Commissioner Of Income tax v. Shri Krishan Kumar
[Citation -2014-LL-1202-3]

Citation 2014-LL-1202-3
Appellant Name Commissioner Of Income tax
Respondent Name Shri Krishan Kumar
Court HIGH COURT OF DELHI AT NEW DELHI
Relevant Act Income-tax
Date of Order 02/12/2014
Assessment Year 1989-90
Judgment View Judgment
Keyword Tags business activity • business expenditure • capital asset • capital expenditure • enduring advantage • expenditure on replacement • holding company • intellectual property • job-work • know-how • lump sum payment • mining lease • music director • payment of royalty • product manufactured • public performance • raw material • reproduction of audio sound and music • revenue expenditure • revenue nature • royalty expenses • sound track • subsidiary company • substantial question of law • tax effect • technical know-how • technical knowledge
Bot Summary: 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. According to ITA No.50/2000 connected appeals Page 12 of 33 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. What is capital expenditure and what is revenue expenditure are not eternal varieties but must ITA No.50/2000 connected appeals Page 17 of 33 needs be flexible so as to respond to the changing economic realities of the business. A Division Bench of this Court in the judgment reported as Commissioner of Income Tax Vs. J.K. Synthetics Limited, 2009 309 ITR 371 after referring to various judgments of the Supreme Court and various High Courts, has summarized the broad principles, as under: ITA No.50/2000 connected appeals Page 20 of 33 the expenditure incurred towards initial outlay of business would be in the nature of capital expenditure 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; it is the aim and object of expenditure, which would, determine its character and not the source and manner of its payment; 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 Courts have held that this, by itself, cannot ITA No.50/2000 connected appeals Page 22 of 33 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; 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. 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.


* IN 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 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 identical substantial question of law, whether royalty paid is revenue expenditure and thereby should be allowed as deduction. Insofar as appeal being ITA No. 69/2004 is concerned, two additional questions have been framed and same would be referred and dealt with separately after answering question with regard to nature of expenditure. 2. appeals pertain to various Assessment Years, details and deletion of additions as upheld by 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 & connected appeals Page 2 of 33 ITA No. 50/2000 3. In this appeal, following substantial question of law was framed by this Court: Whether ITAT and CIT(A) are correct in law in treating expenditure on account of royalty as revenue expenditure? 4. assessee had income from two proprietorship concerns; one, M/s. Krishna International and other M/s. Shree Krishna Pictures. business of M/s. Krishna International was manufacturing of Audio Cassettes (blank and recorded) and its components and manufacturing of blank video cassettes and business of M/s. Shree Krishna Pictures was distribution of feature films. During Assessment Year, M/s. Krishna International had shown gross profit of Rs. 34,27,224/- on total sales of Rs. 1,17,15,875/-/-. Insofar as expenses shown against royalty, Rs. 1,50,500/- was debited as revenue expenditure. 5. Assessing officer was of view that royalty expenditure was for acquiring asset of enduring nature. objective of expenditure was to procure rights which were in nature of permanent assets in hands of assessee. producer had assigned full rights to assessee in consideration of payment of royalty. Assessing Officer referred to agreement to hold that on payment of royalty, assessee acquired rights in respect of recording and for producing, ITA No.50/2000 & connected appeals Page 3 of 33 selling and public performance etc. rights included market rights, whether and/or when to discontinue and recommence sale of records of said work, and to fix and alter price of such records etc. Assessing Officer added Rs. 1,50,500/- to income, treating amount paid as payment on capital account. 6. In appeal, Commissioner of Income Tax (Appeals) [CIT(A), in short], relying upon his earlier order in case of Super Cassettes Industries Private Limited (Appeal No. 120/89-90) for Assessment Year 1986-87 held that royalty payment was revenue expenditure because recorded music was sold as manufactured product. It was observed that by and large, songs for which royalty was paid did not have long life and majority of songs had short life and accordingly, addition made by Assessing Officer of Rs. 1,50,500/- was deleted. 7. In appeal filed by appellant-Revenue, Income Tax Appellate Tribunal ( Tribunal in short) referred to its earlier judgment in case of Super Cassettes Industries Pvt. Ltd., [1992] 41 ITD 530 to upheld order of CIT(A). ITA No. 457/2004 8. For Assessment Year 1993-94, following substantial question of law was framed by this Court: ITA No.50/2000 & connected appeals Page 4 of 33 Whether ITAT was correct in law in deleting addition of Rs. 95,66,219/- made by Assessing Officer on account of royalty expenses paid by assessee? Suffice to state that said expenses on account of royalty were disallowed by Assessing Officer, being capital account. 