Full Judgment
M. V. R. Prasad, AM
This appeal is directed against the order of the Commissioner (Appeals) dated 29-1-1991 for the assessment year 1987-88. The first ground is that the Commissioner (Appeals) erred in upholding the finding of the assessing officer that the expenditure of Rs. 2,75,400 incurred by the assessee for hire of music rights was covered by section 35A of the Income Tax Act.
2. The assessee sells books records, cassettes, magazines, etc. It acquires music rights and sells the cassettes. The assessee had bought the rights of audio sound track of a film Jalwa' from one M/s. PLA Production and the nature of the transaction is described in a letter of the latter concern dated 18-6-1986 addressed to the assessee and it reads as follows :
'This is to confirm that we have sold you this day world rights of the audio sound track of our cinematographic film 'Jalwa' starring Naseeruddin Shah, Archana Puransingh, Saeed Jaffrey and others with lyrics by Pandit Narendra Sharma, Sameer, Gulshan Bawra and Remo Fernandes and music by Anand-Milind and Remo Fernandes, produced by us, for exploitation throughout the world.
This outright sale is for a consideration of Rs. 1,50,000 (Rupees One Lakh Fifty Thousand Only) for a period of 5 (five) years. At the end of which time, the ownership of this product would revert to us. It is, however, agreed that you would have the sole right to commercially exploit the sound track of the film after the 5 years on a royalty basis. The royalty so payable for production and sale after 5 years would be worked out at 13.5% of the net domestic price of the Record/Cassette (less of sales tax duties and C13S's standard packaging deduction of 10%),
We confirm that the sound track is free from all claims of copyright and we are the owners of the sound track in its entirety. All persons/ parties connected with its production have been adequately compensated by us and we indemnify you against any claims from such third parties. We, being the rightful owners of the sound track, are entitled to make this sale to you.'
Besides the amount of Rs. 1,50,000 paid to M/s. PLA Productions, the assessee has also incurred other expenditure relating to acquisition of the rights in Jalwa' of Rs. 1,25,400 and debited an aggregate amount of Rs. 2,75,400 to the P & L account.
3. The assessing officer mentioned that the assessee claimed deduction for the expenditure of Rs. 2,75,400 under the provisions of rule 9A(2)(b) of the I.T. Rules but he disallowed the claim for deduction under this Rule on the ground that the assessee is not a film producer and the rule is applicable only in the case of a producer of films. He considered the claim for deduction under section 35A of the Income Tax Act as the acquisition of copyrights or patent rights in music and allowed deduction of 1/ 14th of the expenditure of Rs. 2,75,400 as stipulated in this section.
4. The Commissioner (Appeals) mentioned that the appellant had claimed deduction under section 37 of the Income Tax Act but held that the expenditure is not allowable under this section and he upheld the action of the assessing officer in granting the deduction under section 35A, i.e. the 1/14thof the claim.
5. Before us, the learned counsel for the assessee invited our attention to the contents of the letter addressed to the assessee by M/s. PLA Productions, which we have reproduced hereinabove and pleaded that the description of the transaction as a sale in the above letter is on] - v a misnomer. It is contended that the contents of the above letter Should be considered as a whole and doing so, it is evident that the amount of' Rs. 1,50,000 is of the nature of a royalty paid to M/s. PLA Productions for the commercial exploitation of the music rights in question over a period initially of 5 years and subsequently over an extended period at a rate to be worked out at 15.596 of the domestic price of the records/ cassettes sold. So, it is claimed that the payment in question being of the nature of a royalty is allowable as a revenue expenditure in the year it is paid, which is the previous year relevant for the assessment year 1987-88.
6. When the Bench queried as to how the entire amount is allowable in one year as it relates to five years or more, it is replied that the assessee has been following cash method of accounting and so, the entire amount is deductible in the year of account. The learned D.R., on the other hand, stressed the word 'sold' figuring in the first line of the letter addressed by M/s. PLA Productions and contended that the assessee had bought the rights in question absolutely and so, the expenditure should be regarded as on capital account.
