SAREGAMA INDIA LIMITED ,KOLKATA vs. PR.CIT-1, KOLKATA

Present for: Appellant by : Shri J. P. Khaitan, Sr. Advocate and Shri Pratyush Jhunjhunwala, Advocate Respondent by : Shri G. HukughaSema, CIT Date of Hearing : 14.12.2022 Date of Pronouncement : 13.03.2023 O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:

This appeal filed by the assessee is against the revision order of Ld. Pr. CIT-1, Kolkatavide Memo No. Pr. CIT-1/Kol/Revision u/s. 263/2018-19/12643-46,dated 20.03.2019 passed u/s. 263 of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), against the assessment order by DCIT, Circle-3(1), Kolkata u/s. 143(3) of the Act,dated 09.09.2016.

are not reproduced for the sake of brevity.

3. Brief facts of the case are that assessee is engaged, inter alia, in the business of production, recording, distribution and sale of music through compact disk, digital versatile disk etc. and also by way of grant of rights to parties to play music against payment of license fees. Assessee is also in the production of films and TV serials. It filed its return of income on 28.11.2014 which was revised on 22.03.2016,reporting a total income of Rs.25,56,92,463/-. Case of the assessee was selected for limited scrutiny through CASS. In the course of assessment, Ld. AO vide notice u/s. 142(1) of the Act dated 17.06.2016, inter alia, required the assessee to furnish full details of expenditure claimed by it in the Profit and Loss Account, amounting to Rs.14,757.14 lakh, with ledger accounts. While furnishing the details in this respect, assessee also furnished details and explanation relating to claim of expenditure towards royalty vide its letter dated 30.08.2016 placed in the paper book volume 1A at page 17 and 18. Reply furnished by the assessee vide this letter is material to the issue raised by the Ld. Pr. CIT and is, therefore, extracted below:

Saregama India Limited, AY 2014-15 3.1. Ld. AO, after considering the submissions made by the assessee,completed the assessment by making a disallowance u/s. 14A of the Act. Subsequently, Ld. Pr. CIT by calling for and examining the records of the assessee, considered that the impugned assessment order passed u/s. Saregama India Limited, AY 2014-15 143(3) of the Act, dated 09.09.2016, is prima facie erroneous in so far as it is prejudicial to the interest of the revenue for invoking the revisionary proceeding.Show cause notice dated 28.01.2019 was issued u/s. 263(1) of the Act by stating the following reasons: “(i) In this case the assessee was engaged in the business of manufacturing and sale of audio cassettes, CDs and also in production of films/TV serials etc. It is observed that the non- payment of "Royalty on License Fees” of Rs.1,80,65,00/-. ii) As per Section 37 of the I.T.Act,1961, any expenditure which was not incurred in the previous year, shall not be allowed as deduction in computing the income chargeable under the head "profit and gains of business or profession". The assessee had debited a sum of Rs. 1688.00 lakh towards Royalty to the profit and loss account for the year ended on 31.03.2014 under the head "other expenses". Further, from note-l0 of the balance sheet as on 31.03.2014 relating to "Short Term Provision". It was also revealed that there was a provision for royalty on license fee amounting to Rs. 1285.73 lakh calculated as below:- As on 31.03.2013 (Rs. In Lakh) Provision at the beginning of the year 1691.63 Add: Creation during the year 1135.77 2827.40 Less: Excess Provision of earlier year written back 34.32 Less: Amount utilized during the year 1507.35 Balance at the end of the year 1285.73 As such, Rs.1507.35 lakh only being amount utilized during the year was required to be claimed as expenditure on royalty. However, the assessee claimed the entire amount of Rs.1688.00 lakh and the same allowed in the assessment. AO has passed the impugned assessment order accepting the return income, appears to be erroneous in so far as prejudicial to the interest of revenue.”

