1998 (8) TMI 614 - AT - Income Tax

Tribunal: Music rights deductible over 5 years, retiring partners' payment not deductible

The Tribunal partly allowed the appeal, ruling that the expenditure for music rights should be deductible over five years and the payment to retiring ... - Issues Involved:1. Deductibility of expenditure for hire of music rights under section 35A of the IT Act.2. Deductibility of payment to retiring partners as capital expenditure.Issue 1: Deductibility of Expenditure for Hire of Music RightsThe first ground of appeal concerns the CIT(Appeals) upholding the Assessing Officer's finding that the expenditure of Rs. 2,75,400 incurred by the assessee for the hire of music rights was covered by section 35A of the IT Act.The assessee, engaged in selling books, records, cassettes, and magazines, acquired music rights for the film 'Jalwa' from M/s. PLA Productions. The transaction was described in a letter dated 18-6-1986, confirming the sale of world rights of the audio soundtrack for Rs. 1,50,000 for five years, with an option for extended exploitation on a royalty basis. The total expenditure debited was Rs. 2,75,400.The Assessing Officer disallowed the deduction under rule 9A(2)(b) of the I.T. Rules, stating it applied only to film producers, and instead allowed 1/14th of the expenditure under section 35A. The CIT(Appeals) upheld this decision, rejecting the claim under section 37.Before the Tribunal, the assessee argued the transaction was a royalty payment, deductible as revenue expenditure in the year paid. The Tribunal agreed the expenditure was of a revenue nature but held it should be deductible over five years, not entirely in one year, citing the principle from Madras Industrial Investment Corpn. Ltd. v. CIT (1997) 225 ITR 802. Consequently, 1/5th of the amount was deductible in the assessment year 1987-88, partly allowing the ground.Issue 2: Deductibility of Payment to Retiring PartnersThe second ground of appeal concerns the CIT(Appeals) upholding the disallowance of Rs. 3,75,000 paid to retiring partners as capital expenditure. The assessee took over a business previously run as a partnership firm, which was dissolved on 31-12-1985. The deed of dissolution dated 22-1-1986 determined the goodwill at Rs. 5,00,000, with the retiring partners' share computed at Rs. 3,75,000.The assessee argued the payment was for the retiring partners' share in future profits, claiming it as deferred revenue expenditure. The revenue authorities treated it as a capital expenditure for goodwill acquisition, denying the deduction.Before the Tribunal, the assessee relied on the Supreme Court decision in Devidas Vithaldas & Co. v. CIT (1972) 84 ITR 277 and other cases, arguing the expenditure was revenue in nature. The Tribunal distinguished these cases, noting the firm was dissolved, and the payment was for goodwill acquisition. The Tribunal cited the Andhra Pradesh High Court decision in CIT v. Puran Das Ranchoddas & Sons (1988) 169 ITR 480, supporting the view that the payment was for acquiring a capital asset, thus capital expenditure. The ground was rejected.Conclusion:The appeal was partly allowed, with the Tribunal holding the expenditure for music rights deductible over five years and the payment to retiring partners as capital expenditure, not deductible.