Royal Multisport Private Limited Vs ACIT (ITAT Mumbai)
Summary: The Special Bench of the Income Tax Appellate Tribunal, Mumbai considered two questions concerning franchise payments made by Royal Multisport Private Limited, formerly known as Jaipur IPL Cricket Private Limited, in connection with its Rajasthan Royals franchise in the Indian Premier League (IPL). The reference arose from the Division Bench’s order constituting the Special Bench by order dated 15-09-2020. The appeals before the Special Bench included ITA Nos. 3602/Mum/2014, 3727/Mum/2014, 1113/Mum/2016 and 1114/Mum/2016 concerning Assessment Years 2009-10, 2010-11 and 2011-12.
The first question was whether the franchise payment made by the assessee was capital or revenue in nature. The second question was, if the payment was capital, whether depreciation was allowable on the entire franchise fee and league deposit or only on the annual instalments of franchise payment and league deposit actually paid by the assessee.
The assessee was the owner of Rajasthan Royals, which participated in the IPL organised by the Board of Control for Cricket in India (BCCI). Following the auction process, the assessee obtained franchise rights and entered into a franchise agreement with BCCI-IPL. Under the arrangement, the franchise fee represented a bid amount of Rs. 268 crore, payable in ten equal annual instalments. The agreement also contemplated payment of 20% of franchise income from the 11th year onwards for the term of the League. The franchisee acquired rights to operate as a member of the League, receive specified revenue shares and exploit its own franchise, subject to the terms of the agreement.
For the relevant year, the assessee capitalised the entire franchise fee of Rs. 268 crore and League deposit of Rs. 80.40 crore in its books and claimed depreciation at 25% on the entire amounts by treating them as intangible assets. In the assessment proceedings for AY 2009-10, the Assessing Officer examined the franchise agreement and held that the franchise rights constituted commercial or business rights in the nature of a licence or franchise covered as intangible assets under Section 32(1)(ii) of the Income-tax Act, 1961. The AO, however, held that depreciation could be allowed only on the amount actually paid during the year.
For AY 2009-10, the assessee had actually paid Rs. 26,80,21,324 towards the first instalment of the franchise fee but claimed depreciation of Rs. 67,00,59,009, being 25% of the entire Rs. 268 crore. The AO accordingly allowed depreciation of Rs. 6.7 crore, being 25% of the actual payment of Rs. 26.8 crore, and disallowed excess depreciation of Rs. 60.3 crore.
The AO noted that the consideration for the franchise rights comprised the League deposit of Rs. 8.04 crore annually over ten years, aggregating to Rs. 80.40 crore; a payment of Rs. 18.76 crore for each of the first ten years, aggregating to Rs. 187.60 crore; and 20% of franchise income from the 11th year onwards. The AO observed that the payments were subject to contingencies, including whether League matches were held, while the payment from the 11th year onwards was variable and indeterminate. On that basis, the AO treated the amount actually paid during each year as the cost of the intangible asset for depreciation purposes.
The Division Bench, while referring the matter to the Special Bench, noted that the parties did not dispute that the franchise payment was capital expenditure on which depreciation was allowable, although the assessee had also advanced an alternative claim that the franchise payment was revenue expenditure. The Division Bench further noted conflicting views of coordinate Benches concerning the nature of the franchise expenditure and, on the depreciation issue, expressed its inability to depart from decisions in The India Cements Ltd. and GMR Sports Pvt. Ltd., which had allowed depreciation on the entire franchise fee and League deposit rather than restricting depreciation to annual instalments actually paid.
After considering the matter, the Special Bench left Question No. 1—whether the franchise payment was capital or revenue in nature—open and did not adjudicate upon it in view of the facts and circumstances referred to in the order. Accordingly, the Special Bench did not finally determine the capital-versus-revenue character of the franchise payment.
On Question No. 2, the Special Bench held that depreciation was to be allowed on the entire franchise fee of Rs. 268 crore, treating that amount as the actual cost of the intangible assets acquired during the financial year, rather than restricting depreciation to Rs. 26.80 crore actually paid during the financial year. The allowance was made subject to necessary adjustment in subsequent financial years as observed in the order.
Thus, the Special Bench answered Question No. 2 in favour of allowing depreciation on the entire franchise fee of Rs. 268 crore, while leaving Question No. 1 open. The Special Bench disposed of the matters and remitted them to the Division Bench for passing appropriate orders. The order was pronounced in the open court on 31-10-2025.
Cases Discussed
- The India Cements Ltd., ITA No. 604/Mds/2012 & 363/Mds/2012 dated 01-01-2016 — The Division Bench referred to this coordinate Tribunal decision, which had allowed depreciation on the entire franchise fee and League deposit rather than restricting depreciation to the annual instalments actually paid.
- GMR Sports Pvt. Ltd., ITA No. 1488/Bang/2015 & 1489/Bang/2015 dated 29-07-2016 — The Division Bench referred to this coordinate Tribunal decision, which similarly allowed depreciation on the entire franchise fee and League deposit. The Division Bench noted judicial discipline and propriety in following the coordinate Bench decisions, leading to the reference to the Special Bench.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The following questions have been raised for consideration of the Special Bench so constituted by the Hon’ble President, ITAT vide his order dated 15-09-2020:
“Q.No.1. Whether the franchise payment made by the assessee is capital or revenue in nature?
Q.No.2. In case, such payment is held as capital, whether the assessee is entitled to claim depreciation on the entire franchise fee and league deposit or the depreciation is allowable only on the annual installment of franchise payment and league deposit actually paid by the assessee?”
2. Firstly, it would be relevant to refer to the background and reasons for reference of the matter by the Division Bench before the Hon’ble President, ITAT for constitution of this Special Bench as the same will provide us the requisite context to examine the contentions advanced by both the parties.
Reference by the Division Bench
3. As noted by the Division Bench, the assessee is the owner of Rajasthan Royals, which participates in annual sporting event named as Indian Premier League (IPL) organised by the Board of Control for Cricket in India (BCCI). Initially, the BCCI invited bid for auction of franchise (Special Bench) rights of eight teams to participate in the IPL. In response to the bid, various entities submitted their bids and ultimately, the assessee was successful in getting the franchise rights of Rajasthan Royals.
4. The Division Bench further noted that a franchise agreement was thereafter executed between the assessee and the BCCI-IPL. As per the terms of the agreement, as a consideration for right to operate as a franchise and to be a member of League, the franchisee was required to pay to the BCCI-IPL two types of payments annually. Firstly, franchise fee represent the bid amount of Rs. 268 crore in ten equal annual installments payable over a period of ten years. That apart, the assessee is also required to pay 20% of the franchise income received every year from 11th year onwards for the term of the League. The terms of the franchise agreement also provide that the franchisee has a right to carry on the franchise as a member of the League so long as the League continues, subject to termination, suspension or renewal and to receive share in revenue from exploitation of central rights and from exploitation of licensing and merchandise rights and to receive revenue from exploitation of its own franchise. The agreement also provide that the franchise can sell the franchise or transfer the controlling interest in franchise to a third party for the remaining term of League. On termination of the agreement, the franchise shall vest in BCCI-IPL, after which, the BCCI-IPL can transfer it to a third party.
5. The Division Bench further noted that in terms of the franchise agreement, the assessee paid the annual installment of franchise fee along with league deposit of 8.04 crore, which also has to be paid annually over a period of ten years. In the books of account, the assessee capitalized the entire franchise fee of Rs. 268 crore as well as the League deposit of Rs. 80.40 crore. In the return of income filed for the assessment year under dispute, the assessee claimed depreciation @ 25% on the entire franchise fee amount of Rs. 268 crore as well as League deposit of Rs. 80.40 crore by treating it as intangible asset.
6. The Division Bench further noted that in the course of assessment proceedings, the Assessing officer (“AO”) while examining the allowability of assessee’s claim of depreciation verified all relevant documents including the franchise agreement. Ultimately, though, the AO held that the payment made by the assessee towards acquiring the franchise right is a capital expenditure, however, he held that the depreciation is allowable only on the amount actually paid by the assessee during the year. In other words, he allowed depreciation on the annual installment of franchise fee and League deposit paid by the assessee and not on the entire franchise amount as well as the League deposit, as claimed by the assessee. The Division Bench further noted that while considering the assessee’s appeal on the issue, the Ld.CIT(A) also agreed with the AO.
7. In the aforesaid factual background, after considering the rival contentions advanced by the Learned Counsel for the assessee and Ld. Department Representative, the Division Bench held that in the facts of the present case, both the assessee and the Revenue have no dispute that the franchise payment made or to be made by the assessee is capital expenditure, on which depreciation is allowable. At the same time, the assessee has raised alternative claim for allowance of franchise payment as revenue expenditure and extensive arguments were also advanced by both the parties on such issue.
8. The Division Bench referred to various decisions of the Co-ordinate Benches of the Tribunal and held that there is a conflict in the opinion expressed by different Benches of the Tribunal with regard to the nature and character of expenditure itself, whether revenue or capital and it was of the opinion that the primary issue which therefore has to be addressed is the nature of expenditure – capital or revenue.
9. The Division Bench further held that where the franchise payment made by the assessee is held in the nature of capital expenditure, they are unable to subscribe to the view expressed by the Co-ordinate Benches of the Tribunal in the cases of The India Cements Ltd. (ITA No. 604/Mds/2012&363/Mds/2012 dated 01-01-2016) and GMR Sports Pvt. Ltd. (1488/Bang/2015&1489/Bang/2015 dated 29-07-2016) allowing depreciation on the entire amount of franchise fee and League deposit, instead of restricting it to the annual installments actually paid by the assessee. However, being a Bench of equal strength, as a matter of judicial discipline and propriety, it cannot take a view different from the view taken by the Co-ordinate Benches of the Tribunal in the aforesaid two cases.
10. In the aforesaid background, the matter has been referred by the Division Bench to the Hon‟ble President, ITAT for constitution of the Special Bench for consideration of aforesaid two questions namely, whether the franchise payment made by the assessee is capital or revenue in nature and in case, such payment is held as capital, whether the assessee is entitled to claim depreciation on the entire franchise fee and league deposit or the depreciation is allowable only on the annual installment of franchise payment and league deposit actually paid by the assessee.
11. Before we examine the contentions advanced before us by the ld Counsel on behalf of assessee and ld CIT DR on behalf of the Revenue, for sake of completeness and even at the cost of repetition, we deem it appropriate to refer to findings of the Assessing officer during the course of assessment proceedings, as well as that of the Ld. CIT(A) during the course of appellate proceedings in case of the assessee for the assessment year 2009-10.
Assessment proceedings and findings of the Assessing officer
12. During the course of assessment proceedings, it was observed by the AO that the assessee company is the owner of Franchise called “Rajasthan Royals”. The company was set in February 2008 after the promoters bought the rights to operate a franchise called the “Rajasthan Royals”. This is second year of operation of the company. The assessee company has made a claim of depreciation of Rs 67,00,59,009/- on account of capital expenditure in respect of Franchise Fee during AY 2009-10. This claim has been made in respect of actual payment of Rs 26,80,21,324/- to the BCCI-IPL as part of the first installment of bid amount of Rs.268 crore approximately. The assessee, therefore, claimed depreciation @ 25% on full bid amount of Rs. 268 crore, although payment made during the year was only of Rs.26.8 crore. In respect of the above, the assessee was asked to produce proof of payment of Rs 26,80,21,324/-, document pertaining to invitation to tender, bid document, copy of Franchise agreement between Jaipur IPL Cricket Pvt. Ltd and BCCI. The assessee provided these documents during the course of assessment proceedings. After having gone through the relevant documents, it was found by the AO that the assessee had made payment of Rs 26,80,21,324/- for buying the right to play in IPL matches. However it was noticed that the assessee claimed depreciation of Rs 67,00,59,009/- in the return of income for AY 2009-10 and the assessee was called upon to explain regarding the allowability of depreciation claim of Rs 67,00,59,009/ vide letter dated 15-05-2011.
13. The assessee vide letters dated 06-07-2011 and 13-07-2011 submitted that the cost of Franchise amounting to Rs.2,68,00,00,000/- was incurred towards acquisition of the Franchise through an auction conducted by the BCCI. It was stated that the consideration was payable to the BCCI in instalments, and hence, the expenditure was capital in nature and not revenue. It was further submitted that the Franchisee represents an identifiable asset, though without physical substance, held for use in the course of rendering services and for earning income therefrom. The assessee emphasized that the said asset was controlled by it as a consequence of entering into an agreement with the BCCI for acquisition of the IPL Franchise, namely, “Rajasthan Royals” and that the same yielded economic benefits in the form of income from BCCI and other sponsorship receipts. The assessee accordingly capitalized the cost of the Franchise and treated it as an intangible asset in accordance with Accounting Standards 10 and 26 isssued by the Institute of Chartered Accountants of India. It was further submitted that, in terms of section 32(1)(iii) of the Act, depreciation is admissible in respect of know-how, patents copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after 1st April, 1998, and depreciation at the prescribed rate of 25% had been claimed accordingly.
14. The AO noted that the firstly, it needs to be determined as to whether the payment made for acquiring the right to play in IPL was revenue expenditure or capital expenditure and in that regard, he took note of following features of the Franchisee Agreement:
1. The preamble to the Franchisee Agreement mentions that in response to the tender documents, the Franchisee submitted a bid and subsequently secured a right to operate a Franchise defined as the Franchisee’s individual business of establishing and operating the team as contemplated in the Agreement.
2. In terms of the Agreement, the BCCI-IPL agreed to stage the IPL (League) each year with eight teams competing upto the first three years and thereafter not more than 10 teams.
3. The BCCI-IPL granted each Franchisee the right to carry on the Franchise as a members of the league so long as the league continued subject to termination, suspension or renewal, to receive share in revenue from exploitation of central rights and from exploitation of licensing and merchandizing rights, and to receive revenue from exploitation of its own franchise.
4. The Franchisee can sell the Franchise or transfer the controlling Interest in the Franchise to the third party for the remaining term of the league.
5. On termination, the Franchise shall vest in the BCCI-IPL after which the BCCI-IPL can transfer it to a third party.
6. As a consideration for a right to operate a Franchise and to be a member of the league, each Franchisee is required to pay to the IPL the following two sums, together termed as Franchisee Payments.
a. A fee, described as a “Franchise Fee” to be paid in ten equal annual Installments.
b. 20% of the franchisee Income received every year from the 11th year onward for the term of the league.
7. The franchisee payments would be adjusted only on the date of first match of the league every year.
8. If no league takes place at all in any year, no liability arises to make the franchisee payments.
15. In view of the aforesaid features of the Franchise Agreement, the AO noted that (a) each Franchisee acquired a right to operate a team for the terms of the league; (b) by virtue of this right, each Franchise is entitled to receive certain revenues relating to the league; (c) as consideration for acquiring these rights, each Franchisee is to make the above Franchisee payments and (d) the Franchisee itself can be sold or controlling interest therein can be transferred by the Franchisee. The AO accordingly held that the Franchisee acquires a bundle of rights which is commercial or business right in the nature of license or franchise described as intangible assets u/s 32(1)(ii) of the Act. Therefore, payment made by the Franchisee to the BCCI-IPL to obtain and enjoy the right is in the nature of capital expenditure.
16. The AO further held that in view of peculiar nature of the contract, it can be held that the franchisee is not a full owner of the entire asset. This is evidenced by the fact that the Agreement provides all pervasive rights to the BCCI-IPL including media rights, umpire sponsorship rights, title sponsorship rights, official sponsorship rights, right to sell stadium advertising, games rights etc. Besides, Franchisee shall have no right to assign or delegate the performance of any rights or obligation under the Agreement without prior written permission from the BCCI-IPL. The Franchisee cannot even sell or transfer its franchise in the first three years of the agreement. Power to terminate the agreement is tilted in favour of the BCCI-IPL. Franchisee shall not sub-let or sub-contract the franchisee rights without prior written permission of the BCCI-IPL.
17. On the issue of allowing the depreciation on the rights acquired by the assessee for the AY 2009-10, the AO noted the following:
1. The total expenditure for acquiring the Franchise which the assessee has to make is Rs. 268 crores to be paid in ten equal annual installments so that each year the assessee makes a payment of Rs.26.8 crores to the BCCI-IPL. The assessee has treated this expenditure as capital in nature and has claimed depreciation 25% on full franchise consideration of Rs.268 crores, although the payment made during the year is only 26.8 crores. Thus, the total depreciation claimed in the books is Rs.67 crores.
