2009 (5) TMI 618 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of profits arising from the transfer of trademarks.
2. Classification of the profits as capital gains or business income.
3. Determination of the cost of acquisition of trademarks.
4. Allowability of stamp duty as a deduction.
5. Prematurity of penalty proceedings under sections 271-D, 271-E, and 271(1)(c).
6. Interest under section 234B.

Detailed Analysis:

1. Taxability of Profits Arising from the Transfer of Trademarks:
The assessee contended that the profits from the transfer of trademarks should be considered as capital receipts not liable to tax. The CIT(A) held that the profits arising from the transfer of trademarks are assessable under the head "Capital Gains" as long-term or short-term capital gains, depending on the period of holding by the appellant and its holding company. The tribunal upheld this view, stating that the transfer of trademarks and designs by the assessee to Hindustan Lever Ltd. for Rs. 110.05 crores is a transfer of a capital asset. The tribunal further clarified that the cost of acquisition and improvement of these trademarks and designs in the hands of the previous owner, Trent Ltd., is indeterminable, and hence, no long-term capital gain tax liability can be levied on the assessee.

2. Classification of the Profits as Capital Gains or Business Income:
The revenue argued that the profits should be taxed as business income. However, the CIT(A) and the tribunal held that the business of the assessee was not to deal in trademarks and designs but to earn royalty income by licensing them. Therefore, the profits from the transfer of these trademarks and designs are assessable under the head "Capital Gains."

3. Determination of the Cost of Acquisition of Trademarks:
The CIT(A) held that the cost of acquisition of these trademarks cannot be taken at "no cost" and determined the cost of acquisition to be Rs. 79.53 crores, which was the amount paid by the assessee to Trent Ltd. The tribunal noted that the cost of acquisition of the trademarks and designs in the hands of the previous owner, Trent Ltd., is indeterminable as these were self-generated assets. Consequently, no long-term capital gain tax liability can be levied on the assessee. However, if any trademark or design was registered within 36 months preceding May 1998, it would be treated as a short-term capital asset, and the Assessing Authority would be at liberty to levy short-term capital gain as per the provisions of the Act.

4. Allowability of Stamp Duty as a Deduction:
The assessee claimed a deduction for stamp duty of Rs. 1.10 crores. The CIT(A) upheld the disallowance, and the tribunal agreed, stating that the expenditure had not been incurred and thus was not allowable as a deduction under section 48(1), which allows deductions for "expenditure incurred wholly and exclusively in connection with such transfer."

5. Prematurity of Penalty Proceedings under Sections 271-D, 271-E, and 271(1)(c):
The CIT(A) held that the grounds of appeal related to the initiation of penalty under sections 271-D and 271-E of the Act are premature and dismissed these grounds. The tribunal did not find it necessary to address these grounds further as they were not pressed by the assessee.

6. Interest under Section 234B:
The assessee contended that interest leviable under section 234B should be restricted to tax payable on the returned income. The tribunal noted that this issue is consequential in nature and would depend on the final determination of the tax liability.

Conclusion:
The tribunal partly allowed the appeals of the assessee for statistical purposes and dismissed the revenue's appeal. The profits from the transfer of trademarks were held to be assessable under the head "Capital Gains," and the cost of acquisition in the hands of the previous owner was deemed indeterminable, leading to no long-term capital gain tax liability. The claim for stamp duty deduction was disallowed, and the penalty proceedings were deemed premature. The issue of interest under section 234B was left as consequential.