3.2. Before Ld. Pr. CIT, assessee made its exhaustive submission vide reply dated 28.02.2019 to substantiate its claim that Ld. AO during the course of assessment proceeding had duly examined the details and explanations

Saregama India Limited, AY 2014-15 submitted before him in respect of claim of royalty expenses and it was only after due consideration of the same, he had accepted the claim of the assessee. Accordingly, assessment order passed by the Ld. AO cannot be said to be erroneous and is not prejudicial to the interest of revenue. The assessee thus, submitted that revisionary proceeding so initiated ought to be dropped. After taking into account the submissions made by the assessee in this respect, Ld. Pr. CIT arrived at a consideration that the manner and determination of the debitable royalty was required to be analysed thoroughly by the Ld. AO. The provision created in respect of claim of royalty expenses has to be examined with reference to the liability for the year. Ld. Pr. CIT thus, observed that Ld. AO erred in not examining the discrepancy in respect of debit of Rs.1688.00 lacs towards royalty expenses while disposing the case and accepting the assessee’s claim without any application of mind or query. Accordingly, assessment order was set aside with the direction to Ld. AO to pass a fresh assessment order after considering the aforesaid observations. Aggrieved, assessee is in appeal before the Tribunal.

Saregama India Limited, AY 2014-15 initiated u/s. 263 of the Act and the impugned order passed thereon. At the outset, Ld. Counsel pointed out that the issue raised by the Ld. Pr. CIT had been duly examined by the Ld. AO in the assessment proceeding and he applied his mind for taking the plausible view and allowed the claim of expenditure on account of royalty. The consideration arrived at by the ld. Pr. CIT on the same issue is nothing but a ‘change of opinion’. Ld. Pr. CIT has altogether ignored the consistent accounting practice adopted by the assessee by following the mercantile system of accounting, more particularly in respect of claim of expenses towards royalty. For this, Ld. Counsel apprised the bench, the details from the audited financial statement, placed in the paper book. He submitted that in the Profit & Loss Statement placed at page 11, total expenses of Rs.14,757.14 lakh includes other expenses of Rs.5,319.42 lakh, details of which are given through Note No. 29, forming part of the financial statement of the assessee. By referring to the details and other expenses in Note No. 29 placed at page 15 of the paper book, he pointed out that it includes royalty of Rs.1,688 lakh. He thus, referred to the ‘notes on significant accounting policies’ forming part of the financial statement, more particularly relating to royalty, which is stated as –

“Royalty and Minimum Guarantee Royalty is recognised as expenses within the license period or ten years, whichever is earlier. Royalty on sales, other than physical sales, is provided on the basis of management’s best estimate of the expenditure required to settle the obligation.

Saregama India Limited, AY 2014-15

Other royalty payments are charged at agreed rates on related sales.”[emphasis supplied by us, by underline]

6.2. Ld. Counsel further elaborated on the modus operandi of the business of the assessee relating to revenue arising from licence fees against which expenditure of royalty is incurred by the assessee. In this respect he referred to the facts and merits of the case which were submitted before the Ld. Pr. CIT which has been reproduced at page 8 and 9 and are extracted below:

“Broadly, the appellant earns revenue from sale of music through physical/online form and also through license fees received from various associations/parties for playing of music. During the year under consideration, the license income received by the appellant amounts to Rs.10,639.26 lakhs. The revenue earned by the appellant from sale of music and also the license fees are received regularly. Hence the appellant, under the agreement with the respective producer, is required to pay- royalty.

Saregama India Limited, AY 2014-15

Identification of amount of royalty to be paid on physical sales is not much of a challenge. However, the royalty payable to producer in respect of license fees takes some time. For licence fees, the details of songs played of a particular party are provided in the course of time through log books. With vast volume and wide spread operations, capturing of details of music played of a particular party and forwardin the same via log book to the appellant is difficult and takes some time. Following the matching concept and the mercantile system of accounting, as the revenue was recognized during the year, in addition to payments made during the year, the appellant on the basis of detailed analysis of past trends of royalty payout to various parties for their music recognized the accrued liability aggregating to Rs. 1,688 lacs. In subsequent years, amount of accrued liability and unpaid amount was written back and offered to tax in AY 2015-16 as stated earlier. Break-up of the amount of Rs. 180.35 lacs paid and written back by the appellant is as follows – Particulars Amount Assessment Remarks (Rs. Lacs) year During which paid/written back Subsequent 85.75 2015-16 Amount paid in financial year Payments 2014-15 (As per details submitted before the AO as Annexure 1 at page 11) Provision 94.90 2015-16 Amount offered to tax in written back financial year 2014-15 (As per details submitted before the AO as Annexure 1 at Page 11) Total 180.65

