Delhi High Court
Commissioner Of Income Tax vs Shri Krishan Kumar on 2 December, 2014
Author: V. Kameswar Rao
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Judgment reserved on July 24, 2014
Judgment delivered on December 02, 2014
+ ITA 50/2000
COMMISSIONER OF INCOME TAX ..... Appellant
Versus
SHRI KRISHAN KUMAR ..... Respondent
+ ITA 69/2004
COMMISSIONER OF INCOME TAX ..... Appellant
Versus
M/S SUPER CASSETTES INDUSTRIES LTD... Respondent
+ ITA 457/2004
THE COMMISSIONER OF INCOME TAX ..... Appellant
Versus
M/S SUPER CASSETTES INDUSTRIES LTD... Respondent
+ ITA 460/2004
COMMISSIONER OF INCOME TAX ..... Appellant
versus
M/S SUPER CASSETTES INDUSTRIES LTD... Respondent
+ ITA 524/2004
COMMISSIONER OF INCOME TAX ..... Appellant
versus
M/S SUPER CASSETTES INDUSTRIES LTD... Respondent
+ ITA 576/2008
ITA No.50/2000 & connected appeals Page 1 of 33
COMMISSIONER OF INCOME TAX DELHI..... Appellant
versus
SUPER CASSETTES INDUSTRIES LTD. ..... Respondent
Through: Mr. Rohit Madan, Sr. Standing Counsel for
appellant/revenue.
Mr. Ajay Vohra,Sr.Adv. with Ms Kavita Jha and
Mr. Vaibhav Kulkarni, Advocates for
respondent/assessee.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE V.KAMESWAR RAO
V.KAMESWAR RAO, J.
1. This batch of appeals involves an identical substantial question of
law, whether the royalty paid is a revenue expenditure and thereby
should be allowed as a deduction. Insofar as the appeal being ITA No.
69/2004 is concerned, two additional questions have been framed and the
same would be referred and dealt with separately after answering the
question with regard to the nature of expenditure.
2. The appeals pertain to various Assessment Years, the details and
the deletion of additions as upheld by the Tribunal are given below:
Appeal Number Amount Assessment Year
ITA 50/2000 Rs.1,50,500/- 1989-90
ITA 69/2004 Rs.85,91,760/- 1989-90
ITA 457/2004 Rs.95,66,219/- 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
assets in the hands of the assessee. The producer had assigned full rights
to the assessee in consideration of payment of royalty. The Assessing
Officer referred to the agreement to hold that on payment of royalty, the
assessee acquired rights in respect of recording and for producing,
selling and public performance etc. The rights included the market
rights, whether and/or when to discontinue and recommence the sale of
records of the said work, and to fix and alter the price of such records
etc. The Assessing Officer added Rs. 1,50,500/- to the income, treating
the amount paid as payment on capital account.
6. In appeal, the Commissioner of Income Tax (Appeals) [CIT(A), in
short], relying upon his earlier order in the case of Super Cassettes
Industries Private Limited (Appeal No. 120/89-90) for the Assessment
Year 1986-87 held that the royalty payment was a revenue expenditure
because the recorded music was sold as a manufactured product. It was
observed that by and large, the songs for which the royalty was paid did
not have long life and majority of songs had short life and accordingly,
the addition made by the Assessing Officer of Rs. 1,50,500/- was
deleted.
7. In appeal filed by the appellant-Revenue, the Income Tax
Appellate Tribunal („Tribunal‟ in short) referred to its earlier judgment
in the case of Super Cassettes Industries Pvt. Ltd., [1992] 41 ITD 530
to upheld the order of the CIT(A).
ITA No. 457/2004
8. For the Assessment Year 1993-94, the following substantial
question of law was framed by this Court:
"Whether the ITAT was correct in law in deleting the
addition of Rs. 95,66,219/- made by the Assessing Officer
on account of royalty expenses paid by the assessee?"