9. On appeal filed by assessee, CIT(A), relying upon its own order for Assessment Year 1990-91, 1991-92 and 1992-93 deleted addition so made by Assessing Officer. 10. appeal of revenue before Tribunal was dismissed. ITA No. 460/2004 11. In this appeal, which pertains to Assessment Year 1991-92, following substantial question of law was framed by this Court on 22.02.2005: Whether ITAT was correct in law in deleting addition of Rs. 1,17,93,547/- made by Assessing Officer on account of royalty expenses paid by assessee? 12. assessee company had debited profit and loss account by amount of Rs. 1,29,76,564/- claiming royalty expenses as revenue expenditure. Assessing Officer disallowed amount of Rs. 1,17,93,547/-, observing that it was in nature of capital expenditure. 13. CIT(A), relying upon appeal for Assessment Year 1990-91, directed Assessing Officer to follow observations made ITA No.50/2000 & connected appeals Page 5 of 33 therein. In other words, addition was deleted. 14. appeal filed by revenue was dismissed and order of CIT(A) was upheld by ITAT. ITA No. 524/2004 15. In this appeal, which pertains to Assessment Year 1992-93, following substantial question of law was framed by this Court on 28.02.2005: Whether ITAT was correct in law in deleting addition of Rs. 54,31,061/- made by Assessing Officer on account of royalty expenses paid by assessee? 16. Assessing Officer had noticed that amount of Rs. 54,31,061/- has been debited to profit and loss account. On explanation sought by Assessing Officer, respondent-assessee asserted that royalty paid should be deducted from income being revenue expenditure. Assessing Officer, noticed that in earlier years, issue had been decided in favour of assessee, but department had not accepted appellate decision. He added amount of Rs. 54,31,061/- to income, treating it as capital expenditure. 17. CIT(A) on issue of royalty followed decision for Assessment Years 1990-91 and 1991-92 and deleted addition as made by Assessing Officer. 18. On appeal, Tribunal upheld order of CIT(A). ITA No.50/2000 & connected appeals Page 6 of 33 ITA No. 576/2008 19. In this appeal, which pertains to Assessment Year 1994-95, following substantial question of law was framed by this Court on 30.07.2008: Whether ITAT was correct in law in deleting addition of Rs. 1.2 Crores made by Assessing Officer on account of royalty expenses paid by assessee by treating it as capital expenditure? 20. expenses on royalty claimed by assessee in Assessment Year in question was Rs. 1,01,87,761/-. assessee had based its claim on decision of Tribunal for Assessment Year 1985-86. It was case of respondent-assessee that company was engaged in reproduction of audio sound and music from master plate provided by film producers and distributors. This master plate contained original sound track of film with whose help, assessee prepared audio cassettes for sale. It was claimed that after marketing of cassettes, master plate became useless and as such, its life was very short. On this ground, master plate was linked to licence granted for specific period for manufacture. respondent- assessee relied upon ruling of Supreme Court in Gotan Lime Syndicate Vs. CIT, [1966] 59 ITR 718. It was also stressed that payment of royalty was related to annual profits and therefore was ITA No.50/2000 & connected appeals Page 7 of 33 revenue in nature. Assessing Officer for following reasoning concluded that payment of royalty was capital expense: a) assessee acquires 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) master plates or U-matics do not become useless since following that analogy all over world classical films and records of last century should have vanished. master tape is utilized to create further master tapes which are utilized in production. high speed duplicators and sound recording equipment does away with need of pristine master record. c) life of master record or U-matics is not transient. T-Series group itself is known for its remix cassettes of old Hindi Songs which have survived so far. d) master plates and U-matics are not stock in trade but are source of stock in trade. assessee does not sell them as such, hence expenses are capital expenses. e) assessee is not required to pay any recurring amount for case of master plates, records or film prints. Therefore no revenue element is involved as in case of Gotan Lime Syndicate Vs. CIT (1996) referred above. f) asset acquired by assessee is of durable nature and generates incomes. g) assessee and T-Series group enjoy near monopoly over regional songs and Hindustani song cassettes and royalty to artistes is not paid per piece. All payments are lump sum and assessee gets to produce mix or remix versions or versions cassettes at its own leisure. ITA No.50/2000 & connected appeals Page 8 of 33 Assessing Officer accordingly added amount paid to income of respondent-assessee, as capital expenditure. 