2010 (9) TMI 1184 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance of website development and maintenance cost.
2. Disallowance of computer software expenses.
3. Disallowance of royalty expenses for original sound track (OST) rights.
4. Disallowance of royalty claim made u/s 40(a)(i).
5. Disallowance of royalty expenses for studio album recordings, album licensing, and concert recording.

Summary:

1. Disallowance of Website Development and Maintenance Cost:

The assessee, engaged in manufacturing and trading pre-recorded music, claimed a deduction of Rs. 21,95,028/- for website development. The Assessing Officer (AO) and CIT(A) treated this as capital expenditure, providing enduring benefits. The Tribunal, referencing CIT Vs. Indian Visit.Com (P) Ltd., ruled that such expenditure is revenue in nature as the websites have a short life and do not provide enduring benefits. The addition by the AO and CIT(A) was directed to be deleted.

2. Disallowance of Computer Software Expenses:

The AO disallowed Rs. 12,52,146/- for computer software expenses, treating it as capital expenditure. The CIT(A) confirmed this. The Tribunal referred to the Special Bench decision in M/s. Amway India Enterprises Vs. DCIT, which laid down principles to determine if software expenditure is capital or revenue. The Tribunal directed the AO to re-examine the issue in light of these principles and decide afresh after hearing the assessee.

3. Disallowance of Royalty Expenses for Original Sound Track (OST) Rights:

The AO treated Rs. 6,83,27,000/- paid for OST rights as capital expenditure, allowing only 20% as revenue expenditure. The CIT(A) confirmed this. The Tribunal referenced Tips Cassettes & Records Co. Vs. ACIT and other cases, concluding that such expenditure in the assessee's line of business should be considered revenue expenditure. The Tribunal directed the deduction of the entire amount.

4. Disallowance of Royalty Claim Made u/s 40(a)(i):

The AO allowed only 20% of Rs. 2,10,27,065/- claimed u/s 40(a)(i) for royalty paid to non-residents, treating the rest as unreasonable. The CIT(A) confirmed this. The Tribunal found the AO's assumption that the assessee paid royalty based on MRP incorrect and without basis. The Tribunal directed the deletion of the disallowance.

5. Disallowance of Royalty Expenses for Studio Album Recordings, Album Licensing, and Concert Recording:

The AO disallowed 80% of Rs. 9,55,42,171/- paid for studio album recordings, album licensing, and concert recording, considering it exaggerated. The CIT(A) confirmed this. The Tribunal found no basis for the AO's disallowance and referenced judicial precedents supporting the assessee's claim. The Tribunal directed the deletion of the disallowance.

Conclusion:

The appeal of the assessee was partly allowed, with the Tribunal directing the deletion of disallowances and re-examination of computer software expenses. The order was pronounced on 9th September 2010.