Depreciation Allowed on Intangible Assets Except Goodwill; TV Serial Production Costs Deductible as Revenue Expenditure.

The ITAT partially allowed the appeal. It directed that depreciation be allowed on intangible assets, excluding goodwill, recognizing copyrights and telecast rights as depreciable under s. 32(1) of the IT Act. Professional expenses incurred for raising capital were upheld as capital expenditure, not allowable as revenue expenses under s. 37. The ITAT allowed the full deduction of deferred revenue expenditure related to TV serial production, recognizing it as revenue in nature under s. 37(1), despite contrary accounting entries.

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Issues Involved:
1. Depreciation on goodwill and other intangible assets.
2. Treatment of professional expenses as capital or revenue expenditure.
3. Disallowance of deferred revenue expenditure.

Issue-wise Detailed Analysis:

1. Depreciation on Goodwill and Other Intangible Assets:
The assessee company acquired all assets and liabilities of a sole proprietorship firm for Rs. 3.23 crores, which included goodwill valued at Rs. 3 crores. The AO disallowed depreciation on goodwill, arguing it is not a depreciable asset under s. 32(1) of the IT Act, 1961. The AO valued goodwill at Rs. 1,59,480 based on a widely used accounting book and concluded that the remaining amount did not qualify for depreciation. The CIT(A) upheld this view, stating goodwill typically appreciates over time rather than depreciates. However, the ITAT found that other intangible assets like copyrights and telecast rights acquired by the assessee are eligible for depreciation under s. 32(1) since they are business or commercial rights of a similar nature. The ITAT directed that depreciation be allowed on the value of these intangible assets, excluding the value of goodwill.

2. Treatment of Professional Expenses as Capital or Revenue Expenditure:
The assessee incurred professional expenses of Rs. 20,70,523 for raising capital through equity placement with UTI Ltd. The AO and CIT(A) treated these expenses as capital expenditure, disallowing them as revenue expenses. The ITAT agreed with this treatment, concluding that expenses incurred for increasing the capital base are capital in nature and thus not allowable as revenue expenses under s. 37.

3. Disallowance of Deferred Revenue Expenditure:
The assessee claimed deferred revenue expenditure of Rs. 1,03,56,975 related to the production of TV serials, arguing that these expenses should be treated as revenue expenses. The AO disallowed this claim, viewing the expenditure as capital in nature since the serials could be exploited over time. The ITAT found that the assessee consistently followed an accounting policy where 50% of production expenses were charged to the P&L account, and the remaining 50% was carried forward as deferred revenue expenditure. The ITAT held that the production expenses are revenue in nature and allowable under s. 37(1) of the IT Act. The ITAT directed that the deferred revenue expenditure be allowed in full, noting that mere accounting entries should not affect the claim for deduction of expenses.

Conclusion:
The ITAT partially allowed the appeal, directing depreciation on intangible assets excluding goodwill, disallowing professional expenses as capital expenditure, and allowing the deferred revenue expenditure in full.

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