2012 (9) TMI 367 - AT - Income Tax

Royalty expenditure - Capital OR Revenue - assessee purchased distribution rights of the Punjabi film Jee Aayan Nu for three years - AO stated to treat the expenditure as capital and deducted depreciation @25% thereon - Held that - On observing a detailed chart of income and expenses from film Jee Aayan Nu it reveals that the assessee paid Rs.34,34,406 for film development and Rs.75,00,000/- as expenditure for payment of royalty and both these expenses have been segregated in four years. As per Auditors Report and final accounts of the assessee the assessee claimed Rs.20,60,706 as film developing charges and Rs.45,00,000 as royalty expenses i.e. 60% of actual expenditure in the assessment year under consideration and remaining 40% expenditure left to be claimed in another three years to come (subsequent to the first year of actual payment expenditure). As AO did not dispute the fact that 60% of the film development expenses was allowed in the year of expenditure and the rest 40% to be treated as deferred revenue expenditure in the forthcoming years but he deviated from this stand while considering the royalty expenditure allowability and held that the same expenditure was capital in nature. As the AO has ignored the Board Circular No. 92 dated 18.9.1972 pertaining to writing off royalty/distribution expenses of films which is binding on tax authorities thus the action of the AO was based on surmises and conjectures, without considering the nature of business of the assessee which was supported by hyper approach ignoring the Board Circular - in favour of assessee.

Summary

Issues:
1. Allowance of royalty payment as revenue expenditure.
2. Treatment of royalty expenditure as capital in nature.
3. Allowance of depreciation on royalty expenditure.
4. Application of Board Circular No. 92 dated 18.9.1972.

Analysis:

Issue 1: Allowance of royalty payment as revenue expenditure
The appeal by the Revenue was against the order of CIT(A) directing the Assessing Officer to allow Rs.45,00,000 paid as royalty as revenue in nature. The assessee company had entered into an agreement for distribution rights of a film and claimed the royalty payment as revenue expenditure. The CIT(A) noted that the Assessing Officer did not provide proper reasons for treating the expenditure as capital and applying depreciation. The CIT(A) found the writing off of royalty expenditure in accordance with a Board Circular and directed its allowance as revenue expenditure. The Tribunal upheld this decision, emphasizing that the Assessing Officer's actions were based on conjectures and ignored the nature of the business and relevant Board Circular.

Issue 2: Treatment of royalty expenditure as capital in nature
The Assessing Officer treated the royalty expenditure as capital in nature and allowed depreciation at the rate of 25%. The Revenue argued that the expenditure should be considered capital due to its exploitation over multiple years. However, the AR contended that the Assessing Officer failed to consider the nature of the business and the distribution of the expenditure over several years. The Tribunal observed that the Assessing Officer deviated from the accepted stand regarding the treatment of royalty expenditure and ignored the relevant Board Circular, leading to an unjust decision.

Issue 3: Allowance of depreciation on royalty expenditure
The Assessing Officer allowed depreciation at 25% on the royalty expenditure, considering it as capital in nature. However, the CIT(A) directed the withdrawal of depreciation and allowance of the royalty payment as revenue expenditure. The Tribunal concurred with the CIT(A)'s decision, highlighting the consistency required in treatment of similar expenditures and the importance of adhering to relevant circulars in tax matters.

Issue 4: Application of Board Circular No. 92 dated 18.9.1972
The Board Circular was crucial in determining the treatment of royalty and distribution expenses of films. The CIT(A) and the Tribunal emphasized the binding nature of the circular on tax authorities and its relevance in deciding the allowability of royalty payments as revenue expenditure. The Tribunal upheld the CIT(A)'s decision based on the proper consideration of the circular and the consistent treatment of similar expenditures.

In conclusion, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order to allow the royalty payment as revenue expenditure and withdraw the depreciation. The judgment underscored the importance of considering the nature of business, adhering to relevant circulars, and maintaining consistency in the treatment of expenditures for tax purposes.