Suffice to state that the said expenses on account of royalty were
disallowed by the Assessing Officer, being a capital account.
9. On appeal filed by the assessee, the CIT(A), relying upon its own
order for the Assessment Year 1990-91, 1991-92 and 1992-93 deleted
the addition so made by the Assessing Officer.
10. The appeal of the revenue before the Tribunal was dismissed.
ITA No. 460/2004
11. In this appeal, which pertains to the Assessment Year 1991-92, the
following substantial question of law was framed by this Court on
22.02.2005:
"Whether the ITAT was correct in law in deleting the
addition of Rs. 1,17,93,547/- made by the Assessing Officer
on account of 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 being a
revenue expenditure. The Assessing Officer, noticed that in the earlier
years, the issue had been decided in favour of the assessee, but the
department had not accepted the appellate decision. He added amount of
Rs. 54,31,061/- to the income, treating it as capital expenditure.
17. The CIT(A) on the issue of royalty followed the decision for the
Assessment Years 1990-91 and 1991-92 and deleted the addition as
made by the Assessing Officer.
18. On appeal, the Tribunal upheld the order of the CIT(A).
ITA No. 576/2008
19. In this appeal, which pertains to the Assessment Year 1994-95, the
following substantial question of law was framed by this Court on
30.07.2008:
"Whether the ITAT was correct in law in deleting the
addition of Rs. 1.2 Crores made by the Assessing Officer on
account of royalty expenses paid by the assessee by treating
it as capital expenditure?"
20. The expenses on royalty claimed by the assessee in the
Assessment Year in question was Rs. 1,01,87,761/-. The assessee had
based its claim on the decision of the Tribunal for the Assessment Year
1985-86. It was the case of the respondent-assessee that the company
was engaged in reproduction of audio sound and music from the master
plate provided by the film producers and distributors. This master plate
contained the original sound track of the film with whose help, the
assessee prepared audio cassettes for sale. It was claimed that after the
marketing of the cassettes, the master plate became useless and as such,
its life was very short. On this ground, the master plate was linked to a
licence granted for a specific period for manufacture. The respondent-
assessee relied upon the ruling of the Supreme Court in Gotan Lime
Syndicate Vs. CIT, [1966] 59 ITR 718. It was also stressed that the
payment of royalty was related to annual profits and therefore was
revenue in nature. The Assessing Officer for the following reasoning
concluded that the payment of royalty was a capital expense:
"a) The assessee acquires a source of its stock in trade
by acquiring rights of films and audio cassettes for use
in its home produced blank audio & video cassettes.
b) The master plates or U-matics do not become useless
since following that analogy all over the world classical
films and records of the last century should have
vanished. The master tape is utilized to create further
master tapes which are utilized 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.
21. On appeal, the CIT(A) deleted the addition made by the Assessing
Officer by holding as under:
"1.3 I have carefully considered the matter. I
have also gone through the reasons given by the Ld.
Assessing Officer in his assessment order to treat this
expenditure as capital expenditure. I find that the Ld.
Officer has gone to a lot of pains to analyse the various
ingredients of the transaction involving transfer of film or
audio rights. At the same time, I find that CIT(A)-IX, New
Delhi had also made detailed analysis of the various facts
of this transaction and after an exhaustive discussion of
all the aspects he held that the royalty was allowable as
revenue expenditure. This view was also approved by the
ITAT Delhi Bench „A‟ in the appellant‟s own case for
assessment year 1985-86. In the present case before me,
it is seen Assessing Officer has not brought any fresh facts
which had not been considered either by the CIT(A) or by
the ITAT in coming to the above decision. In the
circumstances, I find no reason for diverging from the
above decision. In the result, the appellant succeeds on
this ground of appeal".
22. The Tribunal, relying upon its own judgment in the assessee‟s own
case reported in [1992] 41 ITD 530, which has already been referred to
above, has upheld the order of the CIT(A) in deleting the disallowance.