7. We agree with the above contention of the learned counsel for the assessee that the expenditure of Rs. 1,50,000 in question is of the nature of revenue expenditure and is deductible under section 37. We have to hold the same in respect of the entire amount of Rs. 2,75,400, as it is not the case of either side before us that the balance of Rs. 1,24,000 should be given a separate treatment from Rs. 1,50,000. However, on reading the letter dated 18-6-1986 addressed by M/s. PLA Productions to the assessee, as a whole, it is evident that the use of the word 'sold' in the first line of the letter is not technically correct as what the assessee has acquired is only a right or licence to exploit the sound track of the film Jalwa' initially over a period of 5 years. So, we hold that the expenditure of Rs. 2,75,40b is allowable as revenue expenditure over 5 years. No evidence has been produced before us that the assessee has been maintaining his books on cash basis and as such, we do not agree with the contention that the entire expenditure of Rs.2,75,000 Is allowable in one year, i.e. in assessment year 1987-88.
8. We find that the principle laid down by the Apex Court in the case of Madras Industrial Investment Corpn. Ltd. v. CIT : [1997]225ITR802(SC) is applicable to the issue in hand. In that case, the Hon'ble Supreme Court held that the discount on the issue of debentures issued and retained by the company is deductible proportionately each year over the period of heir redemption deductible and the amount deductible is that which relates to each relevant accounting year. In the light of the ratio of this decision, we hold that the amount of Rs. 2,75,400 is deductible proportionately over a period of 5 years. In other words, 1/5th of this amount is deductible in the assessment year 1987-88. In view of these remarks, this ground is partly allowed.
9. The next ground is that the Commissioner (Appeals) erred in upholding the disallowance of the payment of Rs. 3,75,000 by the assessee to the retiring partners as a capital expenditure. The assessee took over, as a going concern, with effect from 1-1-1986, a business which had earlier been run as a partnership firm upto 31-12-1985 of which the assessee was a partner. The relevant portion of the deed of dissolution of the firm dated 22-1-1986 reads as follows:
'This deed of dissolution made at Bombay this Twenty Second day of January, 1986 between Mr. Raj Vasant Pandit hereinafter referred to as 'the Continuing party' of the First Part and Miss Nalini R. Pandit, Miss Rajni R. Pandit, Mrs. Virginia Pandit and Mr. Leslie I. Rodrigues hereinafter collectively referred to as 'the Retiring Partners' of the Second Part, it being understood and agreed that the reference to the parties shall mean and include their respective legal heirs, executors, administrator and assigns;
Whereas the parties hereto had been carrying on partnership business in the name and style of M/s. The Perennial Press at Surya Mahal, 5, Durjori Bharucha Marg, Fort Bombay-400 023 under the Deed of Partnership dated the 1-1-1980.
And whereas the Retiring Partners have voluntarily retired from the said partnership on the 31-12-1985 and the Continuing Party has taken over business of the partnership as a running concern with all its assets and liabilities, trade name, goodwill etc.
And whereas the parties hereto are desirous of reducing to writing the terms and conditions mutually agreed upon between the par-ties hereto.
Now this deed witnesseth and it is hereby agreed and declared by and between the parties hereto as follows :
1. The partnership subsisting between the parties hereto in the firm name and style of Messrs The Perennial Press has been completely dissolved as on 31-12-1985 and the Retiring Partners have retired from the said partnership as on the 31-12-1985.
2. The said business of Messrs The Perennial Press has been taken over as a running business with all its assets, liabilities, trade name, goodwill etc. by the Continuing Party hereto, except for the house in Bangalore which shall be taken away by the Retiring Partner Mrs. Virginia R. Pandit at book value.
3. On dissolution of the firm the Retiring Partners shall be entitled to goodwill of Rs. 5,00,000 (Rupees Five lakhs only) which shall be allocated to them on the basis of their profits sharing ratio which is mentioned in the Deed of Partnership dated l-1-1980.'
10. As per the above clauses, the goodwill of the firm was determined at Rs. 5 lakhs and the share of the outgoing partners in the proportion of their shares was computed at Rs. 3,75,000 and it was paid. The assesse contended that the payment was made to the retiring partners in lieu of their share in future profits of the business and was in the nature of deferred revenue expenditure and as the amount was paid out in the year of account relevant for the present assessment year, it was claimed as all allowable deduction. The revenue authorities held that the amount was paid for the purchase of the goodwill and so, it was expenditure of a capital nature and denied the deduction claimed.
