KAL CABLES PVT LTD.,CHENNAI vs. ACIT, CHENNAI

the Order of the Commissioner of Income Tax (Appeals)-8, Chennai, in dated 06.03.2017 for the AY 2009-10.

Mr.Palanichamy, JCIT, represented on behalf of the Revenue and Mr.K.Ramakrishnan, FCA & Mr.Devanathan, Adv., represented on behalf of the assessee. :- 2 -:

It was submitted by the Ld.AR that the assessee is a multi system operator re-distributing the signals from television broadcaster to individual homes through cables and Set Top Boxes (in short “STBs”) with the help of other cable operators. It was a submission that in the course of the assessment, the assessing authority had disallowed an amount of Rs.5,07,81,570/- representing the expenditure incurred by the assessee in respect of the STBs purchased and written off in the P&L A/c. It was a submission that the assessee had to buy and supply the STBs which had a cost of Rs.1,388/- each. It was a submission that the STBs were provided to each individual households on the basis of the cable connection taken by them. It was a submission that due to high competition in Chennai, the assessee had to provide the STBs free of cost to the households. It was a submission that STBs once given were never return to the assessee and even when they are returned, they are unusable as no new connection would take an old STBs. It was a submission that to maintain uniformity in the STBs, the same was provided by the assessee free of cost to the households. The assessee has not received/collected any money for the STBs nor was the assessee collecting any deposit for the same. It was a submission that consequently such STBs purchased was consumable in the assessee’s business, the assessee had claimed the same as Revenue expenditure. It was a submission that the AO had rejected the assessee’s claim of such expenditure and had held that the STBs was an asset of enduring advantage to the business of the assessee and consequently, treated the said expenditure as capital expenditure. It :- 3 -: was a submission that on appeal, the Ld.CIT(A) had also upheld the view of the AO. The Ld.AR further stated that the STBs are basically devices that connects external signal source and decodes the signal into contents that may be viewed on a TV. The STBs are continuously evolving and sometimes require to be replaced. It was a submission that the regular STBs which were earlier being used after the introduction of the digital signal had to be changed to digital STBs. It was a submission that the STBs being an electronic item, the life of the STBs, many a time, vary and the same are also to be replaced if the customer reports the same to be damaged. It was a submission that the said STBs did not give any enduring benefit to the assessee but was only an apparatus which was provided to the customer for the purpose of converting the digital signal received through the cable to viewable format on the TV. The STBs was signal specific and STBs provided by one service provider cannot be used with the services provided by another service provider. It was a submission that the expenditure incurred by the assessee on the purchase and providing of the STBs to the customers was a Revenue expenditure.

In reply, the Ld.DR submitted that without the STBs, the business of the assessee could not function. Thus, the STBs was in the nature of capital asset. It was a submission that the order of the Ld.CIT(A) and the AO was liable to be confirmed.

We have considered the rival submissions. At the outset, it must be appreciated that there are some cases whether the expenditure does look like a capital expenditure but the expenditure is in effect in Revenue in nature. This has been expressly considered by the Hon’ble Supreme Court in the case of Empire Jute Mills Co. Ltd., referred to supra. The Revenue expenditure are normally expenditure incurred in the normal course of business, expenditures incurred to maintain business, cost of goods purchased for resale, etc. Capital expenditure are normally expenditure incurred for increasing quality of the fixed assets or for increasing useful life of the fixed asset or the capacity, efficiency or operating economy of a :- 5 -: particular fixed asset. Expenditure cannot be said to be a capital expenditure, just because, the expenditure is a large amount or the amount is paid in lump sum. In the present case, it should be appreciated that though the total expenditure claimed is Rs.5,07,81,570/- the actual cost of each STBs is only about Rs.1,388/-. Early cable TV was received through a plain cable system. Subsequently on account of pilferage in the cable system, the signal started to be encoded which required STBs being the specialized equipment for decoding such signals. Then to improve clarity digitalization took place and the digital STBs came into existence.

In the result, the appeal filed by the assessee stands allowed.