2016 (6) TMI 426 - AT - Income Tax

Disallowance for cost of production of TV serials and programmes incurred by the assessee - AO allowing depreciation only @ 25% thereon by treating the same as capital expenditure - Held that - Similar issue had arisen in the case of the sister concern Prism TV Private Ltd., Hyderabad vs. DCIT, Circle16(3), Hyderabad wherein held that the assessee gets revenue from production and broadcasting serials on the lines of feature films, the rights of broadcasting such serials are also treated as stock in trade till the time they are aired and the expenses are debited to the Profit & Loss account. The assessee treats the films and the serials at par and applied the provisions of Rule 9A and 9B of the Income Tax Rules, as are applicable in case of films on serials as well. On the other hand, the contention of the Revenue is that the film and serial broadcasting rights acquired by assessee are perpetual in nature. After first telecast, the assessee does not discard the films but carefully store the same in digital library for airing the same again. Therefore, the assessee gets enduring benefit from the rights acquired in films and serials and they do not expire on the date of first telecast as contemplated by the assessee. The rights are intangible assets within the meaning of Explanation (iii) to Section 32 and do not fall within the purview of Section 37(1). The assessee is entitled to claim depreciation on same - Decided in favour of assessee Valuation of film software library - rate of depreciation allowable therein - Held that - This issue has been dealt with by this Tribunal (to which both of us are signatories) in the case of M/s. UEPL 2016 (3) TMI 820 - ITAT HYDERABAD for the A.Y. 2007-08 and after considering the issue at length, we have held that the film software library is in the nature of an intangible asset and the depreciation thereon is allowable at the rate allowable on an intangible asset. However, as regards the valuation of the asset, this Tribunal has pointed out that certain circumstances leading to the valuation of the asset have not been considered by the authorities below and hence, has set aside the same for re-valuation. Respectfully following the same, we deem it fit and proper to remand this issue also to the file of the A.O. with similar directions and direct the A.O. to allow depreciation as is allowable on an intangible asset.

Summary

Issues Involved:
1. Disallowance of depreciation on non-compete fee.
2. Disallowance of cost of production of TV serials and programs.
3. Depreciation rate on Film Software Library.

Detailed Analysis:

1. Disallowance of Depreciation on Non-Compete Fee:
The assessee appealed against the disallowance of ?53,08,43,906/- claimed as depreciation on non-compete fee. The non-compete fee was a result of a demerger from M/s. Ushodaya Enterprises Pvt. Ltd. (UEPL), which had entered into a non-compete agreement with M/s. Usha Kiran Television and M/s. Usha Kiran Movies. The Assessing Officer (A.O.) disallowed the depreciation, questioning the genuineness and necessity of the non-compete fee, and treating it as a colorable device. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view. The Tribunal noted that similar issues were remanded to the A.O. in the cases of UEPL and Prism TV Pvt. Ltd. It was directed that the A.O. reconsider the matter, examining the impact of the acquisition of 39% equity shares by M/s. Equator Trading Enterprises Pvt. Ltd. and the necessity and genuineness of the non-compete fee. Consequently, this issue was remanded back to the A.O. for reconsideration, aligning with the decisions in related cases.

2. Disallowance of Cost of Production of TV Serials and Programs:
The assessee contested the disallowance of ?46,94,76,000/- incurred on the production of TV serials and programs, which the A.O. treated as capital expenditure, allowing only 25% depreciation. The Tribunal referenced its decision in the case of Prism TV Pvt. Ltd., where it was held that such costs should be treated as revenue expenditure under Section 37 of the Income Tax Act. The Tribunal followed this precedent and allowed the assessee's claim, treating the production costs as revenue expenditure.

3. Depreciation Rate on Film Software Library:
The assessee challenged the depreciation rate of 15% allowed by the A.O. on the Film Software Library, arguing it should be 25%. The Tribunal referred to its decision in the case of UEPL, where it was determined that the Film Software Library should be treated as an intangible asset, allowing depreciation at the higher rate applicable to intangible assets. The Tribunal remanded the issue back to the A.O. for re-valuation of the asset, directing that depreciation be allowed at the rate applicable to intangible assets.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, remanding the issues back to the A.O. for reconsideration and re-valuation, ensuring alignment with the decisions in related cases and proper examination of the genuineness and necessity of the non-compete fee, the treatment of production costs as revenue expenditure, and the correct depreciation rate for the Film Software Library.