TIPS INDUSTRIES LTD,MUMBAI vs. ACIT 11(1), MUMBAI

आदेश / O R D E R PER RAMIT KOCHAR, Accountant Member These four appeals, three filed by the Assessee and one by Revenue, relates to assessment year‟s(AY) 2011-12, 2012-13 and 2013-14. 1.2 The assessee has filed an appeal in AY 2011-12 which is directed against the appellate order bearing no. CIT(A)- I.T.A. No.6194 to 6196/Mum/2017 4/Tr.-241/ACIT-11(1)/14-15 dated 03.07.2017 passed by learned Commissioner of Income-tax (Appeals)-4,Mumbai(hereinafter called “the CIT(A)”) for AY 2011-12 , the appellate proceedings had arisen before learned CIT(A) from assessment order dated 31.12.2013 passed by learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income-tax Act,1961(hereinafter called “the Act”) for AY 2011-12. 1.3 The cross appeals have been filed by assessee and Revenue in ITA No. 6195/Mum/2017 and ITA No. 6291/Mum/2017 respectively for AY 2012- 13, both being directed against the appellate order bearing no. CIT(A)-4/IT- 26/ACIT-16(1)/14-15 dated 04.07.2017 passed by learned CIT(A) for AY 2012-13 , the appellate proceedings had arisen before learned CIT(A) from assessment order dated 26.12.2014 passed by AO u/s 143(3) of the 1961 Act for AY 2012-13. 1.4 The assessee has filed an appeal in ITA No. 6196/Mum/2017 for AY 2013-14 which is directed against the appellate order bearing no. CIT(A)- 4/IT.-22/ACIT-16(1)/16-17 dated 04.07.2017 passed by learned CIT(A) for AY 2013-14 , the appellate proceedings had arisen before learned CIT(A) from assessment order dated 02.03.2016 passed by learned AO u/s 143(3) of the 1961 Act for AY 2013-14.

, if any, at the time of hearing”.

5. During the course of assessment proceeding u/s. 143(3) r.w.s. 143(2) of the 1961 Act, from the perusal of the Balance Sheet of the assessee company, it was observed by the AO that the assessee company has given interest free refundable rent deposit of Rs. 9,00,00,000/- to Mrs. Renu K. Taurani and Mrs. Varsha R. Taurani. The AO observed from the perusal of the Profit & Loss account that the assessee has paid an interest of Rs. 6,42,07,701/- which was claimed as an expenditure on account of interest paid on term loans and other loans. The assessee was asked to explain by the AO as to why the said interest expenditure should not be disallowed u/s. 36(1)(iii) of the Act. 5.2. The assessee submitted before the AO that the assessee has taken commercial premises bearing number 501-601, Durga Chambers, 278/E, Linking Road, Khar West, Mumbai 400052, on Leave & Licence basis from Mrs. Renu K. Taurani and Mrs. Varsha R. Taurani for the period of three years from 01.04.2010 to 31.03.2013, in terms of leave & license agreement dated 01.04.2010 . It was explained that the said agreement was executed owing to the fact that earlier leave & license agreement dated 01.01.2007 had expired . It was explained by the assessee before the AO that letter dated 29.01.2008 was received by the assessee from licensor requesting for increase in compensation and interest free rent deposits. The assessee submitted that as per new leave & licence agreement the monthly compensation is agreed at Rs. 4,50,000/- for each such premises excluding service tax . It was explained that besides this interest free refundable rent deposit of Rs. 9,00,00,000/- was also deposited with the licensors . The receipts alongwith leave & licence agreement were duly furnished by the assessee before the AO. The assessee submitted before the AO that the said amount of Rs. 9,00,00,000/- as interest free refundable rent deposit was I.T.A. No.6194 to 6196/Mum/2017 I.T.A. No. 6291/Mum/2017 given out of interest free fund available with the assessee company , the details of which are as under:- (Figures in Lacs) AY 2004-05 AY 2008-09 i) Share Capital 1265.29/- 1730.59/- ii)Reserves and Surplus(Net) 3648.00/- 5273.63/- iii) Total Interest free Fund 4913.29/- 7004.22/- iv) Interest free Refundable Deposit 200.00 700.00 The assessee also relied upon the presumption available wherein if interest free funds available are more than interest free refundable rent deposit, then it will be presumed that the assessee has made deposit of interest free rent deposit out of interest free funds available with it. 5.3 The AO rejected the contentions of the assessee company by holding that these commercial premises were taken on leave and license basis from the wives of the Director of the company. It was also observed by the AO that these payments of interest free refundable rent deposit were given out of business receipts as is evident from the bank statement of IDBI Bank from 01.01.2008 to 31.03.2008 which as per AO made it clear that interest free refundable rent deposits were not given out of free reserves. It was observed by the AO that assessee is paying interest on the term loans and other loans raised by it while business receipts were utilised for advancing interest free refundable rent deposit . The AO rejected the contention of the assessee that free reserves were utilised for giving said interest free rent deposit and it was held by the AO that the assessee company has utilised the interest bearing funds to advance the interest free rent deposits which led to disallowance of 12% of interest free refundable rent deposit of Rs. 9,00,00,000/- by the AO leading to disallowance of Rs. 1,08,00,000/- u/s 36(1)(iii) of the 1961 Act, vide assessment order dated 31.12.2013 passed by the AO u/s 143(3) of the 1961 Act.

I.T.A. No.6194 to 6196/Mum/2017 “Claim as business loss of amount of Rs. 20,00,000/- advanced towards Rights to Karishma International now considered as irrecoverable: The business of the Assessee Company is that of re-production of Audio Sound & Music from the original track record of the songs provided by the various film producers commonly known as "Audio Rights" (hereinafter referred to as Master Plate). The master plate contains the original sound track of the film relating to the songs and it is with the help of this master plate, the Assessee Company makes several copies of audio cassettes which are ultimately sold in the market. The master plate is similar to designs, formula, mould and raw material from which copies are made. Since the master plate is only a raw material, the cost of purchase of the raw material is allowable deduction in evaluating the gross profit derived in the manufacture and sale of the copy. In order to produce and market the audio cassettes under its logo "TIPS'' Assessee Company have to purchase audio rights of various films from various producers of feature films for which advances have to be paid on execution of the written agreement from time to time, as the completion of feature film takes approx. 15 to 24 months. Accordingly the Assessee Company had paid advance of Rs. 65,00,000/ to the said producer in the financial year 2002-2003 for acquisition of Audio Rights of music feature film of Production No.