11. Before us, the learned counsel for the assessee relied upon the decision of the Apex Court in the case of Devidas Vithaldas & Co. v. CIT (1972) 84 1TR 277 and claimed that the expenditure in question is allowable as revenue expenditure. He has also relied upon the decision of Punjab and Haryana High Court in the case of CIT v. Dharampal Shantisarup, Kalra Hari Singh and also the decision of the ITAT Chandigarh Bench in the case of Raj Kishan & Co. v. Inspecting Assistant Commissioner (1986) 24 Taxman 262.
12. The learned departmental Representative on the other hand, relied upon the order of the assessing officer and claimed that as the payment was made for the purchase of goodwill, it was rightly held as capital expenditure.
13. We are of the view that the Revenue deserves to succeed on this issue. The two decisions on which the learned counsel for the assessee has relied are, to our mind, distinguishable. In the case of Dharampal Shantisarup, Katra Hari Singh (supra), decided by the Punjab and Haryana High Court, there was a finding that the firm had never been dissolved and it was continuing and as the remaining partners had the right to use the goodwill, the amount paid by them to the heirs of the deceased partner was held to be not for the purchase of goodwill but was for the purchase of only (lie exclusive right for the use of such goodwill. In the present case, the firm was dissolved and the business was taken over as a going concern by the assessee. In the case of Devidas Vithaldas & Co. (supra), the Apex Court has clearly held that the amount paid for the acquisition of the goodwill is a capital expenditure. The relevant portion of the head note reads as follows :
'Acquisition of the goodwill of a business is, without doubt, acquisition of a capital assets, and therefore, its purchase price would be capital expenditure. It would riot make any difference whether- it is paid in a lump sum at one time or in instalments distributed over- a definite period. Where, however, the transaction is not one for acquisition of the goodwill, but for the right to use it, the expenditure would be revenue expenditure.'
14. We are of the view that this case actually supports the case of the department and not of the assessee. In this case, there was no lump sum payment for the goodwill but there were annual payments for an indefinite period reckoned with reference to the profits of the business and as such, they were held to be of the nature of payments royalties. The facts in the present case are totally different inasmuch as, the goodwill of the firm has been determined at Rs. 5 lakhs and the share of the retiring partners at Rs. 3,75,000 in proportion to their shares.
15. The decision of the Tribunal in the case of Raj Kishan & Co. (supra), is also distinguishable because in that case there was a finding that the firm in question was started only an year or two back and so, it had no Goodwill but it being a firm of contractors, had binding profit yielding contracts and so, the amount paid to the outgoing partners by the continuing partners was held to be on account of future profits. in the present case, there is no reference to any such binding contracts or orders and there is a clear narration that the amount was paid towards the share of the outgoing partners in the goodwill of the firm which was determined at Rs. 5 lakhs on a lump sum basis. We are of the view that the issue raised in this ground is squarely covered by the decision of the Hon'ble Andhra Pradesh High Court in the case of CIT v. Puran Das Ranchoddas & Sons : [1988]169ITR480(AP) . It is also a case where an amount of Rs. 80,000 was paid by the continuing partners to the retiring partner of a dissolved firm. The relevant portion of the head note of this decision reads as follows:
'Held, that it was true that the deed of dissolution did not expressly mention that the consideration of Rs. 80,000 received was either towards relinquishing their rights in the goodwill or for the use thereof by the other partners. But the assessing authority was bound to determine the true legal relationship resulting from a transaction. A perusal of clauses (11) to (13) of the deed of dissolution made it clear that there was total cessation of relationship between the outgoing partners and the remaining partners. It was obvious that in consideration of giving up their rights, title and interest in the goodwill of the firm, the retiring partners had received Rs. 80,000. The facts that the consideration was not adequate was by itself not a circumstances to show that what was conveyed was not relinquishment of a pre-existing right, title and interest. When the payment was made, it was not incidental to the carrying on of the business but was incidental to the reconstitution of the business by the remaining partners. The consideration was paid to acquire a capital asset and was capital expenditure.'
16. In view of the above decision of the Hon'ble Andhra Pradesh High Court and also the clear verdict of the Apex Court in the case of Devidas Vithaldas &Co.; (supra),we are of the view that the payment of Rs.3,75,000 is towards acquisition of goodwill and is in the nature of capital expenditure and as such, the assessee is not entitled for deduction of this amount. The ground is rejected.
17. The appeal is partly allowed.