M/s. Five Star Audio, CHENNAI V. ITO, CHENNAI

CO 187/CHNY/2012

• Counselvise Citation: [2013] 122 COUNSELVISE.COM (IT) 8216 (ITAT-CHENNAI)
• Duration Of Justice: 1 month(s) 26 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 15-01-2013
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2004-2005
• Appeal Filed On: 19-11-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: M KARUNAKARAN
• Keywords: Capital asset; Depreciation; Revenue expenditure; Capital expenditure
• Section: 32; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : CHENNAI [BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER] I.T.A.NO.1921/MDS/2012 ASSESSMENT YEAR : 2004-05 THE INCOME TAX OFFICER MEDIA WARD I CHENNAI VS M/S FIVE STAR AUDIO NO.3/66, SREE SAYEE NAGAR VIRUGAMBAKKAM CHENNAI - 92 [PAN AAAFF 1470 D] (APPELLANT) (RESPONDENT) C.O.NO.187/MDS/2012 ASSESSMENT YEAR : 2004-05 M/S FIVE STAR AUDIO NO.3/66, SREE SAYEE NAGAR VIRUGAMBAKKAM CHENNAI - 92 VS THE INCOME TAX OFFICER MEDIA WARD I CHENNAI (CROSS OBEJCTOR) (RESPONDENT) DEPARTMENT BY : SHRI SHAJI P. JACOB, ADDL. CIT ASSESSEE BY : SHRI M. KARUNAKARAN, ADVOCATE DATE OF HEARING : 09-01-2013 DATE OF PRONOUNCEMENT : 15-01-2013 O R D E R PER N.S. SAINI, ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY THE REVEN UE AND THE CROSS OBJECTION FILED BY THE ASSESSEE AGAINST THE ORDER OF THE CIT(A)-VI, CHENNAI, DATED 26.7.2012, PASSED FOR ASSESSMENT YEA R 2004-05. I.T.A.NO1921/2012 C.O. 187/2012 :- 2 -: 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APP EAL: 1. THE ORDER OF THE LEARNED CIT(APPEALS) IS CONTRARY T O LAW AND FACTS OF THE CASE. 2. THE LD CIT(APPEALS) ERRED IN HOLDING THAT EXPEND ITURE OF RS.1.11 CRORES INCURRED ON COPYRIGHTS ACQUIRED BY T HE ASSESSEE TOWARDS MECHANICA REPRODUCTION OF SOUND RECORDINGS IN THE FORM OF AUDIO CASSETTE TAPES, COM PACT DISCS IS TO BE TREATED AS REVENUE EXPENDITURE; 2.1 THE LD CIT(APPEALS) FAILED TO APPRECIATE THE FA CT THAT ACCORDING TO THE AMENDED PROVISIONS OF SEC.32(2), W.E.F.11.4.1999, KNOW HOW, PATENTS, COPYRIGHTS, TRA DEMARKS, LICENSES, FRANCHISES OR ANY OTHER BUSINESS OR COMME RCIAL RIGHTS OF SIMILAR NATURE ETC. WERE TO BE TREATED AS INTANGIBLE ASSETS AND DEPRECIATION TO BE ALLOWED ON INVESTMENT S IN SUCH ITEMS. 2.2 IT IS SUBMITTED THAT THE THE ASSESSEE HAD ACQUI RED A MASTER PLATE WITH A RIGHT TO EXPLOIT THE SAME BY RE PRODUCING THE SOUND TRACK IN THE FORM OF CASSETTES AND COMPAC T DISCS ETC. HENCE THE MASTER PLACE ACQUIRED WAS LIKE A MOU LD FROM WHICH THE ASSESSEE RECORDS I RE-RECORDS MANY FOLD CASSETTES AND COMMERCIALLY EXPLOIT THE SAME. 2.3 IT IS SUBMITTED THAT AN EXPENDITURE WHICH GIVES ENDURING BENEFIT TO THE ASSESSEE HAD TO BE TREATED AS CAPITA L IN NATURE. IN THIS CASE, THE MASTER PLATE IS A CAPITAL ASSET AS PER PROVISIONS OF SEC.32(2) OF THE ACT. 2.4 IT IS SUBMITTED THAT THE DECISION OF THE JURISD ICTIONAL ITAT IN THE CASE OF M/S. STAR MUSIC HAS NOT BECOME FINAL AN D AN APPEAL HAS BEEN FILED BEFORE THE HON'BLE HIGH COURT AND PENDING; 2.5 IT IS SUBMITTED THAT THE DECISION RELIED UPON I N THE CASE OF SUPER CASSETTES INDUSTRIES P LTD.