TMI Blog2007 (3) TMI 307X X X X Extracts X X X X X X X X Extracts X X X X ..... m of depreciation. Expln. (2B) to s. 32(1) of the Act is also very much clear and provides for depreciation on these assets. Thus, we can conclude that total value of tangible and intangible assets transferred to the assessee company, as per the valuation arrived at by Anand Parikh Co., amounts to Rs. 4.22 crores. While valuing the intangible assets in the form of copyright, telecast rights, etc., the price offered by Doordarshan to the assessee company was taken into consideration. After having a negotiation with the transferee firm, the entire deal was finalized at a purchase consideration of Rs. 3.32 crores, as against valuation of Rs. 4.22 arrived at by the valuer, which is also supported by the agreement dt. 31st March, 2000 entered into by the assessee with the transferee firm. Both the agreement as well as valuation report were submitted to the AO. The AO himself has carried out independent valuation of the goodwill as per the prescribed norms which works out to Rs. 1,59,480. We hereby accept the valuation of the goodwill as done by the AO, on which the assessee is not eligible to any claim of depreciation. After reducing the value of tangible assets amounting to Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordingly. In the result, the appeal of the assessee is partly allowed. - Member(s) : D. R. SINGH., R. C. SHARMA. ORDER-R.C. SHARMA, A.M.: This is an appeal filed by the assessee against the order of the CIT(A) dt. 29th Nov., 2004 for the asst. yr. 2001-02, in the matter of order passed under s. 143(3) of the IT Act, 1961, wherein following grounds of appeal have been raised: "1. That on the facts and circumstances of the case, the learned CIT(A)-XV erred in accepting the decision of the AO treating commercial and other intangible rights (which are in the nature of copyrights) pertaining to serials as goodwill and hence not allowing depreciation under s. 32(1) of the IT Act, 1961 under the head "Intangible assets being copyrights, business and commercial rights." 2. That on the facts and circumstances of the case, the learned CIT(A)-XV erred in accepting the decision of the AO treating professional expenses incurred in connection with augmenting working capital funds for the company as capital expenditure and not allowing as revenue expenses. 3. That on the facts and circumstances of the case, the learned CIT(A)-XV erred in disallowing the deferred revenue exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pisode in repeat telecast of the serial was worked out at between Rs, 50,000 and Rs. 60,000. The number of episodes multiplied by the estimated realisable value constituted the basis of calculation of goodwill of the company. The valuation of the goodwill by this method came to Rs. 3.90 crores. However, the AO did not agree with this system of valuation of goodwill. Instead, the AO adopted a formula whereby goodwill was valued at two years' purchases by the business. Thus, the value of goodwill = Rs. 79,740 x 2 = Rs. 1,59,480. This computation was based on valuation of goodwill as given in the widely used book on Advanced Accounts by M.C. Shukla, T.S. Grewal and S.C. Gupta. The AO held that there was no real goodwill to be depreciated. The AO also observed that in the whole arrangement of purchase of Guruji Films (Proprietorship) by the assessee company, not a single penny exchanged hands and the company was trying to reduce its tax liability by claiming depreciation on so-called goodwill. Therefore, the AO disallowed depreciation on goodwill. The AO also found that the assessee had claimed an expense of Rs. 1,03,56,975 on account of deferred revenue expenditure. The assessee had e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee in the document but by the actual meaning of the word mentioned therein. With regard to the valuation of goodwill adopted by the AO, the learned Authorised Representative contended that after taking over of the firm, it had all rights of telecasts of episodes in the library of the firm. There is a significant difference in value between "viewing rights" and "telecast rights". Viewing rights may be obtained at nominal cost by purchase of a CD from the market whereas telecast rights attracts much more value. The assets are shown at historical cost basis in the books of account of the firm and the market value of the assets may be different at the time of sale of those assets. The valuation of episodes has been taken by the valuer, M/s Anand Parikh Co. in its report at Rs. 50,000 to Rs. 60,000 per unit and the total valuation of 657 episodes was assessed at Rs. 3,90,30,000. He brought to our notice the fact that Prasar Bharti (Doordarshan) had invited proposals from TV producers for acquisition of programme vide its advertisement dt. 13th Feb., 2002. In response to this advertisement, the assessee company submitted a price-bid for its serial "Aparajita" at Rs. 50,000 per e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred in connection with share capital are capital in nature. 