2. The consideration to acquire the above rights consists of three components which are mentioned in para 7 of the agreement;
a. League deposit of Rs. 8,04,00,000/- over a period of 10 years. The aggregate payment for the 10 years comes to Rs. 80.40 crores
b. A payment made for acquiring and operating the Franchise which is Rs.18.76 crores for each of the first 10 years. Thus aggregate payments for the 10 years comes to Rs. 187.60 crores
c. 20% of the franchisee Income from the 11 year onwards
18. The AO held that these payments are towards the cost of the Intangible asset acquired. The league deposit is paid on 2nd January of each year. The amount is appropriated towards franchise consideration on the date of the first match of the league. The second part of the franchise consideration is also to be paid as per the Agreement on the date of the first match of the league for a particular year. Clearly, if for any reason the league match is not held in a year or season, the league deposit will not be appropriated towards franchise consideration. It would be refunded to the Franchisee in terms of clause 7.1(a)(i) of the agreement. The second part of franchise consideration also will not be paid as this is paid on the first day of the first match. Thus, the payment to be made by the Franchisee as franchise consideration is thus, not absolute but contingent on the league matches being played. If the matches are not held, the franchise consideration is not paid. Thus, cost of the asset increases fractionally year after year subject to payments. Further, from the 11th year onward the franchise payment is 20% of Franchisee’s income which is an indeterminate and a variable amount.
19. The AO accordingly held that in so far as actual cost of the asset is concerned, the same is indeterminate as it is dependent on certain contingencies in the first 10 years and in the 11th year onwards, payment @ 20% of franchisee income is not ascertainable at this stage. In view of this, it was held by the AO that the cost of the asset to the franchisee is, therefore, the amount paid during the year by the franchisee on which depreciation would be allowable at the prescribed rate in that year. The adjusted cost after depreciation would be the WDV of the block of intangible asset at the end of the year if the right is the lone asset in the block. Every year, the payment made towards franchise payment would be added to the opening WDV of the intangible assets for that year and depreciation would be allowed accordingly at the prescribed rate on the so adjusted WDV. If no payment is made in that year, the depreciation shall be allowed only on the opening WDV if there is no other addition to the block. This takes care of a situation where no league matches are played in a particular year and therefore, no franchise payment is made.
20. The AO thus held that the depreciation allowable in the case of the assessee is only @ 25% of the actual franchise payment made during the year which is Rs.26.8 crores. Thus, allowable depreciation comes to Rs.6.7 Crores being 25% of Rs. 26.8 crores as against Rs.67 crores claimed by the assessee and excess depreciation amounting to Rs.60.3 crores was disallowed and corresponding addition was made in the hands of the assessee while determining the assessed income.
Appellate Proceedings and findings of Commissioner of Income Tax (Appeals)
21. The assessee thereafter carried the matter in appeal before the Ld. CIT(A). During the course of appellate proceedings before the Ld.CIT(A), the assessee referred to para 7 of the franchise agreement dealing with determination of the franchise consideration and the mode of payment as under:
i. Towards league deposit Rs. 80.40 cr (payable over a period of 10 years, annual payments to be made in advance each year). Such deposit was to be appropriated towards the annual franchise consideration (i.e, considered as part of franchise consideration) on the date of the first match of the League in the year in which such deposit is paid. The deposit would be refundable in any year only if the League does not take place at all in such year.
ii. Cost of acquiring and operating the Franchise of Rs. 187.6 crs (payable over a period of 10 years, annual payments to be made in advance each year). This part of the consideration would be payable each year on the date of the first match in the League in each such year.
iii. 20% of the franchise income received in each year, from the 11th year onwards.
22. The assessee, based on the above contractual commitments, submitted that it has considered the Franchise consideration at Rs. 268 crs (i.e Rs. 80.40 crs plus Rs. 187.6crs), the third component payable from 11th year onwards being incapable of any reliable estimate, was not considered for such value.
23. It was submitted that before determination of the “actual cost” of an asset, the “asset” and its nature need to be clearly understood. In the assessee’s case, it is clear from the Agreement that what it has acquired under the Agreement from BCCI are the “Franchise Rights” in respect of the IPL league matches to be played, with all consequent income streams over the entire period of the “Franchise Rights”, i.e, for the 10 explicit years from 2008-2017 and for years thereafter. It is such “asset” which has been acquired by the assessee. It is not a case where the asset acquired by the assessee gradually increases in its cost (and value) over the years, simply because the payment of the total consideration for acquiring the asset is spread over a period of ten years. It was submitted that the AO has, in disregard to the terms of the Agreement, assumed that the deferred payment results in “deferred acquisition” of the asset.
24. It was submitted that it is a trite law that provisions of an agreement forming the basis of any transaction (which has also not been considered nor alleged as non-genuine or not reliable for any reason) cannot be read otherwise than what it actually states.
25. Referring to Section 43(1) of the Act which defines “actual cost” to mean the actual cost of the asset to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority., it was submitted that the word “actual cost” refers to the cost incurred by the assessee to acquire the asset. In other words, the cost which is paid/payable by the assessee to acquire the asset is the actual cost of the asset.
26. It was submitted that it is settled position that any future events cannot change/alter such cost. In this connection the assessee relied on the decision of the Hon‟ble Apex Court in the case of Tata Iron & Steel Co. Ltd. (98 TAXMAN 459) wherein it was held as under:
“The manner of repayment of loan cannot affect the cost of the assets acquired by the assessee. What is the actual cost must depend on the amount paid by the assessee to acquire the asset The amount may have been borrowed by the assessee, but even if the assessee does not repay the loan, it will not alter the cost of the asset. If the borrower defaults in repayment of a part of the loan, the cost of the asset will not change
….The manner or mode of repayment of the loan had nothing to do with the cost of an asset acquired by the assessee for the purpose of his business…”
27. It was submitted that the cost of the asset will not be affected regardless of the payment modality and any future events, more so, any unforeseen future event. Therefore in the instant case, the cost of the franchise is Rs. 268 crores payable over a period of 10 years.
28. It was submitted that the AO, for the purpose of the disallowance, has assumed/considered that since the Franchise Rights are in respect of matches to be played, the payments deferred represent contingent part of the asset, as match may not be played in future year(s). It was submitted that such assumption/consideration by the AO is ill founded for the following reasons:
i. The cost determined by the assessee of the Franchise Rights acquired from BCCI was based on the offer made by it while bidding for its acquisition, which clearly indicated the total amount for which the Franchise Rights were bid (information in relation to such bids and the amounts bid for specific Franchise Rights were also available in the media at the time and therefore, in public domain). It was on such bid that the specific Franchise Rights were acquired at a total cost as mentioned in the Agreement and committed by the assessee. Non-payment of any part thereof by the assessee would have entailed not only loss of Franchise revenues but also other legal consequences.
ii. The cost of the Franchise Rights are ascertained and crystallized upon execution of the Agreement and undertaking of the obligation for payment in terms thereof by the assessee. Any such acquisition of intangible asset would generally assume continuation of certain future events, which will in turn continue to make available such intangible to the acquirer (for example, continued enforceability of legal title, continued ability to use the intangible in the specific territory for which the same was acquired etc.) the question of effect on cost in future on occurrence or non-occurrence of events may need to be considered only at such point in future (as regards any amount of future liability not paid/payable, the Hon‟ble Apex Court has settled in the decision referred to above, that the cost of the asset will not be affected).
iii. Even commercially, the valuation of such Franchise Rights acquired by the assessee will not discount any such future contingency, as assumed by the AO. In other words, full commercial value will continue to reflect such asset as acquired by the assessee through the Agreement.
iv. The assessee has not only acquired the Franchise Rights for the entire period at a cost as bid by it and reflected in the Agreement, but it has also acquired the right to receive corresponding income in such period. Conceptually therefore, since the entire bid and acquisition price of the rights flow from the present value of such future income stream, any assumption as made by the AO will also imply that such right to receive corresponding income is not to be considered. Such assumption would be not only not in accordance with the terms of the Agreement but against the very commercial basis on which the said rights were bid and acquired.
v. The assessee could not have acquired the Franchise Right in part (corresponding to any year or years) and had to and infact had acquired the Franchise Rights over the entire period.
vi. Mere deferment of payment of any part of purchase consideration (as in the present case) cannot alter the cost of the asset or the purchase consideration documented and agreed upon by the parties.
29. Further, the assessee drawn the attention of the Ld.CIT(A) towards conditions for allowability of Depreciation. Section 32 of the Act allows any person to claim depreciation on an asset if the following conditions are satisfied.
i. The asset is owned wholly or partly by the assessee, and
ii. The asset is used for the purpose of business of the assessee.
30. It was submitted that the assessee is the owner of the ‘intangible asset as the assessee is not only the full owner of the asset and has control over the same, but also derives income from the said asset. In the case of CIT v. Orient Longman (P.) Ltd. (227 ITR 68), the Hon’ble High Court of Andhra Pradesh held that the “owner” is the one who has the dominion and control over the property in his own right and not in the right of others. The assessee also relied on the decision of the Lucknow Bench of the Tribunal in the case of Smt. Surinder Kaur v. Income-tax Officer (27 SOT 28) wherein it was held as under:
“… it can be said that a wide meaning must be given to the term ‘ownership”. If the assessee is, in possession of an asset, using it for the purposes of earning income and income earned there from is declared in the return of income which is accepted by the revenue, then for all purposes the assessee is the owner of the asset and once it is being used for the purposes of business, the assessee is entitled for depreciation.”
31. It was submitted that the AO inter alia has alleged that the assessee was not the full owner of the entire asset, as BCCI had retained certain controls. It was submitted that the control of BCCI does not render BCCI to be the owner for any part of the asset. The conditions in the Agreement only laid down the manner in which the Franchise Rights could be used by the assessee. It is settled law that even if there is a third party interest in an asset, it would not affect the rights of the owner until the third party exercises its interests as established in the case of SBI Home Finance Ltd. V. CIT (148 Taxman 585), wherein the Hon’ble High Court of Calcutta held as under:
“…But when a person has acquired interest in a property with notice of the right of a third party, then he cannot be said to have acquired any interest or right of ownership on the property. On the other hand, he has acquired the interest, title or ownership on the property subject to the right of the third party of which he has notice and such right can be enforced only by such third party. Until such right is enforced, the transferee continues to be the owner of the property against the whole world.”
32. Further, it was submitted that it is a settled legal principle that where the assessee is in a position to exercise the rights of the owner even when full title has not vested in him, he is said to be the owner of the asset. The assessee relied on the decision of the Hon’ble High Court of Allahabad in the case of U.P State Agro Industrial Corpn. Ltd. (127 ITR 97). In the said case the Hon‟ble Court observed as under:
“To qualify for depreciation under section 32, the property should not only be used by the assessee in connection with his business or profession but it should also be owned by the assessee. The scope of the expression “property of which the assessee is owner” used in section 9 of the 1922 Act, and the expression “the property owned by the assessee” used in section 32 of the 1961 Act, is the same. The expression “property owned by the assessee” has not been used in the sense that the property’s complete title vests in the assessee. The assessee be considered to be an owner of the building under section 32 if he is in a position to exercise the rights of the owner not on behalf of the person in whom the title vests but in his own rights.”
33. It was submitted that it is clear from the Agreement that the payment towards the Franchise fees is to be made in ten equal installments for the first ten years of the League. Further, the assessee placed reliance on the case of Mirza Ataullaha Baig (202 ITR 291) wherein the High Court of Bombay held as under:
“The fact that the full price was not paid at the time of purchase but only a part was paid and the balance was to be paid in installments did not militate against the passing of property to the purchaser. The law is well-settled that in a case of sale in which the price is to be paid by installments, the property passes as soon as the sale is made, even though the price has not been fully paid and may later be paid in installments.”
34. It was submitted that the Delhi High Court, in the cases of General Industries Corpn. (155 ITR 430) as well as in the case of Nagpur Golden Transport Co. (233 ITR 389) has reiterated the aforesaid proposition as under:
“in a hire-purchase scheme, the hirer would be entitled to claim depreciation. These judgments clearly go against the contention of the learned counsel for the assessee that until the last installment was paid, the ownership vested in the assessee and not in the hirer.
35. It was submitted that from the aforesaid, it is evidently clear that the assessee is the “owner” of the intangible asset being Franchise Rights and is therefore, entitled to claim depreciation on the same in terms of the provisions of section 32 of the Act on the entire cost as per the Agreement and as recorded by it.
36. It was further submitted, without prejudice to the above, that a component of a value of an asset being contingent on the happening of an event would not affect the full contractual value of the asset acquired and hence, the right to claim depreciation on the same. If at all, in the event of the contingent event not happening in future (as envisaged in the contract), the value would be revised to recognize the effect thereof at that time in future (and such revised value will form the basis for claim of depreciation for the remainder of the life of asset).
37. Taking the aforesaid submissions of the assessee as well as the findings of the AO into account, the Ld. CIT(A) has given his findings and we deem it appropriate to refer to his findings which read as under:
“Decision on Ground of Appeal -1 & 11:
5.2.5. I have given my careful consideration to the rival submissions, perused the material on record and duly considered the factual matrix of the case as also the applicable legal position.
5.2.6. The Board of Control for Cricket in India started Indian Premier League series by inviting bids (Invitation to Tender (ITT)) to own and operate 8 Teams for different locations in India in order to be part of and take part in the League. The Term of the League is indefinite and for as long as the League Continues. However, the Franchisees are entitled to sell their Franchise to a third party or to effect a transfer of a controlling interest in the company which Controls the Franchisee, only after a minimum period of three years, subject to payment to IPL a percentage of the value of the business, being 10% for the first such sale or transfer and 5% thereafter.
5.2.7. By virtue of the right to own and operate the Franchise, each Franchisee became entitled to receive certain revenues relating to the League and their respective Teams. These revenues arise from exploitation of Central Rights, Licensing & Merchandising Rights and Franchisee Rights. Each Franchisee is responsible for all costs relating to the operation of its Franchise including the fees and salaries of all persons providing services for its Team, all costs of staging home match including hiring of stadium and security & staff costs at stadium.
5.2.7. Consideration for Franchisee:
As a consideration for the right to operate a Franchise and to be a member of the League, each Franchisee is required to pay to the IPL the following two sums, together termed as Franchisee Payments:
a. A fee, described as the ‘Franchise Fee’ to be paid in ten equal annual installments.
b. 20% of sums received by each Franchisee from the exploitation of the Central Rights and Franchise Rights every year from the eleventh year onward for the term of the League.
The successful bid amount of each Franchise represents the Franchise Fee payable in ten equal annual installments. In this case, M/s. Jaipur IPL Cricket Pvt Ltd. made the successful bid for Jaipur Team at USD 67.00 million. This bid amount is payable as the Franchise Fee in ten equal annual installments.
5.2.8. Nature of Franchise and Franchisee Payments:
5.2.8.1. Each Franchisee acquired the right to operate a Team and be a member of the League for the term of the League. By virtue of this right each Franchisee is entitled to receive certain revenues relating to the League and their respective team. As consideration for acquiring these rights each Franchisee is to make the above Franchisee Payments.
5.2.8.2. In the case Techno Shares & Stocks Ltd v CIT, 327 ITR 323 (SC), the assessee was a share broker in the Bombay Stock Exchange (BSE). It claimed before the AO that the BSE Membership Card was a “licence” or business or commercial right of similar nature’ under section 32(1)(ii) and, therefore, an intangible asset eligible to depreciation under section 32(1)(ii). The Assessing Officer did not accept this contention and held that membership was only a personal permission; that there was no ownership of an asset; that what was transferrable was only a Right to Nomination; and that there was no obsolescence, wear and tear or diminution in value of the BSE Membership card by its use, hence, the assessee was not entitled to claim depreciation under section 32(1)(ii). The Apex Court observed that it was the right of membership which enabled the assessee to trade on the floor of the BSE and access the market. It held even though the membership was a personal permission it was a business or commercial right which was similar to a “licence” or “franchise” or ‘akin to a licence” falling in section 32(1)(ii) of the Act. The Apex Court held that right to participate in the market had an economic and money value which was an expense incurred by the assessee satisfying the test of being a “licence” or “any other business or commercial right of similar nature in terms of section 32(1)(ii) However, the Apex Court at the same time made it clear that its judgment should not be understood to mean that every business or commercial right would constitute a “licence” or a “franchise” in terms of section 32(i)(ii) of the 1961 Act.
5.2.8.3. The ratio of the above Apex Court decision is applied to the case here. Herein also each Franchisee gets a right which enables it to operate a team in the IPL for profit. The right to participate in the League has a monetary, cost by way of Franchisees Payments which is an expense incurred by the Franchisee. This satisfies the test of being a “licence” or “franchise” or “any other business or commercial right of similar nature in terms of section 32(1)(ii). Therefore, the right to operate a Franchise and to be member of the League is a “licence or Franchise or “akin to a licence or Franchise”, an item of intangible asset described in section 32(1)(ii) of the 1961 Act. Consequently, the Franchisee Payments being the expense incurred for the right constitute capital expenditure.