21. On appeal, CIT(A) deleted addition made by Assessing Officer by holding as under: 1.3 I have carefully considered matter. I have also gone through reasons given by Ld. Assessing Officer in his assessment order to treat this expenditure as capital expenditure. I find that Ld. Officer has gone to lot of pains to analyse various ingredients of transaction involving transfer of film or audio rights. At same time, I find that CIT(A)-IX, New Delhi had also made detailed analysis of various facts of this transaction and after exhaustive discussion of all aspects he held that royalty was allowable as revenue expenditure. This view was also approved by ITAT Delhi Bench in appellant s own case for assessment year 1985-86. In present case before me, it is seen Assessing Officer has not brought any fresh facts which had not been considered either by CIT(A) or by ITAT in coming to above decision. In circumstances, I find no reason for diverging from above decision. In result, appellant succeeds on this ground of appeal . 22. Tribunal, relying upon its own judgment in assessee s own case reported in [1992] 41 ITD 530, which has already been referred to above, has upheld order of CIT(A) in deleting disallowance. ITA No. 69/2004 23. following substantial questions of law were framed by this Court in this appeal: ITA No.50/2000 & connected appeals Page 9 of 33 i) Whether ITAT order was correct in law in deleting addition of Rs. 85,91,760/- made by Assessing Officer on account of royalty expenses paid by assessee? ii) Whether ITAT was correct in law by deleting 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 addition of Rs. 2,13,801/- claimed to have been spent by Bombay Video Division despite fact that business activities of this unit had not started till end of assessment year in question? 24. return of income for Assessment Year 1989-90, was filed on 27.03.1991 declaring Nil income. assessment order was passed on 27.03.1992. During course of assessment proceedings, 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. Assessing Officer held that this expenditure was capital in nature and accordingly made addition of this amount by disallowing expenditure. Similarly, Assessing Officer rejected addition of Rs. 2,32,900.13/- made by assessee for purchasing carpets by treating it as capital in nature. assessee had also claimed 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 Assessing Officer that commercial activities had not started at Video Division in Bombay as such this expenditure was not allowable. ITA No.50/2000 & connected appeals Page 10 of 33 25. Against order of Assessing Officer, assessee filed appeal before CIT(A) on issue of royalty payment as well as on issue of expenses incurred on carpets. CIT(A) followed orders for earlier years, treating royalty payment as revenue in nature. Expenses incurred by Bombay Video Division were also allowed but disallowance of payment for purchase of carpets was affirmed by CIT(A). 26. Against order of CIT(A), both revenue and assessee had filed cross appeals before Tribunal. Tribunal, vide impugned order dated 18.02.2003 allowed relief to assessee in respect of carpet payment, and on other issue, dismissed appeal of revenue. 27. Mr. Rohit Madan, learned counsel for revenue would submit that Tribunal has erred in treating expenditure on account of royalty as revenue expenditure, for that, royalty expenditure was for getting advantage of enduring nature. objective of expenditure was to acquire rights which were in nature of permanent assets in hands of assessees. According to him, assessees-respondents got rights in respect of recording, producing, selling and public performance etc. including right to decide whether and/or when to discontinue and recommence sale of records of said works and to fix and alter price of such records etc. He would state that life of ITA No.50/2000 & connected appeals Page 11 of 33 music is enduring as 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 earlier assessment year, ITAT had decided in favour of assessees, judgment has not been accepted and has been challenged in this Court. He would rely upon judgment of 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 other hand, Mr.Ajay Vohra, learned counsel appearing for respondents-assessees would state that assessees were engaged in reproduction of audio sound and music from master plate provided by film producers and distributors. This master plate was said to contain original sound track of film with whose help assessee prepares audio cassettes for sale. It was claimed that after marketing of cassettes, master plate became useless and as such, its life was very short. According to him, master plate was like licence granted from specific period for manufacture. It was stressed that payment of royalty was related to annual profit and therefore, revenue in nature. He would also state that for every new music recording, totally different plate was required. He states that plate was embedded with music and as raw material, was revenue expense. According to ITA No.50/2000 & connected appeals Page 12 of 33 him, manner of payment for plate would not make any difference and expenditure incurred for procuring plate embedded with music was surely for revenue generation and cannot be termed as capital expenditure. Cost of plate cannot be