ITA No. 69/2004
23. The following substantial questions of law were framed by this
Court in this appeal:
"i) Whether ITAT order was correct in law in deleting the
addition of Rs. 85,91,760/- made by the Assessing Officer
on account of royalty expenses paid by the assessee?
ii) Whether the ITAT was correct in law by deleting an
addition of Rs. 2,32,900/- on account of purchase of
carpets by treating it as revenue expenditure?
iii) Whether ITAT was correct in law in deleting an
addition of Rs. 2,13,801/- claimed to have been spent by
Bombay Video Division despite the fact that the business
activities of this unit had not started till the end of the
assessment year in question?"
24. The return of income for the Assessment Year 1989-90, was filed
on 27.03.1991 declaring „Nil‟ income. The assessment order was passed
on 27.03.1992. During the course of assessment proceedings, the
Assessing Officer noticed that assessee had claimed Rs. 85,91,760/- as
revenue expenditure on account of payment made 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 appeals before the Tribunal. The Tribunal, vide impugned
order dated 18.02.2003 allowed relief to the assessee in respect of carpet
payment, and on other issue, dismissed the appeal of the revenue.
27. Mr. Rohit Madan, learned counsel for the revenue would submit
that the Tribunal has erred in treating the expenditure on account of
royalty as revenue expenditure, for that, royalty expenditure was for
getting advantage of enduring nature. The objective of the expenditure
was to acquire rights which were in the nature of permanent assets in the
hands of the assessees. According to him, the assessees-respondents got
the rights in respect of recording, producing, selling and public
performance etc. including the right to decide whether and/or when to
discontinue and recommence the sale of records of the said works and to
fix and alter the price of such records etc. He would state that the life of
the music is enduring as the old songs and music are still very popular
and popularity of good music cannot be bound by time. He would state
that even though, for an earlier assessment year, the ITAT had decided in
favour of the assessees, the judgment has not been accepted and has been
challenged in this Court. He would rely upon the judgment of the ITAT
reported as [2002] 82 ITD 641 (Mum), TIPS Cassettes and Record
Company Vs. Assistant Commissioner of Income Tax, more
specifically para 27.
28. On the other hand, Mr.Ajay Vohra, learned counsel appearing for
the respondents-assessees would state that the assessees were engaged in
reproduction of audio sound and music from the master plate provided
by the film producers and distributors. This master plate was said to
contain the original sound track of the film with whose help the assessee
prepares audio cassettes for sale. It was claimed that after the marketing
of the cassettes, the master plate became useless and as such, its life was
very short. According to him, the master plate was like a licence granted
from a specific period for manufacture. It was stressed that the payment
of royalty was related to annual profit and therefore, revenue in nature.
He would also state that for every new music recording, a totally
different plate was required. He states that the plate was embedded with
the music and as a raw material, was a revenue expense. According to
him, the manner of payment for the plate would not make any difference
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 assessee was M/s. Super Cassettes
Industries Ltd. and the said reference was made by the Tribunal to this
Court on identical issue. We had accordingly called for the record of ITR
301/1994. We have perused different orders passed by this Court. We
note that the said reference was not answered keeping in view that the
tax effect in that case was less than Rs.10 lakhs. We further note that a
Review Petition No. 574/2011 was filed by the revenue which was listed
on 30.09.2011 when the same was withdrawn with liberty to file a fresh
application in terms of the orders passed by the Supreme Court in CC
No. 13964/2011 titled as CIT (Central) III Vs. Surya Herbal Ltd. dated
29.08.2011. It appears that no action was taken by the revenue for filing
fresh application. Suffice to note that the said reference pertains to the
AY 1985-86. It also appears that based on the order of the Tribunal in
the reference case, which pertains to the AY 1985-86, the royalty
payment in the subsequent assessment years has been treated as revenue
expenditure.
