TMI Blog2013 (9) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... r plate did not become useless after recording of series of cassette. He held that acquiring of audio right was of enduring nature and therefore expenditure incurred thereon by assessee had to be treated as capital in nature applying provision of section 35A. Whether since revenue had treated-in-house expenses of production of similar item as revenue in nature, assessee was correct in claiming expenses for acquiring ‘audio rights’ as revenue expenditure - Royalty paid for obtaining copyright by the assessee who was in the business of manufacturing pre-recorded cassettes was held to be revenue expenditure - Following decision of Tips Cassettes & Records Co. vs. ACIT [2000 (7) TMI 210 - ITAT BOMBAY-E] and Commissioner of Income-Tax Versus M. Subramaniam [2003 (12) TMI 9 - MADRAS High Court] - Decided in favour of assessee. Disallowance of Distributor’s Settlement expenditure - Held that:- nature of payment is not clear and what is coming out of the finding of the Assessing Officer is that there was some kind of criminal suit filed by the Distributors against the Employees and Director of the companies for which out of Court settlement was done and sum of Rs. 10,00,000/- was paid. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market price and it was not claimed as deduction in the computation of income in the year in which the same was created. Now the same was written back in this year since the amount to be profited at the end of the year was lower than the provisions made as the value of the stock was lower than the market price. The Assessing Officer has rejected the assessee s explanation on the ground that similar addition was made in Assessment Year-2003-04. 5. Even the CIT(A) held that since the disallowance has been confirmed by the CIT(A), Assessment Year 2003-04 therefore, the same is confirmed in this year also. 6. After going through the decision of earlier year of Tribunal Order in ITA No. 2461/Mum/2009, we find that this issue has been set aside to the file of the AO after making following observations. The relevant facts discussed by the Tribunal and also the relevant finding are reproduced herein in below:- Ground No. 2 is against the sustenance of disallowance of provision for stock obsolescence written back Rs. 3,73,80,638/- Brief facts of the above issue are that the A.O. observed that the assessee debited the said amount as provision for stock obsolescence. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment years 1999-2000, 2000 01, 2002-03 and 2003-04 and copy of the assessment orders for A.Y. 2001-02 and 2002-03 appearing at page 21 to 63 of the assessee s paper book. He, therefore, submits that the deduction claimed by the assessee be allowed. On the other hand, the Ld. D.R. while relying on the order of the A.O. and the Ld. CIT(A) submits that since this issue has not been considered the A.O. as per consistent practice followed by the assessee, therefore, in the interest of justice the issue may be restored back to the file of the A.O. to decide the same afresh. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the Ld. D.R. that the issue has not been properly appreciated by the A.O. and the Ld. CIT(A) in the light of the consistent method of accounting practice followed by the assessee and claim made by the assessee. In Sony Music Entertainment India Private Limited vs. Addl. CIT in ITA No. 6569/Mum? 2010 for A.Y. 2005-06 order dated 18.07.2012 the issue before the Tribunal was as under:- On the facts and circumstances of the case and in law, the Learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heard to the assessee. The ground taken by the assessee is, therefore, partly allowed for statistical purpose. 7. Thus, following the precedence of the earlier year, we set aside the order passed by the CIT(A) and restore the matter back to the file of the AO, to decide the issue afresh in view of the aforesaid observations ,after giving due and effective opportunity of hearing to the assessee. In the result, Ground No. 1 is treated as allowed for statistical purpose. 8. In Ground No. 2, the assessee has challenged the disallowance of software expenses of Rs. 4,68,768/- as a capital expenditure. The Assessing Officer noted that the assessee has debited software expenses of Rs. 11,58,844/- in the profit and loss account under the head of manufacturing and other expenses. In response to the show cause notice, as to why the same should not be treated as capital a nature, it was submitted that these expenses pertain to payment towards annual user licence fees of JD Edward software, maintenance software and spares purchase for software. It was further submitted that said expenses does not result into any enduring benefit to the company and are therefore, revenue in nature. The Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso placed on record the copy of the said decisions. On the other hand, the ld. D.R. supports the order of the A.O. and the ld. CIT(A). We have carefully considered the submissions of the rival parties and perused the material available on record. In the case of Asahi India Safety Glass Ltd. (supra), the issue was as to whether the expenditure incurred by the assessee on account of software and professional expenses was a revenue expenditure. Their Lordships while observing that the expenses ought not give a colour to the expenditure incurred as one expended on capital account, decided the issue in favour of the assessee. In Anway India Enterprises (supra), Their Lordships following the decision in Asahi Safety Glass Ltd. (supra), decided the issue against the Revenue. Respectfully following the above decisions we are of the view that the software expenditure incurred by the assessee are revenue in nature and hence the same are allowable as business expenditure and the Ld. CIT(A) was not justified in sustaining the disallowance made by the A.O. The ground taken by the assessee is, therefore, allowed. 