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2007 (3) TMI 307 - AT - Income TaxDepreciation u/s 32(1) - under the head Intangible assets being copyrights, business and commercial rights - Professional expenses - Disallowance of deferred revenue expenditure - Production and telecasting of TV serials - HELD THAT - We agree with the learned AO that 'goodwill' as it is, is not eligible for claim of depreciation. When the AO himself has computed the value of goodwill at Rs. 1,59,480, there is no reason for declining the claim of depreciation on the balance part of consideration paid for acquiring various tangible and intangible assets, rights, etc. There is no dispute for allowing depreciation on tangible assets. For intangible assets also, sub-cl. (ii) of s. 32(1) of the Act provides that know-how, patents, trademark, licenses, franchise or any other business or commercial rights of similar nature being intangible assets acquired on or after 1st day of April, 1998 are eligible for claim of depreciation. Expln. (2B) to s. 32(1) of the Act is also very much clear and provides for depreciation on these assets. Thus, we can conclude that total value of tangible and intangible assets transferred to the assessee company, as per the valuation arrived at by Anand Parikh Co., amounts to Rs. 4.22 crores. While valuing the intangible assets in the form of copyright, telecast rights, etc., the price offered by Doordarshan to the assessee company was taken into consideration. After having a negotiation with the transferee firm, the entire deal was finalized at a purchase consideration of Rs. 3.32 crores, as against valuation of Rs. 4.22 arrived at by the valuer, which is also supported by the agreement dt. 31st March, 2000 entered into by the assessee with the transferee firm. Both the agreement as well as valuation report were submitted to the AO. The AO himself has carried out independent valuation of the goodwill as per the prescribed norms which works out to Rs. 1,59,480. We hereby accept the valuation of the goodwill as done by the AO, on which the assessee is not eligible to any claim of depreciation. After reducing the value of tangible assets amounting to Rs. 32.30 lacs and the value of goodwill arrived at Rs. 1.59 lacs, from the purchase consideration there remains a sum of Rs. 2.98 crores attributable to copyrights, telecast rights, commercial rights, etc. on which the assessee is entitled to allow depreciation as per Expln. (2B) to s. 32(1) of the Act. We direct accordingly. Allowance Of Professional charges - HELD THAT - We found that expenses were incurred for increasing the capital base of the assessee company, the same were essential in the nature of capital expenditure. We are, therefore, inclined to agree with the ld DR, that no interference is warranted in the orders of the lower authorities, disallowing assessee's claim of professional expenses. Disallowance of deferred revenue expenses - HELD THAT - As the expenses were incurred on production of films and no new assets were acquired by the assessee, the same is liable to be allowed deduction, notwithstanding the fact that part of such expenditure was carried to the balance sheet as deferred revenue expenses . As the AO had already allowed 50 per cent of these expenses, which were debited to P L a/c by treating the same as revenue expenses, there is no reason to disallow remaining 50 per cent of very same expenses, merely on the plea that it was treated by the assessee as deferred revenue expenses in the books of account. Mere entry in the books of account cannot disentitle the claim of deduction of expenses which the assessee is entitled to claim as per provisions of IT Act, 1961, while computing its taxable income for income-tax purposes. For the purpose of income-tax what is to be taxed is the real income hence deferred revenue expenditures were claimed in full in computation of income in spite of carried forward of fifty per cent of the deferred revenue expenditure in the books of account. Moreover, this method of accounting is being continuously followed by the company and the company has claimed deferred revenue expenditure in full in the income-tax computation in the asst. yrs. 2000-01 and 2002-03 as well besides 2001-02 which is in the appeal. As a matter of abundant caution, the AO may keep watch on such expenses in the subsequent years, which are now carried in the balance sheet as deferred revenue expenses . The assessee is not entitled for any depreciation on such expenses being carried to the balance sheet. We direct accordingly. In the result, the appeal of the assessee is partly allowed.
Issues Involved:
1. Depreciation on goodwill and other intangible assets. 2. Treatment of professional expenses as capital or revenue expenditure. 3. Disallowance of deferred revenue expenditure. Issue-wise Detailed Analysis: 1. Depreciation on Goodwill and Other Intangible Assets: The assessee company acquired all assets and liabilities of a sole proprietorship firm for Rs. 3.23 crores, which included goodwill valued at Rs. 3 crores. The AO disallowed depreciation on goodwill, arguing it is not a depreciable asset under s. 32(1) of the IT Act, 1961. The AO valued goodwill at Rs. 1,59,480 based on a widely used accounting book and concluded that the remaining amount did not qualify for depreciation. The CIT(A) upheld this view, stating goodwill typically appreciates over time rather than depreciates. However, the ITAT found that other intangible assets like copyrights and telecast rights acquired by the assessee are eligible for depreciation under s. 32(1) since they are business or commercial rights of a similar nature. The ITAT directed that depreciation be allowed on the value of these intangible assets, excluding the value of goodwill. 2. Treatment of Professional Expenses as Capital or Revenue Expenditure: The assessee incurred professional expenses of Rs. 20,70,523 for raising capital through equity placement with UTI Ltd. The AO and CIT(A) treated these expenses as capital expenditure, disallowing them as revenue expenses. The ITAT agreed with this treatment, concluding that expenses incurred for increasing the capital base are capital in nature and thus not allowable as revenue expenses under s. 37. 3. Disallowance of Deferred Revenue Expenditure: The assessee claimed deferred revenue expenditure of Rs. 1,03,56,975 related to the production of TV serials, arguing that these expenses should be treated as revenue expenses. The AO disallowed this claim, viewing the expenditure as capital in nature since the serials could be exploited over time. The ITAT found that the assessee consistently followed an accounting policy where 50% of production expenses were charged to the P&L account, and the remaining 50% was carried forward as deferred revenue expenditure. The ITAT held that the production expenses are revenue in nature and allowable under s. 37(1) of the IT Act. The ITAT directed that the deferred revenue expenditure be allowed in full, noting that mere accounting entries should not affect the claim for deduction of expenses. Conclusion: The ITAT partially allowed the appeal, directing depreciation on intangible assets excluding goodwill, disallowing professional expenses as capital expenditure, and allowing the deferred revenue expenditure in full.
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