30. It is necessary to note here that none of the parties to these appeals
have filed copy of agreement executed between the respondent-assessees
and the producers/owners of the original copy right. Revenue being the
appellant, if they wanted to rely upon the document should have filed the
same. We accordingly proceed to answer the questions, as per the facts
recorded by the Tribunal. Having already referred to the issue(s) which
falls for our consideration in these appeals, we proceed to note the
position of law.
31. In Empire Jute Co. case (supra), the Supreme Court while
dealing with the facts wherein the assessee was engaged in the business
of manufacture of jute, and was a member of the Jute Mills Association,
which was formed on the object of inter alia protecting trade of its
members by regulating production in the mills. In pursuance thereto, the
members had entered into a working time agreement whereby the
number of working hours per week for which the mills were entitled to
work their looms to their full capacity was capped, as there was
overcapacity but lower demand. This restriction had the effect of
limiting the production and consequently the profits, which the assessee
could earn. Under the same agreement, one mill could transfer loom
hours to another for consideration, subject to conditions. Thus, purchase
of loom hours 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 said expenditure was in the line of existing
manufacture. It was a lumpsum payment but the expenditure was held to
be revenue in nature, primarily on the ground that it was incurred for the
purpose of day to day business, which was manufacture of penicillin, and
therefore was not for a new venture, unconnected and different from the
existing business. Secondly, rapid strides in science and technology in
the field of medicine cannot be readily pigeon holed as capital outlay.
From the reading of both the judgments, the following principles
emerge:-
(i) There may be cases where expenditure, even if incurred
for obtaining advantage of enduring benefit, may,
nonetheless be on revenue account and the test of
enduring benefit may break down.
(ii) It is not every advantage of enduring nature acquired
by an assessee that brings the case within the principles
laid down in the enduring benefit test.
(iii) If the advantage consists of merely in facilitating the
assessees‟ trading operations or enabling the management
or conduct of assessees‟ business to be carried on more
efficiently or more profitably while leaving the fixed
capital untouched, the expenditure would be on revenue
account, even though, the advantage may endure for an
indefinite period.
(iv) The test of enduring benefit is not conclusive and
cannot be applied blindly and mechanically without regard
to particular facts and circumstances of a given case.
(v) The idea of „once for all‟ payment and „enduring
benefit‟ are not to be treated as something akin to statutory
conditions, nor are the notions of the capital or revenue, a
judicial fetish. What is capital expenditure and what is
revenue expenditure are not eternal varieties but must
needs be flexible so as to respond to the changing
economic realities of the business. The expression „asset
or advantage of an enduring nature‟ was evolved to
emphasize the element of a sufficient degree of durability,
appropriate to the context.
32. In Travancore Sugars and Chemicals Ltd. Vs. CIT, [1966] 62
ITR 566 (SC), the assessee company acquired certain government
concerns and was made liable to pay to the government a part of profit
share every year. It was held that since the annual payment was for an
indefinite period of time unrelated to the capital value of the assets or a
fixed purchase consideration, the expenses 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 and dispose of sand which was lying on the
surface of river bed without excavation or skilful extraction. The said
expenditure was held to be revenue in character, even though, the
interest of land was also conveyed. The decisive factor was the object for
which the lease was taken and the nature of payment, when and while
obtaining the lease. In Gotan Lime Syndicate's case (supra), the
Supreme Court dealt with a case where the assessee firm which carried
on the business of manufacturing lime from limestone, was granted
under a lease the right to excavate lime-stones in certain areas. On expiry
of lease, the same was extended for short periods. On a change of
policy, 15 square miles of lime deposits were sanctioned to the assessee
on October 4, 1954. Between the period July, 1952 to the date the new
lease was to be given effect, a fixed royalty of Rs. 96,000/- per annum
had to be paid on the basis of dead rent. The assessee could not carry
away any other mineral which might be found in the area and he was
further allowed to go on the land and win them. Payments were finalized
by Mining Engineer who fixed the royalty at Rs. 96,000/- per year as the
royalty fixed by the rules was far less than that figure. For each
assessment years between 1954 to 1957, the assessee paid an amount of
Rs. 96,000/- to the government and claimed it to be revenue deduction.
