TaxTMI 
TaxTMI 
2025 (10) TMI 1428
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....round and reasons for reference of the matter by the Division Bench before the Hon'ble President, ITAT for constitution of this Special Bench as the same will provide us the requisite context to examine the contentions advanced by both the parties. Reference by the Division Bench 3. As noted by the Division Bench, the assessee is the owner of Rajasthan Royals, which participates in annual sporting event named as Indian Premier League (IPL) organised by the Board of Control for Cricket in India (BCCI). Initially, the BCCI invited bid for auction of franchise rights of eight teams to participate in the IPL. In response to the bid, various entities submitted their bids and ultimately, the assessee was successful in getting the franchise rights of Rajasthan Royals. 4. The Division Bench further noted that a franchise agreement was thereafter executed between the assessee and the BCCI-IPL. As per the terms of the agreement, as a consideration for right to operate as a franchise and to be a member of League, the franchisee was required to pay to the BCCI-IPL two types of payments annually. Firstly, franchise fee represent the bid amount of Rs. 268 crore in ten equal annual insta....
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.... aforesaid factual background, after considering the rival contentions advanced by the Learned Counsel for the assessee and Ld. Department Representative, the Division Bench held that in the facts of the present case, both the assessee and the Revenue have no dispute that the franchise payment made or to be made by the assessee is capital expenditure, on which depreciation is allowable. At the same time, the assessee has raised alternative claim for allowance of franchise payment as revenue expenditure and extensive arguments were also advanced by both the parties on such issue. 8. The Division Bench referred to various decisions of the Co-ordinate Benches of the Tribunal and held that there is a conflict in the opinion expressed by different Benches of the Tribunal with regard to the nature and character of expenditure itself, whether revenue or capital and it was of the opinion that the primary issue which therefore has to be addressed is the nature of expenditure - capital or revenue. 9. The Division Bench further held that where the franchise payment made by the assessee is held in the nature of capital expenditure, they are unable to subscribe to the view expressed by th....
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.... of Rs. 268 crore, although payment made during the year was only of Rs.26.8 crore. In respect of the above, the assessee was asked to produce proof of payment of Rs 26,80,21,324/-, document pertaining to invitation to tender, bid document, copy of Franchise agreement between Jaipur IPL Cricket Pvt. Ltd and BCCI. The assessee provided these documents during the course of assessment proceedings. After having gone through the relevant documents, it was found by the AO that the assessee had made payment of Rs 26,80,21,324/- for buying the right to play in IPL matches. However it was noticed that the assessee claimed depreciation of Rs 67,00,59,009/- in the return of income for AY 2009-10 and the assessee was called upon to explain regarding the allowability of depreciation claim of Rs 67,00,59,009/ vide letter dated 15-05-2011. 13. The assessee vide letters dated 06-07-2011 and 13-07-2011 submitted that the cost of Franchise amounting to Rs.2,68,00,00,000/- was incurred towards acquisition of the Franchise through an auction conducted by the BCCI. It was stated that the consideration was payable to the BCCI in instalments, and hence, the expenditure was capital in nature and not re....
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..... 5. On termination, the Franchise shall vest in the BCCI-IPL after which the BCCI-IPL can transfer it to a third party. 6. As a consideration for a right to operate a Franchise and to be a member of the league, each Franchisee is required to pay to the IPL the following two sums, together termed as Franchisee Payments. a. A fee, described as a "Franchise Fee" to be paid in ten equal annual Installments. b. 20% of the franchisee Income received every year from the 11th year onward for the term of the league. 7. The franchisee payments would be adjusted only on the date of first match of the league every year. 8. If no league takes place at all in any year, no liability arises to make the franchisee payments. 15. In view of the aforesaid features of the Franchise Agreement, the AO noted that : (a) each Franchisee acquired a right to operate a team for the terms of the league; (b) by virtue of this right, each Franchise is entitled to receive certain revenues relating to the league; (c) as consideration for acquiring these rights, each Franchisee is to make the above Franchisee payments and (....
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.... years comes to Rs. 187.60 crores c. 20% of the franchisee Income from the 11 year onwards 18. The AO held that these payments are towards the cost of the Intangible asset acquired. The league deposit is paid on 2nd January of each year. The amount is appropriated towards franchise consideration on the date of the first match of the league. The second part of the franchise consideration is also to be paid as per the Agreement on the date of the first match of the league for a particular year. Clearly, if for any reason the league match is not held in a year or season, the league deposit will not be appropriated towards franchise consideration. It would be refunded to the Franchisee in terms of clause 7.1(a)(i) of the agreement. The second part of franchise consideration also will not be paid as this is paid on the first day of the first match. Thus, the payment to be made by the Franchisee as franchise consideration is thus, not absolute but contingent on the league matches being played. If the matches are not held, the franchise consideration is not paid. Thus, cost of the asset increases fractionally year after year subject to payments. Further, from the 11th year onw....
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....e first match of the League in the year in which such deposit is paid. The deposit would be refundable in any year only if the League does not take place at all in such year. ii. Cost of acquiring and operating the Franchise of Rs. 187.6 crs (payable over a period of 10 years, annual payments to be made in advance each year). This part of the consideration would be payable each year on the date of the first match in the League in each such year. iii. 20% of the franchise income received in each year, from the 11th year onwards. 22. The assessee, based on the above contractual commitments, submitted that it has considered the Franchise consideration at Rs. 268 crs (i.e. Rs. 80.40 crs plus Rs. 187.6crs), the third component payable from 11th year onwards being incapable of any reliable estimate, was not considered for such value. 23. It was submitted that before determination of the "actual cost" of an asset, the "asset" and its nature need to be clearly understood. In the assessee's case, it is clear from the Agreement that what it has acquired under the Agreement from BCCI are the "Franchise Rights" in respect of the IPL league matches to be played, with....
