Sri. Ramprasad Padmanabhan, Bangalore vs Department Of Income Tax

Dy. Commissioner of Income Tax, Circle 7(2), Bangalore. .... Appellant.

Vs.

Shri Ramprasad Padmanabhan, No.11, 1st Cross, Gandhinagar, Bangalore. ..... Respondent. PAN AECPR 9281C

Appellant By : Dr. K. Shankar Prasad, JCIT (D.R) Respondent By : None.

Date of Hearing : 04.02.2015. Date of Pronouncement : 20.02.2015.

Per Shri Jason P. Boaz :

This appeal by Revenue is directed against the order of the Commissioner of

Income Tax (Appeals)-I, Bangalore dt.30.1.2014 for Assessment Year 2006-07. No

one was present for the assessee and we have therefore taken the help of the

learned Departmental Representative for Revenue in disposing off this appeal.

2. The facts of the case, briefly, are as under :-

ITA No.718/Bang/2014 2

2.1 The assessee, Proprietor of M/s. Ashwini Recording Company, is engaged in

the business of manufacturing and distributing of Audio CDs and Cassettes. For

Assessment Year 2006-07, the assessee filed his return of income on 30.10.2006

declaring total income of Rs.18,05,821. Proceedings u/s.147 of the Income Tax

Act, 1961 (herein after referred to as 'the Act') were initiated by the Assessing

Officer as she was of the view that income of the assessee exigible to tax had

escaped assessment since the amount of Rs.51,59,100 claimed as revenue

expenses by the assessee towards purchase of audio rights was disallowable, as it

was capital in nature. Notice under Section148 of the Act was then issued to the

assessee on 11.10.2010. The assessment was completed under Section 143(3)

r.w.s. 147 of the Act vide order dt.13.12.2011 wherein the income of the assessee

was determined at Rs.69,64,921 as against the returned income ofRs.18,05,821, in

view of the Assessing Officer disallowing the claim of expenditure on account of

purchase of audio rights amounting to Rs.51,59,100 of being revenue in nature

and holding that the said expenditure was capital expenditure.

2.2 Aggrieved by the order of assessment for Assessment Year 2006-07

dt.13.12.2011, the assessee preferred an appeal before the CIT (Appeals) - I,

Bangalore. The learned CIT(A) disposed off the assessee's appeal vide order ITA No.718/Bang/2014 3

dt.30.1.2014 allowing the assessee's appeal, by holding that the expenditure of

Rs.51,59,100 incurred for purchase of audio rights is revenue in nature.

3. Aggrieved by the order of the CIT (Appeals) - I, Bangalore for Assessment

Year 2006-07 dt.30.1.2014, the Revenue is in appeal before this Tribunal raising

the following grounds :-

"1. The order of the learned CIT (Appeals) is opposed to law and facts of the case.

2. On the facts and in the circumstances of the case the learned CIT (Appeals) erred in law in not appreciating the fact that acquisitionof audio rights is a permanent acquisition which is irrevocable and all the concomitant rights follow viz., re-recording, re-creating, authority to transfer such copy rights which bring enduring benefit to the assessee. In the case of Arvind Mills Ltd. Vs. CIT (SC) 197 ITR 422, it is held that capital expenditure with business activities which resulted in efficiently carrying on day to day business.

3. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT (Appeals) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored.

4. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above."

4. The Grounds raised at S.Nos.1, 3 & 4 by Revenue are general in nature and

therefore no adjudication is called for thereon.

5. Ground No.2 : Expenditure on purchase of Audio Rights - Rs.51,59,100.

5.1 In this ground, revenue assails the order of the learned CIT(A) as being

erroneous in not appreciating the fact that purchase of audio rights is a

permanent acquisition which is irrevocable and all concommitment rights like, re- ITA No.718/Bang/2014 4

recording, re-creating, authority to transfer such copyrights, follow and bring

enduring benefit to the assessee. In support of this claim, the learned

Departmental Representative placed reliance on the decision of the Hon'ble Apex

Court in the case of Arvind Mills Ltd. V CIT 97 ITR 422 (SC). The learned

Departmental Representative was heard in support of the grounds raised and has

placed reliance on the finding of the Assessing Officer in the order of assessment

and prayed for the same to be upheld.