In the absence of material to show that any part of royalty had to be
treated as premium and referable to the acquisition of mining lease, the
royalty payment included the dead rent had relation only to the lime
deposits to be got and were therefore treated as revenue expenditure.
Although, the assessee did derive an advantage; assuming that advantage
was to last at least for a period of five years, there was no payment once
for all. The royalty was not a direct payment for securing an enduring
advantage; it had relation to the raw material to be obtained. The reason
why royalty was allowed as revenue expenditure was the relation it had
to the amount of raw material to be excavated or extracted. You take
more, the more royalty you pay.
33. A Division Bench of this Court in the judgment reported as
Commissioner of Income Tax Vs. J.K. Synthetics Limited, [2009] 309
ITR 371 (Delhi) after referring to various judgments of the Supreme
Court and various High Courts, has summarized the broad principles, as
under:
"(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 which is
required to be drawn is, whether the expense has been
incurred to do away with, what is a recurring expense
for running a business, as against, an expense
undertaken for the benefit of the business as a whole;
(iv) an expense incurred for acquisition of a source of
profit or income would in the absence of any contrary
circumstance, be in the nature of capital expenditure.
As against this, an expenditure which enables the profit
making structure to work more efficiently leaving the
source or the profit making structure untouched, would
be in the nature of revenue expenditure. In other words,
expenditure incurred to fine tune trading operations to
enable the management to run the business effectively,
efficiently and profitably leaving the fixed assets
untouched would be an expenditure of a revenue nature
even though the advantage obtained may last for an
indefinite period. To that extent, the test of enduring
benefit or advantage could be considered as having
broken down;
(v) expenditure incurred for grant of License which
accords 'access' to technical knowledge, as against,
'absolute' transfer of technical knowledge and
information would ordinarily be treated as revenue
expenditure. In order to sift, in a manner of speaking,
the grain from the chaff, one would have to closely look
at the attendant circumstances, such as:
(a) the tenure of the Licence.
(b) the right, if any, in the licensee to create
further rights in favour of third parties,
(c) the prohibition, if any, in parting with a
confidential information received under the
License to third parties without the consent of
the licensor,
(d) whether the Licence transfers the 'fruits of
research' of the licensor, 'once for all',
(e) whether on expiry of the Licence the
licensee is required to return back the plans
and designs obtained under the Licence to the
licensor even though the licensee may continue
to manufacture the product, in respect of,
which 'access' to knowledge was obtained
during the subsistence of the Licence.
(f) whether any secret or process of
manufacture was sold by the licensor to the
licensee. Expenditure on obtaining access to
such secret process would ordinarily be
construed as capital in nature;
(vi) the fact that assessee could use the technical
knowledge obtained during the tenure of the License for
the purposes of its business 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, non-
assignable right and authority to duplicate on appropriate carrier media
software products and other products retaining the ownership of the
copyrights in the software and all associated and Intellectual property
rights in the products. The agreements stipulated that the appellant shall
duplicate and reproduce the software in India and sub-licence the same
as per the terms of the sub-licence deed stipulated and with the holding
company retaining the entire data/intellectual property rights in the
software. The assessee was to pay royalty to the holding company @
30% of the list price of the licenced products as prescribed in the Indian
published price fixed in consultation with the licensor. Apart from the
royalty, some other amounts were to be paid by the assessee. The
question arose, whether the business expenditure was capital or revenue
in character. This Court, after referring to the various judgments
including some referred above, has held as under:
"As noticed above, in the present case the appellant is
duplicating software and sells the same to generate income.
