This is an appeal filed by the assessee against the order of the Commissioner (Appeals) dated 29th Nov., 2004 for the assessment year 2001-02, in the matter of order passed under Section 143(3) of the Income Tax Act, 1961, wherein following grounds of appeal have been raised: 1. That on the facts and circumstances of the case, the learned Commissioner (Appeals)-XV erred in accepting the decision of the assessing officer treating commercial and other intangible rights (which are in the nature of copyrights pertaining to serials as goodwill and hence not allowing depreciation under Section 32(l) of the Income Tax Act, 1961 under the head "Intangible assets being copyrights, business and commercial rights." 2. That on the facts and circumstances of the case, the learned Commissioner (Appeals)-XV erred in accepting the decision of the assessing officer treating professional expenses incurred in connection with augmenting working capital funds for th6 company as capital expenditure and not allowing as revenue expenses.
3. That on the facts and circumstances of the case, the learned Commissioner (Appeals)-XV erred in disallowing the deferred revenue expenditure ascertaining that the expenses resulted in an asset of an enduring nature through the production of serials.
4. That the appellant reserves the right to add, alter, and amend or to delete any or all the grounds of appeal on or before the date of hearing." 2. Rival contentions have been heard and record perused. Brief facts of the case are that the assessee company is engaged in the business of production and telecasting of TV serials. On 31-3-2000, the assessee company acquired all assets and liabilities of a sole proprietorship firm which went by the name of Guruji Films for a consideration of Rs. 3,23,21,610 which was paid by way of allotment of shares to the proprietor in the firm who is also one of the directors of the assessee company. In the course of assessment, the assessing officer found that the assessee company has shown Rs. 3 crores as the goodwill of the company on which it had claimed a depreciation of Rs. 75 lacs. The assessing officer noted that the total sale consideration of Rs. 3.23 crores was for the goodwill and the value of the other assets. The proprietorship did not have goodwill as an intangible asset in its block of assets. But in the assessee company's first balance sheet, goodwill was shown at Rs. 3 crores. The assessee company filed a valuation report by M/s Anand Parikh & Co., Chartered Accountants, Mumbai, before the assessing officer to explain the valuation of goodwill. The assessing officer held that it was clear from the provisions of Section 32(l) that goodwill is not included in the intangible assets on which depreciation is allowable. It does not fall in the category of assets mentioned in the provision as "any other business or commercial rights of similar nature". The words 'similar nature' are to be read in continuity of the assets mentioned in the provision. It cannot be said to be an asset similar in nature to those mentioned in the said part of the section. The assessing officer took the view that goodwill is not a depreciable asset as it is not included in the section specifically and also it does not fall in the clause 'business or commercial right of similar nature'. The assessing officer also examined the method of valuation adopted by the consultants hired by the assessee. The valuer based himself on the fact that the proprietorship firm owned a software library of approximately 400 hours. This software consists of 657 episodes of 3 different serials.
Estimated realisable value per episode in repeat telecast of the serial was worked out at between Rs. 50,000 and Rs. 60,000. The number of episodes multiplied by the estimated realisable value constituted the basis of calculation of goodwill of the company. The valuation of the goodwill by this method came to Rs. 3.90 crores. However, the assessing officer did not agree with this system of valuation of goodwill.
Instead, the assessing officer adopted a formula whereby goodwill was valued at two years' purchases by the business. Thus, the value of goodwill = Rs. 79,740 x 2 = Rs. 1,59,480. This computation was based on valuation of goodwill as given in the widely used book on Advanced Accounts by M.C. Shukla, T.S. Grewal and S.C. Gupta. The assessing officer held that there was no real goodwill to be depreciated. The assessing officer also observed that in the whole arrangement of purchase of Guruji Films (Proprietorship) by the assessee company, not a single penny exchanged hands and the company was trying to reduce its tax liability by claiming depreciation on so-called goodwill.
Therefore, the assessing officer disallowed depreciation on goodwill.
The assessing officer also found that the assessee had claimed an expense of Rs. 1,03,56,975 on account of deferred revenue expenditure.
The assessee had explained to the assessing officer that the assessee company was engaged in the business of production of TV serials and the expenditure incurred thereon has been deferred over 2 years and 50 per cent of the expenses incurred thereon had been charged to the P&L a/c.
