1.This appeal, filed by the Revenue, is directed against the order dt.
14th July, 1998, passed by learned CIT(A)-XI, Kolkata, in the matter of assessment order under Section 143(3) of the IT Act, 1961, for the asst. yr. 1995-96.
2. In the first ground of appeal, Revenue is aggrieved of CIT(A)'s having deleted the addition of Rs. 4 crores on account of difference in valuation of copyrights of certain film songs which the assessee-company had transferred to its subsidiary, namely, Gramco Music Publishing (P) Ltd. 3. During the relevant previous year the assessee-company transferred copyrights of 690 songs, from 91 Hindi films, to a newly floated subsidiary company by the name of Gramco Music Publishing (P) Ltd. This transfer was done for a consideration of Rs. 6 crores, but the AO was not satisfied about adequacy of this consideration and, accordingly, he requisitioned the basis on which this consideration is worked out. The assessee furnished one valuation report by Price Waterhouse & Co which disclosed the value at Rs. 506 lakhs and another valuation report by one M/s Bimal Roy Productions which worked out the estimated value at Rs. 711 lakhs. The basis on which the valuation was done was also duly furnished and the same has been discussed at length in the assessment order. The assessee further stated that the sale consideration was worked out on the basis of averaging of these values disclosed in the valuation reports and rounded off to the nearest ten lakhs. However, the AO was far from impressed. He observed that the "valuation of these copyrights was not done in a proper manner" since the assessee has not taken the sales consideration at the value disclosed by any of the valuation reports. He also observed that in the list of 91 films are "classics" like 'Guide', 'Barasat', 'Madhumati', 'Awara' which won the heart of millions only for the mellifluous songs" and the music of these films cannot be considered to be at par with ordinary film music, and that this aspect of the matter has not been considered in arriving at the fair market value. In the backdrop of these observations, the AO estimated the sales consideration at Rs. 10 crores and made the addition of Rs. 6 crores being the amount represented by difference between sale consideration disclosed by the assessee and the fair market value estimated by the AO. Aggrieved, assessee carried the matter in appeal before the CIT(A) who deleted the addition by observing that "the question of any estimate of sale price so as to bring to tax the notional income which is neither received nor alleged to have been received, is clearly beyond the scope of the legal provisions". Aggrieved, Revenue is in appeal before us.
4. Heard the parties, perused the orders of the authorities below, as well as paper book filed before us, and deliberated upon the applicable legal position as also the factual matrix of this case.K.P. Varghese v. ITO (1981) 131 ITR 597 (SC) has observed that "......the burden is on the Revenue to show that there is an understatement of consideration..........Moreover, to throw the burden of showing that there is no understatement of consideration, on the assessee would be to cast an impossible burden upon him to establish a negative, namely that he did not receive any consideration beyond that declared by him".
Although these observations were made in the context of the scope of sale of capital assets, we feel this proposition also holds good in case Revenue claims that the assessee has understated consideration for any sales. In any case, the AO cannot step into the shoes of the assessee to decide at what price he should sell his assets, unless the transaction itself is claimed to be collusive or colourable device. In the present case, even the understatement is not alleged. We have also noted that the AO has not explained as to on what basis he has arrived at the figure of Rs. 10 crores and there is no material at all, leave aside cogent material, to support the valuation subjectively adopted by the AO. Learned AO's remarks about the film music are also irrelevant and cannot, in any event, justify substitution of his estimated sales price over the sales consideration disclosed by the assessee. Keeping all these factors, as also entirety of the case in mind, we support the conclusions arrived at by the CIT(A) to the effect that "the question of any estimate of sale price so as to bring to tax the notional income which is neither received nor alleged to have been received is clearly beyond the scope of the legal provisions". Accordingly, we confirm the order of the CIT(A) on this point and decline to accept this ground of appeal.
7. In the second ground of appeal, Revenue is aggrieved that the CIT(A) erred in deleting the disallowance of Rs. 75,000 on account of premium on debenture redemption.