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....ent. Therefore in the instant case, the cost of the franchise is Rs. 268 crores payable over a period of 10 years. 28. It was submitted that the AO, for the purpose of the disallowance, has assumed/considered that since the Franchise Rights are in respect of matches to be played, the payments deferred represent contingent part of the asset, as match may not be played in future year(s). It was submitted that such assumption/consideration by the AO is ill founded for the following reasons: i. The cost determined by the assessee of the Franchise Rights acquired from BCCI was based on the offer made by it while bidding for its acquisition, which clearly indicated the total amount for which the Franchise Rights were bid (information in relation to such bids and the amounts bid for specific Franchise Rights were also available in the media at the time and therefore, in public domain). It was on such bid that the specific Franchise Rights were acquired at a total cost as mentioned in the Agreement and committed by the assessee. Non-payment of any part thereof by the assessee would have entailed not only loss of Franchise revenues but also other legal consequences. ii.....
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....ng conditions are satisfied. i. The asset is owned wholly or partly by the assessee, and ii. The asset is used for the purpose of business of the assessee. 30. It was submitted that the assessee is the owner of the 'intangible asset as the assessee is not only the full owner of the asset and has control over the same, but also derives income from the said asset. In the case of CIT v. Orient Longman (P.) Ltd. (227 ITR 68), the Hon'ble High Court of Andhra Pradesh held that the "owner" is the one who has the dominion and control over the property in his own right and not in the right of others. The assessee also relied on the decision of the Lucknow Bench of the Tribunal in the case of Smt. Surinder Kaur v. Income-tax Officer (27 SOT 28) wherein it was held as under: "... it can be said that a wide meaning must be given to the term 'ownership". If the assessee is, in possession of an asset, using it for the purposes of earning income and income earned there from is declared in the return of income which is accepted by the revenue, then for all purposes the assessee is the owner of the asset and once it is being used for the purposes of busine....
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....n in whom the title vests but in his own rights." 33. It was submitted that it is clear from the Agreement that the payment towards the Franchise fees is to be made in ten equal installments for the first ten years of the League. Further, the assessee placed reliance on the case of Mirza Ataullaha Baig (202 ITR 291) wherein the High Court of Bombay held as under: "The fact that the full price was not paid at the time of purchase but only a part was paid and the balance was to be paid in installments did not militate against the passing of property to the purchaser. The law is well-settled that in a case of sale in which the price is to be paid by installments, the property passes as soon as the sale is made, even though the price has not been fully paid and may later be paid in installments." 34. It was submitted that the Delhi High Court, in the cases of General Industries Corpn. (155 ITR 430) as well as in the case of Nagpur Golden Transport Co. (233 ITR 389) has reiterated the aforesaid proposition as under: "in a hire-purchase scheme, the hirer would be entitled to claim depreciation. These judgments clearly go against the contention of the learned couns....
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....Rights, Licensing & Merchandising Rights and Franchisee Rights. Each Franchisee is responsible for all costs relating to the operation of its Franchise including the fees and salaries of all persons providing services for its Team, all costs of staging home match including hiring of stadium and security & staff costs at stadium. 5.2.7. Consideration for Franchisee: As a consideration for the right to operate a Franchise and to be a member of the League, each Franchisee is required to pay to the IPL the following two sums, together termed as Franchisee Payments: a) A fee, described as the 'Franchise Fee' to be paid in ten equal annual installments. b) 20% of sums received by each Franchisee from the exploitation of the Central Rights and Franchise Rights every year from the eleventh year onward for the term of the League. The successful bid amount of each Franchise represents the Franchise Fee payable in ten equal annual installments. In this case, M/s. Jaipur IPL Cricket Pvt Ltd. made the successful bid for Jaipur Team at USD 67.00 million. This bid amount is payable as the Franchise Fee in ten equal annual installments. ....
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.... This satisfies the test of being a "licence" or "franchise" or "any other business or commercial right of similar nature in terms of section 32(1)(ii). Therefore, the right to operate a Franchise and to be member of the League is a "licence or Franchise or "akin to a licence or Franchise", an item of intangible asset described in section 32(1)(ii) of the 1961 Act. Consequently, the Franchisee Payments being the expense incurred for the right constitute capital expenditure. 5.2.8.4. In another case, Jonas Woodhead & Sons (India) Limited Vs CIT 224 ITR 342 (SC), a foreign firm agreed to give the assessee the technical information and know-how relating to the setting up of a plant suitable for manufacture of the products as well as the technical knowhow relating to the setting up of the plant itself. It was agreed that in consideration of the information to be furnished and services to be rendered to the assessee by the foreign firm, the assessee shall pay a royalty on the turnover of the licensed products. In terms of the agreement the assessee made certain payments to the foreign firm as royalty. The AO disallowed one-fourth of the aforesaid payments on the ground that suc....
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.... 5.2.9. Whether depreciation is allowable: 5.2.9.1. In CIT Vs Alps Theatre 6 ITR 377 (SC), a question arose before the Apex Court under the Income tax Act, 1922 whether the cost of land was entitled to depreciation under the Schedule to the Income-tax Act along with the cost of the building standing thereon. The Apex Court noticed that the word used in the Act was "depreciation" and depreciation" meant "a decrease in value of property through wear, deterioration or obsolescence: the allowance made for this in bookkeeping accounting, etc" (Webster's New World Dictionary). In that sense the Apex Court held that land cannot depreciate. The law has not changed since then except by bringing certain intangible assets within the purview of depreciation under section 32 of the Income Tax Act, 1961. If the aforesaid principles are applied to intangible assets, the settled law would be that only such capital assets whose value can diminish is eligible to depreciation under the Act subject to fulfillment of the conditions that they are owned by the assessee and used for the purpose of business of the assessee. 5.2.9.2. Two new teams, Kochi and Pune were added to th....