(DELHI ITAT) , REL ATE TO ASST YEAR 1985-86, AND THE DECISION WAS RENDERED PRIOR T O THE AMENDMENT OF PROVISIONS OF SEC.32(2) OF THE ACT. HE NCE THE SAME CANNOT BE APPLIED TO THE YEAR UNDER CONSIDERAT ION. 2.6 IT IS SUBMITTED THAT THE DECISION RELIED UPON B Y THE CIT(A) IN THE CASE OF CIT VS. M. SUBRAMANIAN (2005)(144TAX MAN 728(MAD) IS DISTINGUISHABLE TO THE FACTS OF THE CAS E AS THE SAME WAS RENDERED (IN PARA 8.9) IN THE CONTEXT AS T O WHETHER PAYMENT OF ROYALTY HAS TO BE TREATED AS REVENUE EXP ENDITURE U/S.37 OR 35A AS CAPITAL EXPENDITURE. I.T.A.NO1921/2012 C.O. 187/2012 :- 3 -: 2.7 IT IS FURTHER SUBMITTED THAT IN THE ABOVE SAID JUDGMENT, WHILE DECIDING THE ISSUE, THE HON'BLE HIGH COURT IN PARA 8 OF THE ORDER OBSERVED THAT THE AGREEMENT CLEARLY PROVI DES FOR ASSIGNMENT OF THE RIGHTS OF THE PRODUCER OF THE MUS IC OF THE MOVIE TO THE ASSESSEE. THE COPYRIGHT SO ASSIGNED IS IN THE NATURE OF A CAPITAL ASSET. THE ASCERTAINED SUM OF R S. 501 PAID BY THE ASSESSEE TO THE PRODUCER AT THE TIME OF ENTE RING INTO THAT AGREEMENT IS CLEARLY A CAPITAL EXPENSE.' 3. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CIT(A) MAY BE SET ASIDE AND THAT OF THE O MAY BE RESTORED. 3. THE DR SUBMITTED THAT THE ONLY ISSUE INVOLVED IN TH IS APPEAL BY THE REVENUE IS THAT THE CIT(A) ERRED IN HOLDING THAT THE EXPENDITURE OF ` 1.11 CRORES INCURRED ON COPYRIGHTS ACQUIRED BY THE ASSESSEE TOWARDS MECHANICAL REPRODUCTION OF SOUND R ECORDINGS IN THE FORM OF AUDIO CASSETTE TAPES, COMPACT DISCS IS TO B E TREATED AS REVENUE EXPENDITURE. 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSING OFFICER TREATED THE COST OF PURCHASE OF AUDIO RIGHTS OF ` 92,00,875/- AS CAPITAL EXPENDITURE AS AGAINST REVENUE CLAIMED BY THE ASSE SSEE AND ALLOWED DEPRECIATION @ 25% THEREON. THE REASONS FOR DOIN G SO ARE AS UNDER: PURCHASE OF AUDIO RIGHTS; DURING THE PREVIOUS YEAR THE ASSESSEE HAS PURCHASED COPYRIGHT FOR MECHANICAL REPRODUCTION OF SOUND RECORDINGS IN THE FORM OF AUDIO CASSETTE TAPES, COMPACT DISCS OR ANY OTHER FO RMAT OF VARIOUS FILMS TO THE TUNE OF RS . 1,11,01,001 . AS PER THE AGREEMENTS ENTERED (ALL THESE AGREEMENTS ARE SIMILA R WITH RESPECT TO TERMS AND CONDITIONS) THE ASSESSEE ACQUI RES A MASTER PLATE CONTAINING THE AGREED SOUND TRACK WITH COPYRI GHT TO COMMERCIALLY EXPLOIT THE SAME . THE ASSESSEE HAS CLAIMED THE COST OF PURCHASE OF THIS MASTER PLATE WITH COPY RIG HT AS REVENUE EXPENDITURE . I.T.A.NO1921/2012 C.O. 187/2012 :- 4 -: AS PER PROVISIONS OF SEC . 32(1)(II) PURCHASE OF ANY KNOW- HOW, PATENTS, COPYRIGHTS , TRADEMARKS, LICENSES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATU RE, BEING INTANGIBLE ASSETS, ACQUIRED ON OR AFTER THE 1-04-19 98 SHALL BE CAPITALIZED AND ONLY DEPRECIATION @ 25 % BE ALLOWED AS PROVISIONS OF RULE 5(1) OF INCOME TAX RULES,1962. BY THIS OFFICE LETTER DATED 7-10 - 2011, THE ASSESSEE WAS REQUIRED TO PUT FORWARD ITS ARGUMENTS AS TO WHY THE COST OF PURCHASE OF COPYRIGHTS SHOULD NOT BE CAPITALIZED AN D DEPRECIATION @ 25 % BE ALLOWED ON THE COST OF PURCHASE . THE ASSESSEE FIRM, VIDE ITS LETTER DATED 19-10-2011 AND 25-11-2011 GIVEN A DETAILED REPLY . THE SUMMARY OF THE ASSESSEE' ARGUMENTS AGAINST THE PROPOSED CAPITALIZA TION AND THE LEGAL/FACTUAL POSITION AS PER THE PROVISIONS OF THE INCOME TAX ACT, 1961 ARE AS UNDER: 1. THE ASSESSEE IS IN THE BUSINESS OF PURCHASING OF CO PYRIGHTS OF SOUND TRACKS OF FEATURE FILMS AND OTHER SOUND TRACK S AND CONVERTING THEM INTO TRADABLE GOODS BY COPYING THEM IN AUDIO CASSETTES, COMPACT DISCS ETC FROM 1996-97 AND THE A SSESSEEIS TREATING THE COST OF PURCHASE OF COPYRIGHTS AS REVE NUE SINCE THEN AND THE ASSESSEE' CLAIM HAS BEEN ACCEPTED BY THE DE PARTMENT TILL THE DATE . NOW THE ASSESSMENT YEAR 2004 - 05 HAS BEEN REOPENED TO CAPITALIZE THE COST OF PURCHASE . THUS THERE IS CONTRADICTION IN TREATING THE SAME TRANSACTION IN T WO DIFFERENT WAYS . THE ASSESSEE'S SUBMISSIONS ARE CONSIDERED . THE SUBMISSION OF THE ASSESSEE IS NOT ACCEPTABLE FOR THE FOLLOWING R EASONS : ( I ) SUBSECTION 1 OF SECTION 32 WAS AMENDED BY FINANC E (NO.2) ACT, 1998 , W . E . F. 01 . 04 . 