2014 (5) TMI 588 - HC - Income Tax

Allowability of expenses u/s 37 of the Act Production as a part of news achieve Capital expenses OR revenue expenses - Held that - The data base of the programmes which are utilised for the creation of news archives belonged to the assessee - The future likelihood of the resources being a possible source of revenue, it would not be justify to include it in the capital stream - the expenditure is a part of the entire total expenditure incurred by the assessee which is concededly treated as revenue Decided against Revenue.

Summary

Issues:
- Whether expenditure incurred on production of programmes for news archives should be treated as revenue expense or capital asset under Section 37 of the Income Tax Act, 1961.

Analysis:
The case involved a dispute over the treatment of expenditure incurred by the assessee on the production of programmes for news archives. The assessee, engaged in television programme production, allocated a portion of the expenditure as the value of 'news archives'. The Assessing Officer (AO) capitalized this amount, considering it led to the creation of a capital asset. However, the Commissioner of Income Tax (Appeals) reversed this decision, stating that the news archives were not akin to plant or income-generating apparatus but part of the product. The lack of an objective basis to quantify future revenue and deferred production costs led to the conclusion that this expenditure should be treated as revenue expenditure.

Upon the revenue's appeal, the Income Tax Appellate Tribunal (ITAT) considered that no separate account was maintained for the expenditure related to the creation of news archives. The ITAT acknowledged the repeat value of the footage from the produced programmes for future use and accepted the assessee's estimation of 10% expenditure as attributable to the news archives. Referring to a Supreme Court judgment, the ITAT emphasized the flexibility needed in distinguishing between capital and revenue expenditure based on changing economic realities. Consequently, the ITAT upheld the Commissioner of Income Tax (Appeals) decision, stating that the estimated value assigned to the news archives did not qualify as capital expenditure.

The High Court, in its analysis, noted that the data base used for creating news archives belonged to the assessee, and the potential future revenue from these resources did not justify their inclusion in the capital stream. Additionally, the 10% expenditure in question was part of the total expenditure treated as revenue. Consequently, the High Court ruled in favor of the assessee, dismissing the appeal brought by the revenue.