7. By the impugned order, the CIT(A) confirmed the action of the AO. 8. It was contended by the learned Authorised Representative that the assessee company has paid professional fees amounting to Rs. 2,07,525 to various professionals/companies for services rendered by them viz., conference with directors and making presentation before potential investors for raising resources of the company, tax and financial advisory services, preparation of valuation reports, placement of company equity shares, etc. in connection with augmenting resources for the company with placement of shares of the company with UTI. Copies of bills/agreements in respect of such professional services were stated to have already been submitted before. the lower authorities. These expenses were argued as of revenue nature, hence allowable as business expenses under s. 37. Shri Nathani further stated that the private placement of company's shares was made not for the purpose of bringing to existence of any asset or advantage but for running the business and augmenting working capital with a view to produce profits as well as to sustain the growth o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the agreement dt. 31st March, 2000. Both the copies of agreement as well as valuation report were duly submitted before the AO. During the course of assessment, the AO found that the assets so transferred by the assessee firm also included goodwill and copyrights, which are not eligible for claim of depreciation; insofar as under s. 32, depreciation was not allowable on goodwill. There is no dispute to the fact that goodwill as it is not eligible for claim of depreciation. However, other intangible assets comprising copyrights, telecast rights, etc. were entitled for depreciation as per amendment w.e.f. 1st April, 1998 under sub-cl. (ii) of s. 32(1) of the Act which reads as under: "know-how, patents, copyrights, trademarks, licenses franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998." As the assessee company bought the copyrights and became owner of stocks of the serials held by M/s Guruji Films and was entitled to all business and commercial rights relating to these serials and these intangible assets were acquired on 31st March, 2000, etc. i.e. after 1st April, 1998 the effective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "And whereas the 2nd Party shall also be entitled to all the trademarks, licenses and all other intangible rights to which the 1st Party is entitled in connection with the said concern and the 1st Party agrees to render all possible assistance to the 2nd Party to get such rights and amenities transferred to their name". 12. Undisputedly, after acquiring stock of all these serials, etc. and the rights attached to it, from the Guruji Films, the assessee company was entitled and became absolute owner of all these stocks, rights, licenses, privileges and benefits pertaining to serials owned by the erstwhile firm. It appears that AO's stand not to allow depreciation is based on his observation that whatever amount has been paid by the assessee for acquiring all the tangible and intangible assets was in the nature of 'goodwill' on which claim of depreciation is not allowable. We are in agreement with the AO that goodwill per se is not eligible for claim of depreciation. From the order of the AO himself, we found that at p. 3, 4 and 5, para 1.2, he himself has carried out the valuation of the goodwill, based on widely used book on Advanced Accountancy by M.C Shukla, T.S. Grewal, S.C. Gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to assessee's claim for allowing professional charges of Rs. 20,07,525, we found that expenses were incurred for increasing the capital base of the assessee company, the same were essential in the nature of capital expenditure. We are, therefore, inclined to agree with the learned Departmental Representative, Shri Rajnish Kumar, that no interference is warranted in the orders of the lower authorities, disallowing assessee's claim of professional expenses of Rs. 20.07 lacs. 15. With regard to disallowance of deferred revenue expenses, we found that the expenditure was incurred by the assessee company on account of production expenses pertaining to four number of serials produced and telecasted under sponsored category as per the accounting policy followed consistently. During the year, total production expenses of Rs. 2.07 crores were incurred. On telecast of these serials, the assessee has recorded income of Rs. 1.43 crores. However, in the books of account, both the expenses and income were shown. In the P L a/c, the assessee has carried 50 per cent of such revenue expenses amounting to Rs. 1.03 crores and balance was carried to the balance sheet under the head "Deferred reven ..... X X X X Extracts X X X X X X X X Extracts X X X X
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