2022 (1) TMI 920 - AT - Income Tax

Admission of additional ground of appeal - receipt of the brand Essar by the assessee trust from EIL - whether EIL was the genuine owner of the Essar brand, trademarks and copyrights, and also, as to whether the settlement of the Essar brand, trademarks and copyrights by EIL in favour of the assessee was a bonafide transaction? - HELD THAT - We are of the considered view, that as stated by the ld. A.R, and rightly so, the aforesaid additional ground of appeal no. 1 raised by the revenue clearly militates against the department s own stand that the assessee had received the brand Essar from EIL. As is discernible from the assessment order, the very genesis of the controversy involved in the present case is the receipt of the brand Essar by the assessee trust from EIL. However, the department by raising the aforesaid additional ground of appeal, and therein questioning as to whether EIL was the genuine owner of the Essar brand, trademarks and copyrights; and as to whether the settlement of the same by EIL in favor of the assessee was a bonafide transaction, is undoubtedly trying to make a complete volte face. Although, we are in agreement with the claim of the ld. A.R that the Tribunal is vested with the jurisdiction to examine a question of law which arises from the facts as found by the authorities below and have a bearing on the tax liability of the assessee, notwithstanding that the same was not raised before the lower authorities, however, the scope and realm of such jurisdiction can by no means be stretched or construed in a manner to change the entire complexion of the case and seek improving upon the assessment, which we are afraid is not permissible under Sec. 254 of the Act. Our aforesaid conviction is fortified by the order of the Special Bench of the ITAT, Mumbai in the case of ACIT Vs. Prakash L. Shah 2008 (8) TMI 387 - ITAT BOMBAY-K Backed by our aforesaid deliberations, we are of the considered view that as the revenue by raising the additional ground of appeal no.1 is trying to change the entire complexion of the case and improve upon the assessment by canvassing facts which clearly militate against the observations drawn by the A.O while framing the assessment, which as observed by us hereinabove is not permissible as per the mandate of Sec. 254 of the Act, therefore, we decline to admit the same. Unexplained money - whether or not on the facts and circumstances of the case and in law the value of Essar brand, trademarks and copyrights could be brought to tax in the hands of the assessee under Sec. 69A ? - The provisions of Sec. 69A are triggered in the assessment year in which an assessee is found to be the owner of the asset in question. Now, in the case before us, the brand Essar was received by the assessee trust from EIL on 29.03.2012, i.e during the period relevant to A.Y 2012-13 and not during the year under consideration. Accordingly, there is substance in the claim of the ld. A.R that as the facts as regards receipt of the brand Essar are not borne from the records of the assessee for the year under consideration, therefore, on the said count itself the additional ground of appeal no. 2 could not be admitted. Also, we concur with the ld. A.R, that the satisfaction of the A.O that the assessee had failed to prove the nature and source of acquisition of the asset in question is the sine qua non for triggering the provisions of Sec. 69A of the Act. Accordingly, as in the course of the assessment proceedings for the year in question no question was raised by the A.O as regards the applicability of Sec. 69A of the Act, therefore, in the absence of there being any opinion of the A.O qua the explanation of the assessee on the nature and source of acquisition of the asset in question, the applicability of the provisions of Sec. 69A could not be looked into. In sum and substance, we concur with the ld. A.R that as the requisite facts for looking into the applicability of Sec. 69A of the Act qua the asset in question, viz. brand Essar are not borne from the record, therefore, on the said count itself the seeking of admission of the aforesaid additional ground of appeal no. 2 by the revenue is liable to be dismissed. Restoration of the computation of the value of Essar brand, trademarks and copyrights to the file of the A.O, for the reason, that subsequent to the order passed by the CIT(A) it was discovered that there was a mistake in the computation of the value of Essar brand, trademarks, copyrights under the DCF method - Although, the department has sought liberty for admission of the aforesaid additional ground of appeal, imputing a mistake in computation of the value of the Essar brand, trademarks, copyrights under the DCF method, but as pointed out by the ld. A.R, and rightly so, there are no facts available on record regarding the alleged error on the part of the A.O. Apart from that, we also concur with the claim of the ld. A.R that the subject matter of appeal before the Tribunal is not regarding the valuation of the brand received by the assessee trust from EIL. Backed by the aforesaid facts, we are of the considered view that as neither the facts as regards the alleged error on the part of the A.O are discernible from the record, nor the valuation of the Essar brand, trademarks, copyrights is the subject matter of appeal before the Tribunal as the CIT(A) had not decided the question of valuation, therefore, the request of the department for admission of the additional ground of appeal no. 3 cannot be accepted and is accordingly rejected. Whether CIT(A) erred in admitting additional evidences under Rule 46A of the Income-tax Rules, 1962, ignoring that there was no sufficient cause for admitting the same? - HELD THAT - EIL was the owner of the brand/trademarks since 1996 was a fact that was available in the domain of the A.O even during the course of the assessment proceedings, therefore, the additional documentary evidence filed by the assessee with the CIT(A) vide its letter dated 13th October, 2016 did not bring any new facts on record, but only substantiated the aforesaid factual position. In other words, the exhaustive list of evidence filed by the assessee