From the above, it may be noted that the alleged excess royalty expenditure claimed by the assessee has been either paid or has been written back and offered to tax in the subsequent assessment year (i.e. assessment year 2015- 16). Thus, there should not be any question of any disallowance in this regard. It is humbly submitted before your kindself that being in the business of sale of music, production of TV serial, etc. it is a standard practice for the assessee to record the liability for royalty following the mercantile system of accounting. Subsequently, based on the details submitted by various parties, royalty is paid from accrued liability and any excess/unpaid amount of royalty is written back and offered to tax in the subsequent assessment year. The assessee has been consistently following the aforesaid principle and the same has been accepted by the Ld. AO over the years.”[emphasis supplied by us, by underline]

Saregama India Limited, AY 2014-15 6.3. Based on the above narration, Ld. Counsel strongly submitted that in the year under consideration, assessee had an unpaid amount of royalty of Rs.180.65 lakh out of which Rs.85.75 lakhs were paid by the assessee in AY 2015-16 and the balance of Rs.94.90 lakh had been written back and offered to tax in the subsequent assessment year. Hence, question of disallowance does not arise at all. Moreover, since the amount written back had already been offered to tax, disallowance of the same as considered by the Ld. Pr. CIT would lead to double taxation in the hands of the assessee.

Saregama India Limited, AY 2014-15 credit notes to the assessee on the basis of which the assessee raises its invoices for its licence fees. In order to ascertain the royalty payable by the assessee to the producers/owners, the assessee requires details of every song played such as name of song, location where it was played, the number of times it was played, identification of producer/owner who is entitled to the royalty, etc. The licensees incorporate such details of every song played in log books. Because of the widespread operations and vast volume, collation of details of producer/owner-wise songs played and incorporation thereof in log books takes a lot of time. Such log books are made available to the assessee in course of time and a lot of them are received after close of the financial year. Thus, exact quantification of royalty payable to the producers/owners in respect of playing of songs for which the assessee receives licence fees is a time-consuming exercise. iii) Since the assessee follows mercantile system of accounting, in respect of licence fees which accrues as income to it during a particular financial year, the assessee is required to make a provision in respect of royalty payable to the producers/owners of the music under the ‘matching concept’ of accounting principles. Such royalty represents a substantial part of the expenditure incurred by the assessee for earning the licence fees. Since a lot of the log books containing producer/owner-wise details of the songs played become available upon collation and incorporation of the details after the close of the financial year, the assessee has to make an estimate of the liability for royalty on the basis of the past trends/trends emerging from the log books to the extent received during the year. The assessee makes the best possible estimate of the expenditure required to settle the obligation to pay royalty on licence fees for the financial year and such provision along with the amount of royalty payable on physical

Saregama India Limited, AY 2014-15 sales is debited to the profit and loss account as "Royalties". The amount so debited includes appropriate proportion of minimum guarantee royalty. iv) The provision for royalty on licence fees is shown on the liabilities side of the balance-sheet out of which payments are made to the producers/owners on the basis of details contained in the logbooks. In the event, the provision for any year is found to be in excess, such excess provision is written back and offered to tax. The aforesaid accounting policy followed by the assessee in respect of expenses on royalty is duly disclosed in its audited accounts. In the notes forming part of the audited accounts, the manner in which expenditure on account of royalty is recognised in the books of account is duly disclosed as a significant accounting policy. The audited accounts and the schedules/notes forming part thereof separately mention the amount on account of royalty debited to the profit and loss account. The amount of provision for royalty on licence fees is also separately shown with break-up of the amount of provision created during the year, the excess provision of earlier years, if any written back, the amount of provision utilised during the year and the amount carried forward to the next year. The aforesaid significant accounting policy followed by the assessee in the matter of recognising liability for payment of royalty and the accounting made by it has all along been duly disclosed on the face of the audited accounts.

7.1. Ld. Counsel referred to Note No. 21 “Revenue from Operations” to point out revenue of Rs.10,639.26 lakhs earned by the assessee during the year towards licence fees forming part of sale and services. He also referred to the significant accounting policies disclosed by the assessee which is stated as:

Saregama India Limited, AY 2014-15 “Sales and licence fees:

Sales represent invoice value of products sold (net of trade discount) and services rendered. License fees represented income from music rights. Revenue from films is recognised on assignment of distribution rights and revenue relating to television serial is recognised on the basis of telecast/sale of …… as applicable.”

