2013 (9) TMI 1241 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance of expenditure on Long Term Capital Gains (LTCG).
2. Taxability of LTCG on sale of self-generated trademarks.

Summary:

1. Disallowance of expenditure on LTCG:

The assessee, a partnership firm engaged in R&D in plant nutrition, sold self-generated trademarks for Rs. 1,51,00,000/-. After deducting VAT, the net consideration was Rs. 1,45,19,231/-. The assessee computed LTCG of Rs. 72,80,698/- after considering the indexed cost of acquisition at Rs. 72,38,533/-, which represented professional fees paid for trademark registration. The Assessing Officer (AO) disallowed the deduction of Rs. 72,38,533/- citing Sections 55(2)(a)(ii) and 55(1)(b) of the Income Tax Act, 1961, which state that the 'cost of acquisition' and 'cost of improvement' for self-generated trademarks should be taken as 'Nil'. The CIT(A) upheld the AO's decision, leading to the present appeal.

2. Taxability of LTCG on sale of self-generated trademarks:

The assessee argued that LTCG on the sale of trademarks is not taxable because such assets do not have a 'cost of improvement', making the computation machinery inapplicable. The assessee cited the Supreme Court's judgment in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294/5 Taxman 1, which held that if computation provisions fail, the asset is not subject to capital gains tax. The assessee also referred to the Bombay High Court's decision in Evans Fraser & Co. Ltd. v. CIT [1982] 137 ITR 493/8 Taxman 22, supporting the argument that self-generated trademarks, lacking ascertainable 'cost of improvement', should not be taxed under Section 45.

The Tribunal considered the rival submissions and noted that Section 55(2)(a)(ii) deems the 'cost of acquisition' of self-generated trademarks as 'Nil'. However, Section 55(1)(b) does not prescribe 'Nil' for the 'cost of any improvement' for trademarks. The Tribunal concluded that the computation provisions fail due to the absence of ascertainable 'cost of improvement', following the Supreme Court's reasoning in B.C. Srinivasa Setty and the Bombay High Court's decision in Evans Fraser & Co. Ltd. Consequently, the transfer of self-generated trademarks is not chargeable to capital gains tax under Section 45.

Conclusion:

The Tribunal held that no capital gain is exigible to tax on the transfer of the impugned trademark by the assessee. The order of the CIT(A) was set aside, and the AO was directed to allow appropriate relief to the assessee. The appeal was allowed in favor of the assessee.