5.2.8.4. In another case, Jonas Woodhead & Sons (India) Limited Vs CIT 224 ITR 342 (SC), a foreign firm agreed to give the assessee the technical information and know-how relating to the setting up of a plant suitable for manufacture of the products as well as the technical knowhow relating to the setting up of the plant itself. It was agreed that in consideration of the information to be furnished and services to be rendered to the assessee by the foreign firm, the assessee shall pay a royalty on the turnover of the licensed products. In terms of the agreement the assessee made certain payments to the foreign firm as royalty. The AO disallowed one-fourth of the aforesaid payments on the ground that such payment represented consideration for services provided by the foreign company of an enduring nature and was, therefore, a capital expenditure. When the matter reached the High Court it also came to the conclusion that the payment stipulated under the agreement by the assessee to the foreign firm was not remuneration for use of the rights granted by the foreign firm but a composite payment for all the services rendered and information furnished by the said foreign firm to the assessee in the setting up of the factory as well as in the manufacture of the licensed products in that factory. The Apex Court concurring with the High Court observed:
“But in the case in hand the High Court having considered the different clauses of the agreement and having come to the conclusion that under the agreement with the foreign firm what was set up by the assessee was a new business and the foreign firm had not only furnished information and the technical know-how but rendered valuable services in setting up of the factory itself and even after the expiry of the agreement there is no embargo on the assessee to continue to manufacture the product in question, it is difficult to hold that the entire payment made is revenue expenditure merely because payment is required to be made at a certain percentage of the rates of the gross turnover of the products of the assessee as royalty. In our considered opinion, in the facts and circumstances of the case the High Court was fully justified in answering the reference in favour of the Revenue and against the assessee.”
5.2.8.5. Applying the above principles to the issue here it emerges that each Franchisee is acquiring a right to operate a team in IPL for profit. As a consideration each Franchisee has to make the Franchisee Payments. By making these payments each Franchisee got a right to set up individual business of operating a team in the League. It is setting up a completely new business. Even after expiry of the period of the League there is no embargo on the Franchisee to continue to run the business. Thus entire Franchisees Payments made for setting up such business represented capital expenditure. Merely because the payments are required to be made in annual installments or at a certain percentage of the future rights income, the same do not alter the character of these payments from capital to revenue.
5.2.9. Whether depreciation is allowable:
5.2.9.1. In CIT Vs Alps Theatre 6 ITR 377 (SC), a question arose before the Apex Court under the Income tax Act, 1922 whether the cost of land was entitled to depreciation under the Schedule to the Income-tax Act along with the cost of the building standing thereon. The Apex Court noticed that the word used in the Act was “depreciation” and depreciation” meant “a decrease in value of property through wear, deterioration or obsolescence: the allowance made for this in bookkeeping accounting, etc” (Webster’s New World Dictionary). In that sense the Apex Court held that land cannot depreciate. The law has not changed since then except by bringing certain intangible assets within the purview of depreciation under section 32 of the Income Tax Act, 1961. If the aforesaid principles are applied to intangible assets, the settled law would be that only such capital assets whose value can diminish is eligible to depreciation under the Act subject to fulfillment of the conditions that they are owned by the assessee and used for the purpose of business of the assessee.
5.2.9.2. Two new teams, Kochi and Pune were added to the IPL in the year 2010 at total bid value of USD 703 Million giving average bid value of USD333.3 Million per team as compared to the average bid value of USD90 Million per team when 8 teams were auctioned in 2008. This shows that the value of the IPL Franchise does not diminish. Since IPL Franchise does not depreciate it is not entitled to depreciation even if it is an intangible asset u/s 32(1)(ii). However, is also noted that in the case of Techno Shares (Supra) the AO had declined depreciation on Membership cost of the Stock Exchange also on the ground that it did not create any depreciating asset. The Apex Court still allowed the claim. A view, therefore, can be taken that concept of diminishing value would apply only to tangible assets and not to intangible asset. Accordingly, depreciation is held to be admissible.
5.2.10. In case of depreciation what would be the WDV:
5.2.10.1. This is the main bone of contention in this case. Section 32(1)(ii) of the Act provides for allowing depreciation on the written down value (WDV) of the block of assets as may be prescribed. As per Explanation 2 thereto “written down value of the block of assets” shall have the same meaning as in clause (c) of sub-section (6) of section 43. The expression “written down value” has been defined in clause (6) of section 43. Sub-clause (a) thereof defines the WDV as the actual cost to the assessee in the case of assets acquired in the previous year, whereas sub-clause (h) defines the WDV in the case of assets acquired before the previous year as the actual cost to the assessee less all deprecation actually allowed to him before the previous year. Instead of determining “WDV’ of the individual assets in the aforesaid manner, in the case of a block of asset sub-clause (c) defines WDV as the aggregate of the written down values of all the individual assets falling within that block in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as increased by the cost of any new asset falling in the block and/or reduced by the money payable on account of sale, transfer, etc as the case may be of an asset of the block.
5.2.10.2. In terms of ITT, one-tenth, of the Franchise Fee is payable every year for first ten years after which an amount equal to 20% of the Rights Income received is payable in respect of 11th year and each subsequent year till the Term of the League. The term is unlimited. Jaipur IPL was to pay the Franchisee Fee in annual installment of Rs. 26.80 crores for the period 2008-17 (inclusive). This sum was to be appropriated every year towards Franchisee Fee on the date when the first match of the League for that year was played. The appellant acquired the right to Franchise in the year 2008 when it paid the first annual installment of the Franchisee Fee in the year 2008.
5.2.10.3. A question arises whether Rs. 26.8 cores can be taken as the WDV of the Franchise acquired during 2008. It is noted here that this is only a part of the actual cost of the Franchise paid in that year. In this situation whether the AO can determine WDV in each assessment year by ascertaining afresh what was-the actual cost to the assessee of the Franchise falling in the block of intangible asset or whether the AO is bound by the WDV determined in the earlier assessment year as the starting point and can merely scale down the written down value of the previous year. A similar issue arose before the Apex Court in the case Maharana Mills (P) Ltd. v. ITO [1959] 36 ITR 350, 357 (SC) in the context of definition of WDV under sub-clauses (a) and (b) of section 10(5) of the Income tax Act, 1922 which correspond to sub-clauses (a) and (b) of section 43(6) of the present Act. The Supreme Court observed thus:
“The limit to which the Income-tax Office, can go back does not stop at the written down value of the previous year but extends up to the figure of the original cost, and the method enjoined by section 10(5)(b) is not that the Income-tax Officer should merely scale down the written down value of the previous year but that he should take into consideration the actual cost, determining it for himself, if necessary, take into consideration the allowances granted in the past and then make his own computation as to the written down value for the assessment year with which he is concerned. Thus, it cannot be said that merely because under section 35 some written down value and the depreciation amount have been determined they are a final determination binding for all times to come nor does the determination operate as estoppel or res judicata for the following years”
5.2.10.4. The above decision was followed in CIT Vs. Hides & Leather Products Pvt.Ltd. [1975] 101 ITR 61 (Guj) and CIT Vs Saharanpur Electric Supply Company Limited [1976] 109 ITR 545 (All), while interpreting the corresponding provisions under section 43(6)(a) & (b) under the income tax Act, 1961. The only distinction is that definition of WDV in sub-clauses (a) and (b) of section 43(6) do not refer to the Block of Assets. However, block of asset does recognize individual asset falling in the block as a new asset can be added to a block or existing individual asset can be removed from the block on account of sale, transfer, obsolescence, destruction or demolition or when there is slump sale. Even otherwise whenever there is improvement in an existing asset of a block, e.g. a building, cost of such improvement is shown as addition to the WDV of the Block of Buildings. In view of this, the pronouncements of the Supreme Court in the case of Maharana Mills (supra) apply to the fact of the appellant here. Accordingly, it is open to the AO to ascertain afresh the WDV of the asset every year by ascertaining the actual cost to the assessee of such asset and allow depreciation on the adjusted WDV. Accordingly, the amount of the Franchisee Payments of every subsequent year will be added to the WDV the Block of Intangible Asset at the beginning of that year and depreciation will be allowed on the so adjusted WDV in that year.
5.2.10.5. Thus, in the case of the appellant, the relevant year for the first annual installment of Rs.26.80 crores is the A.Y.2009-10. If appellant has no Block of Intangible Asset, Rs. 26.80 crores would be the WDV of the Block of Intangible assets and depreciation of Rs. 6.70 crores at the prescribed rate of 25% is allowable. The WDV of the block at the end of the A.Y 2009-10 would be Rs. 20.10 crores. In the next year, if appellant pays the further sum of Rs.26.80 crores that will be added to the aforesaid WDV and depreciation @25% shall be allowed on the adjusted WDV of Rs. 46.90 cores and so on every subsequent year. If appellant does not pay the second annual installment in the A.Y.2010-11 and there is no other addition to the Block of Intangible Asset depreciation would be allowed only on WDV of Rs. 20.10 crores. Thus every subsequent year’s Franchisee Payments shall be treated as additions to the Block of Asset and depreciation would be allowed on the adjusted WDV at the prescribed rate.
5.2.11. The perusal of the franchise agreement signed on 14/04/08 between the appellant company and BCCI shows that the agreement is for an indefinite period. The payment terms has been crystallised based on the bid for amount that is payable over the first 10 years of the franchise and thereafter at 20% of the revenues of the relevant year. BCCI was the owner of the IPL Board in its stream of revenue and costs in relation to IPL. Its revenue is received from TV Broadcasting rights and central rights income which is shared with the franchisee as per franchise agreement. The net revenue after netting of costs received by BCCI is distributed to the franchisees. The central revenue, TV media rights and sponsorship rights are shared by BCCI-IPL with the franchisee. The franchisee are also entitled to local sponsorship revenue, licensing, merchandising and ticketing revenue for home matches at each venue for the respective franchise. The cost incurred by Franchisee are the player cost, franchisee fees, match related expenses for conducting home matches and administrative cost.
5.2.12. Clause 7 of Franchise agreement deals with the fees payable, clause 10 and 16 with Transfer of Franchise and clause 16 with Termination of the Franchise. The appellant has considered Rs 268 crores payable over 10 years as its cost of intangible assets for its claim of depreciation. It has itself not considered the amounts payable after 10th year on the grounds that it is not determinate. It is noted that the tenure of the Franchise is indefinite and perpetual. The appellant has considered amount payable over only 10 years for its convenience. There is no legal or accounting basis for treating this as the cost of Franchise rights. The Franchise agreement clearly stipulates that if matches are not played, no Franchise annual installment is payable. Further, BCCI-IPL has right to terminate the Franchise. In all such eventuality, the amount payable will be less than Rs 268 crores. As a matter of fact, in the case of the appellant, BCCI-IPL issued a notice of termination on 10-10-2010. Thus, there is no basis to consider Rs 268 crores as incurred in the first year itself. The bid amount can at best be considered as some kind of cap on the fees to be paid over the first 10 years but in no way can it be considered as incurred in first year itself or as the cost of the Franchise Rights Intangible.
5.2.13. From the copy of audited accounts called in these proceedings, it is observed that in its books Rs 268 crores is added to its Fixed Assets under head “Intangibles” and depreciation of Rs 26.80 crores is claimed. In its tax return it has claimed the value of Intangible assets is Rs 268 crores on which depreciation of Rs 67.00 crores is claimed.
5.2.14. Several case laws have been relied upon by the appellant. The same are discussed now. In the case of Tata Iron and Steel Company Ltd., the issue was fluctuation in exchange rate which resulted in the amount payable in respect of foreign currency loan used to finance the asset, becoming less. Admittedly, the facts in the present case is different in the present case, it is not as if Rs 268 crores is the total cost which is financed. The total cost itself, which includes cap of Rs 268 crores plus further amounts after 10 years, is uncertain from the beginning itself. In CIT vs Orient Longman P Ltd., the facts were that assessee purchased a Flat but conveyance deed had not been executed. Full payment had been made and assessee had received possession of the Flat. It was held depreciation was allowable. In the case before me Rs 268 crores has not been paid, only Rs 26.80 crores has been paid. The issue in the case of SBI Home Finance Ltd was lease transaction and whether the fact that the lessee had an option to buy the asset at end of lease term affects the right of the lessor so as to be deprived of depreciation claim. The facts are again different from present case. Similarly, the case of Mirza Ataullaha Baig was in respect of vehicle purchased on credit. A part of the price was paid, and balance was to be paid in instalments. Vehicle was registered in name of assessee. It was held that he was entitled to depreciation. In the case before me the most important aspect is that the cost of Franchise is not determinate. Similarly, the case of General Industries Corporation is in respect of depreciation claim in case of hire purchase, which is again not the fact of the appellant. In my considered opinion, the vital fact to consider is that in the case of the appellant, it is only Rs 26.80 crores paid which is certain. It cannot be said thatRs. 268 crores has been incurred in the first year itself. Hence depreciation is allowable only in respect of Rs. 26.80 crores and not Rs 268 crores.
5.2.15. Once it has been found that the nature of payment in respect of franchise fees is capital in nature it cannot simultaneously be argued, as the appellant seems to be making, that in the alternative the payment made each year should be allowed as revenue expenditure. It has been tried to be argued that the payment made each year can be linked to the income earned each year. However, there is nothing to indicate that the amount paid each year has any direct link only to the revenue earned in that year. It could well be the case that the payment to be made each year varies across the years. For instance, in this case Rs. 26.8 crs is paid in the current year which comprises of 10% of the amount bid for 10 year period by the appellant. There is nothing to indicate that the revenue to be earned in the current year is approx. 10% of the total revenue expected in this period of 10 years. The alternative argument and corresponding ground of appeal of the appellant is therefore, dismissed.
In light of the above discussion, I uphold the order of the assessing officer. The Grounds of Appeal I and II are dismissed.”
Contentions advanced by the Ld. Counsel on behalf of the assessee
38. Now, coming to the contentions advanced by the ld. Counsel, Shri Yogesh Thar during the course of hearing. Firstly, as regards Question No. (i) raised for consideration of the Special Bench, the Ld. Counsel submitted that in so far as the assessee is concerned, there is no conflict of view as regards the nature of the expenditure. The expenditure towards acquisition of Franchise Rights is considered as capital in nature by both the Assessee and the Department. Therefore, the said question does not hold any relevance in the present case. However, the Assessee has made an alternative plea that in case it is held that the yearly payments amount to improvement of the asset, then, by its very nature, the yearly payment cannot be regarded as having enduring benefit and therefore, should be held as revenue in nature.
39. As regards Question No. (ii), regarding the actual cost of the asset, the Ld. Counsel refered to Section 43(1) of the Act, which defines actual cost to mean ‘actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority.’ It was submitted that since the term ‘actual cost’ is not exhaustively defined under the Act, it should be construed in the sense which no commercial man would misunderstand. For this purpose, it would be necessary to ascertain the connotation of the said expression in accordance with the normal rules of accountancy prevailing in commerce and industry. In this regard, reliance was placed on the decision of the Hon’ble Supreme Court in the case of Challapalli Sugars Ltd vs. CIT [1975] 98 ITR 167 (SC).
40. The Ld. Counsel also drawn our attention to Accounting Standard (‘AS’)-26 Intangible Assets issued by the Institute of Chartered Accountants of India (‘ICAI). It was submitted that Para 6.1 therein defines an intangible asset to mean ‘an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes‟. Further, Para 6.2 defines asset as a ‘resource controlled by an enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. The term ‘control’ is explained at para 14 of AS 26 to state that an enterprise controls an asset if the enterprise has the power to obtain the future economic benefits flowing from the underlying resource and also can restrict the access of others to those benefits.
41. It was submitted that upon successfully bidding for the Sawai Mansingh Stadium, Jaipur, the Assessee was awarded a right to operate the Franchise ‘Rajasthan Royals for a bid price of Rs. 268 crores. Accordingly, the Assessee was entitled to exploit the various Franchise Rights granted to it under the Franchise Agreement. Thus, the Assessee has obtained control over the resource i.e. the Franchise Agreement on account of the past event of it being awarded the Franchise through which it can exploit the various rights attached to it viz. sponsorship rights, right in the Central Rights income and so on. It was submitted that the Franchise Rights get covered within the meaning of the term “intangible asset as defined in AS-26 issued by ICAI.
42. Further, reference was drawn to Para 20 of AS 26 which lays down the recognition and initial measurement criteria. According to which, an intangible asset shall be recognised only if it is probable that future economic benefits attributable to the asset will flow to the enterprise and cost of the asset can be reliably measured. Para 24 states that where the purchase consideration is in the form of cash or other monetary assets, it is ‘reliably measured”. The term ‘probable’ is not specifically explained in AS 26. However, a clue can be taken from the said word explained in AS 29 to mean “more likely than not’. It was further submitted that in the present case, since the Assessee is required to pay Rs. 268 crores over a period of ten years towards the acquisition of Franchise Rights, it can be said that the cost of the asset can be reliably measured.
43. With regard to Contingency upon payment towards Franchise Rights, the Ld. Counsel submitted that the AO and Ld.CIT(A) in their orders have alleged that the payment to be made towards Franchise Rights is contingent on league matches happening. In this regard, it was submitted that based on the franchise agreement entered into between BCCI and the Assessee, BCCI has agreed to stage league matches every year during the term of the franchise agreement. In the event it is not viable for BCCI to stage league matches for any reason, then, in such circumstances the Franchisee’s obligation to pay Franchise Consideration stands suspended. For instance, in the year 2020, due to the COVID-19 pandemic, BCCI could not stage the league matches during March- May 2020. Therefore, the Assessee’s obligation of paying Franchise Consideration was suspended and stood deferred to October 2020.
44. In this connection, our reference was drawn to AS 29 on Provisions, Contingent Liabilities and Contingent Assets which defines “contingent asset at para 10.5 as a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the enterprise.
