2020 (6) TMI 528 - AT - Income Tax

Gain on the sale of assets - Long Term capital gain OR Short Term Capital Gains - financial asset u/s 2(42A ) or not? - period of holding - assessee s case was a scheme of amalgamation - transfer of intangible assets with right to carry on business - AO held that the period of holding of the assets transferred is less than 36 months and same being financial assets, the sale proceeds are to be treated as Short Term Capital Gain (STCG) - CIT-A held that period of holding of the said asset will include also the period held by the transferor company and treated the sale of asset as LTCG - whether the assets transferred by the assessee to M/s.Masonite Holdings Private Limited is a financial asset coming within the Explanation 1(i)(e) to section 2(42A)? HELD THAT - Financial asset has been described in the Act as share or security and the assets transferred by the assessee does not fall in the category of financial asset . This view is further affirmed by section 2(11) of the I.T.Act, which defines the term block of asset for the purpose of depreciation. The definition u/s 2(11) of the I.T.Act includes intangible assets. Since the intangible assets are covered in the definition of block of asset eligible for depreciation, the same cannot be again covered under the definition of financial asset as per Explanation (1) (i) (d) to section 2(42A) of the I.T.Act. Therefore, the assets transferred by the assessee, the period of holding cannot be determined as per Explanation 1(i)(e) to section 2(42A) of the I.T.Act, as contended by the Assessing Officer. In the facts and circumstances of the case, we are of the view that the holding period should be determined as per Explanation 1(i) (b) to section 2(42A) of the I.T.Act to determine whether or not an asset is a short term capital asset. The assessee s case was a scheme of amalgamation and assessee is an Indian company. Therefore, it is not correct for the Assessing Officer to consider 01.04.2008 as the date on which the assets were acquired, because the brand name was already there with Feroke Boards Limited (one of the companies that got merged with Feroke Boards Doors (P) and later renamed Feroke Boards Limited). The brand name was registered with Trade Marks Registry (Trade Mark No.1432867 dated 14.03.2006). The term amalgamation is defined in section 2(IB) and the assessee s case fall under the said definition. Therefore, there is no transfer taking place on 01.04.2008. The period of holding is much more than 36 months when the relinquishment / sale took place (on 18.05.2010). Therefore, the A.O. ought not to have taxed such receipts as STCG but should have taxed it as LTCG. Explanation to section 49(1) of the I.T.Act is a benevolent provision to extend applicability of the term previous owner to cover cases like assessee. Here the previous owner is the amalgamating company and this company did not acquire it in a mode referred to in clause (i) or clause (ii) or clause (iii) or clause (iv) of section 49(1) of the I.T.Act. However, as no purchase price was paid by the amalgamating company, the cost of acquisition was taken as NIL as required u/s 55(2)(a)(ii) of the I.T.Act. The Hon ble Delhi High Court in the case of CIT v. Mediward Publication (P) Ltd 2011 (4) TMI 503 - DELHI HIGH COURT had held that transfer of intangible assets with right to carry on business was taxable as LTCG. - Decided against revenue.

Summary

Issues Involved:
1. Whether the gain on the sale of assets is Long Term Capital Gain (LTCG) or Short Term Capital Gain (STCG).
2. Determination of the period of holding of the assets transferred.
3. Applicability of Explanation 1(i)(e) to section 2(42A) of the Income Tax Act, 1961.
4. Applicability of Explanation 1(i)(b) to section 2(42A) of the Income Tax Act, 1961.
5. Interpretation of the term "financial asset" under section 2(42A) of the Income Tax Act, 1961.
6. Consideration of the holding period of the previous owner for computation of capital gains.

Detailed Analysis:

1. Whether the gain on the sale of assets is Long Term Capital Gain (LTCG) or Short Term Capital Gain (STCG):
The primary issue in the appeal was whether the gain from the sale of assets by the assessee should be classified as LTCG or STCG. The Assessing Officer (AO) treated the sale proceeds as STCG, arguing that the assets were held for less than 36 months. However, the CIT(A) held that the gain should be treated as LTCG, considering the period of holding by the previous owner.

2. Determination of the period of holding of the assets transferred:
The AO determined the period of holding from the date of amalgamation (01.04.2008) to the date of transfer (18.05.2010), which was less than 36 months. The CIT(A), however, included the period for which the assets were held by the previous owner before amalgamation, thus treating the gain as LTCG.

3. Applicability of Explanation 1(i)(e) to section 2(42A) of the Income Tax Act, 1961:
The AO relied on Explanation 1(i)(e) to section 2(42A) to classify the assets as "financial assets" and treated the gain as STCG. The CIT(A) and the Tribunal disagreed, stating that the assets sold did not fall within the definition of "financial assets" as per Explanation 1(i)(d) to section 2(42A).

4. Applicability of Explanation 1(i)(b) to section 2(42A) of the Income Tax Act, 1961:
The CIT(A) and the Tribunal held that Explanation 1(i)(b) to section 2(42A) was applicable, which includes the period for which the asset was held by the previous owner in determining the period of holding. This interpretation led to the conclusion that the assets were held for more than 36 months, qualifying the gain as LTCG.

5. Interpretation of the term "financial asset" under section 2(42A) of the Income Tax Act, 1961:
The Tribunal clarified that the term "financial asset" as per Explanation 1(i)(d) to section 2(42A) refers to a capital asset being a share or any other security. The assets sold by the assessee, such as "brand name," "trademark," "packaging design," and "knowhow," did not fall under this category. Therefore, the AO's classification of these assets as "financial assets" was incorrect.

6. Consideration of the holding period of the previous owner for computation of capital gains:
The Tribunal emphasized that section 49(1) and Explanation 1(i)(b) to section 2(42A) allow for the inclusion of the holding period of the previous owner in the computation of capital gains. Since the assets were acquired through amalgamation, the period of holding by the previous owner (the amalgamating company) should be considered. Consequently, the holding period exceeded 36 months, and the gain was correctly treated as LTCG by the CIT(A).

Conclusion:
The Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal and confirming that the gain on the sale of assets should be treated as LTCG. The Tribunal's decision was based on the interpretation of relevant sections and explanations of the Income Tax Act, 1961, and the consideration of the holding period of the previous owner. The Tribunal also referenced a judicial pronouncement by the Hon'ble Delhi High Court in the case of CIT v. Mediward Publication (P) Ltd., which supported the treatment of the transfer of intangible assets as LTCG.