capital expense. Even music rights would be revenue expense, as music software is not enduring in nature. He would rely upon 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 submissions made by learned counsel for parties, at outset, we note that during submissions, reference was made to reference case No. ITR 301/1994 decided by ITA No.50/2000 & connected appeals Page 13 of 33 this Court wherein, one of assessee was M/s. Super Cassettes Industries Ltd. and said reference was made by Tribunal to this Court on identical issue. We had accordingly called for record of ITR 301/1994. We have perused different orders passed by this Court. We note that said reference was not answered keeping in view that tax effect in that case was less than Rs.10 lakhs. We further note that Review Petition No. 574/2011 was filed by revenue which was listed on 30.09.2011 when same was withdrawn with liberty to file fresh application in terms of orders passed by 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 revenue for filing fresh application. Suffice to note that said reference pertains to AY 1985-86. It also appears that based on order of Tribunal in reference case, which pertains to AY 1985-86, royalty payment in subsequent assessment years has been treated as revenue expenditure. 30. It is necessary to note here that none of parties to these appeals have filed copy of agreement executed between respondent-assessees and producers/owners of original copy right. Revenue being appellant, if they wanted to rely upon document should have filed same. We accordingly proceed to answer questions, as per facts ITA No.50/2000 & connected appeals Page 14 of 33 recorded by Tribunal. Having already referred to issue(s) which falls for our consideration in these appeals, we proceed to note position of law. 31. In Empire Jute Co. case (supra), Supreme Court while dealing with facts wherein assessee was engaged in business of manufacture of jute, and was member of Jute Mills Association, which was formed on object of inter alia protecting trade of its members by regulating production in mills. In pursuance thereto, members had entered into working time agreement whereby number of working hours per week for which mills were entitled to work their looms to their full capacity was capped, as there was overcapacity but lower demand. This restriction had effect of limiting production and consequently profits, which assessee could earn. Under same agreement, one mill could transfer loom hours to another for consideration, subject to conditions. Thus, purchase of loom hours had effect of relaxing restriction on operation of loom hours and enabled purchaser to work its looms for longer durations and earn profits. Supreme Court observed that capital expenditure was one made with view to bring into existence asset for enduring benefit to trade. But, this rule of enduring benefit was subject to and could break down for good reasons. nature of ITA No.50/2000 & connected appeals Page 15 of 33 advantage has to be considered in commercial sense and only when advantage was in capital field, expenditure could be disallowed by applying enduring benefit test. If advantage consisted of merely facilitating trading operations or enabling management for conduct of business more efficiently and profitably while leaving fixed capital untouched, said expenditure would be on revenue account, though advantage may endure for indefinite period. enduring benefit test was therefore not conclusive and cannot be mechanically applied without considering commercial aspect. Similarly in Alembic Chemicals Work Co. Ltd. s case (supra), assessee had acquired knowhow to produce higher yields and sub-cultures of high yielding range of penicillin. said expenditure was in line of existing manufacture. It was lumpsum payment but expenditure was held to be revenue in nature, primarily on ground that it was incurred for purpose of day to day business, which was manufacture of penicillin, and therefore was not for new venture, unconnected and different from existing business. Secondly, rapid strides in science and technology in field of medicine cannot be readily pigeon holed as capital outlay. From reading of both judgments, following principles emerge:- (i) There may be cases where expenditure, even if incurred ITA No.50/2000 & connected appeals Page 16 of 33 for obtaining advantage of enduring benefit, may, nonetheless be on revenue account and test of enduring benefit may break down. (ii) It is not every advantage of enduring nature acquired by assessee that brings case within principles laid down in enduring benefit test. (iii) If advantage consists of merely in facilitating assessees trading operations or enabling management or conduct of assessees business to be carried on more efficiently or more profitably while leaving fixed capital untouched, expenditure would be on revenue account, even though, advantage may endure for indefinite period. (iv) test of enduring benefit is not conclusive and cannot be applied blindly and mechanically without regard to particular facts and circumstances of given case. (v) idea of once for all payment and enduring benefit are not to be treated as something akin to statutory conditions, nor are notions of capital or revenue, judicial fetish. What is capital expenditure and what is revenue expenditure are not eternal varieties but must ITA No.50/2000 & connected appeals Page 17 of 33 needs be flexible so as to respond to changing economic realities of business. expression asset or advantage of enduring nature was evolved to emphasize element of sufficient degree of durability, appropriate to context. 