45. It was submitted that in the present case, future uncertain event is a match not happening. The happening of matches on year-to-year is a future probable event which can even be seen from para 2.3 of the franchise agreement as referred above. In case of a future uncertain event being the league match not happening, the Assessee is not required to pay the Franchise Consideration. This would lead to a possible savings in cost which may reduce the cost of the asset in future to the Assessee. The said saving is accordingly a contingent asset. Para 30 to 34 of AS 29 says that a contingent asset should not be recognized. Therefore, the contention of the AO/Ld. CIT(A) that the happening of the match is a contingent liability is with due respect misconceived and misleading. As explained above, what is contingent is the match ‘not happening’. The match ‘happening is not a contingent event rather an expected and probable event for which the bid amount is agreed. Accordingly, since at the time of entering into franchise agreement, the ‘probable event is matches happening, the Assessee has recognized its intangible asset at Rs. 268 crores being the cost of acquisition of Franchise Rights.
46. It was submitted that under the franchise agreement, both the parties have made promises to each other. Promise to conduct matches is a promise on part of BCCI and the promise to pay the Franchise Consideration is a promise on the part of the Assessee. Both the parties are bound by each other’s promises. Based on the Assessee’s promise, the liability to pay Rs. 268 crores has arisen in presenti though to be discharged in future in ten equal annual installments. The Assessee discharges it obligation under the FA, it is not open to the BCCI to terminate or increase the Franchise Consideration by a single rupee. Indeed, the risks and rewards of the Franchise Rights have passed on to the Assessee upon signing of the Agreement and no new risks and rewards are added on year-to-year basis.
47. To reiterate that the assessee is the full owner of Franchise Rights, the Ld.AR submitted that the AO has contended that franchisee is not the full owner of the asset as all pervasive rights are assigned to BCCI and the franchisee is allowed to enjoy only those rights which the BCCI acknowledges. In this regard, it was submitted that the Franchise Agreement has clearly defined the various rights obtained under the agreement. For example, the definition of ‘franchisee rights’, clause 2.1, clause 2.3, clause 4 where it is stated that BCCI ‘hereby grants’ the following rights and several other clauses. The Assessee is paying for Franchise Rights and not for BCCI rights. The Assessee’s rights include, inter alia, obtaining its share of media and other rights to be received from BCCI. This is a part of future economic benefits to be received in pursuance to the Franchise Agreement. The AO has merely referred to certain rights of BCCI including media rights, umpire sponsorship rights, title sponsorship rights, etc. without any basis for the same. From the various clauses of the Franchise Agreement as referred above, it is clear that the Assessee is the full owner of the Franchisee Rights. Furthermore, the agreement provides for a 3-year cooling period within which the Franchise cannot sell the Franchisee to a third party or to affect a transfer of controlling interest. This is because of the commercial requirements of BCCI that the franchisee should have his skin in the game. BCCI does not want traders in franchise, but it wants people who are actually interested in running a Franchise to acquire Franchise Rights. This is also clear from the fact that if the Franchisee wants to transfer a minority interest and not controlling interest, it can do so even in the said three-year period. This further substantiates the fact that the Assessee is in fact the full owner of the Franchise.
48. Regarding yearly installments, which are not ‘cost of improvement’ of the asset, it was submitted that the Ld.CIT(A) in his order has termed these yearly installments paid by the Assessee as ‘cost of improvement’. It was submitted that as per para 59 of AS 26, subsequent expenditure in an intangible asset can be recognized only if it is probable that the expenditure will enable the asset to generate future economic benefits in excess of its originally assessed standard of performance.
49. It was submitted that in the present case, all the rights are conferred upon the Assessee at the outset. Such rights would remain unaltered on year-to-year basis upon payment of the yearly installments by the Assessee. The same is corroborated by various clauses of the Franchise Agreement. For instance, clause 2.1 says that ‘BCCI-IPL hereby grants to the Franchisee during the Term the right’; clause 3.1 defines „Term‟ to be as long as the league continues, clause 4 has laid down all the rights of the Franchisee at the outset itself. Thus, it is clear that all the rights of the Franchisee are clearly defined and assigned at the time of entering into the Franchise Agreement. There is no improvement to the rights by making year-to-year payment. No additional rights are attached to the yearly payments. Also, no additional future economic benefits can be expected after making year-to-year payments. This is therefore, not an improvement of the asset. It is a case of the original cost to be paid in installments.
50. It was submitted that an analogy can also be drawn from the Hire Purchase Arrangements where the hire-purchaser takes the possession of the asset and agrees to makes periodic payments to the hire-vendor towards the acquisition of that asset. The CBDT vide Circular No. 9 of 1943 dated March 23, 1943 issued certain instructions for dealing with cases in which an asset is being acquired under hire-purchase agreement. Para 3 therein provided that the periodical payments made by the hire-purchaser should for tax purposes be regarded as payment on account of purchase to be treated as capital outlay, depreciation being allowed to the lessee on the initial value (ie., the amount for which the hired subject would have been sold for cash at the date of agreement). In view of the foregoing, it was submitted that the annual instalments paid by the Assessee are towards the acquisitions of the Franchise Rights conferred upon it on day one and does not in any way lead to acquiring any further rights or additional future economic benefits and accordingly, cannot be treated as ‘cost of improvement”.
51. In response to questions raised by the Bench during the course of hearing, the Ld.AR submitted that during the years 2016 and 2017, the Assessee was banned from playing in the league in pursuance to the report issued by the Lodha Committee. However, in 2016, BCCI had raised an invoice upon the Assessee asking it to pay the January instalment. The Assessee paid the same under protest and went into arbitration challenging the demand. Ultimately, upon an out of court settlement, it was agreed that the Assessee would not be required to pay the 9th and 10th (i.e. for the year 2016 and 2017) instalment towards the Franchise Consideration. From the 11th year onwards, the Assessee’s team got reinstated in the IPL and was required to pay 20% of its franchisee income as franchisee fee as already agreed in the Franchise Agreement and a copy of the invoice raised by BCCI and the Memorandum of Settlement between the Assessee and BCCI was submitted at Bar during the course of the hearing. It was submitted that to the extent of the last two years instalments being Rs. 53.60 crores (Rs. 26.80 crores each year), the cost of acquisition would get reduced following the ratio of the very decisions in case of Maharana Mills (P) Ltd (Supra) and Saharanpur Electric Supply Company (supra) relied upon by the Ld.CIT(A) and such deduction would happen in the years 2016 and 2017.
52. It was submitted that the words ‘expends or lays out’ used in the foregoing decisions are also the words used in section 37 of the Act which allows revenue expenditure in general and our reference was drawn to the decision of Hon’ble Supreme Court in case of Rotork Controls India (P) Limited [2009] 314 ITR 62 (SC) wherein a question before the Hon’ble Supreme Court was whether the provision made for warranty expenses by a vendor of a capital equipment is an allowable expenditure or it is a mere contingent liability as alleged by the Department. As per para 10, a provision can be recognized when three conditions mentioned in a, b and e of that para are satisfied. In Assessee’s case, it was submitted that all the three conditions are satisfied. It was also submitted that in Assessee’s case it was not a mere provision, but it was a liability as per para 11 which is defined as present obligation arising from past events the settlement of which is expected to result in an outflow of resource embodying economic benefits. In the Assessee’s case, the past event is signing of Franchise Agreement. The obligation is the agreement to pay Rs. 268 crores over 10 years. Meeting such obligation would result in outflow of resources. The earning from the game is the expected economic benefits. Based on this, the Ld.AR submitted that the liability to pay Rs. 268 crores has been incurred which is only to be settled in future date and it should therefore, the entire amount of Rs. 268 crores which should be capitalised as intangible asset and depreciation allowed thereon.
Contentions raised by the ld Commissioner of Income Tax on behalf of the Revenue
53. In her submissions, the ld CIT DR, Ms Neena Jeph submitted that as far as the first question of law as to whether the acquisition of franchise rights constitutes a capital asset, there is no dispute between the assessee and the Revenue that the payment made for the said franchise constitutes capital expenditure. It was submitted that it is the second ground, namely, the quantum of allowable depreciation that remains the primary point of controversy.
54. It was submitted that the assessee’s claim to depreciation on the entire Rs.268 crore franchise fee in the first year is contrary to both the Act and the governing contract. It was submitted that Depreciation u/s. 32 read with section 43(2) attaches only to actual cost that is either actually paid or that has crystallised and become enforceable in the relevant year. The franchise consideration was structured as a security deposit, ten annual instalments, and a contingent revenue share from the eleventh year onward, and the ninth and tenth instalments were never paid and stood waived following the ban. The arrangement was a performance conditioned grant where continued enjoyment depended on ongoing compliance and payment, which means cost accrued over time as instalments were paid or incontrovertibly incurred, and not at inception on a notional total.
55. It was further submitted that depreciation under the Income tax Act is confined to the actual cost of an asset as truly borne by the taxpayer. Read with section 32, section 43(2), only amounts actually paid or liabilities that have crystallised and become enforceable in the relevant year can form part of the depreciable base. On the assessee’s own showing, the franchise consideration was never a single lump sum outlay. It comprised a security deposit, ten annual installments, and an indeterminate revenue share of twenty percent from the eleventh year onward. Two installments, the ninth and the tenth, were never paid because the team stood banned during those seasons and the liability was waived by settlement. Amounts that are never laid out and never become irreversibly due cannot be included in actual cost and depreciation cannot be computed upon them. At no point did the assessee become liable for the full Rs.268 crore. The sum is therefore ineligible as paid under section 43 (sub section 2) for depreciation purposes.
56. It was submitted that the contractual architecture is decisive. This was not a simple sale of assets. It was a long term performance conditioned grant of franchise rights with interlocking provisions on deposits, periodic fees, revenue sharing, termination for non payment, event contingencies, and transfer restrictions. The assessee did not acquire on day one a fully paid up intangible. The right to continue enjoying the franchise was expressly conditioned on ongoing payment and compliance. In substance and in law, the consideration was staggered over time and the assessee’s economic stake grew as and when each instalment was actually paid or incontrovertibly incurred. To treat the entire Rs.268 crore as incurred at inception ignores the contract and inflates the asset’s tax cost contrary to statute.
57. It was submitted that Section 43(2) provides that “paid” means actually paid or incurred according to the method of accounting on which business profits are computed. This definition does not permit the inclusion of contingent, avoidable, or suspended charges in actual cost. A liability is incurred only when it crystallises under the contract and becomes enforceable. Where the obligation to pay depends on future events such as matches being held or seasons actually occurring, the sums do not become due until those triggers occur. The franchise agreement explicitly embedded such event based contingencies. Where matches are not held or seasons are cancelled, the obligation to pay stands suspended. Failure to pay leads not to the accrual of a fixed debt but to forfeiture or other contractual consequences. Judicial understanding of similar arrangements recognises that non- payment under such terms is policed by forfeiture of rights rather than the creation of an unconditional money debt. In the present case the ban in the ninth and tenth seasons meant that no matches occurred, the franchise did not make those instalment payments, and those instalments were ultimately waived. Sums that never became finally due and were never discharged cannot be treated as part of the actual cost on which depreciation is computed.
58. It was submitted that the assessee’s own financial posture reinforces this analysis. The eleventh year onward, revenue share at twenty percent was inherently indeterminate and incapable of precise quantification at the start. Its very nature demonstrates that the full Rs.268 crore could not have been the asset’s day one cost. Accounting prudence embedded in AS 29 recognises a liability only when an obligation is probable and reliably measurable. While accounting cannot override statute, here accounting and tax point the same way – only truly crystallised outgoings can be capitalised.
59. It was submitted that the statutory purpose of depreciation also supports the Department’s position. An intangible franchise right of this kind does not perish in a single year. Its economic benefit accrues over the tenure subject to continued performance. As each yearly instalment is paid, the assessee preserves and extends its enjoyment of the franchise for that year. The written down value of the block of intangibles should therefore grow gradually with actual additions made when each instalment is paid or has unconditionally accrued, and should then be written down by the allowable rate. It would be illogical to grant depreciation on a value that does not exist or is expressly contingent in the contract. To allow depreciation on the entire notional total from year one would decouple tax relief from economic reality and from the Act’s design that only real crystallised cost may be depreciated.
60. It was submitted that another compelling consideration arises from the agreement’s transfer provisions. The Rajasthan franchise carried a distinct three year cooling period after which the franchise could be sold, whereas other teams contracts were not identical. If the assessee were permitted to depreciate the entire Rs.268 crore up front, a sale soon after the cooling period would produce a double deduction of the same economic value. The seller would have written off the notional full cost in year one. The buyer would pay the market price on transfer and then claim depreciation on that purchase price. Such a double depreciation is at odds with the Act. The safeguard against this anomaly is the statute itself. Depreciation must track amounts actually paid or liabilities that have genuinely accrued to the assessee year by year, so that each taxpayer deducts only the cost they truly bear.
61. It was submitted that viewed through the prism of the actual terms, the yearly franchise payments cannot be characterised as an all at once day one cost of acquisition. They are the continuing consideration for ongoing enjoyment of the same underlying rights. In economic substance each instalment either adds to or maintains the assessee’s interest. Failure to pay causes the value to stagnate or collapse, even to zero if the franchise is dissolved. Put differently the payment stream functions as a series of additions to the asset’s cost as the rights are kept alive. The correct tax treatment is to recognise additions to the block in the years in which instalments are paid or unconditionally fall due and to compute depreciation thereon. Unpaid or waived sums do not and cannot form part of the cost base.
62. It was submitted that the terms of the franchise agreement also show that significant portions of the Rs.268 crore were never firmly payable from inception. Each annual instalment was contingent on events such as the holding of league matches. If matches did not occur the obligation to pay was suspended. During the pandemic example cited by the assessee, matches were deferred and the payment obligation stood suspended. The assessee’s own reliance AS 29 acknowledges that a failure of underlying events would reduce its liability and that such potential savings are contingent assets that are not to be recognised. This aligns with the legal position that contingent liabilities or avoidable obligations do not count as incurred until they crystallise. In similar IPL matters, it has been noted that failure to pay under franchise terms can lead to forfeiture of rights which underscores that unpaid fees reflect risks that may dissipate rather than binding obligations. Since depreciation is based on actual cost, these contingent sums cannot be included in the depreciable base before the triggering events occur and the liability becomes absolute,
63. The Ld. CIT-DR referred to the decision of the Hon’ble Bombay High Court in case of Habilb Hussein v. CIT [1963] 48 ITR 859 (Bom) and Hon’ble Andhra Pradesh High Court in case of CIT v. Challapalli Sugars Ltd. [1970] 77 ITR 392 (AP) to underline the principle that depreciation is allowable only on the amount actually paid in the year it is paid, not on hypothetical or contingent liabilities. In both cases, the factual dispute was also about whether amounts already expended could form part of “actual cost.” Even in Challapalli Sugars when the Hon?ble Supreme Court reversed the Andhra Pradesh High Court in (1975) 98 ITR 167 (SC), the controversy remained confined to whether interest actually paid prior to commencement of production should be capitalized as part of actual cost. The Supreme Court allowed capitalization of interest only to the extent of interest already discharged, and not the entire future liability under the loan. This itself demonstrates that the judicial consensus has consistently been that depreciation attaches only to sums already met, not those merely payable or contingent in nature.
64. It was submitted that on the assessee?s reliance on accounting norms from Challapalli Sugars case and the assessee?s claim that the Supreme Court recognized accounting principles as determinative of “actual cost” is misplaced. A careful reading of para 14 of the judgment shows that the Court applied accounting principles only because, under the 1922 Act, there was no statutory definition of “actual cost.”
“14. It would appear from the above that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets which have been created as a result of such expenditure. The above rule of accountancy should, in our view, be adopted for determining the actual cost of the assets in the absence of any statutory definition or other indication to the contrary” (Emphasis supplied)
65. It was submitted that with the introduction of the Income Tax Act, 1961, section 43(1) now provides an explicit definition of “actual cost,” which reads as under:
“actual cost” means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority.”
66. It was submitted that the phrase “cost… as has been met” clearly restricts depreciation to costs that are discharged, not those that remain payable. Thus, reliance on accounting conventions is redundant and untenable where the legislature itself has provided a clear statutory mandate.
67. On the distinction between paid vs. payable amounts, the Ld. CIT DR submitted that the assessee’s interpretation, if accepted, would contradict both legislative intent and judicial precedent. Depreciation under section 32 read with section 43(1) and 43(2) must follow the principle that the allowance is tied to what is factually paid and expended in acquiring the asset. Extending depreciation to amounts contingent upon future uncertain events would result in a deduction for a cost that may never materialize, an outcome never contemplated by the statute. The fact that the Supreme Court in Challapalli Sugars (SC) itself restricted depreciation to interest already paid is a direct authority against the assessee’s proposition.
