In a judgment in the case of CIT v. Radio Today Broadcasting Ltd. [2015], Delhi High Court allowed additional depreciation to FM Radio Station. Delhi HC held that radio programs were deemed as articles ‘manufactured or produced’, and an additional depreciation was allowed on plant and machinery used in production of these radio programs. Above that depreciation was also allowed on license fee paid for FM radio stations which were not operational.

Facts of the Case:

The assessee was engaged in the business of FM radio broadcasting. He was granted permission for operating broadcasting channels at Delhi, Kolkata, Mumbai, Jodhpur, Patiala, Amritsar and Shimla against payment of prescribed One Time Entry Fees (‘OTEF’). Out of seven stations, the assessee went on air from three radio stations in Delhi, Kolkata and Mumbai in A Y 2008-09, while three other stations in Jodhpur, Patiala and Amritsar were made ready to go on air too. But due to unfavourable market conditions, the marketing team of the assessee decided against going on air, at the latter stations. On advice being given by team, the trial runs were started by running radio programs within the office premises.

The assessee claimed additional depreciation on plant and machinery used for production of radio programs under section 32(1)(iia) of the Income-tax Act (‘the Act’). Besides, he also claimed depreciation on One Time Entry Fee (license fee) paid for the FM channels which were not operational.

The return was picked up for scrutiny and statutory notices were issued to the assessee. The AO queried why additional depreciation should not be disallowed.

The assessee filed a written submission that as per section 32(1)(iia), these three conditions had to be satisfied:

i) Assessee in engaged in manufacture / production of article or thing.

ii) New plant and machinery is acquired and installed after March 31, 2015.

iii) It should be an eligible plant and machinery.

Further the company had purchased plant and machinery a used the same in production of programs, on which additional depreciation was claimed.

Assessment Order:

The AO rejected the assessee’s contention that radio programs were “articles or things produced by it”. The AO held that, by no stretch of imagination can production of radio programs be considered as production of article or thing.

Regarding depreciation claimed on OTEF (One Time Entry Fee) pertaining to stations not operational, the AO said that since the assets at Jodhpur, Amritsar, and Patiala were not put to use during the relevant previous year, depreciation on OTEF could not be allowed. The plea of the assessee that the three stations were made ready to use and the company had started taking trial runs was not accepted by the AO on the ground that “depreciation shall not be allowed unless the asset is actually used for the business”.

 Order of CIT (Appeals):

The CIT (A) dismissed the appeal, concurring with the AO, that “airing of radio programs cannot be said to be manufacturing or producing of article or thing as defined under section 32(1)(iia) of the Act”.

The CIT (A) makes following observation:

(i) In commercial sense no article or thing can said to be produced by airing a radio program, as the appellant is not manufacturing or producing any article or thing which can be sold or commercially exploited.

(ii) Further, channels earn revenue from advertisement and not sale of radio programs. The public does not have to incur expense to log in to any channel. Expenses are incurred by various companies who provide revenue by advertising their products.

(iii) The floppy or CD are not tradable as a large number of programs are aired live, e.g., cricket matches.

(iv) All these clearly show that assessee is not engaged in business, manufacture, or production of any article or thing.

As regards the disallowing of depreciation on the licence fee, the CIT (A) held that the Assessee had claimed depreciation “only on the licence fee but not on the other tangible asset. If the claim of the Appellant is valid then the Appellant’s claim should not have been restricted to claim of depreciation only on licence fee.” Further since the Assessee had not claimed that the programmes were actually aired but had clarified that the airing was postponed, its claim for depreciation on the licence fee could not be permitted.

ITAT’s Order:

ITAT held that the assessee was very much eligible for claiming additional depreciation under section 32(1)(iia) of the Act.

Relying on case of CIT v. Oracle Software India Ltd [2010] 187 Taxman 275 (SC), the Tribunal said the radio programs consist of editorial and specific stanza of the songs and the same is first recorded, then edited and then broadcasted. The assessee thus, “uses plant and machinery in the production of these pre-recorded radio programs.”