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....ual to 20% of the Rights Income received is payable in respect of 11th year and each subsequent year till the Term of the League. The term is unlimited. Jaipur IPL was to pay the Franchisee Fee in annual installment of Rs. 26.80 crores for the period 2008-17 (inclusive). This sum was to be appropriated every year towards Franchisee Fee on the date when the first match of the League for that year was played. The appellant acquired the right to Franchise in the year 2008 when it paid the first annual installment of the Franchisee Fee in the year 2008. 5.2.10.3. A question arises whether Rs. 26.8 cores can be taken as the WDV of the Franchise acquired during 2008. It is noted here that this is only a part of the actual cost of the Franchise paid in that year. In this situation whether the AO can determine WDV in each assessment year by ascertaining afresh what was-the actual cost to the assessee of the Franchise falling in the block of intangible asset or whether the AO is bound by the WDV determined in the earlier assessment year as the starting point and can merely scale down the written down value of the previous year. A similar issue arose before the Apex Court in the cas....
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....the amount of the Franchisee Payments of every subsequent year will be added to the WDV the Block of Intangible Asset at the beginning of that year and depreciation will be allowed on the so adjusted WDV in that year. 5.2.10.5. Thus, in the case of the appellant, the relevant year for the first annual installment of Rs.26.80 crores is the A.Y.2009-10. If appellant has no Block of Intangible Asset Rs. 26.80 crores would be the WDV of the Block of Intangible assets and depreciation of Rs. 6.70 crores at the prescribed rate of 25% is allowable. The WDV of the block at the end of the A.Y 2009-10 would be Rs. 20.10 crores. In the next year, if appellant pays the further sum of Rs.26.80 crores that will be added to the aforesaid WDV and depreciation @25% shall be allowed on the adjusted WDV of Rs. 46.90 cores and so on every subsequent year. If appellant does not pay the second annual installment in the A.Y.2010-11 and there is no other addition to the Block of Intangible Asset depreciation would be allowed only on WDV of Rs. 20.10 crores. Thus every subsequent year's Franchisee Payments shall be treated as additions to the Block of Asset and depreciation would be allowed on....
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....irst year itself or as the cost of the Franchise Rights Intangible. 5.2.13. From the copy of audited accounts called in these proceedings, it is observed that in its books Rs 268 crores is added to its Fixed Assets under head "Intangibles" and depreciation of Rs 26.80 crores is claimed. In its tax return it has claimed the value of Intangible assets is Rs 268 crores on which depreciation of Rs 67.00 crores is claimed. 5.2.14. Several case laws have been relied upon by the appellant. The same are discussed now. In the case of Tata Iron and Steel Company Ltd., the issue was fluctuation in exchange rate which resulted in the amount payable in respect of foreign currency loan used to finance the asset, becoming less. Admittedly, the facts in the present case is different in the present case, it is not as if Rs 268 crores is the total cost which is financed. The total cost itself, which includes cap of Rs 268 crores plus further amounts after 10 years, is uncertain from the beginning itself. In CIT vs Orient Longman P Ltd., the facts were that assessee purchased a Flat but conveyance deed had not been executed. Full payment had been made and assessee had received posse....
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....smissed." Contentions advanced by the Ld. Counsel on behalf of the assessee 38. Now, coming to the contentions advanced by the ld. Counsel, Shri Yogesh Thar during the course of hearing. Firstly, as regards Question No. (i) raised for consideration of the Special Bench, the Ld. Counsel submitted that in so far as the assessee is concerned, there is no conflict of view as regards the nature of the expenditure. The expenditure towards acquisition of Franchise Rights is considered as capital in nature by both the Assessee and the Department. Therefore, the said question does not hold any relevance in the present case. However, the Assessee has made an alternative plea that in case it is held that the yearly payments amount to improvement of the asset, then, by its very nature, the yearly payment cannot be regarded as having enduring benefit and therefore, should be held as revenue in nature. 39. As regards Question No. (ii), regarding the actual cost of the asset, the Ld. Counsel referred to Section 43(1) of the Act, which defines actual cost to mean 'actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly o....
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....ognised only if it is probable that future economic benefits attributable to the asset will flow to the enterprise and cost of the asset can be reliably measured. Para 24 states that where the purchase consideration is in the form of cash or other monetary assets, it is 'reliably measured". The term 'probable' is not specifically explained in AS 26. However, a clue can be taken from the said word explained in AS 29 to mean "more likely than not'. It was further submitted that in the present case, since the Assessee is required to pay Rs. 268 crores over a period of ten years towards the acquisition of Franchise Rights, it can be said that the cost of the asset can be reliably measured. 43. With regard to Contingency upon payment towards Franchise Rights, the Ld. Counsel submitted that the AO and Ld.CIT(A) in their orders have alleged that the payment to be made towards Franchise Rights is contingent on league matches happening. In this regard, it was submitted that based on the franchise agreement entered into between BCCI and the Assessee, BCCI has agreed to stage league matches every year during the term of the franchise agreement. In the event it is not viable....
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....es has arisen in presenti though to be discharged in future in ten equal annual installments. The Assessee discharges it obligation under the FA, it is not open to the BCCI to terminate or increase the Franchise Consideration by a single rupee. Indeed, the risks and rewards of the Franchise Rights have passed on to the Assessee upon signing of the Agreement and no new risks and rewards are added on year-to-year basis. 47. To reiterate that the assessee is the full owner of Franchise Rights, the Ld.AR submitted that the AO has contended that franchisee is not the full owner of the asset as all pervasive rights are assigned to BCCI and the franchisee is allowed to enjoy only those rights which the BCCI acknowledges. In this regard, it was submitted that the Franchise Agreement has clearly defined the various rights obtained under the agreement. For example, the definition of 'franchisee rights', clause 2.1, clause 2.3, clause 4 where it is stated that BCCI 'hereby grants' the following rights and several other clauses. The Assessee is paying for Franchise Rights and not for BCCI rights. The Assessee's rights include, inter alia, obtaining its share of media and....