It requires master copies, which have to be updated and
upgraded to be able to sell the said software. In case the
appellant had imported the said software and sold the
same, it would be stock in trade and deductible. However,
when the master copies were used for duplication and the
software replicated and transferred on the media as a result
of the said activities was then sold, the master copy itself
might not be stock in trade as such in strict sense, but it did
not have a long life and its value and life span was small
since it perished and diminished when the upgraded version
or a better software in form of the next master copy was
imported, for the purpose of duplication. When we accept
the said position, the requirement of enduring benefit fails
and it cannot be said that any capital asset was acquired or
purchased. In these circumstances, we need not apply and
go into the other test or caveats. The flaw and the error
committed by the tribunal is that they applied other tests or
caveats without first ascertaining and determining whether
enduring benefit test is satisfied or not. The enduring test
may not be the sole, exclusive or universal test but is
considered to be the primary test".
34. We note that with regard to one of the assessees in this batch of
appeals namely Super Cassettes Industries Ltd. for the Assessment Year
1987-88, an identical issue was decided by the Delhi Bench of ITAT, 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 plate
could be termed as the raw material, formula etc. For
every master plate provided to the assessee, except for
the similarity of the blank plate, all other factors, such
as music, sound, dialogue are very different. The activity
of the assessee is basically that of a jobber, who carries
on the functions of job-work, on the material provided
or on the material prescribed to it by the owner. In the
instant case, the assessee is allowed to use its own tapes,
gramophone records manufactured by it, for filling them
up with the sound contained in the master plate. The
content of the plate is a design, the formula, raw
material all embedded into one. The plate in these
circumstances could not be termed to be of capital
nature. The initial payment of lump sum also does not
change its basic character as elucidated above. The
recurring payment dependent upon the sales also
indicates that, the royalty would become due only when
the product so made are sold and therefore, what is
dependent upon an uncertain happening could not be on
capital account at all. The recurring payment is similar
in nature to the royalty or dead rent paid for the
extraction of limestone from the quarries, as has been
held by the Supreme Court in Gotan Lime Syndicate‟s
case. We are therefore of the opinion that, the royalty
paid including the cost of the plate is on revenue
account and hence fully allowable as deduction in
computing the income from business".
35. Insofar as the case in hand is concerned, we note, the issue pertains
to two types of payment. The first one is a fixed amount or a lump sum
payment for the master plate and copyright in the music and the second,
being royalty which is recurring in nature, depending upon the quantum
of sale i.e. volume of sales generated by a particular record/cassettes of
an album/song. First, dealing with the fixed amount expenditure, the
question would arise whether the same has an enduring benefit. If the
enduring benefit test is fulfilled, the conclusion possible could be that the
payment was for acquiring a capital asset and expenditure related to it is
capital expenditure. But the enduring test could break down for good
valid reasons. For good reasons, this test need not be applied as a test to
determine the nature of expenditure. The admitted position is that the
assessees are in the business related to manufacture and sale of music
cassettes. 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 like the music director, type of music, the singer etc. These facts
and factors have not been adverted to and elucidated in the assessment
orders, as the Assessing Officer with foreordained commitment
disallowed the entire expenditure, unmindful that possibly, it would
difficult to sustain the entire addition. Order of remit, after a long time
gap would have difficulties. Proceeding on the premise that 5% of the
expenditure on the plate etc. had enduring benefit, to that extent, the
expenditure could be considered as a capital expenditure, we are not
inclined to interfere and partially reverse the final outcome. The capital
amount or asset so created would be of a minuscule value and there
would be a minimal tax effect. Question of depreciation would arise. The
position stood settled over these years. Any order at variance would
unsettle the settled position. In the facts of the case, this Court is of the
view that accounts should not be re-written because of the smallness and
minimum tax effect.
36. Coming to the royalty paid to the producers on the sales effected,
it must be held that the same is a revenue expenditure, moreso, when it is
clear that the main business of the assessees was manufacture of blank
cassettes and pre-recorded cassettes. The purchase of music rights and
reproducing is the purpose of its business. The royalty payment for the
cassettes sold is an expenditure in relation to the business activity of the
assessee and on this ground and reason, should be regarded as revenue
expenditure. It was an expenditure incurred in the normal course of
business and was related to the revenue generated and payable
accordingly. It did not secure and add to value or create any new capital
asset.