32. In Travancore Sugars and Chemicals Ltd. Vs. CIT, [1966] 62 ITR 566 (SC), assessee company acquired certain government concerns and was made liable to pay to government part of profit share every year. It was held that since annual payment was for indefinite period of time unrelated to capital value of assets or fixed purchase consideration, expenses were revenue in nature. In Assam Bengal Cement Co. Ltd. Vs. CIT, [1955] 27 ITR 34 (SC), it was held that if expenditure is not for 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 revenue expenditure. Similarly, in Commissioner of Income Tax Vs. J.K.Synthetics Ltd. [2009] 309 ITR 371 (Delhi), this Court was of view that amounts paid for process and technical know-how, supply of technicians and training of personnel is revenue expenditure. 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 ITA No.50/2000 & connected appeals Page 18 of 33 benefit, means enduring in way that fixed capital endures; expenditure on acquiring floating capital is not made with view to acquiring enduring asset. It is made with view to acquiring asset that may be turned over in course of trade at comparatively early date . In M.A.Jabbar Vs. CIT, [1968] 68 ITR 493 (SC), wherein assessee had taken short term lease of eleven months for quarrying purposes to carry away, sell and dispose of sand which was lying on surface of river bed without excavation or skilful extraction. said expenditure was held to be revenue in character, even though, interest of land was also conveyed. decisive factor was object for which lease was taken and nature of payment, when and while obtaining lease. In Gotan Lime Syndicate s case (supra), Supreme Court dealt with case where assessee firm which carried on business of manufacturing lime from limestone, was granted under lease right to excavate lime-stones in certain areas. On expiry of lease, same was extended for short periods. On change of policy, 15 square miles of lime deposits were sanctioned to assessee on October 4, 1954. Between period July, 1952 to date new lease was to be given effect, fixed royalty of Rs. 96,000/- per annum had to be paid on basis of dead rent. assessee could not carry away any other mineral which might be found in area and he was ITA No.50/2000 & connected appeals Page 19 of 33 further allowed to go on land and win them. Payments were finalized by Mining Engineer who fixed royalty at Rs. 96,000/- per year as royalty fixed by rules was far less than that figure. For each assessment years between 1954 to 1957, assessee paid amount of Rs. 96,000/- to government and claimed it to be revenue deduction. In absence of material to show that any part of royalty had to be treated as premium and referable to acquisition of mining lease, royalty payment included dead rent had relation only to lime deposits to be got and were therefore treated as revenue expenditure. Although, assessee did derive advantage; assuming that advantage was to last at least for period of five years, there was no payment once for all. royalty was not direct payment for securing enduring advantage; it had relation to raw material to be obtained. reason why royalty was allowed as revenue expenditure was relation it had to amount of raw material to be excavated or extracted. You take more, more royalty you pay. 33. Division Bench of this Court in judgment reported as Commissioner of Income Tax Vs. J.K. Synthetics Limited, [2009] 309 ITR 371 (Delhi) after referring to various judgments of Supreme Court and various High Courts, has summarized broad principles, as under: ITA No.50/2000 & connected appeals Page 20 of 33 (i) expenditure incurred towards initial outlay of business would be in nature of capital expenditure, however, if expenditure is incurred while business is ongoing, it would have to be ascertained if expenditure is made for acquiring or bringing into existence asset or advantage of enduring benefit for business, if that be so, it will be in nature of capital expenditure. If expenditure, on other hand, is for running business or working it, with view to produce profits, it would be in nature of revenue expenditure; (ii) it is aim and object of expenditure, which would, determine its character and not source and manner of its payment; (iii) test of 'once and for all' payment i.e., lump sum payment made, in respect of, transaction is inconclusive test. character of payment can be determined by looking at what is true nature of asset which is acquired and not by fact whether it is payment in 'lump sum' or in instalment. In applying test of advantage of enduring nature, it would not be proper, to look at advantage obtained, as lasting forever. distinction which is required to be drawn is, whether expense has been incurred to do away with, what is recurring expense for running business, as against, expense undertaken for benefit of business as whole; (iv) expense incurred