5.2.1 We have heard the learned Departmental Representative and perused and

carefully considered the material on record; including the judicial

pronouncements cited and relied upon by both Revenue and the learned CIT(A) in

the impugned order. From an appreciation of the material on record, it is seen

that in the course of assessment proceedings, the Assessing Officer observed that

the assessee had claimed expenditure of Rs.51,59,100 for purchase of audio rights

in his profit and loss account. The Assessing Officer on examination thereof was

of the view that the said expenditure results in the permanent requisition of

Audio Rights; hence it is in the nature of capital expenditure and therefore sought

the explanation of the assessee, as to why the assessee's claim should not be

disallowed. In response thereto, the assessee submitted that the audio rights

purchased by him is only an item in the nature of new material to be used for ITA No.718/Bang/2014 5

production and not an equipment to produce; as his business is to produce and

market the audio rights from producers to Motion Pictures. The assessee also

submitted that the marketability of the music produced out of the audio rights in

short lived, as music loses currency with the passage of time and new music items

replace the old ones. According to the assessee, in view of the above, the

expenditure incurred on acquisition of audio rights does not in any enduring

benefit to the assessee, and it is therefore allowable as revenue expenditure.

5.2.2 The Assessing Officer rejected the explanation put forth by the assessee on

the following grounds :-

(i) that the purchase of audio rights was irrevocable and remains with the

assessee permanently;

(ii) that the purchase of audio rights is not in the nature of raw material since the

assessee was not required to return the copy rights to the producers of motion

pictures;

(iii) that the audio rights do not get exhausted in the production and marketing of

music; since old songs continue to be in currency following mixing and re-mixing

in the process of recreation of songs.

ITA No.718/Bang/2014 6

In this view of the matter, the Assessing Officer disallowed the assessee's claim

and treated the amount of Rs.51,59,100 expended to purchase audio rights as

capital expenditure.

5.2.3 On appeal, the learned CIT(A) considered this issue in detail at paras 3.3 to

3.6 of the impugned order. At para 3.7 of the impugned order the learned CIT(A)

held that the assessee being a manufacturer of music, the raw material for this is

the master plate which can be acquired only by way of assignment of copy rights

and therefore since the amount paid for procuring the raw material to ensure its

smooth and legal supply, the expenditure incurred for acquiring the audio rights

is revenue in nature. In coming to this finding, the learned CIT(A) was of the view

that the findings rendered in the following decisions of various Tribunals squarely

covered the issue in favour of the assessee in the case on hand :-

i) Super Cassettes Industries P. Ltd. V CIT (1992) 41 ITD 530 (Del)

ii) M. Subramanian V DCIT (1992) 42 ITD 676 (Mad)

iii) Gramaphone Co. Of India Ltd. V DCIT (1994) 48 ITD 145 (Cal)

iv) Tips Cassettes & Record Co. V ACIT (2002) 82 ITD 641 (Mum)

v) ITO V Five Star Audio (ITA No.1921/Mds/2012).

5.2.4 From an appreciation the details on record, the orders of the authorities

below and the judicial decisions cited and placed reliance on (supra), it is clear ITA No.718/Bang/2014 7

that the assessee's is in the business of reproduction of audio sound and music

from the original track record of the songs provided by the film producers,

commonly known as audio rights (i.e. the master plate). With the help of the

master plate, which is similar to a formula or mould, the assessee manufacturers

the required number of copies of the audio cassettes, which are ultimately sold in

the market. In this manner, the assessee manufacturers cassettes for different

films every year, for which a different master plate is required for each film.

There is no dispute with respect to the fact that the master plate for each film is

retained by the assessee is perpetuity. But its life is usually very short and as

soon as the series of the cassettes of a film are manufactured and marketed, the

master plates are rendered useless as very quickly new music and songs of more

recent movies replace the old items of music. The master plate of one movie

cannot be used for another and for every movie a new and different master plate

is required; indicating that the master plate is nothing more than raw material.

From the factual matrix of the case on hand, we find that the master plate of a

movie is only a new material from which copies are produced on cassettes for that

movie only and being material to the evaluation of the gross profit derived from

the manufacture and sale of copies / cassettes, would, in our considered view, be

construed as Revenue expenditure.

ITA No.718/Bang/2014 8

5.2.5 On a careful perusal of the judicial pronouncements of the various

Tribunals relied upon by the learned CIT(A) listed at 5.2.3 of this order, in the

context of the factual matrix of the case as discussed from para 5.2.1 of this order,

we concur with the finding of the learned CIT(A) that the assessee is a

manufacture of music and the new material is the master plate which can be

obtained only by way of assignment of copyrights. Since the assignment of copy

rights and the amount paid is for procuring new material and to ensure its smooth

and legal supply as understood in the commercial parlance, the expenditure is

Revenue in nature. Except for raising this ground, before us revenue has not been

able to controvert this finding of the learned CIT(A) in the impugned order. We,

consequently, uphold the order of the learned CIT(A) on this issue and

accordingly dismiss Ground No.2 raised by Revenue.

6. In the result, Revenue's appeal for Assessment Year 2006-07 is dismissed.

Order pronounced in the open court on 20th Feb., 2015.

Sd/- Sd/- (RAJPAL YADAV) (JASON P BOAZ) Judicial Member Accountant Member *Reddy gp