The assessing officer held that there is no concept of deferred revenue expenditure in the IT law and disallowed the claim of the assessee. The assessing officer took the view that since the serials were the permanent assets of the assessee and could be exploited over a period of time, the expenditure was capital in nature. Accordingly, the assessing officer disallowed the expense and made an addition of Rs. 1,03,56,975.
3. With regard to claim of depreciation, the Commissioner (Appeals) observed that goodwill does not fit in the description of an asset that would depreciate with the passage of time or with usage. Indeed, goodwill would usually grow over the years. Goodwill can be described as the intangible name of the business, which gets it an advantage in business, especially for marketing of its products. This advantage would likely grow over the years, rather than depreciation.
4. Aggrieved by the above order of the Commissioner (Appeals), the assessee approached us for further adjudication. It was contended by the learned Authorised Representative, Shri Gopal Nathani, that the company had taken over a business entity named, Mls Guruji Films (proprietorship concern of Dr. Vishwanath Dixit, who is one of the directors of the assessee company) for a consideration of Rs. 3,23,21,610 as per agreement dated 31-3-2000. As per this agreement, the assessee company had taken over all the assets and liabilities of the proprietorship as on 21-3-2000. The second party paid the consideration in the form of allotment of 32,32,161 equity shares of Rs. 10 each fully paid-up to the proprietor of the firm. He further contended that the assessing officer has not taken cognizance of the contents of the agreement in his assessment order and has ignored the true character of the assets in copyrights, licenses, intangible rights, etc. The assessee company is entitled to depreciation on these intangible assets, but the assessing officer has gone by the description of the assets as mentioned in the chart of assets and not by the nature of the assets. The character of the assets was copyrights and commercial/business rights which,are entitled for depreciation. The assessing officer should not have gone by the nomenclature used by the assessee in the document but by the actual meaning of the word mentioned therein. With regard to the valuation of goodwill adopted by the assessing officer, the learned Authorised Representative contended that after taking over of the firm, it had all rights of telecasts of episodes in the library of the firm. There is a significant difference in value between "viewing rights" and "telecast rights". Viewing rights may be obtained at nominal cost by purchase of a CD from the market whereas telecast rights attracts much more value. The assets are shown at historical cost basis in the books of account of the firm and the market value of the assets may be different at the time of sale of those assets. The valuation of episodes has been taken by the valuer, Mls Anand Parikh & Co. in its report at Rs. 50,000 to Rs. 60,000 per unit and the total valuation of 657 episodes was assessed at Rs. 3,90,30,000. He brought to our notice the fact that Prasar Bharti (Doordarshan) had invited proposals from TV producers for acquisition of programme vide its advertisement dated 13-2-2002. In response to this advertisement, the assessee company submitted a price-bid for its serial "Aparajita" at Rs. 50,000 per episode vide letter dated 19-2-2003. As per learned Authorised Representative, this could be taken as a reference price for the cost of acquisition by the assessee company and therefore the valuation of goodwill done by the assessing officer was faulty.
5. With reference to 50 per cent deferred revenue expenditure charged to P&L a/c, the learned Authorised Representative contended that it is engaged in the business of production of TV serials which are under two categories, namely, commissioned and sponsored category. In the commissioned category, the producer makes the serial and sells it to the TV channel and the rights belong to the TV channel in future, and the TV channel has all rights to telecast/revenue-telecast on other channels or on the media network. In this category, the producer claims all the expenses incurred and also takes into account the total corresponding revenue and no amount is deferred in such cases. But in the sponsored category, the producer telecasts the serial on the channel in an allotted time slot and pays the telecast fee and the producer to get advertisement revenue from the sponsors who does the marketing. In this category, all the future rights vest with the film producer. The assessee has in the year under consideration, debited to P&L a/c. the telecast fee paid in full as it is paid for particular time slot of telecasting the serial. But, the production cost though revenue in nature, has a longer utility and as such only one-half of the expenses have been debited to P&L a/c. and the remaining one-half has been carried forward as deferred revenue expenditure. The assessee has incurred an expenditure of Rs. 2,07,13,950 in the production of 4 serials, namely Agina, Aaiye Huzoor, Aparajita and Ardhangini. The company has written off only 50 per cent of this expenditure i.e. Rs. 1,03,59,675 and balance was treated as deferred revenue expenditure and carried to the next year.
