TaxTMI 
TaxTMI 
2003 (12) TMI 9
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....A of the Income-tax Act. The assessee is an individual engaged in the production of audio cassettes with popular film songs. He carries on the business of manufacturing pre-recorded cassettes and selling the same in the name of ECHO Recording Company. In order to obtain such popular songs, the assessee enters into agreements with the producers of the films for obtaining the right to re-produce the film songs. The assessee claimed that the monies paid under those agreements were in the nature of royalty and should, therefore, be allowed as revenue expenditure in computing the assessee's income. His claim was accepted on September 29, 1996 for the assessment year 1985-86. For the assessment year 1984-85 also, the assessment was made und....
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....e copyright in so far as it extends to the exclusive right to make records from recordings embodied in ...". Clause 5(v) of the agreement empowers the assessee's company to have exclusive right over the records. The assessee was also permitted to lease or issue licence, etc., and allow others to do so under such trademark and prices and upon such terms. Clause 7(a) of the agreement provides that the company shall pay to the producer an all-in-royalty in respect of all records manufactured. Clause 3 of the agreement provides that what was assigned included the right to publish and the reproduction rights thereof. Clause 7(e) of the agreement provides for payment of royalty. The agreement clearly provides for assignment of the rights of....
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.... to whether the payment made in terms of the clause in the agreement was capital or revenue expenditure. The court held that that expenditure was revenue expenditure as, (a) the payment was for an indefinite period; (b) the payment was related to the annual profits which flowed from the trading activities of the company and had no relation to the capital value of the assets; and (c) the payment was not related to or tied up, in any way, to any fixed sum agreed between the parties as part of the purchase price of the three undertakings. The reasons so given by the court were similar to those given by Lord Greene M.R. in Commissioners of Inland Revenue v. 36/49 Holdings Ltd. [1943] 25 TC 173 (CA). The reasons that were given in that case f....
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....sideration should, therefore, be taken to consist of two elements, one of a capital nature and another of an income nature. The fact that some of the elements of sale consideration are of a capital nature does not in the least bit point to the periodical payments which are indefinite depending on the profits of the company being also of a capital nature." The court also quoted from Wheatcroft's treatise, The Law of Income Tax, Sur Tax and Profits Tax, at page 1152: "First, there are cases where all the payments must be treated as income of the recipient and the payer is entitled to deduct tax on payment and to a deduction in computing his total income. Secondly, there are cases where the payments are all treated as capital and are nei....