68. On the assessee’s reliance on Rotork Controls India (P) Ltd. [2009] 314 ITR 62 (SC), it was submitted that the reliance placed by the assessee on Rotork Controls India (P) Ltd. v. CIT [(2009) 314 ITR 62 (SC)/ is wholly misconceived. That decision was rendered in the context of section 37(1) of the Act, which governs deductions for revenue expenditure, and expressly excludes capital expenditure from its ambit. The Hon’ble Supreme Court in Rotork was dealing with the allowability of a provision for warranty expenses, a revenue item, and the tests laid down therein are confined to the recognition of a provision for revenue expenditure. In the present matter, the assessee has itself admitted that the expenditure of Rs. 268 crores is capital in nature, and once that admission is made, section 37(1) and the law explained in Rotork become irrelevant. To import the principles of section 37(1) into the domain of capital allowances under section 32 would amount to applying a provision beyond its legislative scope, a course impermissible in law. The assessee’s further contention that the words “expends or lays out as used in judicial precedents under section 37(1) should carry the same import when interpreting section 32 is equally untenable. Words in a statute cannot be read in isolation but must be construed in the context of the section in which they appear and the legislative intent it embodies. Section 37 is a residuary provision dealing with allowable expenditure of a revenue nature, whereas section 32 deals with depreciation allowance on capital assets. The two provisions are conceptually distinct, one relates to a deduction of expenditure laid out for the purpose of business, and the other to a statutory allowance towards wear and tear of capital assets. Conflating the two would obliterate this distinction and lead to absurd results. The mere similarity of phraseology cannot justify transplanting judicial interpretations given in the context of section 37 into section 32, which operates in a different sphere altogether. Even on its own terms, Rotork’s provision test (as emphasised by the assessee) does not convert a future instalment stream imo depreciable “actual cost”. Paragraph 10 of Rotork explains when a provision for a revenue expense may be recognised for profit computation. That accounting test does not answer the separate tax question here, which is whether depreciation can be granted on an unpaid, contingent balance of a capital amount. Whether the bid amount qualifies as a provision is irrelevant after the assessee admits it is capital. Capitalisation for depreciation turns on statutory “actual cost and on sums paid or crystallised and met. Recognising a provision for a possible outflow in future seasons does not transform the unpaid balance into “actual cost” for section 32. The written down value can step up only to the extent of instalments actually remitted or liabilities that have incontrovertibly accrued and been met in the specific year in which depreciation is being claimed. Further, the assessee has also stressed upon the words “expends or lays out” as used in the judgement cited by the revenue, in this regard it is humbly submitted that as per the Oxford Dictionary, the word “expend” has been defined to mean “to use or spend a lot of time, money, energy, etc..” and the Cambridge Dictionary defines the same word as “to use or spend time, effort, or money.” Similarly, the phrase “lays out,” in terms of money has been defined to mean “to spend money, especially a large amount” by the Cambridge Dictionary and “to spend money” by the Oxford Dictionary. Hence, the assessee’s argument that the meaning of such words would encompass money that is liable to be paid but not yet actually paid is contrary to the ordinary dictionary meaning of the terms.
69. It was submitted that the contractual heterogeneity within the league further defeats any premise that all franchises stood on identical footing for tax purposes. The Rajasthan franchise contained a clause prohibiting sale for the first three year and other franchises did not. The assessee itself urged comparisons with other teams but the correct approach is to read and apply the agreement that governs this assessee. Tax consequences must follow the legal incidents of the particular contract. One size fits all cannot convert contingent and event specific outlays into an actual cost on day one
70. Finally, the Ld. CIT-DR submitted that depreciation must follow “actual cost” within sections 32 and 43, which focuses on what is actually paid or has crystallised and been met in the relevant year. This is exactly the thrust of the case laws cited by the Department. In Habib Hussein v. CIT [1963] 48 ITR 859 (Bom), “actual cost to the assessee” was read as the amount the assessee has in fact paid or spent to acquire the depreciable asset. In CIT v. Challapalli Sugars Ltd. [1970] 77 ITR 392 (AP), later considered by the Hon?ble Supreme Court in Challapalli Sugars [1975] 98 ITR 167 (SC), the Supreme Court permitted capitalization only of interest actually incurred before commencement and not in the whole interest that was payable during the entire tenure of the loan agreement. Depreciation must follow the statutory scheme of amount actually “paid” as understood through section 43(2). Only amounts that are actually paid in the relevant year, or that have crystallised into an enforceable liability for that year, can form part of the depreciable base. A notional figure that is merely liable to be paid does not satisfy the statutory test of “paid”. The assessee?s approach of claiming depreciation on the full bid liability disregards the text and scheme of the Act, which focus on cash outflow and crystallised obligation in the year of allowance. It was submitted that the franchise contract makes payment contingent on future events. Allowing first year depreciation on the entire bid would therefore create relief on sums that may never be discharged. This is not hypothetical. Several IPL franchises did not complete all ten instalments. Pune Warriors India, Rising Pune Supergiants, Kochi Tuskers, Gujarat Lions, and Deccan Chargers are clear illustrations. If the assessee’s argument is accepted, such teams would have received depreciation on amounts never actually paid, which would be an unwarranted windfall and a result never contemplated by the Act. It was submitted that each instalment that is actually remitted is not an improvement to a fixed cost to the assessee. It is an addition to cost that accretes to the franchise right as payments are made year by year. The written down value must be stepped up only by those paid or otherwise crystallised additions for the year, and depreciation must be computed on that augmented cost alone. Any claim on the unpaid or contingent portion of the bid must be rejected, since the value increases only in proportion to the instalments that are in fact paid. In conclusion, the Ld.DR submitted that the depreciation u/s. 32 r.w.s. 43(1) must be confined strictly to the actual cost actually paid or crystallised in the specific assessment year and that the assessee’s claim on depreciation on the entire bid amount is untenable.
Our Analysis and Discussion:
71. We have heard the rival contentions and perused the material available on record. The contractual architecture of the franchise agreement has its roots in the invitation to tender and it would therefore be relevant to refer to the same before we refer to the contents of the franchise agreement. In terms of invitation to tender i.e, bids invited by BCCI for auction of franchise rights to operate a franchise and to be a member of the League, it was provided that each franchisee will have the right and obligation to establish and operate one team which will form part of and take part in the League. It was provided that franchisee shall, subject to the ongoing requirement to comply with the franchise agreement and regulations at all times, be entitled to operate their franchise at their discretion including the development of local, commercial arrangements with the sponsors and suppliers. It was also provided that there are certain League rights which are to be exploited centrally by the IPL. Thereafter, the bid document defines the “central rights” and the “franchisee rights” and the term of the franchise to operate the team for so long as the league continues. It provides that each bidder will be obliged to enter into the franchise agreement and deliver it to IPL as part of its bid documentation. It further provides that the franchise or the owners of the franchise shall after a minimum period of three years be entitled to sell their franchise to a third party subject to the terms and conditions as set out in the franchise agreement.
72. The bid document thereafter talks about the franchisee payments and it provides that as consideration for right to operate a franchise and to be a Member of the League, each franchise shall pay to IPL the following sums – (a) for the first ten years, a fee for the grant of above rights (referred as “Franchise Fee”) which the franchise shall be obliged to pay in ten equal instalments over a period of ten years. It has been specifically provided that the total amount of the “Franchise Fee” must be included as part of each bid; (b) from 11th year onwards, 20% of the sum received by the said franchisee from the exploitation of the Central Rights and franchise rights; (c) where the BCCI and IPL have paid any amount to the player under the player bid process and such sum shall be payable by such franchisee to IPL in accordance with the franchise agreement and (d) where the franchisee successfully bids for a player who has entered into a firm agreement with BCCI and the franchisee agrees to pay an annual sum which exceeds the fee which the BCCI had agreed to pay to such player, then an amount equal to such excess shall be paid by such franchisee to IPL and not to the relevant player.
73. The bid document further talks about the performance deposit of US$ 5 Million Indian rupees equivalent and it provides that for successful bidders, the performance deposit shall, upon the award of the franchise, become IPL‟s property and shall act as the payment or part payment (as appropriate) of the first annual instalment of the franchise fee.
74. In terms of selection of the winning bids, it provides that each bidder must as part of bid specify the “Franchise Fee” it is prepared to pay in respect of each location included in the franchise bid form in order to be granted the right to operate a franchise at each such location. It provides that the proposed “Franchise Fee” included in any bid for any location shall be a minimum of US$50 Million (Fifty Million US dollars) and any bid which includes a “Franchise fee” lower than the said sum will be rejected. It further provides that eight franchises will be awarded in respect of eight different locations to eight different bidders and each franchise will be awarded to the bidder, who proposes the highest “Franchise Fee” in respect of the relevant location.
75. In response to the aforesaid invitation to tender, the assessee submitted a bid for Sawai Mansigh Stadium, Jaipur for a Franchisee Fee of US$ 67 Million equivalent to Rs. 268 crores which was accepted and it secured the right to operate a Franchise at Jaipur.
76. A franchise agreement was thereafter entered into between BCCI and Jaipur IPL Cricket Private Ltd., the assessee, in connection with establishment and operation of such franchise on the terms and conditions specified therein. The agreement was signed on behalf of the assessee on 02-04-2008 and on 14-08-2008 on behalf of BCCI and as provided in the agreement, where the agreement is signed on different dates, then it shall take effect on the later date.
77. In the franchise agreement, the term “franchise” has been defined to mean franchisee‟s individual business of establishing and operating the team pursuant to and as contemplated by this agreement. The “franchise consideration” has been defined to mean all sums payable by franchisee to BCCI-IPL under clause 7.1. The term “franchise rights” has been defined to mean all rights in respect of the team including those rights set out in clause 4.3 excluding the Central Rights and all rights in respect of licencing of replica uniforms.
78. Clause-2 of the franchise agreement talks about the rights granted to the franchisee/assessee and contents thereof read as under:
“2.Rights Granted
2.1 BCCI-IPL hereby grants to the Franchisee during the Term the right:
a. to carry on the Franchise subject to and in accordance with this Agreement;
b. to be the only team in the League whose home stadium is located in the Territory during a period of not less than the first three Seasons;
c. to stage its home League Matches at the Stadium which shall be provided at cost to the Franchisee by BCCI-IPL by way of an agreement between BCCI-IPL and the owner of the Stadium (it being acknowledged that BCCI-IPL reserves the right at any time to provide an alternative stadium from the one named in this Agreement if the latter is unavailable for any reason). BCCI-IPL agrees that if another franchisee is granted rights in the Territory after the end of the third Season then such franchisee will not be granted the right to stage its home matches at the Stadium for so long as the Franchisee wishes to stage its home League Matches at the Stadium.
2.2 BCCI-IPL agrees that no increase in the number of teams shall occur before the start of the fourth year of the Term and that the League shall not be increased by more than one additional team in any subsequent year thereafter (it being anticipated but not guaranteed that no more than ten teams shall compete in the League).
2.3 BCCI-IPL agrees to stage the League in each year during the Term as contemplated by the Operational Rules unless in respect of any such year BCCI-IPL reasonably believes that staging the League is not viable for any reason and in such circumstances if the League is not staged at all then the obligation of the Franchisee to pay the Franchisee Consideration and those of the Franchisee’s obligations in respect of the staging of Matches shall be suspended until such time as the League is staged once more (in whole or part) whereupon all of said obligations shall automatically and in their entirety be of full force and effect. If the League is not staged at all for two consecutive years then the Franchisee shall have the right by service of written notice to terminate this Agreement which right shall be its only remedy in respect of the non-staging of the League. If before the service of any such notice of termination the League commences once more (in whole or part) then the Franchisee’s right to serve such notice of termination shall, in respect of the prior non-staging of the League, cease to be of any further force or effect. Any non-staging of the League by BССІ-IPL (in whole or part) shall not constitute a breach of this Agreement for the purposes of clause 11 or otherwise.
2.4 BCCI-IPL shall supply to the Franchisee a copy of the Operational Rules and Match Staging Regulations (it being acknowledged that the Franchisee is able to download the current League Rules from the website relating to the League and shall be deemed to have done so throughout the Term.”
79. Clause-3 of the franchise agreement talks about term and renewal of the franchise and it provides that the agreement shall come into effect upon signature and shall continue for so long as the league continues subject to termination, suspension or renewal as provided in the agreement.
80. Clause-4 of the franchise agreement talks about Central Rights and Franchise Rights and the contents thereof read as under:
“4.1The Franchisee acknowledges and agrees that BCCI-IPL owns the Central Rights and shall throughout the Term have the exclusive right to exploit all of the Central Rights and that if and to the extent that further rights in relation to the League become available for exploitation which have not previously been exploited then BCCI-IPL shall have the option to include such rights within the Central Rights and to exploit the same as contemplated by this Agreement.
4.2 The Franchisee acknowledges that the various rights set out in Schedule 4 are an indication of the type and extent of the rights which might be granted to a BCCI-IPL Partner and that other or more extensive rights may be granted to any BCCI-IPL Partner. Schedule 4 talks about indicative rights such as title sponsorship rights, official sponsorship rights and umpire sponsorship rights.
4.3 The Franchisee shall be entitled to exploit the Franchisee Rights in such manner as it decides and it is acknowledged by BCCI-IPL that the Franchisee Rights include the following:
a. the shirt sponsorship rights in respect of the Team;
b. official suppliership rights in respect of the Team;
c. corporate entertainment/premium seating rights at the Stadium during home League Matches (subject to BCCI-IPL’s right to receive tickets referred to in paragraph (c) below);
d. the right to conduct Franchisee Licensing (subject as provided in clause 5);
e. the right to retain all of the Gate Receipts in respect of the Franchisee’s home League Matches and, if it stages the Play-Off Matches, the gate receipts from such matches save that in each case it is acknowledged that BCCI-IPL may require such number of tickets as corresponds to 20% of each category of tickets in respect of each such home League Match or Play-Off Match free of charge (such tickets to be used to meet the Stadium host cricket associations commitments to members and other organisations);
f. the right to sell merchandise at the Stadium on the days of its home League Matches; and
g. such other rights in relation to the Team (not being Central Rights) which may be identified in the commercial guidelines which BCCI-IPL shall provide to Franchisees to assist them in the exploitation of the Franchisee Rights (as such guidelines may be updated from time to time).
4.4 The exploitation of the Franchisee Rights shall be subject always to compliance by the Franchisee with the terms of this Agreement including without limitation the agreement by the Franchisee that it shall:
a. not enter into any agreement or arrangement whereby any person acquires any of the Central Rights;
b. ensure that all BCCI-IPL Partners are allowed to exercise all of the rights granted to them by BCCI-IPL insofar as such rights have been notified to the Franchisee and relate to the Team, the Franchise, the Squad and/or any Matches involving the Team including without limitation (and insofar as the same are within the Franchisee’s power):
i. by allowing all accredited broadcasters and other media representatives such access and other assistance as is required for them to carry on their intended activities at the Stadium and any other relevant facilities;
ii. by ensuring the delivery of the Title Sponsorship Rights, the Umpire Sponsorship Rights and Official Sponsorship Rights to the Title Sponsor, the Umpire Sponsor and the relevant Official Sponsor respectively;
iii. by ensuring that any interviews with Players or the Coach take place in such a way as to ensure the delivery to all BCCI-IPL Partners of any exposure or other benefits of any kind relating to such interviews to which such BCCI-IPL Partners are entitled; and
iv. by ensuring all relevant third parties (including BCCI-IPL Partners) have sufficient access to Players and the Coach both for pre and post Match interviews and generally during the course of the Season in each case as may be prescribed in the Operational Rules and in accordance with generally accepted industry practice.”
81. Clause-5 talks about the Central Licensing rights to be exercised by BCCI-IPL and franchisee Licensing rights to be exercised by the franchisee. Clause -6 talks about various obligations which the franchisee is required to comply with as set out in Schedule 3 throughout the term of the agreement in terms of establishment of franchise, operational obligations relating to players, obligations relating to staging of home league matches at the specified home stadium, and matters relating to reporting, website establishment and maintenance, insurance, intellectual property rights, sponsorship/ advertisements rights and other related matters.
82. Clause-7 talks about the franchise payments and the contents there of reads as under:
“7. Franchisee Payments
As consideration for the right to operate the Franchise and to be a member of the League and in addition to the obligations referred to in Clause 6 the Franchisee shall pay to BCCI-IPL Franchise Consideration in the following sum and manner-:
(a) in respect of the period 2008-17 (inclusive).
i. the sum of US$ 2.01 million (Two Million Ten Thousand Only) equivalent to INR 8,04,00,000/- (Rupees Eight Crores, Four Lacs only calculated at the exchange rate of INR 40/–1USD) (the “League Deposit”) on or before 2 January of each such year. This League Deposit shall be appropriated towards the annual Franchise Consideration on the date of the first Match of the League in the year in which the League Deposit is paid. The amount of what is referred to in the Tender Document as the “Performance Deposit which has been paid by the Franchisee upon submission of its bid for a Franchise shall, in respect of 2008, be credited towards the League Deposit in respect of 2008 and if the amount of the Performance Deposit is less than the sum referred to above in this paragraph (1) then the Franchisee shall within 10 days of signature of this Agreement pay the remainder of the League Deposit in respect of 2008. The League Deposit shall only be refundable in any year if the League does not take place at all in such year and in such circumstances shall be refunded without interest, and
ii. the sum of USS 4.69 million (Four Million Six-Hundred-and-Ninety Thousand Only equivalent to INR 18,76,00,000/- (Rupees Eighteen Crores, Seventy Six Lacs only) calculated at the exchange rate of INR 40/-1USD) which shall in each such year be paid on the date of the first match in the League in each such year
(b) from and including 2018 onwards an amount equal to 20% of the Franchisee Income received in respect of such year. Such sum shall be paid in four instalments within 60 days of 31 March, 30 June, 30 September and 31 December in 2018 and each subsequent year of the Term.
