TaxTMI 
TaxTMI 
2020 (2) TMI 318
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.....155/CIT(A)-22/Kol/03-04/15-16, 157/CIT(A)-22/Kol/04-05/15-16, 156/CIT(A)-22/Kol/10-11/15-16, 160/CIT(A)- 22/Kol/01-02/15-16 & 163/CIT(A)-22/06-07/15-16,assessment year-wise; respectively relevant proceedings in all cases are u/s 143(3) of the Income Tax Act, 1961; in short 'the Act'. Learned Shri J.P.Khetan, Senior Advocate / authorized representative with Shri P. Jhunjhunwala representing assessee and Shri Meena, learned CIT-DR and Shri Roy appearing at the Revenue's behest. Case file(s) perused. 2. A combined perusal of the seven appeal(s) suggests that various issues raised herein are almost identical / inter-connected. These seven appeal(s) are therefore disposed of vide our instant common adjudication. We proceed assessment year-wise / issue-wise for the sake of convenience and brevity. Assessment Year:2003-04:- 3. The Revenue's seven substantive grounds in its appeal ITA No.470/Kol/2017 seek to reverse the CIT(A)'s action deleting minimum guarantee royalty payments disallowance addition of Rs.19,62,00,000/-, restricting advertisement / sales promotion, consultancy expenses, other ad hoc expenses and recording expenses involving varying sums from 10% estimated ....
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....assessee was asked to explain as to why the same should not be disallowed. The assessee submitted reply on 17.02.2006 - "As your kind self is aware, that the company is engaged inter-alia in the business of manufacture and sale of audio cassettes, CDs etc. and also in production of films/TV serials etc. For this purpose, the company enters into agreements with various producers etc. for purchasing the right to reproduce film -music (hereinafter referred to as 'music') on payment or royalty. It may be pertinent to mention that in the nature of business in which the company Is engaged, such right to reproduce the sell music obtained by the company under these agreements from the respective producers constitute Its basic raw material. In some of the said agreement entered by the company with the respective producers, the music is purchased on the terms that a minimum guaranteed payment would be made to the producer tiff a specific sale volume is reached. After such specified sale Volume, the producers are entitled to receive further royalty depending on the sale volume achieved by the company. For the purpose of its accounts, the company consistently treats a....
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....essee's business itself constitute of reproducing and selling recorded music, the royalty payment for the purchase of the original music, which forms the raw material, is an expenditure incurred out of business necessity such as a sugar manufacture require a sugarcane as its raw material. The payment is so related to the conduct of the assessee's business that it must be regarded as an integral part of the profit earning process and not for acquisition of any asset or any right of a permanent character". "It is submitted that the principle laid down by the Hon'ble Tribunal would apply to all payment for purchase of raw material (music) Irrespective of the determination of the quantum/mode/terms of payment. On perusal of the order of the Hon'ble ITAT, it is clear that the music is the raw material of the company and purchasing of music is made to reproduce the same in music cassettes, CDs for selling them to the public. The Hon'ble ITAT has also compared the situation with a sugar manufacture who would require sugarcane as Its raw material. Since purchase of sugarcane for the manufacture of the sugar (i.e. for the production) is a revenue expenditure, pu....
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.... computing the total income of the company under the provisions of the Act but this judgment is distinguished in as that it relates to royalty paid and not for M.G. Royalty paid for the acquisition of monopoly right. The Hon'ble Supreme Court in the case of J.K. Cotton Manufactures Ltd. VS. CIT 101 ITR 221 to determine the nature of expenditure, several tests that have been evolved over the years by the Hon'ble Supreme Court as also by the High Court, and they may briefly be formulated as follows: (i) Bringing into existence an asset or advantage of enduring nature would lead to the inference that the expenditure disbursed is of a capital nature. These terms, such as 'asset' or 'advantage of enduring nature' are, however, purely descriptive rather than definite and no rule of universal application can be laid down. Ultimately, the question will have to depend on the facts and circumstances of each case, namely, quality and quantum of the amount, the position of the parties, the object of the transaction which has impact on the business, the nature of trade for which the expenditure is incurred and the purpose thereof, etc. ....
