ASSISTANT COMMISSIONER OF INCOME TAX-16(1), MUMBAI vs. VIACOM18 MEDIA PRIVATE LIMITED, MUMBAI

This appeal has been preferred by the Revenue against the order dated 27/08/2024 impugned herein passed by the National Faceless Appeal Centre (NFAC)/Commissioner of Income Tax (Appeals), Delhi (in short, ‘Ld. Commissioner’) u/sec. 250 of the Income Tax Act, 1961 (in short, ‘Act’) for the A.Y. 2013-14.

(1) M/s. Eenadu Television Private Ltd. {in short “ETPL”} ; (2) M/s. Prism TV Private Ltd. {in short “PTVPL”} and, (3) M/s. Panorama Television Private Ltd. {in short “PTPL”} 2.1 The non-telugu channels other than Hindi and Urdu channels were clubbed together and transferred to M/s. Prism TV Private Limited {herein called “Assessee”} against whom assessment order and impugned order were passed. The Assessee company M/s. Prism TV Private Ltd. now merged with Viacom 18 Media Pvt. Ltd. w.e.f. 01-04-2015 {herein called as “Successor Assessee”} who is now contesting the orders passed by the Authorities below.

3.1 The Assessee, in response to the statutory notices issued, furnished required information and documents. The AO on perusing the information and documents and conducting assessment proceedings, ultimately passed the assessment order dated 24/03/2016 u/sec. 143(3) of the Act, making following additions/disallowances: - (i) Rs. 15,79,57,119/- on account of disallowance of depreciation on non-compete fee;

Rs. 134,79,41,873/- (ii) on account of disallowance of cost of production of TV serials and programmes claimed as revenue expenditure;

Rs. 10,13,96,329/- (iii) on account of disallowance of excess depreciation on “Film Software Library”; and, (iv) Rs. 63,324/- on account of restriction of depreciation on computer accessories to 15%.

“1. Whether on facts and circumstances of the case, the Id CIT(A) is correct in allowing depreciation on Non- compete fee placing reliance on the Order which was binding on the AO l.e. Order giving effect and not considering the prime reason of disallowance by the then AO Le. the necessity and genuinity of the purchase or payment of Non- compete fee.

2. Whether on facts and circumstances of the case the Ld. CIT(A) is justified in allowing the impugned claim of the whole expense of cost of TV serials and programs of Rs. 101,09,56,405/- considering the same as revenue in nature ignoring the fact that the cost incurred on production of TV Serials and programs can have enduring advantage to the business over several years and this creates long term benefits or future earning potential hence, needs to be placed under Capital Expenditure.

3. Whether on facts and circumstances of the case the Id. CIT(A) is justified in deciding the ground of disallowance of film software library without appreciating the fact that the final decision i.e. CIT(A)'s decision for appeal against the OGE order dated 31.03.2017 for AY 2007-08 from where the issue incepted is still pending and also not considering the merit of the ground.”

7. The AO therefore, in order to examine such claim of the Assessee to the tune of Rs. 15,79,57,119/- on account of non- compete fees, examined the necessity for such non-compete fee and observed that Shri Ch. Ramoji Rao in his individual capacity is the Chairman of the Assessee-company i.e. UEPL and holds substantial shares. In the annual report, under the head “Enterprises over which shareholders, key management personnel and their relatives exercise control of significant influence”, there is a mention of “various entities of Ramoji HUF”. Two entities i.e. UKT & UKM are nothing but the business entities of HUF concern of Ch. Ramoji Rao. As such, both the payer and payees are related parties and exercise control or significant influence on each other. Thus, it is quite illogical to say that a person competes with himself. Moreover, the transaction itself is a sham transaction, inasmuch as to cover up brought forward losses of HUF (HUF as a whole is returning losses year after year), the profit making undertaking i.e. UEPL paid such huge sum under the guise of non-compete fee.

7.1 The AO further by relying on certain judgments as mentioned in para 5.2 held that it is evident that the Assessee company resorted to colourable device in the name of ‘non-compete fee’ when there was no case for competing. Without prejudice to the above, the method adopted for valuation of non-compete fee needs to be examined.

7.2 The AO further by observing “that the Assessee in the course of scrutiny proceedings, has furnished written submissions qua nature of its business carried out by UKM & UKT”, held that there is no authentic and comparable basis for the decline in revenue by 48% to 52%. The Assessee company obtained a valuation report from M/s. SSPA & Co., wherein the basis for valuation is as under: - "Rationale for paying non-compete fees: We have been informed by the management of UEPL that substantial sum of around Rs. 787 crores was available with UKTV and UKM (the sellers of the TV software library) with which they could aggressively buy rights of block buster films, produce expensive reality and game shows and also feature films, had there been no non-compete restriction. This would have impacted the viewership of the TV channels operated by UEPL and consequently, its revenues and EBITDA. Therefore, to further secure the business that has been acquired in March, 2007, UEPL had additionally paid Rs.670 crores in January, 2008 to UKTV and UKM towards non-compete fee to ensure that these organizations do not compete for a period of 5 years from the date of agreement.

Valuation of Non-compete:

Clause 5.2: We have been informed by the Management of UEPL that if non-compete agreement is not entered, then revenue of UEPL and consequently profits might decline by 48% to 52%.

We understand that while working out the above, management has given due consideration to various factors such as strength of UKTV UKM in the business, industry dynamics and other relevant factors which could have impact on profitability of the business in case UKTV and UKM competes.

Clause 5.3: Considering the above, the valuation for non-compete has been worked out under both the situations; i) when there is decline in revenue by 48% ii) when there is decline in revenue by 52%"

7.3 The AO further by considering the valuation report, ultimately held that this valuation does not stand test of jury and as such not taken into cognizance, as there is no scientific basis for the valuation, by observing and holding as under: - “7.2 On verification of the Valuation Report, it is seen that the Valuer has not explored any scientific method to work out the valuation for the above 48% to 52% ratio. The valuer simply worked out the non-compete for the above ratios basing on the management's certification. Further, while working out the cost of equity, the valuer has taken only Sun TV, Zee Entertainment and Raj TV for comparative purpose when there are other comparable TV producers. Thus, there is absolutely no scientific basis for decline in revenues by 48% to 52% as submitted by the assessee- company. Accordingly, this valuation does not stand the test of jury and as such not taken into cognizance.

In the light of the foregoing discussion, it is held that there is no scientific basis for the valuation.”

7.4 The AO further by considering and examining another aspect/issue whether the Assessee is eligible for depreciation on non-compete fee or not, ultimately held that non-compete fee cannot be treated as intangible assets qualified for depreciation. The Assessee’s claim of substantial depreciation is nothing short of a colourable device in the name of ‘non-compete fee’ when there was no case for competing.

7.5 The AO thus, on the aforesaid reasons, rejected the submissions of the Assessee and disallowed the depreciation claimed to the tune of Rs. 15,79,57,119/- on the amount of “non- compete fee” by observing and holding as under: -

8.1. Further, there is no explicit provision for claiming deduction on non-compete fees. Therefore, it is very obvious that all intangible assets are not eligible for depreciation allowance. The said payment does not come under either knowhow, patents, copyrights, trademarks, licenses, franchises. The only remaining category is the residual one "any other business or commercial rights of similar nature". It is to be seen that any other business or commercial rights are not by themselves intangible assets eligible for depreciation. Those rights must be of similar nature; all similar nature to knowhow, patents, copyrights, trademarks, licenses, franchises. Any business or commercial rights not similar in nature to the above mentioned six items cannot be treated as intangible assets qualified for depreciation. 8.2. In this context, the aspects need examination: • that section 32(1)(ii) uses the words 'any other business or commercial rights of similar nature'. • that by using the words 'similar nature', the Legislature has restricted the scope of 'intangible assets' to the specified ones, I.e., know-how, patents, copy rights, trade marks, licences, franchises. • that in the present case, the assessee had acquired 'non-compete obligation' which is not an asset. • that the 'non-compete obligation' acquired by the assessee is not an asset since it has no market value, it could not be sold or assigned, and it was not a transferable right. • that since the right acquired through non-competition agreement was not an asset, there was no question of discussing whether it was an intangible asset or not, or whether it was similar to, 'know-how, patents, copy rights, trade marks, licenses, franchises'. • that, without prejudice to above, even if 'non-compete obligation' is treated as an asset, it is not of a similar nature as 'know-how, patents, copyrights, trade marks, licenses, franchises'. • that there is no diminution in the value of these assets. • that the issue is covered, in favour of the department, by the decision of ITAT, Chennai, in the case of A.B. Mauria India (P.) Ltd. [IT Appeal No. 1293 (Mad.) of 2006, dated 23-11-2007]. • the decisions of the Tribunal in the following cases, where it was held that 'Goodwill' was not similar to the items-specified in clause (ii), and therefore, was not eligible for depreciation. (i) Guruji Entertainment Network Ltd. v. Asstt. CIT [2007] 14 SOT 556 (Delhi)

(il) Bharatbhai J. Vyas' case (supra). • that reliance was also placed on the decision of ITAT in the case of M.M. Nissim & Co. v. Asstt. CIT [2007] 18 SOT 274 (Mum.)

8.3. The sum and substance of the above is that the 'right' acquired by the assessee through the non-compete agreement, on the facts of the present case, was not an 'asset' at all. In order to buttress the assessee-company contention it is pertinent to mention here the definition of 'asset' given in Advanced Law Lexicon by P. Ramanatha Aiyer (3rd Ed. 2005), which is as under:

"An asset must be one for which a market value can be ascertained. A right to personal services under a contract of service is unassignable, it cannot be bought or sold. It cannot survive the demise of either of the parties. It can have no actual market value and so it cannot be an asset. [O' Brien (Inspector of Taxes) v. Bensons Hosiery (Holdings) Ltd. [1978] 3 All ER -1057, 1063]

The right to trade freely and to compete in the market place is not an asset [Kirby V/s Thorn Emi Plc. [1988] 2 All ER 947, 959 (CA)]."

Further, the provisions of clause (ii) of sub-section (1) of section 32 did not need to be applied to the 'non-compete right' acquired by the assessee-company, because it did not fall within the definition of 'asset', as given in Advanced Law Lexicon (supra). The 'non-compete obligation' acquired by the assessee was not an 'asset' because it had no market value, it could not be sold or assigned, it was incapable of being transferred by the assessee to anybody else, and the agreement did not make it a transferable right. If the 'right' acquired through non-compete agreement was not an 'asset', there was no need to go into the question whether it was an 'intangible asset', or whether it was similar to 'know-how, patents, copyrights, trademarks, licenses, franchises'.

8.4. In this connection, reliance is placed on the decision of the ITAT, Chennai, in the case of A.B.Mauria India (P) Limited (supra). In that case the Assessing Officer had allowed depreciation on non-compete fee and this order was set aside by the CIT under section 263, on the ground that the deduction for depreciation was allowed by the Assessing Officer without verification. The Assessing Officer was, accordingly, directed by the CIT, to redo the assessment in accordance with law. The said order of the CIT under section 263 was confirmed by the Tribunal.

Right as to knowhow, patents, copyrights, trademarks, licences, franchises, etc., can be construed to be right in them which can be claimed against the world at large. Right in restrictive covenant is 'right in personam' which is available against the contracting parties only. As such, right in restrictive covenant is not of similar nature. Therefore, depreciation on restrictive covenant is not allowable as per the prescription of S 32(1)(ii). Once this conclusion is arrived at, the issue whether the transaction was collusive and colourable becomes only academic.

8.5. The tenets of law are being enacted on the basis of pragmatism. Similarly, the rules relating to interpretation are also based on common sense approach. The dictum of EJUSDEM GENERIS means of the same kind, class or nature. The rule is that when general words follow particular and specific words of the same nature, the general words must be confined to things of the same kind as those specified. A word shall be interpreted with reference to the accompanying words. Words derive colour from the surrounding words. Since, non-compete fee is not a right that is acquired by the payer but a restriction on the recipient, it cannot be deemed to be covered under the residuary phrase "any other business or commercial rights of similar nature".

8.6. It is pertinent to note that in the case of Srivatsan Surveyors (P) Ltd V/s ITO (2009) (32 SOT 268) (Chennai-Tribunal), it has been held that "Right as to know how, patents, copyrights, trademarks, licences, franchises, etc can be construed to be right in rem which can be claimed against the world at large. Right in restrictive covenant is 'right in personam' which is available against the contracting parties only. As such right in restrictive covenant is not of similar nature. Therefore, depreciation on restrictive covenant is not allowable as per the prescription of Section-32(1)(ii). Once this conclusion is arrived at, the issue whether the transaction was collusive and colourable becomes only academic."

In fact, the assessment Order in which depreciation on non-compete fees was disallowed was upheld by the Ld. CIT(A).

8.7. In this regard a show cause opportunity was given to the assessee as why depreciation on non-compete fees be not disallowed, vide hearing dtd. 2/3/16. As a reply assessee has made mention of the following case laws : • ACIT-Vs-Real Image Tech(P) Ltd (1997)120 TTJ 983(Chennai) • ITO-Vs-Medicorp Tecnologies India Ltd (2009) 21 DTR 69( Chennai) • OCV Reinforcements Manufacturing Limited-Vs-ACIT (ITS 1678/Hyd/2010)

Assessee's contention is that in each of the above mentioned cases, depreciation on non-compete fees was allowed by the appellate authorities.

Extract from the case ACIT-vs-Real Image Tech (Pvt) Ltd (1997)120 TTJ 983(Chennai), which is also the essence of the order passed by Chennai Tribunal is given below

"When a businessman pays money to another businessman for restraining the other businessman from competing with the assessee, he gets a vested right which can be enforced under law and without that the other businessman can compete with the first businessman. When by payment of non-compete fee, the businessman gets his right what he is practically getting is kind of monopoly to run his business without bothering about the competition.