8. The premium on debenture redemption was disallowed by the AO by merely observing that the same is "not an allowable expenditure". In appeal, CIT(A) deleted the disallowance by taking into account Hon'ble Calcutta High Court's judgment in the case of CIT v. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal) wherein it is held that such premium is allowable in the year in which it is incurred. Revenue is aggrieved and in appeal before us, 9. Heard the parties, perused the orders of the authorities below, as well as paper book filed before us, and deliberated upon the applicable legal position as also the factual matrix of this case.
10. We find that the company had the discretion to repurchase the debentures before the date of redemption at the market price, and, as such, it could not be said that the assessee had any obligation to pay the premium. This liability to pay premium crystallizes only at the time of redemption. On these facts, the entire premium is, as held by the Hon'ble jurisdictional High Court in Tungabhadra's case (supra), allowable in the year in which the debentures are redeemed on redemption. As the premium was paid in the previous year relevant to this assessment year, in our considered view, the same was rightly allowed by the learned CIT(A). We, therefore, approve the CIT(A)'s order on this aspect also and decline to interfere in the matter.
1. I have gone through the order drafted by my learned Brother Shri Pramod Kumar, AM, but with due respect, I do not agree with the facts brought out and conclusion drawn by him in his order. Therefore, I write a separate order as under.
2. The brief facts of the case are that the assessee-company is engaged in manufacturing and selling of audio cassettes, discs, records, etc.
It has the arrangement with the producers/distributors of the various Hindi films songs. During the asst. yr. 1995-96, the assessee paid the licence fees of Rs. 53,01,338. During the asst. yr. 1996-97, it paid the licence fees of Rs. 91,58,203 and the average of such fees is Rs. 75,29,705 as appears from the AO's order (Para 2.5).
3. However, during the assessment year under consideration, the assessee floated a subsidiary company by investing Rs. 2 crore in the name of M/s Gramco Music Publishing (P) Ltd. (hereinafter known as GMPPL). The said company is the subsidiary company of the assessee-company (GCIL). Thereafter, the assessee-company has transferred the copyright of songs of its 91 Hindi films to this subsidiary company for the consideration of Rs. 6 crore. The AO took the value of the consideration at Rs. ten crores on ad hoc basis and made the addition of Rs. 4 crore. But the CIT(A) has deleted the same by mentioning it as a notional/hypothetical income.
4. From the record, it reveals that before transferring the copyright of the said songs, the assessee-company asked for its valuation from M/s Price Waterhouse & Co., who has estimated the value of the songs at Rs. 506 lakhs. But the assessee was not satisfied with this valuation.
So it appointed another valuer M/s Bimal Roy Production, Mumbai, who estimated the value at Rs. 711 lakhs. It is not clear whether both these valuers were approved valuers or not.
5. The assessee thereafter took the average value of the sale consideration at Rs. 6 crore. But the fact remains that neither party has informed why the valuation was not taken at Rs. 7,11,00,000, which was the higher. The same was expected from the prudent business entrepreneurs.
6. From the record, it appears that the CBDT Circular No. 3WT of 1957, dt. 28th Sept., 1957, prescribed the method for determining the value of patent, copyright, etc. Accordingly, the income at the rate of the income derived during the year ending on the valuation date will arise during the rest of its life. The above circular is quoted by the AO in his order at para 2.3.1. Thus, for the purpose of determining the value of the copyright, unexpired period of the life of the item is vital and it will have to be multiplied with the income earned during the year ending on the valuation date. Nowhere it is evident that the same system was followed. The AO has pointed out in his order that M/s Price Waterhouse & Co. has taken the value "on the basis of average of three years royalty." The said CBDT circular is binding on the Department, which was not followed in the instant case by the AO.7. In the instant case, the average unexpired life of the songs was taken at 33 years. The same was not multiplied with the rate of the income derived during the year ending on the valuation date by each so-called independent valuer. Moreover, both the valuers were the private valuers appointed by the assessee who are supposed to fulfil the desire of the assessee.
"In a nutshell the appellant-company has sold copyrights relating to 91 films for a sum of Rs. 4 crores which has been offered for tax as business income".
But in reality, the assessee has offered Rs. 6 crores for tax as business income. It shows the casual approach adopted by the CIT(A) in the impugned order before deleting the addition.