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.... general royalty is related to expenses made after the production of specified number as mentioned in the agreement. The general royalty may be considered of revenue nature because it is paid at a specified rate on sales which means that the amount of royalty is variable with quantum of sale but in this case it is fixed and contractual and the company is competent to produce music only after entering the contract and making payment at the initial stage. In other words, the MG royalty is purchase price to acquire that right. Again, it can be inferred that even if no production of music/cassette is made even then MG royalty is to be paid because without making this payment company is not competent to produce the music cassette/CD. In the circumstances, the above judgment is distinguished from the instant case and in view of these discussions, the payment/investments of MG royalty for Rs. 19,62,00,000/- is considered as capital expenditure and the same is being added to the total income. [Addition: 19,62,00,000/-]" 05. During the course of the appeal, the appellant I Ld. A.R for the appellant - company have submitted as follows: "Nos.1(a) -1(e): Minimum Guar....
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.... appellant duly furnished copies of agreements of MG Royalty and explained its contention towards allow ability of such MG royalty as revenue expenditure while computing its income chargeable to tax. The Assessing Officer however rejected the contention of the appellant by holding that the expenditure Incurred towards MG Royalty Is a capital expenditure as the same has been incurred to acquire the absolute right for reproduction and sale of cassettes. The appellant does not agree with the aforesaid action of the Assessing Officer for reasons stated herein below - At the outset we would like to submit that the said Issue has been decided by your kind self in favour of the appellant in Assessment Year 2002-03. Your kind self In the said order has held that MG royalty Is allowable as revenue expenditure. Copy of the order dated 02-08-2005 for Assessment Year 2002-03 is attached (Pgs. 116-125). Further we would like to submit as follows: (i) Raw Material is Music: The appellant's business is that of manufacturing of recorded music cassettes and COs which it sells to the public at large and In the normal course of its business the appellant requires music ....
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....rial. The payment is so related to the conduct of the assessee's business that it must be regarded as in Integral part of the profit earning process and not for acquisition of any asset or any right of a permanent character." The learned CIT (Appeals) attention is drawn to page 13 (Pg. 138) of the aforesaid Hon'ble Tribunal's order where the agreement based on which the royalty paid has been stated at Paragraph 11. The said paragraph read as follows - "The agreement with the producers of films for the purpose of obtaining the copyright in the film songs and music of the original sound track also contains the following clause: (3)(A) The Producer hereby assigns and transfers and agrees to assign and transfer to the company absolutely and beneficially for the world:- (i) The copyright for making records of all contract works which are made available to the Company under the terms of this Agreement and the copyright, performing right and all other rights title and interest in and to the literary dramatic and musical works embodied in the Producer's Films including all rights of publication, sound and television broadcasting public pe....
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....lso compared the situation with a sugar manufacturer who would require sugarcane as its raw material. Since purchase of sugarcane for the purpose of manufacture of sugar (i.e. for the production) Is a revenue expenditure, purchase of music for the purpose of reproducing the same in the music cassettes and CDs would also be revenue expenditure. The learned CIT (Appeals) would appreciate that by whatever method the payment is made (i.e. in the form of MG Royalty till a specified sale and then further royalty on achieving different sales volume), the payment is made for the purchase of the music i.e. the bask raw material and therefore the same should be allowed as revenue expenditure. Moreover, the Assessing Officer had contradicted to his own stand by holding that "so far as general royalty is concerned this expenditure is of revenue nature" (by general royalty, he meant that royalty which Is paid after achieving the sales volume up to which MG Royalty Is paid) without appreciating the fact that the entire amount which is being paid to the producer In the form of MG Royalty and other Royalties, is the purchase price of "music" which Is the raw material. If a part of the pur....
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....roduction of audio cassettes the master cassette represents the original sound music is like the mineral which has already been gotten on the surface. The assessee had incurred expenditure for obtaining the right to acquire this music i.e. raw material and therefore applying the principle laid down by the Supreme Court the said expenditure was held to be revenue in nature. Reference in this regard is also made to the decision of the Hon'ble Delhi Tribunal In Super cassettes Industries (P) Ltd. vs. CIT [41 ITD 530 (Del) where besides making payment of royalty some initial payments was also made which has also been treated as revenue expenditure on the ground that the payment was made to obtain raw material for the business of the assessee. It was held that the "master plate" could be termed as raw material and the activity of the assessee was absolutely that of jobber. The plate in these circumstances would not be termed to be capital in nature. In para 11 of the order it is mentioned that: "the initial payment of lump sum also does not change its basic character as elucidated above. " The attention of the learned CIT (Appeals) is drawn to the decision....
