2000 (7) TMI 210 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of 'Audio Right' expenses: capital vs. revenue expenditure.
2. Disallowance of Motor Car expenses and depreciation: personal vs. business use.

Summary:

1. Treatment of 'Audio Right' Expenses:
The primary issue was whether the 'Audio Right' expenses claimed by the assessee should be treated as a capital expenditure or revenue expenditure. The assessee argued that these expenses were integral to their business of manufacturing and selling pre-recorded audio cassettes and CDs, and thus, should be considered as revenue expenses. The Assessing Officer (A.O.) and the Commissioner of Income Tax (Appeals) [CIT(A)] had previously treated these expenses as capital in nature, allowing deductions u/s 35A of the Income-tax Act, 1961. The CIT(A) relied on earlier appellate orders and the nature of the agreements, which assigned audio rights in perpetuity, to uphold the capital nature of the expenses.

The assessee contended that the 'Audio Right' expenses were akin to raw material costs, essential for the production of pre-recorded cassettes, and should be allowed as revenue expenses u/s 37(1) of the Act. The Tribunal examined various precedents, including judgments from the Supreme Court and other ITAT decisions, which emphasized the need to consider the nature of the advantage in a commercial sense. The Tribunal found that the master plates and audio rights were integral to the assessee's profit-making process and should be treated as revenue expenses. Therefore, the Tribunal allowed the assessee's appeal on this ground, holding that the expenditure was revenue in nature and not covered by section 35A.

2. Disallowance of Motor Car Expenses and Depreciation:
The second issue involved the disallowance of 1/3rd of the motor car expenses and depreciation claimed by the assessee, which the A.O. attributed to personal use. The CIT(A) provided partial relief but retained the disallowance on depreciation. The assessee argued that the firm's cars were primarily used for business purposes and that the disallowance was excessive. The Tribunal found the disallowance to be excessive and reduced it to 1/5th of the claimed expenses and depreciation, thus partly allowing the assessee's appeal on this ground.

Conclusion:
The Tribunal concluded that the 'Audio Right' expenses were revenue in nature and allowable as claimed by the assessee. Additionally, the disallowance of motor car expenses and depreciation was reduced to 1/5th, providing partial relief to the assessee. The appeal was partly allowed.