TMI Blog1993 (7) TMI 120X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 7,16,300---as provision for stock, (ii) Incorrect allowance of Rs. 5,98,939---under the head 'Miscellaneous expenses', (iii) Non-inclusion of Rs. 23,11,661 being bonus paid to the assessee's dealers for the purpose of disallowance under section 37(3A) of the Act, and (iv) Wrong allowance of Rs. 1,55,80,867 being royalty paid by the assessee company. 3. In response to the notice issued by the CIT under section 263, the assessee submitted a detailed reply dated 4-3-1989. After considering the reply, the CIT took the view that the assessment had been completed without any enquiry into the various claims of the assessee (listed above), and he therefore set aside the same with a direction to the Income-tax Officer to reframe the assessment in accordance with law after giving opportunity to the assessee. 4. It is the correctness of the aforesaid order of the CIT which is in dispute before us. The learned counsel for the assessee fairly stated that as far as the allowance of the provision for stock as well as the miscellaneous expenses are concerned, the assess has no grievance and the appeal is limited only to the other two issues namely the bonus paid to dealers as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctual net purchase of gramophone records and music cassettes by the dealer from the assessee. A perusal of this scheme clearly establishes that the payment of the bonus has a direct nexus or link to the actual sales made by the dealer. The bonus is paid in addition to the commission. In CIT v. Hindusthan Motors Ltd. [1991] 192 ITR 619 (Cal.) the Calcutta High Court had occasion to deal with the question whether commission and brokerage payment could be equated with sales promotion expenses and the provisions of section 37(3A) could be applied thereto. It was held that the section cannot be invoked for disallowance of the commission and brokerage payments since they were expenses incurred by the assessee which had a direct link with the actual sales and were therefore part of the selling expenses of the assessee's products. It was held by the Court that every type of expenditure incurred in connection with the sale of goods will not be hit by the provisions of section 37(3A) of the Act notwithstanding the phraseology used in the provisions viz., 'advertisement', 'publicity' and 'sales promotions'. In the present case, it cannot be disputed that the ratio is applicable. The bonus pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent was not related to the capital value of the rights obtained under the agreement, that the payments were to continue indefinitely as and when there were sales of the gramophone records and music cassettes containing recorded music and that the payment of royalty fluctuated with the chances of the business, and therefore the royalty payment cannot be characterised as capital expenditure. He further submitted that the rights relating to the music obtained under the various agreements were not rights in the capital field, but the expenditure must be treated as one incurred for acquiring the stock-in-trade for the assessee's business. The ld. Departmental Representative on the other hand, took up a preliminary objection. It was his contention that since the assessee did not challenge the order of the CIT on the first two grounds namely the allowance for provision for stock and the allowance under the head 'Miscellaneous expenses', the assessee should not be allowed to challenge the order of the CIT on other points. According to him, once it is held that the assessment order is erroneous in respect of one item, then the entire order must be taken to be erroneous. The decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was no bar on the CIT recording final conclusions on the merits of the issues though he was not bound to record final conclusion. 8. On a consideration of the rival submissions on the preliminary objection, we are of the opinion that there is no merit in the same. Under section 263 of the Act, the CIT has been constituted a revising authority for revising the assessment order passed by the ITO. The assessment order contains various decisions taken by the ITO on different aspects of the assessment. Various claims are made in the return of income and the ITO examined each and every claim and records his findings. Some of them may be found to be correct and some of them found to be incorrect by the CIT while examining the assessment in the course of the proceedings under section 263. We cannot therefore accept that once an assessment order is found to be erroneous in respect of one issue, the entire assessment order should be taken to be erroneous. The corollary of this proposition would be that even the correct decisions of the ITO will have to be set aside. The right or proper conclusion drawn by the ITO cannot be set aside and this proposition is too elementary to require any aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itting in appeal over the order of the CIT, to examine whether the conclusions of the CIT are correct on the merits of the issues. In the present case, we find that the CIT has made the observations at paragraphs 6 and 9 of his order which cannot be stated to be merely obiter. They are not tentative conclusions also. For example in paragraph 6 while dealing with the bonus to the dealers, the CIT has recorded a clear finding that the bonus should be disallowed under section 37(3A), of the Act. Similarly, in paragraph 9, while dealing with the royalty payment, the CIT has clearly found that on a reference to the records and