7. Aggrieved by assessment order dated 31.12.2013 passed by the AO u/s 143(3) of the 1961 Act, the assessee filed first appeal before Ld. CIT(A). The Ld. Counsel for the assessee reiterated the submissions before learned CIT(A) as were made before the AO which are not repeated here.The assessee relied upon the decision of Hon‟ble Bombay High Court in the case of CIT v. Nicholas Piramal (India) Ltd., (2016) 95 CCH 2015(Bom.). The assessee also relied upon the decision of Hon‟ble Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd. (2009) 77 CCH 0019 (Bom). The assessee also relied upon decision in the case of Hon‟ble Delhi High Court in the case of CIT v. Mrs. Sushma Kapoor (2009) 77 CCH 0958 (Delhi). The Ld. CIT(A) after considering the submission of the assessee rejected the same vide appellate order dated 03.07.2017 , by holding as under:- “ 7.2. I have considered the findings of the Assessing Officer, evidences on record and rival submission of the Appellant, carefully. I find that the Appellant has taken commercial premises 501-601 of Durga Chambers, 278/E, Linking Road, Khar(West), Mumbai - 400 052 on leave & license from wives of Directors namely; Mrs. Renu K. Taurani & Mrs. Varsha R. Taurani. According to the admission of the Appellant, it has given Interest free deposit of Rs.2 crores in F.Y.2002-03 and further an amount of Rs.7 lakh(sic. crores) in F.Y.2007-08. The leave & license agreement was further extended for 3 years. It is very obvious that such advance has been given from the business receipts as demonstrated by the Assessing Officer in Para 10.3 of the assessment order hence, the contention of the Appellant that such deposits have been given out of Interest free loans & advances or from Reserves & Surplus is factually incorrect. The Ld. A.R. has not refuted the finding of the Assessing Officer in his written arguments submitted on 23.01.2017. The Ld. A.R. has merely demonstrated the Share Capital and Reserves & Surplus of Rs.4913.29 lakhs of A.Y.2004-05 and Rs.7004.22 lakhs in A.Y.2008-09 and Interest-free Refundable deposit of Rs.2 crores in A.Y.2004-05 and Rs.7 crores in A.Y.2008-09 but has not explained as to how such Share Capital and Reserves & Surplus and Refundable deposits were given to the wives of Directors whereas the Assessing Officer has demonstrated that deposits have been given out of business related transactions. The Ld. A.R. has not refuted this factual finding of the Assessing Officer. Therefore, the reply and representation of the Appellant is found to be very vague and general in nature. The argument that interest free deposit has been given from interest free fund, is of no avail because no such truth is there as such deposit of Rs.9 crores I.T.A. No.6194 to 6196/Mum/2017 has been given from business transactions. It can be seen from the Balance Sheet of F.Y.2007-08 that shareholder's fund including Reserves & Surplus of Rs.7004.22 lakhs have been utilized for Inventory of Rs.2331.83 lakhs, Sundry Debtors of Rs.101.81 and Cash & Bank Balance of Rs.3535.43. Further, the Gross Block of Assets as on 31.03.2008 is of Rs.1755.73 lakhs. Thus, it is very evident that Share capital and Reserves & Surplus of Rs.7004.22 lakhs has been utilized. Thus, for giving advance of Rs.9 crores, the funds might have been utilized from Secured Loans or from business transactions. Therefore, the contention of the Appellant that such deposit of Rs.9 crores has been made from Interest free Surplus fund is factually incorrect. 7.3. As regards business expediency of such Rent Deposit, the Appellant has not explained anything as to how there is business expediency for making such deposit with the wives of Directors for taking premises of Durga Chambers on rent. It can be seen that a very good monthly rent of Rs.4,50,000/- has been given for such premises hence, there is no need to give any deposit of Rs.5,50,00,000/- for each premise to be engaged by the wives of the Directors namely; Mrs. Renu K. Taurani & Mrs. Varsha R. Taurani.

7.4. The reliance placed by Ld. A.R. in the case of CIT vs. Nicolas Piramal India Ltd.(2016) 239 Taxman 470(Bom) is not applicable because the facts are different. In that case, the Assessee was carrying on business of Glass Manufacturing from a established Plant & Machinery and during the year has set-up a Plant &. Machinery for expansion of its existing business. There was functional integrity between 3 business namely; Pharma Business, Bulk Drug Business and Glass Manufacturing Business with interlinking of same Management and common funds hence, interest on loans borrowed for business expansion was allowed as deduction u/s.36(1)(iii) of the Income-tax Act, 1961. Here is not the case like that hence, reliance of Ld. A.R. in this case is misplaced. Similarly, the facts of the case of CIT vs. Reliance Utility Power Ltd. (2009) 313 ITR 340(Bom) is altogether different. In that case, it was found by the CIT(A) as well as ITAT that interest free fund was utilized for investment in the Sister Concerns hence, no disallowance could be made. In that set of facts, Hon'ble Bombay High Court has held that no fault could be found in the finding of lower authority. Here is not the case like that. Similarly, the facts of CIT vs. Miss Sushma Kapoor (2009) 319 ITR 299(Delhi) is altogether different. In that case, it was found by the CIT(A) that interest free advances were given by that Assessee in earlier years before taking the loan on which interest was paid and therefore, advances were not given out of loan taken by the Assessee. In that circumstances, it was held by the Hon'ble Delhi High Court that there was no substantial question of law arises for consideration. Here is not the case like that. Thus, none of the cases is applicable to the facts of the case. In this I.T.A. No.6194 to 6196/Mum/2017 case, as observed earlier, the Appellant has not demonstrated in facts of the business expediency hence, amount/loan/fund diverted to related person having element of interest is to be taken into consideration for disallowance. For this propositions reference may be had of S.A. Builders Ltd. vs. CIT 288 ITR 1(SC), Madhav Prasad Jatia vs. CIT 118 ITR 200(SC). It can be seen from the set of facts that in spite of giving good rent of Rs.4,50,000/- per month to the wives of the Directors, such huge amount of Rs.9 crores has been given for no business purposes. Thus, fund has been given to the wives of the Directors without charging of interest hence, corresponding interest expenditure is disallowable. For this proposals reliance is placed in the following case laws :- "Highways Construction Co. Pvt Ltd. vs. ClT(Gau) 199ITR 702 CIT vs. India Silk House (Mad.) 152 of the Income-tax Rule, 1962 79 Marolia & Sons Vs. CIT(All) 129 of the Income-tax Rule, 1962 475 Tirupati Trading Co. Vs. CIT(Cal.) 242 ITR 13 CIT Vs. Sujanni Textiles (P) Ltd.(Mad-) 225 ITR 560 CIT Vs. P. Ganu Rao and Sons (Mad.) 185 ITR 324" Thus, in the light of above, factual references and judicial proposals, the disallowance of interest expenditure of Rs. 1,08,00,000/- made u/s.36(1)(iii) is sustained.” 7.2. Similarly, the assessee also contended before learned CIT(A) that an amount of Rs. 20,00,000/- paid on account of advance towards audio rights is revenue in nature, by submitting as under:-

