessee entered into an agreement with M/s Wise Men’s Consultancy Co. (P) Ltd. to take over from latter the business of conducting training course in the field of leasing and higher purchase and related areas. The consideration for taking over the business from the said company was agreed at Rs. 2,00,000 which was paid by the assessee on 15th March, 1996 and 31st March, 1996. Since the assessee acquired the right to conduct the commercial activities of another company for an indefinite period, I am of the considered view that for acquiring such right the lower authorities have rightly treated the expenditure as capital expenditure.
10. In view of the above, the assessee’s appeal is dismissed.
REFERENCE UNDER Section 255(4) OF THE IT ACT, 1961
19th Feb., 2003
As there is a difference of opinion between the JM and the AM, the matter is being referred to the Hon’ble President of Tribunal with a request that the following question may be referred to a Third Member or pass such order as the Hon’ble President may kindly decide :
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment of Rs. 2 lakhs made by the assessee to M/s Wise Men’s Consultancy Co. (P) Ltd. under an agreement to provide to the assessee all its training materials, contacts, data bases, softwares arid other training aids and also assist the assessee in general in advancing its business as revenue expenditure or the expenditure should be held as capital expenditure?”
M.A. Bakshi, Vice President (As Third Member)
4th Aug., 2003
1. As a result of difference of opinion between the two Members of the Division Bench, I have been nominated by the Hon’ble President, as Third Member, for deciding the following point of difference in the appeal of the assessee :
2. The point of difference is as under :
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment of Rs. 2 lakhs made by the assessee to M/s Wise Men’s Consultancy Co. (P) Ltd. under an agreement to provide to the assessee all its training material’s contacts, data bases, softwares and other training aids and also assist the assessee in general in advancing its business as revenue expenditure for the expenditure should be held as capital expenditure.”
3. In my view, real difference of opinion arising in this case is as to whether, on the facts and in the circumstances of the case, the amount of Rs. 2 lakhs paid to M/s Wise Men’s Consultancy (P) Ltd. (hereinafter referred to as Wisemen) by the assessee under an agreement executed on 24th May, 1995 is allowable as a deduction as revenue expenditure. In this case, the assessee-company was incorporated with the prime purpose of specialising in offering of training courses in the field of financial services and other academic activities relating to financial services such as offering of distance education courses, organising conferences in and outside India, developing training facilities and class rooms, etc. Wisemen had been in the business of carrying on such activities which were taken over by the assessee. The assessee-company had paid a sum of Rs. 2 lakhs to Wisemen, (a company of the same group as that of the assessee-company) for acquisition of whole business of the said company, viz. Wisemen. In the return of income for the asst. yr. 199,6-97, the sum of Rs. 2 lakhs paid to Wisemen was claimed as revenue expenditure under the head seminar expenses. The AO was of the view that the sum of Rs. 2 lakhs paid by the assessee for taking over all the business of the other company was of capital nature as the business activity of another company was taken for an indefinite period.
4. The assessee appealed to the CIT(A) against the decision of the AO, but without success. The CIT(A) held that the assessee-company had taken over the training courses and educational activities for a consideration of Rs. 2 lakhs, of a company belonging to the same group and that Wisemen had to stop the activities following the take over of their business by the assessee-company. The CIT(A) in the impugned order has further observed that one particular wing, viz., the training wing of a company belonging to the same group was closed down so that a new company under the same group can start the same business at the same time. He also observed that the assessee-company was earlier not doing any activity in the field of imparting training. It was only after the appellant took over the training business of a sister-concern, the company could start activities in that field. (This finding recorded by the CIT(A) is contrary to the claim of the assessee that they had started the business before the take over). It was thus held that the consideration of Rs. 2 lakhs paid by the assessee was for initiation of business to set up profit making apparatus in motion. With these observations, the CIT(A) confirmed the action of the AO.
5. On appeal of the assessee to the Tribunal, the learned AM proposed an order allowing the appeal of the assessee. The learned AM held that the payment of Rs. 2 lakhs paid by the assessee to Wisemen was in the nature of revenue expenditure because none of the components of the consideration could be said to be in the nature of creation of any assets which are of the nature of capital assets. The learned AM has pointed out that merely because a lump sum payment was made for obtaining references and letters of recommendation, training course materials, manuals, developing and carrying out the activities of training and generally ensuring that the assessee carried on training courses smoothly, the payment would not cease to be of revenue nature. He has also observed that merely because the amount was paid in lump sum to another company, which was also carrying on business in the same line, the character of the expenditure, would not change.