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....hts by making year-to-year payment. No additional rights are attached to the yearly payments. Also, no additional future economic benefits can be expected after making year-to-year payments. This is therefore, not an improvement of the asset. It is a case of the original cost to be paid in installments. 50. It was submitted that an analogy can also be drawn from the Hire Purchase Arrangements where the hire-purchaser takes the possession of the asset and agrees to makes periodic payments to the hire-vendor towards the acquisition of that asset. The CBDT vide Circular No. 9 of 1943 dated March 23, 1943 issued certain instructions for dealing with cases in which an asset is being acquired under hire-purchase agreement. Para 3 therein provided that the periodical payments made by the hire-purchaser should for tax purposes be regarded as payment on account of purchase to be treated as capital outlay, depreciation being allowed to the lessee on the initial value (ie., the amount for which the hired subject would have been sold for cash at the date of agreement). In view of the foregoing, it was submitted that the annual instalments paid by the Assessee are towards the acquisitions of....
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.... in Assessee's case it was not a mere provision, but it was a liability as per para 11 which is defined as present obligation arising from past events the settlement of which is expected to result in an outflow of resource embodying economic benefits. In the Assessee's case, the past event is signing of Franchise Agreement. The obligation is the agreement to pay Rs. 268 crores over 10 years. Meeting such obligation would result in outflow of resources. The earning from the game is the expected economic benefits. Based on this, the Ld.AR submitted that the liability to pay Rs. 268 crores has been incurred which is only to be settled in future date and it should therefore, the entire amount of Rs. 268 crores which should be capitalised as intangible asset and depreciation allowed thereon. Contentions raised by the ld Commissioner of Income Tax on behalf of the Revenue 53. In her submissions, the ld CIT DR, Ms Neena Jeph submitted that as far as the first question of law as to whether the acquisition of franchise rights constitutes a capital asset, there is no dispute between the assessee and the Revenue that the payment made for the said franchise constitutes capital ex....
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.... The assessee did not acquire on day one a fully paid up intangible. The right to continue enjoying the franchise was expressly conditioned on ongoing payment and compliance. In substance and in law, the consideration was staggered over time and the assessee's economic stake grew as and when each instalment was actually paid or incontrovertibly incurred. To treat the entire Rs.268 crore as incurred at inception ignores the contract and inflates the asset's tax cost contrary to statute. 57. It was submitted that Section 43(2) provides that "paid" means actually paid or incurred according to the method of accounting on which business profits are computed. This definition does not permit the inclusion of contingent, avoidable, or suspended charges in actual cost. A liability is incurred only when it crystallises under the contract and becomes enforceable. Where the obligation to pay depends on future events such as matches being held or seasons actually occurring, the sums do not become due until those triggers occur. The franchise agreement explicitly embedded such event based contingencies. Where matches are not held or seasons are cancelled, the obligation to pay stands ....
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.... other teams contracts were not identical. If the assessee were permitted to depreciate the entire Rs.268 crore up front, a sale soon after the cooling period would produce a double deduction of the same economic value. The seller would have written off the notional full cost in year one. The buyer would pay the market price on transfer and then claim depreciation on that purchase price. Such a double depreciation is at odds with the Act. The safeguard against this anomaly is the statute itself. Depreciation must track amounts actually paid or liabilities that have genuinely accrued to the assessee year by year, so that each taxpayer deducts only the cost they truly bear. 61. It was submitted that viewed through the prism of the actual terms, the yearly franchise payments cannot be characterised as an all at once day one cost of acquisition. They are the continuing consideration for ongoing enjoyment of the same underlying rights. In economic substance each instalment either adds to or maintains the assessee's interest. Failure to pay causes the value to stagnate or collapse, even to zero if the franchise is dissolved. Put differently the payment stream functions as a series....
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.... liability under the loan. This itself demonstrates that the judicial consensus has consistently been that depreciation attaches only to sums already met, not those merely payable or contingent in nature. 64. It was submitted that on the assessee's reliance on accounting norms from Challapalli Sugars case and the assessee's claim that the Supreme Court recognized accounting principles as determinative of "actual cost" is misplaced. A careful reading of para 14 of the judgment shows that the Court applied accounting principles only because, under the 1922 Act, there was no statutory definition of "actual cost." "14. It would appear from the above that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets which have been created as a result of such expenditure. The above rule of ....
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....n is made, section 37(1) and the law explained in Rotork become irrelevant. To import the principles of section 37(1) into the domain of capital allowances under section 32 would amount to applying a provision beyond its legislative scope, a course impermissible in law. The assessee's further contention that the words "expends or lays out as used in judicial precedents under section 37(1) should carry the same import when interpreting section 32 is equally untenable. Words in a statute cannot be read in isolation but must be construed in the context of the section in which they appear and the legislative intent it embodies. Section 37 is a residuary provision dealing with allowable expenditure of a revenue nature, whereas section 32 deals with depreciation allowance on capital assets. The two provisions are conceptually distinct, one relates to a deduction of expenditure laid out for the purpose of business, and the other to a statutory allowance towards wear and tear of capital assets. Conflating the two would obliterate this distinction and lead to absurd results. The mere similarity of phraseology cannot justify transplanting judicial interpretations given in the context of ....