Delhi HC Order:

An appeal was filed by the Revenue in High Court of Delhi under Section 260A of the Income Tax Act, 1961 against the impugned order dated 9^th September, 2014 passed by the ITAT (Income Tax Appellate Tribunal).

The following questions of law were framed for consideration:

1. Whether the ITAT fell into error in holding that the Assessee was entitled to additional depreciation for the machinery used by it to broadcast radio programs in the FM channel given the definition of ‘manufacture’ as it existed at the time the assessment was taken up in this case?
2. Did the ITAT fell into error in its opinion with respect to depreciation on broadcasting rights for the centres where the assets were not put to use, in the facts and circumstances of the case?

Submissions by the Counsel:

Mr. N.P. Sahni, the standing counsel for the Revenue referred to the definition of ‘thing, article, and manufacture’ in Black’s Law Dictionary and various other judicial rulings viz; CIT v. Oracle Software India Limited, Commissioner of Income Tax v. Tara Agencies, Empire Industries Limited v. Union of India, Union of India v. J.G. Glass Industries Limited, Gramaphone Co. of India v. Collector of Customs, Deputy Commissioner of Income Tax v. Yellamma Dasappa Hospital, and many others.

Mr. Salil Aggarwal, learned counsel for the Respondent (Assessee) pointed out that as regards the question of additional depreciation, while there is no dispute that the Assessee did acquire or install new and eligible plant and machinery after 31st March 2005. The only dispute raised by the Revenue was that the Assessee did not ‘use’ the said plant and machinery for producing or manufacturing an article or thing. The ITAT held that production of radio programmes, since it involves the technical process of recording, editing, copying and then broadcasting, amounted to production of an article or thing and therefore, the Assessee was eligible for additional depreciation.

After due deliberation and listening to the counsels of both the party, Question No. 1 was answered in favour of the Assessee and against the Revenue.

Moving to Question No. 2, it is seen that the fact is that the Assessee kept ready for use the intangible assets in respect of three radio stations at Jodhpur, Amritsar and Patiala. This has not been denied even by the Revenue. The order of the AO recorded as under:

The Assessee has submitted that depreciation has not been claimed on any of the other assets in case of the other three stations, i.e., Patiala, Amritsar and Jodhpur, apart from One Time Entry Fee. This is not in consonance with the Assessee’s statement of his written submission dated 2nd December 2010, wherein he has that stated that depreciation was claimed because of the existing case laws in his knowledge. He has stated that based on the decisions of the above cited case laws, depreciation has been claimed on assets kept ready to use and on which trial run was being done. This being the case, the Assessee has not given any reason why depreciation has been claimed on the Licence Fee, but not on the tangible assets also being used on trial runs.

The above passage reveals that the AO was not questioning the fact that the intangible asset has been kept ready for use. The AO disallowed it because depreciation was claimed on the licence fee, i.e. a non-intangible asset and not on a tangible asset. The order of the CIT (A) also proceeded on the same footing. No provision of the Act has been brought to the notice of the Court which states that an Assessee would be denied the claim of depreciation on intangible assets only because there was no claim also on the tangible asset.

The Assessee relied upon the two decisions i.e., CIT v. Refrigeration & Allied Ind. Ltd. in which it was held that an asset can be said to be ‘used’ when it is kept ‘ready for use’. Likewise in Capital Bus Service Pvt. Ltd. v. CIT (Del) it was held that while interpreting the expression ‘used’ “it would be more appropriate to envisage the expression as comprehending cases where the machinery is kept ready by the owner for its use in the business and the failure to use it actively in the business is not on account of its incapacity for being used for that purpose or its non-availability.

For all the above mentioned reasons, Question No. 2 was also answered in favour of the Assessee and against the Revenue.