6. On the other hand, the learned JM has disagreed with the view expressed by the learned AM. According to the learned JM the amount of Rs. 2 lakhs paid by the assessee to Wiseman was for taking over the business of imparting and conducting training course in the field of leasing and higher purchase and related areas and that by taking over the business, the assessee acquired the right to conduct the commercial activities of another company for an indefinite period and that acquisition of such right was of capital nature. Hence the difference.
7. The learned counsel for the assessee contended that the expenditure incurred by the assessee was to facilitate carrying on of the business of the assessee with the help of references and educational material. The expenditure was not for acquisition of any capital asset. It was further contended that the material acquired by the assessee from Wisemen was not everlasting material and as such the assessee had not derived any benefit of enduring nature. In support of the contention, the learned counsel relied on the decision of the Supreme Court in the case of M.K. BROS. (P) Ltd. v. CIT (1972) 86 ITR 38 (SC). Reliance was also placed on the decision in the case of The Jagat Bus Service v. CIT (1950) 18 ITR 13 (All) and on the decision in the case of CIT v. Associated Cement Companies Ltd. (1988) 172 ITR 257 (SC) in support of the contention that any payment made for increasing the volume of business of the assessee was on revenue account and allowable as deduction in computing income from business. Reliance was also placed on the decision of Allahabad High Court in the case of R.S. Radha Kishan Kapoor v. CIT (1963) 47 ITR 938 (All) wherein the payment made for acquisition of monopoly right was held to be allowable as revenue expenditure. The learned counsel also contended that one has to take into account the substance of agreement In this connection reliance was placed on the decision of Supreme Court in the case of CIT v. Panipat Woollens & General Mills Co. Ltd. (1976) 103 ITR 66 (SC). According to the learned counsel, the assessee had paid Rs. 2 lakhs for expanding its existing business and had procured references and study material from M/s Wisemen and thus deduction was allowable as an expenditure of revenue nature. The learned counsel further contended that the assessee had acquired no goodwill but list of clients which enabled it to enhance its business. He further pointed out that the assessee had not acquired any brand name or trade name of the payee-company. The name of the payee-company had also not been utilised by the assessee. It was accordingly pleaded that the view expressed by the learned AM may be adopted in preference to the view of the learned JM.
8. On the other hand, the learned Departmental Representative contended that as per the agreement between the assessee and Wisemen, the assessee-company had taken over the rights of the payee-company to carry on the business. The assessee-company had ensured to avoid competition and had utilised the references and other materials as incidental benefits. Reliance was placed on the following decisions in support of the contention that the expenditure of the nature involved in this case is capital in nature.
(1) U.K. Brothers (P) Ltd. v. CIT (supra)
(2) J.K. Cotton Manufacturers Ltd v. CIT (1975) 101 ITR 221 (SC).
It was contended that the expenditure incurred for acquisition of a right to get the raw material was held to be of capital nature. He argued that in this case the assessee had acquired a right to carry on the business and Wisemen was precluded from carrying on the business for a consideration. The expenditure incurred thus was of capital nature. He supported the viewpoint of the learned JM.
9. I have given my thoughtful consideration to the rival contentions and also taken into consideration the views expressed by the learned Members of the Division Bench. The issue as to whether the expenditure of the nature incurred by the assessee involved in this case is capital or revenue nature is dependent on various facts. In my considered view, it is necessary to elaborate the facts, some of which seem to have escaped the notice of the learned Members of the Bench.
10. The assessee-company was incorporated on 1st March, 1995 for setting up business of consultancy, imparting training etc. M/s Wisemen is a company of same group, as observed by the learned CIT(A) in the impugned order and it is not disputed by the assessee. Whereas the assessee claimed before the learned CIT(A) that the business of imparting training had already been commenced by the assessee before entering into agreement with M/s Wisemen, the CIT(A) has recorded a finding of fact to the contrary that the assessee had started business only after entering into the agreement with M/s Wisemen.
