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TMI Blog2023 (4) TMI 798X X X X Extracts X X X X X X X X Extracts X X X X ..... y on facts which are verifiable from the records of the assessee placed on record. Examination and verification of the audited financial statement i.e. Balance sheet and Profit and Loss Account of the assessee together with notes to accounts and significant accounting policies, perusal of the ledger accounts and the details made by the assessee in the paper book for the data maintained by it, reveals the correct state of affairs in respect of the issue raised in the impugned revisionary proceeding. Accordingly, action u/s. 263 is not justifiable which in our considered view cannot be sustained under the facts and circumstances of the present case. - Decided in favour of assessee. - ITA No.1286/Kol/2019 - - - Dated:- 13-3-2023 - Shri Rajpal Yadav, Vice President And Shri Girish Agrawal, Accountant Member For the Appellant : Shri J. P. Khaitan, Sr. Advocate And Shri Pratyush Jhunjhunwala, Advocate For the Respondent : Shri G. HukughaSema, CIT ORDER PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: This appeal filed by the assessee is against the revision order of Ld. Pr. CIT-1, Kolkatavide Memo No. Pr. CIT-1/Kol/Revision u/s. 263/2018-19/12643-46, dated 20.03.2019 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e non- payment of Royalty on License Fees of Rs.1,80,65,00/-. ii) As per Section 37 of the I.T. Act, 1961, any expenditure which was not incurred in the previous year, shall not be allowed as deduction in computing the income chargeable under the head profit and gains of business or profession . The assessee had debited a sum of Rs. 1688.00 lakh towards Royalty to the profit and loss account for the year ended on 31.03.2014 under the head other expenses . Further, from note-10 of the balance sheet as on 31.03.2014 relating to Short Term Provision . It was also revealed that there was a provision for royalty on license fee amounting to Rs. 1285.73 lakh calculated as below:- As on 31.03.2013 (Rs. In Lakh) Provision at the beginning of the year 1691.63 Add: Creation during the year 1135.77 2827.40 Less: Excess Provision of earlier year written back 34.32 Less: Amount utilized during the year 1507.35 B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Ld. AO in the assessment proceeding and he applied his mind for taking the plausible view and allowed the claim of expenditure on account of royalty. The consideration arrived at by the ld. Pr. CIT on the same issue is nothing but a change of opinion . Ld. Pr. CIT has altogether ignored the consistent accounting practice adopted by the assessee by following the mercantile system of accounting, more particularly in respect of claim of expenses towards royalty. For this, Ld. Counsel apprised the bench, the details from the audited financial statement, placed in the paper book. He submitted that in the Profit Loss Statement placed at page 11, total expenses of Rs.14,757.14 lakh includes other expenses of Rs.5,319.42 lakh, details of which are given through Note No. 29, forming part of the financial statement of the assessee. By referring to the details and other expenses in Note No. 29 placed at page 15 of the paper book, he pointed out that it includes royalty of Rs.1,688 lakh. He thus, referred to the notes on significant accounting policies forming part of the financial statement, more particularly relating to royalty, which is stated as - Royalty and Minimum Guara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the agreement with the respective producer, is required to pay- royalty. Identification of amount of royalty to be paid on physical sales is not much of a challenge. However, the royalty payable to producer in respect of license fees takes some time. For licence fees, the details of songs played of a particular party are provided in the course of time through log books. With vast volume and wide spread operations, capturing of details of music played of a particular party and forwarding the same via log book to the appellant is difficult and takes some time. Following the matching concept and the mercantile system of accounting, as the revenue was recognized during the year, in addition to payments made during the year, the appellant on the basis of detailed analysis of past trends of royalty pay-out to various parties for their music recognized the accrued liability aggregating to Rs. 1,688 lacs. In subsequent years, amount of accrued liability and unpaid amount was written back and offered to tax in AY 2015-16 as stated earlier. Break-up of the amount of Rs. 180.35 lacs paid and written back by the appellant is as follows - Particulars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd claiming it as a deduction in the profit and loss statement. i) Assessee enters into agreements with producers/owners of the songs so as to obtain against payment of royalty, the right to reproduce the songs and sell the same to the public at large in the form of compact discs, digital versatile discs, etc. and also to grant rights to licensees to play the songs. The liability to pay royalty to the producers/owners arises as and when music is sold by the assessee in physical form/through online sales or when the music is played by the assessee'slicencees at different locations, radio