6. With regard to expenditure on raising the capital amounting to Rs. 20,70,523, the assessing officer disallowed the same by observing that during the year the assessee company has raised capital by way of equity placement from UTI Ltd. In this connection, the assessee company has incurred an expenditure of Rs. 20,70,523 which has been debited in P&L a/c. This amount was paid to different consultants for preparation of presentation material, etc. The assessing officer held that expenditures incurred in connection with share capital are capital in nature.
7. By the impugned order, the Commissioner (Appeals) confirmed the action of the assessing officer.
8. It was contended by the learned Authorised Representative that the assessee company has paid professional fees amounting to Rs. 2,07,525 to various professionals/companies for services rendered by them viz., conference with directors and making presentation before potential investors for raising resources of the company, tax and financial advisory services, preparation of valuation reports, placement of company equity shares, etc. in connection with augmenting resources for the company with placement of shares of the company with UTI. Copies of bills/agreements in respect of such professional services were stated to have already been submitted before the lower authorities. These expenses were argued as of revenue nature, hence allowable as business expenses under Section 37. Shri Nathani further stated that the private placement of company's shares was made not for the purpose of bringing to existence of any asset or advantage but for running the business and augmenting working capital with a view to produce profits as well as to sustain the growth of the company.
9. On the other hand, learned CIT departmental Representative, Shri Rajnish Kumar, submitted that assessee was not eligible for claiming depreciation in respect of the amount paid for goodwill insofar as goodwill is not includible in the intangible assets on which depreciation is allowable under Section 32(l) of the Act. He further submitted that valuation of all the assets and liabilities as taken over by the assessee company was done by M/s Anand Parikh & Co. just to carry out a valuation of the company for internal purpose, therefore, such value cannot be taken into account for the purpose of allowing claim of depreciation. As per learned departmental Representative, whatever copyrights, licenses, intangible rights, etc. acquired by the assessee company, whether registered or not, were not brought on record. He further contended that Expln. (3) to Section 43(l), has not been examined for judging the reasonableness of value of the assets, on which depreciation was claimed by the assessee.
10. We have considered the rival contentions, carefully gone through the orders of the authorities below and found from the record that M/s Guruji Films was an established professional firm and was successfully engaged in the mass media production of TV serials, technicians, documentary ad-films, etc. This firm was also associated with the Doordarshan since 1987 and was producig different types of programme for Doordarshan since then. As the firm was having stock of various TV serials running into 100s of episodes in its library as on 31-3-2000, and the assessee company has taken over the entire business of Guruji Films, which also included value of the stock of TV serials, various tangible assets, telecast rights as well as liabilities. For ascertaining the value of all these assets, the assessee engaged M/s Anand Parikh & Co., Chartered Accountants, for preparing its valuation report. M/s Anand Parikh & Co. assessed the value of tangible assets at Rs. 32.30 lacs, value of stock of TV serials for their telecast rights at Rs.3.90 crores which resulted into total valuation of Rs. 4.22 crores. Valuation of serials was done as per the offer given to the Doordarshan by the assessee company in respect of its various serials/episodes. After negotiation, the firm was taken over by the assessee company in toto for a lump sum consideration of Rs. 3.23 crores as per the agreement dated 31-3-2000. Both the copies of agreement as well as valuation report were duly submitted before the assessing officer. During the course of assessment, the assessing officer found that the assets so transferred by the assessee firm also included goodwill ' and copyrights, which are not eligible for claim of depreciation; insofar as under Section 32, depreciation was not allowable on goodwill. There is no dispute to the fact that goodwill as it is not eligible for claim of depreciation. However, other intangible assets comprising copyrights, telecast rights, etc. were entitled for depreciation as per amendment with effect from 1-4-1998 under sub- clause (ii) of Section 32(l) of the Act which reads as under: know-how, patents, copyrights, trademarks, licenses franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1-4-1998." As the assessee company bought the copyrights and became owner of stocks of the serials held by M/s Guruji Films and was entitled to all business and commercial rights relating to these serials and these intangible assets were acquired on 31-3-2000, etc. i.e. after 1-4-1998 the effective date of applicability of the provision, hence it was entitled to depreciation @ 25 per cent on such stock of TV serials, etc. and the rights, attached to such serials, etc. during the year under reference. It is pertinent to note that Expln. 