5.1. In appeal, on other hand, it is contended that Ld. “ Assessing Officer has wrongly disallowed the genuine expenditure incurred during the course of business. It has paid advances of Rs.65 lakhs to the Film Producer, M/s. Karishma International for acquisition of Audio Rights in F.Y.2002-03. It may be noted that such advance is a business advance hence, allowable expenditure. 5.2. The written submission of the Assessee is as under: 3. Disallowance of Rs.20,00,000/- on account of Advance towards Audio Rights Appellant company had paid advances of Rs.65,00,000/- to the producer M/s. Karishma International for acquisition of audio rights for proposed feature films in the financial year 2002- 2003. It be kindly noted that the amount had been paid for acquiring audio rights which is the basic I.T.A. No.6194 to 6196/Mum/2017 ingredients for production of audio cassettes without which pre-recorded music cassettes of motion pictures cannot be manufactured, as such, it is nothing but part and parcel of raw materials used for manufacturing of the cassettes. It is evident from the ledger account of "M/s, Karishma International" that though the said advance was paid for acquisition of audio rights to producer "M/s. Karishma International in the financial year 2002-03, the audio rights have not been received till this date, since the said producer have neither commenced the productions of the feature films nor have commenced production of any other feature films to adjust the advances given to them. In fact the appellant company had various meetings and discussions with the said party M/s. Karishma International to recover an amount of Rs.65,00,000/-. Finally on 22nd March 2004, appellant company has reached an understanding to create lien on Overseas Territory of the Feature Film "DIL CHURAKE CHAL DIYE" produced by the said party M/s. Karishma International and assigned to M/s. RAMNORD RESEARCH LABORATORIES PVT LTD. In term of the said letter of understanding dated 22.3.2004, it had been mutually agreed that the appellant company had lien on the OVERSEAS TERRITORY of the above said feature film to the extent of the amount of Rs.65,00,000/-. Xerox copy of the Letter of Arrangement dated 22.3.2004 has been placed on records at the time of assessment proceedings. Appellant Company only could recover an amount of Rs.45,00,000/- from the OVERSEAS RIGHTS OF THE FILM "SHADI KARKE PHAS GAYA YAAR" from Redsun Exports Pvt. Ltd., on behalf of M/s. Karishma International. Copy of the letter dated 31st July 2004 is placed on records at the time of assessment proceedings. Thereafter, Appellant company rigorously followed with M/s. Karishma International for the recovery of balance amount of Rs.20,00,000/- but the said party expressed their inability to make further payments as they suffered heavy losses in their various film productions. In fact the said production house had discontinued the business activities of film production, therefore, the advances become irrecoverable and hence, the appellant company had no other alternative but to claim the said advances as revenue expenditure u/s.37(1) of the I T Act and accordingly has debited the said amount of Rs.20,00,000/- to the Profit and Loss account under the head "BAD DEBTS". It is humbly submitted that the business loss is directly connected with the business operation and incidental to the I.T.A. No.6194 to 6196/Mum/2017 carrying on the business of the appellant company, hence the same be allowed as business loss. It is reiterated that "M/s. Karishma International" has discontinued the film production business and since the advance payment though initially was towards acquisition of Audio Rights but later converted to create lien on the OVERSEAS TRRITORY of the feature film "DIL CHURAKE CHAL DIYE" and the fact that only an amount of Rs.45,00,000/- was recovered from the overseas rights from Redsun Exports P Ltd., on behalf of M/s. Karishma International. The balance amount has become irrecoverable and time barred under the law of limitation act, and therefore, the said amount cannot be legally recoverable from the above said party. Therefore, appellant company had no other alternative but to write off the said amount of Rs.20,00,000/- as revenue expenditure u/s.37(1) of the I T Act. The Assessee has also placed his reliance in the case of CIT vs. Mysore Sugar Co. Ltd. 46 ITR 0649(SC).” 7.3 The contentions of the assessee were rejected by Ld. CIT(A) vide appellate order dated 03.07.2017, by holding as under:- “ I have considered the findings of the Assessing Officer as well as rival submission of the Appellant, carefully. The facts emerged from the clarification of the Appellant is that it has given an advance of Rs.65 lakhs to one producer namely; M/s. Karishma International for acquisition of Audio Rights for a proposed Feature Films in F.Y.2002-03. Since Producer has not produced the Film, the Audio Rights was not received. Hence, advance was not adjusted. On 22.03.2004, the Appellant Company had reached an understanding with the producer to create an lien on Overseas Territory of the Feature Film "Dil Chura Ke Chal Diye", produced by M/s. Karishma International and assigned to M/s. Ramnord Research Laboratories Pvt. Ltd.. As per the letter of arrangement dated 22.03.2004, the Appellant has got lien on the overseas territory to the extent of Rs.65 lakhs but according to the Appellant, it could recover only an amount of Rs.45 lakhs from the Overseas Rights of other Film namely, "Shadi Karke Phas Gaya Yaar" from M/s. Redsun Exports Pvt. Ltd.. In support of this contention, the Assessee has submitted a copy of letter dated 21.07.2004. For rest of amount of Rs.20 lakhs, it is submitted that the same was not recovered from M/s. Karishma International because of heavy loss suffered by them. M/s. Karishma International has discontinued the business activities of Film Production hence, according to the Assessee, such an amount of Rs.20 lakhs becomes Bad debt hence, allowable expenditure. This contention of the Appellant is not tenable because under the I.T.A. No.6194 to 6196/Mum/2017 Income-tax Act, the allowable Bad debt should be one which has already been included in the Income in earlier year. Sec.36(vii) r.w.s.36(2) is very specific over such issue. Since the Assessee has never shown an amount of Rs.65 lakhs or Rs.20 lakhs as Income from earlier year, no such advance could be allowable as Bad debt. The contention that it should be allowed u/s.37 can also not be accepted because of the facts of the case. It can be seen from the admission of the Appellant that it had given Rs.65 lakhs to one M/s. Karishma International for Audio Rights of a Film to be produced. However, the production of film did not materialize, and as mentioned by the Appellant, M/s. Karishma International had discontinued its production business hence, advance was outstanding right from F.Y.2002- 03. Subsequently, the Appellant has negotiated for having "lien on overseas territory of the Feature Film namely; "Dil Churake Chal Diye" claimed to be produced by M/s. Karishma International. This film was assigned to one M/s. Ramnord Research Laboratories Pvt. Ltd.. Thus, according to the Mutual arrangement, the Assessee has lien over the overseas territory of feature film "Dil Chura Ke Chal Diye" for an amount of Rs.65 lakhs vide arrangement letter dated 22.05.2004. It means nature of advance was changed subsequently and it was not for acquisition of Audio Rights of proposed film. Obviously, the Appellant had taken into account, the facts of the Agreement for having lien on the Overseas Territory on his Feature Film for Rs.65 lakhs. According to the admission of the Appellant, it could recover only an amount of Rs.45 lakhs from another film namely, "Shadi Karke Phas Gaya Yaar" through other company M/s. Redsun Exports Pvt. Ltd.. Therefore, it is very evident that nature of advance was changed. Therefore, in such circumstances, such advance which has not been recovered is a Capital Loss. It cannot be recorded as Business loss. The facts of the case of CIT vs. Mysore Sugar Co. Ltd. 46 ITR 049(SC) is altogether different hence, same cannot be applied. The loss of capital cannot be equated with business loss because acquiring of lien on the Overseas Territory of Film was not at all the business of the Appellant if, the business is of Manufacturing and Sale of Audio Cassettes, CDs. If the money is advanced or debited and later on written off as recoverable is a loss of capital as held in the case of S.P. Shrivastava & Sons vs. CIT 86 ITR 730(All.), CIT vs. Chidambaranath Mudliyar 240 ITR 552(Mad.) & Grindwell Norton Ltd. vs. DCIT in 91 ITD 412(Mumbai ITAT). Further, reference reliance is also placed in the case of Salem Magnesite Pvt. Ltd. vs. CIT 321 ITR 43(Bom). Thus, advance of Rs.20 lakhs claimed to be irrecoverable is a loss of capital hence, disallowance made by the Assessing Officer is sustained.”

I.T.A. No.6194 to 6196/Mum/2017 I.T.A. No.6194 to 6196/Mum/2017 I.T.A. No. 6291/Mum/2017 10.4 Before we proceed further, it is important to reproduce hereunder agreement of arrangement dated 2nd March 2004 entered into between and by assessee and the M/s Karishma International to resolve their differences and disputes which arose in context of and in implementing original agreement dated 9th June 1999. Incidentally the assessee has not produced I.T.A. No.6194 to 6196/Mum/2017 I.T.A. No. 6291/Mum/2017 original agreement dated 09th June 1999 which was entered into by and between the assessee and said M/s . Karishma International. The said agreement of arrangement dated 02nd March 2004 entered into by and between assessee and M/s Karishma International to resolve and settle their disputes and differences is placed in paper book filed with tribunal at page 70-74 , which is reproduced hereunder:

I.T.A. No.6194 to 6196/Mum/2017 I.T.A. No.6194 to 6196/Mum/2017 I.T.A. No. 6291/Mum/2017 I.T.A. No.6194 to 6196/Mum/2017 I.T.A. No. 6291/Mum/2017 I.T.A. No.6194 to 6196/Mum/2017 I.T.A. No. 6291/Mum/2017 I.T.A. No.6194 to 6196/Mum/2017 I.T.A. No. 6291/Mum/2017 10.5 Perusal of the aforesaid Ledger account of M/s. Karishma International in books of accounts of the assessee as well agreement of arrangement dated 02.03.2004 to settle and resolve disputes and difference between assessee and M/s Karishma International and other relevant documents as are on record in paper book are to be read in conjunction, which is done by us as hereunder to appreciate and culled out the facts properly: a) The assessee and M/s Karishma International originally entered into an agreement dated 09.06.1999 with respect to grant of audio rights in feature film „Dil Churake Chal Diye‟ produced by Karishma International in favour of the assessee, which is emanating from agreement of arrangement dated 02.03.2004 which is placed on record by the assessee. The said original agreement dated 09.06.1999 entered into by the assessee and M/s Karishma International is not placed on record. The agreement of arrangement dated 02.03.2004 entered into by and between assessee and Karishma International is to settle and resolve disputes and differences which arose between assessee and M/s Karsihma International over a period of time in relation to feature film „Dil Churake Chal Diye‟. Perusal of the ledger account of M/s Karishma International in the books of assessee will reveal that first payment of Rs. 30 lacs was made by the assessee to M/s Karishma International on 09th June 1999 itself i.e. the date of original agreement dated 09.06.1999. b) There arose some disputes and differences between assessee and M/s Karishma International while implementing original agreement dated 09.06.1999 relating to film „Dil Churake Chal Diye‟. . The complaint was also filed by the assessee with M/s Film Combine against said M/s Karishma International. The disputes and differences between the assessee and M/s Karishma International stood resolved vide this agreement of arrangement dated 02.03.2004. c) There were three more parties found mentioned in the said agreement of arrangement dated 02.03.2004 who were having disputes and differences with M/s Karishma International namely Mrs. Renu K Taurani , Mrs. Varsha R. Taurani and Dasmesh I.T.A. No.6194 to 6196/Mum/2017 International Limited, whose disputes and differences with M/s Karishma International also stood resolved as mentioned in this agreement of arrangement dated 02.03.2004. Incidentally as we have seen with respect to other issue in this appeal with respect to interest free refundable rent deposit given by the assessee , the said Mrs Renu K Taurani and Mrs Varsha R Taurani happens to be wives of Directors of the assessee company. d) The total consideration stipulated in the original agreement dated 09.06.1999 signed by the assessee with M/s Karishma International was Rs. 280 lacs for acquiring audio rights of the movie „Dil Churake Chal Diye‟ (Movie renamed later to „Shaadi Kar Ke Phas Gaya Yaar‟) . Now, with mutual consent of both the parties agreed vide this agreement of arrangement dated 02.03.2004 , the consideration for acquisition of audio rights of feature film „Dil Churake Chal Diye‟ stand reduced to Rs. 55 lacs as against original agreed consideration amount of Rs. 280 lacs owing to several circumstances and events including slump in the film market. e) It is also mentioned in the said agreement of arrangement dated 02.03.2004 that the assessee has already paid to M/s Karishma International an aggregate sum of Rs. 130 lacs as of date towards the consideration originally payable under the agreement dated 09.06.1999. Perusal of Ledger account of Karishma International in the books of the assessee will reveal that the assessee had infact made payment of Rs. 130 lacs as of 02.03.2004, which is the date of entering into an agreement of arrangement between assessee and M/s Karishma International. f) It is also agreed vide this agreement of arrangement dated 02.03.2004 that the assessee will pay to M/s Karishma International additionally an advance of Rs. 100 lacs refundable in the manner stipulated in this agreement. As part of this agreement of arrangement dated 02.03.2004 vide Annexure-A , the details of 10 post dated cheques of Rs. 10 lacs each, all drawn on UTI Bank Limited , Andheri Branch, Mumbai issued by said M/s Karishma International in favour of the assessee towards refund of aforesaid advance of Rs. 100 lacs stood also mentioned.