1999 SO AS TO CLASSIFY KNOW-HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENSES, FRANCHIS ES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE, ET C . AS INTANGIBLE ASSETS PROVIDING FOR ALLOWANCE OF DEPRECIATION ON I NVESTMENTS IN SUCH ITEMS . THE ISSUE OF PROMISSORY ESTOPPELS RAISED BY THE ASS ESSEE IS NOT CORRECT FOR THE REASON THAT THE ACTION TAKEN TO TREAT THE AUDIO RIGHTS PURCHASED AS INTANGIBLE ASSET IS ONLY IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. IN THIS CONTEXT THE FOLLOWING CASES LAWS ARE RELIED : CLT V. B.N. BHATTACHARJEE [1979] 118 ITR 461, THE HON'BLE SUPREME COURT HAS OBSERVED THAT THE SOUL OF ESTOPPE L IS EQUITY, NOT FACILITY FOR INEQUITY AND THAT ESTOPPELS AGAINS T THE STATUTE IS I.T.A.NO1921/2012 C.O. 187/2012 :- 5 -: NOT PERMISSIBLE BECAUSE PUBLIC POLICY ANIMATING A S TATUTORY PROVISION MAY THEN BECOME THE CASUALTY. IN THE CASE OF MATHURA PRASHAD & SONS V. STATE OF PUNJAB AIR 1962 SC 745 IT HAS BEEN HELD THAT THERE IS NO ESTOPPELS AGAINST A STATUTE . FURTHER, IT HAS BEEN OBSERVED BY THE APEX COURT THA T IF THE LAW REQUIRES THAT A CERTAIN TAX IS TO BE COLLEC TED, IT CANNOT BE GIVEN UP, AND ANY ASSURANCE THAT IT WOULD NOT BE CO LLECTED, WOULD NOT BIND THE GOVERNMENT , WHENEVER IT CHOOSES TO COLLECT IT . 2. THE CHARACTER OF EXPENDITURE HAS TO BE DECIDED ON THE FACTS AND CIRCUMSTANCES OF EACH CASE . ANY PAYMENT OR EXPENDITURE FOR ENSURING SOURCE OF STOCK IN TRADE IS CAPITAL WHEREA S THE PAYMENT OR EXPENDITURE FOR OBTAINING STOCK IN TRADE FROM KN OWN SOURCE IS REVENUE. THE PAYMENT MADE BY THE ASSESSEE IS TO OBT AIN STOCK IN TRADE. THE ASSESSEE' CONTENTION IS CONSIDERED . IT IS NOT ACCEPTED FOR THE FOLLOWING REASONS : PARA NO..3 . 3 . 1 OF THE AGREEMENT ENTITLES THE ASSESSEE TO USE, EXPLOIT AND PRODUCE, DUPLICATE AND OR REPRODUCE THE WORKS FOR MARKETING AND/OR SALES OF WORKS IN THE FORM AUDIO C ASSETTES, COMPACT DISCS, AND/OR ANY OTHER FORMS OF SOUND RECO RDING/ANY OTHER CONTRIVANCE/ APPLIANCE BEARING OR USED FOR EM ITTING SOUNDS THAT MAY DEVELOPED IN FUTURE WITHIN THE AGREED TERR ITORY . THUS WHAT THE ASSESSEE ACQUIRED BY WAY OF AGREEMENT IS N OT STOCK IN TRADE BUT A MASTER PLATE WITH COPYRIGHT WHICH ENABL ES THE ASSESSEE TO COPY IT MANY FOLDS IN THE FORM OF AUDIO CASSETTES AND COMPACT DISCS ETC . AND EXPLOIT THE SAME COMMERCIALLY. STOCK IN TRADE IS A PRODUCT WHICH THE ASSESSEE DURI NG THE COURSE OF BUSINESS ACQUIRES AND SELLS THE SAME IN MARKETAB LE CONDITION . IN THE CASE OF THE ASSESSEE, IT ACQUIRES A MASTER P LATE WITH A RIGHT TO EXPLOIT THE SAME BY REPRODUCING THE SOUND TRACK IN THE FORM OF CASSETTES AND COMPACT DISCS ETC . THE MASTER PLATE ACQUIRED IS LIKE A MOULD FROM WHICH THE ASSESSEE RE CORDS/RE- RECORDS MANY FOLD CASSETTES , COMPACT DISCS ETC . AND COMMERCIALLY EXPLOITS THE SAME. CAPITALIZING THE CO ST OF MOULD AS PER PROVISIONS OF SEC 32 OF INCOME TAX ACT, 1961 AN D TREATING THE GOODS PRODUCED OUT OF MOULD AS STOCK IN TRADE IS AN ACCEPTED MAXIM. IN THE CASE OF ASSESSEE, THE SAME METHOD OF TREATMENT IS ADOPTED BY CAPITALIZING THE COST OF MASTER PLATE AL ONG WITH THE COPYRIGHT, AS PER THE PROVISIONS OF SEC 32 AND THE VALUE OF CASSETTES , COMPACT DISCS ETC . AS STOCK IN TRADE AND SALE VALUE AS TRADING INCOME . I.T.A.NO1921/2012 C.O. 187/2012 :- 6 -: 3. THE ORIGINAL MASTER PLATE IS PRIMARILY A RAW MAT ERIAL AND INCIDENTALLY HAPPENS TO BE THE SUBSTRATUM OF THE BU SINESS . THE ASSESSEE' CONTENTION IS CONSIDERED . IT IS NOT ACCEPTED FOR THE FOLLOWING REASONS : THE MASTER PLATE IS NOT A RAW MATERIAL FOR THE SIMP LE REASON THAT THE SAME IS NOT CONSUMED TO MAKE A NEW PRODUCT BUT BY USING THE SAME AS MOULD THE ASSESSEE MAKES TRADABLE PRODU CTS AND THE ORIGINAL MASTER PLATE REMAINS THE SAME WITH NOR MAL WEAR AND TEAR . 