for acquisition of source of profit or income would in absence of any contrary circumstance, be in nature of capital expenditure. As against this, expenditure which enables profit making structure to work more efficiently leaving source or profit making structure untouched, would be in nature of revenue expenditure. In other words, expenditure incurred to fine tune trading operations to enable management to run business effectively, efficiently and profitably leaving fixed assets untouched would be expenditure of revenue nature even though advantage obtained may last for ITA No.50/2000 & connected appeals Page 21 of 33 indefinite period. To that extent, 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 manner of speaking, grain from chaff, one would have to closely look at attendant circumstances, such as: (a) tenure of Licence. (b) right, if any, in licensee to create further rights in favour of third parties, (c) prohibition, if any, in parting with confidential information received under License to third parties without consent of licensor, (d) whether Licence transfers 'fruits of research' of licensor, 'once for all', (e) whether on expiry of Licence licensee is required to return back plans and designs obtained under Licence to licensor even though licensee may continue to manufacture product, in respect of, which 'access' to knowledge was obtained during subsistence of Licence. (f) whether any secret or process of manufacture was sold by licensor to licensee. Expenditure on obtaining access to such secret process would ordinarily be construed as capital in nature; (vi) fact that assessee could use technical knowledge obtained during tenure of License for purposes of its business after Agreement has expired, and in that sense, resulting in enduring advantage, has been categorically rejected by courts. Courts have held that this, by itself, cannot ITA No.50/2000 & connected appeals Page 22 of 33 be decisive because knowledge by itself may last for long period even though due to rapid change of technology and huge strides made in field of science, knowledge may with passage of time become obsolete; (vii) while determining nature of expenditure, given diversity of human affairs and complicated nature of business; test enunciated by courts have to be applied from business point of view and on fair appreciation of whole fact situation before concluding whether expenditure is in 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 case wherein assessee was incorporated on 18.01.1993 and was subsidiary of Oracle Corporation, USA. subsidiary company entered into 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 ownership of copyrights in software and all associated and Intellectual property rights in products. agreements stipulated that appellant shall duplicate and reproduce software in India and sub-licence same as per terms of sub-licence deed stipulated and with holding company retaining entire data/intellectual property rights in software. assessee was to pay royalty to holding company @ 30% of list price of licenced products as prescribed in Indian ITA No.50/2000 & connected appeals Page 23 of 33 published price fixed in consultation with licensor. Apart from royalty, some other amounts were to be paid by assessee. question arose, whether business expenditure was capital or revenue in character. This Court, after referring to various judgments including some referred above, has held as under: As noticed above, in present case appellant is duplicating software and sells same to generate income. It requires master copies, which have to be updated and upgraded to be able to sell said software. In case appellant had imported said software and sold same, it would be stock in trade and deductible. However, when master copies were used for duplication and software replicated and transferred on media as result of said activities was then sold, master copy itself might not be stock in trade as such in strict sense, but it did not have long life and its value and life span was small since it perished and diminished when upgraded version or better software in form of next master copy was imported, for purpose of duplication. When we accept said position, 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 other test or caveats. flaw and error committed by tribunal is that they applied other tests or caveats without first ascertaining and determining whether enduring benefit test is satisfied or not. enduring test ITA No.50/2000 & connected appeals Page 24 of 33 may not be sole, exclusive or universal test but is considered to be primary test . 