11. What is the nature of payment of Rs. 2 lakhs described in the agreement is crucial for determining the issue involved in this case. The learned AM has referred to only Clause 4 of the agreement as the subject-matter of transfer. However, careful examination of the agreement reveals that it is not so. It is well-settled principle of law that in order to interpret an agreement one has to consider the substance of the agreement rather than its form. The agreement should be read as a whole and not in piecemeals. This principle is supported by the decisions of Supreme Court in the cases of CIT v. Panipat Woollen & General Mills Co. Ltd. (supra), Devidas Vithaldas & Co. v. CIT (1972) 84 ITR 277 (SC) and CIT v. Travancore Sugars & Chemicals Ltd. (1973) 88 ITR 1 (SC). I, therefore, consider it necessary to reproduce the preamble and Clauses 4, 5 and 6 of the agreement :
Preamble
This agreement made this 24th day of May one thousand nine hundred and ninety (1995) between Wise Men’s Consultancy Co. (P) Ltd., a company incorporated under the Companies Act, 1956 and having its registered office at 9/12 Lal Bazar Street, E, Block 4th floor, Calcutta-700 001 (hereinafter called “the first party”) and
Vinod Kothari Consultants (P) Ltd., a company incorporated under the Companies Act, 1956 and having its registered office at 9/12 Lal Bazar Street, E Block 4th floor, Calcutta 700 001 (hereinafter called “the second party”)
Whereas as the first party is a financial consulting firm which has, inter alia, also been engaged in conducting of training courses in the field of leasing and hire purchase and related areas.
And whereas Vinod Kothari Consultants (P) Ltd. has been incorporated with the prime purpose of specialising in the offering of training courses in the field of financial services and other academic activities relating to financial services such as offering of distance education courses, organising conferences in and outside India, developing training facilities and class-rooms etc.
And whereas in view of the specific and specialised nature of activities of the second party, it is considered desirable that the second party take over the training courses activities being carried on by the first party.
(underlying, italicized in print, is mine).
Accordingly, it is hereby agreed by and between the parties as under :
*****
Clause 4. The first party shall, in consideration hereof, do the following for the benefit of the second party :
(a) Give references and letters of recommendation to the first party’s existing clients for services being taken over by the second party, and if any such references come to the first party at any time in future, forward them over the second party.
(b) hand over to the second party all the training course materials, manuals, presentations, software, working cases and other tools for conducting the training courses, as might be the property of the first party, and all such tools shall henceforth become the property of the second party;
(c) assist the second party in developing and carrying out the activities being taken over hereunder;
(d) generally ensure that the second party carries forth the brand equity for the training courses developed by the second party;
Clause 5
5. The first party shall, in consideration hereof, soon and after the commencement date refrain from carrying on any activity, either by itself or in association with any other person, in the nature of offering any training or educational facilities, organising or assisting in the organising of any training courses or conferences, workshop, symposia, any distance training tools, any other educational products.
Clause 6.
6. If, at any time within the period of 5 years from the commencement date it appears to the first party that the second party is not carrying on the activities proposed to be taken over hereunder, the first party shall, after giving a notice to this effect, be free to resume the aforesaid activity,s
It is thus observed from the preamble and Clauses 4, 5 and 6 of the agreement that the essence of the agreement is to take over all the business activities of M/s Wisemen. The transfer of training courses, materials, references, etc. as per Clause 4 is incidental to take over of the business. In this connection reference may also be made to the Statement of Facts filed before the first appellate authority, the relevant portion of which reads as under:
1. The appellant is a private company limited by shares. The appellant is engaged in consulting and holding training courses on leasing, hire-purchase and financial services.
2. During the financial year relevant to the assessment year to which the appeal pertains, the appellant returned a total income of Rs. 1,20,600. The return of income was filed on 24th March, 1998.
3. Notices were issued under Section 143(2) and 143(1) in response to which hearings took place on various dates.
4. In his assessment order dt. 3rd Nov., 1998, the AO has made certain additions to returned income as discussed below.
Disallowance of payment of Rs. 2 lakhs made to Wisemen’s Consultancy Co. (P) Ltd.
5. The AO has made a disallowance of Rs. 2 lakhs being the amount paid to Wise Men’s Consultancy Co. (P) Ltd. The amount was paid/provided for being the amount payable to the latter company under an agreement signed with that company. The AO has, commented that as with the said payment the appellant “acquired the right to conduct the commercial activities of another company for an indefinite period, the consideration passing in acquiring such right should be treated as a capital expenditure.”
