TMI Blog1992 (6) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... -------------------------------------------------------------------------------------------------------------- Asst. Year Number of Expenditure Sale of Sale of Year ended Pictures records cassettes --------------------------------------------------------------------------------------------------------------------------------------------------- Rs. Rs. Rs. --------------------------------------------------------------------------------------------------------------------------------------------------- 1984-85 30-6-1983 108 2,51,384 18,44,647 7,13,016 1985-86 30-6-1984 83 3,82,429 31,47,645 6,25,531 1986-87 30-6-1985 124 5,16,477 42,91,513 16,46,837 1987-88 30-6-1986 190 6,65,314 58,72,126 59,61,224. --------------------------------------------------------------------------------------------------------------------------------------------------- The assessee claimed that the expenditure incurred was in the nature of royalty and should therefore, be allowed as a revenue expenditure in computing the income. This claim was accepted by the assessment made under section 143(1) for the assessment year 1985-86 on 29-9-1986. Similarly, for the assessment year 1984-85, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is in appeal against both the orders under section 263 for the assessment years 1984-85 and 1985-86 as well as the appellate orders of the CIT (Appeals) for the assessment years 1986-87 and 1987-88. The main contention of the assessee is that the expenditure incurred is not capital expenditure in which case alone the provisions of section 35A could be applied. According to the assessee, the payment was in the nature of royalty incurred for the purpose of regular production of the cassettes, the song being an input and, therefore, the expenditure a revenue expenditure. It was also submitted that even though the proforma agreement used the word "assign", the conduct of the party shows that it was actually understood as a licence and, therefore, the payment would be only a royalty. On the other hand, it was contended on behalf of the revenue on the analogy of publishers and printers that the assessee was actually acquiring a master record which was being reproduced in the cassettes and, therefore, the payment was only a capital expenditure. It was pointed out that a copyright can be assigned even in respect of specified territories and therefore the agreement which used the word ' a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight in the work royalties in respect of all such records to be made by him, at the rate fixed by the Copyright Board in this behalf : Provided that in making the records such person shall not make any alterations in, or omissions from, the work unless records recording the work subject to similar alterations and omissions have been previously made by, or with the licence or consent of, the owner of the copyright or unless such alterations and omissions are reasonably necessary for the adaptation of the work to the records in question ;" Rule 21 of the Copyright Rules, 1958 provides for issuing 15 days notice and paying the owner of the copyright, along with the notice, the amount of royalty due in respect of all the records to be made at the rate fixed by the Copyright Board in this behalf. This indicates that in the case of records Copyright Act recognises the payment of a standard royalty for the reproduction of records on commercial basis. The distinction between the payment of such royalty which is for a licence to reproduce the record and an assignment of the copyright will essentially be that in the case of an assignment the assignee becomes entitled to future royalties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether any person who reproduces the record in terms of section 52(j) would pay royalty to the assessee or to the producer. The facts clearly indicate that the assessee would not have the right to receive such royalty because the producers have reserved such rights under the agreement. We are therefore convinced that inspite of the use of the word 'assign', the agreement was essentially a licence. The assessee would have been better advised to be precise in the language used in such agreements to avoid this kind of litigation. 9. The contention of the revenue was that since the agreement specifically uses the word 'assign' and Copyright Act made a clear distinction between an 'assignment' and a 'licence' and also provided for partial assignment, the agreement should be taken as a partial assignment. 10. An analogous case can be the business of publishing and selling books where the publisher acquires the copyright of books and prints the books to make a profit. Such a case is that in the case of Hira Ltd. Phoolchand v. CIT [1947] 15 ITR 205 (All.) relied on by the revenue, where it was held that the royalty paid for purchase of copyright was price paid for acquiring a capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to decide this issue, even the test of enduring benefit has not found to be really decisive. The courts have come to the conclusion that there is so far no single infallible test to decide whether the expenditure is capital or revenue. Each case depends upon its particular facts depending upon all the relevant circumstances so that a conclusion is reached according to the general tenor and combined effect. Recently, a distinction has been made by the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 between an advantage in the capital field and an advantage in facilitating the trading operation. In other words, the cost of acquisition of an income earning apparatus would be a capital expenditure while the cost of performing the income earning operation would be a revenue expenditure. (See the South Africa's case of New State Areas Ltd. v. IRC--SA [1946] 601). Similarly, the Madras High Court has pointed out in the case of CIT v. Sarada Binding Works [1976] 102 ITR 187 that periodical sums paid towards part of consideration but which are indefinite and depend upon future profit earned cannot be treated as capital nature. 