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2019 (4) TMI 774 - AT - Income TaxNature of expenditure - salaries and training cost of employees - capitalized in the assessee s books of accounts as intangible assets - AS-26 relating to the accounting treatment of intangible asset - revenue or capital expenditure - HELD THAT - in the Notes on Accounts, it has been mentioned that the unamortized amount on account of intellectual property in the form of employee knowledge enhancement developed through various programmes and supported by employees agreements, are to be amortized equally over in the next three years as the utilization of resources in the current year is nominal. Therefore, it is stated clearly that the intangible assets has arisen only out of employee cost and training and that there is an enduring benefit out of the same, which is being spread over three years. It is also seen that for such types of training costs, whose benefit can be enduring and spread over a few years, AS-26 will apply, as mentioned in para 3 of AS-26. This supports the contention of the assessee that it was constrained to capitalize the expenses due to application of Accounting Standards (AS) and amortize it over a period of time, even though the nature of those expenses is Revenue in nature. Further, as was held in Kedarnath Jute Manufacturing Co. Ltd., Vs. CIT 1971 (8) TMI 10 - SUPREME COURT , relied upon by the CIT(A), the entitlement of the assessee to a particular deduction will depend upon the provisions of the Income Tax Act, 1961 and not on the entries in the Books of Account. The expenditure in question, is incurred in the form of salaries / training of employees and IRSE assessment cost, which are purely in the Revenue field. There is also no dispute that the said expenditure has been expended wholly and exclusively for the purposes of the assessee s business. There is nothing on record to controvert the contention that these expenses are incurred for imparting skill to employees to enhance their knowledge. The findings rendered by the CIT(A) in this regard have not been controverted before us. The only contention raised by Revenue in the grounds of appeal is that the assessee itself has capitalized these expenses; which, in our view, cannot be the reason for denial of deduction.- Decided in favour of assessee.
Issues Involved:
1. Condonation of delay in filing the appeal by Revenue. 2. Nature of expenditure incurred by the assessee – whether capital or revenue. 3. Treatment of capitalized expenses as revenue in nature. Issue-wise Detailed Analysis: 1. Condonation of Delay in Filing the Appeal by Revenue: The Revenue filed its appeal for Assessment Year 2008-09 belatedly by 51 days. The Assessing Officer (AO) sought condonation of the delay, citing reasons such as the time-barring date for completion of assessments and continuous holidays due to festivals, which resulted in staff being on long leave. The Tribunal considered the rival submissions and the principles laid down by the Hon’ble Apex Court in MST Katiji and Others (167 ITR 471) (SC) and concluded that Revenue had reasonable and sufficient cause for the delay. Consequently, the delay was condoned, and the appeal was admitted for consideration. 2. Nature of Expenditure Incurred by the Assessee – Capital or Revenue: The assessee, engaged in providing signaling systems solutions to the Railways, claimed certain expenditures as deductions in the computation of income, despite capitalizing them as intangible assets in its books. The AO disallowed these expenditures, treating them as capital in nature, and allowed depreciation at 25%. The CIT(A) allowed partial relief to the assessee, treating the expenditure on salaries and training costs of employees as revenue in nature. The CIT(A) observed that these expenses were in line with the normal business activity and did not render the expenses disallowable as capital investment merely because they provided better skills to employees and long-term indirect benefits to the assessee. The CIT(A) also noted that trained manpower is not a capital asset of the assessee and does not provide exclusive or absolute rights to the trained staff. The expenditure was tested by the yardstick of commercial expediency and business purpose, as upheld by the Hon’ble Apex Court in Travancore Titanium Products Ltd. Vs. CIT (60 ITR 277) (SC). 3. Treatment of Capitalized Expenses as Revenue in Nature: The CIT(A) observed that the assessee capitalized the expenses and showed them as intangible assets due to the requirements of Accounting Standards – 26. The CIT(A) relied on the decision of the Hon’ble Apex Court in Kedarnath Jute Manufacturing Ltd. Vs. CIT (81 ITR 363) (SC), which held that the entitlement to a deduction depends on the provisions of the Income Tax Act and not on the entries in the books of account. The CIT(A) also noted that the similar issue was decided in the assessee’s favor for the earlier Assessment Year 2007-08. The Tribunal upheld the CIT(A)’s order, observing that the expenditure on salaries, training, and IRSE assessment costs were purely in the revenue field and expended wholly and exclusively for the assessee’s business purposes. The Tribunal also noted that the capitalization was due to the application of Accounting Standards, and the nature of expenses remained revenue. The decision of the ITAT – Delhi Bench in DCIT Vs. Sapient Corporation Pvt. Ltd. (ITA No.1856/Del/2010) was found to be squarely applicable, supporting the view that the expenditure was revenue in nature. Conclusion: The Tribunal dismissed both Revenue’s appeal and the assessee’s Cross Objections for Assessment Year 2008-09, upholding the CIT(A)’s order that treated the expenditure as revenue in nature despite being capitalized in the books of account. The Tribunal emphasized that the determination of the nature of expenditure should be based on the provisions of the Income Tax Act and not merely on accounting treatments.
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