TaxTMI 
TaxTMI 
2007 (3) TMI 307
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....ompany as capital expenditure and not allowing as revenue expenses. 3. That on the facts and circumstances of the case, the learned CIT(A)-XV erred in disallowing the deferred revenue expenditure ascertaining that the expenses resulted in an asset of an enduring nature through the production of serials. 4. That the appellant reserves the right to add, alter, and amend or to delete any or all the grounds of appeal on or before the date of hearing." 2. Rival contentions have been heard and record perused. Brief facts of the case are that the assessee company is engaged in the business of production and telecasting of TV serials. On 31st March, 2000, the assessee company acquired all assets and liabilities of a sole proprietorship firm which went by the name of Guruji Films for a consideration of Rs. 3,23,21,610 which was paid by way of allotment of shares to the proprietor in the firm who is also one of the directors of the assessee company. In the course of assessment, the AO found that the assessee company has shown Rs. 3 crores as the goodwill of the company on which it had claimed a depreciation of Rs. 75 lacs. The AO noted that the total sale consideration of Rs. 3.23 crores ....
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...., the AO disallowed depreciation on goodwill. The AO also found that the assessee had claimed an expense of Rs. 1,03,56,975 on account of deferred revenue expenditure. The assessee had explained to the AO that the assessee company was engaged in the business of production of TV serials and the expenditure incurred thereon has been deferred over 2 years and 50 per cent of the expenses incurred thereon had been charged to the P&L a/c. The AO held that there is no concept of deferred revenue expenditure in the IT law and disallowed the claim of the assessee. The AO took the view that since the serials were the permanent assets of the assessee and could be exploited over a period of time, the expenditure was capital in nature. Accordingly, the AO disallowed the expense and made an addition of Rs. 1,03,56,975. 3. With regard to claim of depreciation, the CIT(A) observed that goodwill does not fit in the description of an asset that would depreciate with the passage of time or with usage. Indeed, goodwill would usually grow over the years. Goodwill can be described as the intangible name of the business, which gets it an advantage in business, especially for marketing of its products. T....
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....on of programme vide its advertisement dt. 13th Feb., 2002. In response to this advertisement, the assessee company submitted a price-bid for its serial "Aparajita" at Rs. 50,000 per episode vide letter dt. 19th Feb., 2003. As per learned Authorised Representative, this could be taken as a reference price for the cost of acquisition by the assessee company and therefore the valuation of goodwill done by the AO was faulty. 5. With reference to 50 per cent deferred revenue expenditure charged to P&L a/c, the learned Authorised Representative contended that it is engaged in the business of production of TV serials which are under two categories, namely, commissioned and sponsored category. In the commissioned category, the producer makes the serial and sells it to the TV channel and the rights belong to the TV channel in future, and the TV channel has all rights to telecast/revenue-telecast on other channels or on the media network. In this category, the producer claims all the expenses incurred and also takes into account the total corresponding revenue and no amount is deferred in such cases. But in the sponsored category, the producer telecasts the serial on the channel in an allo....
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....ose of bringing to existence of any asset or advantage but for running the business and augmenting working capital with a view to produce profits as well as to sustain the growth of the company. 9. On the other hand, learned CIT Departmental Representative, Shri Rajnish Kumar, submitted that assessee was not eligible for claiming depreciation in respect of the amount paid for goodwill insofar as goodwill is not includible in the intangible assets on which depreciation is allowable under s. 32(1) of the Act. He further submitted that valuation of all the assets and liabilities as taken over by the assessee company was done by M/s Anand Parikh & Co. just to carry out a valuation of the company for internal purpose, therefore, such value cannot be taken into account for the purpose of allowing claim of depreciation. As per learned Departmental Representative, whatever copyrights, licenses, intangible rights, etc. acquired by the assessee company, whether registered or not, were not brought on record. He further contended that Expln. (3) to s. 43(1), has not been examined for judging the reasonableness of value of the assets, on which depreciation was claimed by the assessee. 10. We ....
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....led to all business and commercial rights relating to these serials and these intangible assets were acquired on 31st March, 2000, etc. i.e. after 1st April, 1998 the effective date of applicability of the provision, hence it was entitled to depreciation @ 25 per cent on such stock of TV serials, etc. and the rights, attached to such serials, etc. during the year under reference. It is pertinent to note that Expln. 2(b) to s. 32(1) comprises intangible assets, being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature. As per agreement between M/s Guruji Films and the company, the company is entitled to all the trademarks, licenses and all other intangible rights to which the firm was entitled. The Webster's World Dictionary defines "copyright" as under: "the exclusive right to the publication, production, or sale of the rights to a literary, dramatic, musical or artistic work, or to the use of a commercial print or label, granted by law for a specified period of time to an author, artist, distributor, etc." 11. With regard to the copyrights and licenses as acquired by assessee company, the AO observed that t....
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....t p. 3, 4 and 5, para 1.2, he himself has carried out the valuation of the goodwill, based on widely used book on Advanced Accountancy by M.C Shukla, T.S. Grewal, S.C. Gupta. After taking into account annual profit of the firm, normal profit, support profit, the AO computed the value of goodwill at Rs. 1,59,480. We also agree with the learned AO that 'goodwill' as it is, is not eligible for claim of depreciation. When the AO himself has computed the value of goodwill at Rs. 1,59,480, there is no reason for declining the claim of depreciation on the balance part of consideration paid for acquiring various tangible and intangible assets, rights, etc. There is no dispute for allowing depreciation on tangible assets. For intangible assets also, sub-cl. (ii) of s. 32(1) of the Act provides that know-how, patents, trademark, licenses, franchise or any other business or commercial rights of similar nature being intangible assets acquired on or after 1st day of April, 1998 are eligible for claim of depreciation. Expln. (2B) to s. 32(1) of the Act is also very much clear and provides for depreciation on these assets. 13. In view of the above discussion, we can conclude that total value of ....
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.... the assessee has carried 50 per cent of such revenue expenses amounting to Rs. 1.03 crores and balance was carried to the balance sheet under the head "Deferred revenue expenses" and was also claimed in full in the income-tax computation to disclose the true and correct state of affairs for the determination of tax, and the carry forward in the books of account was only for the purposes of accounting treatment as per the accounting policy followed by the assessee company. Undisputedly, the assessee was following consistently this system of accounting with respect to the revenue expenditure incurred on production of serials. The nature of the business of the assessee is production and marketing of television serials. The expenses incurred in connection with production/marketing/telecasting are of revenue nature and allowable under s. 37(1) and the corresponding income form sale/telecasting of these serials is in the nature of revenue income and is taxable. Further, the item of manufacturing and sale of an entity cannot be a capital asset of that entity. It is correct that the future rights are vested with the assessee company in relation to these serials. If any income is generated....