TMI Blog2003 (8) TMI 171X X X X Extracts X X X X X X X X Extracts X X X X ..... rved that the assessee-company tookover the business of M/s. Wise Men's Consultancy of conducting to training courses in the field of leasing and hire-purchases and related areas by virtue of an agreement dated 24-5-1996 for a consideration of Rs. 2 lakhs. The Assessing Officer 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 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 Assessing Officer. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 not 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. Per B.K. Mitra, Judicial Member : 7. I have carefully gone through the draft order authored by my Ld. Brother. Much as I persuade myself to agree with the conclusion arrived at my Ld. Brother, I am unable to concur with him of 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 corporal or incorporal right so that they could be of a lasting or enduring benefit to the enterprise in issue. Revenue-expenditure on the other hand is operated in its perspective and solely inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right the lower authorities have rightly treated the expenditure as capital expenditure. 10. In view of the above, the assessee's appeal is dismissed. As there is a difference of opinion between the Judicial Member and the Accountant Member, the matter is being referred to the Hon'ble President of I.T.A.T. 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 and 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"? THIRD MEMBER ORDER Per Shri M.A, Bakshi, Vice-President. - As 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 ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther 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 takeover]. 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 Assessing Officer. 5. On appeal of the assessee to the Tribunal, the learned Accountant Member proposed an order allowing the appeal of the assessee. The ld. 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 whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In this connection reliance was placed on the decision of Supreme Court in the case of CIT v. Panipat Woollen General Mills Co. Ltd. [1976] 103 ITR 66. According to the ld. 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 ld. 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 utilized by the assessee. It was accordingly pleaded that the view expressed by the ld. AM may be adopted in preference to the view of the ld. JM. 8. On the other hand, the ld. DR 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 utilized the references and other materials as incidental benefits. Reliance was placed on the following d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icals 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 five (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 specializing 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, organi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore 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 sections 143(2) and 143(1) in response to which hearings took place on various dates. 4. In his assessment order dated 3rd Nov., 1998, the Assessing Officer has made certain additions to returned income as discussed below. DISALLOWANCE OF PAYMENT OF RS. 2 LAKHS MADE TO WISE MEN'S CONSULTANCY CO. (P.) LTD. 5. The Assessing Officer 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 Assessing Officer has commented that as with the said payment the appellant "acquired the right to conduct the commercial activities of ano ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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. Handover to the company all training materials, manuals, presentations, Software, workings, cases and other tools for conduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee of Rs. 2 lacs 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 touch stone for determination of the issue. Lord Dunedin's test is recognized as one of the tests for deciding the nature of the expenditure. In the case of Vallambrosa Rubber Co. Ltd. v. Farmer [1910] 5 TC 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, 273 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 on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the capital assets" of the taxpayer. In the case of Regent Oil Co. Ltd. v. Strick [1969] 73 ITR 301, 318-319, 321 (HT), 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 TC 239, 243 (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, 655 (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 cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 49(SC), the 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, 909, 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, the Supreme Court held that the word "asset" is not confined to "something material"; the asset or advantage may be of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 above-mentioned 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 takeover of the business of Wisemen by the assessee, yet an enduring benefit has ensued to the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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