I.T.A. No.6194 to 6196/Mum/2017 g) This agreement of arrangement dated 02.03.2004 also provides that the assessee had additionally agreed to pay Rs. 45 lacs each to Mrs. Renu K. Taurani and to Mrs. Varsha K. Taurani , aggregating to Rs. 90 lacs. Further, it was agreed by the assessee to pay Rs. 70 lacs to Mega Bollywood Private Limited. Now, under this settlement agreement dated 02.03.2004, it is agreed between the assessee and M/s Karishma International that the assessee will pay Rs. 45 lacs each to Mrs. Renu K. Taurani and to Mrs. Varsha K. Taurani , aggregating to Rs. 90 lacs, out of the aforesaid advance of Rs. 100 lacs agreed by assessee to be paid to M/s Karishma International as refundable advance vide this agreement of arrangement dated 02.03.2004 , at the time of effecting of delivery to assessee by Karishma International of Master Tapes/Original Recording Tracks(Dats.) containing all songs, dialogues and musical works of the said picture „Dil Churake Chal Diye‟. The said M/s Karishma International agreed to deliver to assessee aforesaid master tapes/original recording tracks etc on signing of this agreement of arrangement dated 02.03.2004. The said M/s Karishma International agreed and assured assessee vide this agreement of arrangement dated 02.03.2004 to release the film „Dil Churake Chal Diye‟ in the month of July 2004. The authorities below had not seen whether the assessee had paid this additional advance of Rs. 100 lacs out of which Rs. 90 lacs were disbursed to wives of the Directors of the assessee company by assessee for and on behalf of Karishma International to settle and resolve their inter-se dispute with Karishma International , arose from contractual , commercial and legal boundation of the assessee to sub-serve the business interest of the assessee or was an amount of Rs.90 lacs disbursed gratuitously to protect the interest of wives of Directors of the assessee because already the said Karishma International was holding excess payment of Rs. 75 lacs owing to reduced consideration of audio rights of the feature film „Dil Churake Chal Diye‟. h) It was further agreed vide this agreement of arrangement dated 02.03.2004 that the assessee will not be required to pay Rs. 70 lacs to M/s Mega Bollywood Private Limited for which said M/s I.T.A. No.6194 to 6196/Mum/2017 Karishma International agreed to obtain confirmation of waiver from said M/s Mega Bollywood Private Limited. i) This aspect of further release of Rs. 100 lacs as an additional advance to be paid by the assessee to M/s Karishma International and to effect the release of additional advance of Rs. 100 lacs , the assessee agreeing to make payment of Rs. 90 lacs in aggregate to Mrs Renu K Taurani and Mrs Varsha R Taurani , both wives of Directors of the assessee company was not explained by the assessee nor looked into by authorities below as discussed above. The fate of clearance of 10 cheques of Rs. 10 lacs each given by M/s Karishma International to the assessee to ensure refund of aforesaid additional advance of Rs. 100 lacs was also not explained by the assessee nor looked into by authorities below. j) As noted above, the consideration for acquisition of audio rights of feature film „Dil Churake Chal Diye‟ was reduced to Rs. 55 lacs from Rs. 280 lacs, owing to several factors including slump in film market. By this time when agreement for arrangement was entered into on 02.03.2004 by the assessee and M/s Karishma International, the assessee had already advanced Rs. 130 lacs towards acquiring audio rights of feature film „Dil Churake Chal Diye‟ leaving a refundable excess amount of Rs. 75 lacs. Out of Rs. 100 lacs as fresh additional refundable advance which assessee agreed to release to Karishma International, Rs. 90 lacs were paid to Mrs Renu K Taurani and Mrs Varsha R Taurani, wives of Directors to settle their inter-se disputes and differences with M/s Karishma International. Whether the said advances were released keeping in view commercial expediency or was a gratuitous payment has not been verified by the authorities below. The said advance was secured by refund cheques of Rs. 100 lacs issued by M/s Karishma International in favour of the assessee and whether these cheques stood cleared from bank also has not been verified by the authorities below. The balance of Rs. 10 lacs advance out of fresh advance of Rs. 100 lacs granted by assessee to M/s Karsihma International was adjusted against Rs. 75 lacs now recoverable owing to excess advance keeping in view reduced consideration of Rs. 55 lacs for acquisition of audio rights of the I.T.A. No.6194 to 6196/Mum/2017 feature film „Dil Churake Chal Diye‟ , vide agreement of arrangement dated 02.03.2004 , instead of original agreed consideration of Rs. 280 lacs vide original agreement dated 09.06.1999. This left the balance recoverable of Rs. 65 lacs by assessee from M/s Karishma International. The assessee vide entry in its books of accounts passed on 25.09.2004 has debited Rs. 155 lacs towards audio rights expenses for the film „Dil Churake Chal Diye‟ (later renamed as „Shaadi Kar Ke Phas Gaye Yaar‟ ) as is emanating from ledger account filed by the assessee. However , the reduced cost of acquisition of audio rights was Rs. 55 lacs while Rs. 100 lacs was refundable advance for which 10 refund cheques of Rs. 10 lacs all drawn on UTI Bank , Andheri, Mumabi was handed over by Karishma International to the assessee , but entry as is appearing in Ledger accounts of M/s Karishma International in the books of accounts of the assessee is of Rs. 155 lacs towards cost of acquisition of audio rights of „Dil Churake Chal Diye‟ ( later renamed as Shadi Kar Ke Phas Gaya Yaar‟ ) as per ledger account . This aspect was not looked into by the authorities below nor the justification of further releasing an additional advance of Rs. 100 lacs by the assessee to said Karishma International whose proceeds were used to pay Rs. 90 lacs in aggregate to wives of the Directors of the assessee , in settlement of inter-se disputes and differences of wives of Directors of the assessee company with said M/s Karishma International. The assessee has debited M/s Karishma International for Rs. 90 lacs on 01.01.2005 towards payments made to Mrs Varsha R. Taurani and Mrs. Renu K. Taurani as per agreement of arrangement dated 02.03.2004 on settlement of inter-se disputes and differences of Mrs. Varsha R.Taurani and Mrs. Renu K Taurani, both wives of the Directors of the assessee,. It is critical to look into original agreement dated 09.06.1999 entered into by the assessee with M/s Karishma International to understand the role and responsibilities of wives of Directors of the assessee vis-a- vis the aforesaid feature film „ Dil Churake Chal Diye‟ or any other arrangements which was existing between them and said Karishma International and nature of their dispute and differences I.T.A. No.6194 to 6196/Mum/2017 with Karishma International so as to understand whether commercial expediency or prudence was in play while advancing additional advance of Rs. 100 lacs by the assessee to said M/s Karishma International , out of which Rs 90 lacs was paid by the assessee to the wives of Directors of the assessee company on behalf of said M/s Karishma International in settlement of their inter-se dispute and difference or was this additional advance of Rs. 100 lacs was gratuitous payment by the assessee to said M/s Karishma International to protect the interest of wives of the Director of the assessee company. It is also important to understand the fate/clearance of cheques of Rs. 100 lacs ( 10 cheque of Rs. 10 lacs each) given by said Karishma International to the assessee as refund of this additional advance of Rs. 100 lacs. k) The agreement of arrangement dated 02.03.2004 also provides that M/s Karishma International acknowledged that it is liable to pay to assessee Rs. 65 lacs as well fresh additional advance received Rs. 100 lacs received by it from assessee , wherein M/s Karishma International agreed that it will pay Rs. 65,00,000/- to the assessee before effecting delivery of any prints of the said picture for any of the territories of the world including the Overseas territories . M/s Karishma International agreed that it will not release, distribute, exhibit or exploit the said picture „Dil Chuarke Chal Diye‟ in any of the territories of the world directly or indirectly until this amount of Rs 65 lacs is first paid to the assessee. M/s Karishma International also agreed to secure this payment of Rs. 65 lacs by obtaining in favour of the assesseee , simultaneously a letter of confirmation from the laboratories where the negatives of the said picture „Dil Churake Chal Diye‟ are lying , to the effect that the said laboratory shall not effect delivery of any prints of the said picture for any territory of the world until the said sum of Rs. 65 lacs is first paid in full to the assessee. Apart from above, said M/s Karishma International also agreed to repay Rs. 100 lacs by ten monthly instalments of Rs. 10 lacs each starting from the expiry of one year from the date of the first release of the said picture in any territories of the world. As I.T.A. No.6194 to 6196/Mum/2017 collateral security for securing payment of Rs. 100 lacs, M/s Karishma International deposited 10 undated cheques with the assessee of Rs. 10 lacs each. l) The assessee on its part agreed to release the music of the said film within 30 days of the delivery of the master tapes/original recording track(Dats.) of the said feature film. m) This agreement of arrangement dated 02.03.2004 , also records that M/s Karishma International has also entered into settlement with M/s Dashmesh International to resolve their disputes and differences. n) Thus, it is clear from this agreement of arrangement dated 02.03.2004 that the assessee did get the audio rights from M/s Karishma International with respect to the movie „Dil Churake Chal Diye‟ for a reduced consideration of Rs. 55 lacs as against originally agreed consideration of Rs. 280 lacs. Since, the assessee had already advanced Rs. 130 lacs by the time their disputes and differences got resolved vide agreement of arrangement dated 02.03.2004, the excess amount became refundable to the assessee owing to reduced compensation which after adjustment of additional advance of Rs. 10 lacs , was Rs. 65 lacs, which was further secured by M/s Karishma International by creating a lien over overseas rights of the feature film „Dil Churake Chal Diye‟ in Hindi in favour of the assessee. Since negative of the said film were lying with laboratory M/s Ramnord Research Laboratories Private Limited , instructions were accordingly issued by Karishma International to the said laboratory not to release negatives of the said film to anybody for overseas territory unless firstly the assessee was paid Rs. 65 lacs. This letter dated 22.03.2004 written by Karishma International to M/s Ramnord Research Laboratories Private Limited is placed in paper book at page 75. The said laboratory vide letter dated 08.04.2004 written to the assessee acknowledged that it will not deliver negatives of the said feature film „Dil Churake Chal Diye‟ for overseas territory unless the assessee is paid Rs. 65 lacs.The said letter is placed in paper book at page 76.