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....ontingent and event specific outlays into an actual cost on day one 70. Finally, the Ld. CIT-DR submitted that depreciation must follow "actual cost" within sections 32 and 43, which focuses on what is actually paid or has crystallised and been met in the relevant year. This is exactly the thrust of the case laws cited by the Department. In Habib Hussein v. CIT [1963] 48 ITR 859 (Bom), "actual cost to the assessee" was read as the amount the assessee has in fact paid or spent to acquire the depreciable asset. In CIT v. Challapalli Sugars Ltd. [1970] 77 ITR 392 (AP), later considered by the Hon'ble Supreme Court in Challapalli Sugars [1975] 98 ITR 167 (SC), the Supreme Court permitted capitalization only of interest actually incurred before commencement and not in the whole interest that was payable during the entire tenure of the loan agreement. Depreciation must follow the statutory scheme of amount actually "paid" as understood through section 43(2). Only amounts that are actually paid in the relevant year, or that have crystallised into an enforceable liability for that year, can form part of the depreciable base. A notional figure that is merely liable to be paid does no....
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....ement to comply with the franchise agreement and regulations at all times, be entitled to operate their franchise at their discretion including the development of local, commercial arrangements with the sponsors and suppliers. It was also provided that there are certain League rights which are to be exploited centrally by the IPL. Thereafter, the bid document defines the "central rights" and the "franchisee rights" and the term of the franchise to operate the team for so long as the league continues. It provides that each bidder will be obliged to enter into the franchise agreement and deliver it to IPL as part of its bid documentation. It further provides that the franchise or the owners of the franchise shall after a minimum period of three years be entitled to sell their franchise to a third party subject to the terms and conditions as set out in the franchise agreement. 72. The bid document thereafter talks about the franchisee payments and it provides that as consideration for right to operate a franchise and to be a Member of the League, each franchise shall pay to IPL the following sums - (a) for the first ten years, a fee for the grant of above rights (referred ....
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....nd Jaipur IPL Cricket Private Ltd., the assessee, in connection with establishment and operation of such franchise on the terms and conditions specified therein. The agreement was signed on behalf of the assessee on 02-04-2008 and on 14-08-2008 on behalf of BCCI and as provided in the agreement, where the agreement is signed on different dates, then it shall take effect on the later date. 77. In the franchise agreement, the term "franchise" has been defined to mean franchisee's individual business of establishing and operating the team pursuant to and as contemplated by this agreement. The "franchise consideration" has been defined to mean all sums payable by franchisee to BCCI-IPL under clause 7.1. The term "franchise rights" has been defined to mean all rights in respect of the team including those rights set out in clause 4.3 excluding the Central Rights and all rights in respect of licencing of replica uniforms. 78. Clause-2 of the franchise agreement talks about the rights granted to the franchisee/assessee and contents thereof read as under: "2. Rights Granted 2.1 BCCI-IPL hereby grants to the Franchisee during the Term the right: (a) to carry....
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....ging of the League by BССІ-IPL (in whole or part) shall not constitute a breach of this Agreement for the purposes of clause 11 or otherwise. 2.4 BCCI-IPL shall supply to the Franchisee a copy of the Operational Rules and Match Staging Regulations (it being acknowledged that the Franchisee is able to download the current League Rules from the website relating to the League and shall be deemed to have done so throughout the Term." 79. Clause-3 of the franchise agreement talks about term and renewal of the franchise and it provides that the agreement shall come into effect upon signature and shall continue for so long as the league continues subject to termination, suspension or renewal as provided in the agreement. 80. Clause-4 of the franchise agreement talks about Central Rights and Franchise Rights and the contents thereof read as under: "4.1 The Franchisee acknowledges and agrees that BCCI-IPL owns the Central Rights and shall throughout the Term have the exclusive right to exploit all of the Central Rights and that if and to the extent that further rights in relation to the League become available for exploitation which have not previou....
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.... of the Central Rights; (b) ensure that all BCCI-IPL Partners are allowed to exercise all of the rights granted to them by BCCI-IPL insofar as such rights have been notified to the Franchisee and relate to the Team, the Franchise, the Squad and/or any Matches involving the Team including without limitation (and insofar as the same are within the Franchisee's power): (i) by allowing all accredited broadcasters and other media representatives such access and other assistance as is required for them to carry on their intended activities at the Stadium and any other relevant facilities; (ii) by ensuring the delivery of the Title Sponsorship Rights, the Umpire Sponsorship Rights and Official Sponsorship Rights to the Title Sponsor, the Umpire Sponsor and the relevant Official Sponsor respectively; (iii) by ensuring that any interviews with Players or the Coach take place in such a way as to ensure the delivery to all BCCI-IPL Partners of any exposure or other benefits of any kind relating to such interviews to which such BCCI-IPL Partners are entitled; and (iv) by ensuring all relevant third parties (including BCCI-IPL Partners) have suff....
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.... be refunded without interest, and (ii) the sum of USS 4.69 million (Four Million Six-Hundred-and-Ninety Thousand Only equivalent to INR 18,76,00,000/- (Rupees Eighteen Crores, Seventy Six Lacs only) calculated at the exchange rate of INR 40/-1USD) which shall in each such year be paid on the date of the first match in the League in each such year (b) from and including 2018 onwards an amount equal to 20% of the Franchisee Income received in respect of such year. Such sum shall be paid in four instalments within 60 days of 31 March, 30 June, 30 September and 31 December in 2018 and each subsequent year of the Term. 7.2 The Franchisee shall within 30 days of 31 March, 30 June, 30 September and 31 December in each year from 2018 onwards supply BCCI-IPL with a report which includes full details of all Franchisee Income which has been receive by the Franchisee (or any Franchisee Group Company or Owner) in the immediately preceding three month period up to 31 March, 30 June, 30 September and 31 December (as appropriate) in each year. 7.3 The Franchisee shall from 2018 onwards throughout the Term and for one year thereafter keep and maintain accurate a....