Moreover, this right (asset) will evaporate over a period of time of five years in this case because after that the protection of non-competition will not be available to the assessee. This means, this right is subject to wear and tear by the passage of time, in the sense that after the lapse of a definite period of five years, this asset will not be available to the assessee and, therefore, this asset must be held to be subject to depreciation."

8.8. Extract from the judgement of the tribunal talks about the arrangement between two independent businessmen who have entered Into an agreement not to compete with each other for a period of 5 years. Fact of this case law is completely different from the facts involved in the present case of Prism TV Limited. The point that buyer of the asset i.e. Ushodaya Enterprises Private Limited and seller of the asset l.e. UKM and UKTV are one and the same. This point is. elaborately discussed in the earlier paragraphs which talk about lifting of corporate veil. As discussed above the assessee- company claim of substantial depreciation, is nothing short of a colourable device in the name of "Non-compete fee" when there was no case for competing. Submission of assessee is rejected.

Similarly the facts of the case ITO-vis-Medicorp as decided by Chennal Tribunal are squarely different from the facts of the present case and hence, the submission of the assessee is rejected. OCV Reinforcements Manufacturing Limited- vs-ACIT (ITS 1678/Hyd/2010).

Assessee instead of verifying the applicability of the above case laws to the present case of Prism TV Private Limited, has mere mechanically quoted the mentioned case laws. Submissions of the assessee are not valid in light of the above facts and are hence rejected.

Therefore, the depreciation claimed on non-compete fee amounting to Rs. 15,79,57,119/- is disallowed and added back.”

8. The Ld. Commissioner, on appeal, by taking cognizance of the fact that the present issue emanated from the earlier year i.e. AY 2008-09, wherein identical claim of depreciation on non-compete fees paid was disallowed by the AO and the matter travelled upto the Hon'ble ITAT, who vide order dated 22-10-2014 in and 100/Hyd/2012 remanded back the matter to the file of the AO for verification and examination of certain issues and to pass the assessment order afresh and thereafter consequential order has been passed by the AO allowing the claim of the Assessee on the basis of valuation report of Valuation Officer, allowed the claim lodged by the Assessee qua “Non-compete fee”.

9. We observe that the then AO without verifying and examining the issues afresh, as per directions of the Hon’ble Tribunal vide order dated 22-10-2014, referred the matter qua non-compete fee to the valuation officer, who requested further time and failed to provide the valuation report qua "Non-Compete Fee", till the date of passing the consequential order 31/03/2017 giving effect to the Tribunal’s order dated 22/10/2014 and therefore, the AO reiterated the disallowance under consideration by observing as under: - “10. It is clear from the above that the valuator requested further time to submit valuation report in respect of value of "Non-Compete Fee", in spite of this office being constantly in touch with him and also bringing to his notice about the limitation of time given to him for the purpose of valuation. In view of the above facts and circumstances of the case, the assessment order passed by the then Assessing Officer with regard to necessity for Non-Compete Fee and valuation thereof, discussed in detail with respect to the issue of 'Non-Compete Fee' holds good.”

9.1 The AO further, in para 12 of the said order dated 31/03/2017, also noted as under: - “ 12 However, it may be noted that as and when the final report of valuator on the issue of ‘Non-Compete Fee’ is received in this office, this order will accordingly stand modified after giving due opportunity to the Assessee in accordance with the provisions of the I.T. Act, 1961.”

9.2 Somehow the Assessee challenged the said consequential order dated 31/03/2017 passed by the AO, by filing first appeal before the then CIT(A), before whom during the course of such appellate proceedings the valuation report was provided/submitted.

9.3 The then Ld. CIT(A) thus vide order dated 24/03/2023 directed the AO to allow claim of ‘non-compete fee’ as per the valuation determined by the valuation officer appointed by the AO.

10. Thus, the AO thereafter, vide order dated 19/05/2023 given effect to the order of appellate authority i.e. the then Ld. CIT(A) and allowed the claim of depreciation on ‘Non-Compete Fee’ of Rs. 618,45,51,000/- value determined by the Valuation Officer, as against the valuation arrived at by the Assessee to the tune of Rs. 670,00,00,000/- .

11. Thus, the present Ld. Commissioner in this case by perusing the order of the Hon'ble Tribunal and the then CIT(A) and corresponding orders giving effect by the AO, ultimately, came to a conclusion that this issue is now covered by the order of AO himself, as the AO has allowed the claim of depreciation @25% on the ‘non- compete fee’ as per valuation arrived at by the Departmental Valuation Officer to the tune of Rs. 618 crores as against the value of the Assessee of Rs. 670 crores. Thus, the value of the ‘non-compete fee’ as determined by the valuation officer has already been accepted by the AO in the earlier assessment year 2008-09, has to be considered for the purpose of continuing the claim of depreciation on such ‘non-compete fee’.

12. The Learned DR, therefore, being aggrieved has claimed as under: - In captioned AY ie. 2013-14 the CIT(A) had allowed the ground of Non- compete fees stating the AO has already passed the order dt. 19.05.2023 allowing the claim of the depreciation @25% It is pertinent to mentioned that CIT(A) in his order dated 24.08.2024 for the AY 2013-14 has taken very narrow view of the issue and allowed the claim of the assessee banking upon the order which was binding on the then AO to give effect of the CIT(A) order dated 24.03.2023. The CIT(A) has not appreciated the fact that AO has never decided this ground on merit.

It can be seen from the extract of the consequential order dated 31.03.2017 the AO has sustained the reason for disallowance. The purpose behind writing "with regard to necessity for Non-compete Fees and Valuation thereof, discussed in detail with respect to the issue of Non-compete fee holds good' is that AO has deliberated on the fact that the core issue of the ground is the veracity of the payment of the Non- compete fees which has been subdued gradually over the time.

The UEPL has paid non-compete fees of Rs 670 crores to Usha Kiron Television and Usha Kiron Movies to restrict them to compete against him for five years On exploring the facts of the case it is found that Shri Ch. Ramoji Rao in his Individual capacity is the chairman of the Ushodaya Enterprises Private Limited and the two entities to whom the amount was being paid were the HUF units of Ramoji HUF Thus. Both the payer and payees are related parties and exercise control or significant influence on each other. Thus, it is absurd and irrational to say that person competes with himself. In addition to this, the transaction is merely a blanket/veil to cover the brought forward losses of the HUF and to reduce the profit of the UEPL.

Reference can be made to the case of M/s Indo Tech Electric Co. Vs. DCIT (2011) (196) CTR 0277), while deciding the genuineness of non- compete fee paid by a company to a firm, which was taken over by it on going-concern basis, the Hon'ble Madras High court held that:

"Similarly, the question of payment to be made as compensation by way of non-competing fee also would not arise, considering the fact that the assessee firm has been taken over as a going concern in its entirety by the new company. As observed earlier, the partners of the assessee firm are the new Directors of the company. The consideration was paid to the assessee firm and not the partners. There was no competition as alleged between the assessee firm and the new private limited company. There was also no control between the partners of the assessee and the new private limited company. Hence, considering above said factual position, we are of the considered view that the findings of the Tribunal in holding that in as much as there was no competition between the partners of the assessee firm and the new private limited company, coupled with the fact that the entire business of the assessee company was transferred the same cannot be found fault with."

The facts of the case under scrutiny too are similar The members of Ramoji HUF are also on the board of directors of the assessee-company Since the entire unit of the Ramoji HUF has been taken over on a going- Concern basis, there could be no case for completion.

Also, in the case of CIT V/s Indian Express Newspapers (Madurai) Pvt Ltd. (1999) (238 ITR 70) the madras court held that:

It is well settled that the corporate veil of a company can be lifted for the purpose of ascertaining the real character of a transaction, if that transaction was a fraudulent or sham or was intended to evade payment of tax. While legitimate tax avoidance is always permissible, devices adopted to evade payment of tax, however are not permissible though the dividing line is not always easy to draw, such a line does exist Therefore, in the light of the above facts and discussion it is clear that the Assessee's company claim for depreciation is not genuine and merely a colourable device in the name of "Non- Compete fee" when there was no case for competing.

Another question which arises from the claim of the assessee is whether the "Non-compete fees" is eligible for depreciation u/s 32(1)(ii).

With regard to this it must be noted the basic definition for classifying any asset as revenue or capital in nature is that If an asset has enduring benefit to the business, then it can have capitalized and gradually amortized. In the instant case "Non-compete fees" is not a right that is acquired by the payer but a restriction on the recipient and neither it is an asset of enduring nature, thus question of claiming depreciation has no ground to stand.

"Section 32(1)(ii) prescribes for depreciation in respect of know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature being intangible assets acquired on or after the first day of April, 1998 owned or fully partly by the assessee and used for the purpose of the business or profession. There is no prescription for allowance of depreciation in respect of non- compete fees since it down not get covered under the phrase "any other business or commercial rights similar nature" that section 32(1)(ii) uses the words 'any other business or commercial rights or similar nature' that by using the words 'similar nature', the Legislature has restricted the scope of 'intangible assets to the specified ones, ie, know-how patents, copy rights, trade marks, licences, franchises. • that in the present case, the assessee had acquired 'non-compete obligation' which is not an asset. • that the 'non-compete obligation' acquired by the assessee is not an asset since it has no market value, it could not be sold or assigned, and it was not a transferable right • that since the right acquired through non-competition agreement was not an asset, there was no question of discussing whether it was an intangible asset or not, • or whether it was similar to, 'know-how, patents, copy rights, trade marks, licenses, franchises'. • that, without prejudice to above, even if 'non-compete obligation' is treated as an asset, it is not of a similar nature as 'know-how, patents, copyrights, trademarks, licenses, franchises' • that there is no diminution in the value of these assets. • that the issue is covered, in favor of the department, by the decision of ITAT, Chennai, in the case of A.B. Mauria India (P.) Ltd. [IT Appeal No. 1293 (Mad.) of 2006, dated 23-11-2007 • The decisions of the Tribunal in the following cases, where it was held that 'Goodwill' was not similar to the items-specified in clause (ii), and therefore, was not eligible for depreciation (i) Guruji Entertainment Network Ltd. v. Asstt.. CIT (2007) 14 SOT 556 (Delhi) (ii) Bharatbhai J. Vyas' case (supra). • that reliance was also placed on the decision of ITAT in the case of M.M. Nissim & Co. v. Asstt. CIT [2007] 18 SOT 274 (Mum.) To sum up and in the view of above discussion and judicial precedents it is hereby stated that CIT(A) in the present case has just taken the bird eye view and not appreciated the merit of the case and made his decision on the order which was just binding on the AO to give effect and not an order of merit. Hence, it is requested the decision of the Id CIT(A) may kindly be set aside.”

13. On the contrary, learned Counsel for the Assessee relied on the decision of the Ld. Commissioner and submitted that the then AO on being satisfying himself qua claim of the Assessee in respect of non-compete fee in the AY 2008-09 and as per the directions of the Hon'ble Tribunal, ultimately, sought for the valuation from the District Valuation Officer and on receiving the valuation report, during the appellate proceedings before the then Ld. CIT(A) and on being directed by the then CIT(A) vide order dated 24/03/2023, accepted the valuation report and/or the claim of the Assessee to the extent of Rs. 618 crores being depreciation @ 25% on the ‘non-compete fee’ and thus, the issue is squarely covered in favour of the Assessee and does not require any interference.

14. We have heard the parties and given thoughtful consideration to the facts and circumstances of the case and rival contentions raised by the parties. As observed above, an identical addition /disallowance has also been made by disallowing the claim of depreciation claimed on ‘Non-Compete Fee’ by the then AO in the case pertaining to AY 2008-09, which travelled upto the Tribunal, who vide order dated 22/10/2014 in & for the AY 2008-09 remanded the issue qua ‘Non-Compete Fee’ to the file of the AO for decision afresh in view of the statutory provisions and as per the ratio laid down in the decision referred to, in the order of the tribunal, by observing and holding as under:-

“25. We have heard the submissions of the parties and perused the orders of revenue authorities as well as other materials on record and also gone through the decisions cited. A perusal of the assessment order as well as the order passed by CIT(A) would leave no room for doubt that assessee’s claim of depreciation on non-compete fee has been rejected basically for the following two reasons:

1. 1. Genuineness of the payment made and necessity of paying non- compete fee.

2. Non-compete fee not being in the nature of an intangible asset as defined in section 32(1)(ii), depreciation is not allowable.

26. Before examining whether non-compete fee can be considered to be an intangible asset so as to entitle the assessee to claim depreciation on it, it is necessary, at the outset, to address the issue of genuineness of payment of non-compete fee and necessity to make such payment. As can be seen from the assessment order, AO has treated the agreement entered into between assessee for payment of non-compete fee as a sham transaction as Shri Ramoji Rao is not only the owner of UKT and UKM being the karta of HUF to which these concerns belong but he also in his individual capacity is the Chairman of the assessee company. As such, assessee cannot be considered to be competing with himself. As it is an arrangement between related parties, there is no necessity for payment of noncompete fee. AO further observed that the assessee has entered into agreement for payment of non-compete fee to reduce its tax burden by allowing Shri Ramoji Rao HUF to adjust the non-compete fee against the huge brought forward losses suffered by it. AO also raised doubts with regard to the value of non-compete fee at Rs. 670 crores. However, the CIT(A) has rejected assessee’s claim by holding that as Shri Ramoji Rao, who is the kartha of HUF, which owns UKT and UKM and also in his individual capacity is the Chairman of the assessee company, therefore, there is no question of paying non- compete fee as a person cannot compete with himself. Of course the CIT(A) has also held that as non-compete fee does not provide any asset of enduring nature, deprecation cannot be allowed. In this context, it is to be noted that assessee on 25/01/2008 has entered into subscription agreement and share purchase agreement with a domestic company, Viz.; Equator Trading Enterprises Pvt. Ltd. as per which the said domestic company agreed to make substantial investment in purchase of equity shares of the assessee company. However, as a precondition for making such investment, the said domestic company required the assessee company to enter into a non-compete agreement with UKT and UKM. Though, copies of the share purchase agreement and subscription agreement are not available on record before us, however, on perusal of the closing agreement dated 30/01/08 between assessee and M/s Equator Trading Enterprises Pvt. Ltd. a copy of which is at page 220 of paper book, we find a reference to such precondition in clause 2(a). Further, as it appears from the fact on record and which remains uncontroverted in pursuance to the condition imposed by the domestic investor assessee has entered into the non- compete agreement with UKT and UKM for a period of 5 years on payment of non-compete fee of Rs. 670 crores, which is also approved by the domestic investor. It is the contention of assessee that as a result of fulfillment of such condition of non-compete fee thereby excluding UKT and UKM competing with assessee company in future, the domestic company invested substantial amount by acquiring 39% of share in the assessee company.