4. THE LIFE OF THE SOUND TRACKS IS VERY SHORT DUE TO THE FREQUENCY WITH WHICH NEW FILMS ARE RELEASED WHICH RESULT IN N EW TYPES OF MUSIC . BESIDES THERE IS A CUT THROAT COMPETITION IN THE MA RKET DUE TO PIRATED CASSETTES AND CDS AS THEY ARE SOLD F OR THROWAWAY PRICE. THE ASSESSEE' CONTENTION IS CONSIDERED . IT IS NOT ACCEPTED FOR THE FOLLOWING REASONS : THE ASSESSEE ACQUIRES AN ENDURING BENEFIT BY ACQUIR ING THE MASTER PLATE WITH COPY RIGHT . THE MARKET VALUE OF THE CASSETTES, COMPACT DISCS ETC . DEPEND ON THE QUALITY AND MUSIC VALUE OF THE SOUND TRACK . THESE CONSTRAINS ARE ALWAYS TAKEN INTO ACCOUNT BEFORE THE COST FIXED/AGREED FOR THE MASTER PLATE W ITH COPY RIGHT . THESE PROPOSITIONS IN ANY WAY, DOES NOT AFFECT THE NATURE AND TREATMENT OF TRANSACTION . 5. ON APPEAL, THE CIT(A) ALLOWED THE CLAIM OF THE ASS ESSEE BY OBSERVING AS UNDER: 5. GROUND NOS. 6 & 7 DEALS WITH DISALLOWANCE OF RS.1,11,01,001/-BEING ASSIGNMENT OF COPYRIGHT AND M ASTER PLATE CLAIMED AS REVENUE EXPENDITURE. THE AO HAS SUMMARIZED THE ARGUMENTS OF THE APPELLANT AND HIS S TAND IN PAGE NOS.2 TO 5 OF THE ASSESSMENT ORDER AND REJECTE D THE CONTENTION AND TREATED IT AS CAPITAL EXPENDITURE AN D ALLOWED DEPRECIATION. DURING THE APPEAL PROCEEDINGS THE AR RELIED ON THE STATEMENT OF FACTS AND GROUNDS OF APPEAL AND SUBMITTED A COPY OF ORDER OF JURISDICTIONAL ITAT IN THE CASE OF STAR MUSIC VS DCIT (ITA NO.910/MDS/2011 DATED 30.03.2012) AND SUBMITTED THAT THE FACTS OF THE CAS E OF THE I.T.A.NO1921/2012 C.O. 187/2012 :- 7 -: APPELLANT ARE COVERED BY THE SAID DECISION WHEREIN THE CLAIM OF THE APPELLANT RELATING TO REVENUE EXPENDITURE WA S UPHELD. 5.1 I HAVE CAREFULLY CONSIDERED THE SUBMISSION OF T HE AR AND ALSO PERUSED THE JUDGEMENT OF HON'BLE ITAT. IN THE SAID JUDGEMENT THE HON'BLE TRIBUNAL RELIED ON THE JUDGEM ENT OF DELHI TRIBUNAL IN THE CASE OF SUPER CASSETTES INDUS TRIES P. LTD. VS CIT AND COORDINATE BENCH JUDGEMENT IN THE C ASE OF M. SUBRAMANIAM VS DCIT AND HELD THAT 'THE LEARNED C IT HAS ERRED IN COMING TO THE CONCLUSION THAT THE EXPE NDITURE INCURRED BY THE ASSESSEE IN ACQUIRING AUDIO COPY RI GHTS AND COS AND DVD RIGHTS ARE NOT REVENUE EXPENDITURE AND HAVE TO BE CAPITALIZED'. RESPECTFULLY FOLLOWING THE JUDG EMENT OF THE JURISDICTIONAL TRIBUNAL I DIRECT THE AO TO ALLO W THE EXPENDITURE INCURRED BY THE APPELLANT FOR ACQUIRING COPY RIGHT AS REVENUE. THESE GROUNDS OF APPEAL ARE ALLOWED. 6. THE DR FAIRLY CONCEDED THAT THE ISSUE WAS COVERED I N FAVOUR OF THE ASSESSEE BY THE DECISION OF CHENNAI C' BE NCH OF THE TRIBUNAL IN THE CASE OF M/S STAR MUSIC VS DCIT IN I.T.A.NO. 910/MDS/2011, ORDER DATED 30.3.2012. HOWEVER, HE SUBMITTED THAT THE ABOVE DECISION OF THE TRIBUNAL HAS NOT BECOME FINAL AS TH E DEPARTMENT HAS FILED AN APPEAL BEFORE THE HON'BLE MADRAS HIGH COUR T. 7. WE FIND THAT THE TRIBUNAL IN THE ABOVE QUOTED ORDER HAS HELD AS UNDER: 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSES SE/APPELLANT IS ENGAGED IN THE BUSINESS OF PURCHASING AUDIO RIGHTS, MANUFACTURING AUDIO CASSETTES, CDS AND SELLING THEM. THE ASSESSEE FILED RETURN OF INCOME FOR THE ASSESSMENT YEAR 2006-07 ON 31.10.200 6 ADMITTING TOTAL INCOME OF ` 16,49,741/-. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY. NOTICE UNDER SECTION 143(2) WAS ISSUE D TO THE ASSESSEE ON 9.7.2007. THE ASSESSING OFFICER DISALLOWED EXPEN SES TO THE TUNE OF ` 22,430/- ON ACCOUNT OF DONATION ( ` 15,000) AND POOJA EXPENSES ( ` 7430) IN THE PROFIT AND LOSS ACCOUNT. SINCE THE ASS ESSEE BROUGHT FORWARD THE LOSSES FOR THE ASSESSMENT YEARS 2004-0 5 AND 2005-06 I.T.A.NO1921/2012 C.O. 187/2012 :- 8 -: AGAINST THE TOTAL INCOME FOR THE ASSESSMENT YEAR 20 06-07, THE TAX LIABILITY OF THE ASSESSEE WAS NIL. 3. THE CIT ISSUED NOTICE UNDER SECTION 263 OF THE A CT TO THE ASSESSEE WITH THE FOLLOWING OBSERVATIONS:- IT IS SEEN THAT DURING THE YEAR THE ASSESSEE HAS PURCHASED AUDIO COPY RIGHTS AND CD, DVD RIGHTS AND DEBITED P & L ACCOUNT WITH ENTIRE EXPENDITURE TOWAR DS ACQUISITION OF COPY RIGHTS. THE ASSESSING OFFICER S HOULD HAVE CAPITALIZED THE EXPENDITURE OF ` 82,55,000/- [ ` 51,85,000 + ` 30,70,000] AND ALLOWED DEPRECIATION ON IT. INSTEAD OF ALLOWING DEPRECIATION OF ` 20,63,750/- THE ASSESSING OFFICER ALLOWED THE ENTIRE EXPENDITURE WH ICH HAS RESULTED IN UNDERASSESSMENT. ON ACCOUNT OF THIS , THE ASSESSMENT ORDER IS ERRONEOUS AND PREJUDICIAL TO TH E INTEREST OF THE REVENUE. THEREFORE PROVISIONS OF S ECTION 263 OF THE INCOME-TAX ACT, 1961 ARE INVOKED. 4. THE ASSESSEE FILED REPLY DATED 16.03.2011 TO THE SHOW CAUSE NOTICE STATING THAT TREATMENT OF RIGHTS AS CAPITAL AND PROVIDING DEPRECIATION ON THE SAME IS NOT CORRECT. IF THE PU RCHASES HAVE TO BE CAPITALIZED, IN THE SAME MANNER, THE RECEIPT ALSO N EEDS TO BE CAPITALIZED. AS PER RULE 9A THE ENTIRE EXPENSES OF A MOVIE/PRODUCTION COULD BE WRITTEN OFF IF THE SAME IS RELEASED WITHIN THREE MONTHS BEFORE THE END OF THE FINANCIAL YEAR. THE CIT DID NOT ACCE PT THE CONTENTIONS OF THE ASSESSEE AND HELD AS UNDER:- THE ASSESSEE HAS PURCHASED THE END PRODUCT FROM A PRODUCER I.E. AUDIO RIGHTS AND RIGHTS IN CD & DVDS. THE ASSESSEE HAS PURCHASED BY INCURRING EXPENSES OF ` 51,85,000/- TOWARDS PURCHASE OF AUDIO RIGHTS AND ` 30,70,000/- TOWARDS CD AND DVD RIGHTS. THESE RIGHTS PERMIT THE ASSESSEE TO EXPLOIT THE AUDIO AND CD AND DVD TO EARN REVENUE. THE RIGHTS BEING PURCHASED BY PAYING A LUMP SUM AMOUNT ARE CAPITAL AND ON THIS DEPRECIATION ARE ALLOWABLE AT 25%. WHILE MAKING THE ASSESSMENT, THE ASSESSING OFFICER HAS NOT TAKEN PRO PER STAND WHICH HAS RESULTED IN ALLOWING THE ENTIRE EXPENDITURE THAT LED TO UNDER-ASSESSMENT. THE ASSESSING OFFICER IS DIRECTED TO MODIFY THE ASSESSM ENT AS DISCUSSED ABOVE AND REDO THE ASSESSMENT AFRESH AFTE R PROVIDING OPPORTUNITY TO THE ASSESSEE. 5. AGGRIEVED BY THE ORDER OF THE CIT, THE ASSESSEE HAS FILED THE PRESENT APPEAL BEFORE THE TRIBUNAL. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE AS UNDER:- I.T.A.NO1921/2012 C.O. 187/2012 :- 9 -: 1. FOR THAT THE ORDER OF THE CIT IS WITHOUT JURISD ICTION, CONTRARY TO LAW, FACTS AND CIRCUMSTANCES OF THE CASE AND AT ANY RATE IS OPPOSED TO THE PRINCIPLES OF EQUITY, NATURAL JUSTIC E & FAIR PLAY. 2. FOR THAT THE CIT FAILED TO APPRECIATE THAT THERE WAS NO ERROR OR PREJUDICE MUCH LESS BOTH TO WARRANT THE INVOCATI ON OF THE POWERS CONFERRED U/S.263. 3. FOR THAT THE CIT ERRED IN CONCLUDING THAT THE EX PENDITURE TOWARDS ACQUISITION OF COPY RIGHTS IS NOT REVENUE I N NATURE AND HAS TO BE CAPITALIZED. 4. FOR THAT THE CIT FAILED TO APPRECIATE THAT THE EXPENDITURE TOWARDS ACQUISITION OF COPY RIGHTS WAS ALLOWED AS R EVENUE EXPENDITURE AS CLAIMED BY THE APPELLANT IN EARLIER YEARS ALSO. 5. FOR THAT THE CIT FAILED TO APPRECIATE THAT THE ASSESSING OFFICER HAS ALLOWED THE SAME AS REVENUE EXPENDITURE ONLY AFTER DETAILED EXAMINATION. 6. FOR THAT WITHOUT PREJUDICE TO THE ABOVE, THE CIT FAILED TO APPRECIATE THAT IF THE PURCHASES HAVE TO BE CAPITAL IZED THEN THE RECEIPTS ALSO HAVE TO BE CAPITALIZED. 7. FOR THAT THE CIT FAILED TO APPRECIATE THAT THE BUSINESS OF THE APPELLANT IS TRADING IN RIGHTS AND THAT THERE WILL BE NO BUSINESS OR INCOME CALLING FOR CAPITALIZATION OR WRITE OFF. 8. FOR THAT THE CIT FAILED TO APPRECIATE THE RULES LAID DOWN IN RULE 9A/9B OF THE I.T.RULES FOR WRITE OFF OR EXP ENSES. 