37. The substantial question of law at serial no. 1 is thus decided in
favour of the respondent-assessees and against the appellant-revenue.
38. Since two more substantial questions of law arise for consideration
in ITA No. 69/2004, we proceed to decide the said questions, which
read:-
"ii) Whether the ITAT was correct in law by deleting an
addition of Rs. 2,32,900/- on account of purchase of
carpets by treating it as revenue expenditure?
iii) Whether ITAT was correct in law in deleting an
addition of Rs. 2,13,801/- claimed to have been spent by
Bombay Video Division despite the fact that the business
activities of this unit had not started till the end of 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 be replaced at frequent intervals. As
has been held in the case of Shri Hari Mills Pvt. Ltd.
reported in 237 ITR 188. The expenditure on
replacement could not be treated as capital expenditure.
The replacement, renewals and repair were to keep the
business going on and the amount expended was for the
purpose of continuing the business without breakdown
and such expenditure has to be held to be revenue in
nature. We, therefore, reverse the finding of the CIT(A)
and direct the AO to allow the deduction of expenditure
incurred on carpets. Depn., if any allowed, has to be
withdrawn".
40. On the basis of above, for the assessment year in question i.e.
1989-90, it was held that the expenditure incurred for the purchase of
carpet was revenue expenditure. It was a replacement costs and in the
nature of current repairs. From the above, we note that the Tribunal has
relied upon judgment reported as [1999] 237 ITR 188 (Mad) in Shri
Hari Mills Pvt. Ltd., wherein, it was held that the expenditure on
replacement could not be treated as capital expenditure and having
recorded a finding of fact that the life of the carpets is very short and
have to be replaced at frequent intervals, we are of the view that the
conclusion of the Tribunal is not perverse and the same is justified. The
question of law is, therefore, decided in favour of the respondent
assessee and against the appellant revenue.
41. Insofar as the issue whether the Tribunal was right in deleting an
addition of Rs. 2,13,801/- claimed to have been spent by the Bombay
video division despite the fact that the business activities of this unit had
not commenced/set up till the end of the assessment year in question, is
concerned, the factual findings of the Assessing Officer were not
accepted in the appellate orders. The Assessing Officer, while making
disallowance of the said amount had observed that the expenditure was
not admissible as deduction since it pertained to the video division in
Bombay as the assessee has not started activities in this division in
Bombay and the expenses are in the nature of pre-operative expenses.
The CIT(Appeals) reversed the factual finding of the Assessing Officer
on the ground that the assessee was engaged in the manufacture of audio
and video cassettes both blank and recorded, therefore, the video film
division was closely linked up with the said business activity. The
purpose of making video film was to increase the market of the video
cassettes. The direct expenses linked to video movies was treated as a
part of the stock in trade. The nature of expenses consist of salaries and
wages, selling, distribution and administrative expenses etc. and the
same could be claimed as a business expenditure because the video
division at Bombay was closely linked with the day to day business
activity of the assessee, being undertaken. The expenditure as such was
not to procure or purchase an equipment or machinery. The expenses
were in the nature of salary, wages to employees, selling, distribution
and administrative expenses. The Tribunal upheld the said conclusion of
the CIT(Appeals) on the ground that the expenses incurred are purely
revenue in nature. We agree with the conclusion of the Tribunal. That
apart, the tax effect is very low. The question of law is accordingly
decided in favour of the respondent assessees and against the appellant-
revenue.
42. In view of our aforesaid discussion, the appeals stand dismissed
with no order as to costs.
(V.KAMESWAR RAO)
JUDGE
(SANJIV KHANNA)
JUDGE
DECEMBER 02, 2014/akb