27. From the aforesaid facts it cannot be denied that Equator Trading Enterprises Pvt. Ltd is a major stakeholder in assessee company. As can be seen from the assessment order as well as order passed by the CIT(A) before coming to their respective conclusion that the transaction entered into by parties for payment of non-compete fee is not genuine or there is no necessity for paying the non-compete fee as the same person is controlling both the assessee company and the two other companies acquired by the assessee, the role of M/s Equator Trading Enterprises Pvt. Ltd. in any decision taken by assessee company has not at all been considered. Neither the AO nor the CIT(A) has examined the effect of acquisition of 39% of equity shares by another entity and whether after such acquisition of shares, it can still be held that Shri Ramoji Rao is the controlling authority of assessee company and it is a transaction between related parties. Unfortunately, the assessment order and order of CIT(A) is totally silent on this aspect. Though in the remand report, AO has examined the issue of investment made by the domestic investor and has alleged that it as a sham transaction and a collusive agreement entered into between the parties to reduce the tax burden by claiming depreciation on payment of non-compete fee. However, such inference drawn by AO, in our view, is more on presumptions and surmises rather than on the basis of strong evidence. When two independent parties enter into an agreement on certain terms and conditions, it cannot be termed as sham or collusive without bringing sufficient evidence to prove such fact. AO cannot treat the transaction as a colourable device adopted by the parties merely on presumptions and surmises without proving the fact that either the promoters of both the companies are same or M/s Equator Trading Enterprises Pvt. Ltd. is a front company of either the assessee or the Ramoji Rao group. In these circumstances, the inference drawn on mere assumptions and presumptions that the agreement is a colourable device to reduce the tax burden cannot be accepted. Therefore, without examining the impact of investment made in equity shares to the extent of 39% by the domestic investor and condition imposed by it, the conclusion drawn by the CIT(A) that there is no necessity of payment of non-compete fee as the same person is controlling the assessee company as well as UKT and UKM, in our view, is without proper appreciation of facts and evidences brought on record, hence, cannot be sustained.

28. Even though the AO in the assessment order has also raised the issue of payment of non-compete fee for the purpose of setting off the loss sustained by the HUF and also has questioned the value of non- compete fee but the learned CIT(A) has not at all dealt with these issues. Be that as it may, it needs to be observed that so far as valuation of non-compete fee is concerned, in course of assessment proceeding, assessee has submitted a valuation report of a CA firm in support of the valuation made by it. Therefore, if the AO had any doubt with regard to the valuation made, he should have got it valued through an independent valuer instead of rejecting the valuation by simply observing that the method adopted is not correct or scientific. It is also alleged by the AO that the payment of non-compete fee was made on the one hand to enable the assessee to reduce its profit and at the same time allowing Shri Ramoji Rao HUF to adjust it against its huge brought forward losses. In this context, it is to be observed that in course of hearing before us the learned AR has submitted certain documents as additional evidence. A perusal of the said documents reveal that Shri Ramoji Rao HUF for the assessment year 2008-09 has not only shown the non-compete fee received by it as income but has also adjusted it against the brought forward losses of earlier years. AO i.e. JCIT, Range -16, while completing assessment in case of Shri Ramoji Rao HUF has accepted not only the income but also its adjustment against brought forward losses in an assessment order passed u/s 143(3) on 24/12/2010. Therefore, when the non-compete fee paid by assessee has been accepted at the hands of Shri Ramoji Rao HUF and allowed to be set off against the brought forward losses, it needs to be examined whether still the payment of noncompete fee made by the assessee to Shri Ramoji Rao HUF can be held to be either non-genuine or not necessary. Therefore, considering the totality of the facts and circumstances we are of the view that as the impact of acquisition of 39% of equity shares by M/s Equator Trading Enterprises Pvt. Ltd. has not at all been examined by AO at the time of assessment proceeding or by the learned CIT(A) while disposing of assessee’s appeal and further as the additional evidences produced before us were not examined either by the AO or by CIT(A), which certainly have a crucial bearing on the issue as to whether the payment of non- compete fee is genuine and necessary, we are inclined to remit the matter back to the file of AO for deciding afresh. Only after the issue relating to genuineness of non-compete fee paid and necessity to pay such fee is resolved, AO will decide the allowability of depreciation claimed on such non-compete fee by keeping in view the statutory provision as well as the ratio laid down in the decisions referred to hereinabove and any other decision brought to his notice. It is needless to mention that AO must afford a fair opportunity of hearing to assessee in the matter before deciding the issue. This ground is considered to be allowed for statistical purposes.

29. Before parting, we need to mention that in ground no.9, assessee has raised an alternative contention for allowing non-compete fee as deferred revenue expenditure. Though the learned AR at the time of hearing has also advanced arguments in respect of the aforesaid issue, however, considering the fact that we have remitted the issue relating to genuineness and necessity of payment of non-compete fee and assessee’s claim of depreciation on it, we are not inclined to go into the issue at this stage. However, it is open for the assessee to raise such issue before the AO at the time reassessment proceedings. If the assessee raises such an issue, AO must have to decide the same after considering the facts and materials brought on record and in accordance with law.

15. We observe from the decision of the Coordinate Bench in the aforesaid case, in remanding the issue to the file of the AO, and the same is in consideration before us, that the coordinate Bench of the Tribunal vide order dated 22/10/2014 not only analyzed the peculiar facts and circumstances of the case but also findings of the authorities below and the additional evidence filed by the Assessee and ultimately observed “when the ‘Non-Compete Fee’ paid by the Assessee has been accepted at the hands of Shri Ramoji Rao HUF and allowed to be set of against the brought forward losses” then it needs to be examined “whether still the payment of ‘Non-Compete Fee’ made by the Assessee to Shri Ramoji Rao HUF can be held either non-genuine or not necessary”.

15.1 The Coordinate Bench by considering the peculiar facts and circumstances, was also of the view that as the impact of acquisition of 39% of the equity shares of M/s. Equator Trading Enterprises Pvt. Ltd. has not at all been examined by the AO at the time of assessment proceedings or by the CIT(A), while disposing of Assessee’s appeal and further as the additional evidences produced before the Coordinate Bench were not examined by any of the authorities below, which are clearly having crucial bearing on the issue “as to whether the payment of ‘Non-Compete Fee’ is genuine and necessary” and therefore the Hon'ble Coordinate Bench opined that the matter needs decision afresh.

15.2 The Hon'ble Coordinate Bench also directed that only if the issue relating to genuineness of ‘Non-Compete Fee’ paid and necessity to pay such fee is resolved, then the AO will decide the liability of depreciation on such ‘Non-Compete Fee’ by keeping the statutory provision as well as the ratio laid down in the decisions referred to hereinabove.

15.3 It is also a fact that before remanding the case to the file of the AO, the Hon'ble Coordinate Bench has also taken into consideration the peculiar facts and observed “that Assessee on 25/01/2018 has entered into subscription agreement and share purchase agreement with a domestic company viz. Equator Trading Enterprises Pvt. Ltd., however, as per a precondition for making such investment, the said domestic company required the Assessee company to enter into a non-compete agreement with UKT and UKM. Though, copies of the share purchase agreement and subscription agreement are not available on record before us, however, on perusal of the agreement dated 30/01/2018 between Assessee and M/s. Equator Trading Enterprises Pvt. Ltd., a copy of which is at page No. 220 of paper book, the Hon'ble Bench found a reference to such precondition I clause 2(a). Further, as it appears from the fact on record and which remains uncontroverted in pursuance to the condition imposed by the domestic investor Assessee has entered into the non-compete agreement with UKT and UKM for a period of 5 years on payment of ‘Non-Compete Fee’ of Rs. 670 crores, which is also approved by the domestic investor. It is the contention of Assessee that as a result of fulfillment of such condition of ‘Non-Compete Fee’ thereby excluding UKT and UKM competing with Assessee company in future, the domestic company invested substantial amount by acquiring 39% of share in the Assessee company. From the aforesaid facts, it cannot be denied that M/s. Equator Trading Enterprises Pvt. Ltd. is a major stakeholder in Assessee company. As can be seen from the assessment order as well as order passed by the CIT(A) before coming to their respective conclusion that the transaction entered into by parties for payment of non-compete fee is not genuine or there is no necessity for anything the ‘Non-Compete Fee’ as the same person is controlling both the Assessee company and the two other companies acquired by the Assessee. The role of M/s. Equator Trading Enterprises Pvt. Ltd. in any decision taken by Assessee company, has not at all been considered. Neither the AO nor the CIT(A) has examined the effect of acquisition of 39% of equity shares by another entity and whether after such acquisition of shares, it can still be held that Shri Ramoji Rao is the controlling authority of Assessee company and it is a transaction between related parties. Unfortunately, the assessment order and the order of CIT(A) is totally silent on this aspect. Though, in the remand report, the AO has examined the issue of investment made by the domestic investor and has alleged that it as a sham transaction and a collusive agreement”.

15.4 The Hon'ble Coordinate Bench further observed “that the AO cannot treat the transaction as a colourable device adopted by the parties merely on presumptions and surmises, without proving the fact that either the promoters of both the companies are same or M/s. Equator Trading Enterprises Pvt. Ltd. is a front company of either the Assessee or the Ramoji Rao group. In these circumstances, the inference drawn on mere assumptions and presumptions that the agreement is a colourable device to reduce the tax burden cannot be accepted. Therefore, without examining the impact of investment made in equity shares to the extent of 39% by the domestic investor and condition imposed by it, the conclusion drawn by the CIT(A) that there is no necessity of payment of ‘Non-Compete Fee’ as the same person is controlling the Assessee company as well as UKT and UKM, in our view, is without proper appreciation of facts and evidences brought on record, hence cannot be sustained”.

15.5 The Hon'ble Bench further held “that if the AO had any doubt with regard to the valuation made by the Chartered Accountant firm as submitted by the Assessee in the course of assessment proceedings, then the AO should have got it valued through an independent value instead of rejecting the valuation by simply observing that the method adopted is not correct or scientific”.

16. We observes from the order of Hon'ble Coordinate Bench that as per order and directions dated 22-10-2014 {supra} of the Hon'ble Coordinate Bench, the AO was supposed to consider all the facts and aspects as observed above, however, in absence of valuation report, which the valuator failed to file till passing the consequential order dated 31/03/2017, the then AO by observing that necessity of Non-Compete Fee and valuation thereof, as discussed in detail with respect to issue of “Non-Compete Fee”, holds good. However, the AO in the note mentioned that as and when the final report of valuator on the issue of ‘Non-Compete Fee’ is received in this office, the consequential order will accordingly stand modified after giving due opportunity to the Assessee.

16.1 Admittedly, the then AO while passing the consequential order dated 31/03/2017 failed to follow the directions of the Hon'ble Coordinate Bench in its true spirit and proper manner and without examining the issue under consideration, as per the directions of the Hon'ble Coordinate Bench and held ‘Non-Compete Fee’ as good.

16.2 However, thereafter, somehow the Assessee challenged the said consequential order dated 31/03/2017 and the then CIT(A)’s vide order dated 24/03/2023 allowed such appeal and without examining the issue and following the directions of the Hon’ble Coordinate Bench, directed the AO to allow to the claim of deprecation, as per the value determined in valuation report by the Valuation Officer, which was neither disputed nor challenged by the Assessee as it clearly appears from para 7.6 of the order dated 24/03/2023 by the then CIT(A).

16.3 Thus, the AO subsequently passed another consequential order dated 19/05/2023 and allowed the claim of depreciation to the tune of Rs. 61845.51 crores, as per the valuation report by the Valuer vide letter dated 30/06/2018 as against the valuation arrived at by the Assessee of Rs. 670,00.00 crores.

17. We further observe that this issue qua ‘Non-Compete Fee’ has also cropped up in the case pertaining to AY 2011-12, which resulted into making an identical addition /disallowance qua ‘Non- Compete Fee’ by the AO and subsequently affirmed by the then CIT(A), which resulted into filing of appeal before the Hon'ble Coordinate Bench of the Tribunal at Hyderabad, who vide order dated 24/03/2016 in & 1249/HYD/2015 by following the order 22/10/2014 {in & 100/HYD/2012 for the AY 2008-09} by the Hon'ble Coordinate Bench, Hyderabad, also remanded the issue to the file of the AO with a direction to give consequential effect to the decision taken by him for the AY 2008- 09.

17.1 However, the Hon’ble Coordinate Bench in the case pertaining to AY 2007-08 {order dated 16.02.2016 passed in has recorded the finding as under:

Similar circumstance existed in the Assessee’s own case for the subsequent A.Y. 2008-09 regarding the non-competing fee and this Tribunal has observed that the factual position has not been properly appreciated by the authorities below and has set aside the issue for reconsideration

18. Admittedly, both the authorities below in the case pertaining to AY 2008-09 which is the foundation of issue involved, have not examined the issues under consideration in the true spirt and right perspective and proper manner and as per the directions of the Hon'ble Coordinate Bench in the case pertaining to AY 2008-09, but in fact simply relied on and accepted the valuation report of Valuation Officer qua ‘Non-Compete Fee’, without analyzing the genesis and need of the ‘Non-Compete Fee’ in the context of the ownership and the stake-holding, as well as, without examining the additional evidences, which were directed to be examined by the Hon'ble Coordinate Bench specifically.