12. The facts of the present case i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plication of section 35A was untenable and is therefore cancelled. Similarly, the treatment of the expenditure as capital expenditure and the application of section 35A in making the assessments for the assessment years 1986-87 and 1987-88 were also untenable. Hence we set aside the orders of the authorities below for these assessment years on this point and direct the ITO to allow the entire royalty paid as revenue expenditure and re-compute the total income for these two assessment years. 14. In the result, all the appeals are allowed. Annexure AGREEMENT BETWEEN.................... AND ECHO RECORDING COMPANY AN AGREEMENT made this.......... day of......... 19.......... between ECHO RECORDING CO. having its Office at Cisons Complex, 2nd floor, 150, Montieth Road, Egmore, Madras-600008, hereinafter called " The Company " (which expression shall mean and include its successors and assigns) of the One Part and hereinafter called "THE PRODUCER" which expression shall include his/her successors, his/her heirs executors, administrators and assigns of the Other Part. WHEREAS : (a) The Producer is actively engaged, inter alia, in producing cinematograph films : (b) The Compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion whereof shall commence during a period of three years from the date of this Agreement : (ii) the original recordings of any music or musical, literary, dramatic and/or artistic work[s] which may have been recorded by or for, the PRODUCER for the purpose of, and/or with the intent of, incorporating the same in the above cinematograph film[s] irrespective whether or not the same is/are so incorporated in the final versions of the cinematograph film[s]. (iii) The Company has this day paid Rs. 101 (rupees one hundred and one only) as part consideration on this Royalty Agreement. 3. The right[s] hereby assigned and/or agreed to be assigned and transferred to the Company in the cinematograph film[s] and/or original recordings as stated under 2[i] and [ii] above shall stand assigned and transferred in favour of the Company protanto upon the completion of the whole or part of the cinematograph film[s]/original recordings and shall include the right to publish and the reproduction rights thereof. 4. Forthwith upon completion of whole or part of the cinemotograph film[s]/original recording[s], the Producer shall, at his expense, deliver to, and supply, the Company with such cinem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further indemnifies, and holds indemnified, the Company against all and any claims and damages arising out of the exercise of right[s] assigned and transferred to the Company in this regard ; (c) to deliver to the Company photographs or other likenesses of the artists, performers and the author[s] whose work[s] may have been incorporated in the cinernatograph film[s] and/or original recording[s], together with their respective biographical material, with the right to the Company, accompanied, if so desired by the Company, by letters of consent of such artist[s] performer[s] and authors to use the photographs or other likeness[es] orbiographical material for advertising and publicity and for all record sleeves and for any other matter connected with the making distribution, marketing and sale of records ; (d) to provide to the Company, at request, the Producer's logos, trademarks, stylised lettering/designs etc. relating to the cinematograph film(s)/original recordings for incorporating them on the labels, covers sleeves, catalogues, etc. of, and for advertising the records, and to grant to the Company the right to do so ; (e) not to do, either during the period of this Agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, shall be excepted from payment of royalty. (d) The royalty payable by the Company to the Producer as herein provided shall be the only consideration payable and the Producer warrants and represents that he will satisfy all claims, if any, of third parties in connection with the recordings of which the record is made hereunder and agrees to indemnify and keep indemnified, the Company in respect of all demands, claims, actions and proceedings in that behalf. (e) The Company will pay royalties as long as the recordings covered by the Agreement are sold by the Company or its licensees, but not for longer than the period for which the recordings are legally protected. However, in the event of the Producer committing a breach of the provisions of this or any other Agreement with the Company, then, in that event without prejudice to any other rights or remedies which the Company may have in that behalf, the Company's obligation to pay royalty to the Producer as herein before provided shall cease until such time as the Producer may have remedied such default. 8. The Company shall furnish to the Producer for each half-yearly accounting period statements showing the number and type ..... X X X X Extracts X X X X X X X X Extracts X X X X
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