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....r deduction of the relevant league expenses in respect of such year. 84. Clause-10 talks about the sale of franchise and the terms and conditions under which such sale can happen. It provides that the franchisee has no right to assign or delegate the performance of any right or obligations under the agreement. At the same time, with BCCI-IPL prior written consent which can happen after the first three years and subject to other conditions as so specified, the franchisee will have the right to sell the franchise to any person and in such an event, a new franchise agreement will be entered into by way of replacement of this agreement for the remainder of the term. 85. Clause-11 talks about the termination of franchise by either party by notice in writing if the other party has failed to remedy any remediable material breach of the agreement and it has been provided that a breach by the franchisee of its payment obligations under the agreement shall be deemed to be a material breach for the purposes of this clause. It further provides that either party may terminate the agreement if the other party commits or permits an irremediable breach of the agreement or if it is subject to....
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....mmercial right of similar nature" within the meaning of section 32(1)(ii). 88. The Ld.CIT(A) accordingly held that the right to operate a Franchise and to be member of the League is in the nature of a "licence" or "Franchise" or is at lease akin thereto, and hence, qualifies as an intangible asset described in section 32(1)(ii) of the Income Tax Act, 1961. The franchisee payments, being expenditure incurred for acquiring such right, were therefore capital in nature. 89. Further, relying upon the decision of the Hon'ble Supreme Court in the case of Jonas Woodhead & Sons (India) Ltd. vs. CIT [1997] 224 ITR 342 (SC), the Ld.CIT(A) held that by making the Franchise payments, each Franchisee acquired the right to set up an independent business of operating a team in League. It was, in effect, the setting up of a new business. Even upon expiry of the League tenure, there existed no embargo on the Franchisee to continue its business operations. Accordingly, the Ld.CIT(A) concluded that the entire Franchise payments made for setting up such business represented capital expenditure. The fact that the payments were to be made in annual instalments or computed as a percentage of future ....
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....inancial year relevant to assessment year 2009-10, being the assessment year considered for present discussions. 94. The construct of the relevant provisions of the Act which have a bearing on the matter under consideration are as follows. Section 4 talks about charge of income tax. It provides that the income tax shall be charged for any assessment year in accordance with, and subject to the provisions of this Act in respect of the total income of the previous year of every person. The total income has been defined in section 2(45) to mean total amount of income referred to in section 5 computed in the manner laid down in this Act. Section 5 talks about scope of total income, wherein sub-section (1) provides that subject to the provisions of this Act, the total income of any previous year of a person, who is a resident, includes all income from whatever source derived, which is received or deemed to be received in India in such year or accrues or arises or deemed to accrue or arise to him in India during such year or accrues or arises to him outside India during such year. Section 14 thereafter provides for various heads of income and it provides that save as otherwise provided....
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....he amount of such reduction does not exceed the written down value as so increased". 99. It further provides for determination of written down value where the assets forming part of block of assets or the whole block of assets are transferred subsequently by various transfer mechanisms such as by way of slump sale, by holding company to subsidiary, by amalgamating company to the amalgamated company, by demerger, etc. 100. The expression "actual cost" has been defined u/s. 43(1) of the Act. It provides that in sections 28 to 41 and in this section, unless the context otherwise requires, "actual cost" means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. The relevant provisions of section 43(1) reads as under: "actual cost" means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority." 101. The expression "money payable' has been defined as having the meaning as in explanation below 41(4) and as per that explanation, money payab....
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..... Indermani Jatia v. CIT [1959] 35 ITR 298 (SC) and Morvi Industries Ltd. v.CIT [1971] 82 ITR 835 (SC)]. The distinguishing feature of the mercantile system of accountancy is that it brings into credit what is due immediately it becomes legally due, and before it is actually received; and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. [ReferCIT v. Shrimati Singari Bai [1945] 13 ITR 224 (All) and State Bank of Travancore's case (supra)]. Where accounts are kept on mercantile basis, the profits or gains are credited though they are not actually realised and the entries thus made really show nothing more than an accrual or arising of the said profits at the material time. The same is the position with regard to debits made. [Refer-Smt. Indermani Jatia's case (supra)] and C.I.T v. Shiv Prakash Janak Raj & Co. (P.) Ltd. [1996] 88 Taxman 536 (SC)]. 13. In the mercantile system of accountancy, the book profits are taken for the purpose of assessment of tax, though the credit amount is not realized or the debit amount is not actually disbursed. [ Refer-CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 (S....
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....DT) initially notified two accounting standards in 1996 for the purpose of computing taxable income. These were later replaced by the current Income Computation and Disclosure Standards (ICDS) vide notification dated 31-03-2015 and amended notification dated 29-09-2016 with effect from assessment year 2017-18 and hence, not relevant and not considered for the present discussion. The initial notified AS defines 'Accounting Policies' to mean the specific accounting principles and the methods of applying those principles adopted by the assessee in the preparation and presentation of financial statements. It further provides that the Accounting Policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies. For this purpose, the major considerations governing the selection and application of accounting policies are the following, namely: (i) Prudence : Provisions should be made for all known liabilities and losses, even though the amount cannot be determined with certainty and represents only a best ....