19. In this case, both the authorities below also failed to examine the issue involved in its right perspective and proper manner and in the context of the ownership/stake holding of Equator Trading Enterprises Pvt. Ltd. and Shri Ramoji Rao.

20. Admittedly, the Assessee before us, has also failed to establish the genesis of ‘Non-Compete Fee’. We reiterate that from the orders passed by the authorities below, it is clear that both the authorities below have not gone into genesis of the issue involved and the Ld. Commissioner simply relying on the consequential order passed in the case relevant to AY 2008-09 and without analyzing the fact that in the AY 2008-09, neither the AO nor CIT(A) examined the issue in detail and as per the specific directions of the Hon'ble Coordinate Bench vide order dated 22/10/2014 {supra} , allowed the claim of the depreciation claimed, and therefore the decisions of the Authorities below are unsustainable.

22.1 Resultantly, issue/ground no 1 raised by the Revenue is allowed for statistical purposes.

23. Coming to the 2nd issue/ground raised by the Revenue Department, which relates to the disallowance of Rs. 134,79,41,873/- on account of cost of production of TV serials and programmes which was claimed by the Assessee as “Revenue expenditure” completely, instead of claiming depreciation on the same debiting to the profit and loss account.

23.1 The AO only allowed the depreciation @25% on the said expenditure and made addition of rest of the amount, by observing and holding as under: - “The assessee-company debited an amount of Rs.134,79,41,873/- towards cost of production of T.V serials and Programmes. This expenditure relates to the year under consideration. Instead of claiming depreciation, the entire expenditure is claimed as revenue expenditure and debited to Profit and Loss account. Further, the cost of production of T.V serials and Programmes is not covered under Rule 9A or Rule 98. Rule 9A states as under: [(1) In computing the profits and gains of the business of production of feature films carried on by a person (the person carrying on such business hereafter in this rule referred to as film producer), the deduction in respect of the cost of production of a feature film certified for release by the Board of Film Censors in a previous year shall be allowed in accordance with the provisions of sub-rule (2) to sub-rule (4).

Rule 98 states as under:

(1) In computing the profits and gains of the business of distribution of feature films carried on by a person (the person carrying on such business hereafter in this rule referred to as film distributor), the deduction in respect of the cost of acquisition of a feature film shall be allowed in accordance with sub-rule (2) to sub-rule (4).

The definition of Rule 9A clearly shows that the expenditure of the assessee-company on production of T.V serials and Programmes is not covered. Similarly, the definition of Rule 9B clearly shows that the expenditure claimed by the assessee-company is not covered, as the assessee is not a film distributor. Therefore, the expenditure debited by the assessee-company on the above items is disallowed and depreciation is allowed on the above items separately as per Section 32 of the Income Tax Act."

However, considering the Programs as intangible assets of the company, depreciation is allowed at the rate of 25% on this expenditure.”

25. On the contrary, the AO before the Ld. Commissioner has claimed that such expenditure is not covered under Rule 9A and 9B of the Income Tax Rules, 1962 (for short, ‘Rules’) and therefore, the said expense is intangible assets u/sec. 32(1)(ii) of the Act. But the AO just allowed the depreciation @25% on that assets, resulting into net disallowance of Rs. 101,09,56,405/-.

“1. I have gone through the assessment order making the additions /disallowances, the detailed written submissions filed by the Appellant and the supporting documents and various judicial decisions relied on by the Appellant company and submitted in the form of Paper Book.

1. The only dispute with regards to this issue is the allowability of cost of production / purchase of TV serials and programme as revenue expenditure as against the action of the AO of considering it to be a capital expenditure eligible for claiming depreciation. The Appellant has submitted that the said issue in the present appeal is fully covered by order of Hon'ble Hyderabad Tribunal in Appellants' (Prism TV) own case vide Hyd /2015 for AY 2011-12 and Hyd /2015 for AY 2012-13, wherein the Tribunal allowed the deduction for cost of TV serials and programmes as revenue expenditure. I have perused through the Hon'ble ITAT's order dated 24.03.2016 for AY 2011-12 and 2012-13 as relied on by the Appellant.

1. The Hon'ble ITAT while dealing with this issue before them for the preceding years have allowed the claim of the Appellant considering this issue as fairly covered in favour of the Appellant by the following decisions. • Hon'ble Chennai ITAT Bench order dated 31.10.2013 in the case of ACIT. Media Circle-II Chennai v M/s Sun TV Network Ltd, Chennai in to 1520/Mds/2013. • Hon'ble Mumbai ITAT Bench order dated 12.08.2015 in the case of Zee Media Corporation Limited (formerly known as Zee News

Limited), Mumbai v DCIT, Circle 7(3), Mumbai in • In coming to the conclusions drawn in above cases, the Hon'ble ITAT has followed the judgement of the Hon'ble Delhi High Court in the case of CIT v Television Eighteen India Limited (364 ITR 597) (Del)

1. Considering that the issue is squarely covered by Hon'ble ITAT's order in Appellant's own case for AYs 2011-12 and AY 2012-13 and there has been no change in the facts, I decide this issue in favour of the Appellant and allow the cost of production / purchase of TV serials and programme as revenue expenditure.”

1. Rule 9A operates within the framework of the Act and does not override statutory provisions such as sections 37 & 43B.

2 Costs incurred post-certification by the Censor Board, such as promotional expenses, are governed by general provisions of the Act.

3. Capital expenditures linked to abandoned films are allowable as business losses under commercial expediency.

The Ld. DR, in view of the above, further submits that expenditure debited by the Assessee of Rs. 134,79,41,873/- has rightly been treated as “capital expenditure” and therefore depreciation on the same @25%. has rightly been allowed by the AO and thus decision of the AO on this issue, is liable to be restored.

“6. As regards ground No.2, against the treating of the cost of production of TV serials and programmes as capital expenditure, brief facts are that the assessee company debited an amount of Rs.123,63,94,000 towards cost of production of TV serials and programmes for the year under consideration. Instead of claiming depreciation, the entire expenditure was claimed as revenue expenditure and debited to the P & L account. The A.O. observed that the cost of production of TV serials and programmes is not covered under Rule 9A or 9B of I.T. Rules. As these Rules are applicable only to production of feature films. The A.O. treated the entire expenditure as capital expenditure and allowed the depreciation thereon. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who confirmed the order of the A.O. and the assessee is in second appeal before us.

7. The Ld. Counsel for the assessee, while reiterating the submissions made by the assessee before the authorities below, has relied upon the decision of the Coordinate Bench of this Tribunal at Chennai and Mumbai and also the decision of Hon’ble High Court at Delhi in support of his contention that the expenditure incurred on production of television programmes should be allowed as revenue expenditure under section 37 of the I.T. Act. Copies of the said decisions are also filed before us.

8. The Ld. D.R. on the other hand, supported the orders of the authorities below.

9. Having regard to the rival contentions and the material on record, we find that the ‘A’ Bench of this Tribunal at Chennai in the case of ACIT, Media Circle-II, Chennai vs. M/s. Sun TV Network Ltd., Chennai in ITA.Nos.1515 to 1520/Mds/2013 by its order dated 31.10.2013 has held as under :

“8. Now, we take up the common issue involved in all the appeals. The assessee is in the business of running satellite television channels. These channels telecast films, serials etc., through satellite channels. The rights over these films are purchased from the producers of the respective films for broadcasting through satellite television. These rights come with an embargo that the films shall not be broadcasted or aired for a specified period from the date of release in theatres depending upon the success at the box office and other factors. Till the time, such films are broadcasted, they are to be treated as stock in trade. Once the films are broadcasted, the purchase value of the films is written-off. The expenditure on purchase of films is claimed in the first year itself. The assessee has got only satellite telecasting rights and has no universal rights for airing the films or serials. Once the film or the serial is aired, its value is diminished in subsequent telecasts. The assessee earns substantial revenue in the first telecast itself. In repeat telecast, the assessee is able to generate marginal revenue. Whatever income is earned from the subsequent telecasts is offered as income without claiming any expenditure.

The assessee also generates revenue from broadcasting serials through satellite channels. The assessee gets revenue from production and broadcasting serials on the lines of feature films, the rights of broadcasting such serials are also treated as stock in trade till the time they are aired and the expenses are debited to the Profit & Loss account. The assessee treats the films and the serials at par and applied the provisions of Rule 9A and 98 of the Income Tax Rules, as are applicable in case of films on serials as well.

On the other hand, the contention of the Revenue is that the film and serial broadcasting rights acquired by assessee are perpetual in nature. After first telecast, the assessee does not discard the films but carefully store the same in digital library for airing the same again. Therefore, the assessee gets enduring benefit from the rights acquired in films and serials and they do not expire on the date of first telecast as contemplated by the assessee. The rights are intangible assets within the meaning of Explanation (iii) to Section 32 and do not fall within the purview of Section 37(1). The assessee is entitled to claim depreciation on same.

of the assessee. For the sake of brevity, we are not reproducing the findings of CIT (Appeals) in accordance with the judgment of the Hon'ble Supreme Court of India in the case of CIT Vs. K. Y. Pillah & Sons reported as 63. ITR 411 subsequently followed by the Hon'ble Delhi High Court in the case of CIT Vs. Global Vantedge (P) Ltd., reported as 354 ITR

21. (Del). The Id. DR has not been able to controvert the well reasoned order of the CIT (Appeals) on the issue. Accordingly, the findings of the CIT (Appeals) on the issue are affirmed and this ground of appeal of the Revenue in respect of all the AYs is dismissed.”

9.1. In the case of Zee Media Corporation Ltd., (Formerly known Zee News Limited), Mumbai vs. DCIT, Circle-7(3), Mumbai, the ‘G’ Bench of Tribunal at Mumbai in ITA.No.1590/Mum/2015 by order dated 12.08.2015 has held as under :

“25. We have heard both the parties and perused the orders of the Revenue Authorities as well as the cited precedents and paper book filed before us. The case of the assessee on the merits is that the assessee has a method of valuation of the news items/non fictional in nature, TV programs and the film rights. The details are given in the aforementioned 'Note No 7' to the financial statements. According to the same, while the news items purchased are debited to the P and L account as they do not have the repeat telecast value, other items like the TV program and the film rights constitutes 'current assets', which are amortised over the years and the period of such amortization is given in the said Note. Per contra, the case of the revenue on these issues is that these items constitute 'intangible depreciable capital assets' and provisions of section 32 of the Act apply. Considering the same, we shall now undertake to discuss the item wise adjudication as follows. a. On the debits relating to the purchases of the News items: Regarding the nature of the news items purchased by the assessee and debited to the P and L account, we find it is in the common knowledge of every citizen that the news items do not have enduring benefit. Normally, the news items/non fictional items purchased by the assessee lose its value once they are telecast. Therefore, such items do not have repeat telecast value in terms of the revenue generation by way of advertisement from the sponsors. As such, it is a settled issue at the level of Hon'ble Delhi High Court in the case of Television Eighteen India Ltd (supra) that the claims of the assessee relating to news/non-fictional items are allowable. Even otherwise, even if some income generated, that is not criterion for describing the items as 'intangible assets' for the purpose of invoking the provisions of section 32(ii) of the Act. We rely on the above referred Delhi High Court's Judgment in the case of Television Eighteen India Ltd (supra). Further, we find that the assessee has a declared method of accounting relating to accounting of these transactions. He has been consistently following the same without any change. In fact, the Revenue has consistently allowed the claim in the past. This is for the first time, AO disturbed the claim of the assessee and invoked the provisions of section 32 (ii) of the Act, without any sustainable reasoning. Therefore, considering all the points mentioned above, we are of the firm opinion that the decision of the AO/CIT(A) is unsustainable legally. Hence, the assessee is entitled to claim the purchases of news items/non-fictional items as an allowable expenditure. Accordingly, we direct the AO to delete the relevant addition. b. On the debits relating to the purchases of the TV Programs/Film rights: Assessee amortised the 'inventories' as per the method of accounting consistently followed by him over the years. In fact, the Revenue has consistently allowed the claim in the past. This is for the first time, AO disturbed the claim of the assessee and invoked the provisions of section 32 (ii) of the Act without any sustainable reasoning. We have perused he judgment of Honble High Court of Delhi and the order of the Tribunal of Chennai Bench in the case of M/s Sun TV Networks Ltd (supra). We have also extracted the relevant paragraphs and already placed in this order above. We find similar issue of amortization of the TV Programs/Film rights came up before the Chennai Bench of the Tribunal wherein the issue was decided in favour of the assessee and rejected the AD's proposal to invoke the provisions of section 32(ii) of the Act in respect of the above programs/rights. As such, the Ld DR's argument on the applicability of the AS-26 to the TV Programs and Film rights is not supported by any precedents and therefore, the arguments raised by the Revenue are not allowed. Thus, considering the covered nature of the issue as well as the consistent method of accounting followed by the assessee in this regard and also in the absence of any contrary material to support the arguments of the Revenue against the assessee's claim, we are of the opinion that the decision taken by the CIT (A) in the impugned order is required to be reversed. Accordingly, Ground nos. 2 and 3 raised by the assessee are allowed.

9.2. In coming to this conclusion, the Tribunal has followed the judgment of the Hon’ble Delhi High Court in the case of CIT vs. Television Eighteen India Limited reported in (2014) 364 ITR 597 (Del.). The relevant portion of the judgment of the Hon’ble Delhi High Court is reproduced as under :

“The revenue has preferred this appeal claiming to be aggrieved by an order of the Income Tax Appellant Tribunal (ITAT) dated 17.03.2006. The question of law framed in this case is:-

(i) Whether the Income Tax Appellate Tribunal was right in holding that the entire expenditure incurred by the assessee on production of programmes which became part of news archives should be allowed as a revenue expense under Section 37 of the Income Tax Act, 1961 and should not be treated as incurred for creating a capital asset?