I.T.A. No.6194 to 6196/Mum/2017 o) On page 77 of the paper book is a letter written by Redsun Exports Private Limited to M/s Karishma International with copy to the assessee acknowledging that Rs. 65 lacs shall be paid on behalf and on account of M/s Karishma International to the assessee , which is in accordance with the understanding vide inter-se agreement Karishma International had with Redsun Exports Private Limited, dated 20.08.1999 for overseas circuit. p) Then there was further change in understanding between M/s Karishma International with assessee, vide fresh agreement of arrangement dated 18.03.2005, which is placed at page 78 of paper book. In this revised agreement of arrangement dated 18.03.2005, it is recorded that release of film „Dil Churake Chal Diye‟ now titled „Shaadi Karke Phas Gaya Yaar‟ got delayed from proposed date of release in June 2004 to now revised date of release in May 2005. It is agreed by the assessee with M/s Karishma International that it will accept Rs. 45 lacs as against Rs. 65 lacs as originally agreed vide agreement of arrangement dated 22.03.2004. The said Karishma International agreed that movie will be released in May 2005 or otherwise this letter will become null and void. The said M/s Karishma International released two post dated cheques of Rs. 10 lacs each aggregating to Rs. 20 lacs drawn on Development Credit Bank, Lokhandwala Branch, Mumbai in favour of the assessee payable within ten months from the date of release of aforesaid film, towards remaining amount of Rs. 20 lacs payable to the assessee .The said Karishma International also created lien on full rights for the entire world over their forthcoming production titled „Jat Yamla Pagla Deewana‟ starring Bobby Deol , Akshay Khanna and others, directed by Mr. Bubby Kent. The fate/clearance of these post dated cheques of Rs. 20 lacs drawn on DCB in favour of the assessee as well about release of this proposed movie „Jat Yamla Pagla Deewana‟ over which the assessee held rights is neither explained by the assessee nor looked into by the authorities below. q) On 19.03.2005, Karishma International intimated to laboratory M/s Ramnord Research Laboratories Private Limited about their fresh arrangement with the assessee, wherein now the assessee I.T.A. No.6194 to 6196/Mum/2017 has agreed to accept Rs. 45 lacs instead of Rs. 65 lacs vide previous arrangement before release/delivery of the aforesaid picture/prints for overseas territory. The said letter is placed in paper book at page 80. r) Then at page 81 of the paper book is the letter dated 31.07.2006 written by the assessee to laboratory namely M/s Ramnord Research Laboratories Limited acknowledging about the receipt of cheque number 121851 dated 29.07.2006 drawn on Vijaya Bank, Hill Road Branch, Bandra(W) , Mumbai for Rs. 45 lacs from M/s Redsun Exports Private Limited for and on behalf of Karishma International and permission was granted by the assessee to said laboratory to deliver the prints of „Shaadi Karke Phas Gaya Yaar‟ for overseas territory thereby lifting lien which was earlier recorded in favour of the assessee by the said laboratory. The photocopy of aforesaid cheque of Rs. 45 lacs is also placed in paper book at page 82. 10.6 Thus, what transpires from the analysis of the above documents which are placed on record before us is that the facts were not properly explained by the assessee before the authorities below nor were these facts properly appreciated by the authorities below . Keeping in view our aforesaid detailed analysis of the material on record, it is now required to look into , as follows: a) The original agreement between assessee and M/s Karishma International dated 09.06.1999 is required to be placed on record by the assessee. b) The commercial expediency and prudence in further advancing Rs. 100 lacs by the assessee to said M/s Karishma International vide agreement of arrangement dated 02.03.2004 needs to be explained, more so when the amount already advanced was Rs. 130 lacs which was in excess of reduced consideration of Rs. 55 lacs for acquiring audio rights of feature film „Dil Churake Chal Diye‟ and the said additional advance of Rs. 100 lacs is disbursed by assessee for and on behalf of Karishma International to the tune of Rs. 90 lacs to wives of Directors of the assessee company which was in resolving inter-se disputes and differences of wives of the Directors of the assessee with M/s Karishma International.

I.T.A. No.6194 to 6196/Mum/2017 The commercial expediency and prudence in releasing additional advance to M/s Karishma International needs to be looked into more-so out of this Rs. 90 lacs were disbursed by assessee on behalf of M/s Karishma International to wives of the Director of the assessee to settle and resolve their inter-se disputes and differences. c) Fate/clearances of cheques of Rs. 100 lacs issued by Karishma International in favour of the assessee to secure additional advance of Rs. 100 lacs vide agreement of arrangement dated 02.03.2004 needs to be explained and looked into. d) Reason for booking cost of audio rights in September 2004 of Rs. 155 lacs in books of accounts of the assessee as against reduced consideration of Rs. 55 lacs vide agreement of arrangement dated 02.03.2004 needs to be explained and looked into. e) Fate/clearance of cheques of Rs. 20 lacs issued by Karishma International in favour of the assessee vide fresh agreement of arrangement dated 18.03.2005 to secure this remaining unpaid amount of Rs. 20 lacs needs to be explained and looked into. f) Fate of release of proposed movie to be produced by Karishma International namely „Jat Yamla Pagla Deewana‟ needs to be explained and looked into and how the rights assigned by Karishma International in favour of the assessee with respect to above feature film was dealt with by the assessee also needs to be explained and looked into. 10.7 We have culled out the facts as detailed above from the records before us and our observations are also culled out above as to these facts on record. We have observed that the assessee need to put all the facts of the case in proper perspective before the authorities below surrounding this write off of Rs. 20 lacs and authorities below are also directed to appreciate the facts in proper perspective after considering all the details to arrive at conclusion that this can be allowed as business loss or not. Thus, keeping in view our detailed discussions as above, we are of the considered view that matter need to be restored to the file of the AO for f denovo assessment . The assessee is directed to give complete explanations as to this write off of Rs. 20 lacs keeping in view entire factual matrix of the case and as culled out by I.T.A. No.6194 to 6196/Mum/2017 us in this order in preceding para‟s. The AO is directed to give proper and adequate opportunity of being heard to the assessee in accordance with principles of natural justice in accordance with law in set aside proceedings . The AO is directed to admit all evidences/explanations submitted by the assessee in set aside proceedings before the AO its defence which shall be then adjudicated by the AO on merits in accordance with law. We have also noted that the tribunal vide orders dated 06.08.2018 in assessee‟s own case in ITA no. 1894/Mum/2017 for AY 2010-11 has held that expenditure incurred for purchase of audio video rights is revenue in nature. This ground of appeal being ground no. 1 filed by the assessee in memo of appeal with tribunal is allowed for statistical purposes. We order accordingly.

11. Coming to the second issue, we have observed that the assessee has taken on leave & licence basis commercial premises bearing numbers 501- 601, Durga Chambers, 278/E, Linking Road, Khar West, Mumbai 400052 from Mrs. Renu K Taurani and Mrs Varsha R. Taurani, wives of the Director of the assessee company for a period of three years w.e.f. 01.04.2010 to 31.03.2013 vide leave and license agreement dated 01st April 2010. The said agreement dated 01.04.2010 was entered into by the assesse as the earlier agreement dated 01.01.2007 had expired and licensors have vide letter dated 29.01.2008 asked for increase in compensation and interest refundable rent deposit. In terms of leave and license agreement, the monthly compensation being license fee is fixed at Rs. 4,50,000/- for each premises excluding service tax component. The assessee had also given interest free refundable rent deposit of Rs. 9.0 crores to licensors who happened to be wives of the Directors of the assessee company. It is pertinent to mention that this amount of Rs. 9.0 crores was all paid in earlier years. The ledger account of Rent deposit is placed in paper book at page 1-4. Perusal of the Rent Deposit account will reveal that Rs. 2.0 crores were paid in financial year 2003-04 , while Rs. 7.0 crores were paid in financial year 2006-07 and 2007-08. We have also observed that there is no dispute as to taking these premises on leave and license basis by the assessee for commercial use for the purposes of the business of the assessee as this aspect is not subject matter of the dispute by the Revenue. The Revenue is firstly aggrieved that such a huge amount of Rs. 9.00 crores is paid as interest free refundable rent deposit to wives of the Directors of the assessee company which defies commercial I.T.A. No.6194 to 6196/Mum/2017 expediency and secondly revenue is also aggrieved that on one hand the assessee has availed term loans and other loans on which interest is paid by the assessee and on the other hand , interest free refundable rent deposit of Rs. 9.0 crores is deposited with wives of the Directors of the assessee company, which led the AO to make additions to the income of the assessee by way of disallowance of interest expenses to the tune of Rs. 1,08,00,000/- being 12% of interest free refundable rent deposit of Rs. 9.0 crores. On the first grievance of the Revenue, we have observed it was incumbent on the Revenue to have brought on record incriminating material to justify that interest free refundable rent deposit of Rs. 9.0 crores for taking on leave and license basis commercial premises bearing numbers 501-601, Durga Chambers, 278/E, Linking Road, Khar West, Mumbai 400052 defies commercial expediency and the same is unconscionably high keeping in view interest free refundable rent deposit granted by licensee of the similar commercial premises in vicinity in favour of licensors of the premises. No such comparables are brought on record by the authorities below to prove that these interest free refundable rent deposits were unconscionably high defying commercial expediency and only bald statement is made that the said rent deposits are excessive and in the absence of cogent incriminating material, the interest free refundable rent free deposit of Rs. 9.0 crores cannot be held to be excessive or exorbitant. The assessee has placed all leave and license agreements on record in paper book filed with tribunal at page 23-42. 11.2. We have gone through audited financial statements of the assessee for financial year 2003-04 and also from financial year 2007-08 to financial year 2012-13 , which are all placed in paper book filed with the tribunal at page 6-18. The perusal of these financial statements clearly shows that the assessee has its own interest free funds available with it which are more than the interest free refundable rent deposit released by the assessee in favour of licensors of the aforesaid commercial premises .The net worth statement of the assessee company for the financial year 2003-04 to 2013- 14 are also placed in paper book at page 5. The details of the interest free refundable rent deposit granted by the assessee was Rs. 2 crores in financial year 2003-04 while Rs. 7 crores stood disbursed in financial year 2006-07 and 2007-08 ( Rs. 1 crore in financial year 2006-07 while Rs. 6 crores stood I.T.A. No.6194 to 6196/Mum/2017 disbursed in financial year 2007-08 ) –Refer paper book/page 1-4. The perusal of audited financial statements placed on record clearly reveals that own funds consisting of share capital and reserves and surplus were higher than interest free refundable rent deposit disbursed by the assessee in all these years. Revenue has also not brought on record any direct nexus of interest bearing borrowed funds being utilised for granting interest free refundable rent deposit. The interest free funds available with the assessee comprising of share capital and reserves and surplus for all these years are reproduced hereunder: Financial Year Share Capital Reserves and Surplus Total ( Rs In Crores) 2003-04 12.65 99.32 111.97 2006-07 15.94 28.64 44.58 2007-08 17.30 52.73 70.04 2008-09 17.30 61.96 79.27 2009-10 17.30 67.92 85.22 2010-11 15.96 63.51 79.47 2011-12 15.96 68.62 84.58 2012-13 15.36 72.49 87.85 Thus, perusal of audited financial statements for all these years clearly reveals as detailed above that the availability of interest free funds with the assessee were much higher than interest free refundable rent deposit of Rs. 9 crores advanced by the assessee and in the absence of any cogent material inextricably linking interest bearing borrowings with the interest free refundable rent deposit granted by the assessee , the presumption will apply that the assessee has released the interest free refundable rent deposit out of interest free funds available with it. The decision of Hon‟ble Bombay High Court in the case of Reliance Utilities and Power Limited(supra) is relevant. We hold this ground number 2 raised by assessee in its appeal for AY 2011- I.T.A. No.6194 to 6196/Mum/2017 12 in favour of the assessee and order deletion of additions as were made by the AO which stood later affirmed by learned CIT(A). We order accordingly.

