Licence to reproduce copyrighted songs was revenue expenditure, not capital outlay, because the payer acquired no copyright ownership.

Royalty paid for the right to reproduce film songs in pre-recorded cassettes was treated as revenue expenditure, not capital expenditure. Although the agreement used the word "assign," the surrounding terms showed that the producers retained relevant rights, the payment was calculated as a percentage of sales, and the arrangement operated as a licence rather than an assignment of copyright. Because the outlay was variable, tied to production and sales, and did not secure ownership of a capital asset or enduring advantage, section 35A did not apply and the expenditure was deductible in full.

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Issues: Whether royalty paid for acquiring the right to reproduce film songs in pre-recorded cassettes constituted capital expenditure attracting section 35A of the Income-tax Act, 1961, or revenue expenditure deductible in full.

Analysis: Section 35A applies only where the expenditure is of a capital nature incurred on the acquisition of copyright. The agreement, read with the Copyright Act, 1957 and the Copyright Rules, 1958, showed that although the word "assign" was used, the payment was a percentage of sales, the producers retained relevant rights, and others were also receiving royalty. The arrangement therefore operated as a licence to reproduce the songs and not as an assignment of the copyright. The payment varied with production and sales, was linked to the manufacture of cassettes as part of the income-generating process, and did not secure an enduring advantage or ownership of a profit-making apparatus.

Conclusion: The royalty was revenue expenditure and section 35A was not applicable; the expenditure was deductible in full in favour of the assessee.

Ratio Decidendi: A payment made under a licence to reproduce copyrighted material, where the payer does not acquire ownership of the copyright and the outlay is variable and tied to sales or production, is revenue expenditure and not capital expenditure for the purposes of section 35A.

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