34. We note that with regard to one of assessees in this batch of appeals namely Super Cassettes Industries Ltd. for Assessment Year 1987-88, identical issue was decided by Delhi Bench of ITAT, 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 following manner:- 11. In instant case, component with help of which, assessee is able to carry out one of its activity of manufacturing and trading in pre-recorded tapes and gramophone records is plate, which plate is not one but as many as agreements for making of copies are entered into. There is every likelihood that, contract for making of copies may be, entered into on last of days of accounting year and that, plate may have been paid for on last of few days of year, and reproduction of it may be still in process. All these factors are common in any business of manufacture. As submitted by assessee, product manufactured is based on reproduction of sound, music etc. from master plate into tapes and records by use of electrical and magnetic impulses. These are embedded into master plate, ITA No.50/2000 & connected appeals Page 25 of 33 and assessee only makes identical copy of same. copy so made is therefore, possible only with help of original. Therefore, master plate could be termed as raw material, formula etc. For every master plate provided to assessee, except for similarity of blank plate, all other factors, such as music, sound, dialogue are very different. activity of assessee is basically that of jobber, who carries on functions of job-work, on material provided or on material prescribed to it by owner. In instant case, assessee is allowed to use its own tapes, gramophone records manufactured by it, for filling them up with sound contained in master plate. content of plate is design, formula, raw material all embedded into one. plate in these circumstances could not be termed to be of capital nature. initial payment of lump sum also does not change its basic character as elucidated above. recurring payment dependent upon sales also indicates that, royalty would become due only when product so made are sold and therefore, what is dependent upon uncertain happening could not be on capital account at all. recurring payment is similar in nature to royalty or dead rent paid for extraction of limestone from quarries, as has been held by Supreme Court in Gotan Lime Syndicate s case. We are therefore of opinion that, royalty ITA No.50/2000 & connected appeals Page 26 of 33 paid including cost of plate is on revenue account and hence fully allowable as deduction in computing income from business . 35. Insofar as case in hand is concerned, we note, issue pertains to two types of payment. first one is fixed amount or lump sum payment for master plate and copyright in music and second, being royalty which is recurring in nature, depending upon quantum of sale i.e. volume of sales generated by particular record/cassettes of album/song. First, dealing with fixed amount expenditure, question would arise whether same has enduring benefit. If enduring benefit test is fulfilled, conclusion possible could be that payment was for acquiring capital asset and expenditure related to it is capital expenditure. But enduring test could break down for good valid reasons. For good reasons, this test need not be applied as test to determine nature of expenditure. admitted position is that assessees are in business related to manufacture and sale of music cassettes. Looking from commercial angle, it is seen and common knowledge that music/film songs do not have long life. Each year, expenditure was incurred to acquire and procure similar rights in new music. It was recurring expenditure quite similar and like acquiring and purchasing raw material, used in earning profits. Increase in raw ITA No.50/2000 & connected appeals Page 27 of 33 material would increase production, turnover and corresponding profits. In case, such rights were not acquired and purchased from time to time, assessee would go out of 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, sales falter and returns/incomes does not flow and stops. There are few songs which are evergreen and are heard by public at large and remain popular even after few/many years of their release. Some songs of 1960s and 1970s/80s are considered immortal and timeless. percentage of such music and songs is abysmally small and probably in range of 5% to 10% of music/songs launched every year. said percentage would necessarily depend upon several factors, which again would be fact specific like music director, type of music, singer etc. These facts and factors have not been adverted to and elucidated in assessment orders, as Assessing Officer with foreordained commitment disallowed entire expenditure, unmindful that possibly, it would difficult to sustain entire addition. Order of remit, after long time gap would have difficulties. Proceeding on premise that 5% of expenditure on plate etc. had enduring benefit, to that extent, expenditure could be considered as capital expenditure, we are not inclined to interfere and partially reverse final outcome. capital ITA No.50/2000 & connected appeals Page 28 of 33 amount or asset so created would be of minuscule value and there would be minimal tax effect. Question of depreciation would arise. position stood settled over these years. Any order at variance would unsettle settled position. In facts of case, this Court is of view that accounts should not be re-written because of smallness and minimum tax effect. 36. Coming to royalty paid to producers on sales effected, it must be held that same is revenue expenditure, moreso, when it is clear that main business of assessees was manufacture of blank cassettes and pre-recorded cassettes. purchase of music rights and reproducing is purpose of its business. royalty payment for cassettes sold is expenditure in relation to business activity of assessee and on this ground and reason, should be regarded as revenue expenditure. It was expenditure incurred in normal course of business and was related to revenue generated and payable accordingly. It did not secure and add to value or create any new capital asset. 