7.2 The Franchisee shall within 30 days of 31 March, 30 June, 30 September and 31 December in each year from 2018 onwards supply BCCI-IPL with a report which includes full details of all Franchisee Income which has been receive by the Franchisee (or any Franchisee Group Company or Owner) in the immediately preceding three month period up to 31 March, 30 June, 30 September and 31 December (as appropriate) in each year.
7.3 The Franchisee shall from 2018 onwards throughout the Term and for one year thereafter keep and maintain accurate and independently audited books and records with respect to all Franchisee Income and shall allow BCCI-IPL (at BCCI-IPL’s cost and not more than twice per year) to inspect and copy the same upon reasonable notice during business hours on a business day. If any such inspection reveals that the Franchisee has failed to pay the full amount to BCCI-IPL in accordance with Clause 7.1 (b) then the Franchisee shall within 30 days of such inspection pay to BCCI-IPL the relevant unpaid amount.
7.4 In addition to the Franchise Consideration the Franchisee shall pay to BCCI-IPL such amount of the Player Fee payable to any Player selected by the Franchisee as part of the Player Bid Process which BCCI-IPL has previously paid to such player in respect of the 2008 Season (which amount shall be set out in the documents relating to the Player Bid Process). Such amount shall be payable within 15 days of the date on which the Franchisee selected the relevant Player(s) under the Player Bid Process.
7.5 The Franchisee acknowledges that if in respect of any Player who has entered into any “Firm Agreement” with BCCI-IPL (as such term is clarified in the Tender Document and the documents relating to the Player Bid Process) the annual sum which, pursuant to the Player Bid Process, the Franchisee agreed to pay in respect of such Player exceeds the reserve sum for such Player set out in such documents then for the period from 2008-10 (inclusive) the Player Fee payable to such player shall be the relevant reserve sum and the Franchisee shall pay to BCCI-IPL an amount equal to such excess. Such excess sum shall be paid at the same time as the Player Fee is paid to the relevant Player.”
83. “Franchisee Income” has been defined in clause -1.1 to mean the aggregate of (i) all income in relation to the operation of the Franchise which accrues to the Franchise (or any Franchise Group Company or Owner) under or in connection with any Franchise Partner Agreement and/or by way of any Gate Receipts and (ii) any payment of Central Rights Income made by BCCI-IPL to the Franchise under Clause 8.1 excluding any Franchisee Licensing Income and “Central Rights Income” has been defined to mean the amount of income in respect of each year which is actually received by BCCI-IPL from the exploitation of the Central Rights (excluding service tax) in each case after deduction of the relevant league expenses in respect of such year.
84. Clause-10 talks about the sale of franchise and the terms and conditions under which such sale can happen. It provides that the franchisee has no right to assign or delegate the performance of any right or obligations under the agreement. At the same time, with BCCI-IPL prior written consent which can happen after the first three years and subject to other conditions as so specified, the franchisee will have the right to sell the franchise to any person and in such an event, a new franchise agreement will be entered into by way of replacement of this agreement for the remainder of the term.
85. Clause-11 talks about the termination of franchise by either party by notice in writing if the other party has failed to remedy any remediable material breach of the agreement and it has been provided that a breach by the franchisee of its payment obligations under the agreement shall be deemed to be a material breach for the purposes of this clause. It further provides that either party may terminate the agreement if the other party commits or permits an irremediable breach of the agreement or if it is subject to an insolvency event. It further provides that BCCI-IPL may terminate the agreement where there is change of control of the franchisee, the franchisee transfers any material part of its business or assets, or the franchisee act in any way which has a material adverse effect upon the reputation or standing of the league, BCCI-IPL, team and/or game of cricket. It further provides that franchisee may terminate the agreement where the annual revenue payable under the agreement relating to grant by BCCI-IPL of the media rights is less than US$ 59 Million in any year commencing with effect from sixth year of the term subject to certain conditions as so specified.
86. The AO, after going through the aforesaid franchise agreement during the course of assessment proceedings, held that the assessee acquired a right to operate a team for the term of the league, that the assessee is entitled to receive certain revenues relating to the league, that as consideration for acquiring these rights, the assessee is to make the Franchisee payments and that the Franchisee itself can be sold or controlling interest therein can be transferred by the assessee. The AO accordingly held that the assessee acquires a bundle of rights which is a commercial or business right of the nature of license or franchise described as intangible assets u/s 32(1)(ii) of the Act and the payment made by the assessee to the BCCI-IPL to obtain and enjoy the right is in the nature of capital expenditure.
87. Similarly, the Ld.CIT(A) has recorded a finding that the assessee had acquired the right to operate a team and be a member of the League for the term of the League, and that such right entitled the assessee to receive certain revenues relating thereto. As consideration for acquiring these rights, the assessee was required to make the Franchise payments to the BCCI. Placing reliance on the decision of the Hon‟ble Supreme Court in the case of Techno Shares & Stocks Ltd vs. CIT, 327 ITR 323 (SC), the Ld. CIT(A) observed that, in the present case, each Franchisee including the assessee, obtained a right enabling it to operate a team in the IPL for profit. The right to participate in the League, having a monetary cost by way of Franchisees payments, constituted an expenditure incurred for acquiring such right, thereby satisfying the test of being a “licence”, “franchise,” or “any other business or commercial right of similar nature” within the meaning of section 32(1)(ii).
88. The Ld.CIT(A) accordingly held that the right to operate a Franchise and to be member of the League is in the nature of a “licence” or “Franchise” or is at lease akin thereto, and hence, qualifies as an intangible asset described in section 32(1)(ii) of the Income Tax Act, 1961. The franchisee payments, being expenditure incurred for acquiring such right, were therefore capital in nature.
89. Further, relying upon the decision of the Hon‟ble Supreme Court in the case of Jonas Woodhead & Sons (India) Ltd. vs. CIT [1997] 224 ITR 342 (SC), the Ld.CIT(A) held that by making the Franchise payments, each Franchisee acquired the right to set up an independent business of operating a team in League. It was, in effect, the setting up of a new business. Even upon expiry of the League tenure, there existed no embargo on the Franchisee to continue its business operations. Accordingly, the Ld.CIT(A) concluded that the entire Franchise paymens made for setting up such business represented capital expenditure. The fact that the payments were to be made in annual instalments or computed as a percentage of future rights income would not alter their essential character from capital or revenue.
90. There is, thus, no dispute that the assessee acquired the right to operate a Franchise and to be member of the League at the time of signing of the Franchise Agreement, which constitutes a “licence” or “Franchise”, being an item of intangible asset described in section 32(1)(ii) of the Income Tax Act, 1961. The franchisee payments, representing the expenditure incurred for acquiring and enjoying such rights, accordingly partake the character of capital expenditure, eligible for depreciation under the aforesaid provision.
91. During the course of hearing before us, the Ld Counsel for the assessee also submitted that in so far as the assessee is concerned, there is no conflict of view as regards the nature of the expenditure as the expenditure towards acquisition of Franchise Rights is considered as capital in nature by both the Assessee and the Department. Therefore, the question No. 1 raised before the Bench does not hold any relevance in the present case. Similarly, the Ld.CIT-DR on behalf of the Revenue has fairly submitted that the first question of law as to whether the acquisition of franchise rights constitutes a capital asset, there is no dispute between the assessee and the Revenue that the payment made for the said franchise constitutes capital expenditure. It was submitted that it is the second ground, namely, the quantum of allowable depreciation that remains the primary point of controversy. In light of the submissions so advanced by both the sides and considering the facts and circumstances of the present case, we, therefore, do not deem it necessary to adjudicate the first question raised for our consideration and the same is thus left open and not adjudicated upon.
92. The Learned Counsel for Knight Riders Private Limited also sought an intervention regarding the aforesaid ground of appeal. Since we have decided not to adjudicate this ground of appeal, the intervention application also stand disposed-off.
93. Coming to second question raised for our consideration as to whether the assessee is entitled to claim depreciation on the entire franchise fee and league deposit of Rs 268 crores or the depreciation is allowable only on the annual installment of franchise payment and league deposit actually paid by the assessee of Rs 26.8 crores during the financial year relevant to assessment year 2009-10, being the assessment year considered for present discussions.
94. The construct of the relevant provisions of the Act which have a bearing on the matter under consideration are as follows. Section 4 talks about charge of income tax. It provides that the income tax shall be charged for any assessment year in accordance with, and subject to the provisions of this Act in respect of the total income of the previous year of every person. The total income has been defined in section 2(45) to mean total amount of income referred to in section 5 computed in the manner laid down in this Act. Section 5 talks about scope of total income, wherein sub-section (1) provides that subject to the provisions of this Act, the total income of any previous year of a person, who is a resident, includes all income from whatever source derived, which is received or deemed to be received in India in such year or accrues or arises or deemed to accrue or arise to him in India during such year or accrues or arises to him outside India during such year. Section 14 thereafter provides for various heads of income and it provides that save as otherwise provided by this Act, all income shall for the purposes of charge of income tax and computation of total income be classified under the following heads of income, which inter alia includes the head “profits and gains of business or profession”.
95. Section 29 provides that income under the head “profits and gains of business or profession” as referred in section 28 shall be computed in accordance with the provisions contained in section 30 to 43D of the Act. Section 28 talks about various nature of income which shall be chargeable to income tax under the head “profits and gains of business or profession” and inter alia provides that the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year.
96. Section 32 talks about depreciation in respect of tangible and intangible assets and it provides that the same shall be determined in accordance with these provisions and shall be computed while determining the total income irrespective of whether the assessee has claimed it or not while computing its total income.
97. Section 32 provides for depreciation of buildings, machinery, plant or furniture, being tangible assets; know-how, patents, copyrights, trade marks, licences, franchises or any other business commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the assessee shall be allowed deduction in case of any block of assets, such percentage on the written down value thereof as may be prescribed.
98. The expression “written down value” has been defined in Section 43(6)(c) of the Act. It provides that in case of any block of assets in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down value of all the assets falling within that block of assets at the beginning of the previous year and adjusted by the “increase by the actual cost of any asset falling within that block, acquired during the previous year”, and further adjusted by the “reduction of moneys payable in respect of any asset falling within that block which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased”.
99. It further provides for determination of written down value where the assets forming part of block of assets or the whole block of assets are transferred subsequently by various transfer mechanisms such as by way of slump sale, by holding company to subsidiary, by amalgamating company to the amalgamated company, by demerger, etc.
100. The expression “actual cost” has been defined u/s. 43(1) of the Act. It provides that in sections 28 to 41 and in this section, unless the context otherwise requires, “actual cost” means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. The relevant provisions of section 43(1) reads as under:
“actual cost” means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority.”
101. The expression “money payable‟ has been defined as having the meaning as in explanation below 41(4) and as per that explanation, money payable in respect of any building, machinery, plant or furniture includes any insurance, salvage or compensation money payable in respect of thereof and where the building, machinery, plant or furniture is sold, the price for which it is sold.
102. Section 43(2) defines the expression “paid” and provides that in Section 28 to 41 and in this section unless the context or otherwise requires, “paid” means actually paid or incurred according to the method of accounting upon the basis of which the profit and gains are computed under the head “profits and gains of business or profession”.
103. Section 145 talks about method of accounting. It provides that the income chargeable under the head “profits and gains of business or profession or “income from other sources” shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. It further provides that the Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessee or in respect of any class of income. It further provides that where the AO is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the AO may make an assessment in the manner provided in section 144 of the Act.
104. To understand the difference between the cash and mercantile system of accounting, we can gainfully refer to the decision of the Hon‟ble Andhra Pradesh High Court in the case of CIT vs. KCP Ltd. [2018] 94 taxmann.com 46 wherein it was held as under:
“12. The mercantile system of accounting differs substantially from the cash system of book keeping. Under the cash system, it is only actual cash receipts and actual cash payments that are recorded as credits and debits; whereas under the mercantile system, credit entries are made in respect of amounts due, immediately they become legally due and before they are actually received; similarly, the expenditure items for which legal liability has been incurred are immediately debited even before the amounts in question are actually disbursed.[ Refer-Smt. Indermani Jatia v. CIT [1959] 35 ITR 298 (SC) and Morvi Industries Ltd. v.CIT [1971] 82 ITR 835 (SC)]. The distinguishing feature of the mercantile system of accountancy is that it brings into credit what is due immediately it becomes legally due, and before it is actually received; and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. [Refer-CIT v. Shrimati Singari Bai [1945] 13 ITR 224 (All) and State Bank of Travancore’s case (supra)]. Where accounts are kept on mercantile basis, the profits or gains are credited though they are not actually realised and the entries thus made really show nothing more than an accrual or arising of the said profits at the material time. The same is the position with regard to debits made. [Refer-Smt. Indermani Jatia’s case (supra)] and C.I.T v. Shiv Prakash Janak Raj & Co. (P.) Ltd. [1996] 88 Taxman 536 (SC)].
13. In the mercantile system of accountancy, the book profits are taken for the purpose of assessment of tax, though the credit amount is not realized or the debit amount is not actually disbursed. [ Refer-CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 (SC)]. Whenever the right to receive money, in the course of a trading transaction accrues or arises, even though income is not realised, income embedded in the receipt is deemed to arise or accrue.[ Refer- Raja Mohan Raja Bahadur v. CIT [1967] 66 ITR 378 (SC).] Where the assessee keeps the accounts according to the mercantile method of book-keeping, the effect of making a credit entry in the interest account would be to treat that amount as income or profits received by the assessees or treated by him as received for the purpose of tax. [Refer-CIT v. A.T.K.P.L.S.P. Subramaniam Chettiyar AIR 1927 Mad 891 (FB) and Smt. Indermani Jatia’s case (supra)].
14. An assessee, who follows the mercantile system of accounting, is entitled to deduct, from the profits and gains of the business, such liability which had accrued during the period for which the profits and gains were being computed, even though it is required to be discharged at a future date.[ Refer- CIT v. Kalinga Tubes Ltd. [1996] 84 Taxman 435 (SC) and Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC)] If a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged later. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty, though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent liability. It is a liability in praesenti, though it will be discharged at a future date. It does not make any difference if the future date, on which the liability has to be discharged, is not certain[Refer- Taparia Tools Ltd. v. Jt. CIT [2015] 55 taxmann.com 361 (SC) and Bharat Earth Movers v. CIT [2000] 112 Taxman 61(SC)]
15. Where accounts are kept on accrual basis, profits or gains are credited though they are not actually realised.[Refer-Babulal Narottamdas v. CIT [1991] 55 Taxman 3(SC)]. Income can be held to accrue when the assessee acquires a right to receive that income. Income must be held to accrue on the date when a debt becomes due.[Refer-Babulal Narottamdas v. CIT [1991] 55 Taxman 3 (SC) and E.D. Sassoon & Co. Ltd. v. C.I.T. [1954] 26 ITR 27) (SC)]”.
105. Under Section 145(2) of the Income-tax Act, 1961, the Central Board of Direct Taxes (CBDT) initially notified two accounting standards in 1996 for the purpose of computing taxable income. These were later replaced by the current Income Computation and Disclosure Standards (ICDS) vide notification dated 31-03-2015 and amended notification dated 29-09-2016 with effect from assessment year 2017-18 and hence, not relevant and not considered for the present discussion. The initial notified AS defines „Accounting Policies‟ to mean the specific accounting principles and the methods of applying those principles adopted by the assessee in the preparation and presentation of financial statements. It further provides that the Accounting Policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies. For this purpose, the major considerations governing the selection and application of accounting policies are the following, namely:
i. Prudence : Provisions should be made for all known liabilities and losses, even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information;
ii. Substance over form : The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form;
iii. Materiality : Financial statements should disclose all material items, the knowledge of which might influence the decisions of the user of the financial statements.
106. The notified Accounting Standard further provides that „Accrual‟, „Going Concern‟ and „Consistency‟ are the fundamental accounting assumptions in preparation and presentation of accounts. If these are not followed, a specific disclosure is required to be made. These terms are defined as follows. „Accrual‟ refers to the assumption that revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate; „Consistency‟ refers to the assumption that accounting policies are consistent from one period to another; „Going concern‟ refers to the assumption that the assessee has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the business, profession or vocation and intends to continue his business, profession or vocation for the foreseeable future. These accounting standards are in effect recognition of the fact that in working out profits, the principles that have to be applied are those which are a part of commercial practice or which an ordinary man of business will resort to when making computation for its business purposes.