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.... a. The assessee-company has accepted that MG royalty is paid for acquiring absolute right for the reproduction of the music cassette/CD on a particular film as per agreement with various parties, and therefore the benefit coming to the assessee out of investment/expenditure is a capital asset. b. The observation/decision of the Hon'ble ITAT in the assessee's case for the A.Y 1984-85 [reported in 48 ITD 145, 156, 157 (Cal)] is distinguished because in that case the issue considered was royalty as a whole but in the instant case, it is, with respect to minimum guaranteed royalty without which the assessee cannot proceed to produce music/cassettes/CD etc. and this right cannot be withdrawn. c. The general royalty is related to expenses made after the production of specified number as mentioned in the agreement. The general royalty may be considered of revenue nature because it is paid at a specified rate on sales which means that the amount of royalty is variable with quantum of sale but in this case it is fixed and contractual and the company is competent to produce music only after entering the contract and making payment at the initial stage. In other wor....
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....re amount of Rs. 33,72,15,567/- debited in its profit & loss A/c. under the account-head 'royalty' and claimed deduction of an aggregate amount of Rs. 34,50,15,567/- which related to royalty accrued during the year. The said amount included MG royalty of Rs. 19,62,00,000/- accrued during the year under appeal. A copy of the computation annexed with the return (Pg. 115). d. On specific query raised by the Assessing Officer during the course of the assessment proceedings, the appellant duly furnished copies of agreements of MG Royalty and explained its contention towards allow ability of such MG royalty as revenue expenditure while computing its income chargeable to tax. The Assessing Officer however rejected the contention of the appellant by holding that the expenditure incurred towards MG Royalty is a capital expenditure as the same has been incurred to acquire the absolute right for reproduction and sale of cassettes. e. At the outset we would like to submit that the said issue has been decided by your kind self in favour of the appellant In Assessment Year 2002-03. Your kind self in the said order has held that MG royalty is allowable as revenu....
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....ed in the larger context of business necessity or expediency. Since the assessee's business itself consists of reproducing and selling recorded music, the royalty payment for the purchase of the original music, which forms the raw material, is an expenditure incurred out of business necessity just as a sugar manufacturer would require sugarcane as its raw material. The payment is so related to the conduct of the assessee's business that it must be regarded as in integral part of the profit earning process and not for acquisition of any asset or any right of a permanent character. " g. The learned CIT (Appeals) attention is drawn to page 13 (Pg. 138) of the aforesaid Hon'ble Tribunal's order where the agreement based on which the royalty paid has been stated at Paragraph 11. The said paragraph read as follows - "The agreement with the producers of films for the purpose of obtaining the copyright in the film songs and music of the original sound track also contains the following clause: (3)(A) The Producer hereby assigns and transfers and agrees to assign and transfer to the company absolutely and bona fidely for the world:- (i) The....
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....s not open to the Revenue to challenge its correctness without just cause. j. On perusal of the order of the Hon'ble Tribunal, it is clear that music is a raw material of the assessee company and purchasing of music (raw material) is made to reproduce the same in music cassettes and CDs for selling them to the public. The Hon'ble Tribunal has also compared the situation with a sugar manufacturer who would require sugarcane as its raw material. Since purchase of sugarcane for the purpose of manufacture of sugar (i.e. for the production) is a revenue expenditure, purchase of music for the purpose of reproducing the same in the music cassettes and CDs would also be revenue expenditure. The learned CIT (Appeals) would appreciate that by whatever method the payment is made (i.e. in the form of MG Royalty till a specified sale and then further royalty on achieving different sales volume), the payment is made for the purchase of the music i.e. the basic raw material and therefore the same should be allowed as revenue expenditure. k. Moreover, the Assessing Officer had contradicted to his own stand by holding that "so far as general royalty is concerned this expen....
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....rface, expenditure for acquiring the right over or in the land to win the minerals would be of capital nature. It was also held that however, the mineral has already been gotten and is on the surface, expenditure incurred for obtaining the right to acquire the raw materials i.e. would be revenue expenditure. The Hon'ble Mumbai Tribunal held that in the case of production of audio cassettes the master cassette represents the original sound music is like the mineral which has already been gotten on the surface. The assessee had incurred expenditure for obtaining the right to acquire this music i.e. raw material and therefore applying the principle laid down by the Supreme Court the said expenditure was held to be revenue in nature. m. Reference in this regard is also made to the decision of the Hon'ble Delhi Tribunal in Super Cassettes Industries (P) Ltd. vs. CIT [41 ITD 530 (Del) where besides making payment of royalty some Initial payments was also made which has also been treated as revenue expenditure on the ground that the payment was made to obtain raw material for the business of the assessee. It was held that the "master plate" could be termed as raw material....
