DCIT, BANGALORE vs. SRI. RAMPRASAD PADMANABHAN, BANGALORE

O R D E R Per Shri Jason P. Boaz : This appeal by Revenue is directed against the order of the Commissioner of Income Tax (Appeals)-I, Bangalore dt.30.1.2014 for Assessment Year 2006-07. No one was present for the assessee and we have therefore taken the help of the learned Departmental Representative for Revenue in disposing off this appeal. 2. The facts of the case, briefly, are as under :-

1. The order of the learned CIT (Appeals) is opposed to law and facts of the case.

2. On the facts and in the circumstances of the case the learned CIT (Appeals) erred in law in not appreciating the fact that acquisitionof audio rights is a permanent acquisition which is irrevocable and all the concomitant rights follow viz., re-recording, re-creating, authority to transfer such copy rights which bring enduring benefit to the assessee. In the case of Arvind Mills Ltd. Vs. CIT (SC) 197 ITR 422, it is held that capital expenditure with business activities which resulted in efficiently carrying on day to day business.

3. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT (Appeals) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored.

4. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above.”

4. The Grounds raised at S.Nos.1, 3 & 4 by Revenue are general in nature and therefore no adjudication is called for thereon.

5. Ground No.2 : Expenditure on purchase of Audio Rights – Rs.51,59,100. 5.1 In this ground, revenue assails the order of the learned CIT(A) as being erroneous in not appreciating the fact that purchase of audio rights is a permanent acquisition which is irrevocable and all concommitment rights like, re- 4 recording, re-creating, authority to transfer such copyrights, follow and bring enduring benefit to the assessee. In support of this claim, the learned Departmental Representative placed reliance on the decision of the Hon'ble Apex Court in the case of Arvind Mills Ltd. V CIT 97 ITR 422 (SC). The learned Departmental Representative was heard in support of the grounds raised and has placed reliance on the finding of the Assessing Officer in the order of assessment and prayed for the same to be upheld. 5.2.1 We have heard the learned Departmental Representative and perused and carefully considered the material on record; including the judicial pronouncements cited and relied upon by both Revenue and the learned CIT(A) in the impugned order. From an appreciation of the material on record, it is seen that in the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed expenditure of Rs.51,59,100 for purchase of audio rights in his profit and loss account. The Assessing Officer on examination thereof was of the view that the said expenditure results in the permanent requisition of Audio Rights; hence it is in the nature of capital expenditure and therefore sought the explanation of the assessee, as to why the assessee’s claim should not be disallowed. In response thereto, the assessee submitted that the audio rights purchased by him is only an item in the nature of new material to be used for 5 production and not an equipment to produce; as his business is to produce and market the audio rights from producers to Motion Pictures. The assessee also submitted that the marketability of the music produced out of the audio rights in short lived, as music loses currency with the passage of time and new music items replace the old ones. According to the assessee, in view of the above, the expenditure incurred on acquisition of audio rights does not in any enduring benefit to the assessee, and it is therefore allowable as revenue expenditure. 5.2.2 The Assessing Officer rejected the explanation put forth by the assessee on the following grounds :- (i) that the purchase of audio rights was irrevocable and remains with the assessee permanently; (ii) that the purchase of audio rights is not in the nature of raw material since the assessee was not required to return the copy rights to the producers of motion pictures; (iii) that the audio rights do not get exhausted in the production and marketing of music; since old songs continue to be in currency following mixing and re-mixing in the process of recreation of songs.

6 In this view of the matter, the Assessing Officer disallowed the assessee's claim and treated the amount of Rs.51,59,100 expended to purchase audio rights as capital expenditure. 5.2.3 On appeal, the learned CIT(A) considered this issue in detail at paras 3.3 to 3.6 of the impugned order. At para 3.7 of the impugned order the learned CIT(A) held that the assessee being a manufacturer of music, the raw material for this is the master plate which can be acquired only by way of assignment of copy rights and therefore since the amount paid for procuring the raw material to ensure its smooth and legal supply, the expenditure incurred for acquiring the audio rights is revenue in nature. In coming to this finding, the learned CIT(A) was of the view that the findings rendered in the following decisions of various Tribunals squarely covered the issue in favour of the assessee in the case on hand :- i) Super Cassettes Industries P. Ltd. V CIT (1992) 41 ITD 530 (Del) ii) M. Subramanian V DCIT (1992) 42 ITD 676 (Mad) iii) Gramaphone Co. Of India Ltd. V DCIT (1994) 48 ITD 145 (Cal) iv) Tips Cassettes & Record Co. V ACIT (2002) 82 ITD 641 (Mum) v) ITO V Five Star Audio (ITA No.1921/Mds/2012). 5.2.4 From an appreciation the details on record, the orders of the authorities below and the judicial decisions cited and placed reliance on (supra), it is clear 7 that the assessee's is in the business of reproduction of audio sound and music from the original track record of the songs provided by the film producers, commonly known as audio rights (i.e. the master plate). With the help of the master plate, which is similar to a formula or mould, the assessee manufacturers the required number of copies of the audio cassettes, which are ultimately sold in the market. In this manner, the assessee manufacturers cassettes for different films every year, for which a different master plate is required for each film. There is no dispute with respect to the fact that the master plate for each film is retained by the assessee is perpetuity. But its life is usually very short and as soon as the series of the cassettes of a film are manufactured and marketed, the master plates are rendered useless as very quickly new music and songs of more recent movies replace the old items of music. The master plate of one movie cannot be used for another and for every movie a new and different master plate is required; indicating that the master plate is nothing more than raw material. From the factual matrix of the case on hand, we find that the master plate of a movie is only a new material from which copies are produced on cassettes for that movie only and being material to the evaluation of the gross profit derived from the manufacture and sale of copies / cassettes, would, in our considered view, be construed as Revenue expenditure.

8 5.2.5 On a careful perusal of the judicial pronouncements of the various Tribunals relied upon by the learned CIT(A) listed at 5.2.3 of this order, in the context of the factual matrix of the case as discussed from para 5.2.1 of this order, we concur with the finding of the learned CIT(A) that the assessee is a manufacture of music and the new material is the master plate which can be obtained only by way of assignment of copyrights. Since the assignment of copy rights and the amount paid is for procuring new material and to ensure its smooth and legal supply as understood in the commercial parlance, the expenditure is Revenue in nature. Except for raising this ground, before us revenue has not been able to controvert this finding of the learned CIT(A) in the impugned order. We, consequently, uphold the order of the learned CIT(A) on this issue and accordingly dismiss Ground No.2 raised by Revenue.