2016 (6) TMI 419 - AT - Income Tax

Allowability of the non-compete fee and the depreciation thereon - Held that - We find that on demerger of the parent company, the assessee has succeeded to the issue of the depreciation on non-compete fee as well and therefore, the decision of the Tribunal for the A.Y. 2008-2009 (cited supra) on the very same issue would be consequential and applicable to the facts of the case before us. This appeal before us being for the subsequent assessment year, also needs to be remanded to the file of the A.O. to give consequential effect to the decisions taken by him for the A.Y. 2009-2010. This ground of appeal is accordingly treated as allowed in favor of assessee for statistical purposes. Treating of the cost of production of TV serials and programmes - revenue or capital expenditure - Held that - AO directed to treat the expenditure incurred by the assessee on cost of production of TV programmes as revenue expenditure as the future likelihood of these resources being a possible source of revenue, cannot in the opinion of this Court justify its inclusion in the capital stream. Disallowance of depreciation on film software library - Held that - We find that this issue has arisen for the first time in the assessment year 2007-2008 when M/s. Ushodaya Enterprises P. Ltd., had taken over the business of M/s. Ushakiran Movies and M/s. Ushakiran Television. The issue had come up for adjudication before the A Bench of this Tribunal 2016 (3) TMI 820 - ITAT HYDERABAD and this Tribunal vide its order has remitted the issue to the file of the A.O. for the limited purpose of verification of facts and circumstances stated to be the cause of the transfer of the asset i.e., the Film Software Library to the assessee and also for the re-valuation of the asset in accordance with the provisions of Law. The issue in the ground before us is consequential to the decision given by this Tribunal in the case of M/s. Ushodaya Enterprises Limited. Therefore, this issue is also remitted to the file of the A.O. with a direction to give consequential effect after a decision is taken in the case of M/s. Ushodaya Enterprises Limited in accordance with the directions of the Tribunal. - Decided in favour of assessee for statistical purposes.

Issues Involved:

1. Allowability of depreciation on non-compete fee.
2. Treatment of cost of production of TV serials and programs as capital or revenue expenditure.
3. Disallowance of depreciation on film software library.

Detailed Analysis:

1. Allowability of Depreciation on Non-Compete Fee:

The primary issue revolves around whether the depreciation claimed on the non-compete fee by the assessee is allowable. The assessee, M/s. Prism TV Pvt. Ltd., claimed depreciation on a non-compete fee paid by its parent company, M/s. Ushodaya Enterprises P. Ltd., which had entered into a non-compete agreement with M/s. Ushakiran Television and M/s. Ushakiran Movies. The Assessing Officer (A.O.) disallowed the depreciation, considering the transaction a sham aimed at reducing the tax burden, arguing that a person cannot compete with themselves. The CIT(A) upheld this disallowance.

The Tribunal, referencing its earlier decision in the case of M/s. Ushodaya Enterprises P. Ltd. for A.Y. 2008-09, noted that the genuineness of the non-compete fee and its valuation were crucial. The Tribunal had previously remanded the matter to the A.O. to examine the genuineness and necessity of the non-compete fee and its valuation. The Tribunal found that the payment of ?670 crores was influenced by a precondition set by a domestic investor, Equator Trading Enterprises Pvt. Ltd., which acquired a 39% stake in the assessee company. The Tribunal emphasized that the role of the investor and the genuineness of the transaction needed thorough examination. Consequently, the current appeal was also remanded to the A.O. to give consequential effect based on the decisions for A.Y. 2009-10.

2. Treatment of Cost of Production of TV Serials and Programs as Capital or Revenue Expenditure:

The second issue pertains to whether the cost of production of TV serials and programs should be treated as capital expenditure or revenue expenditure. The assessee claimed the entire expenditure as revenue expenditure, while the A.O. treated it as capital expenditure and allowed depreciation. The CIT(A) confirmed the A.O.'s order.

The Tribunal referred to various decisions, including those of the Chennai and Mumbai Benches and the Hon’ble Delhi High Court, which held that such expenditure should be treated as revenue expenditure under section 37 of the I.T. Act. It was noted that the assessee consistently followed this accounting method, and the Revenue had allowed the claim in the past. The Tribunal directed the A.O. to treat the expenditure incurred on production of TV programs as revenue expenditure, following the precedents set by previous judgments.

3. Disallowance of Depreciation on Film Software Library:

The third issue involves the disallowance of depreciation on the film software library. This issue first arose in A.Y. 2007-08 when M/s. Ushodaya Enterprises P. Ltd. took over the business of M/s. Ushakiran Movies and M/s. Ushakiran Television. The Tribunal had previously remitted the issue to the A.O. for verification of facts and revaluation of the asset. The current issue was deemed consequential to the decision in the case of M/s. Ushodaya Enterprises P. Ltd. The Tribunal remitted this issue back to the A.O. to give consequential effect based on the decision in the case of M/s. Ushodaya Enterprises P. Ltd.

Conclusion:

The appeals were partly allowed for statistical purposes. The Tribunal remanded the issues regarding the non-compete fee and the film software library back to the A.O. for further examination and directed the A.O. to treat the cost of production of TV programs as revenue expenditure. The order was pronounced in the open Court on 24.03.2016.

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