6. The AO has arbitrarily come to such conclusion without there being any basis. The payment of Rs. 2,00,000 to Wise Men’s Consultancy Co. Ltd. was paid in pursuance of agreement with the latter company. The agreement intended to eliminate competition between the two companies and promote the business of the appellant-company which was incorporated with the specific objective of carrying on training courses on finance. Hence the agreement provided that such training courses, which were also being conducted by Wise Men’s Consultancy Co. Ltd. would henceforth be conducted only by the appellant-company, and Wise Men’s will assist the appellant in carrying on such activities. (underlining, italicized in print, is mine)
7. The consideration as per agreement passed on to Wise Men’s for the covenants undertaking by Wise Men’s as per the said agreement. These covenants included passing on to the appellant the complete data base and references to clients, training manuals, materials and software, and a continuing obligation to assist the appellant in carrying on the business.
8. No enduring asset in the nature of capital asset has come into existence as a result of the said payment. The payment was made only for the purpose of efficiently carrying on the business of the appellant. It cannot be said that the appellant had acquired a new business with the said payment. It is worthwhile noting that the agreement was made effective from 1st April, 1995, the appellant-company was already in business on that date.
9. There are various rulings of Courts including the apex Court on the matter, reference to which will be made at the time of the hearing. The appellant seeks liberty to place facts and case law supporting the claim of the appellant in the course of hearing.
In the written submission before the first appellate authority, placed at pp. 52 and 53 of the paper book, the assessee had claimed as under :
“Disallowance of an expense of Rs. 2 lakhs paid to Wise Men’s Consultancy Co. (P) Ltd.
During the year, the company paid a sum of Rs. 2 lakhs to Wise Men’s Consultancy Co. (P) Ltd. The AO has disallowed the said expense as being a capital expenditure.
The facts leading to the payment and the submissions of the appellant are as follows : Vinod Kothari Consultants (P) Ltd. was set up on 1st March, 1995. The purpose of formation of the company was to engage in training courses in financial services. The company started its operations soon after incorporation.
As this was focused company for training courses, it was thought fit that Wise Men’s Consultancy Co. (P) Ltd. an affiliate company hitherto carrying training activities will cease to carry on the same business.
(underlining, italicized in print, is mine)
However, since Wise Men’s Consultancy Co. (P) Ltd., which was carrying the said business since 1989 had developed a big data base of potential clients, training modules, training presentation material etc. It was, therefore, considered appropriate to pay a consideration of Rs. 2 lakhs to Wise Men’s Consultancy Co. (P) Ltd. .
Clause 4 of the agreement entered into between the companies provides the following as forming the consideration passed on by Wise Men’s Consultancy Co. (P) Ltd.
1. Giving references and letters of recommendation to the clients of Wise Men’s and passing on such references as and when they arise in future;
2. Hand over to the company all training materials, manuals, presentations, software, workings, cases and other tools for conducting training courses;
3. Assist the company in developing and carrying out the activities of training;
4. Generally ensure that the company carries forth the brand quality develop by Wise Men’s Consultancy Co.”
From the statement of facts and the written submissions before the CIT(A) and the terms and conditions of the agreement, I am of the view that there is hardly any scope for doubt that the assessee had paid Rs. 2 lakhs for taking over the activity of affiliate-company with the specific purpose of carrying on the business on the condition that the affiliate-company would cease to carry on the same business. It is only when all the facts stated above are taken into consideration together that a view expressed by the Hon’ble Supreme Court and various High Courts will be of guidance to decide issue as to whether the expenditure of Rs. 2 lakhs incurred by the assessee by virtue of an agreement dt. 24th May, 1995 is of revenue nature or of capital nature. It would be pertinent to mention that profits and gains of business are required to be computed in accordance with the provisions of Sections 30 to 43D as provided under Section 29 of the IT Act, 1961. Sections 30 to 36 deal with specific deductions. It is nobody’s case that the expenditure in dispute falls within the ambit of any of these sections viz. Sections 30 to 36. Section 37 is a residuary section which reads as under:
“Sec. 37(1) Any expenditure not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purposes of the business. or profession shall be allowed in computing the income chargeable under the head ‘profits and gains of business or profession’.
Explanation.–For removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.”,
From Section 37 quoted above, it is clear that any expenditure in the nature of capital expenditure is not allowable as a deduction in computing the profits and gains of business. It is, therefore, necessary to consider if the expenditure incurred by the assessee of Rs. 2 lakhs is of capital nature. It would be useful to refer to various decided cases for determination of the issue involved in the present case. Various tests have been laid down on the basis of facts and circumstances of each case which may serve as a touchstone for determination of the issue.
