COMMISSIONER OF INCOME TAX vs. M/S.MAVIS SATCOM LIMITED

T.C.A.No.433 of 2015 IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 11.11.2024 CORAM: THE HONOURABLE MR.JUSTICE R.SURESH KUMAR and THE HONOURABLE MR.JUSTICE C.SARAVANAN T.C.A.No.433 of 2015 and M.P.No.1 of 2015 The Commissioner of Income Tax, Media Circle, Chennai. ... Appellant

Vs. M/s.Mavis Satcom Limited, No.48, N.B.Jawaharlal Nehru Salai, Ekkattuthangal, Chennai – 600 032. PAN:AACCM 2127 K ... Respondent Prayer: Appeal under Section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal, “D” Bench, Chennai dated 18.03.2014 in ITA.No.1661/MDS/2013. 1/18 https://www.mhc.tn.gov.in/judis T.C.A.No.433 of 2015

For Appellant : Mr.Karthik Ranganathan For Respondent : Mr.A.S.Sriraman

JUDGMENT (Judgment of the Court was delivered by C.SARAVANAN, J.) This Tax Case Appeal is directed against the impugned order dated 18.03.2024 passed by the Income Tax Appellate Tribunal in ITA.No.1661/Mds/2013. 2. By the impugned order, the Appellate Tribunal has dismissed Appeal in I.T.A.Nos.1659, 1660, 1661, 1662 & 1663/Mds/2013 filed by the Department for the Assessment Years 2003-04, 2004-05, 2005-06, 2007-08 & 2008-09 against the order dated 28.03.2013 of the Commissioner of Income Tax (Appeals) in I.T.A.Nos.190, 265, 266/09-10 and 614 and 615/10-11. 3. Though the Appellant/Income Tax Department had filed the appeal against the all orders of the Appellate Tribunal covered by the impugned 2/18 https://www.mhc.tn.gov.in/judis T.C.A.No.433 of 2015 Common Order in various appeals, they were dismissed by separate orders of this Court on account of low tax effect. Only the present appeal survives for adjudication before us. 4. This Appeal was admitted on 27.07.2015. Following substantial questions of law were framed for being answered:- “1) Whether on the facts and circumstances of the case the Hon'ble Income Tax Appellate Tribunal was right in law in holding the reopening u/s 147 as invalid? 2) Whether on the facts and circumstances of the case, the Hon'ble Income Tax Appellate Tribunal was right in holding that reopening as invalid when as per Explanation 1 to the provisions of Sections 147, production of account or other evidences before the Assessing Officer from which material evidence could with due diligence have been discovered will not necessarily amount to disclosure within the meaning of proviso to Section 147 of the Act? 3) Whether on the facts and circumstances of the case, the Hon'ble Income Tax Tribunal was right in holding that reopening u/s 147 as invalid when as per clause (c) of Explanation 2, where assessments have earlier been made and there is escapement of income, reopening can be made to reassess the escaped income? 4) Whether on the facts and circumstances of the case, the Hon'ble Income Tax Appellate Tribunal was right in law in holding the reopening u/s 147 as invalid when the assessee had claimed expenditure as 'revenue' in nature while the benefit of expenditure is enduring in nature and hence the proceedings are valid as per law? 3/18 https://www.mhc.tn.gov.in/judis T.C.A.No.433 of 2015 5) Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the rights are found incapable of sustained exploitation after the first broadcast and hence considering the principles of consistency and nature of expenditure, the same has to be treated as revenue in nature, since the assessee does not derive enduring benefit? 6) Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in law in reversing the capitalization of the expenses without noting that as per accounting standards issued by the Institute of Chartered Accounts of India AS26, copyrights in films/serials are intangible assets and writing off of entire cost of the acquiring such rights at the first broadcast itself on the ground that future revenues are not ascertainable? 