2006 (4) TMI 51 - AT - Income Tax

Capital or Revenue receipt Revenue is of the view that the amount receive by the assessee is for the giving up right to manufacture, surrender of goodwill and user of trademark and brand name is of capital nature Held that revenue contention was correct and allowed

Summary

Issues Involved:
1. Nature of Rs. 55 lakhs received by the assessee.
2. Taxability of the received amount.
3. Validity of the agreements executed between the parties.
4. Determination of whether the receipt was a capital or revenue receipt.
5. Bifurcation of the received amount for tax purposes.

Detailed Analysis:

1. Nature of Rs. 55 Lakhs Received by the Assessee:
The primary issue is the nature of Rs. 55 lakhs received by the assessee under agreements executed between the parties. The assessee claimed that the amount was received for relinquishment of trade mark user rights and termination of ice-cream manufacturing under the brand name "Kwality." The Revenue contended that the amount was a revenue receipt for termination of the agreement.

2. Taxability of the Received Amount:
The assessee offered Rs. 10 lakhs as long-term capital gains for surrender of goodwill and treated Rs. 45 lakhs as a capital receipt not liable to tax. The Assessing Officer, however, considered the entire amount of Rs. 55 lakhs as a revenue receipt, arguing that the agreement executed on February 17, 1997, was a tax-avoidance device.

3. Validity of the Agreements Executed Between the Parties:
The agreements in question include a memorandum of understanding (MoU) dated May 31, 1995, and a formal agreement dated February 17, 1997. The Assessing Officer argued that the latter agreement was executed to avoid tax. However, the Tribunal found that the agreement was necessitated by business considerations and not merely a tax-avoidance device.

4. Determination of Whether the Receipt Was a Capital or Revenue Receipt:
The Tribunal considered various judicial precedents to determine whether the receipt was capital or revenue in nature. Key principles include:
- Compensation for loss of a capital asset: Generally considered a capital receipt.
- Compensation for loss of profits: Considered a revenue receipt.
- Nature of the payment: More relevance attaches to the nature of the receipt in the hands of the recipient rather than the motive of the payer.
- Impact on the business structure: If the compensation affects the trading structure or results in the loss of the source of income, it is generally a capital receipt.

The Tribunal concluded that the amount of Rs. 55 lakhs was received on account of surrender of user rights/goodwill and giving up the right to manufacture ice-cream under the brand name "Kwality," making it a capital receipt.

5. Bifurcation of the Received Amount for Tax Purposes:
The assessee had bifurcated the amount into Rs. 10 lakhs for surrender of goodwill and Rs. 45 lakhs for termination of ice-cream manufacturing rights. The Tribunal found that the bifurcation lacked a proper basis and decided to apportion Rs. 15 lakhs towards goodwill/trade name/trade mark and the remaining Rs. 40 lakhs towards the surrender of the right to manufacture ice-cream and other allied products.

Conclusion:
The Tribunal partially allowed the appeal of the Revenue. It held that the amount of Rs. 55 lakhs received by the assessee was a capital receipt and directed the Assessing Officer to recompute the amount assessable to tax by apportioning Rs. 15 lakhs towards goodwill/trade name/trade mark and the remaining Rs. 40 lakhs towards the surrender of manufacturing rights.