1992 (6) TMI 80 - AT - Income Tax

Business Expenditure, Capital Expenditure, Expenditure On Acquisition, Patent Rights, Revenue Expenditure

Summary

Issues Involved:
1. Whether the expenditure incurred by the assessee for acquiring the rights to reproduce film songs should be treated as capital or revenue expenditure.
2. Whether the provisions of Section 35A of the Income-tax Act, 1961, were rightly invoked in computing the income of the assessee for the assessment years 1984-85 to 1987-88.

Detailed Analysis:

Issue 1: Nature of Expenditure (Capital vs. Revenue)
The primary contention revolved around whether the expenditure incurred by the assessee for acquiring the rights to reproduce film songs should be treated as capital or revenue expenditure. The assessee argued that the expenditure was in the nature of royalty and should be allowed as revenue expenditure. The Commissioner of Income-tax (CIT), however, viewed it as capital expenditure, thereby invoking Section 35A, which allows such expenditure to be amortized over 14 years.

The Tribunal noted that the agreements with the producers and artists involved a token payment and royalties based on sales. The agreements used the term "assign," but the conduct of the parties indicated it was understood as a licence. The Tribunal examined the Copyright Act, 1957, to determine if the agreements constituted an assignment or a licence. The Tribunal concluded that despite the use of the word "assign," the agreements were essentially licences, as the payments were variable and based on sales, and the producers continued to receive royalties from other sources.

The Tribunal highlighted that the expenditure was for the purpose of regular production of cassettes, making it a revenue expenditure. The royalty payments were linked to the sales of cassettes and did not provide any enduring benefit to the assessee. The Tribunal cited the Supreme Court's distinction between an advantage in the capital field and an advantage in facilitating trading operations, concluding that the expenditure facilitated the income-earning operation and was therefore revenue in nature.

Issue 2: Application of Section 35A
Section 35A of the Income-tax Act, 1961, provides for the amortization of capital expenditure incurred on acquiring copyrights over 14 years. The Tribunal noted that this section could only be applied if the expenditure was of a capital nature. Since the Tribunal determined that the expenditure was revenue in nature, the provisions of Section 35A were not applicable.

The Tribunal examined the agreements and the conduct of the parties, concluding that the rights acquired by the assessee were licences rather than assignments of copyright. The payments were royalties based on sales, and the producers retained rights to receive royalties from other sources. The Tribunal found that the expenditure was for the purpose of regular production of cassettes and did not result in any enduring benefit, making it a revenue expenditure.

Conclusion
The Tribunal allowed the appeals, concluding that the expenditure incurred by the assessee was revenue in nature and not subject to the provisions of Section 35A. The orders under Section 263 for the assessment years 1984-85 and 1985-86 and the appellate orders for the assessment years 1986-87 and 1987-88 were set aside. The Tribunal directed the Income-tax Officer to allow the entire royalty paid as revenue expenditure and recompute the total income for the relevant assessment years.