9. In the present case, the assessee has sold the copyrights for a consideration of Rs. 6 crores. It means that this was the capital transfer and is subject to capital gain. No material is available before us to throw the light regarding the aspect of the capital gain shown by the assessee. Further, it is not clear whether the subsidiary company was 100 per cent owned by the assessee for exclusively this purpose.
10. No reason has been given for the estimation of the consideration for Rs. 6 crores, especially when M/s Bimal Roy Production had shown the value at Rs. 7,11,00,000. It is expected that the sale will be made at the higher prices by the "assessee-company being an intelligent business entrepreneur.
11. It may be mentioned that the learned Departmental Representative, during the course of argument, submitted that by floating the subsidiary company, the assessee made the attempt to dilute the tax liability and it is a colourable device as per the ratio laid down by Hon'ble Supreme Court in the case of McDowell & Co. Ltd v. CTO (1985) 154 ITR 148.(SC).
12. In this regard, it will not be out of place to mention (from Chaturvedi & Pithisaria's Income-tax Law, Vol. 2, p. 1844 ) i.e., "If a holding company transfers any of its capital assets to its subsidiary company or vice versa, the actual cost of the asset in the hands of transferee-company shall, for and from asst. yr.
1965-66, be taken to be the same as it would have been if the transferor-company had continued to hold the capital asset for the purpose of its business, if- (i) in case the transfer is by a holding company to its" subsidiary company- (a) The parent company or its nominees hold the whole of the share capital of the subsidiary company; and 13. As per the CBDT formula, the valuation of the assets is supposed to come to Rs. 24,84,82,247 as discussed by AO in his order at para 2.5.
But I am sorry to state that AO is not an expert to determine the copyrights, may be on estimate basis. The Hon'ble Supreme Court, in the case of Saraswati Industrial Syndicate Ltd. v. CIT (1999) 237 ITR 1 (SC), observed that neither the ITO nor the High Court were entitled to make the statements on technical matters. We agree with the submission made by the learned authorized representative that the valuation of these copyrights was not made in a proper manner by the AO. But the fact remains that this is equally applicable on the assessee. It would have been better if the AO might have appointed the DVO to determine the value of the copyrights of the said Hindi films songs. When the facts are not clear regarding the valuation method, then the case law cited by the learned authorized representative has no relevance as the same is dealing with the notional/hypothetical/estimated income of the sale price.
14. In the light of above discussion and by considering the totality of the facts and circumstances of the case, I am of the view that the assessee has shown the said consideration on much lower side as discussed above. It was expected from the AO that before estimating the value, to have referred the matter to DVO and obtained expert's opinion. Therefore, I modify both the orders of lower authorities and restore the issue to the file of the AO to obtain the value of the copyrights of the said Hindi films songs in a scientific manner from the DVO. The AO is also directed to examine various aspects of the issue involved in the light of observations contained in the earlier paragraphs and determine the correct value for bringing the same to tax in accordance with law. Needless to mention that AO shall provide reasonable opportunity to assessee as per law.
15. In the result, the appeal filed by the Department is allowed for statistical purposes.
As there is a difference of opinion between the Members, we refer the following question to the Hon'ble President, Tribunal, under Section 255(4) of the IT Act, 1961: "Whether, on the facts and in the circumstances of the case, the addition of Rs. 4 crores pertaining to the sale consideration of the copyrights of 91 Hindi films songs is required to be deleted/restored to the AO for fresh examination, specially when he himself is not an expert and has not referred to DVO." 1. The appeal of the Revenue for the asst. yr. 1995-96 was heard by 'D' Bench of the Tribunal constituted by two Members. Out of the two grounds raised by the Revenue, there was a difference of opinion amongst the Members of the Division Bench in regard to the addition of Rs. 4 crores on account of sale of copyrights of 690 songs of 91 Hindi feature films to a subsidiary company.
2. I have been nominated as Third Member in regard to point of difference formulated by the Bench as under: "Whether, on the facts and in the circumstances of the case, the addition of Rs. 4 crores pertaining to the sale consideration of the copyrights of 91 Hindi films songs is required to be deleted/restored to the AO for fresh examination, specially when he himself is not an expert and has not referred to DVO." Parties have been heard and records, including the orders of my learned Brothers perused. Though the facts have been stated in the dissenting orders, I would like to state the same in my own words for the sake of coherence and. proper appreciation of the issue involved.