The assessee, at the relevant time, was in the business of television programme production. The assessee reflected Rs.88,83,128/- being 10% of the total expenditure incurred by it as value of “news archives” under the head of fixed assets. In the return filed by the assessee for the Assessment Year 1997, the said amount was claimed as revenue expenditure. According to the assessee this expenditure was allocated for the creation of “news achieves”, which comprised of its published or telecasted programmes. The AO capitalised this amount holding that the expenditure led to creation of an asset of enduring advantage. The CIT (Appeals) on appeal, however, reversed the findings of the AO. It was noticed that the news archives were not in the nature of plant or income generating apparatus but part of the product. It was also held that the unavailability of any objective basis, to quantify with any decree of accuracy future revenue that were likely to be generated and the proportionate cost of production that could be deferred, led to the conclusion that the 10% of the total expenditure earmarked for creation of “news archives” could not be treated as a capital expenditure.

On the revenue’s appeal, the ITAT held as follows:-

“12. It is admitted that no separate account was maintained wherein any expenditure was debited which could be earmarked towards creation of News Archives library. The assessee felt a part of footage of the news based on programmes produced has repeat value which could be used for the production of programme in future. The assessee, therefore, estimated 10% expenditure incurred as reasonable to be attributable to the News Archives library. The assessee has been engaged in the production of such programmes since assessment year 1994-95 and all along the cost of production of such expenditure has been treated as revenue expenditure and also allowed by the Department. Learned A.R. has referred to judgment of Hon’ble Supreme Court in the case of Alembic Chemical Works Ltd. vs. CIT 177 ITR 377 which laid down that what is capital expenditure and what is revenue are not eternal verities but must needs to be flexible so as to respond to the changing economic realities of business. Viewed in that perspective, we are of the opinion that the estimated value assigned to the News Archives cannot be treated to be an expenditure incurred in the capital field. We, therefore, uphold the order of CIT (A) on this ground.

In this case, there is no dispute that the data base of the programmes which are utilised for the creation of “news archives” belonged to the assessee. The future likelihood of these resources being a possible source of revenue, cannot in the opinion of this Court justify its inclusion in the capital stream. Furthermore, this Court notices that the expenditure i.e. 10% Rs.88,83,128/- is a part of the entire total expenditure incurred by the assessee which is concededly treated as revenue, even otherwise.

In view of the above discussions, this Court is of the opinion that the question of law framed is answered in favour of the assessee and against the revenue. The appeal is dismissed.”

9.3. Thus, it is seen that the issue is fairly covered in favour of the assessee by the above decision and the A.O. is directed to treat the expenditure incurred by the assessee on cost of production of TV programmes as revenue expenditure. This ground of appeal of the assessee is accordingly allowed.”

30. As the issue has elaborately been dealt with by the Hon'ble Coordinate Bench of the Tribunal in the aforesaid case, not only on factual aspects but also in the context of the judicial precedents concerning the issue involved and thus, in view of the aforesaid order, as the same pertains to the Assessee itself , we are inclined to respectfully follow the same. Thus, in our considered view, the Ld. Commissioner has rightly allowed the claim of the Assessee @ 100% of the amount of cost of production of TV Serials and Programmes to the tune of Rs. 134,79,41,873/- as “Revenue Expenditure” by deleting the disallowance of Rs.101,09,56,405/-. Thus, the decision of the Ld. Commissioner on the issue under consideration is upheld.

30.1 Resultantly, issue/ground no 2 raised by the Revenue is dismissed.

31. Coming to ground/issue No.3 which pertains to the disallowance of depreciation of Rs. 10,13,96,329/- claimed on ‘Film Software Library’. The Assessee has shown opening Written Down Value (WDV) of ‘Film Software Library’ as on 01/04/2012 at Rs. 54,29,62,024/- from the business activities of satellite television broadcasting and claimed depreciation on such WDV @ 25%, claiming the same as intangible asset.

32. The AO, though, allowed depreciation to the tune of Rs. 3,34,35,177/- @ 15%, however, disallowed the rest of the amount i.e. Rs. 10,13,96,329/- (Rs. 13,57,40,506 – Rs. 3,34,35,177) and added back to the income of the Assessee, by observing and holding as under: -

10. The business activity of the assessee-company is satellite television broadcasting and claimed depreciation of Rs.13,57,40,506/-on opening WDV (Rs.54,29,62,024/-) of Film Software Library @ 25% stating the same as intangible asset. In the A.Y 2007-08 M/s UEPL has purchased the "Film Software Library" from Sri Ramoji Rao (HUF) and in the depreciation schedule has assigned its value at Rs.775,00,00,000 (based on the Film Library Valuation report prepared by M/s Ernst & Young Pvt Ltd) and accordingly treating it as Intangible asset claimed depreciation @25% amounting to Rs. 96,87,50,000 (< 180 days hence 50% of 25% on Rs.775,00,00,000) in AY 2007-08. Whereas the WDV of the "Film Software Library" in the hands of Sri Ramoji Rao (HUF) as on 31-03-2006 for the A.Y 2006- 07 is only Rs. 160,96,47,766. Further during the A.Y 2007-08 the assessing officer vide his assessment order U/s 143(3) r.w.s 263 of the Income Tax Act, 1961 dated 08- 02-2013 with the prior approval of AddI.CIT, Range-16, Hyderabad has invoked provisions of Explanation-3 to Section-43(1) and adopted the value of the "Film Software Library" In the hands of the assessee-company at Rs. 160,96,47,766 (WDV in the hands of Sri Ramoji Rao (HUF) as on 31-03-2006 for the A.Y 2006-07). Further the assessing officer vide his assessment order dated 08-02-2013 after elaborate discussion and applying ratios set in CIT Vs Premier Automobiles Ltd (1994) 206 ITR 1 (Mumbai-HC), CIT VS Krishna Bottlers Pvt Ltd (1989) 175 ITR 154 (AP-HC), CIT VS Margadarsi Chit Fund (P) Ltd (1997) 227 ITR 646 (AP-HC), Scientific Engg. House (P) Ltd. Vs CIT (1986) 157 ITR 86 (SC), Sundaram Motors (P.) Ltd. Vs Commissioner of Income-tax (1969) 71 ITR 587 (MAD-HC), Commissioner of Income-tax Vs Tata Hydro Electric Power Supply Co. Ltd. (1978) 122 ITR 288 (BOM-HC) and R.C. Chemical Industries v. CIT (1982) 134 ITR 330 (Del-HC) has stated that since the assessee-company is in the business of satellite television broadcasting and the Film Software Library forms an important apparatus of its business which squarely fall within definition of 'Plant and Machinery' and accordingly allowed depreciation @15%. Hence in view of the above the claim of depreciation for the assessee-company with regard to the Film Software Library is reworked as under:

10.1. In the scheme of demerger, M/s.Prism TV Private Limited has acquired intangible asset by name Film Software Library whose WDV was recorded at Rs 96,52,65,820 as on 01.04.2010. This comes to 33.74% of the total WDV of the asset in the books of Ushodaya Enterprises Private Limited. This is as per the value of the Film Software Library valued at Rs 770 Cr by valuation report prepared of M/s Ernst & Young Pvt Ltd. However, the depreciation as discussed above by rejecting the valuation by M/s. Ernst & Young Pvt. Ltd will be as per the table below:

M/s. Ushodaya Enterprises P. limited

A Particu Rate of Openin Additions Deprec Closing Y lars deprecia g WDV iation WDV (in >18 < 180 tion amoun Rs.) 0 days t (in day Rs.) s 10 ‘Film 15% 107,57,47,7 -- -- 16,13,6 91,43,85,56 - Softwa 22.62 2,15,8.3 4.23 11 re 9 Librar y’ In the scheme of demerger M/s. Prism TV Private Limited has acquired the asset by name Film Software Library and its share @ 33.74% will work out to Rs. 30,85,13,689.

Thus, in the view of the above discussion, the excess depreciation claimed amounting to Rs. 10,13,96,329/- (13,57,31,506 – 3,34,35,177) is being disallowed and added back to the income returned.

1. The dispute is with regards the allowability of depreciation on the asset 'Film Software Library' as acquired pursuant to demerger in AY 2007-08 by the Appellant in terms of the value of the WDV and also the eligible rate of depreciation i.e. @ 25% or 15% depending on the nature the asset - whether as an Intangible asset or Plant & Machinery. The Appellant has submitted that the issue in the present appeal is fully covered by order of Hon'ble Hyderabad Tribunal in case of UEPL (Demerged company) vide order dated 16.02.2016 in /2013 for AY 2007-08.

1. I have perused through the Hon'ble ITAT's order dated 16.02.2016 in /2013 for AY 2007-08 as relied on by the Appellant, wherein the Hon'ble Tribunal ruled in favour of the Appellant on both the counts:

1. The asset 'Film Software Library' cannot be considered as Plant & Machinery as held by AO, but is an Intangible Asset, as such asset consists of Copyrighted Films and Programmes and hence such asset is eligible for depreciation at the rate of 25%

1. The AO cannot invoke Explanation 3 to Section 43(1) of the Act without recording his satisfaction that the valuation of the asset is done at a higher rate in order to claim higher depreciation. Further, even if the valuation of the asset at Rs 775 crores is not accepted by the AO, he cannot merely adopt the WDV of asset in the hands of the Seller but has to arrive at the actual cost of the asset to the assessee by adopting a scientific and reasonable method and in the present case the AO has failed to do such exercise.

Exact wordings of the AO of concluding Para are reproduced below:-

In view of the above facts and circumstances of the case, this office has no other option but to reiterate the findings given in speaking order dated 15.11.2016 and the same is passed in accordance with the direction of ITAT in its order dtd 16.02.2016 which discussed the facts and circumstances and basis for coming to such conclusion. In other words, the assessment order passed by the then AO with regards to valuation of Film Software library holds good.

The AO was clear in his opinion that disallowance on the film software library is correct by the then AO and thus sustained the disallowance. Aggrieved by the this stand of the AO on merits the UEPL appealed to the CIT(A), whose decision is still not decided and it is in the proceeding stage. Hence technically, On learning the facts of the grounds and from where it is incepted from it is clear that decision for the AY 2013-14 would bank upon the decision of the CIT(A) for AY 2007-08 Hence the interim decision of the CIT(A) on the relevant ground should have been kept in abeyance. The assessee in its submission bas also deliberated that decision on this ground can be kept in abeyance and decided after the final decision of the CIT(A) for the AY 2007-08 from where this issue has been borne in.

If for a while technicality of the ground and the contention related to invoking the provision of Explanation-3 are kept aside merits of the grounds related to depreciation can also prevail, the then AO had disallowed the additional claim of the depreciation on film software library categorising it in the section of plant and machinery and allowed the deprecation @15%.

The intention for keeping in the category of plant and machinery was as the assessee was in the business of satellite television broadcasting and the film software library forms an important apparatus of its business which squarely fall within the definition of plant and machinery and accordingly allowed deprecation @15%. In the AY i.e. 2013-14 the issue is similar to that of AY 2007-08 and therefore the action of the AO is endorsed.

Reference can be made to the decision of the Bombay High Court in the case of Commissioner of Income-tax Vs Tata Hydro Electric Power Supply Co. Ltd. (1978) 122 ITR 288 and the Delhi High court's decision in the case of RC Chemical Industries v CIT (1982) 134 ITR 330 Further in the cases of Scientific Engg. House (P) Ltd. v. CIT [1986] 157 ITR 86 (SC) and 6.4 Kapur Sons & Co. v. Commissioner or Income-tax (19851 (DEL) It was held that the term plant could be any article or object, fixed or movable, live or dead used by a businessman for carrying on his business and it is not necessarily confined to an apparatus which is used for mechanical operations or process or is employed in mechanical or industrial business. In order to qualify as "plant", the article must have some degree of durability. The functions or a plant in the Assessee's trading activity as a tool of his trade with which he carries on his business was considered to be the functional test on which an item could be considered to be a plant. In the case of Sundaram Motors (P) Ltd. v. Commissioner of Income-tax (2068) (MAD)_it was held that the word 'plant' should be given the same meaning as 'machinery'. If the plant in combination with other appliances in the business effectuates and perpetuates the trade or commerce in question, then such induction or introduction of such a plant should be deemed to be such that they are placed in a position for service or use in the business From the above, it is clear that the definition of "plant" in section 43(3) of the Income Tax Act is not exhaustive but it is illustrative and has much wider meaning. In short, the apparatus by which a businessman carries on his business is referred to as plant. This functional test is the fundamental decipher of the nature of any asset. All decisions interpreting the word 'plant' go to show that the word 'plant' has to be construed in the context of particular kind of trade or manufacture carried on by the assessee and if in the context it could be taken as 'plant' as understood in the popular sense it would be eligible for the allowance of depreciation and development rebate. The books in the library of lawyer, barrister, solicitor, doctor, chartered accountant or an engineer are clearly and expressly covered within the meaning of the word plant. Likewise material record of know-how, being the accumulated fund of knowledge acquired by years of observation, research, experimentation and experience, would clearly fall within the meaning of the word plant. In other words. the one important test is where the asset in question is tool of trade for the business and the product cannot be produced without this particular tool of trade In the context of the assessee case it is seen that the main business of the assessee is broadcasting on television. The TV programmes and films referred to as "television software" are mostly contained in CDs and other storage media. If we apply the aforementioned functional test the conclusion is very obvious. The assessee would not be in position to telecast anything without television software i.e. the films and TV Programmes. These are therefore not just assets but are vital tools of trade for the assessee. In the context of the assessee's business, they squarely fall within four walls of plant."

In light of the above discussion, it is requested that the decision of the CIT(A) may kindly be set aside on technical ground as well as on merit.”