6. SHRI T.BANUSEKAR, AUTHORIZED REPRESENTATIVE OF T HE ASSESSEE SUBMITTED THAT THE EXPENSES INCURRED BY THE ASSESSE E IN PURCHASING AUDIO COPY RIGHTS AND CD & DVD RIGHTS ARE REVENUE I N NATURE. HE CONTENDED THAT CIT HAS FAILED TO APPRECIATE THAT EX PENDITURE TOWARDS ACQUISITION OF COPY RIGHTS WERE ALLOWED AS REVENUE EXPENDITURE TO THE ASSESSE/APPELLANT IN THE EARLIER YEARS ALSO. HE FUR THER CONTENDED THAT IT IS A WELL SETTLED LAW THAT EXPENDITURE TOWARDS A CQUISITION OF COPY RIGHTS IS REVENUE IN NATURE AND IS NOT TO BE CAPIT ALIZED. HE SUBMITTED THAT THE CASE OF THE ASSESSE/APPELLANT IS SQUARELY COVERED BY THE ORDERS OF THE OTHER BENCHES OF THIS TRIBUNAL IN THE CASES OF : I) SUPER CASSETTES INDUSTRIES P.LTD., VS. CIT (1992 ) 41 ITD 530 (DEL); II) M. SUBRAMANIAM VS. DCIT (1992) 42 ITD 676 (MAD) III) GRAMOPHONE CO.OF INDIA LTD. VS. DCIT (1994) 48 ITD 145 (CAL); IV) VENUS RECORDS & TAPE MFG. CO.(MUM); & V) TIPS CASSETTES & RECORD CO. VS. ACIT., (2002) 8 2 ITD 641(MUM). 7. ON THE OTHER HAND, THE LEARNED D.R. SUBMITTED TH AT THE ORDER PASSED BY THE CIT IS A WELL REASONED ORDER. HE FURT HER CONTENDED THAT THE CIT HAS RIGHTLY INVOKED THE PROVISIONS OF SECTI ON 263 OF THE ACT. THE BENEFITS/PROFITS FROM COPYRIGHTS ACQUIRED BY AS SESSEE FOR MUSIC CD & DVD ARE ENDURING IN NATURE. LEARNED D.R. FURTH ER SUBMITTED THAT THE EXPENDITURE INCURRED ON ACQUISITION OF COPYRIGH TS SHOULD BE CAPITALIZED AND THE ASSESSEE IS ENTITLED TO CLAIM D EPRECIATION ON THE SAME. I.T.A.NO1921/2012 C.O. 187/2012 :- 10 -: 8. IN SUPER CASSETTES INDUSTRIES P.LTD., (SUPRA) THE DELHI BENCH OF THE TRIBUNAL CAME TO THE CONCLUSION THAT ROYALTY PAID F OR OBTAINING RIGHTS OF REPRODUCTION OF AUDIO SOUND AND MUSIC FROM MASTER P LATE WAS ALLOWABLE AS REVENUE EXPENDITURE. THE ASSESSEE WAS ENGAGED IN BUSINESS OF MANUFACTURING PRE-RECORDED AUDIO AND VIDEO CASSETTE S AS ALSO BLANK AUDIO AND VIDEO CASSETTES, AKIN TO THE ASSESSEES C ASE. THE CONCERN PURCHASED MASTER PLATE BY WAY OF ASSIGNMENT OF COPY RIGHTS WHICH CONTAIN ORIGINAL SOUND-TRACK AND SONGS, REPRODUCED THE SAME INTO BLANK CASSETTES WITH THE HELP THEREOF AND SOLD THE SAME I N MARKET. THE CONCERN HERE HAD PAID THE CONSIDERATION MONEY PARTLY IN SHA PE OF A FIXED SUM INITIALLY AND PARTLY BY WAY OF PERCENTAGE OF SALE V ALUE OF THE RECORDED CASSETTES. FOR EVERY PRODUCER FROM WHOM THE MASTER PLATE WAS PURCHASED, THE PLATE WAS DIFFERENT. THE ASSESSEES CLAIM WAS THAT THE FINAL PRODUCT AS PRODUCED BY THE ASSESSEE WAS DIFFE RENT. FOR EVERY SERIES OF ITEM OF MUSIC SOUND ETC. WAS NEVER UNIFORM. THE CONTENTS OF THE PLATE WAS A DESIGN, FORMULA AND RAW MATERIAL ALL EMBEDDED INTO ONE. THE PLATE CANNOT BE TERMED AS OF CAPITAL NATURE. THE INITIAL LUMPSUM PAYMENT AND SUBSEQUENT REIMBURSEMENT IN THE FORM OF ROYALTY ON SALES WILL NOT CHANGE THE CHARACTER OF ITS EXPENDITURE BEING REVENUE IN N ATURE. THE HONBLE MEMBERS OF THE TRIBUNAL, DELHI BENCHES, FOLLOWING T HE JUDGEMENTS OF THE HONBLE SUPREME COURT IN THE CASE OF TRAVANCORE SUG ARS & CHEMICALS LTD., VS. CIT., (1966) 62 ITR 566(SC) GOTAN LIME SY NDICATE VS. CIT, (1966) 59 ITR718 (SC) AND EMPIRE JUTE MILLS CO.LTD. VS. CIT (1980) 124 ITR 1(SC) HELD THAT THE ROYALTY PAID INCLUDING THE COST WAS ON REVENUE ACCOUNT AND HENCE WAS FULLY ALLOWABLE AS DEDUCTION IN COMPUTING THE INCOME OF THE ASSESSEE. 