7.2. Ld. Counsel also contended that issue raised by Ld. Pr. CIT in respect of expenditure on royalty is as if assessee is entitled to deduction only on payment basis. He submitted that Ld. Pr. CIT failed to take note of the fact that assessee maintains its books of account on mercantile system of accounting. On the misplaced assumption of the Ld. Pr. CIT, he has observed that since out of the sum of Rs.1688 lakh debited to P&L Account, assessee had utilised provision for the royalty expenditure to an extent of Rs.1507.35 lakh only thus, the difference of Rs.180.65 lakh should not be allowed. He, thus, contended that assessee is entitled to deduction in respect of entire amount of Rs.1688 lakh on account of royalty on accrual basis since assessee follows the mercantile method of accounting for which due disclosures have been made in the financial statement of the assessee. Ld. Counsel reiterated that assessee had duly furnished the details of royalty expenditure which had been examined by the Ld. AO and has duly applied his mind to take appropriate view by accepting the details furnished by the assessee and, therefore under no circumstances, the impugned assessment order can be termed as erroneous and prejudicial to the interest of the revenue.

Saregama India Limited, AY 2014-15 under the Act. Also, he submitted that ld. Pr. CIT has raised his concern as to whether the provisioning done by the assessee is scientific and acceptable for the line of business in which assessee is. He thus, submitted that no prejudice is caused to the assessee when Ld. Pr. CIT has directed the ld. AO to examine the issue afresh and pass the assessment order accordingly.

Saregama India Limited, AY 2014-15 9.1. Further, in respect of tainting the assessment order as erroneous for the impugned revisionary proceedings by the ld. Pr. CIT, from the material placed on record, we take note that the issue was examined by the Ld. AO in the assessment proceeding for which all the details were furnished, explaining the claim of royalty expenditure debited in the Profit and Loss Account for Rs.1688 lakhs. Assesseehas given all the details of royalty on physical sales as well as non-physical sales, forming part of paper book from pages 236 to 426. Ld. AO had sought details of expenses against which a specific reply was made by the assessee explaining the basis and modus operandi of the business (extracted above) along with corroborative accounting data maintained by it. Ld. AO completed the assessment by taking a plausible view and cannot be terms as erroneous for the purpose of revisionary proceedings. On this issue, Hon’ble Supreme Court in the case of Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62 (SC) had dealt with similar issue on the allowability of expense claim on the basis of provision and allowed the claim by observing in para 17 as under: “The principle which emerges from these decisions is that if the historical trend indicates that large number of sophisticated goods were being manufactured in the past and in the past if the facts established show that defects existed in some of the items manufactured and sold then the provision made for warranty in respect of the army of such sophisticated goods would be entitled to deduction from the gross receipts under section 37 of the 1961 Act. It would all depend on the data systematically maintained by the assessee.”[emphasis supplied by us, by underline] 9.2. It is well settled law that for invoking the provisions of section 263 of the Act, both the conditions that the order must be erroneous and prejudicial to the interest of revenue needs to be satisfied. This ratio stands laid down by various Hon'ble Courts.

9.3. For this, let us take the guidance of judicial precedence laid down by the Hon’ble Apex Court in the case of Malabar Industries Ltd.

Saregama India Limited, AY 2014-15 vs. CIT [2000] 243 ITR 83(SC) wherein their Lordships have held that twin conditions need to be satisfied before exercising revisional jurisdiction u/s 263 of the Act by the CIT. The twin conditions are that the order of the Assessing Officer must be erroneous and in so far as prejudicial to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous order, that is (i) if the Assessing Officer’s order was passed on incorrect assumption of fact; or (ii) incorrect application of law; or (iii) Assessing Officer’s order is in violation of the principle of natural justice; or (iv) if the order is passed by the Assessing Officer without application of mind; (v) if the AO has not investigated the issue before him; [because AO has to discharge dual role of an investigator as well as that of an adjudicator] then in aforesaid any of the events, the order passed by the AO can be termed as erroneous order. Looking at the second limb as to whether the actions of the AO can be termed as prejudicial to the interest of Revenue, one has to understand what is prejudicial to the interest of the revenue. The Hon’ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. “prejudicial to the interest of the revenue’’ has to be read in conjunction with an erroneous order passed by the AO. Their Lordships held that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law.

