2016 (1) TMI 982 - AT - Income Tax

Receipts for transfer of trademark - assessed as capital receipt or business income - Held that - The assessee has acquired rights in trademarks/brands through family arrangement and settlement.It is a well settled law that goodwill and the trademarks are intangible assets and are shown as Assets in the balance sheet. Thus, any income generated on transfer of rights attached to capital assets is a capital receipt. The Commissioner of Income Tax (Appeals) has rightly rejected the findings of Assessing Officer in holding that the receipt of ₹ 1 crore by the assessee on transfer of trademarks is taxable u/s. 28(iv) as business income. As corollary to above findings we hold that the income generated from transfer of rights in trademarks to M/s. Thakur V. S. Bidi Works is a capital receipt. Whether the capital receipt is taxable u/s. 45 r.w.s. 55(2)(a)? - Held that - In the case of CIT Vs. B. C. Srinivasa Setty (1981 (2) TMI 1 - SUPREME Court ) the Hon ble Supreme Court of India has held that where goodwill is generated in a newly commenced business, it cannot be described as asset within the meaning of section 45 of the Act and thus, the transfer of goodwill initially generated in a business does not give rise to a capital gain for the purposes of income-tax. Thus, ratio laid down in the case of goodwill squarely applies on trademarks also, as both are intangible assets and are generated in similar manner over the period of time. In view of the facts of the case and the decisions referred above, we hold that the amount of ₹ 1 crore received by the assessee on transfer of rights in trademark is a capital receipt not liable for tax u/s. 45 under the provisions of section 55(2) of the Act.

Issues Involved:
1. Taxability of Rs. 1 crore received by the assessee on transfer of trademark.
2. Treatment of the amount as capital receipt or business income.
3. Applicability of section 55(2) of the Income Tax Act, 1961.
4. Levy of penalty under section 271(1)(c) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Taxability of Rs. 1 crore received by the assessee on transfer of trademark:
The primary issue in the appeals was whether the Rs. 1 crore received by the assessee on transferring the trademark to M/s. Thakur V.S. Bidi Works should be treated as a capital receipt exempt from tax or as business income taxable under section 28(iv) of the Income Tax Act, 1961. The assessee claimed it as a capital receipt based on the Supreme Court's decision in CIT Vs. B. C. Srinivasa Setty, arguing that the trademark was a self-generated asset with no ascertainable cost. The Assessing Officer (AO) contended that the amount should be taxed as business income under section 28(iv) since the assessee had not sold any "capital asset" but only assigned rights to use the trademark.

2. Treatment of the amount as capital receipt or business income:
The Commissioner of Income Tax (Appeals) [CIT(A)] held that the amount received was a capital receipt taxable under section 45 read with section 55(2) of the Act. The CIT(A) concluded that the amount was consideration for transferring rights to manufacture, produce, or process specified brands of bidis and sell them in specified areas. The Tribunal upheld the CIT(A)'s decision, rejecting the AO's findings that the receipt should be taxed as business income under section 28(iv). The Tribunal noted that the trademarks were intangible assets, and any income generated from their transfer should be treated as a capital receipt.

3. Applicability of section 55(2) of the Income Tax Act, 1961:
The Tribunal examined whether the capital receipt was taxable under section 45 read with section 55(2)(a) of the Act. The Tribunal held that the amendment to section 55(2)(a) by the Finance Act, 2001, which included "trademark or brand name associated with a business," was effective from April 1, 2002. Since the assessment year in question was 2001-02, the amended provisions did not apply. The Tribunal relied on the Bombay High Court's decision in CIT Vs. Fernhill Laboratories & Industrial Establishment, which held that the amendment was effective from the assessment year 2002-03 onwards. Consequently, the Rs. 1 crore received by the assessee was not liable to tax under section 45.

4. Levy of penalty under section 271(1)(c) of the Income Tax Act, 1961:
The AO had levied a penalty of Rs. 25,00,000 under section 271(1)(c) on two counts: treating the Rs. 1 crore as capital receipt exempt from tax and valuation of closing stock of tobacco. The CIT(A) deleted the penalty on both counts. The Tribunal upheld the CIT(A)'s decision, noting that since the addition made in the assessment proceedings was deleted, there was no ground for levying the penalty on the said issue. Regarding the valuation of closing stock of tobacco, the Tribunal agreed with the CIT(A) that no penalty could be imposed as the stock was valued at market price, and the assessee had not furnished inaccurate particulars.

Conclusion:
The Tribunal concluded that the Rs. 1 crore received by the assessee on transferring the trademark was a capital receipt not liable to tax under section 45 read with section 55(2) of the Act. The Tribunal also upheld the deletion of the penalty levied under section 271(1)(c) by the CIT(A). The appeal of the assessee was partly allowed, and both appeals of the Revenue were dismissed.

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