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TMI Blog2014 (12) TMI 190X X X X Extracts X X X X X X X X Extracts X X X X ..... 19/- 1993-94 ITA 460/2004 Rs.1,17,93,547/- 1991-92 ITA 524/2004 Rs.54,31,061/- 1992-93 ITA 576/2008 Rs. 1.2 Crores 1993-94 ITA No. 50/2000 3. In this appeal, the following substantial question of law was framed by this Court: "Whether ITAT and CIT(A) are correct in law in treating the expenditure on account of royalty as a revenue expenditure?" 4. The assessee had income from two proprietorship concerns; one, M/s. Krishna International and the other M/s. Shree Krishna Pictures. The business of M/s. Krishna International was manufacturing of Audio Cassettes (blank and recorded) and its components and manufacturing of blank video cassettes and the business of M/s. Shree Krishna Pictures was distribution of feature films. During the Assessment Year, M/s. Krishna International had shown a gross profit of Rs. 34,27,224/- on the total sales of Rs. 1,17,15,875/-/-. Insofar as the expenses shown against the royalty, Rs. 1,50,500/- was debited as revenue expenditure. 5. The Assessing officer was of the view that the royalty expenditure was for acquiring an asset of enduring nature. The objective of the expenditure was to procure rights which were in the nature of permanent as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f royalty expenses paid by the assessee?" 12. The assessee company had debited the profit and loss account by an amount of Rs. 1,29,76,564/- claiming royalty expenses as revenue expenditure. The Assessing Officer disallowed the amount of Rs. 1,17,93,547/-, observing that it was in the nature of capital expenditure. 13. The CIT(A), relying upon the appeal for the Assessment Year 1990-91, directed the Assessing Officer to follow the observations made therein. In other words, the addition was deleted. 14. The appeal filed by the revenue was dismissed and the order of the CIT(A) was upheld by the ITAT. ITA No. 524/2004 15. In this appeal, which pertains to the Assessment Year 1992-93, the following substantial question of law was framed by this Court on 28.02.2005: "Whether the ITAT was correct in law in deleting the addition of Rs. 54,31,061/- made by the Assessing Officer on account of royalty expenses paid by the assessee?" 16. The Assessing Officer had noticed that an amount of Rs. 54,31,061/- has been debited to the profit and loss account. On explanation sought by the Assessing Officer, the respondent-assessee asserted that the royalty paid should be deducted from income b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zed in production. The high speed duplicators and sound recording equipment does away with the need of a pristine master record. c) The life of a master record or U-matics is not transient. The T-Series group itself is known for its remix cassettes of old Hindi Songs which have survived so far. d) The master plates and U-matics are not stock in trade but are a source of stock in trade. The assessee does not sell them as such, hence the expenses are capital expenses. e) The assessee is not required to pay any recurring amount for the case of the master plates, records or film prints. Therefore no revenue element is involved as in the case of Gotan Lime Syndicate Vs. CIT (1996) referred above. f) The asset acquired by the assessee is of durable nature and generates incomes. g) The assessee and the T-Series group enjoy a near monopoly over regional songs and Hindustani song cassettes and the royalty to the artistes is not paid per piece. All payments are lump sum and the assessee gets to produce mix or remix versions or versions cassettes at its own leisure." The Assessing Officer accordingly added the amount paid to the income of the respondent-assessee, as capital expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for acquiring rights in respect of music etc. from other parties. The Assessing Officer held that this expenditure was capital in nature and accordingly made addition of this amount by disallowing the expenditure. Similarly, the Assessing Officer rejected an addition of Rs. 2,32,900.13/- made by the assessee for purchasing the carpets by treating it as capital in nature. The assessee had also claimed an expenditure of Rs. 2,13,801/- in its video division in Bombay office. This expense was claimed for making feature films. It was noticed by the Assessing Officer that commercial activities had not started at the Video Division in Bombay as such this expenditure was not allowable. 25. Against the order of the Assessing Officer, the assessee filed an appeal before the CIT(A) on the issue of royalty payment as well as on the issue of expenses incurred on carpets. The CIT(A) followed orders for the earlier years, treating royalty payment as revenue in nature. Expenses incurred by Bombay Video Division were also allowed but the disallowance of payment for purchase of carpets was affirmed by the CIT(A). 