raised by the revenue in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) read as under:- “1. "Whether on the facts, in the circumstances of the case and as per law, the Ld. CIT(A) has erred in directing to delete the addition of audio right expenses amounting to Rs.3,10,99,925/- holing the same as revenue expenses without appreciating that the Expenses Incurred are of enduring nature and categorically falls under the head of "capital expenses" 2. "Whether on the facts, in the circumstances of the case and as per law, the Ld. CIT(A) has erred in directing to delete the directing the addition of audio right expenses amounting to Rs.3,10,99,925/- without appreciating that the audio rights acquired by the assessee gives it a perpetual right to exploit the same and as such the expenses incurred are of capital in nature".

3. The appellant prays that the order of CIT(A) on the above grounds be set aside and that of the Assessing Officer restored".

4. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary."

I.T.A. No.6194 to 6196/Mum/2017 14.3 We have observed that the short question which has been arisen in this appeal is with respect to disallowance of expenditure incurred towards audio rights to the tune of Rs.3,10,99,925/- which was claimed by the assessee as revenue expenses while the AO treated the same as capital expenditure and consequently the AO allowed depreciation on the same. The assessee had submitted before the AO as under:- "Explanation as to why Audio Right expenditure Rs.3,10,99,925/-should not be considered as capital expenditure. Assessee is doing business of manufacturing and sale of Audio cassettes and CD's. They Manufacture blank as well pre- recorded cassettes of motion pictures and musical software's (non-Filmy songs/or basic programs) under the trade name and logo of TIPS. To manufacture and market pre-recorded cassettes of films assessee company has to purchase the "MASTER PLATE" i.e. original sound track of Films songs also commonly Known as Audio Rights, which of course is acquired in perpetuity from different film producers and also of its own productions for making several copies of Audio cassettes of various films. It is only after acquiring the audio rights of various films the Music and songs of the pictures whose audio rights are acquired are transmitted by reproducing such music and songs in audio cassettes which are also manufacture and/or purchased from the outside on job work basis. In other words assessee's is to produce and market the audio cassettes under its logo "TIPS' for which they have to purchase audio rights of various films from different producers and from its own productions of motion pictures which ultimately are reproduced and transmitted in audio cassettes either manufactured by the assessee firm or manufactured or purchased from outside on job work basis. In view of the above facts of case, it is clear that acquiring of audio rights is the basic ingredient for production of the Audio Cassettes without which pre-recorded cassettes of motion pictures cannot conceived as such the same is to be treated as part and parcel of raw material used for manufacturing the Cassettes. Since Audio rights is itself an item to be used for production and not an equipment to help the production, expenses incurred on this items directly vary with the turnover of the goods produced and sold as evident from the enclosed statement of purchases of audio rights and sales for past three years. As such, the said expenses is rightly claimed as manufacturing expenses and debited to trading account (to the extent of cassettes released during the year) and claimed as 39 | P a g e I.T.A. No.6194 to 6196/Mum/2017 expenses for amount paid to producers or during the year purchase of audio u/s. 37(1) of the IT. Act, 1961 and on the same basis cost of Audio rights is also included while valuing the closing stock of the finished cassettes included in the closing stock shown in the trading Account. Considering the above the facts you will appreciate that amount spent for purchase of Audio rights during the year is rightly claimed as Manufacturing expenses which through purchased and held in perpetuity is of the revenue nature hence the same be allowed u/s 37(1) of the act. Reasons as to why Audio rights of Rs.3,10,99,925/- should be considered as revenue and not capital expenses. Assessee’s business is that re-production of Audio sound and music from the original record of the songs provided by the film producers and its own production commonly know as audio rights (hereinafter referred to a master Plate). The Master plate contains the original sound track of the film relating to the songs and with the help of this master plate the firm makes several copies of audio cassettes, which are ultimately sold in market. The master plate is similar to design formula or a mould used in the manufacturing. The company produces several of these cassettes for different master plate. Further for each film that is being made the producers require music cassettes and sound tracks, which the company manufactures with the help of this master plate and provides the cassettes prior to the release of the film No doubt this master plate is retained by the company, but its use and reuse would entirely depend upon the marketability of the cassettes manufactures by it, further as soon as the series of the cassettes relating to a film are manufactured and marketed the master plates becomes useless, through in rare case they do get reused for manufacturing cassettes of additional copies. The life of the master plate is very short, through the assessee retains the copy rights of the same in perpetuity. We further submit that the master plate is a formula or raw material from which copies are made since the master plate is only a raw material the cost of the purchase of the raw material is an allowable deduction in evaluating the gross profit derived in the manufacture and sale of the copies, Further more, the frequency with which films are made which results in new types of music it has considerably reduced the life of the sound track for it is outdated very fast. The master plate of one could not substituted for another and for every new music recording a totally different plate is required, indicated very clearly that the plate is nothing more than a raw material. It is contended that merely for the reason that the payment of the master plate is paid in a lump sum format, it does not make any difference because, without the contents of the plate, the plate are worthless and it is for the contents that the price is paid and it can never be equated with purchase of any technical 40 | P a g e I.T.A. No.6194 to 6196/Mum/2017 know how. It is further contended that nor than the payment, the important fact that has to be given consideration of is nature of the item that is acquired. Since the plate, is a basic material to facilitate the copying of, the payment made for it, is nothing more than the revenue. We once again reiterate that unlike the tangible and visible products that have raw material that is either visible, tangible the present product is reproduction of sound music etc. embedded into magnetic tapes or gramophone records. The payment of audio rights is relatable to the magnetic tapes or the gramophone records or compact discs fitted with the same sound, music dialogues etc. the production of filled tapes etc is nothing more than duplication of the original. The original master plate is primarily a raw material and incidentally happen to be the substratum of the business of the assessee. The only point of difference is that the substratum part is entirely incidental to the main activity of reproduction of the original plate which reproduction of the original is impossible without the original since the making of the master plate has cost the producer certain sum of money he gets re-imbursement from the assessee in the shape of fixed sum. The selling price of tapes of the audio cassettes consists of the sale value of the basic empty tapes or and the other elements towards the overhead cost for filling them up with sound music, dialogue etc. to further, substantiate our arguments the assessee company while valuing closing stock of the finished goods shown in the trading account also include cost of audio rights under the heading other cost of production. All the above facts taken into consideration itself that the assessee treats its audio rights as its stock in trade as such the same is considered as a revenue expenses. We further submit that the master plate contains only that material that has been filled into and the plate could be used to make exact copies of that plate only. From this point of view it clearly indicates that for every producers from whom the copies are made from the plate the plate is different. In other words, the final product produced by the assessee is very different from one to another. For every series of items of music, sound etc that is being made the basic material is different and is ever uniform, as such it would be wrong to that the expenditure is in nature of capital. Audio rights expenses as explained above have been treated as capital expenses and has been disallowed we submit that appeal in the very case of appellant for the year 1990-91 to 2008-09 before the ITAT, bench-E-Mumbai has been decided in the favour of the assessee. The various facts including the CIT(A) VIII orders for assessment year 1995-96 as well as various decisions cited on this disputed matter has been discussed and reviewed an honourable bench has come to the conclusion. That expenditure on Audio rights is of revenue nature and is allowed u/s. 37(1) of the I. T.Act.