3. The respondent-company had transferred the copyrights of various 690 songs of 91 Hindi feature films to its subsidiary viz., Gramco Music Publishing (P) Ltd. for an aggregate consideration of Rs. 6 crores. By virtue of an agreement executed on 31st March, 1995, a copy of which is placed on record, the value for the transfer of copyrights for the above songs was adopted on the basis of valuation made by an independent valuer viz., Price Waterhouse & Co., a firm of chartered accountants. The entire, amount of consideration of Rs. 6 crores was offered for taxation for the year under appeal. The AO was of the view that the valuation made by the firm of chartered accountants was not proper, particularly in the light of CBDT Circular No. 3 WT of 1957, dt. 28th Sept., 1957. For the reasons recorded in paras 2.3 to 2.6 the AO estimated the value of the copyrights at Rs. 10 crores. The difference between Rs. 10 crores being the estimated value of copyrights of 690 songs of Hindi feature films and the actual value of consideration of Rs. 6 crores, i.e., Rs. 4 crores was added by the AO as income of the assessee. The CIT(A) deleted the above addition on the ground that the same had been made by the AO without valid reasons, but on pure guesswork and without any material on record. The CIT(A) referred to various decisions in the impugned order in support of his view that the AO was not empowered to tax notional income which the assessee had not derived at all.
4. On appeal to the Tribunal, the learned AM agreed with the view of the CIT(A) and accordingly dismissed the first ground of appeal raised by the Revenue. However, the learned JM expressed the view that the AO should have referred the matter to the Departmental Valuation Officer for arriving at the market value of the copyrights of feature film songs on scientific basis. He accordingly directed the AO to obtain the value of copyrights from the DVO and decide the issue afresh in accordance with the observations contained in his order and in accordance with law.
5. In my considered view, the controversy relating to market value of the copyrights of 690 songs of feature films is unnecessary. It is not disputed that the respondent-company had transferred the copyrights of songs to its subsidiary company, viz., Gramco Music Publishing (P) Ltd. for an aggregate consideration of Rs. 6 crores. There is no allegation by the Revenue authorities that the assessee has received more than Rs. 6 crores from the subsidiary company in consideration of transfer of the copyrights of various songs of feature films. It is also not the case of the Revenue that the transfer has been made by the respondent-company to the subsidiary company as a device of tax avoidance much less tax evasion. Once there is no doubt about the actual consideration received by the assessee from the subsidiary company, in my view, it is unnecessary to enter into the controversy of valuation of copyrights. The assessee had appointed a firm of chartered accountants viz., Price Waterhouse & Co. for valuation of the copyrights of 690 feature film songs. The said valuer had determined the value at Rs. 5.06 crores. However, the assessee had also got the valuation made by M/s Bimal Roy Productions, Mohan Studios, Andheri 'East, Mumbai, who had valued the copyrights at Rs. 7.11 crores on the basis of their experience in the same business. Since the transaction was between the holding company and 100 per cent subsidiary company, it was decided to adopt average value of the two valuations for the purpose of actual transfer of copyrights. So long as there is no doubt about the bona fides of the transactions and about the actual consideration received, the mere fact that the market value of the copyrights was more than the value at which the same was transferred to the subsidiary company may not be of any consequence for the purpose of taxation under the IT Act, 1961. It is well-settled principle of law that income-tax is not chargeable on the income which has neither accrued nor received by any assessee. Their Lordships of Hon'ble Supreme Court in the case of CIT v. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC) have held that where income has not resulted at all, there is neither accrual nor receipt of income. Their Lordships further laid down the principle that income-tax can be levied on real income i.e., income that has accrued or received and not on notional income i.e., income that could have been received, if at all. In other words, the income which the assessee could have received but which has not at all been received is not taxable. This principle has again been reiterated in the case of Poona Electric Supply Co. Ltd. v. CIT (1965) 57 ITR 521 (SC). In the case of CIT v. Birla Gwalior (P) Ltd. (1973) 89 ITR 266 (SC) their Lordships of the Supreme Court held that "it is not a hypothetical accrual of income that has got to be taken into consideration but the real accrual of income". In the case of State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC) their Lordships of the Supreme Court reiterated the above-mentioned principle of law by holding that "it is the income which has really accrued or arisen to the assessee that is taxable".
