2015 (12) TMI 1279 - AT - Income Tax

Nature of payments made by assessee franchise to BCCI towards right to operate IPL franchises of Deccan Chargers (DC) for a period of ten years - Held that - The character of the payment would depend on nature of rights acquired and the period for which such rights was acquired by the appellant. Any payment made for obtaining a commercial right would be a capital expenditure. But payment made periodically for exploiting such rights is revenue in nature. Therefore, in the instant case, payment made at the first instance for grant of right to be franchisee can be considered as capital payment. However, the subsequent annual payments made by the assessee are clearly for exploiting the rights as a franchisee, which are for a year and which can be terminated for non-payment of the franchise fees in the subsequent year. Therefore, the franchise fee paid is revenue in nature because by making such annual payment the appellant does not acquire any rights of permanent nature - Decided against revenue

Summary

Issues:
1. Classification of franchise fee payment as capital or revenue expenditure.

Detailed Analysis:

1. Classification of franchise fee payment as capital or revenue expenditure:
The appeal revolved around the issue of determining whether the payments made by the assessee franchise to the Board of Control for Cricket in India (BCCI) towards the right to operate IPL franchises of 'Deccan Chargers' (DC) for a period of ten years should be treated as capital or revenue expenditure. Initially, the assessee capitalized the entire franchise fee of Rs. 428.04 Crores and claimed depreciation at 25%. However, in a revised return, the assessee claimed the payment of Rs. 42.80 Crores made during the year as revenue expenditure. The Assessing Officer (AO) treated the franchise fee as capital expenditure, disallowing the amount under section 37(1) of the Income Tax Act. The AO also disallowed corresponding service charges but allowed depreciation on both amounts. The Commissioner of Income Tax (Appeals) analyzed the situation and allowed the assessee's contentions, leading to the Revenue's appeal. The ITAT upheld the CIT(A)'s decision, emphasizing that the franchise right acquired by the assessee was not a perpetual right but for conducting matches on a yearly basis. The ITAT concurred with the CIT(A) that the expenditure paid annually was revenue expenditure, not capital. Various legal precedents were cited to support the distinction between capital and revenue expenditure based on the nature of rights acquired and the period for which such rights were obtained by the appellant. The ITAT dismissed the Revenue's appeal, affirming the CIT(A)'s order based on the judicial principles applied to the case.

This detailed analysis provides a comprehensive overview of the judgment, focusing on the key issue of classifying the franchise fee payment as either capital or revenue expenditure, as decided by the ITAT in the case.