7)Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in law in reversing the capitalization of the expenses when the assessee is offering the revenue derived on subsequent telecast in the relevant assessment year, but has chosen to claim the entire expenditure relating to such revenue in the first year of telecast, which is against the mercantile system of account followed by the assessee?" 5. Although the above substantial questions of law have been framed, we are of the view, the only surviving substantial question of law that has to be answered in this appeal is Question Nos.1 & 7 as extracted above. The dispute in this appeal is confined to the Assessment Year 2005-2006. 4/18 https://www.mhc.tn.gov.in/judis T.C.A.No.433 of 2015 6. The brief facts of the case are that the respondent assessee is a Broadcasting company running a Television channel namely JAYA T.V. For the purpose of carrying on its business, it acquires Satellite rights over feature films for being telecasted, in its Television channel as per the terms and conditions of the agreements with the respective copyright holders in film who are predominantly the producers of films. 7. The rights in respect to the films are required which are not necessarily telecasted immediately after the agreements are signed, wherein, the rights are transferred to the respondent assessee. There are lock-in period, depending upon the market exigency, the films are telecasted/were telecasted by the respondent assessee. 8. The case of the respondent assessee is that the expenses incurred in acquiring the rights are revenue expenditure and therefore the respondent assessee was entitled to deduction under Section 37(1) of the Income Tax Act, 1961. 5/18 https://www.mhc.tn.gov.in/judis T.C.A.No.433 of 2015 9. However, the Department has taken a stand that under the respective agreements, wherein, rights have been conferred in the feature films to the respondent assessee for being telecasted in their TV channel are capital asset, they have enduring rights to utilize the same over a period of time and cannot be termed as a revenue expenditure. 10. Earlier assessment was completed on 30.03.2007 in response to the Return of Income filed on 31.10.2005 for the Assessment Year 2005-2006, wherein, the respondent assessee has admitted a taxable Income of Rs.6,25,82,476/-. The returns that was filed was accepted in the Assessment Order dated 30.03.2007 passed under Section 143(1) of the Income Tax Act, 1961. The claim of the respondent assessee for deduction on the expenses incurred for acquiring the rights under Section 37(1) of the Income Tax Act, 1961, for a sum of Rs.18,73,72,622/- was allowed. 11. Under these circumstances, the Department issued a notice under Section 148 of the Income Tax Act, 1961 on 03.04.2009 to disallow the expenditure incurred for the aforesaid amount of Rs.18,73,72,622/- on the 6/18 https://www.mhc.tn.gov.in/judis T.C.A.No.433 of 2015 ground that the same was a capital expenditure and therefore the respondent assessee cannot claim deduction under Section 37(1) of the Act as a revenue expenditure. 12. The income of the respondent assessee was thus recomputed vide Order dated 28.12.2010 under Section 143(3) read with Section 147 of the Income Tax Act, 1961 for the Assessment Year 2005-2006. 13. The stand of the Appellant/Department is that the Satellite rights acquired for telecasting movie was a “capital asset” and not a stock-in-trade and therefore the respondent assessee was entitled to only “depreciation” under Section 32 of the Income Tax Act, 1961 and could not have claimed deduction under Section 37(1) of the Income Tax Act, 1961. 14. Accordingly, the taxable income of the respondent assessee was re-computed at Rs.18,59,07,710, after adjusting the depreciation and accumulated depreciation on the opening balance. Accordingly, the income was assessed as under:- 7/18 https://www.mhc.tn.gov.in/judis T.C.A.No.433 of 2015 Income From Business Rs. Rs. Add: 6,25,82,476/- 1.Excess