107. We, therefore, find that the determination of depreciation allowance u/s. 32 of the Act is part of the overall determination of income chargeable under the head „profits and gains of business or profession’ which in turn refers to the determination in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Therefore, the determination of actual cost of the intangible asset for the purposes of determining the written down value (and the corresponding depreciation thereon) has to be governed by the method of accounting regularly followed by the assessee following the accounting principles of prudence and accrual. Though section 43(1) talks about the expression “actual cost” and lays down various situations where the actual cost has to be determined. However, it doesn’t specifically define as to what is meant by “actual cost”. The emphasis is more on situation where such actual cost is met by any other person or authority and in such a situation and to that extent, the actual cost shall stand reduced. It further nowhere specifically excludes the applicability of the method of accounting and more particularly, mercantile system of accounting as so employed by the assessee in the instant case for determination of actual cost. Therefore, for the purposes of determination of actual cost, one has to give a harmonious construction to the method of accounting regularly followed by the assessee as emphasized by provisions of section 43(2) of the Act and which should also be in consonance with section 43(1) of the Act and so long as actual cost as so determined in accordance with regular method of accounting is not in conflict with any express provision of section 43(1), the same shall form the basis for determining the written down value and the corresponding depreciation thereon.
108. During the course of hearing, our reference was drawn to the decision in case of CIT vs. Challapalli Sugars Ltd. (supra). In the said case, the issue for consideration before the Hon’ble Andhra Pradesh High Court was whether the interest payment before commencement of production on the money borrowed for acquisition and installation of Plant and Machinery can be considered as part of the actual cost of the assessee for the purposes of claim of depreciation and development rebate. The Hon’ble Andhra Pradesh High Court, referring to the explanation to subsection (5) to Section 10 of the 1922 Act, which defines the expression “actual cost” to means the actual cost of the asset to the assessee reduced by that portion of the cost thereof, if any as has been met directly or indirectly by the Government or by any public or local authority, held that this is a restricted definition of the term and not very useful for the present purposes and has also referred to Section 43(1) under the new Act, which is on the same lines and stated that since the word “actual cost” not defines specifically in the Act, one has to find the true meaning of term and its scope in the context of other provisions of the Act. In that context, it held that the term “actual cost” cannot be read to mean anything more than cost accurately ascertained. It held that the phrase “actual cost” plainly indicates that the sum of money which the person has expended out of his own resources, called cost, of which the burden has ultimately fallen upon him. The term “actual cost” therefore guides one to the conclusion that all expenditure on the machinery by the assessee will be the actual cost. The actual cost to the assessee is what he expends or lays down for acquiring and installing the asset and thus, all expenditure incurred directly or intimately on the machinery can be said to be included and it would not be correct to restrict its meaning to the cost paid to the vendors of the machinery, such an expenditure would vary from asset to asset and would depend upon its nature and availability and the term “actual cost” therefore has to be liberally construed.
109. At the same time, the Hon‟ble Andhra Pradesh High Court held that as far as the interest paid on borrowed capital which went into acquisition of the asset is concerned, the same cannot be part of the actual cost. In this regard, it held that there is no valid and compelling reason to hold that where a plant is constructed out of borrowed moneys, interest paid on the loan up to the date of commencement of the business can be capitalised and treated as part of the actual cost of the plant. It held that it would not be correct to treat the interest paid on the borrowed capital on par with the services rendered or supervision made by technicians to select and erect the machinery and expenses incurred in that behalf. It held that while interest is paid not on the acquisition of the asset, but on borrowed capital and the fact that the borrowed money has gone into the acquisition of the plant may be a factor, but is certainly not directly or intimately connected with the acquisition of the asset itself. The interest paid, therefore, is on the capital which the assessee obtained by borrowing and has little to do with the actual cost to the assessee of the machinery which is his asset. It must be remembered that the source of capital is hardly relevant. What is relevant and pertinent is what actual cost the assessee has incurred in acquiring and erecting the machinery. It accordingly held that when sections 10(2)(vi) and 10(5) speak of original and actual cost of machinery to the assessee, it only means the amount expended or laid out by the assessee in acquiring and installing machinery. The interest paid on the borrowed capital, which went into the acquisition of an asset, cannot form part of the actual cost of the asset.
110. Regarding the contention that the accounting practice permits the capitalization of interest and treated as part of the cost incurred in acquiring the asset, the Hon’ble High Court held that it need not be doubted that the method of accounting and allowing the interest paid on the borrowed capital to be capitalised for certain purposes is recognised in accounting practice. But merely because the method of accounting is followed in the way in which the above-said extract indicates, it does not necessarily follow that the legislature has adopted this principle when it said that the “actual cost” to the assessee of machinery should alone be deducted. How the assessee writes the accounts or what mode he adopts in treating a particular expenditure is hardly relevant. What is relevant is the actual words employed in the section and what meaning they give. The Hon’ble High Court accordingly held that it is not correct to interpret the term “actual cost” to include the interest after it is capitalised and added to the cost of the machinery as part of the actual cost of the machinery to the assessee within the meaning of section 10(2)(vi) of the 1922 Act.
111. The matter thereafter came up for consideration before the Hon’ble Supreme Court wherein it was held that while consideration the question of deduction on account of depreciation, one has to take into account the written down value which in turn depends upon the actual cost of the asset to the assessee. Drawing reference to the explanation to section 10(5) of the Act, the Hon’ble Supreme Court again emphasized the fact that the expression “actual cost” has not been defined in the Act. It held that the expression should be construed in the sense in which no commercial man would misunderstand and for this purpose, it would be necessary to ascertain the connotation of the expression in accordance with the normal rules of accountancy prevailing in commerce and industry. It thereafter referred to various accountancy publications by leading authorities on the subject and also the statement of auditing practice issued by the Institute of Chartered Accountants of India and held that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production of such borrowed money can be capitalized and added to the cost of the fixed assets which have been created as a result of such expenditure. It was held that the rule of accountancy should be adopted for determining the actual cost of the asset in absence of any statutory definition or other indication to the contrary.
112. We find that the said decision still holds the field and the rule of accountancy should continue to guide the determination of actual cost in absence of anything contrary so provided in the statute. Infact, we find that if we exclude the various explanations which have been provided in the statute from time to time which are, in any case, not relevant for the present purposes, nothing much has changed over the years as far as the definition of actual cost is concerned which is similarly worded as was under consideration before the Hon‟ble Supreme Court in the said case. The Supreme Court subsequently in case of CIT v. U.P. State Industrial Development Corporation (1997) 225 ITR 703 (SC) reiterated that it is well-accepted proposition that “for the purposes of ascertaining profits and gains, the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statute”. The term “actual cost” therefore has to be construed in commercial sense and has to be ascertained in accordance with normal rules of accountancy as per the method of accounting regularly followed by the assessee.
113. In the instant case, we find that the assessee is following mercantile system of accounting and has followed Accounting Standard [AS-26] issued by the Institute of Chartered Accountants of India for accounting for intangible assets in its books of account. The Accounting Standard provides that the recognition of an item as an intangible asset requires an enterprise to demonstrate that the item meets the definition of an intangible asset and recognition criteria set out in the standard. The term “intangible asset” has been defined to mean an identifiable non-monetary asset without physical substance held for use in the production or supply of goods and services for rental others or for administrative purposes and “asset” has been further defined to mean a resource controlled by an enterprise as a result of past event and from which future economic benefits are expected to flow to the enterprise. It further provides that an intangible asset should be recognized if and only if, it is probable that future economic benefits that are attributable to the asset will flow to the enterprise and the cost of the asset can be measured reliably and the intangible asset should be measured initially at cost. It further provides that if an intangible asset is acquired separately, the cost of the intangible asset can usually be measured reliably. This is particularly so when the purchase consideration is in the form of cash or other non-monetary assets. It further provides that cost of intangible asset comprises its purchase cost including any import duties and other taxes (other than those subsequently recoverable by the enterprise from the taxing authorities) and any directly attributable expenditure on making the asset ready for its intended use.
114. We, therefore, find that the Accounting Standard lays emphasis on accounting for intangible assets which satisfy the requirement of identifiability, control over the resource and expectation of future economic benefits flowing to the enterprise and the cost of which can be measured reliably. In the instant case, there is no dispute regarding identifiability of the intangible assets in terms of right to operate the franchise and to be a member of the league which has been acquired during the year, control over the franchise by the assessee subject to certain obligations and the league matches happening year-on-year being a probable event as can be seen from clause 2.3 of the franchise agreement which provides that BCCI-IPL agrees to stage the leagues in each year during the term as contemplated by the Operational Rules and the expectation of future economic benefits flowing to the assessee in terms of franchisee income. The annual league matches are no doubt at the core of the franchise agreement, it is relevant to note that the franchise fee and league deposit of Rs. 268 crores are in respect of whole bundle of franchise rights acquired by the assessee at the time of signing of the Franchise Agreement and that too, for term of the league. As such, no fresh rights are acquired annually during the term of league and similarly, even where league matches doesn‟t happen in a particular year, the assessee continues to hold and enjoy the franchise rights so acquired.
135. As far as measurement of cost of such intangible is concerned, the emphasis is on reliable measurement and it has been provided that the intangible asset should be measured initially at cost. In the instant case, we find that the franchise consideration has been defined in clause 7 of the franchise agreement and on perusal thereof, we find that there is a fixed and variable component of franchise consideration for the right to operate the franchise and to be a member of the League. The fixed component of franchise consideration of Rs 26,80,00,000 (Rs. 8,04,00,000 plus Rs 18,76,00,000) to be paid annually for the period 2008-2017 and thereafter, a variable component of 20% of franchisee income from year 2018 onwards. The fixed component of US$ 67 Million equivalent to Rs 268 Crores has infact form the very basis for selection of assessee‟s bid by BCCI-IPL and the said figure was known and understood by the assessee and BCCI-IPL as “Franchise Fee” right from the stage of placing the bid to successful selection and thereafter, signing of the franchise agreement. The league matches happening annually is a probable event and therefore, the sum total of annual payments over the initial ten year period can be reliably measured. Therefore, as far as fixed component of franchise consideration is concerned, the same is clearly defined and quantified and thus, there cannot be any dispute as to how to measure the same. As far as variable component is concerned, the same has been defined in percentage terms, however, the quantification thereof cannot be possible at this stage in absence of what the franchisee income would be in year 2018 onwards. The assessee therefore in its prudence has determined the cost of intangible asset as can be measured reliably at Rs 268 crores and has accounted for it in books of accounts. The assessee at the same time, knowingly very well that the variable component cannot be measured and that too, in the first year of its effective operation, has not accounted for the same. Merely because the variable component cannot be measured reliably, the same cannot be basis to ignore and not account for the fixed component which is clearly measurable and defined. We therefore find that the assessee has followed the right approacin accounting for the intangible asset at a cost of Rs 268 crores with corresponding liability towards BCCI-IPL in its books of accounts which is clearly in consonance with the Accounting Standard – 26 issued by the ICAI and the same should be taken as cost of the intangible asset acquired during the year for the purposes of determining the written down value of block of intangible assets and depreciation thereon u/s 32(1)(ii) of the Act. The depreciation therefore shall be allowed on the entire franchise fee of Rs 268 crores and not on Rs 26.80 crores actually paid during the financial year relevant to AY. 2009-10.
136. Besides determination of actual cost relevant to AY. 2009-10 in respect of intangible assets acquired during the previous year, a related issue that arises for consideration is whether the actual cost so determined is a static figure for all times to come once it entered the block of assets and whether it can be modified or altered at a subsequent stage in any of the subsequent assessment years. The said issue assumes importance in the context of situations where league matches don‟t take place in any year and there is refund of league deposit or the situations such as non-payment of 9th and 10th installment by the assessee due to ban and subsequent memorandum of settlement entered into between the assessee and BCCI, leading to temporary suspension or where the franchise consideration is discharged annually as percentage of franchisee income from year 2018 onwards. Though we believe that the situation so contemplated are in terms of future events and consequences arising therefrom and not at the time of acquisition of intangible assets by virtue of signing of the Franchise Agreement (and consequent determination of cost in the year of such acquisition) and which, invariably, likely to arise in any commercial transaction, at the same time, we proceed to examine the same given the rival contentions advanced by both the sides.
137. In this regard, we refer to the decision of the Hon’ble Supreme Court in the case of Maharana Mills (P.) Ltd. vs. ITO (supra) in the context of Section 35 of the Indian Income Tax Act, 1922, which corresponds to Section 154 of the of the Income Tax Act, 1961. The question for consideration before the Hon’ble Supreme Court was where the ITO found that in earlier A.Y. 1952-53, there was an apparent arithmetical mistake in the account of the written down value of the properties which resulted in a corresponding mistake in the assessment of the year in controversy i.e, A.Y 1953-54, whether the ITO could take the corrected figure for the purposes of the assessment as it could be said that the mistake was apparent from the record. The Hon’ble Supreme Court held that the words used in the section 35 of 1922 Act are “apparent from the record” and the record does not mean only the order of assessment but it comprises all proceedings on which the assessment order is based and the Income-tax Officer is entitled for the purpose of exercising his jurisdiction under section 35 of 1922 Act to look into the whole evidence and the law applicable to ascertain whether there was an error. If he doubts the written down value of the previous year, it is open to him to check up the previous calculations and if he finds any mistake, it is open to him to make fresh calculations in accordance with the law applicable including the rules made thereunder. The Hon’ble Supreme Court held that the limit to which the ITO can go back does not stop at the written down value of the previous year but extends up to the figure of the original cost, and the method enjoined by section 10(5)(b) of 1922 Act is not that the Income-tax Officer should merely scale down the written down value of the previous year but that he should take into consideration the actual cost, determining it for himself, if necessary, take also into consideration the allowances granted in the past and then make his own computation as to the written down value for the assessment year with which he is concerned. Thus it cannot be said that merely because under section 35 of 1922 Act, some written down value and the depreciation amount have been determined, they are a final determination binding for all times to come nor does the determination operate as stopple or res judicata for the following years.
138. In the case of CIT vs. Hides & Leather Products (P) Ltd. (supra), a similar matter came up for consideration before the Hon‟ble Gujarat High Court. In that case, the facts of the case were that in 1955, a piece of machinery was purchased by the assessee from the Swiss suppliers at the price of Rs. 30,572/-. However, no amount was paid towards the price thereof on the ground of some defect in the piece of machinery. The liability to the Swiss suppliers was being shown in the balance-sheet and in the books of account of the assessee-company but in 1960 by making appropriate entries in the books of account, the assessee-company wrote back the amount of Rs. 30,572/- and debited the amount of Rs. 30,572/-in the account of the Swiss suppliers and credited the same amount to the capital reserve. The ITO called upon the assessee to produce all correspondence in regard to the purchase of this machinery and the payment of the purchase price thereof. The assessee did not produce any correspondence before the ITO on the ground that no correspondence was available with it because it was destroyed. The ITO thereafter came to the conclusion that the assessee had been under-assessed for assessment years 1956-57 to 1960-61 in as much as the assessee had been allowed development rebate and depreciation which were not due to it because the cost of the asset on which the development rebate and depreciation was claimed and allowed to the assessee in these assessment years was ‘Nil’. He, therefore, initiated proceedings for reassessment u/s. 147(1)(a) of the 1961 Act, and added back to the income as originally assessed the development rebate and depreciation allowed in the original assessments.
As regards assessment years 1961-62 to 1965-66, the ITO did not allow the assessee depreciation on the machinery and this action of the ITO was confirmed by the AAC. The Tribunal held that there had been no cessation or remission of the liability and the original cost to the assessee of the machinery was held to be the cost an indicated in the books of account in the calendar year 1955. The Tribunal, therefore, held that the assessee was entitled to depreciation with reference to the cost of machinery.
139. On reference, the Hon’ble Gujarat High Court, relying on the decision of the Hon’ble Supreme Court in case of Maharana Mills (supra) as well as Hon’ble Bombay High Court in case of Habib Hussein (supra), held that so far as the ITO is concerned, he has to determine the written down value for each assessment year for himself and he can determine for himself what the actual cost to the assessee had been in the first instance and not merely depend upon the determination of that question in any of the previous assessment years.
140. The Hon’ble Gujarat High Court further noted that in the said case, the system of account keeping of the assessee was on mercantile basis and when a credit entry was shown in the books of account in favour of the Swiss suppliers, from that date onwards, the assesses-company accepted its liability to the Swiss suppliers and acknowledged their liability to pay and it held that because of the mercantile system of account keeping, it was not necessary for the assessee actually to pay the amount to the Swiss suppliers in order to claim the amount of Rs. 30,572 as the actual cost of the machinery. It held that because of the mercantile system of account keeping, one could proceed on the footing that from 1955 to 1960, the assessee-company by mentioning year after year the liability to the suppliers was acknowledging its liability to the suppliers and the amount of Rs. 30,572 was being shown as the actual cost. The Hon’ble Gujarat High Court has thus laid emphasis on the mercantile system of account keeping and held that it was not necessary for the assessee to actually pay the amount to the Swiss suppliers in order to claim the amount of Rs. 30,572 as the actual cost of the machinery. The case of the assessee is on a better footing where liability towards BCCI-IPL has been duly accounted for in the year of acquisition of franchise rights and the payments are made on annual installment basis.