stations, online platforms, etc. ii) Royalty payable on physical sales can be readily quantified. However, quantification of royalty payable to the producers/owners in respect of songs played by the licencees takes a lot of time. The volume of music is vast and its playing is widespread at different locations, radio stations, online platforms, etc. The licensees issue credit notes to the assessee on the basis of which the assessee raises its invoices for its licence fees. In order to ascertain the royalty payable by the assessee to the producers/owners, the assessee requires details of eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of the audited accounts, the manner in which expenditure on account of royalty is recognised in the books of account is duly disclosed as a significant accounting policy. The audited accounts and the schedules/notes forming part thereof separately mention the amount on account of royalty debited to the profit and loss account. The amount of provision for royalty on licence fees is also separately shown with break-up of the amount of provision created during the year, the excess provision of earlier years, if any written back, the amount of provision utilised during the year and the amount carried forward to the next year. The aforesaid significant accounting policy followed by the assessee in the matter of recognising liability for payment of royalty and the accounting made by it has all along been duly disclosed on the face of the audited accounts. 7.1. Ld. Counsel referred to Note No. 21 Revenue from Operations to point out revenue of Rs.10,639.26 lakhs earned by the assessee during the year towards licence fees forming part of sale and services. He also referred to the significant accounting policies disclosed by the assessee which is stated as: Sales and licence f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eneration of revenue from licence fees against which expenditure of royalty is claimed by the assessee. We have also gone through the methodology adopted by the assessee for accounting in respect of claim of royalty expenditure by way of provisioning for which it adopts matching concept under the mercantile system of accounting. Assessee submitted that it creates provision for royalty expenses on the basis of detailed analysis of past trends of royalty payout to various parties for their music and recognizes it on accrual basis. Further, assessee demonstrated from its factual data that in subsequent years, amount of accrued liability and unpaid amount of royalty is written back and offered to tax. In the present case for AY 2014-15, assessee furnished the details of Rs. 180.65 lakhs comprising of Rs. 85.75 lakhs which was paid in the subsequent year i.e. AY 2015-16 and Rs. 94.90 lakhs which was written back and offered to tax in AY 2015-16 being excess provision. From these facts, we do not find any prejudice being caused to the interest of revenue which is a condition precedent for undertaking the revisionary proceedings. 9.1. Further, in respect of tainting the assessment orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous order, that is (i) if the Assessing Officer s order was passed on incorrect assumption of fact; or (ii) incorrect application of law; or (iii) Assessing Officer s order is in violation of the principle of natural justice; or (iv) if the order is passed by the Assessing Officer without application of mind; (v) if the AO has not investigated the issue before him; [because AO has to discharge dual role of an investigator as well as that of an adjudicator] then in aforesaid any of the events, the order passed by the AO can be termed as erroneous order. Looking at the second limb as to whether the actions of the AO can be termed as prejudicial to the interest of Revenue, one has to understand what is prejudicial to the interest of the revenue. The Hon ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. prejudicial to the interest of the revenue has to be read in conjunction with an erroneous order passed by the AO. Their Lordships held that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the AO to conduct further enquiries without a finding that the order is erroneous, the condition or requirement which must be satisfied for exercise of jurisdiction u/s 263 of the Act. In such matters, to remand the matter/issue to the AO would imply and mean that the CIT has not examined and decided whether or not, the order is erroneous but has directed the AO to decide the aspect/question. 10.1.4. The Hon'ble Court further held that this distinction must be kept in mind by the CIT while exercising jurisdiction u/s 263 of the Act and in the absence of the finding that the order is erroneous and prejudicial to the interest of revenue, exercise of jurisdiction under the said section is not sustainable. In most cases of alleged inadequate investigation , it will be difficult to hold that the order of the AO, who had conducted enquiries and had acted as an investigator, is erroneous, without CIT conducting verification/enquiry himself. The order of the AO may be or may not be wrong. CIT cannot direct reconsideration on this ground but only when the order is erroneous. An order of remit cann ..... X X X X Extracts X X X X X X X X Extracts X X X X
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