considering the facts and circumstances of the case, it was clear that the assessee got an income earning apparatus under its control and the manner in which it made the payment was not important. Only after recording this final conclusion, the CIT states that no enquiry has been made by the ITO into these aspects and therefore the assessment has to be set aside. Though it is no doubt true that the CIT was not bound to record final conclusions about the issues in controversy before him, if he takes the view that the assessment should be made afresh since it was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er subsist in the records derived from the said matrices, including the rights of broadcasting, public performance and copying shall for all countries vest solely in EMI." It will be seen from the aforesaid clause that the ownership of the recording in the matrices would continue to remain with EMI and the assessee would only get the right to use the recording for the purpose of reproduction and sale. Clause 16 states that the rights agreed to be granted by EMI to the assessee cannot to be assigned in whole or in part without the prior consent of EMI in writing. 10. The agreement with the artists whose music the assessee records for the purpose of reproduction into gramophone records or music cassettes which in turn will be sold also records in Clause 10 thereof, the following: "The company shall be entitled to the sole right of production, reproduction sale (under such trademarks as it may select) use and performance (including broadcasting) throughout the world by any and every means whatsoever of records manufactured in pursuance of this Agreement. The company shall be the owner of the original plate within the meaning of the Copyright Act, 1957 and any extensions or modi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v) the right of use and public performance (including sound and television broadcasting) throughout the world by any and every means whatsoever of the contract works or and of them, and the Company shall have the irrevocable right to authorise any other person, firm or corporation to do any and all such act and things." These clauses show that the producers assign or transfer their copyright over the records relating to the film to the assessee for the purpose of enabling the assessee to reproduce the same through any means. Similarly, in respect of an author of a song who is also owner of the copyright of the song, the agreement shows that it is an assignment of the copyright, performing right and any other right in the work in favour of the assessee. In all the aforesaid agreements, the consideration for the recording is a royalty payable on the basis of the sales of the particular music recorded in the gramophone records or music cassettes. All the agreements are for a definite period say three to five years. The artist who records music for the company is prohibited from recording his music for any other concern where such recording is made with the purpose or object of selli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al. It may be that by entering into an agreement for a period of three to five years, the assessee is in a position to ensure continuous supply of the raw-material for a payment which is to be made as an when the sales takes place. But that by itself would not mean that the payment is a capital expenditure. This has been laid down by the Hon'ble Supreme Court in the aforesaid decision at page 727. The Hon'ble Supreme Court further held that it is not the law that in every case if an enduring advantage is obtained, the expenditure for securing it must be treated as capital expenditure. We are not to be understood as having decided that the assessee by entering into various agreements with the suppliers of music, has obtained an enduring advantage. The agreement is only for a limited period, the maximum period being five years. Even during this period it is quite conceivable that there may be no demand for a particular music or the work of a particular artist, and therefore the assessee may not have occasion to reproduce the recording more than once. In that case, it cannot be postulated that the assessee has obtained an enduring advantage to last for ever. Even assuming for a moment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... producers of Cinema films for obtaining the right to reproduce the film song and paid royalty as a percentage of the sales of the cassettes. The Tribunal after an elaborate discussion of the facts as well as agreements entered into between the assessee and the film producers, took the view that notwithstanding the use of the word 'assign' in the agreement which conveyed the meaning that the agreement is one of assignment of the copyright, the real object of the agreement was only to grant a licence to the assessee in that case to reproduce the music in music cassette, and therefore the payment of the royalty for such licence was an expenditure incurred for the purpose of obtaining a basic raw-material namely the film song, and therefore the same was allowable item of revenue expenditure. The Tribunal viewed the agreement as one granting licence to the assessee to reproduce the songs. At para 11 of the order, the Tribunal also referred to the judgment of the Supreme Court in the case of Empire Jute Co. Ltd., and held that even if the agreement is considered as a partial assignment, there was no advantage in the capital field to the assessee and the expenditure represented the cost o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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