2(b) to Section 32(l) comprises intangible assets, being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature. As per agreement between M/s Guruji Films and the company, the company is entitled to all the trademarks, licenses and all other intangible rights to which the firm was entitled. The Websters World Dictionary defines copyright" as under the exclusive right to the publication, production, or sale of the rights to a literary, dramatic, musical or artistic work, or to the use of a commercial print or label, granted by law for a specified period of time to an author, artist, distributor, etc." 11. With regard to the copyrights and licenses as acquired by assessee company, the assessing officer observed that these rights can be purchased by way of making payment, insofar as these were not registered. In this regard, as per our considered opinion the assessee has purchased these rights by making payments, the payment to takeover price of Rs. 3.23 crores was satisfied in the form of allotment of equity shares of assessee's company. Therefore, we do not see any reason for declining any depreciation on the copyrights or licenses as acquired by the assessee company. The agreement entered into between the firm and the assessee company which was on record with the assessing officer, in itself signifies that the company purchased copyrights, licenses and other tangible rights pertaining to TV serials and it also contained the consideration amount and mode of payment. The relevant clauses of agreement read as under: And whereas the 1st Party has agreed for consideration of Rs. 3,23,21,610 for transfer of its business and goodwill and copyrights to the 2nd Party and which shall be satisfied by the 2nd Party in the form of allotment of 32,32,161 equity shares of Rs. 10 each fully paid-up to the proprietor of the firm.
And whereas the 1st Party shall transfer to the 2nd Party and the 2nd Party shall accept from the 1st Party, firstly, all rights, licenses, privileges and benefits in the firm's name and style of M/s Guruji Films as on 31-3-2000 owned by Guruji Films." And whereas the 2nd Party shall also be entitled to all the trademarks, licenses and all other intangible rights to which the 1st Party is entitled in connection with the said concern and the 1st Party agrees to render all possible assistance to the 2nd Party to get such rights and amenities transferred to their name".
12. Undisputedly, after acquiring stock of all these serials, etc. and the rights attached to it, from the Guruji Films, the assessee company was entitled and became absolute owner of all these stocks, rights, licenses, privileges and benefits pertaining to serials owned by the erstwhile firm. It appears that assessing officer's stand not to allow depreciation is based on his observation that whatever amount has been paid by the assessee for acquiring all the tangible and intangible assets was in the nature of 'goodwill' on which claim of depreciation is not allowable. We are in agreement with the assessing officer that goodwill per se is not eligible for claim of depreciation. From the order of the assessing officer himself, we found that at p. 3, 4 and 5, para 1.2, he himself has carried out the valuation of the goodwill, based on widely used book on Advanced Accountancy by M.C. Shukla, TS.Grewal, S.C. Gupta. After taking into account annual profit of the firm, normal profit, support profit, the assessing officer computed the value of goodwill at Rs. 1, 59,480. We also agree; with the learned assessing officer that goodwill as it is, is not eligible for claim of depreciation. When the assessing officer himself has computed the value of goodwill at Rs. 1,59,480, there is no reason for declining the claim of depreciation on the balance part of consideration paid for acquiring various tangible and intangible assets, rights, etc. There is no dispute for allowing depreciation on tangible assets. For intangible assets also, sub-cl. (ii) of Section 32(1) of the Act provides that know-how, patents, trademark, licenses, franchise or any other business or commercial rights of similar nature being intangible assets acquired on or after 1-4-1998 are eligible for claim of depreciation. Expln.
(2B) to Section 32(1) of the Act is also very much clear and provides for depreciation on these assets.
