2010 (12) TMI 800 - AT - Income Tax

Capital gain or other sources - an amount of Rs.1,35,45,000/- was paid to the assessee by M/s Sambandam Spinning Mills during the relevant period, for using assessee s name, i.e. Sambandam as a part of the name of the company and for/on the company s product - This being intangible asset and when the assessee allowed to retain the name in the name of the company, the very same day this had been stood transferred when the consideration of Rs.1,35,45,000/- was received by the assessee - The brand name is always treated as capital asset as defined in section 2(14) of the Act - Held that Even if the assessee continues to use his name for his personal purposes but allow use of the name in the company as per the correspondence between them, although there is a rider the assessee can withdraw this benefit when, in future, in our opinion, the transfer of partial right is exigible to capital gains - Decided in favour of the assessee

Summary

Issues:
1. Treatment of payment received by the assessee from a company as capital gains or income from other sources.
2. Applicability of Explanation 3 to section 32(1)(ii) of the Income-tax Act, 1961.
3. Evaluation of goodwill and intangible assets in the context of the transaction.

Issue 1: Treatment of Payment Received

The appeal challenged the finding that a payment of Rs.1.35 Crores received by the assessee from a company should be treated as capital gains and not income from other sources. The assessee argued that the receipt was in the nature of a capital receipt for the use of his name, which had become a trade name in the market. The assessee relied on legal precedents to support the classification of the receipt as a capital asset. The Assessing Officer (A.O.) initially taxed the receipt as income from other sources, but the first appeal before the ld. CIT (Appeals) resulted in the treatment of the receipt as a capital gain. The Revenue contended that the transaction was an ex-gratia payment and raised various grounds challenging the treatment of the payment as capital gains.

Issue 2: Applicability of Explanation 3 to Section 32(1)(ii)

The assessee invoked Explanation 3 appended to section 32(1)(ii) of the Income-tax Act, 1961, which includes a trade name/commercial right under the definition of "intangible assets." The assessee argued that the payment received was in consideration of the relinquishment of rights and interests in the company, qualifying as a capital asset under section 2(14) of the Act. The assessee claimed that the receipt was for the use of his name, which had become a brand name associated with the business of the company. The appellate order upheld the treatment of the payment as a capital gain based on the transfer of the brand name from the individual to the company.

Issue 3: Evaluation of Goodwill and Intangible Assets

The dispute centered on whether the name "Sambandam" had acquired goodwill and commercial significance, making it an intangible asset. The Revenue argued that the goodwill should have been evaluated in the year 1992 when the company was converted into a public limited company and that the subsequent evaluation in 2002 was erroneous. The appellate finding emphasized the commercial importance of the name "Sambandam" in the market, considering it a trade name and an intangible asset. The correspondence between the parties indicated the significance of the name in the local market, leading to the conclusion that the brand name had been transferred from the individual to the company, resulting in a capital gain taxable under the Act.

In conclusion, the Appellate Tribunal ITAT, Chennai upheld the treatment of the payment received by the assessee as capital gains, dismissing the appeal filed by the Revenue. The judgment delved into the intricacies of evaluating intangible assets, the transfer of brand names, and the applicability of relevant provisions of the Income-tax Act, 1961, in determining the taxability of the transaction.