Can ITAT Direct Amortisation Of Royalty Payment Beyond AO's Findings? Delhi High Court To Decide

The Delhi High Court is set to examine whether the Income Tax Appellate Tribunal (ITAT) could direct the Assessing Officer (AO) to conduct a de novo assessment and amortise a music licence fee when the direction went beyond the case originally set up by the AO.

A Division Bench of Justices Dinesh Mehta and Rajneesh Kumar Gupta admitted an appeal filed by Aalap Digital Music Private Limited against an ITAT order concerning Assessment Year 2016-17. The substantial question of law framed by the High Court is:

“Whether in the facts and circumstances of the case, the Tribunal was legally correct in remanding the matter to the Assessing Officer for making de-novo assessment and issuing direction for amortisation of the royalty payment … beyond the finding or case set up by the Assessing Officer?”

The company had acquired a licence from Hungama Entertainment for exploitation of music content. It claimed that Hungama had acquired the rights from Zee Music and subsequently sub-licensed 20 film titles to the company under an agreement dated 20 December 2015. The licence agreement provided for a minimum guarantee fee of Rs. 11.73 crore plus service tax for six years.

During assessment proceedings, the AO examined the company's claim of Rs. 11.79 crore as royalty expenditure. The AO questioned the fact that the agreement referred to commencement dates falling in Financial Year 2014-15, although the agreement itself was executed in Financial Year 2015-16.

The company contended that the liability crystallised only when the licence agreement was executed on 20 December 2015 and that the expenditure was therefore allowable in Assessment Year 2016-17. It also submitted that corresponding income of Rs. 3.50 crore had been recognised during Financial Year 2015-16 on a provisional basis.

The AO, however, disallowed Rs. 7,77,85,538, treating it as prior-period expenditure. The Commissioner of Income Tax (Appeals) upheld the disallowance.

The ITAT order did not merely uphold the AO's treatment of the expenditure as prior-period expenditure. It further held that the minimum guarantee fee was linked to the earning of revenue and that the company ought to recognise the corresponding licence expenditure over the licence period.

It directed the AO to allow the licence fee relatable to the current period, covering four months from December 2015 to March 2016, amounting to Rs. 65,20,140, while carrying forward the remaining amount as expenditure.

It further held that even if the payment was treated as having been made during the relevant year, it would have to be treated as deferred licence fee and amortised over the six-year licence period. Since the licence had been utilised for four months during the relevant year, the balance was to be amortised over the remaining period.

Ultimately, the ITAT held that the method adopted by the company and the disallowance made by the AO were not appropriate. It therefore directed the AO to redo the assessment de novo, determine the actual income and expenditure, and allow the relevant cost over the six-year licence period.

Before the High Court, the company questioned whether the ITAT was legally entitled to issue directions concerning amortisation beyond the case set up by the AO.

Counsel for the company also submitted that the AO had, in the meantime, given effect to the ITAT's order and passed an order resulting in a substantial demand against the company.

The matter is listed for 3 September 2026.

For Appellant: Mr. Vishal Kalra, Mr. Anil Kumar & Ms.Suvandna Kalra, Advs.

For Respondent: Mr. Indruj Singh Rai, SSC with Mr.Sanjeev Menon, Mr. Rahul Singh & Ms. Priya Sarkar, JSCs, Mr. Gaurav Kumar & Mr. Prateek Bhati, Advs.