Lord Dunedin’s test is recognised as one of the tests for deciding the nature of the expenditure. In the case of Vallambrosa Rubber Co. Ltd. v. Farmer (1910) 5 Tax Cases 529, 536, Lord Dunedin observed “in a rough way I think it is not a bad criterion of what is capital expenditure-as against what is revenue expenditure-to say that capital expenditure is a thing that is going to be spent once for all, and income expenditure is a thing that is going to incur every year”.
In Ounsworth v. Vickers Ltd. (1915) 3 KB 267 Rowlatt J. held that the expense of making what in effect was a new means of access was capital expenditure. Lord Dunedin qualified the above observation by saying “I take it…. That no stress is there laid upon the words “every year” : the real test is between expenditure which is made to meet a continuous demand as opposed to an expenditure which is made once for all”.
In British Insulated & Helsby Cables Ltd. v. Atherton (1926) AC 205 (HL) Viscount Cave LC laid down the following test :
“When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is a very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue, but to capital.”
The Hon’ble Supreme Court in the case of Punjab State Industrial Development Corporation Ltd. v. CIT (1997) 225 ITR 792 (SC) referred to the above tests and observed that the test laid down above at best can be a guide for determining whether a particular expenditure forms part of revenue expenditure or capital expenditure. So, however, in the absence of special circumstances leading to an opposite conclusion the aforementioned principles shall have to be considered for arriving at the conclusion on the basis of the above tests.
In the case of John Smith & Sons v. Moore (1921) 12 Tax Cases 266 (HL) Lord Haldane held that “fixed capital is what the assessee turns into profits by keeping it in his own possession and circulating capital is what he makes profits of by parting with it and letting it change masters”. In this case the son took over his father’s coal-merchant business. The price included a sum of pound 30,000, representing the value of certain unexpired contracts with colliery owners for supply of coal at a fixed price, which was much less than the prevailing rates. On the question whether the sum of pound 30,000 was deductible as. business expenditure it was held that the expenditure was capital in nature because of the fact that the right to obtain coal under the contracts was a part of the fixed capital on the basis whereof he was entitled to procure his stock-in-trade which was a circulating capital. This principle was followed in the case of J.K. Cotton Manufacturers Ltd. v. CIT (supra).
In Southern v. Borax Consolidated Ltd. (1942) 10 ITR (Supp) 1, 5 (KB) Justice Lawrence laid down that “where a sum of money is laid out for the acquisition or the improvement of a fixed capital asset, it is attributable to capital, but that if no alteration is made in the fixed capital asset by the payment, then it is properly attributable to revenue, being in substance a matter of maintenance, the maintenance of the capital structure or the capital assets” of the taxpayer.
In the case of Regent Oil Co. Ltd. v. Strick (1969) 73 ITR 301 (HL), it was laid down that in case of expenditure for acquisition of a tangible asset, the criterion is supplied by fixed capital and circulating capital test. In case of an intangible asset, ordinary commercial principles in respect of the asset are the guide.
In the case of City of London Contract Corpn. Ltd. v. Styles (1887) 2 Tax Cases 239 (CA) his Lordship observed “you do not use it for the purpose of your concern which means, for the purpose of carrying on your concern, but you use it to acquire the concern”. It was further held expenditure for the procurement of raw material/stock-in-trade is, ordinarily, of revenue nature. On the other hand, expenditure for procurement of the source of raw material/stock-in-trade is capital expenditure. This principle was also laid down, in the case of R.B. Seth Moolchand Suganchand v. CIT (1972) 86 ITR 647 (SC), it was held that expenditure for procurement of raw material/stock-in-trade is, ordinarily of revenue character. On the other hand, expenditure for procurement of the source of raw material/stock-in-trade is capital expenditure. This view has been followed by the Calcutta High Court in CIT v. Rishabh Investment Ltd. (1979) 117 ITR 962 (Cal).
In the case of Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 (SC), their Lordships of the Supreme Court held “there may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nevertheless, be on revenue account and the test of enduring benefit may break down. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of the above test”. This principle was reiterated by the Supreme Court in the case of CIT v. Associated Cement Companies Ltd. (supra). Their Lordships held that what is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of the above test. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitability while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future.