36.1 The Revenue being aggrieved, against the order of the then CIT(A) preferred 1st appeal before the Tribunal. And therefore the Hon'ble Coordinate Bench of the Tribunal in Assessee’s own case pertaining to AY 2007-08, has also dealt with identical issue qua applicability and quantum of depreciation to be allowed on Film Software Library’. We observe that the Hon'ble Coordinate Bench has elaborately discussed the applicability of depreciation @25% on the Film Software Library’ and ultimately held that asset which consists of ‘copyrighted films and programmes’ is an ‘intangible asset’ eligible for depreciation @ 25% by observing and holding as under: - “9. Having regard to the rival contentions and the material on record as well as the written submissions filed by the Ld. Counsel for the assessee, we find that the first issue before us is about the nature of the asset the ‘film software library’ i.e., whether it is an intangible or tangible asset and the rate of depreciation allowable thereon? The rate of depreciation allowable on an asset would depend on the nature of the asset.

“4. Some intangible assets may be contained in or on a physical substance such as a compact disc (in the case of computer software), legal documentation (in the case of a license or patent) or film. In determining whether an asset that incorporates both intangible and tangible elements should be treated under Ind AS 16, Property, Plant and Equipment, or as an intangible asset under this Standard, an entity uses judgment to assess which element is more significant. For example, computer software for a computer-controlled machine tool that cannot operate computer software for a computer-controlled machine tool that cannot operate computer software for a computercontrolled machine tool that cannot operate without that specific software is an integral part of the related hardware and it is treated as property, plant and equipment. The same applies to the operating system of a computer. When the software is not an integral part of the related hardware, computer software is treated as an intangible asset.”

11.1. From a reading of the above accounting standard and also the judgments relied upon by the AO, we find that an intangible asset can also be treated as plant, provided, it becomes an integral part of the tools used by the entity to carry on its business. In the case before us, the films and TV programmes are essential for the assessee company to carry on its business of telecasting of films and other programmes, but there is no caveat that the assessee company has to telecast only these films and programmes and none other for assessee’s business. Further, not only the films and programmes in the ‘Film Software Library’, but the assessee may also telecast any other programmes or films on its channels. By purchasing the library, the assessee is gaining exclusive right over the asset but this library cannot be held as a tool for carrying on of its business as assessee can carry on its business even without the ‘Film Software Library’. The said library only assists in determining the content of the telecast, but does not limit the telecast and is not essential for the operations of the assessee’s business and therefore cannot be termed as the tool of the trade. Thus, it fails the functional test adopted by the assessing officer. Therefore, we hold that the asset which consists of ‘Copyrighted Films and Programmes’ is an ‘Intangible Asset’ eligible for depreciation at the rate of 25%. Thus, the ground of appeal No.3 of the revenue is rejected.”

46. Respectfully following the judgment of the Hon'ble Tribunal on the identical issue, we are inclined to follow the same. Thus, we hold that the depreciation @25% on the Film Software Library’, would be applicable and Assessee will get benefit of the same.

47. However, coming to the next issue with regard to “valuation of the Film Software Library”, we observe that before the Tribunal the Revenue Department has raised following ground no. 2 and additional ground:

2. The Ld. CIT(A) ought to have considered that value of Software Film Library WDV of the asset is only Rs. 16.,96,47,766/- in the hands of Sri Ch Ramoji Rao (HUF), instead of valuing at an exorbitant price of Rs. 775,00.00,000/-.

Additional Ground: 1. The Ld. CIT(A) has erred in holding that the requirements of section 43(1) are not met/or provisions are erroneously invoked.”

47.1 We observe that the Hon'ble Tribunal by considering the peculiar facts and circumstances and the issue in detail and at length and in the context of the relevant judgments concerning the issue, allowed the aforesaid grounds raised by the Revenue challenging the value or WDV of “Software Film library”, for statistical purposes.

47.2 Resultantly the Hon’ble Bench ultimately remanded the issue to the file of the AO, for the limited purpose of verification of the facts and circumstances stated to be the cause of transfer of the asset to the Assessee therein as reproduced in the above paragraphs. The Hon’ble Bench further directed the AO that if the said circumstances are proved to have existed, then the provisions of Explanation-3 to Section 43(1) are clearly not attracted. However, if the above circumstances are not proved or are found to be not the reason/purpose for transfer of the asset, only then shall the A.O. invoke the above provision. And in such circumstances, if the A.O. is not satisfied with the valuation done by Ernst & Young, then after giving a speaking order for not accepting the same, the A.O. shall revalue the asset in accordance with the provisions of law and shall not adopt the WDV of the asset in the hands of the previous owner”.

For brevity and ready reference, the analyzations and observations made, finding arrived at and conclusion drawn by the Hon'ble Tribunal, are reproduced herein below: - “12. The next issue to be decided is whether the Assessing Officer has rightly invoked Explanation 3 to Section 43(1)? The brief facts relating to this issue are that pursuant to the order of the CIT u/s 263 of the Act, the AO invoked the provisions of Sec.43(1) and explanation 3 thereto and adopted the WDV of the film software Library in the hands of the previous owner as the ‘Actual cost of the asset to the Assessee’ and allowed depreciation on that value only. On appeal, the Ld CIT(A) proceeded to consider whether the provisions of Explanation-3 to Section 43(1) of the I.T. Act are attracted in the case of the assessee. He observed that the Explanation-3 to Section 43(1) is intended to counteract the attempts of an assessee to claim higher depreciation on assets acquired at more than the market value and can be applied only to those assets which are part of WDV block. He observed that if the assets are found to be part of WDV block of assets of the seller, the said Explanation cannot be invoked. He observed that even in respect of assets which are in the block of assets, the A.O. has to be satisfied that the main purpose of transfer of assets is to claim higher depreciation. He observed that in assessee’s case, the A.O. has roped in Explanation-3 to Section 43(1), though all the films in the film library were not in the WDV basket of films. He observed that the films in the WDV basket are mostly other language films and not Telugu films, the cost of which was written off as revenue expenditure many years ago and that this is a patent mistake committed by the A.O. Further, he also examined as to whether the A.O. has recorded the requisite satisfaction before invoking the provisions of Explanation3 to Section 43(1) of the Act. He observed that the assessment record does not contain any such satisfaction and further that even if the A.O. had recorded reasons, those reasons would not have stood the test of scrutiny in as much as the A.O. has erroneously believed the film library to comprise of only those films which form part of WDV of films, completely overlooking the fact that the library also consists of 1596 Telugu Films, which were not part of WDV basket. Thus, he held that since the A.O. did not record his satisfaction to invoke Explanation-3 to Section 43(1), the revaluation of the film library by the A.O. is not sustainable. He also observed that the A.O. has to determine the market value of the asset and not merely adopt the WDV of an asset in the hands of the previous owner. He observed that the A.O. has erred in assuming that the films in the film library bought by the assessee were all part of WDV of films and therefore, substitution of cost by the A.O. also is not sustainable. He also observed that the assessee had relied upon an expert to value the film library on the basis of certain methodology and even if the expert has relied on some presumptions which are questionable and not scientific, the A.O. has failed to follow any method at all and has also failed to take into account the much and more valuable part of the library i.e., 1596 films (Annexure-2) which was outside the WDV basket. He observed that since the assessee’s price is supported by an international renowned expert valuer, as compared to the valuation of the A.O. having no method or erroneous method, the former has to be accepted as more appropriate and reliable. He therefore, held that the value adopted by the assessee for purchase of film library i.e., Rs.775 crores is to be treated as the actual cost of entire film library to the assessee and depreciation thereon @ 25% is to be allowed. Aggrieved by the order of the Ld. CIT(A), the Revenue is in appeal before us.

13. The Ld. D.R. supported the order of the A.O. and further submitted that the assessee herein as well as M/s. Ushakiran Movies and M/s. Ushakiran Television are all enterprises held by Shri Ramoji Rao (HUF) and his family members and that M/s. Usha Kiran Movies and M/s. Ushakiran Television produced the films and TV programmes respectively which are telecast by the assessee herein and a part of the revenue therefrom is also appropriated by the assessee herein. He submitted that during the relevant previous year, the assessee has purchased the film library from Shri Ramoji Rao (HUF) at an exorbitant cost in order to reduce its income tax liability by claiming higher depreciation on the same and reducing its tax liability. He has drawn our attention to page-22 of the assessment order to show that the WDV of the Film Software Library as on 31st March, 2006 for the A.Y. 2006-07 in the books of Shri Ramoji Rao (HUF) is only Rs.160,96,47,766 whereas this library was valued by M/s. Ernst & Young at Rs.775 crores and based on such valuation, the film software library was transferred to the assessee at such an exorbitant rate and the depreciation was claimed @ 25% on such an enhanced value for taking undue benefit. Thus, according to him, this transaction attracts the provisions of Explanation-3 to Section 43(1) of the Income Tax Act. He submitted that though the issue of the applicability of Explanation-3 to Section 43(1) was very much part of the assessment order as well as the order of the Ld. CIT(A), the Revenue has inadvertently omitted to raise such ground at the time of filing of Form No.36 and prayed that the additional ground of appeal on this issue raised by the Revenue be admitted and adjudicated by this Tribunal.

14. The Ld. Counsel for the assessee, on the other hand, supported the order of the Ld. CIT(A) and extensively argued in favour of the assessee and drew our attention to the relevant material on record to demonstrate that the transfer of the asset and the valuation of the film software library was due to commercial expediency i.e., to fulfill the condition precedent set by the foreign investor M/s Blackstone FP Capital Partner (Mauritius) V Ltd., and not due to any premeditated plan to reduce its income tax liability by claiming higher depreciation. He also has drawn our attention to the following judgments in support of the contention that before invoking the provisions of Explanation-3 to section 43(1) of the I.T. Act, the A.O. has to record his satisfaction that the valuation of the asset is done at a higher rate in order to claim higher depreciation:

i. Ashwin Vanaspati Industries vs CIT reported in 255 ITR 26 ii. Chitra Publicity Company (P) Ltd., vs Assisstant CIT reported in (2010) 4 ITR(T) 738 (Ahmedabad) (T.M.) iii. CIT VS Sekar Offset Press reported in 214 ITR 516 14.1. He submitted that as rightly brought out by the Ld. CIT(A), there is no such satisfaction recorded by the A.O. which is part of the assessment record and therefore, the invocation of the said provision is not sustainable. He also tried to distinguish the decisions relied upon by the AO from the facts of the case before us. Further, without prejudice to the above contention, he also submitted that even if the valuation of the asset at Rs.775 crores is not accepted by the A.O, he cannot merely adopt the WDV of the asset in the hands of the seller but has to arrive at the actual cost of the asset to the assessee by adopting a scientific and reasonable method and that in assessee’s case, the A.O. has failed to carry out this exercise. According to him, the WDV of the asset as adopted by the A.O. to be the ‘actual cost’ to the assessee is not sustainable when the film software library consisted also of films not included in the WDV basket of films.

He therefore, urged that the order of the Ld. CIT(A) be confirmed as regards the valuation of the asset at Rs.775 crores. The Ld. Counsel also filed detailed written submissions and extensively argued on the unsustainability of the assessment order by relying on the judicial precedents.

15. Having gone through the assessment order as well as the order of the Ld. CIT(A), we find that the A.O. has invoked the provisions of the Explanation-3 to section 43(1), while the Ld. CIT(A) has held that the said provision is not applicable to the assessee’s case. Therefore, we find that all the necessary facts are already part of the record. Therefore, we admit the additional ground of appeal

and proceed to adjudicate the same.

16. For proper appreciation of the legal position and for the purpose of clarity and ready reference, the relevant provision is reproduced hereunder:

“43. In sections 28 to 41 and in this section, unless the context otherwise requires—

(1) "actual cost" means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority:

[Provided that where the actual cost of an asset, being a motor car which is acquired by the assessee after the 31st day of March, 1967, [but before the 1st day of March, 1975,] and is used otherwise than in a business of running it on hire for tourists, exceeds twenty-five thousand rupees, the excess of the actual cost over such amount shall be ignored, and the actual cost thereof shall be taken to be twenty-five thousand rupees.]

Explanation 1.—Where an asset is used in the business after it ceases to be used for scientific research related to that business and a deduction has to be made under 1[clause (ii) of sub-section (1)] of section 32 in respect of that asset, the actual cost of the asset to the assessee shall be the actual cost to the assessee as reduced by the amount of any deduction allowed under clause (iv) of sub-section (1) of section 35 or under any corresponding provision of the Indian Income-tax Act, 1922 (11 of 1922).

[Explanation 2.—Where an asset is acquired by the assessee by way of gift or inheritance, the actual cost of the asset to the assessee shall be the actual cost to the previous owner, as reduced by—

(a) the amount of depreciation actually allowed under this Act and the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922), in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1988; and (b) the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988, as if the asset was the only asset in the relevant block of assets.]

Explanation 3.—Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the [Assessing] Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the [Assessing] Officer may, with the previous approval of the 4[Joint Commissioner], determine having regard to all the circumstances of the case”.

16.1. From a literal reading of the above provision, we find that the following conditions have to be satisfied before invoking the above provision.

1. The Asset should have been used by any other person for the purpose of his business before such an asset is acquired by the assessee: and 2. The A.O. is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of the liability to income tax (by claiming depreciation with reference to enhanced cost).

19.1. During the relevant previous year, in order to expand its business and also withstand the competition in the market, the assessee company approached a private equity capital company, M/s. Black Stone FP capital partner, (Mauritius) V Limited, a foreign company, for investment in the equity shares of the assessee company. The said company desired that the assessee company should acquire and own the film software library from Shri Ramoji Rao (HUF) before it makes the investment in the equity shares of the assessee company. To fulfill its contractual obligation and facilitate the foreign direct investment into the assessee company, the assessee company desired to acquire the said asset from Shri Ramoji Rao (HUF) and for the said purpose, the valuation of the Film software Library was referred to M/s. Ernst & Young, a reputed company having expertise in valuation of assets. Ernst & Young recommended the value of the software library in the range of Rs.746.41 crores to Rs.814.27 crores taking into consideration the rights in all the films and programmes in the software library proposed for sale at that time by Shri Ramoji Rao (HUF). By virtue of acquiring the asset, the assessee had acquired the entire Film Software Library consisting of 47.95 lakh minutes of TV programmes and 3778 films with satellite rights for a period ranging from 5 to 50 years and for some films for a perpetual period.