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....rious situations where the actual cost has to be determined. However, it doesn't specifically define as to what is meant by "actual cost". The emphasis is more on situation where such actual cost is met by any other person or authority and in such a situation and to that extent, the actual cost shall stand reduced. It further nowhere specifically excludes the applicability of the method of accounting and more particularly, mercantile system of accounting as so employed by the assessee in the instant case for determination of actual cost. Therefore, for the purposes of determination of actual cost, one has to give a harmonious construction to the method of accounting regularly followed by the assessee as emphasized by provisions of section 43(2) of the Act and which should also be in consonance with section 43(1) of the Act and so long as actual cost as so determined in accordance with regular method of accounting is not in conflict with any express provision of section 43(1), the same shall form the basis for determining the written down value and the corresponding depreciation thereon. 108. During the course of hearing, our reference was drawn to the decision in case of CIT vs.....
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.... of borrowed moneys, interest paid on the loan up to the date of commencement of the business can be capitalised and treated as part of the actual cost of the plant. It held that it would not be correct to treat the interest paid on the borrowed capital on par with the services rendered or supervision made by technicians to select and erect the machinery and expenses incurred in that behalf. It held that while interest is paid not on the acquisition of the asset, but on borrowed capital and the fact that the borrowed money has gone into the acquisition of the plant may be a factor, but is certainly not directly or intimately connected with the acquisition of the asset itself. The interest paid, therefore, is on the capital which the assessee obtained by borrowing and has little to do with the actual cost to the assessee of the machinery which is his asset. It must be remembered that the source of capital is hardly relevant. What is relevant and pertinent is what actual cost the assessee has incurred in acquiring and erecting the machinery. It accordingly held that when sections 10(2)(vi) and 10(5) speak of original and actual cost of machinery to the assessee, it only means the amo....
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....d accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production of such borrowed money can be capitalized and added to the cost of the fixed assets which have been created as a result of such expenditure. It was held that the rule of accountancy should be adopted for determining the actual cost of the asset in absence of any statutory definition or other indication to the contrary. 112. We find that the said decision still holds the field and the rule of accountancy should continue to guide the determination of actual cost in absence of anything contrary so provided in the statute. Infact, we find that if we exclude the various explanations which have been provided in the statute from time to time which are, in any case, not relevant for the present purposes, nothing much has changed over the years as far as the definition of actual cost is concerned which is similarly worded as was under consider....
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.... its intended use. 114. We, therefore, find that the Accounting Standard lays emphasis on accounting for intangible assets which satisfy the requirement of identifiability, control over the resource and expectation of future economic benefits flowing to the enterprise and the cost of which can be measured reliably. In the instant case, there is no dispute regarding identifiability of the intangible assets in terms of right to operate the franchise and to be a member of the league which has been acquired during the year, control over the franchise by the assessee subject to certain obligations and the league matches happening year-on-year being a probable event as can be seen from clause 2.3 of the franchise agreement which provides that BCCIIPL agrees to stage the leagues in each year during the term as contemplated by the Operational Rules and the expectation of future economic benefits flowing to the assessee in terms of franchisee income. The annual league matches are no doubt at the core of the franchise agreement, it is relevant to note that the franchise fee and league deposit of Rs. 268 crores are in respect of whole bundle of franchise rights acquired by the assessee at ....
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....ed reliably, the same cannot be basis to ignore and not account for the fixed component which is clearly measurable and defined. We therefore find that the assessee has followed the right approach in accounting for the intangible asset at a cost of Rs 268 crores with corresponding liability towards BCCI-IPL in its books of accounts which is clearly in consonance with the Accounting Standard - 26 issued by the ICAI and the same should be taken as cost of the intangible asset acquired during the year for the purposes of determining the written down value of block of intangible assets and depreciation thereon u/s 32(1)(ii) of the Act. The depreciation therefore shall be allowed on the entire franchise fee of Rs 268 crores and not on Rs 26.80 crores actually paid during the financial year relevant to AY. 2009-10. 116. Besides determination of actual cost relevant to AY. 2009-10 in respect of intangible assets acquired during the previous year, a related issue that arises for consideration is whether the actual cost so determined is a static figure for all times to come once it entered the block of assets and whether it can be modified or altered at a subsequent stage in any of the s....
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....luding the rules made thereunder. The Hon'ble Supreme Court held that the limit to which the ITO can go back does not stop at the written down value of the previous year but extends up to the figure of the original cost, and the method enjoined by section 10(5)(b) of 1922 Act is not that the Income-tax Officer should merely scale down the written down value of the previous year but that he should take into consideration the actual cost, determining it for himself, if necessary, take also into consideration the allowances granted in the past and then make his own computation as to the written down value for the assessment year with which he is concerned. Thus it cannot be said that merely because under section 35 of 1922 Act, some written down value and the depreciation amount have been determined, they are a final determination binding for all times to come nor does the determination operate as stopple or res judicata for the following years. 118. In the case of CIT vs. Hides & Leather Products (P) Ltd. (supra), a similar matter came up for consideration before the Hon'ble Gujarat High Court. In that case, the facts of the case were that in 1955, a piece of machinery was purchas....
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....the first instance and not merely depend upon the determination of that question in any of the previous assessment years. 120. The Hon'ble Gujarat High Court further noted that in the said case, the system of account keeping of the assessee was on mercantile basis and when a credit entry was shown in the books of account in favour of the Swiss suppliers, from that date onwards, the assesses-company accepted its liability to the Swiss suppliers and acknowledged their liability to pay and it held that because of the mercantile system of account keeping, it was not necessary for the assessee actually to pay the amount to the Swiss suppliers in order to claim the amount of Rs. 30,572 as the actual cost of the machinery. It held that because of the mercantile system of account keeping, one could proceed on the footing that from 1955 to 1960, the assessee-company by mentioning year after year the liability to the suppliers was acknowledging its liability to the suppliers and the amount of Rs. 30,572 was being shown as the actual cost. The Hon'ble Gujarat High Court has thus laid emphasis on the mercantile system of account keeping and held that it was not necessary for the assessee to....
