2003 (12) TMI 9 - HC - Income Tax

Court rules royalties for film songs as revenue expenditure under Income-tax Act

Commissioner of Income-Tax Versus M. Subramaniam.

The court ruled in favor of the assessee, holding that the expenditure incurred for obtaining the right to reproduce film songs should be treated as ... Expenditure in obtaining a right for reproduction of film songs for a specific period – allowability - revenue expenditure or capital expenditure - whether Tribunal was right in law in holding that the expenditure in obtaining a right for reproduction of film songs for a specific period is royalty and allowable as revenue expenditure and not a capital expenditure, which attracts the provisions of section 35A - The royalties paid by the assessee, were therefore, required to be regarded as falling within the field of revenue expenditure. Moreover, the sale of film songs is dependent on their popularity which in most cases is of short duration. The realisation from the future sale of cassettes which was a funding activity also was unascertainable at the time of the agreement. Thus, our answer to the question referred has, therefore to be and is in favour of the assessee and against the Revenue. Issues:1. Whether expenditure in obtaining the right for reproduction of film songs for a specific period is considered royalty and allowable as revenue expenditure or capital expenditure under section 35A of the Income-tax ActRs.Analysis:The judgment dealt with the issue of whether the expenditure incurred by an individual, engaged in the production of audio cassettes with popular film songs, for obtaining the right to reproduce the film songs should be treated as royalty and allowed as revenue expenditure or considered as capital expenditure attracting the provisions of section 35A of the Income-tax Act. The assessee entered into agreements with film producers to obtain the rights for reproducing the songs and claimed that the monies paid under these agreements were in the nature of royalty and should be treated as revenue expenditure. Initially, the claim was accepted for certain assessment years. However, later, the Commissioner of Income-tax viewed that the royalty paid for acquiring the copyright should be treated as capital expenditure as it resulted in obtaining a capital asset.The subsequent assessments for other years were taken up, and the Income-tax Appellate Tribunal directed that the entire royalty paid should be treated as a revenue expenditure. The court analyzed the agreements between the assessee and the film producers, which clearly provided for the assignment of copyright in the music of the movies to the assessee, constituting a capital asset. The court distinguished between the initial payment, which was a capital expense, and the variable royalty payments, which were considered to be in the field of revenue expenditure. The court referred to precedents such as the case of Travancore Sugars and Chemicals Ltd. v. CIT and Commissioners of Inland Revenue v. 36/49 Holdings Ltd. to support its reasoning that periodic payments related to trading activities should be treated as revenue expenditure.Moreover, the court cited the case of CIT v. Sarada Binding Works to emphasize that payments depending on future profits should be dissected into income and capital components. The court concluded that the royalties paid by the assessee should be regarded as falling within the realm of revenue expenditure due to the uncertainty of future sales realization and the short duration of the popularity of film songs. Consequently, the court ruled in favor of the assessee and against the Revenue, holding that the expenditure should be treated as revenue expenditure rather than capital expenditure under the Income-tax Act.