19.2. M/s. Black Stone had agreed to invest a sum of Rs.1217 crores for acquiring 26% stake in the assessee company by entering into necessary agreements, subject to the approval from Foreign Investment Promotion Board (“FIPB”), Government of India, as is required during that period. In anticipation of the said agreement going through, the assessee company had also obtained a loan from Standard Chartered Bank and acquired the software library from Shri Ramoji Rao (HUF) during the F.Ys. 2006- 07 and the purpose was only to facilitate the investment by M/s. Black Stone in assessee company. However, M/s. Black Stone could not invest in assessee company as approval from the FIPB could not be obtained before the due date and the deal did not materialize/was not executed. Therefore, the assessee company had approached another investor, a domestic company i.e., M/s Equator Trading Enterprise Pvt. Limited, which came forward to invest a sum of Rs.2604 crores after carrying out the due diligence of the activities, assets and liabilities of the assessee company including the software library acquired by the assessee company from Shri Ramoji Rao (HUF). It was thereafter, that the domestic investor acquired 39% of share capital of assessee company by way of allotment of shares from the assessee company and also purchase of shares from Shri Ramoji Rao (HUF). Thus, M/s Equator Trading Enterprise Pvt. Limited, invested a sum of Rs.2604 crores in assessee company for 39% of share capital and desired that the assessee company should be split into four companies and the software library was accordingly transferred to one of the companies at the value acquired from Shri Ramoji Rao (HUF). M/s. Equator Trading Enterprise Pvt. Limited had also paid non-compete fees of Rs.670 crores subsequently to Ramoji Rao (HUF).

19.3. During the assessment proceedings under section 143(3) of the I.T. Act, the A.O. accepted the contention of the assessee that it had acquired software library at Rs.775 crores and also allowed depreciation thereon as an intangible asset @ 25%. The CIT sought to revise the assessment order under section 263 of the I.T. Act on the grounds of high/exorbitant valuation of the library and also incorrect rate of depreciation allowed on the same. Before the Ld. CIT, the assessee had explained that there was no intention to enhance the valuation of the software library for the purpose of claiming enhanced depreciation in the books of account of the assessee due to the above facts of investment of equity capital by unrelated parties and further that Shri Ramoji Rao (HUF) is also assessed to tax by the same A.O. and he was aware of the book value of the software library and accepted the sale consideration of software library in the assessment of Shri Ramoji Rao (HUF) which establishes the fact that the market value of the software library was at arms’ length. It was also submitted that Shri Ramoji Rao (HUF) had shown the entire sale value of software library in its return of income as income from business, but the department had assessed the sale consideration under the Head “Long Term Capital Gain” and Shri Ramoji Rao (HUF) had paid the taxes as demanded, though he appealed against the treatment of business income as income from capital gains before ITAT. Thus, it was submitted that there is no intention to reduce the tax liability particularly, as the outside investor invested a sum of Rs.2604 crores in the assessee company by taking into account the value of various assets including software library.

21. During the course of assessment proceedings under section 143(3) read with section 263 of the I.T. Act, the A.O. re-examined all the contentions of the assessee and held that the transaction is between the related parties and that the assessee has been using the asset of its sister concerns exclusively and therefore, it is difficult to understand the purpose of the assessee to buy the same film software library at an exorbitant price of Rs.775 crores while the WDV of the asset is only Rs.160,96,47,766 in the hands of Shri Ramoji Rao (HUF) as on 31.03.2006. He held that the only conclusion possible at this juncture is that the transfer of Film Software Library was done at an enhanced cost from its group concern with the sole purpose to claim higher depreciation by M/s. Ushakiran Enterprises Limited thereby, resulting in reduction of income tax liability and thus the provisions of the Explanation-3 to section 43(1) of the I.T. Act are attracted. The Ld. CIT(A), on the other hand, held that the Explanation-3 to Section 43(1) is not applicable as the A.O. has not recorded the requisite satisfaction before invoking the said provisions. According to him, the A.O.’s observations in the assessment order are not sufficient compliance as envisaged in the said proviso but ought to have recorded reasons which led him to his satisfaction that the main purpose of the transfer was to reduce the tax liability. He further held that even if the A.O. had recorded reasons, those reasons would not have stood the test of scrutiny inasmuch as he erroneously believed the film library to comprise of only those films which formed part of WDV basket of films, completely overlooking the fact that the library consisted of 1596 telugu films also which were not part of WDV basket. He observed that the A.O. has applied the provision on the premise that the main purpose of transfer was reduction of tax liability while the main purpose was to sell equity of the company which materialized long after the acquisition of the film library by the assessee. Therefore, according to him, the provisions of Explanation-3 to Section 43(1) of the I.T. Act are not attracted. He accordingly deleted the disallowance made by the A.O. against which the Revenue is now in appeal before us.

22. The Ld. D.R. relied upon the orders of the A.O. and submitted that the assessee and all the other entities being related parties, the A.O. has rightly brought out that the intention for the transfer of the asset at an enhanced rate was to reduce the tax liability of the assessee by claiming higher depreciation. He has referred to the decisions relied upon by the A.O. to justify invoking of the Explanation-3 to Section 43(1) and also of making disallowance. The Ld. D.R. has also filed written submissions in support of the contentions of the Revenue. He has also placed reliance upon the judgment of the Hon’ble Supreme Court in the case of Max Data Pvt. Ltd. vs. CIT in Civil Appeal No.9772 of 2013 wherein while considering the provisions of section 271(1)(c) of the I.T. Act, it was held that before initiating penalty proceedings under section 271(1)(c) of the Act, the requirement of Law is that the A.O. has to be satisfied whether the penalty proceedings be initiated during the course of assessment proceedings but it is not the requirement to record his satisfaction in a particular manner or reduce it into writing. He further relied upon the approval granted by the Addl. CIT dated 05.02.2013 to the A.O. to invoke the provisions of section 43(1) of the Act and finalise the proceedings accordingly. The copy of the approval is placed at page No.1 of the paper book filed by him. He also relied on the judgments referred to by the A.O. in the assessment order and the following other decisions :

(i) Gujdar Kajoria Coal Mines Ltd., vs. CIT, Calcutta (1972) 85 ITR 599 (SC) (ii) CIT (Central), New Delhi vs. Dalmia Dadri Cement Ltd., (1980) 125 ITR 510 (Del.) (HC) (iii) Nagammal Cotton Mills (P) Ltd., vs. CIT (2002) 258 ITR 390 (Mad.) (HC). (iv) CIT vs. Poulose & Mathen P. Ltd., (1999) 236 ITR 416 (Kerala) (H.C.) (v) MAK Data P. Ltd., vs. CIT-II, SLP (Civil) No.18389 of 2013 (vi) Bilt Power Ltd., New Delhi vs. Addl. CIT, Range-2, New Delhi (2012) 34 CCH 134 (Del.) (Tribu.) (vii) Ushodaya Enterprises P. Ltd., Hyderabad vs. ACIT, Circle-16(2), Hyderabad ITA.No.26/H/2011 dated 22.10.2014 (Hyd.) (Tribu.)

23.1. The Ld. Counsel for the assessee further submitted that even if it is to be accepted that the A.O. was satisfied that the transfer of the asset had taken place in order to enable the assessee to claim higher depreciation, the A.O. is required to value the asset with the approval of the JCIT after taking into consideration of all the relevant circumstances. He has submitted that the A.O. has failed to carry out this exercise, but instead has taken the WDV of the asset in the hands of the previous owner as the value without taking into consideration the fact that some of the assets i.e., Films and TV programmes transferred to the assessee, were in addition to the assets in the WDV basket. Thus, the value adopted by the A.O. is totally without any basis. The Ld. Counsel for the assessee further submitted that the income from the sale of Film Software Library has been offered as business income by Shri Ramoji Rao (HUF) but the department has not accepted the same as business income but has treated it as long term capital gain. He submitted that the Shri Ramoji Rao (HUF) is in appeal before the ITAT against the above. He submitted that the fact that Shri Ramoji Rao (HUF) has offered the income in his hands also goes to prove that there was no intention on the part of any of the related parties to claim higher depreciation or to reduce the tax liability. In support of his contention, he placed reliance on the following decisions.

(i) Ashwin Vanaspati Industries vs. CIT (2002) 255 ITR 26 (Guj.) (HC) (ii) Chitra Publicity Co. P. Ltd., vs. ACIT (2010) 4 ITR 738 (Ahd.) (T.M.) (iii) CIT vs. Sekar Offset Press (1995) 214 ITR 516 (iv) Kungendi Industrial Works P. Ltd., vs. CIT 57 ITR 540 (A.P.) (v) CIT vs. Poulose & Mathen P. Ltd., (1999) 236 ITR 416.

24. Having regard to the rival contentions and the material available on record, we find that the assessee had argued that the A.O. has not recorded a finding in the assessment order or before seeking the approval of JCIT that the intention of the assessee was to reduce the tax liability and CIT(A) has accepted this contention and thus, according to him, the disallowance and the consequential additions are not sustainable. According to him, the A.O. has to record his satisfaction in writing before proceeding further and in support of this contention, he placed reliance upon the judgment of Hon’ble Gujarat High Court in the case of Aswin Vanaspati (cited supra). Before applying the said decision, we proceed to consider the facts of the case as to whether the facts on record would satisfy the apprehension of the A.O. that the transfer of the asset is to reduce tax liability. The agreement of the assessee with M/s. Black Stone for investment of equity fund in the assessee company is not disputed and it is also not out of place to mention that when such an investment is proposed to be made, the investor company would stipulate certain conditions. As seen from the agreement between the assessee company and M/s. Black Stone, one of the conditions precedent to completion of the agreement was acquisition of the Film Software Library and TV Programmes Library from M/s. Ushakiran Television, M/s. Ushakiran Movies and Shri Ramoji Rao (HUF). It is also not in dispute that the agreement could not be completed due to non-receipt of the approval from FIPB within the due date and it is for the purpose of the execution of the agreement that the assessee had got the Film Software Library valued by Ernst & Young. Thus, it is clear that the valuation of the asset was done with an intention to get equity fund from a third party. The further fact that the assessee had taken loan from Standard Chartered Bank and since the assessee’s agreement with M/s. Black Stone could not be executed, the assessee had to approach another party for the equity investment also is not disputed. According to us, the above facts justify the reference of the valuation of the asset to Ernst and Young, but does not prove that the valuation fixed/arrived at, was reasonable and was not exorbitant or that the higher valuation was not for claiming higher depreciation as the transaction was between related parties. However, the fact that the third parties have accepted the valuation goes to prove that the valuation is not entirely unreliable. The only ground on which the A.O. seems to have entertained the doubt is because both the seller as well as the purchaser are related parties.

“11. Now, the original cost of a particular asset is a question of fact which has to be determined on the evidence of the material produced before or available to the IT authorities. Any document or formal deed mentioning the consideration or the cost paid for the purchase of an asset by an assessee would be a piece of evidence and, prima facie, the statements or figures given therein would show how much the cost of the asset to the assessee is. But, if circumstances exist showing that a fictitious price has been put on the asset or there is fraud or collusion between the vendor and the vendee and there has been inflation or deflation of value for ulterior purposes it is open to the IT authorities to refuse to accept the price mentioned in the deed or alleged by the assessee and to ascertain what the actual original cost was: See Pindi Kashmir Transport Co. Ltd. v. CIT (1954) 26 ITR 595 (Lah-Pak) : TC29R.253 and Kalooram Govindram vs. CIT (1965) 57 ITR 335 (SC) :

TC29R.254. In this view of the matter it is open to the IT authorities to determine and to the assessee to show whether the goodwill of the business is or is not included in the consideration or the price paid for the acquisition of the asset. In other words, even if it is not expressly mentioned that goodwill has been sold, it can be shown and ascertained by evidence whether the same has been purchased or not by the assessee. The expression "goodwill" has been considered and explained by this Court in S.C. Cambatta & Co. P. Ltd. vs. CEPT (1961) 41 ITR 500 (SC), and nothing more need be said about it. The principles stated by us are by no means exhaustive and are mainly illustrative.

12. Keeping in view the facts of the present case, we may make it clear that, if circumstances exist for going behind the valuation as also the allocation given in the deed of conveyance, it was and is open to the IT authorities to determine the valuation as well as the allocation between depreciable and non- depreciable assets.”

26. In the case of CIT (Central), New Delhi vs. Dalmia Dadri Cement Ltd. (cited supra), the Hon’ble Delhi High Court while dealing with the provisions of Explanation-3 to Section 43(1) of the Act has held as under :

“11. We have heard the parties and given our utmost consideration to all the circumstances. As is clear from the narration of facts, in the books of Bhagwati Glass, the total expenditure incurred by it in the execution of the contract jobs was Rs. 3,11,954. As against that the assessee has paid Rs. 7,70,000 to it for execution of those jobs. This, on the face of it, appears to be a very high payment, specially when the Tribunal has noted that the jobs did not require any specialised or sophisticated skill. It was mostly a labour contract as the material was entirely supplied by the assessee. It is next also clear that the assessee and Bhagwati Glass were connected concerns indirectly owned by R. Dalmia, and that Bhagwati Glass had a carried forward loss of over Rs. 7 lakhs this year. The result has been that although Bhagwati Glass enjoyed a profit of about Rs. 4,58,000 in the execution of this contract, no tax liability ensued to it and the entire profit was wiped off against the large brought forward loss. At the same time, the assessee has claimed to be entitled to depreciation, etc., on the capital value of those works at Rs. 7,70,000. The I.T. authorities were, therefore, right in observing that there was considerable element of collusion in the entire affair which could not be treated as the result of normal commercial considerations. The capital cost has no doubt been inflated in the hands of the assessee to enable it to claim higher depreciation, etc.

between the vendor and the vendee and there has been inflation or deflation of value for ulterior purpose, it is open to the I.T. authorities to refuse to accept the price mentioned in the deed or alleged by the assessee and to ascertain what the actual cost was. These observations in our view render the approach adopted by the Tribunal in the present case as unsustainable when it observed that collusion and inflation would not entitle the I.T. authorities to substitute their own figure of actual cost.