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.... the Ld.AO and the submissions of the Ld. A.Rs, I find that the identical issue has travelled to the Hon'ble ITAT on different occasions. The matter has also been decided in favour of the appellant-company for the A.Y 2001-02 by the First Appellate Authority in Appeal No 902/CIT(A)- 1/C- 3/2014-15 dated 11th March, 2015. For the A.V 2002-03, the matter had travelled to the ITAT. The Hon'ble ITAT-"D"-Bench in their decision in ITA No.2236 (Kol) / 2005 for the A.Y 2002-03 dated 22.06.2007 have adjudicated the matter in favour of the appellant-company. The relevant portion of the order of the Hon'ble ITAT is reproduced as under: [quote] "5. We have carefully gone through the arguments of the parties, the facts of the case and the documents on record and are Inclined to accept the order passed by the Ld CIT(Appeal) holding M G Royalty as revenue expenditure. In our considered view, given the nature of business of the assessee in the present case, it cannot be disputed that music is a raw material in the case of the assessee, a fact which has been confirmed by the Tribunal in A.Y 1984- 85. It purchases music on payment of royalty and reproduces the....
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....d not for acquisition of any asset or any right of a permanent character. "(emphasis ours) We are of the considered view that the aforesaid principle emerged from the said order of the Hon'ble tribunal in the assessee's own case would also hold good in the case of the assessee for M G Royalty paid for purchase of music, i.e. raw material In the year under consideration. In this respect we must point out that expenditure Incurred for purchase of raw material is always revenue expenditure irrespective of mode of payment viz. minimum guarantee royalty or recurring royalty & therefore mode of payment cannot change the basic character of the expenditure i.e., expenditure incurred for purchase of raw material (music In the present case) which is always revenue. One has to see for what the expenditure has been made. In the present case, the expenditure has been incurred to purchase music and therefore the same is allowable as revenue expenditure. We would also like to add In this regard that as we have already noted that a reference application u/s 256(2) filed by the Department against the said order passed by this Tribunal has been dismissed by the Hon'ble Calcutta ....
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.... facts in deleting the impugned minimum guarantee royalty relating to acquisition of music rights as revenue expenditure. Mr. Meena is very fair in not disputing the clinching fact that the instant issue is no more res integra since the assessee has succeeded qua the same up to hon'ble jurisdictional high court in earlier assessment years (supra). He seeks to pin-point an exception in assessee's impugned minimum guaranty royalty claim based on per cassette-wise payment. His case is that since it has undertaken to pay the impugned royalty based on cassette sales in addition to the former limb of lump sum figure as per the agreement clauses, this said component; even if treated as revenue expenditure, ought to have been booked in the year of music / cassette / CD records' sales. We find no merit in Revenue's instant argument. The fact remains that the assessee's impugned cassettes sale-wise royalty is payable on achieving the fixed target component sufficiently suggests that the sales pertaining to the instant limb remain uncertain going by the corresponding market trend dynamic of music industry. Be that as it may, hon'ble apex court's recent decision in Taparia Tools vs. JC....
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.... rightly noted the above twin discrepancies in all these four heads to estimate 10% disallowance therein. We find no substance in Revenue's instant argument seeking to revive the impugned ad hoc disallowance under four head(s). Apart from the fact that the earlier co-ordinate bench's order(s) (supra) have already upheld the CIT(A)'s identical action, we note that the assessing authority itself is very fair in estimating the impugned disallowance @ 10% meaning thereby that assessee's claim(s) stand accepted in principle @ 90%. We therefore adopt judicial consistency to affirm CIT(A)'s findings restricting all four disallowance(s) items from 10% to 2% only. The Revenue as well as assessee's corresponding grounds fail therefore as a necessary corollary. The assessee's main appeal ITA No.309/Kol/2017 rejected these four issues fails. 8. The Revenue's sixth substantive ground pleads that the CIT(A) has erred in law and on facts in holding that the assessee's training and development expenses amounting to Rs.19,82,000/- are revenue in nature as against that held as capital in the assessment order dated 23.03.2006. Suffice to say, we find no substance in Revenue's grievance at the t....