9. IN THE CASE OF M.SUBRAMANIAM (SUPRA), THE CO-ORD INATE BENCH OF THIS TRIBUNAL HELD IN PARAGRAPH 12 AS UNDER:- 12. THE FACTS OF THE PRESENT CASE INDICATE THAT TH SONG WHICH THE ASSESSEE WAS PERMITTED TO RECORD IN THE CASSETT E WAS IN THE NATURE OF A BASIC RAW MATERIAL. THE RECORDED CASSET TE CONSISTED OF THE CASSETTE AND TAPE ON WHICH THE MUSIC WAS REC ORDED. THEREFORE, THE PRODUCTION OF THE RECORDED CASSETTE CANNOT BE COMPLETE UNLESS THE MUSIC IS RECORDED IN THE CASSET TE AND TOGETHER IT FORMS THE FINISHED PRODUCT. THE ROYALTY IS PAID ON THE PRICE OF EACH CASSETTE SOLD AND IS THEREFORE PRICE PAID FOR THE RAW MATERIAL EMBEDDED IN THE CASSETTE. THUS THE ROY ALTY PAID GOES INTO THE COST OF PRODUCTION AND VARIES WITH TH E QUANTITY OF CASSETTES PRODUCED. EVEN THOUGH THE LICENCE HAS BEE N GIVEN FOR THE DURATION OF THE COPYRIGHT, THE MANUFACTURE AND SALE OF THE CASSETTES ITSELF WILL DEPEND UPON THE POPULARITY OF THE SONGS WHICH IN THE CASE OF FILM SONGS MAY NOT LAST EVEN A YEAR. THUS THE RECURRING PAYMENT OF ROYALTY IS DEPENDENT UPON THE PRODUCTION AND SALE OF CASSETTES RECORDING THAT PAR TICULAR SONG AND THE LIABILITY IS THEREFORE UNCERTAIN AND VARIAB LE. SUCH AN UNCERTAIN AND VARIABLE PAYMENT CANNOT BE REGARDED A S A CAPITAL I.T.A.NO1921/2012 C.O. 187/2012 :- 11 -: EXPENDITURE. EVEN IF WE APPLY THE TEST OF ACQUISITI ON OF PROFIT MAKING APPARATUS AS AGAINST COST OF PERFORMING INCO ME EARNING, OPERATION, WE FIND THAT THIS FALLS UNDER THE SECOND CATEGORY. IF THE ASSESSEE HAD STEPPED INTO THE SHOES OF THE ORIG INAL OWNER AS AN ASSIGNEE AND EARNED INCOME BY GRANTING LICENC ES OF THE COPYRIGHT, THEN IT WOULD HAVE BEEN A CAPITAL OUTLAY . BUT AS LONG AS THE ASSESSEE ITSELF MANUFACTURES THE CASSETTES A ND PAYS ROYALTY DEPENDING UPON THE QUANTITY OF CASSETTES MA NUFACTURED, THE OUTLAY IS ONLY FOR THE INCOME EARNING OPERATION . THEREFORE, WE ARE FULLY CONVINCED THAT THE EXPENDITURE LAID OU T DID NOT GIVE THE ASSESSEE ANY ENDURING BENEFIT AND RESULTED ONLY IN A REVENUE EXPENDITURE. MOREOVER, THE OUTLAY WAS IN CO NSONANCE WITH THE ACTUAL PRODUCTION AND THEREFORE A PROPER I NPUT OF THE INCOME EARNING OPERATION. THUS, IT WAS CLEARLY A RE VENUE EXPENDITURE. WE FIND THAT SIMILAR VIEW HAS BEEN TAK EN ON IDENTICAL FACTS BY THE DELHI BENCH OF THIS TRIBUNAL IN THE CASE OF SUPER CASSETTES INDUSTRIES (P) LTD., IN ITA NO.3108 OF 1988 DATED 30.03.1992. 10. SIMILAR VIEWS WERE TAKEN BY THE KOLKATA AND MUM BAI BENCHES IN M/S. GRAMOPHONE CO. OF INDIA LTD., AND M/S. VENUS RECORDS & TAPE MFG. CO. RESPECTIVELY. IN THE CASE OF TIPS CASSETTES & RECORD COMPANY(SUPRA), THE MUMBAI BENCH OF THIS TRIBUNAL AFTER CONSIDERING THE TRIBUNAL JUDGEMENTS OF MUMBAI, DELHI, KOLKATA & CHENNAI BENCHES OBSERVED AS UNDER :- IN NUTSHELL, THE TRIBUNAL HELD THAT THE ASSESSEE WAS A DEALER OF MUSIC AND THE NATURE OF CAPITAL OR REVENUE VIS--VI S VARIOUS EXPENDITURE HAS TO BE CONSIDERED ON THIS POINT. SIN CE THE ASSESSEE WAS DEALER IN MUSIC, THE MASTER PLATE OR I N TURN THE RIGHTS WHICH ENABLE THE ASSESSEE TO OBTAIN THE MAST ER PLATE (ASSIGNMENT OF COPYRIGHTS) BECOME RAW MATERIAL OF T HE ASSESSEE. THE ASSESSEE SELLS MUSIC PURCHASED ON MAS TER PLATE AND TRANSMITS ON A DIFFERENT DEVICE CALLED CASSETTE OR RECORD. THE RAW MATERIAL, I.E. MASTER PLATE IS INTEGRAL PAR T OF THE PROFIT EARNING PROCESS AND NOT THE CAPITAL FIELD. UNDER TH ESE CIRCUMSTANCES, THE TRIBUNAL HELD THE SAME TO BE REV ENUE IN NATURE. 11. WE FIND THAT THE ISSUE INVOLVED IN THE PRESEN T CASE IS IDENTICAL TO THAT OF THE ABOVE REFERRED CASES. THEREFORE, RE SPECTFULLY FOLLOWING THE RATIO LAID DOWN BY THIS TRIBUNAL IN THE ABOVE C ITED CASES, WE ARE OF THE FIRM OPINION THAT THE LEARNED CIT HAS ERRED IN COMING TO THE CONCLUSION THAT THE EXPENDITURE INCURRED BY THE ASS ESSE/APPELLANT IN ACQUISITION OF AUDIO COPY RIGHTS AND CDS & DVD RIGH TS ARE NOT REVENUE EXPENDITURE AND HAVE TO BE CAPITALIZED. 