6. It may be relevant to point out that the legislature had incorporated Section 52 for assessment of capital gains in respect of transfer made for a consideration less than the fair market value. The said section was deleted by the Finance Act, 1987, w.e.f. 1st April, 1988. Their Lordships of Supreme Court in the case of K.P. Varghese v.ITO (1981) ITO 131 ITR 597 (SC) had the occasion to consider the applicability of Section 52. In that case, their Lordships held that "it would indeed be most harsh and inequitable to tax the assessee on income which had neither arisen to him nor is received by him, merely because he has carried out the contractual obligation undertaken by him." Their Lordships further observed that it would indeed be strange if obedience to law should attract levy of tax on income which has neither arisen to the assessee nor has been received by him.
7. In the present case, the assessee had transferred the copyrights at the price determined by the valuer. The valuation was made by the assessee in order to decide the reasonable consideration between the holding company and 100 per cent subsidiary company. It is relevant to point out that the assessee has not treated the sale of copyrights as sale of a capital asset. The assessee has treated the transfer as transfer of goods and has offered the entire consideration for taxation notwithstanding the fact that the transfer was made to 100 per cent subsidiary company.
8. Therefore, there was no justification for the addition of Rs. 4 crores made by the AO on the basis of substantive estimation of market value of copyrights. The reference to CBDT Circular No. 3 WT of 1957, dt. 28th Sept., 1957, in the assessment order in para 2.3.1 is misplaced. The said circular relates to wealth-tax and was relevant for determination of market value of copyrights on the valuation date. It hardly needs to be emphasised that wealth-tax is chargeable in respect of market value of assets. However, in this case, there is sale of copyrights. What is assessable to tax is on the basis of the consideration received by the assessee and not the market value of the copyrights on the date of transfer. Determination of market value could form a basis of suspicion that the transaction between the parties was not bona fide transaction; but it is a well-settled law that suspicion cannot be the sole foundation for the purpose of fixing the tax liability. Suspicion is mother of enquiry but does not take place of proof.
9. Having gone through the valuation made by the firm of chartered accountants, viz., Price Waterhouse & Co. and the valuation made by M/s Bimal Roy Productions at Rs. 7.11 crores. I find no infirmity in adopting the value of the copyrights at average value of Rs. 6 crores, keeping in view that the transaction was between the assessee and its 100 per cent subsidiary. As already pointed out, the valuation of copyrights is hardly of any significance in the background of the actual consideration of Rs. 6 crores having been received by the assessee. Reference to DVO, as suggested by the learned JM; in my view, would be an exercise in futility. I, therefore, agree with the view expressed by the learned AM and hold that the CIT(A) was justified in deleting the addition of Rs. 4 crores made by the AO. There is, thus, no necessity for restoring the matter to the AO for fresh examination.
10. In the result, as per my decision, the appeal of the Revenue is dismissed.
11. The three orders shall be placed before the regular Bench for passing consequential order in accordance with the majority view, 1.On a difference of opinion between the learned Members constituting this Division Bench, the following question was referred to a Third Member for his opinion under Section 255(4) of the IT Act, 1961 : "Whether, on the facts and in the circumstances of the case, the addition of Rs. 4 crores pertaining to the sale consideration of the copyrights of 91 Hindi films songs is required to be deleted/restored to the AO for fresh examination, specially when he himself is not an expert and has not referred to DVO ?" 2. Hon'ble Vice-President (KZ) has, as Third Member in this case and taking the totality of the facts and circumstances of the case into consideration in the light of the legal principles discussed in his order, concurred with the conclusion of the learned AM. that the CIT(A) was justified in deleting the addition of Rs. 4 crores made by the AO for asst. yr. 1995-96 and thus there is no necessity for restoring the matter to the AO for fresh examination.
3. In accordance with the majority views, therefore, the appeal of the Revenue is dismissed.