26. Against the order of the CIT(A), both revenue and assessee had filed cross appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence and expenditure incurred for procuring the plate embedded with the music was surely for revenue generation and cannot be termed as a capital expenditure. Cost of the plate cannot be a capital expense. Even music rights would be revenue expense, as music software is not enduring in nature. He would rely upon the following judgments in support of his case:- (i) Income Tax Officer Vs. Five Star Audio, [2013] 34 Taxmann.com (Chennai-Trib.) (ii) Star Music Vs. DCIT [2013] 34 taxmann.com 235 (Chennai-Trib.) (iii) CIT Vs. Subramanian [2005] 144 Taxman 728 (Mad) (iv) Tips Cassettes & Record Co. Vs. ACIT [2002] 82 ITD 641 (ITAT Mum.) (v) Gramophone Co. of India Ltd. Vs. DCIT [1994] 48 ITD 145 (ITAT Cal.) (vi) CIT Vs. Modern Theatres Ltd. [1963] 50 ITR 548 (Mad.) (vii) Empire Jute Co. Ltd. Vs. CIT [1980] 124 ITR 1 (SC) (viii) Alembic Chemical Works Co. Ltd. Vs. CIT [1989] 177 ITR 377 (SC) (ix) Gotan Lime Syndicate Vs. CIT [1966] 59 ITR 718 (SC) 29. Having considered the submissions made by the learned counsel for the parties, at the outset, we note that during the submissions, a reference was made to a reference case No. ITR 301/1994 decided by this Court wherein, one of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ours had the effect of relaxing the restriction on operation of loom hours and enabled the purchaser to work its looms for longer durations and earn profits. The Supreme Court observed that capital expenditure was one made with a view to bring into existence an asset for enduring benefit to the trade. But, this rule of enduring benefit was subject to and could break down for good reasons. The nature of advantage has to be considered in commercial sense and only when the advantage was in capital field, the expenditure could be disallowed by applying the enduring benefit test. If the advantage consisted of merely facilitating trading operations or enabling the management for conduct of business more efficiently and profitably while leaving the fixed capital untouched, the said expenditure would be on revenue account, though the advantage may endure for an indefinite period. The enduring benefit test was therefore not conclusive and cannot be mechanically applied without considering the commercial aspect. Similarly in Alembic Chemicals Work Co. Ltd.'s case (supra), the assessee had acquired knowhow to produce higher yields and sub-cultures of high yielding range of penicillin. The sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es were revenue in nature. In Assam Bengal Cement Co. Ltd. Vs. CIT, [1955] 27 ITR 34 (SC), it was held that if the expenditure is not for the purpose of bringing in existence of any asset or advantage but for running of business or working for it to produce profit, it would be a revenue expenditure. Similarly, in Commissioner of Income Tax Vs. J.K.Synthetics Ltd. [2009] 309 ITR 371 (Delhi), this Court was of the view that the amounts paid for process and technical know-how, supply of technicians and training of personnel is a revenue expenditure. The expression „enduring benefit‟, has been judicially interpreted by Romer L.J. in Anglo-Persian Oil Company Ltd. Vs. Dale, (1932) 1 KB 124 by agreeing with Rowlatt J. that enduring benefit, means enduring in the way that a fixed capital endures; "an expenditure on acquiring floating capital is not made with a view to acquiring an enduring asset. It is made with a view to acquiring an asset that may be turned over in the course of a trade at a comparatively early date". In M.A.Jabbar Vs. CIT, [1968] 68 ITR 493 (SC), wherein the assessee had taken a short term lease of eleven months for quarrying purposes to carry away, sell an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;"(i) the expenditure incurred towards initial outlay of business would be in the nature of capital expenditure, however, if the expenditure is incurred while the business is ongoing, it would have to be ascertained if the expenditure is made for acquiring or bringing into existence an asset or an advantage of an enduring benefit for the business, if that be so, it will be in the nature of capital expenditure. If the expenditure, on the other hand, is for running the business or working it, with a view to produce profits, it would be in the nature of revenue expenditure; (ii) it is the aim and object of expenditure, which would, determine its character and not the source and manner of its payment; (iii) the test of 'once and for all' payment i.e., a lump sum payment made, in respect of, a transaction is an inconclusive test. The character of payment can be determined by looking at what is the true nature of the asset which is acquired and not by the fact whether it is a payment in 'lump sum' or in an instalment. In applying the test of an advantage of an enduring nature, it would not be proper, to look at the advantage obtained, as lasting forever. The distinction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness after the Agreement has expired, and in that sense, resulting in an enduring advantage, has been categorically rejected by the courts. The Courts have held that this, by itself, cannot be decisive because knowledge by itself may last for a long period even though due to rapid change of technology and huge strides made in the field of science, the knowledge may with passage of time become obsolete; (vii) while determining the nature of expenditure, given the diversity of human affairs and complicated nature of business; the test enunciated by courts have to be applied from a business point of view and on a fair appreciation of the whole fact situation before concluding whether the expenditure is in the nature of capital or revenue". This Court in Oracle India (Pvt.) Ltd. Vs. Commissioner of Income Tax, [2014] 264 CTR 144 (Delhi) while dealing with a case wherein the assessee was incorporated on 18.01.1993 and was a subsidiary of Oracle Corporation, USA. The subsidiary company entered into an agreement with parent company under which it was granted non-exclusive, nonassignable right and authority to duplicate on appropriate carrier media software products and other products ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a reference of which has already been given above, and which is reported as Super Cassettes Industries Pvt. Ltd. Vs. CIT, [1992] 41 ITD 513, in the following manner:- "11. In the instant case, the component with the help of which, the assessee is able to carry out one of its activity of manufacturing and trading in pre-recorded tapes and gramophone records is the plate, which plate is not one but as many as the agreements for making of the copies are entered into. There is every likelihood that, the contract for making of copies may be, entered into on the last of the days of the accounting year and that, the plate may have been paid for on the last of the few days of the year, and the reproduction of it may be still in process. All these factors are common in any business of manufacture. As submitted by the assessee, the product manufactured is based on reproduction of the sound, music etc. from the master plate into tapes and records by the use of electrical and magnetic impulses. These are embedded into the master plate, and the assessee only makes an identical copy of the same. The copy so made is therefore, possible only with the help of the original. Therefore, the master p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assettes. Looking from a commercial angle, it is seen and a common knowledge that music/film songs do not have a long life. Each year, expenditure was incurred to acquire and procure similar rights in new music. It was a recurring expenditure quite similar and like acquiring and purchasing raw material, used in earning profits. Increase in raw material would increase production, turnover and corresponding profits. In case, such rights were not acquired and purchased from time to time, the assessee would go out of the business. Further and importantly, sale of new music initially, we all know is brisk but fades and ceases to be catchy after sometime. When popularity fades, the sales falter and returns/incomes does not flow and stops. There are a few songs which are evergreen and are heard by the public at large and remain popular even after few/many years of their release. Some songs of the 1960s and 1970s/80s are considered immortal and timeless. The percentage of such music and songs is abysmally small and probably in the range of 5% to 10% of the music/songs launched every year. The said percentage would necessarily depend upon several factors, which again would be fact specific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year in question? 39. Insofar as the question (ii), is concerned, the same relates to deletion of an addition of Rs. 2,32,900/- on account of purchase of carpets by treating it as revenue expenditure. We note that the Assessing Officer had treated it as a capital expenditure. He further directed that the depreciation be allowed on the same. The CIT(Appeals) was of the view that since he had already held in the earlier year that the cost of carpet was a capital expenditure, the action of the AO was to be confirmed. The reasoning of the CIT(Appeals) was that since the carpets were used in the recording room, it was a part of plant and machinery. We note that the ITAT, for the earlier year 1987-88, was of the following view: "21. As regards the expenditure of Rs. 1,79,577/- laying down the carpets in the recording studio, we find that an atmosphere has to be created for recording of the cassettes. The recording rooms have to be sound proof and dust proof. By laying down the carpets in these rooms, it is augmentation of efficiently carrying on the business. The factory was running in three shifts and due to rush of staff, life of carpets was short. Such carpets have to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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