Their Lordships of the Calcutta High Court in the case of CIT v. Cominco Binani Zinc Ltd. (1993) 204 ITR 56 (Cal) held that the test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.
In the case of Devidas Vithaldas & Co. v. CIT (supra), their Lordships of Supreme Court held the test of fixed and circulating capital also sometimes breaks down because there are many forms of expenditure which do not fall easily within these two categories. Moreover, there may be cases where expenditure, though referable to or in connection with fixed capital, is nevertheless allowable as revenue expenditure, e.g., an expenditure preserving and maintaining capital asset.
In the case of Arvind Mills Ltd. v. CIT (1992) 197 ITR 422 (SC), the Supreme Court held that the expenditure incurred on a capital asset does not lose the character of capital expenditure and does not become a revenue expenditure on the score that the said capital expenditure also ultimately enures to the efficient running of the business.
In the case of Bikaner Gypsums Ltd. v. CIT (1991) 187 ITR 39 (SC), their Lordships held that where the assessee has an existing right to carry on a business, any expenditure made by it during the course of business for the purpose of removal of any restriction or obstruction or disability would be on revenue account, provided the expenditure does not acquire any capital asset. Payments made for removal of restriction, obstruction or disability may result in acquiring benefits to the business, but that by itself would not acquire any capital asset.
In the case of CIT v. Coal Shipments (P) Ltd. (1971) 82 ITR 902 (SC), the Supreme Court held that although “enduring benefit” need not be of an everlasting character for the expenditure to be held as of capital character, it should not be so transitory and ephemeral that it can be terminated at any time at the volition of any of the parties.
In the case of Assam Bengal Cement Co. Ltd. v. CIT (1955) 27 ITR 34 (SC), the Supreme Court held that the word “asset” is not confined to “something material”, the asset or advantage may be of an impalpable or incalculable nature.
In the case of Sitalpur Sugar Works Ltd. v. CIT (1963) 49 ITR 160 (SC), it has been held that there can be an enduring advantage acquired without an addition to, or increase in, the value of a capital asset.
In the case of Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377 (SC), their Lordships of the Supreme Court held that the idea of “once for all” payment and enduring benefit are not to be treated as something akin to statutory conditions; nor are the notions of “capital” or “revenue” a judicial fetish. What is capital expenditure and what is revenue are not eternal varities but needs to be flexible so as to respond to the changing economic realities of business. The expression “asset or advantage of an enduring nature” was evolved to emphasise the element of a sufficient degree of durability appropriate to the context.
In the case of CIT v. Coal Shipments (P) Ltd. (supra), the Supreme Court held that payment made to ward off competition in business to a rival would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time; the same result would not follow if there is no certainty of the duration of the advantage and the same can be put to an end at any time. How long the period of contemplated advantage should be, in order to constitute enduring benefit, would depend on the circumstances and the facts of each individual case.
It was further held that although an enduring benefit need not be of an everlasting character, it should not be so transitory and ephemeral that it can be terminated at any time at the volition of any of the parties.
From the above tests, certain principles of fundamental character may be summarised as under :
(1) If the expenditure is for the initial outlay or for acquiring or bringing into existence an asset or advantage of an enduring benefit to the business that is being carried on, or for extension of the business that is going on, or for a substantial replacement of an existing business assets, it would be capital expenditure.
(2) If, on the other hand, the expenditure, although for the purpose of acquiring an asset or advantage, is for running of the business or for working out that asset with a view to produce profit, it would be revenue expenditure.
(3) If the outgoing is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit earning process or operation, and not for the acquisition of an asset of a permanent character, the possession of which is a condition precedent for the running of the business, then it would be expenditure of a revenue nature.
(4) Special knowledge, or technical knowledge, or a patent, or a trade mark, is an asset and if it is acquired for payment for use and exploitation for a limited, period, and what is acquired is not an asset or advantage of an enduring nature and at the end of the agreed period that advantage or asset reverts back intact to the giver of that special knowledge or the owner of the patents or trade marks, it would be expenditure of a revenue nature.
(5) If it is intrinsically a capital asset, it is immaterial whether the price for it is paid once and for all, or periodically, or whether it is paid out of capital or income, or linked up with net sales, the outgoing in such a case would be of the nature of capital expenditure.