claim

of depreciation 2,69,028/- 2.Copy right of purchase of films 18,51,58,100/- 18,54,27,128/- 24,80,09,604/- Less: As discussed 1.Depreciation on current year purchase 4,62,89,525/- 2.Accumulated depreciation on copyright of film on the opening balance 1,58,12,370/- 6,21,01,895/- Assessed total income 18,59,07,709/- or 18,59,07,710/- 15. The Assessing Officer thus determined the tax liability of the respondent assessee as detailed below:- Rs. Tax thereon 6,50,67,698/- Add:Surcharge Add: Education cess @ 2% 16,26,692/- 13,33,888/- Less: TDS 6,80,28,278/- 42,13,418/- 6,38,14,860/- Less:Advance-tax 1,45,00,000/- 4,93,14,860/- Less:Tax as per 154 order dated 41,81,076/- 8/18 https://www.mhc.tn.gov.in/judis T.C.A.No.433 of 2015 Rs. 12.02.2008 4,51,27,784/- Add:Interest u/s 234B(3) 1,57,94,724/- Payable 6,09,22,508/- 16. Aggrieved by the same, the respondent assessee successfully challenged the Order dated 28.12.2010 of the Assessing Officer along with other orders for the other Assessment Years before the CIT Appeal who by an order dated 28.03.2013 accepted the case of the respondent assessee with the following observations:- “25.The AR has also pointed out that the principle of consistency is violated by making these adjustments to the amortization of costs. It is argued that the said method of amortization or write off of the cost of films is being followed by the assessee since its inception and the same has been accepted by the department. It is also argued that this method of amortization or write off is also being followed by all the other satellite TV companies throughout the country. Against this argument of the AR the AO has dismissed his plea stating that resjudicata does not apply to Income Tax proceedings. 26. I have examined the principles of resjudicata in this regard. It is true that resjudicata does not apply to income tax proceedings where fundamental aspects found as a fact varies subsequently. In the case of Lovely Balashiksha Parishad (266 ITR 349) it is laid down that it would not be appropriate to allow the procedure be changed in a subsequent year where fundamental aspect continue through different AYs has been found as a fact one way or the other and parties have allowed 9/18 https://www.mhc.tn.gov.in/judis T.C.A.No.433 of 2015 that position to be sustained by not challenging the order. This view has been held by many High Courts and Supreme Court as a guiding principle for nurturing and sustaining the principle of consistency or resjudicata. In this given case, there was no fresh material to change the method of amortization that has been brought on record by the AO. It is only a change of opinion tinged with adventurism. Hence it is held that principle of consistency has to be followed in this case. 27. Accordingly, it is held that the purchase of the satellite rights over feature films is held to be a revenue item. The appeals are allowed. 28. To sum up, the reopening of assessments in AY 2003-04, is held to be barred by time and reopening in the AY 2004-05 & 2005-06 were held to be within time limits, while the reasons for reopening were found to be inadequate for all the three years. Hence, the reopening of all the three assessment are annulled. Coming to the merits, the capitalization of the cost of films is found to be not sanctioned by the provisions of Section 28(i) read with Section 9(1)(v) Clause (vi) and Rule 9B of the Act read in conjunction with Section 2(f) and 14(d) of the Copyright Act. Accordingly, the appeals are allowed.” 17. Aggrieved by the same, the Appellant/Income Tax Department preferred an appeal, wherein, alluding to Rule 9(b) of the Income Tax Rules, the Appellate Tribunal dismissed the Appeal of the appellant Income Tax Department with the following observations:- 10/18 https://www.mhc.tn.gov.in/judis T.C.A.No.433 of 2015 “12. We concur with the findings of the CIT(Appeals) on the issue of applicability of Rule 9B in the case of assessee and amortization of the cost of acquisition of film copyrights in the year of its first telecast. There is no reason to interfere with the findings of the CIT(Appeals) and thus, the same are confirmed. The Id.AR has placed on record a copy of the order of the co-ordinate bench of the Tribunal in the case of Sun TV Network Ltd., Vs. Department of Income Tax (supra), wherein similar issue had come up before the Tribunal and the Tribunal has decided the issue in favour of the assessee. We find that the issue in hand is squarely covered by the decision of the co-ordinate Bench cited by the Id.AR. 13. In view of the facts and circumstances of the case discussed above, the appeals of the Revenue are dismissed being devoid of merit.” 18. Arguing the case, the learned counsel for the Income Tax Department submits that the impugned order wrongly affirmed erroneous order dated 28.03.2013 of CIT (Appeals). It is submitted that the respondent assessee is only entitled to claim depreciation as the feature films in respect of which rights are acquired by the respondent assessee are not a stock-in-trade of the respondent assessee. 11/18 https://www.mhc.tn.gov.in/judis T.C.A.No.433 of 2015 19. Defending the order, the learned counsel for the respondent assessee submits that the respondent assessee is engaged in business of telecasting various Television programs, News programs including telecasting of feature films and therefore the acquired rights in respect of feature films. It is submitted that the rights in the feature film are to be treated as a stock-in-trade and therefore the respondent assessee eligible to write of the expenses incurred in acquiring such rights under Section 37 of the Income Tax Act, 1961. 