12. THE CIT HAS FURTHER INVOKED THE PROVISIONS OF S ECTION 263 OF THE ACT ON THE PREMISE THAT ASSESSMENT ORDER DATED 30.1 0.2008 FOR THE I.T.A.NO1921/2012 C.O. 187/2012 :- 12 -: ASSESSMENT YEAR 2006-07 PASSED BY THE ASSESSING OFF ICER IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE RE VENUE. AFTER GOING THROUGH THE FACTS OF THE CASE AND FOLLOWING THE VIE W TAKEN BY THE CO- ORDINATE BENCHES OF THE TRIBUNAL, WE FIND THAT CIT WAS NOT CORRECT IN HOLDING THAT THE ASSESSMENT ORDER IS ERRONEOUS. FOR INVOKING THE PROVISIONS OF SECTION 263, THE TWIN CONDITIONS, NAM ELY I) ORDER OF THE ASSESSING OFFICER SOUGHT TO BE REVI SED IS ERRONEOUS; AND II) THE ORDER OF THE ASSESSING OFFICER IS PREJUDICI AL TO THE INTEREST OF THE REVENUE. HAVE TO BE SATISFIED. IF ONE OF THE ABOVE CONDITION S IS ABSENT, THE PROVISIONS OF SECTION 263(1) CANNOT BE INVOKED. IN THE INSTANT CASE THE FIRST CONDITION AS MENTIONED ABOVE IS NOT SATIS FIED. THE ORDER PASSED BY THE ASSESSING OFFICER WHICH HAS BEEN REVE RSED BY THE CIT IS NOT ERRONEOUS. 13. THE HONBLE SUPREME COURT IN THE CASE OF MALABA R INDUSTRIAL CO.LTD. VS. CIT, REPORTED AS (2000) 243 ITR 83(SC) HAS HELD AS UNDER:- THE PHRASE PREJUDICIAL TO THE INTERESTS OF THE RE VENUE HAS TO BE READ IN CONJUNCTION WITH AN ERRONEOUS ORDER PASSED BY THE ASSESSING OFFICER. EVERY LOSS OF REVENUE AS A CONSEQUENCE OF AN ORDER OF THE ASSESSING OFFICER CANNOT BE TREATED AS PREJUDICIAL TO THE INTERESTS OF THE REVENUE. FOR EXAMPLE, WHEN AN INCOME TAX OFFICE R ADOPTED ONE OF THE COURSES PERMISSIBLE IN LAW AND IT HAS RESULT ED IN LOSS OF REVENUE; OR WHERE TWO VIEWS ARE POSSIBLE AND THE IN COME TAX OFFICER HAS TAKEN ONE VIEW WITH WHICH THE COMMISSIONER DOES NOT AGREE, IT CANNOT BE TREATED AS AN ERRONEOUS ORDER PREJUDICIAL TO THE INTERESTS OF THE REVENUE, UNLESS THE VIEW TAKEN BY THE ITO IS UN SUSTAINABLE IN LAW. IT HAS BEEN HELD BY THIS COURT THAT WHERE A SU M NOT EARNED BY A PERSON IS ASSESSED AS INCOME IN HIS HANDS ON HIS SO OFFERING THE ORDER PASSED BY THE ASSESSING OFFICER ACCEPTING THE SAME AS SUCH WILL BE ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE. 14. IN THE PRESENT CASE, THE ASSESSING OFFICER IN H IS ASSESSMENT ORDER PASSED THE ORDER OF NIL ASSESSED INCOME AFTER GOING THROUGH THE RECORDS. THE CIT HAS FAILED TO FOLLOW THE WELL SETT LED LAW LAID DOWN BY THE TRIBUNAL IN SEVERAL CASES DISCUSSED ABOVE. THE EXPENDITURE INCURRED BY THE ASSESSEE FOR ACQUIRING AUDIO COPYRI GHTS AND CD, DVD RIGHTS IS REVENUE IN NATURE AND THUS HAS TO BE ALLO WED AS SUCH. IN VIEW OF THE ABOVE FINDINGS, WE HAVE NO HESITATION TO SET ASIDE THE ORDER OF THE CIT AND RESTORE THE ORDER OF THE ASSESSING OFFI CER. I.T.A.NO1921/2012 C.O. 187/2012 :- 13 -: 9. NO MATERIAL COULD BE BROUGHT ON RECORD BY THE DR T O SHOW THAT THE ORDER OF THE TRIBUNAL WHICH WAS RELIED ON BY THE CIT(A) TO ALLOW THE APPEAL OF THE ASSESSEE WAS VARIED IN APP EAL BY ANY HIGHER FORUM. WE, THEREFORE, DO NOT FIND ANY GOOD AND JUSTIFIABLE REASON TO INTERFERE WITH THE ORDER OF THE CIT(A) WHICH IS CON FIRMED AND THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE DISMISS ED. 10. IN THE CROSS OBJECTION FILED BY THE ASSESSEE, THE A.R SUBMITTED THAT THE ASSESSEE HAS SUPPORTED THE ORDE R OF THE CIT(A). THERE BEING NO GRIEVANCE AGAINST THE ORDER OF THE C IT(A), THE CROSS OBJECTION FILED BY THE ASSESSEE IS DISMISSED AS IN FRUCTUOUS. 11. IN THE RESULT, BOTH, THE APPEAL FILED BY THE RE VENUE AND THE CROSS OBJECTION FILED BY THE ASSESSEE ARE DISMISSE D. ORDER PRONOUNCED ON TUESDAY, THE 15 TH OF JANUARY, 2013 AT CHENNAI. SD/- SD/- (VIKAS AWASTHY) JUDICIAL MEMBER (N.S.SAINI) ACCOUNTANT MEMBER DATED: 15 TH JANUARY, 2013 RD COPY TO: APPELLANT/RESPONDENT/CIT(A)/CIT/DR