(6) If the amount paid for the acquisition of an asset of an enduring nature is settled, the mere fact that the amount so settled is chalked out into various small amounts or periodic instalments, the capital nature of expenditure would not cease to be so or alter into the nature of a revenue expenditure.
(7) A lump sum amount for liquidating recurring claims would not cease to be revenue expenditure or get converted into capital expenditure merely because its payment is spread over a number of years. It is the intention and object with which the asset is acquired, that determines the nature of the expenditure incurred over it, and not the method or the manner in which the payment is made, or the source of such payment.
(8) If the expenditure is recurring and is incurred during the course of business or manufacture, it would be revenue expenditure.
(9) An asset or advantage of an enduring nature does not mean that it should last for ever. If the capital asset is, in its nature, a short-lived one, the expenditure incurred over it does not, for that reason, cease to be a capital expenditure.
(10) It is not the law that, if an enduring advantage is obtained, the expenditure for securing it must always be treated as capital expenditure. If the advantage acquired is to get the stock-in-trade of the business, then it would be revenue expenditure. But if what is acquired is not the advantage of getting the stock- in-trade directly, but of something which facilitates the acquisition of stock, the expenditure is of capital nature.
(11) The expenditure of capital nature is not referable only to tangible assets, but also to intangible assets. The asset acquired may be impalpable or incalculable nature.
(12) The expenditure to enhance the profit earning capacity, or capital base is of capital nature notwithstanding the fact that no tangible asset has been acquired.
(13) The expenditure to ward off competition for indefinite period is also of capital nature unless the agreement can be terminated at will.
(14) Expenditure on a capital asset does not lose the character of capital expenditure and does not become revenue expenditure on the score that the capital expenditure also ensures to efficient running of the business.
(15) There can be enduring advantage acquired without any addition to the value of capital assets.
12. Let me now apply the above tests to the present facts of the case. As pointed out elsewhere in this order, the learned AM has taken only Clause 4 of the agreement into consideration in determining the issue. I have referred to the preamble, Clauses 4, 5 and 6 of the agreement. I have also referred to the statement of facts before the CIT(A). The cumulative effect of the abovementioned material does not leave any doubt in my mind to hold that the essence of the agreement of the assessee with Wisemen is to avoid competition in the business. The assessee has thus got an advantage of enduring nature. It is pertinent to mention that in the agreement, Wisemen had the option of taking back the business of the assessee if the assessee would fail to start the business within a period of five years from the date of execution of the agreement. However, the assessee having started the business, the said clause has been rendered redundant. Consequently, the right of Wisemen to carry on the business of similar nature as taken over from them is relinquished for good. Though no tangible asset has come into surface as a result of take over of the business of Wisemen by the assessee, yet an enduring benefit has enured to the assessee by warding off competition in the business for all the times to come. The expenditure incurred for avoiding competition is of capital nature as held by the Supreme Court in the case of Coal Shipments (P) Ltd. (supra). I am, thus, of the considered view that the amount of Rs. 2 lakhs paid by the assessee to Wisemen is of capital nature. The incidental benefit arising to the assessee, such as references and course material, etc. which Wisemen was supposed to give to the assessee does not carry any separate price tag. The transfer of such material to the assessee may have benefited the assessee to earn more profits, but, in my view, such a benefit is incidental and consequential to taking over of the business by the assessee. It would have been a different matter if a separate price tag had been fixed for the references and course material transferred to the assessee by Wisemen in which case a question about treating the expenditure attributable to such transfer could be considered to fall within the ambit of revenue expenditure. As already pointed out, the essence of the agreement being the taking over of the business of Wisemen and warding off competition in business, the expenditure falls in the category of capital expenditure and does not qualify for deduction as revenue expenditure. I, therefore, concur with the conclusion arrived at by the learned JM in preference to that of the learned AM.
13. Let the matter be placed before the regular Bench for passing a consequential order in accordance with the majority view.
B.K. Mitra, J.M.
12th Aug., 2003
1. There is a difference of opinion between AM and JM for which the case was referred to the Hon’ble President for nominating Third Member. The Hon’ble President nominated Vice President (KZ) as Third Member. Accordingly, the case was heard by the Hon’ble Vice President as Third Member, who, vide his order dt. 4th Aug., 2003, concurred with the conclusion of the JM in preference to that of AM.
2. Therefore, in view of the majority decision, assessee’s appeal is dismissed.