37. substantial question of law at serial no. 1 is thus decided in favour of respondent-assessees and against appellant-revenue. 38. Since two more substantial questions of law arise for consideration in ITA No. 69/2004, we proceed to decide said questions, which ITA No.50/2000 & connected appeals Page 29 of 33 read:- ii) Whether ITAT was correct in law by deleting 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 addition of Rs. 2,13,801/- claimed to have been spent by Bombay Video Division despite fact that business activities of this unit had not started till end of assessment year in question? 39. Insofar as question (ii), is concerned, same relates to deletion of addition of Rs. 2,32,900/- on account of purchase of carpets by treating it as revenue expenditure. We note that Assessing Officer had treated it as capital expenditure. He further directed that depreciation be allowed on same. CIT(Appeals) was of view that since he had already held in earlier year that cost of carpet was capital expenditure, action of AO was to be confirmed. reasoning of CIT(Appeals) was that since carpets were used in recording room, it was part of plant and machinery. We note that ITAT, for earlier year 1987-88, was of following view: 21. As regards expenditure of Rs. 1,79,577/- laying down carpets in recording studio, we find that atmosphere has to be created for recording of cassettes. recording rooms have to be sound ITA No.50/2000 & connected appeals Page 30 of 33 proof and dust proof. By laying down carpets in these rooms, it is augmentation of efficiently carrying on business. 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 case of Shri Hari Mills Pvt. Ltd. reported in 237 ITR 188. expenditure on replacement could not be treated as capital expenditure. replacement, renewals and repair were to keep business going on and amount expended was for purpose of continuing business without breakdown and such expenditure has to be held to be revenue in nature. We, therefore, reverse finding of CIT(A) and direct AO to allow deduction of expenditure incurred on carpets. Depn., if any allowed, has to be withdrawn . 40. On basis of above, for assessment year in question i.e. 1989-90, it was held that expenditure incurred for purchase of carpet was revenue expenditure. It was replacement costs and in nature of current repairs. From above, we note that Tribunal has relied upon judgment reported as [1999] 237 ITR 188 (Mad) in Shri Hari Mills Pvt. Ltd., wherein, it was held that expenditure on replacement could not be treated as capital expenditure and having recorded finding of fact that life of carpets is very short and have to be replaced at frequent intervals, we are of view that ITA No.50/2000 & connected appeals Page 31 of 33 conclusion of Tribunal is not perverse and same is justified. question of law is, therefore, decided in favour of respondent assessee and against appellant revenue. 41. Insofar as issue whether Tribunal was right in deleting addition of Rs. 2,13,801/- claimed to have been spent by Bombay video division despite fact that business activities of this unit had not commenced/set up till end of assessment year in question, is concerned, factual findings of Assessing Officer were not accepted in appellate orders. Assessing Officer, while making disallowance of said amount had observed that expenditure was not admissible as deduction since it pertained to video division in Bombay as assessee has not started activities in this division in Bombay and expenses are in nature of pre-operative expenses. CIT(Appeals) reversed factual finding of Assessing Officer on ground that assessee was engaged in manufacture of audio and video cassettes both blank and recorded, therefore, video film division was closely linked up with said business activity. purpose of making video film was to increase market of video cassettes. direct expenses linked to video movies was treated as part of stock in trade. nature of expenses consist of salaries and wages, selling, distribution and administrative expenses etc. and ITA No.50/2000 & connected appeals Page 32 of 33 same could be claimed as business expenditure because video division at Bombay was closely linked with day to day business activity of assessee, being undertaken. expenditure as such was not to procure or purchase equipment or machinery. expenses were in nature of salary, wages to employees, selling, distribution and administrative expenses. Tribunal upheld said conclusion of CIT(Appeals) on ground that expenses incurred are purely revenue in nature. We agree with conclusion of Tribunal. That apart, tax effect is very low. question of law is accordingly decided in favour of respondent assessees and against appellant- revenue. 42. In view of our aforesaid discussion, appeals stand dismissed with no order as to costs. (V.KAMESWAR RAO) JUDGE (SANJIV KHANNA) JUDGE DECEMBER 02, 2014/akb ITA No.50/2000 & connected appeals Page 33 of 33 Commissioner Of Income tax v. Shri Krishan Kumar
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