142. The Hon’ble High Court further held that notwithstanding the entries in the books of accounts, one has to see actual cessation of liability and looking to the fact that for a period of 5 years and even till date, no action had been taken by the Swiss supplier to recover the amount of Rs.30,572 from the assessee-company and no legal steps had been taken, it was not unreasonable to infer that the Swiss supplier at least had treated this liability of the assessee-company towards itself to have come to an end and to have ceased and, under these circumstances, in substance and in fact there had been a cessation of the liability of the assessee to the Swiss suppliers.
143. The Hon’ble High Court thereafter held that under the Act of 1922, which was applicable to assessment year 1961-62, it was only if there was any contribution from Government or public or local authority, those contributions could be deducted while ascertaining the actual cost. The Swiss suppliers were neither Government nor any public or local authority, and, therefore, for the assessment year 1961-62, even though there was cessation of liability, the assessee-company was entitled to have the benefit of the entire amount of Rs. 30,572 as the actual cost to the assessee for that particular assessment year and to have the written down value of assessment year 1961-62 worked out on the footing that for that particular year, the cost to the assessee of this particular piece of machinery was Rs. 30,572.
144. As regards assessment year 1962-63 to 1965-66, the Hon’ble High Court held that under the definition as set out in section 43(1), even if the cost has been met directly or indirectly by any other person or authority, that direct or indirect meeting of the cost has to be deducted in order to ascertain the actual cost to the assessee. Since there was cessation of liability particularly in the light of the omission of the Swiss supplier to take any legal action against the assessee, the actual cost to the assessee must be reduced for assessment years 1962-63 to 1964-65 by Rs. 30,572 in the light of section 43(1) of the Act of 1961. The Hon’ble High Court accordingly held that for the assessment year 1961-62, the depreciation was rightly allowed to the assessee on the basis that the cost of the machinery in question was Rs. 30,572 and for assessment years 1962-63 to 1964-465, the depreciation was wrongly allowed to the assessee as the actual cost to the assessee should be reduced by the amount of Rs. 30,572 for these four assessment years. The said decision thus underscores the importance of method of accounting, as we have noted above, in context of section 145 of the Act and at the same time, emphasized on the definition of actual cost as so defined u/s 43(1), thus giving a harmonious construct to the relevant provisions of the Act and allowing necessary flexibility to determine actual cost due to change of events in subsequent years.
15. Similarly, in the case of CIT vs. Saharanpur Electric Supply Company Ltd., (supra), the matter came up for consideration before the Hon‟ble Allahabad High Court. In that case, the appellant electric supply undertaking had installed service connections during the years relevant to assessment years 1952-53 to 1961-62. For assessment year 1962-63, the Revenue held that though the assets had been acquired in earlier previous years, the statutory mandate of section 43(6) was that their actual cost should be determined afresh for each assessment year and it thus ignored the written down value of these assets as per earlier record and computed the actual cost of the service lines by excluding the part of the cost met by customers. The matter was carried in appeal before the Hon‟ble Allahabad High Court. The Hon‟ble Allahabad High Court, following the decision in the case of Maharana Mills (P.) Ltd.(supra) and Hides & Leather Products Pvt Ltd (supra), decided the matter in favour of the Revenue and held that it is no longer open to contend that the determination in the assessment year 1961-62 of the actual cost to the assessee, should be regarded as final and that for determining the written down value for the purpose of making the assessment for the year 1963-64, the ITO could not ascertain afresh the actual cost to the assessee in accordance with the definition of „actual cost‟. Similar view was taken by various other High Courts in case of other electric supply undertakings and all these matters were thereafter carried in appeal and came up for consideration before the Hon‟ble Supreme Court as reported in [1992] 60 Taxman 412 (SC) and the Hon‟ble Supreme Court held as under:
“8. We may, at the outset, dispose of an argument raised by Dr. Pal. His point was that the figure of actual cost ascertained in respect of any asset in any of the earlier previous years cannot be altered in a subsequent year. According to him, both the 1922 Act as well as the 1961 Act envisage a continuance of the figure of actual cost once arrived at in respect of any plant or machinery throughout the life time of such plant or machinery. He says that, for the assessment year 1962-63, the question of determination of actual cost can arise only in respect of assets acquired during the relevant previous year under sub-clause (a) of section 43(5). So far as the assets in question are concerned, which had been acquired in earlier previous years, depreciation has to be calculated on the basis of the written down value. Since the written down value in respect of these assets had already been ascertained for the assessment year 1961-62, all that has to be done further, to find out the written down value for the assessment year 1962-63, is to deduct therefrom the depreciation allowed for the assessment year 1961-62.
9. Attractive as this argument appears, there are two difficulties in accepting it. The first is the language of section 43(6)of the 1961 Act and, even, its predecessor section 10(5)(a) of the 1922 Act. Though, in substance, depreciation on an asset for any assessment year is calculated on its written down value which is normally carried forward from an earlier assessment year, the phraseology of the Act does not bear out the contention that the actual cost of the asset has to be determined only once, viz., in the previous year of its acquisition. Section 43(6)specifically deals with two categories of assets: (1) those acquired during the relevant previous year, and (a) those acquired earlier to that. Even in respect of the latter class of assets, the Act envisages a computation of the actual cost of the asset and the deduction therefrom of all depreciation allowed in earlier years in respect of that asset. Thus, the first step, statutorily prescribed, for the determination of the written down value of any asset for any year is for the Assessing Officer to determine its actual cost. This is a mandatory step which the officer cannot be prevented from taking merely because the actual cost of the asset has already been determined in one or more earlier years, though it may be true that in ninety-nine (and perhaps even more) per cent of the cases, the result (barring mistakes and some special situations) will just be the equivalent of the written down value taken for the immediately preceding assessment year less the depreciation allowed for that year. This mechanics of the definition was explained by the Calcutta High Court in Karnani Industrial Bank Ltd. v. CIT [1954] 25 ITR 558 approved by this Court in Maharana Mills (P.) Ltd. v. ITO [1959] 36 ITR 350 and followed in Habib Hussein v. CIT [1963] 48 ITR 859 (Bom.) In the light of these decisions and the clear language of the statute, it is not possible to accept the contention that the ITO had no justification to compute first the actual cost of an asset which had been acquired before the previous year. The second difficulty in the way accepting the argument of Dr. Palis that, whatever its validity over the period of continuous operation of the same Act (of 1922 or 1961), it can have no application for the assessment years 1962-63. There is no provision in the 1961 Act which permits or compels the adoption or continuance of the figure of actual cost and written down value determined under the provisions of the earlier statute which has been repealed by the 1961 Act. We, therefore, reject this contention of Dr. Pal.
10. Perhaps realising the above difficulty, Shri Dastur put forward a slightly modified contention. He concedes that the actual cost as determined for the earlier years is not sacrosanct or untouchable and that there may be circumstances in which it may have to be modified in the light of subsequent events. According to the learned counsel, however, changes in actual cost in three situations can be taken into account for purposes of the definition in section 43(7) read with clause (6). These according to him are-
(i)Subsequent factual occurrences which call for a modification of the figure of actual cost as at the time of acquisition determined earlier,
ii. Discovery of arithmetical errors in the earlier computation of the actual cost or written down value of any asset; and
iii. Redetermination of the original actual cost necessitated by a specifically retrospective statutory provision.
He points two instances of such modifications permitted by judicial decisions. In Karnani Industrial Bank Ltd’s case (supra) the assessee claimed to have purchased a machinery for Rs. 3,94,000 and obtained depreciation on that basis from the assessment year 1939-40 onwards. In proceedings for the assessment year 1946-47, the officer discovered that the cost of the machinery was only Rs. 2,80,000 and, since assessee had already obtained depreciation beyond this, refused the grant of depreciation for the assessment years 1946-47 and 1947-48. This was upheld by the Calcutta High Court. In Maharana Mills ( P.) Lid’s case (supra)the officer rectified the assessments of the assessee to re- work the written down value computed and the depreciation granted for earlier years as not being in accordance with law. The validity of these rectifications was upheld. In Habib Hussein’s case (supra)the asset in question had been acquired in the previous year relevant to the assessment year 1950-51. The assessee had acquired the asset under an agreement dated 4-6-1948. But that agreement had been revised on 10-7-1950 (after the close of the relevant previous year). The assessee claimed, nevertheless, that a sum of Rs. 3,30,000 payable by virtue of the subsequent agreement, also formed part of the actual cost of the asset. This claim was upheld by the High Court. According to the learned counsel, this was also a case where the original figure of actual cost was more precisely defined and quantified later. The counsel concedes that, in cases of this type the actual cost as determined in earlier years might need to be modified and that the Assessing Officer will be at liberty to do so. He, however, contends that the actual cost cannot be altered merely because a subsequent legislation provides for a different formula for ascertainment of actual cost; that formula may very well apply in respect of assets acquired in and after the previous year to which the new law will be applicable but it cannot be retrospectively made applicable to assets which had been acquired much earlier and the actual cost of which had been determined in accordance with the earlier prevalent law, unless the statute specifically says so. As an example, he refers to Explanation 8 to section 43(7) which, though inserted in 1989, provides that certain expenditure, of the nature specified therein, “shall not be included, and shall be deemed never to have been included in the actual cost of such asset.” [Emphasis supplied]
11. We are of the view that it is difficult to read any limitations into the statutory provision in section 43(6) as contended for by the counsel. As already explained, the definition envisages the computation of the actual cost of each asset, for every assessment year, not only in respect of assets acquired during the previous year but also in respect of assets acquired before the previous year. This naturally has to be done with reference to the factual or legal position that may prevail during the relevant previous year and can be taken into account for the relevant assessment year. The section does not say that the computation of the actual cost of the asset has to be based only on the facts or law as they stood at the time of acquisition of the asset and as could have been taken into account for the assessment year relevant to the previous year of acquisition. It is one thing to contend, as Dr. Pal did, that once the actual cost as at the date of acquisition has been computed, that figure is final and cannot be interfered with subsequently, But that contention is not acceptable for reasons already discussed. Once it is conceded that the figure of actual cost can require modifications it is not possible to confine such modifications in the manner contended for by Shri Dastur. Where subsequent information factual or legal reveals that the actual cost determined originally was wrong, there can be no doubt that the original figure of actual cost has to be altered, if need be, and, if possible, by reopening the earlier assessments and, if that be not possible, at least for the future. This is illustrated by the situations in Karnani Industrial Bank Lld’s case (supra) and Maharana Mills (P.) Ltd’s case (supra )and this is also the position in cases to which Explanation 8 applies. These are situations which have a retrospective impact on the original actual cost. But it is equally conceivable that the ‘actual cost may undergo a change which does not relate back in fact or law and there is no reason why such change should not be given effect to in future, irrespective of what may have happened in the past. In fact this is what happened in Habib Hussein’s case (supra). It was not a case of the category suggested by Shri Dastur. It was a case where the figure of original cost underwent a change by reason of a subsequent agreement and the High Court directed that the sum of Rs. 3,30,000 or part thereof attributable to the acquisition of the assets “should be included in the actual cost of these assets to the assessee in the respective year or years of account at the commencement of which the liability to pay it or part thereof had accrued or would accrue”. That the redetermination of actual cost permitted by the provision with which we are concerned is not restricted to cases of the limited range of retrospective change in the actual cost suggested by Shri Dastur is also illustrated by the decision in CII v. Hides & Leather Products (P.) Ltd. [1975] 101 ITR 61 (Guj). In that case:
“The assessee who maintained its accounts on the mercantile system purchased a piece of machinery from a foreign firm in 1955. No amount was paid towards the price thereof on the ground that there was some defect in the machinery. The liability to the foreign supplier was shown in the books of account and balance-sheet of the assessee. But in 1960 by making appropriate entries the assessee wrote back the amount of Rs. 30,572 being the price of machinery, debited the amount in the account of the foreign supplier and credited the same amount in the capital reserve account. On the question whether the assessee was entitled to depreciation on the actual cost computed at Rs. 30,572 for the assessment years 1961-62 to 1965-66.” (p. 61)
The High Court held that,
“… in view of the fact that the foreign supplier had not recovered the amount of Rs. 30,572 and no legal steps had been taken towards its recovery for so long a time, it was not unreasonable to infer that the foreign supplier had treated the liability of the assessee to itself as having ceased and in fact and in substance there had been a cessation of this liability. The Act of 1922 applied to the assessment year 196162, and as the foreign supplier was neither Government nor public nor local authority, though there was cessation of liability the assessee was entitled to have the benefit of the entire amount of Rs. 30,572 as the actual cost. Depreciation was allowable to the assessee for the assessment year 1961-62 on the basis that the cost to it of the machinery was Rs. 30,572. The Act of 1961 applied to the assessment years 1962-63 to 1964-65 and under section 43(7) of the Act, since there was cessation of liability, the actual cost of the machinery to the assessees for these assessment years should be reduced by Rs. 30,572.” (p. 62)
Shri Dastur challenged the correctness of this decision insofar as it held that the original cost itself did not stand modified as a result of the subsequent development. We are not concerned with that aspect here. All that is relevant is that this is a decision which permits an alteration in the figure of actual cost consequent on subsequent factual occurrences that do not relate back. It also shows that the actual cost for 1961-62 could be scaled down for the assessment year 1962-63. There are also other decisions which make it clear that the original cost of an asset may change after the year of installation or erection as a result of further liabilities arising later: CIT v. U.P. Hotel-Restaurant Ltd [1980] 123 ITR 626 (All.) and Kilkotagiri Tea & Coffee Estate Ltd. v. CIT [1978] 113 ITR 729 (Ker.) decided in the context of depreciation allowance and CII v. Mithlesh Kumari [1973] 92 ITR 9 (Delhi) and Addl. CIT v. KS. Gupta [1979] 119 ITR 372 (AP) decided in the context of the allied concept of ‘cost of acquisition’ for purposes of capital gains.
12. These apart, there are clearly situations in which the actual cost does get altered prospectively and not retrospectively. One such instance is where the cost of an asset increases or decreases on account of fluctuation in the value of the currency. Suppose an asset was purchased in 1965 for $ 10,000 (equivalent to say, Rs. I lakh) and the price or the moneys borrowed by the assessee in foreign currency for its payment, remained outstanding. The devaluation of the rupee in June 1966 would result in the increase of the price to say, Rs. 1,20,000. It may be arguable whether this is a retrospective enhancement in the price or not. But it would be only reasonable to say that the actual cost has increased to Rs. 1,20,000 in June 1966 and that the assessee should be entitled to the grant of depreciation and other allowances at least thereafter, on the basis of the altered cost. This is what section 43 A provides. Another situation would be where, subsequent to the acquisition of the asset, substantial capital expenditure has been incurred thereon (not amounting to the addition of a separate asset on which depreciation, etc., could be independently allowed). Such expenditure is added, under the rules, in practice to the actual cost and allowance given thereon subsequently, vide the third column in the table set out at page 878 in Habib Hussein’s case (supra). This is quite correct and fully accords with the department’s interpretation of the provision. On the assessee’s interpretation no such increased allowances can at all be granted as there is no other provision permitting the additional cost being taken into account as part of the ‘actual cost’ even for years subsequent to the addition or alteration. In principle, therefore, we are unable to except the contention that the actual cost cannot be determined year after year on the factual or legal position applicable for the relevant previous year and that the actual cost once determined cannot be altered except in the three situations outlined by the counsel where the original figure itself requires a modification.” [Emphasis supplied]
125. Applying the legal proposition so laid down by the Hon‟ble Courts in the instant case, we are of the considered opinion that the actual cost so determined is not a static figure for all times to come once it entered the block of assets and it can be modified or altered at a subsequent stage in any of the subsequent assessment years where the subsequent situations-factual or legal so warrants and the Assessing officer is duly empowered to do so and there is no legal impediment to exercise of such powers. Even from an accounting standpoint, we find that the assessee following mercantile system of accounting has to pass appropriate entries adjusting its outstanding liability where such liabilities are no longer payable and corresponding adjustment has to be done in the cost of the asset so capitalised at the original cost. Therefore, in a situation where league matches don‟t take place in any year and there is refund of league deposit or the situations such as non-payment of 9th and 10th installment by the assessee, the actual cost of the intangible asset will undergo a downward adjustment, fresh written down value to be determined and the depreciation will be computed on the adjusted written down value. Similarly, in the situation where the franchise consideration is discharged annually as percentage of franchisee income from year 2018 onwards, the actual cost of the intangible asset will undergo an upward adjustment, fresh written down value to be determined and the depreciation will be computed on the adjusted written down value.
Conclusion:
126. In light of aforesaid discussion and in the entirety of facts and circumstances of the case, the Question No. 1 is left open and not adjudicated upon considering the facts and circumstances of the present case as so observed in paragraph 91 herein above. In respect of Question No. 2, the depreciation shall be allowed on the entire franchise fee of Rs. 268 crores, being the actual cost of the intangible assets so acquired during the financial year and not on Rs. 26.80 crores actually paid during the financial year subject to necessary adjustment as warranted in subsequent financial years as observed by us in para 125 herein above.
127. In light of aforesaid, all matters stand disposed off and matter remitted to the Division Bench for passing appropriate orders.
Order pronounced in the open court on 31-10-2025
