2023 (4) TMI 798 - AT - Income Tax

Tribunal upholds AO's assessment of royalty expenses, quashes revisionary order.

Saregama India Limited Versus Principal Commissioner of Income-tax-1, Kolkata

The Tribunal found that the Ld. AO had adequately examined the royalty expenses during the assessment proceedings, and the order was not deemed erroneous ... Revision u/s 263 by CIT - manner and determination of the debitable royalty was required to be analysed thoroughly by the AO - provision created in respect of claim of royalty expenses has to be examined with reference to the liability for the year, CIT thus, observed that Ld. AO erred in not examining the discrepancy in respect of debit towards royalty expenses while disposing the case and accepting the assessee’s claim without any application of mind or query - HELD THAT:- Pr. CIT has invoked the revisionary proceedings by merely observing a variation in the amount of royalty expenses debited in the profit and loss account and the amount of provision reported in the balance sheet towards royalty. The extent of enquiry undertaken and replies filed in the assessment proceedings as well as those furnished before him in the revisionary proceedings, forms part of the records of the case on which Pr. CIT ought to have applied his mind before embarking upon the journey of initiating the revisionary proceedings. We find that the issue in the present case is purely on facts which are verifiable from the records of the assessee placed on record. Examination and verification of the audited financial statement i.e. Balance sheet and Profit and Loss Account of the assessee together with notes to accounts and significant accounting policies, perusal of the ledger accounts and the details made by the assessee in the paper book for the data maintained by it, reveals the correct state of affairs in respect of the issue raised in the impugned revisionary proceeding. Accordingly, action u/s. 263 is not justifiable which in our considered view cannot be sustained under the facts and circumstances of the present case. - Decided in favour of assessee. Issues Involved:1. Assumption of jurisdiction by the Ld. Pr. CIT for invoking revisionary proceedings u/s. 263 of the Income-tax Act, 1961.2. Examination of the claim of royalty expenses by the Ld. AO during the assessment proceedings.3. Determination of whether the assessment order was erroneous and prejudicial to the interest of the revenue.Summary of Judgment:1. Assumption of Jurisdiction by Ld. Pr. CIT:The appeal was filed against the revision order passed by Ld. Pr. CIT-1, Kolkata, invoking section 263 of the Income-tax Act, 1961, against the assessment order passed by DCIT, Circle-3(1), Kolkata. The grounds of appeal related to the assumption of jurisdiction by the Ld. Pr. CIT for invoking the revisionary proceeding u/s. 263 and passing the impugned order.2. Examination of Royalty Expenses by Ld. AO:The assessee, engaged in the business of production and sale of music, had filed its return of income, which was selected for limited scrutiny. During the assessment, the Ld. AO required the assessee to furnish details of expenditure, including royalty expenses. The Ld. AO, after considering the submissions, completed the assessment by making a disallowance u/s. 14A. The Ld. Pr. CIT considered the assessment order erroneous and prejudicial to the interest of the revenue, primarily due to the non-payment of 'Royalty on License Fees' and the discrepancy in the provision for royalty expenses.3. Determination of Erroneous and Prejudicial Order:The assessee contended that the Ld. AO had duly examined the details and explanations regarding the claim of royalty expenses. The Ld. Pr. CIT's consideration was deemed a 'change of opinion.' The assessee followed a consistent accounting practice under the mercantile system, recognizing royalty expenses on an accrual basis. The Ld. Pr. CIT's direction to re-examine the royalty expenses was challenged as it would lead to double taxation, given that the unpaid royalty amount was either paid or written back and offered to tax in subsequent years.Conclusion:The Tribunal found that the Ld. AO had examined the royalty expenses during the assessment proceedings, and the assessee had provided all necessary details. The order was not erroneous or prejudicial to the interest of the revenue. The Tribunal quashed the impugned order u/s. 263 of the Act, allowing the appeal of the assessee.Order Pronounced:The appeal of the assessee was allowed, and the order was pronounced in the open court on 13th March 2023.