2016 (5) TMI 1549 - AT - Income Tax

Capital asset being trademark - Treatment of asset transferred viz. Trade Mark as short term capital gains and disallowing the claim u/s.54F - Trust v/s settlement - difference between Gift and Settlement and the Explanation-1(i)(b) to Sec.2(42A) r.w.s.49(1)(ii) - HELD THAT - There are striking differences between a settlement and a gift. Under no circumstances can a settlement be equated to a gift. The appellant s contention of importing the definition of gift from the Gift Tax Act, 1958, which is no longer in existence, is not a valid proposition. Whether the capital asset is a Long Term Capital Asset or a Short Term Capital Asset under the Income Tax Act? - In our opinion the artificial distinction made by the lower authorities with reference to the Gift and Settlement is not appropriate and we are of the opinion that for the purpose of Sec.49(1)(ii), there is no difference between the gift and settlement and in the present case, the settlement made by Mrs.Malathy Rangaswami Mr.T.T.Ashok in favour of Mrs.Maya Varadarajan to be considered as Gift in terms of Sec.49(1)(ii) of the Act and accordingly, Explanation-1(i)(b) to Sec.2(42A) to be applied so as to compute the holding period of the asset after considering the holding period of the said capital asset by previous owner i.e. SETTLOR. In the present case, the date from which SETTLOR holding the title over the Registered Trade Mark PREETT is not available on record and we are not in a position to give a finding whether transfer of this Trade Mark by the present assessee would give rise to short/long term capital gains. Hence, this issue is remitted to the file of AO to determine the period of holding of this impugned capital asset and decide the issue afresh.

Issues Involved:
1. Treatment of the transferred asset "Trade Mark" as short-term capital gains.
2. Disallowance of the claim under Section 54F of the Income Tax Act.
3. Determination of whether a settlement deed can be considered a gift under the Income Tax Act.
4. Calculation of the holding period for the capital asset.

Detailed Analysis:

1. Treatment of the Transferred Asset "Trade Mark" as Short-Term Capital Gains:
The primary issue in both appeals was the treatment of the transferred asset, specifically the "Trade Mark," as short-term capital gains. The Assessing Officer (AO) classified the asset as short-term because the asset was held by the assessee for less than 36 months preceding the date of transfer. The AO argued that the period during which the previous owners held the asset could not be considered since the asset was acquired through a settlement deed, not a gift or will.

2. Disallowance of the Claim under Section 54F:
The AO disallowed the claims for deduction under Section 54F of ?8 crores for one assessee and ?36.99 crores for the other, on the grounds that the asset was short-term. Section 54F benefits apply only to long-term capital assets. The AO held that the asset did not qualify as long-term because it was not acquired through a gift or will, and thus, the period of holding by the previous owner could not be included.

3. Determination of Whether a Settlement Deed Can Be Considered a Gift:
The Ld.CIT(A) and the AO both concluded that a settlement deed could not be equated to a gift under the Income Tax Act. They noted that there are marked differences between a settlement and a gift. For instance, a gift is made without consideration, whereas a settlement can be made in consideration of marriage or for other purposes. Additionally, a gift requires acceptance, while a settlement does not. The Ld.CIT(A) emphasized that the definition of a gift from the Gift Tax Act, 1958, which is no longer in existence, could not be imported into the Income Tax Act.

4. Calculation of the Holding Period for the Capital Asset:
The Ld.CIT(A) held that since the settlement deed could not be considered a gift, the provisions of Section 49(1) of the Income Tax Act, which allow the period of holding by the previous owner to be included, did not apply. Consequently, the asset was deemed a short-term capital asset as per Section 2(42A) and the gains arising from its transfer were considered short-term capital gains under Section 2(42B).

Tribunal's Findings:
The Tribunal found merit in the argument that there is no significant difference between a gift and a settlement for the purposes of Section 49(1)(ii) of the Income Tax Act. They cited previous Tribunal decisions, including the cases of Shri S. Krishnan vs. DCIT and Mr. Abdul Hameed Khan Mohammed, where it was held that a settlement deed could be considered equivalent to a gift. The Tribunal directed that the period of holding by the previous owner should be considered in determining whether the asset is a long-term capital asset.

Remand for Fresh Consideration:
The Tribunal remitted the issue back to the AO to determine the period of holding of the capital asset by the previous owner and to decide the issue afresh. They emphasized that the artificial distinction made by the lower authorities between gift and settlement was not appropriate.

Conclusion:
Both appeals were partly allowed for statistical purposes, and the AO was directed to reassess the holding period of the capital asset and the applicability of Section 54F benefits in light of the Tribunal's findings.

Order Pronounced:
The order was pronounced in the open court on 11th May, 2016, at Chennai.

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