20. It is further submitted that if the order of the CIT (Appeals) dated 28.03.2013 which has been upheld by the Appellate Tribunal vide impugned order dated 18.03.2014 is reversed, the respondent assessee will be subjected to a huge loss as it cannot avail depreciation and the unabsorbed depreciation will lapse under Section 72 of the Income Tax Act, 1961. 21. On the other hand, the learned counsel for the Income Tax Department submits that reference to Section 72 of the Income Tax Act, 1961 is totally misconceived. He further submits that unabsorbed depreciation will 12/18 https://www.mhc.tn.gov.in/judis T.C.A.No.433 of 2015 not get lapsed under Section 72 of the Income Tax Act, 1961 only unabsorbed loss will get lapsed after an expiry of 8 years in terms of Section 72(3) of the Income Tax Act, 1961. He therefore submits that reference to Section 72 of the Income Tax Act, 1961 is totally misconceived and therefore is liable to be rejected. 22. We have considered the arguments advanced by the learned counsel for the Income Tax Department on behalf of the appellant and the learned counsel for the respondent assessee. 23. The stand taken by the respondent assessee is erroneous in as much as the respondent has wrongly treated the rights conferred under agreements in feature film on par with “stock-in-trade” merely because, the respondent assessee is also in the business of telecasting of feature films in its channel as per the terms and conditions of the agreements under which such rights were acquired by respondent assessee. 13/18 https://www.mhc.tn.gov.in/judis T.C.A.No.433 of 2015 24. The rights acquired by the respondent assessee under the agreements with copyright holders is an “intangible rights” and therefore entitles the respondent assesee a right to claim only depreciation under Section 32 of the Income Tax Act, 1961. 25. Section 37(1) of the Income Tax Act, 1961 which allows an assesee to write off expenditure is not applicable to the respondent assesee as the rights acquired by the respondent assesee are in the nature of capital asset and the expenditure incurred by the respondent assessee are capital expenditure for the purpose of its business. They gave the respondent assesee an enduring benefit over a period of time. Therefore, such expenditure cannot be allowed as revenue expenditure for computing the income chargeable to tax of the respondent assesese under the head “Profits and gains of Business or Profession”. The expenditure incurred by the respondent assesee are capital expenditure. 14/18 https://www.mhc.tn.gov.in/judis T.C.A.No.433 of 2015 26. The expression “stock-in-trade” is specifically excluded from the definition of “Capital Asset” in Section 2(14) of the Income Tax Act, 1961. The expression stock-in-trade is not defined in the Income Tax Act, 1961. Therefore, rights acquired in feature films by the respondent assessee cannot be written off as revenue expenditure under Section 37 of the Income Tax Act, 1961. Rights acquired in a feature films can be construed as a “stock-in- trade”, if the rights conferred on the respondent assessee in the feature film were used for making copies of such feature films for being sold and distributed as a part of business. 27. In fact, under Rule 9B of Income Tax Rules, 1982 deduction in respect of expenditure incurred for acquisition of distribution rights of feature films is recognized as distributors sell such rights to theatres and screens. On the other hand, in the present case, there is neither sale of copies of feature film nor such feature film is held as a stock-in-trade by the respondent assessee nor they were used as an input or output by the respondent assessee. 15/18 https://www.mhc.tn.gov.in/judis T.C.A.No.433 of 2015 28. The argument is that the feature film in respect of which rights were acquired by the respondent assessee are stock-in-trade and are not “capital asset” as defined in Section 2(14) of the Income Tax Act, 1961 cannot be countenanced as they confer an enduring right to the respondent assessee in all times to come. 29. Further, the definition of “Capital Asset” in Section 2(14) of the Income Tax Act, 1961 specifically excludes “stock-in-trade”. 30. The only benefit that is available to an assessee under the provisions of the Income Tax Act, 1961 on capital asset as defined in Section 2(14) of the Income Tax Act, 1961 is depreciation under Section 32 of the Act. The comparison made in the impugned order to Rule 9(b) of the Income Tax Rules, 1962 is also incorrect. 16/18 https://www.mhc.tn.gov.in/judis T.C.A.No.433 of 2015 31. This Tax Case Appeal is allowed. The substantial questions of law are answered in favor of the Appellant and against the Respondent-Assessee. No costs. Consequently, connected miscellaneous petition is closed. [R.S.K., J.] [C.S.N., J.]

11.11.2024 Index : Yes/No Internet : Yes/No Speaking Order/Non-Speaking Order Neutral Citation : Yes/No jas 17/18 https://www.mhc.tn.gov.in/judis T.C.A.No.433 of 2015 R.SURESH KUMAR, J. and C.SARAVANAN, J. jas T.C.A.No.433 of 2015 and M.P.No.1 of 2015 11.11.2024 18/18 https://www.mhc.tn.gov.in/judis