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....62-63 to 1964-65 by Rs. 30,572 in the light of section 43(1) of the Act of 1961. The Hon'ble High Court accordingly held that for the assessment year 1961-62, the depreciation was rightly allowed to the assessee on the basis that the cost of the machinery in question was Rs. 30,572 and for assessment years 1962-63 to 1964-465, the depreciation was wrongly allowed to the assessee as the actual cost to the assessee should be reduced by the amount of Rs. 30,572 for these four assessment years. The said decision thus underscores the importance of method of accounting, as we have noted above, in context of section 145 of the Act and at the same time, emphasized on the definition of actual cost as so defined u/s 43(1), thus giving a harmonious construct to the relevant provisions of the Act and allowing necessary flexibility to determine actual cost due to change of events in subsequent years. 124. Similarly, in the case of CIT vs. Saharanpur Electric Supply Company Ltd., (supra), the matter came up for consideration before the Hon'ble Allahabad High Court. In that case, the appellant electric supply undertaking had installed service connections during the years relevant to assessment....
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....nd out the written down value for the assessment year 1962-63, is to deduct therefrom the depreciation allowed for the assessment year 1961-62. 9. Attractive as this argument appears, there are two difficulties in accepting it. The first is the language of section 43(6)of the 1961 Act and, even, its predecessor section 10(5)(a) of the 1922 Act. Though, in substance, depreciation on an asset for any assessment year is calculated on its written down value which is normally carried forward from an earlier assessment year, the phraseology of the Act does not bear out the contention that the actual cost of the asset has to be determined only once, viz., in the previous year of its acquisition. Section 43(6)specifically deals with two categories of assets: (1) those acquired during the relevant previous year, and (a) those acquired earlier to that. Even in respect of the latter class of assets, the Act envisages a computation of the actual cost of the asset and the deduction therefrom of all depreciation allowed in earlier years in respect of that asset. Thus, the first step, statutorily prescribed, for the determination of the written down value of any asset for any year is for....
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....ination of the original actual cost necessitated by a specifically retrospective statutory provision. He points two instances of such modifications permitted by judicial decisions. In Karnani Industrial Bank Ltd's case (supra) the assessee claimed to have purchased a machinery for Rs. 3,94,000 and obtained depreciation on that basis from the assessment year 1939-40 onwards. In proceedings for the assessment year 1946-47, the officer discovered that the cost of the machinery was only Rs. 2,80,000 and, since assessee had already obtained depreciation beyond this, refused the grant of depreciation for the assessment years 1946-47 and 1947-48. This was upheld by the Calcutta High Court. In Maharana Mills ( P.) Lid's case (supra)the officer rectified the assessments of the assessee to re- work the written down value computed and the depreciation granted for earlier years as not being in accordance with law. The validity of these rectifications was upheld. In Habib Hussein's case (supra)the asset in question had been acquired in the previous year relevant to the assessment year 1950-51. The assessee had acquired the asset under an agreement dated 4-6-1948. But that a....
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....t as at the date of acquisition has been computed, that figure is final and cannot be interfered with subsequently, But that contention is not acceptable for reasons already discussed. Once it is conceded that the figure of actual cost can require modifications it is not possible to confine such modifications in the manner contended for by Shri Dastur. Where subsequent information factual or legal reveals that the actual cost determined originally was wrong, there can be no doubt that the original figure of actual cost has to be altered, if need be, and, if possible, by reopening the earlier assessments and, if that be not possible, at least for the future. This is illustrated by the situations in Karnani Industrial Bank Lld's case (supra) and Maharana Mills (P.) Ltd's case (supra )and this is also the position in cases to which Explanation 8 applies. These are situations which have a retrospective impact on the original actual cost. But it is equally conceivable that the 'actual cost may undergo a change which does not relate back in fact or law and there is no reason why such change should not be given effect to in future, irrespective of what may have happened in the....
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....sment year 1961-62 on the basis that the cost to it of the machinery was Rs. 30,572. The Act of 1961 applied to the assessment years 1962-63 to 1964-65 and under section 43(7) of the Act, since there was cessation of liability, the actual cost of the machinery to the assessees for these assessment years should be reduced by Rs. 30,572." (p. 62) Shri Dastur challenged the correctness of this decision insofar as it held that the original cost itself did not stand modified as a result of the subsequent development. We are not concerned with that aspect here. All that is relevant is that this is a decision which permits an alteration in the figure of actual cost consequent on subsequent factual occurrences that do not relate back. It also shows that the actual cost for 1961-62 could be scaled down for the assessment year 1962-63. There are also other decisions which make it clear that the original cost of an asset may change after the year of installation or erection as a result of further liabilities arising later: CIT v. U.P. Hotel-Restaurant Ltd [1980] 123 ITR 626 (All.) and Kilkotagiri Tea & Coffee Estate Ltd. v. CIT [1978] 113 ITR 729 (Ker.) decided in the context of depr....
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....ing the legal proposition so laid down by the Hon'ble Courts in the instant case, we are of the considered opinion that the actual cost so determined is not a static figure for all times to come once it entered the block of assets and it can be modified or altered at a subsequent stage in any of the subsequent assessment years where the subsequent situations- factual or legal so warrants and the Assessing officer is duly empowered to do so and there is no legal impediment to exercise of such powers. Even from an accounting standpoint, we find that the assessee following mercantile system of accounting has to pass appropriate entries adjusting its outstanding liability where such liabilities are no longer payable and corresponding adjustment has to be done in the cost of the asset so capitalised at the original cost. Therefore, in a situation where league matches don't take place in any year and there is refund of league deposit or the situations such as non-payment of 9th and 10th installment by the assessee, the actual cost of the intangible asset will undergo a downward adjustment, fresh written down value to be determined and the depreciation will be computed on the adjusted wri....