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....00/- less Rs. 12,50,000/- adjustment/ reversal during the year) was considered while computing the total rent chargeable to tax for the year. Copy of the letters dated 13 November, 2006 and 12 September, 2006 filed during the course of assessment proceedings is marked as Annexure-3 & 7 (refer Pg 210-219 and Pg 245-248 of the WS), respectively. The Assessing Officer, without appreciating the facts of the case, has inflicted an addition of Rs. 990,000/- which has no basis whatsoever and is liable to be deleted summarily. By making the above adjustment, the AO has virtually taxed a notional income which is not allowable. Your kindself will note that the actual income of the company from Sprint RPG is (Rs. 500,000) [i.e. Rs. 12,50,000/- on reversal less Rs. 7,50,000/- income booked during the year]. The appellant has already offered the rental income of Rs. 12,50,000/- to tax in earlier years, hence to pay tax on real income, the adjustment was carried out. By rejecting the adjustment, the Assessing Officer has ignored the principle of tax on real income. It is submitted that for the purpose of income-tax, what is to be taxed is the real income which is to be....
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....50,000 was booked during the year on account of Sprint RPG. However, pursuant to the downward rate revision during the year in respect of the rent for earlier period, there was an adjustment/reversal of Rs. 12,50,000. Accordingly, a net amount of Rs.(-) 500,000/- (income for the year Rs. 7,50,000/- less Rs. 12,50,000/- adjustment/ reversal during the year) was considered while computing the total rent chargeable to tax for the year. Copy of the letters dated 13 November, 2006 and 12 September, 2006 filed during the course of assessment proceedings is marked as Annexure-3 & 7 (refer Pg 210-219 and Pg 245-248 of the WS), respectively. c. The Assessing Officer, without appreciating the facts of the case, has inflicted an addition of Rs. 990,000/- which has no basis whatsoever and is liable to be deleted summarily. By making the above adjustment, the AO has virtually taxed a notional income which is not allowable. Your kind self will note that the actual income of the company from Sprint RPG is (Rs. 500,000) [i.e. Rs. 12,50,000/- on reversal less Rs. 7,50,000/- income booked during the year]. The appellant has already offered the rental income of Rs. 12,50,000/- to ta....
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....he year. Be that the case, the deductions available for house property income have been specified in the Income Tax act under Sec 24, and the Ld AO has quite correctly, in my considered opinion allowed the necessary deductions and disallowed the balance amount of Rs. 9,90,000/-. In summary, the addition made by the Ld. AO stands confirmed, and the ground is decided against the appellant-assessee. The ground of appeal stands dismissed." 12. We have given our thoughtful consideration qua above stated sole issue of rent amount addition. Both the learned representatives are ad idem during the course of hearing that the assessee's claim of impugned downward revision of rent charge and received in case of its sister concern requires necessary factual verification / computation once again in view of the learned lower authorities alleged failure in getting all the settlement records to this effect. We therefore deem it appropriate to restore the same back to the Assessing Officer to decide afresh as per law within three effective opportunities of hearing. The assessee's main appeal ITA No.310/Kol/2017 is accepted for statistical purposes. Assessment year 2005-06:- 13. The....
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....rores as against interest free loans of Rs.24.17 crores; respectively. The CIT(A) has followed hon'ble's Bombay high court's decision in CIT vs. Reliance Utilities and Power Ltd. in (2009) 313 ITR 340 (Bom) that the necessary presumption in such an instance is of utilization of interest free funds only. We accordingly affirm the CIT(A)'s findings under challenge. This Revenue's appeal ITA No. 472/Kol/2017 is dismissed. Assessment Year 2006-07:- 16. This fourth assessment year 2006-07 involves Revenue's appeal in ITA No.473/Kol/2017. Its first substantive grievance of minimum guarantee royalty of Rs.2,09,06,044/- already stand rejected (supra). 17. Next comes the Revenue's second substantive ground that the Assessing Officer had rightly invoked sec. 14A r.w. Rule 8D administrative expenditure disallowance of Rs.80 lakh qua the assessee's dividend income of Rs.24.23 lakhs. There can hardly be any quarrel that hon'ble Bombay high court's judgment in Godrej & Boyce Manufacturing Company Ltd. vs. DCIT 328 ITR 81 (Bom) as upheld in hon'ble apex court's has made it clear that Rule 8D carries prospective effect only from assessment year 2008-09. We notice that the CIT(....