11. Thus, respectively following the same, we also hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain clauses from the aforesaid agreement and found that the assessee acquired copyright of the music in perpetuity He was of the view that the assessee would be entitled to enjoy benefits indefinitely. He was therefore of the view that the expenditure would be capital expenditure. The Assessing Officer also expressed doubt that the entire expenditure may not be capital expenditure, he therefore allowed 20% of the aforesaid sum paid by the assessee as deduction as revenue expenditure and disallowed remaining sum. The AO proceeded on the assumption that the Assessee would have the benefit of copyright in the music purchased for a. period of 5 years and that is the reason he has allowed 20% of the expenses as revenue expenditure. The Learned CIT(A) confirmed the order of the Assessing Officer which has given rise to ground No 3 by the assesee before the Tribunal. With reference to the remaining royalty, the Assessee has paid royalty of Rs. 9,55,42,171/- (Rs. 163869171- 68327000) to various Parties by way of studio album recording, concert recording and to international music companies by way of royalty on international music . In this connection the AO observed from the agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92 of I.T. Act, 1961 will also apply to royalty payments made to non-resident companies/firms/individuals. The Learned CIT(A) confirmed the order of the AO, giving raise to Ground No.5 by the Assessee before the Tribunal. The assessee had claimed deduction of royalty of Rs. 2,10,27,065/- in AY 2000-01. The assessee had not deducted tax at source and paid the same to the Central Government on the aforesaid payments as required u/s. 40(a) (i) of the Act. However, in the present A.Y. 2001-02. The assessee claimed deduction of the aforesaid sum because tax deducted at source had been paid and on payment basis, the Assessee claimed deduction of royalty of Rs. 2,10,27,065/- u/s 40(a) of the I.T. Act, 1961. The AO had no other option but to allow the claim of the Assessee for deduction. However, the AO was of the view that the issue regarding reasonableness of royalty of Rs. 21,027065/- was not considered during A.Y. 2000-01 and keeping in view the discussions made in the earlier paragraphs-11 of this order, the AO held that a sum of Rs. 42,05,413/- @ 20% of Rs. 21027065/- will alone be allowed as a deduction irrespective of the fact that liability was incurred during previous year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35A held yes. Similarly, in the case of Super Cassettes Industries (P) Ltd. vs. CIT, 41 530 (Del). Royalty paid for obtaining copyright by the assessee who was in the business of manufacturing pre-recorded cassettes was held to be revenue expenditure. In the case of M. Subramaniam Vs. DCIT, 42 ITD 676 (Mad), it was held that the assessee is manufacturing pre-recorded cassettes and selling the same, was entitled to claim royalty paid to the owner of the copyright as revenue expenditure. The Learned DR, however, pointed out that u/s 32 of the Act w.e.f. 1.4.1999 in respect of any copyright owned and used by the Assessee for the purpose of business, only deprecation can be allowed. It was submitted that in the decisions relied upon by learned counsel for the assessee, these aspect cannot be considered because these cases related to an assessment prior to 1.4.1999. According to him, in the light of the aforesaid amendment, the assessee should be allowed deprecation at the appropriate rate and the entire expenditure cannot be allowed as revenue expenditure. We find that by the Finance Act (No. 2) 1998 w.e.f., 1.4. 1999 section 32(1) has been amended and the amended prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an out of court settlement of Rs. 10 lakhs with distributors and had filed the compromise petition to the Court so that the criminal proceedings initiated against the company and its directors and employees as passed and withdrawn. 18. The Assessing Officer observed that, what is the nature of Criminal Complaint is not clear, and the settlement deed also does not speak as to why the payment of Rs. 10,00,00 was made. Accordingly, he held that such expenditure cannot be held to be allowable u/s 37(1) and it is also in the nature of expenditure incurred to settled an act, which is prohibited by law. The Ld. CIT (A) too confirmed the observations and the finding of the Assessing Officer and confirmed the disallowance. 19. Before us, Ld Senior Counsel submitted that a Criminal Case was filed by the Distributors against the Officers, Employees and Director of the companies for which out of court settlement was arrived to bail out of the Criminal complaint and payment of Rs. l0,00,000/- was made towards this settlement. Thus, such an expenditure was not for any personal reason or any breach of law but for the purpose of business only for smooth functioning of the business and to get ..... X X X X Extracts X X X X X X X X Extracts X X X X
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