DEPRECIATION ON LICENCE FEE

[Mr. M. GOVINDARAJAN]

In ‘Commissioner of Income Tax V. Radio Today Broadcasting Limited’ – 2015 (12) TMI 633 - DELHI HIGH COURT the assessee is engaged in the FM radio broadcasting.  The assessee was granted permission on 08.12.2006 for operating FM radio broadcasting channels at Delhi, Kolkata, Mumbai, Jodhpur, Patiala, Amritsar and Shimla against payment of prescribed one time entry fees.   Out of 7 stations, the assessee went on air in the financial year 2008 – 09 from three radio stations, Delhi, Kolkata and Mumbai.  The three stations at Jodhpur, Patiala and Amritsar were made ready to go on air by 08.12.2007.  Due to unfavorable market conditions, the marketing team of the assessee decided against going on air for the said stations in the assessment year 2008 – 09.  However on the advice of the marketing team, the assessee started taking trial runs by running radio programs within the office premises at Jodhpur, Patiala and Amritsar in the assessment year 2008 – 09.

The assessee filed its return claiming depreciation in the sum of ₹ 47,25,000 on the one time entry fee (licence fee) paid for the FM channels.  The return of the assessee was selected for scrutiny by the Department.  A notice was sent to the assessee as to why the depreciation should not be disallowed.  The assessee filed reply to the Department.  The assessee submitted in the reply the following:

• According to the terms and conditions of grant of permission agreement by the Ministry of Information and Broadcasting, the Government of India has fixed the term of the permission as 10 years from the date of operationalization of channel or upon expiry of one year from the date of grant of permission, whichever occurs first;
• The assessee was granted permission for seven stations on 08.12.2006;
• At the end of the year three channels were made operational;
• The other three channels were made operation subsequent to year end;
• The 7^th channel could not be made operation because of Ministry’s inability to provide basic infrastructure;
• The amount of one time entry for six channels upon getting operational or upon expiry of one year from the date of grant of permission agreement has now been considered as licence fee paid for the licensing period and has suitably been capitalized as an intangible asset as per AS-26;
• The amount of licence fee capitalized as intangible asset would be written off over the period of the permission of 10 years;
• The one time entry fee for the 7^th channel has been considered as an advance as at the end of the financial year as in previous year in view of basic infrastructure not provided by the Ministry.

The Assessing Officer held that the assets under question were not put to use during the relevant previous year depreciation could not be allowed.  The arguments put forth by the assessee have not been taken into consideration by the Assessing Officer only on the ground ‘depreciation shall not be allowed unless the asset is actually used for the business.

The assessee filed appeal before Commissioner of Income Tax (Appeals).  He held that that the assessee had claimed depreciation only on the licence fee but not on the other tangible assets.  If the claim of the appellant is valid then the appellant’s claim should have been restricted to claim of depreciation only on licence fee.   Since the assessee had not claimed that the programs were actually aired but had clarified that the airing was postponed, its claim for the depreciation on the licence fee could not be permitted.

The assessee then filed appeal to the Tribunal.  The Tribunal accepted the plea of the assessee that the Assessing Officer was not justified in disallowing the claim since the plant and machinery in question was ready to use and actually run on trial basis at the three stations.

Against the order of the Tribunal the Revenue filed appeal before the High Court.  The Revenue contended that the decision of the Tribunal were distinguishable on facts.  The assessee contended that the depreciation would be allowed as long as the asset is kept ready and has been used for undertaking trial.

The High Court found that the assessee kept ready for use of the intangible assets in respect of three radio stations.  This has not been denied by the Revenue.  The High Court further found that the Assessing Officer did not question the fact that the intangible asset has been kept ready for use.  The Assessing officer disallowed it because depreciation was claimed on the licence fee and not on a tangible asset.  The order of the Commissioner (Appeals) was also on the same footing.  The lower authorities did not provide the exact provision of the Act to the notice of the court which states that an assessee would be denied the claim of depreciation on intangible assets only because there was no claim on the tangible asset.  The High Court held that for the purpose of Section32 it is sufficient that the assets be kept ready for use in order to claim depreciation thereon.  The asset can be said to be ‘used’ when it is kept ‘ready for use’.  The expression ‘used’ it would be more appropriate to envisage the expression as comprehensive cases where the machinery is kept ready by the owner for its use in the business and the failure to use it actively in the business is not on account of its incapacity for being used for that purpose or its non availability.

The High Court dismissed the appeal filed by the Revenue.