Saregama India Limited, AY 2014-15

10.1. The aspect of application of mind by ld.Pr. CIT as contended by the ld. Counsel has been succinctly dealt by the Hon’ble Delhi High Court in the judgment of DG Housing Finance Co. Ltd. [2012] 20 taxmann.com 587 (Del) which is discussed hereunder.

10.1.1. While adverting on the issue, Hon’ble High Court held that the CIT has to come to the conclusion and himself decide that order is erroneous, by conducting necessary enquiry, if required and necessary before the order u/s 263 of the Act is passed. In such cases, the order of the AO will be erroneous because the order passed is not sustainable in law and the said finding must be recorded by CIT who cannot remand the matter to the assessing officer to decide whether the findings recorded are erroneous. 10.1.2. In cases where there is inadequate enquiry but not lack of enquiry, again the CIT must give and record a finding that the order/enquiry made is erroneous. This can happen if an enquiry and verification is conducted by the CIT and he is able to establish and show the error or mistake made by the AO, making the order unsustainable in law.

Saregama India Limited, AY 2014-15 10.1.3. In some cases, possibly though rarely, the CIT can also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the AO had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the AO to conduct further enquiries without a finding that the order is erroneous, the condition or requirement which must be satisfied for exercise of jurisdiction u/s 263 of the Act. In such matters, to remand the matter/issue to the AO would imply and mean that the CIT has not examined and decided whether or not, the order is erroneous but has directed the AO to decide the aspect/question. 10.1.4. The Hon'ble Court further held that this distinction must be kept in mind by the CIT while exercising jurisdiction u/s 263 of the Act and in the absence of the finding that the order is erroneous and prejudicial to the interest of revenue, exercise of jurisdiction under the said section is not sustainable. In most cases of alleged “inadequate investigation”, it will be difficult to hold that the order of the AO, who had conducted enquiries and had acted as an investigator, is erroneous, without CIT conducting verification/enquiry himself. The order of the AO may be or may not be wrong. CIT cannot direct reconsideration on this ground but only when the order is erroneous. An order of remit cannot be passed by the CIT to ask the AO to decide whether the order was erroneous. This is not permissible. An order is erroneous, unless the CIT holds and records reason why it is erroneous. Therefore, CIT must after recording reasons, hold that order is erroneous. The jurisdictional pre-condition stipulated is that CIT must come to the conclusion that the order is erroneous and is unsustainable in law.

Saregama India Limited, AY 2014-15 10.1.5. It was further observed by the Hon’ble High Court that the material, which the CIT can rely up on includes not only the records as it stands at the time when the order in question was passed by the AO but also records as it stands at the time of the examination by the CIT. Nothing prohibits CIT from collecting and relying new/additional material which evidence to show and state that the order of the AO is erroneous.

10.2. In the present case before us, we note that ld. Pr. CIT has invoked the revisionary proceedings by merely observing a variation in the amount of royalty expenses debited in the profit and loss account and the amount of provision reported in the balance sheet towards royalty. The extent of enquiry undertaken and replies filed in the assessment proceedings as well as those furnished before him in the revisionary proceedings, forms part of the records of the case on which ld. Pr. CIT ought to have applied his mind before embarking upon the journey of initiating the revisionary proceedings.

10.3. In the course of hearing, ld. CIT DR placed reliance on the decision of coordinate bench of ITAT Mumbai in the case of Crompton Greaves v. CIT in dated 01.02.2016. On perusal of the same from para 4 containing facts in brief, it is noted that is dealt with the issue relating to expenditure of contingent nature for which the liability had not crystalized during the year. Also, in para 9, in the finding, it is stated that ld. AO had not made any enquiry with respect to the claim of deduction made by the assessee. While concluding, it is held that deduction can only be claimed for known and ascertained liabilities having crystalized during the assessment year. In the present case before us, facts do not relate to expenses of contingent nature since claim of royalty expenses had Saregama India Limited, AY 2014-15 crystalized during the year as corresponding license fee had been earned by the assessee and offered to tax. Thus, in our understanding, the said decision does not help ld. CIT DR for the contentions raised.

Order pronounced in the open court on 13th March, 2023.