16. We are further of opinion that the Tribunal was not justified in restricting the operation of the actuality of cost to cases where part of that consideration was not paid or ploughed back or covered some other items. In these cases, the cost would be what is in fact paid. What was not paid or was returned would never be considered as cost. This will be independent of the provisions contained in the IT Act. The provisions of this Act have not been introduced for this purpose. They have rather a special objective and is directed towards nullifying the malpractices, sometimes indulged in some quarters, of disproportionately inflating capital cost in order to earn high depreciation, and pass on in collusion substantial amounts to sister concerns or closely connected parties to whom those amounts may have little or negligible bearing on the incidence of tax. This is what appears to have happened in the present case. In our opinion, when the Legislature has prefixed the word "actual" to the word "cost", it was to lay emphasis on the reality and genuineness thereof and exclude collusive, inflated, deflated or fictitious costs.”

27. In the case of CIT vs. Poulose & Mathen P. Ltd., (cited supra), the Hon’ble Kerala High Court while considering the applicability of the provisions of Explanation-3 to section 43(1) has held as under :

“15. We cannot agree with the conclusion of the Tribunal that the revaluation of the assets on the eve of the dissolution of the firm was made bona fide for adjustment of the mutual rights of the firm. This is not a case where there is no written down value, which means, in the case of assets acquired in the previous year, the actual cost to the assessee and in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under the Act as defined under s. 43(6). Sec. 43(1) with Explanations thereof supersedes the general rule of law governing partnership, its assets and dissolution etc. The definition of ‘actual cost’ contained in s. 43(1) read with Explanations thereof affords a mechanism by which reduce the actual cost to a figure which is anything but real. When the asset was formally used by any other person for the purpose of his business and the main purpose of the transfer of the asset to the assessee is to claim a higher depreciation allowance so as to reduce the liability to pay incometax, the ‘actual cost’ shall be determined by the AO in the exercise of the power conferred on him as prescribed in Expln. 3 to s. 43(1) no matter what the general law prescribes for determining the costs of the assets on dissolution of partnership firms and transfer of its assets.

by the parent company after they had been got valued by valuers, because the material on the basis of which the value had been fixed by the valuers for the assets in question had been withheld by the witness who was examined on behalf of the valuers before the ITO and the nonproduction of such material led to an adverse inference being drawn against the assessee company. On these facts, two questions arose for consideration before the High Court on reference. First question is whether the proviso to s. 10(5)(a) has been properly applied and the second question is, whether the Tribunal is justified in rejecting the valuation and drawing an adverse inference against the assessee. As far as the first question is concerned the Court found that the condition for attracting the proviso to s. 10(5)(a) was satisfied because the assets had been used by the parent company for their business before they were transferred to the assessee-company. On the second question the Court found that the Tribunal was justified in rejecting the valuation report and drawing an adverse inference against the assessee. The first question alone is relevant in the present case and on that question the Court said that the ITO proceeded to fix or determine the actual cost (written down value) of the assets transferred by adopting the written down value of those assets transferred in the books of the transferor of the assessee-company as on the date of transfer and added to that figure the balancing charge arising under s. 10(2)(vii) of the Act. The Court further observed:

"It cannot be disputed that this method, if adopted, would clearly give the actual cost of the assets transferred to the transferor company as on the date of transfer, the determination would be irrational or unreasonable. If the ITO adopted this method of determining the actual cost of the transferred assets with the approval of the IAC, it will be difficult to say that the method adopted was unreasonable or irrational".

17. Even if the assessee produces the valuation report, it cannot be said that the above conclusion would be different. Therefore, the drawing of adverse inference against the assessee has no impact on the question decided by the Court. The attempt of the Tribunal to distinguish the above decision on the basis that the assessee has furnished the revaluation report in the present case would not fructify.”

28. In the case of Nagammal Cotton Mills P. Ltd. vs. CIT (cited supra), the Hon’ble Madras High Court has held as under :

“6. The learned counsel for the assessee submitted that the value of the machineries which the assessee had adopted when it took over the assets at the time of dissolution was in accordance with what had been said in the case of A.L.A. Firm vs. CIT (1991) 93 CTR (SC) 133 : (1991) 189 ITR 285 (SC) : TC 2R.453 wherein the Court approved the observation of this Court in the case of Md. Ussain vs. Abdul Gaffoor AIR 1950 Mad 758. Counsel submitted that the formation of the company was only due to the insistence of the lenders that the business of the company, namely, the running of the cotton mill should be by an incorporated company before the financial institutions could lend money to it. However, there is no material on record to substantiate that claim.

29. The Coordinate Bench of Delhi Tribunal in the case of Bilt Power Ltd., New Delhi vs. Addl. CIT, Range2, New Delhi (cited supra), has held as under :

“36. At the outset, we may observe that AO has not considered the entire scheme as demerger under the Income-tax Act as contemplated u/s 2(19AA) of the Income-tax Act. Therefore, we do not consider it necessary to examine the observations of AO, and ld. CIT(A) and the submissions of both the parties on this count as it would only be of academic interest. This is evident from the fact that AO has invoked Explanation 3 to sec. 43(1) and not Explanation 7A to sec. 43(1). Further the contention of assessee that transferor company had also paid long term capital gain tax on the sale consideration is also not of much significance because tax liability is to be determined qua assessee. Therefore, the main issue for our consideration is whether AO was justified in invoking Explanation 3 to sec.43(1) by holding that the entire purpose of this scheme was reduction of tax liability by claiming higher depreciation in respect of those assets which were earlier used by transferor company by escalating the cost of the assets.

Explanation 3 has been incorporated in sec. 43(1) to counter the attempts of assessee to claim higher depreciation by purporting to purchase assets at more than their true or real cost. It is fundamental principle that department cannot question the wisdom of assessee in carrying out its business operations. Department cannot dictate as to how the assessee should conduct its business. However, legislature has made specific provisions in the Income- tax Act when department can depart from this fundamental principle and ignore the apparent state of affairs and pearce the smoky-screen created by assessee in the transaction to find out the true intention. These sections provide circumstances in which department can impute its judgment to the assessee’s decision. The relevant provisions are to be found in section 40A(2), Explanation 3 to sec. 43(1), section 92C etc. But before these provisions can be invoked, legislature has required the AO to acquire necessary satisfaction in this regard which obviously has to be acquired judiciously and not arbitrarily. The AO should demonstrate that his satisfaction was rational and based on relevant factors. Explanation 3 to section 43(1) reads as under: -

(1) "actual cost " means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority.

Explanation 3 - Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the AO is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the AO may, with the previous approval of the [Joint Commissioner], determine having regard to all the circumstances of the case. " Thus, the basic ingredients of Explanation 3 are as under: - i) an asset was already in use in a business in the hands of one persons; ii) that person transfers the asset to assessee; iii) the A.O. is satisfied that the main purpose of transfer of such assets was the reduction of liability to Income-tax by claiming depreciation with reference to an enhanced cost; iv) the A.O. can refuse to accept the sale price as the actual cost to the purchaser (assessee) in the purchasers assessments.

cost to the assessee in terms of Explanation 3, we first decide some objections of both the sides. The assessee’s objection is that AO has not recorded his requisite satisfaction for invoking Explanation 3: we are not in agreement with ld. Sr. Counsel’s argument because, as rightly pointed out by ld. DR, a holistic view is to be taken. The entire discussion by AO proceeds on the premise that assessee was trying to claim higher depreciation on enhanced cost. The next objection of ld. Sr. Counsel is that AO did not determine the actual cost as required in Explanation 3. We are not in agreement with this argument also of ld. Sr. Counsel because, as rightly demonstrated by ld. DR, AO had made all out efforts to find out the actual cost. We do not find any substance in this plea of the assessee because AO had taken into consideration different valuation reports and WDV of assets before arriving at the conclusion that WDV as per Income-tax records was the actual cost of assets.”

30. In assessee’s own case for A.Y. 2008-09, ‘B’ Bench of this Tribunal (cited supra), while dealing with the disallowance of depreciation claimed on non-compete fee of Rs.670 crores paid by the assessee company to UKT and UKM for non-competing in the business directly or indirectly for a period of five years from the date of agreement, has held as under :

“. . . . . .Therefore, considering the totality of the facts and circumstances we are of the view that as the impact of acquisition of 39% of equity shares by M/s Equator Trading Enterprises Pvt. Ltd. has not at all been examined by AO at the time of assessment proceeding or by the learned CIT(A) while disposing of assessee's appeal and further as the additional evidences produced before us were not examined either by the AO or by CIT(A), which certainly have a crucial bearing on the issue as to whether the payment of non-compete fee is genuine and necessary, we are inclined to remit the matter back to the file of AO for deciding afresh. Only after the issue relating to genuineness of non-compete fee paid and necessity to pay such fee is resolved, AO will decide the allowability of depreciation claimed on such noncompete fee by keeping in view the statutory provision as well as the ratio laid down in the decisions referred to hereinabove and any other decision brought to his notice. It is needless to mention that AO must afford a fair opportunity of hearing to assessee in the matter before deciding the issue. This ground is considered to be allowed for statistical purposes.”

31.1. In the case of Chitra Publicity Co. P. Ltd., vs. ACIT reported in (2010) 4 ITR 738 (Ahd.) (T.M.) it was held that the A.O. under Explanation-3 to Section 43(1) has to determine the ‘actual cost’ which can only mean arms length value or real value or worth of assets transferred and it is, therefore, not possible to totally reject the concept of market value of assets transferred as not relevant for determining the actual cost.

31.2. In the case of CIT vs. Sekar Offset Press reported in (1995) 214 ITR 516 it was held that the Explanation-3 to Section 43(1) of the I.T. Act, would be attracted only in cases where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purpose of business and the Income Tax Officer is satisfied that the main purpose of the transfer of such assets directly or indirectly to the assessee was for the reduction of the liability to income tax. It was held that there are no other circumstances, under which, the Explanation can be invoked.

31.3. In the case of Kungendi Industrial Works P. Ltd., vs. CIT reported in 57 ITR 540 (AP) wherein similar provisions of section 192(2) of the Act was considered and it was held that the increase in the value of the asset was substantial and out of the proportion to the WDV in the hands of the previous owner and the reasons advanced for the change-over did not justify the increase in value of the assets.

31.4. With respect to the case of CIT vs. Poulose & Mathen P. Ltd., reported in 236 ITR 416, it was submitted that the A.O. has relied upon this decision for invoking the provisions of section 43(1). However, he has submitted that the facts of the case before us are distinguishable from the said case before the Hon’ble Madras High Court. Thus, according to him, the A.O. has invoked the provisions of section 43(1) and Explanation-3 thereto, without recording the satisfaction and hence, the subsequent valuation of the WDV of the asset by the A.O. is not sustainable.

32.1. Similar circumstance existed in the assessee’s own case for the subsequent A.Y. 2008-09 regarding the non-competing fee and this Tribunal has observed that the factual position has not been properly appreciated by the authorities below and has set aside the issue for reconsideration. In the case before us, the Ld. CIT(A) also has not referred to or verified the circumstances leading to the transfer of the asset to come to the conclusion that the above provisions are not applicable to the case on hand but has granted relief on the ground that the A.O. has not recorded his satisfaction before invoking the above provisions. Though, the Ld. D.R. has not been able to rebut the factual submissions of the assessee on the circumstances leading to the transfer of the asset, we find that the same needs verification by the authorities below.

In view of the same, we deem it fit and proper to remand this issue to the file of the A.O. for the limited purpose of verification of the facts and circumstances stated to be the cause of transfer of the asset to the assessee herein which are reproduced in the above paragraphs and we hold that if the said circumstances are proved to have existed, then the provisions of Explanation-3 to Section 43(1) are clearly not attracted. However, if the above circumstances are not proved or are found to be not the reason/purpose for transfer of the asset, only then shall the A.O. invoke the above provision. But in such circumstances, we direct that if the A.O. is not satisfied with the valuation done by Ernst & Young, then after giving a speaking order for not accepting the same, the A.O. shall revalue the asset in accordance with the provisions of law and shall not adopt the WDV of the asset in the hands of the previous owner. In the result, ground No. 2 and the additional ground of appeal are treated as allowed for statistical purposes.”

48. Thus, respectfully following the judgment of the Hon'ble Tribunal on the identical issue, as involved in the instant case, as the Assessee herein has also claimed the depreciation on ‘Film Software Library’ which was allowed @ 15% instead of 25% to the extent of Rs. 13,57,40,506/- @25% on opening WDV (Rs. 54,29,62,024/-) on the basis of valuation report prepared by M/s. Ernst & Young Pvt Ltd.

48.1 It is a fact that in pursuance of the directions issued by the Hon'ble Tribunal in the case pertaining to AY 2007-08 which is the base year, the AO though passed the consequential order dated 31/03/2017, however, in absence of valuation report, which the Valuation Officer failed to file, the AO ultimately, affirmed his own findings qua the issue involved in an assessment order dated 15/11/2016, however, in the “Note” mentioned that as and when final report of the valuator on the issue of ‘Film Software Library’ is received, then the order will accordingly stand modified.

Order pronounced in the open court on 15.10.2025.