I.T.A. No.6194 to 6196/Mum/2017 In view of the facts and considering the nature of expenses of the assessee all the expenses incurred by purchase of audio rights are of the revenue natured and the same is allowable in business expenses as claimed by the assessee. We respectfully submit in view of the above Facts of the case of the case, we pray that you be kind enough to follow the decision of ITAT an allow the audio rights as claimed as business expenses u/s 3 7(1) of the I. T.Act."

14.4 The AO rejected the contentions of the assessee by holding that the Revenue has not accepted the decision of the ITAT, Mumbai which is challenged by Revenue before Hon‟ble Bombay High Court, wherein the AO vide assessment order dated 26.12.2014 passed u/s 143(3) of the 1961 Act, decided the issue against the assessee by holding as under:- “5.3 The issue as to whether audio expenses of Rs.3,10,99,925/- debited to the P&L account are capital or revenue in nature has been deliberated in detail in the earlier assessment years right from A.Y.1990-91. In this regard, the stand of the Revenue is that these expenses are of enduring nature and therefore, should be treated as capital expenses. Although the issue has been decided in favor of the assessee by the CIT(A) and the ITAT, the Revenue has not accepted the said decision and filed appeal before the Hon’ble Bombay High Court. Hence, following the stand of the Revenue in the earlier years, the assessee's claim of expenditure on acquiring audio rights as revenue expenditure is not accepted. Accordingly, expenditure on acquiring audio rights claimed as revenue expenditure amounting to Rs.3,10,99,925/- is hereby disallowed and the same is treated as capital expenditure. However, depreciation @ 25% of the said expenditure is allowed u/s.32. The same works out to Rs.77,74,981/-. Accordingly, net disallowance of Rs.2,33,24,944/- is made and added to the total income of the assessee for the year under consideration. “.

I.T.A. No.6194 to 6196/Mum/2017 "3.2. I have considered the issue under appeal, carefully. I find that similar addition was also made in earlier years which has been decided by the Hon'ble ITAT in the favour of the Assessee. Respectfully following the decision of Hon'ble ITAT in ITA No.7222/Mum/2012 dated 14.12.2014, the addition so made of Rs.3,50,000/-(Net amount of Rs.2,62,500/-) is deleted."

17.2 We have observed that the tribunal in assessee‟s own case in earlier years has held that these expenses incurred for purchase of audio rights are revenue expenses. We have also observed that the tribunal has consistently held that the expenses incurred for acquisition of audio rights to be revenue in nature and was allowed as business expenses by holding the issue in favour of the assessee. The details of tribunal orders for earlier years are placed in para 16 above.

17.3 We have also observed that the tribunal in recent decision in for AY 2010-11 in assessee‟s own case vide appellate orders dated 06.08.2018 has observed that expenditure incurred for purchase of audio video rights by the assessee is revenue in nature, by holding as under;- “ 4. We have heard both the parties and perused the materials available on record. The issue of expenditure incurred for purchase of audio and video rights of feature films for production of cassettes and CDs has been considered by the Tribunal in assessee’s own case for earlier years and after considering relevant facts held that expenditure incurred for purchase of master plates is revenue in nature. The relevant portion of the order is extracted below:-

“4. After considering the relevant findings of the Assessing Officer and the learned Commissioner (Appeals) and also the earlier year's order of the Tribunal, we find that this issue has been decided in favour of the assessee right upto the assessment year 2008-09. In the latest decision of the Tribunal in ITA no.6925/Mum./2011 for the assessment year 2008-09, order dated 29th January 2013, the Tribunal, after relying upon the earlier year orders has observed and held as under:-

"4, We have the benefit of the decision of the Tribunal in TTA No. 599/Mum/09 wherein the Tribunal at para-5, page-2 has held as under:- "As regards ground No. 1, the Tribunal has dealt with this issue at para 3.1 of its order in I.T.A.No.2407/M/08 which is reproduced hereunder for easy reference 3.1 Ground No1 is on the issue of allowability of Expenditure incurred on purchase of audio rights treated by the assessing officer as capital expenditure. The assessee is engaged in the business of manufacture and sale of audio rights and CDs and 44 | P a g e to 6196/Mum/2017 I.T.A. No. 6291/Mum/2017 for this purpose it purchases audio rights of film songs from producers. Expenditure incurred on purchase of audio rights, music for which is released [accepted as audio rights] is treated by the assessee as revenue expenditure. The income- tax department has been since assessment year 1990-91, disallowing the claim of the assessee on the ground that the expenditure is capital in nature. The Tribunal for all the earlier assessment years has been deciding the issue in favour of the assessee. The assessing officer made the addition observing at paragraph 3.3 on page 7 that the revenue has not accepted the decision of the Tribunal and has filed an appeal before Hon'ble Bombay High Court and that the addition is made by following the stand of the revenue in the earlier years to keep the issue alive. The first appellate authority applied the decision of the tribunal and deleted the addition. We see no infirmity in the same. In fact, ground IB of the revenue appeals states that the ground is taken because the department has not accepted the decision of the Tribunal. In view of the above discussion, we respectfully apply the decision of the coordinate bench of the Tribunal in the assessee's own case for earlier years and dismiss the ground taken by the revenue. In view of the same, ground of appeal

No. 1 is rejected,"

5. As no distinguishing facts have been brought on record by the Ld. Departmental Representative, we have no hesitation in following the decision of the Tribunal (supra). Accordingly, the revenue's appeal is dismissed."

5. Thus, respectfully following the judicial precedence of the earlier years, we do not find any merits on the ground raised by the Revenue and the same is dismissed.”

5. In this view of the matter and consistent with the view taken by the co- ordinate bench, we are of the considered view that expenditure incurred for purchase of audio video rights is revenue in nature. The CIT(A), after considering relevant facts, has rightly deleted addition made by the AO. We do not find any error in the order of the Ld.CIT(A) and hence, we are inclined to uphold the findings of Ld.CIT(A) and dismiss the appeal filed by the revenue.”