13. In view of the above discussion, we can conclude that total value of tangible and intangible assets transferred to the assessee company, as per the valuation arrived at by Anand Parikh & Co., amounts to Rs. 4.22 crores. While valuing the intangible assets in the form of copyright, telecast rights, etc., the price offered by Doordarshan to the assessee company was taken into consideration. After having a negotiation with the transferee firm, the entire deal was finalized at a purchase consideration of Rs. 3.32 crores, as against valuation of Rs. 4.22 arrived at by the valuer, which is also supported by the agreement dated 31-3-2000 entered into by the assessee with the transferee firm. Both the agreement as well as valuation report were submitted to the assessing officer. The assessing officer himself has carried out independent valuation of the goodwill as per the prescribed norms which works out to Rs. 1,59,480. We hereby accept the valuation of the goodwill as done by the assessing officer, on which the assessee is not eligible to any claim of depreciation. After reducing the value of tangible assets amounting to Rs. 32.30 lacs and the value of goodwill arrived at Rs. 1.59 lacs, from the purchase consideration there remains a sum of Rs. 2.98 crores attributable to copyrights, telecast rights, commercial rights, etc. on which the assessee is entitled to allow depreciation as per Exphi. (2B) to Section 32(1) of the Act. We direct accordingly.
14. With regard to assessee's claim for allowing professional charges of Rs. 20,07,625 , we found that expenses were incurred for increasing the capital base of the assessee company, the same were essential in the nature of capital expenditure. We are, therefore, inclined to agree with the learned departmental Representative, Shri Rajnish Kumar, that no interference is warranted in the orders of the lower authorities, disallowing assessees claim of professional expenses of Rs. 20.07 lacs.
15. With regard to disallowance of deferred revenue expenses, we found that the expenditure was incurred by the assessee company on account of production expenses pertaining to four number of serials produced and telecasted under sponsored category as per the accounting policy followed consistently. During the year, total production expenses of Rs. 2.07 crores were incurred. On telecast of these serials, the assessee has recorded income of Rs. 1.43 crores. However, in the books of account, both the expenses and income were shown. In the P&L a/c, the assessee has carried 50 per cent of such revenue expenses amounting to Rs. 1.03 crores and balance was carried to the balance sheet under the head "Deferred revenue expenses" and was also claimed in full in the income-tax computation to disclose the true and correct state of affairs for the determination of tax, and the carry forward in the books of account was only for the purposes of accounting treatment as per the accounting policy followed by the assessee company.
Undisputedly, the assessee was following consistently this system of accounting with respect to the revenue expenditure incurred on production of serials. The nature of the business of the assessee is production and marketing of television serials. The expenses incurred in connection with production/marketing/telecasting are of revenue nature and allowable under Section 37(1) and the corresponding income form sale/telecasting of these serials is in the nature of revenue income and is taxable. Further, the item of manufacturing and sale of an entity cannot be a capital asset of that entity. It is correct that the future rights are vested with the assessee company in relation to these serials. If any income is generated in future with such rights relating to serials then such income will be taxed in full in the year of receipt. Suppose, there is no income in future from these rights then in which year these deferred revenue expenditures, will be allowed and how these expenses will be accounted for under the Income Tax Act.
Hence, as general business rule all production expenses in connection with making serials are allowable business expenditures under Section 37(1) of the Income Tax Act, 1961. As the expenses were incurred on production of films and no new assets were acquired by the assessee, the same is liable to be allowed deduction, notwithstanding the fact that part of such expenditure was carried to the balance sheet as "deferred revenue expenses". As the assessing officer had already allowed 50 per cent of these expenses, which were debited to P&L a/c by treating the same as revenue expenses, there is no reason to disallow remaining 50 per cent of very same expenses, merely on the plea that it was treated by the assessee as deferred revenue expenses in the books of account. Mere entry in the books of account cannot disentitle the claim of deduction of expenses which the assessee is entitled to claim as per provisions of Income Tax Act, 1961, while computing its taxable income for income-tax purposes. For the purpose of income-tax what is to be taxed is the real income hence deferred revenue expenditures were claimed in full in computation of income in spite of carried forward of fifty per cent of the deferred revenue expenditure in the books of account. Moreover, this method of accounting is being continuously followed by the company and the company has claimed deferred revenue expenditure in fall in the income-tax computation in the assessment years 2000-01 and 2002-03 as well besides 2001-02 which is in the appeal. As a matter of abundant caution, the assessing officer may keep watch on such expenses in the subsequent years, which are now carried in the balance sheet as "deferred revenue expenses". The assessee is not entitled for any depreciation on such expenses being carried to the balance sheet. We direct accordingly.
16. In the result, the appeal of the assessee is partly allowed in terms indicated hereinabove.