with the CIT(A) only substantiates that the trademark Essar was registered in the name of EIL, a fact which is borne from the assessment record. Accordingly, as the additional evidence filed by the assessee was not with a purpose or motive of bringing any fresh facts on the record, but with a limited purpose of dispelling all doubts and substantiating to the hilt that EIL was the owner of Essar brand prior to its settlement in the assessee trust, therefore, on the said count also no infirmity can be related to the admission of the same by the CIT(A). We, thus, in terms of our aforesaid observations not finding any infirmity in the admission of the additional evidence by the CIT(A), uphold his order to the said extent. The Ground of appeal No. 1 is dismissed. Value of the Essar brand, trademarks and copyrights purported to have been settled by EIL to the assessee without any consideration, constituted taxable income as per section 56(1) - Whether on facts and circumstances of the case and in law, the Ld. CIT(A) grossly erred in not upholding the AO's finding that the value of the Essar brand, trademarks and copyrights purported to have been settled by EIL to the assessee without any consideration, was income as per section 2(24) of the Act.? - the tax authorities have no role to play or question the validity of the transaction when the shareholders had unanimously passed the resolutions and ratified the transaction, unless it is either illegal or against the national interest. The assessee obviously received the gift in the form of brands, which constituted its profit-making apparatus, and thus, was in the nature of its fixed asset/capital. As observed by us hereinabove, as the brand Essar contributed as a gift by EIL to the corpus of the assessee trust formed the latters profit-making apparatus, that was exploited by it by entering into non-exclusive brand licensing agreements with its group entities and, earning substantial license fees therefrom, thus, the same formed its fixed capital. Accordingly, as the brand Essar (supra) was only a means by which the assessee had entered into non-exclusive brand licensing agreements with its operative group entities, therefore, it could not be anything but its capital asset. Our aforesaid view is fortified by the judgment of the Hon ble Supreme Court in the case of CIT Vs. Vazir Sultan and Sons 1959 (3) TMI 5 - SUPREME COURT The transaction in question does not involve any exchange of consideration between the parties, and is in the nature of a Gift of a profit-making apparatus which has huge potential to generate royalty income, which too is possible only when the group companies are willing to contribute, otherwise, it literally has no value. Therefore, in the backdrop of our aforesaid observations, we are of the considered view that as the transaction under consideration i.e contribution of the brand Essar as a gift by EIL to the corpus of the assessee trust does not fall under any category of income, therefore, we find no reason to interfere with the view taken by the CIT(A), who had rightly concluded that as the contribution of brand Essar as a gift by EIL to the corpus of the assessee trust did not involve any profit element which could be brought within the meaning of Income under Sec. 2(24) of the Act, therefore, it could not be subjected to tax under the residuary head i.e Other sources u/s 56(1) of the Act, thus, uphold his view to the said extent. We neither find any substance in the aforesaid contentions advanced by the ld. D.R as regards the issue in hand, nor any justification to interfere with the reasoned view arrived at by the CIT(A). In our considered view, the CIT(A) had rightly concluded, that as the contribution of brand Essar as a gift by EIL to the corpus of the assessee trust did neither involve any profit element which could be brought within the meaning of Income under Sec. 2(24) of the Act, nor partook the nature of income, therefore, it could not be subjected to tax under the residuary head i.e Other sources u/s 56(1) of the Act, thus, uphold his view to the said extent. The Grounds of appeal Nos. 2 3 are dismissed. Income from other sources - claim of the A.O that as the Essar brand was registered by EIL as an artistic work under the Copyrights Act, 1957, therefore, the same would fall within the realm of the definition of property as contemplated in clause (d) of the Explanation to Sec. 56(2)(vii)(c) - Whether provisions of section 56(2)(vii) of the Act would not apply to the value of the 'Essar' brand, trademarks and copyrights purported to have been settled by EIL to the assessee without any consideration? - HELD THAT - As the methods specified in Rule 11UA(1)(b) for valuing any work of art does not contain the method adopted by the A.O. In the present case before us, the A.O treating the Essar brand as any work of art , had valued the same by adopting the DCF method, which we are afraid is not the method specified in the aforesaid rule. In the backdrop of our aforesaid observations, we are of the considered view, that though we have held that as the brand Essar is neither an artistic innovation nor possesses any artistic quality for bringing it within the meaning of any work of art as contemplated in the definition of property in Explanation (d) to Sec. 56(2)(vii) of the Act, however, alternatively, as observed by us hereinabove, the very method adopted by the A.O for valuing the same by applying DCF method is not as per the mandate of law. We, thus, in terms of our aforesaid observations concur with the view taken by the CIT(A) that the brand Essar contributed as a gift by EIL to the corpus of the assessee trust could not have been brought within the meaning of any work of art as contemplated in the definition of property in Explanation (d) to Sec. 56(2)(vii) of the Act, and thus, on the said count be subjected to tax under the head Income from other sources . The Ground of appeal No. 4 is dismissed. Income from business - Whether provisions of section 28(iv) of the Act would not apply to the value of the Essar brand, trademarks and copyrights purported to have been settled by EIL to the assessee without any consideration? - HELD THAT - As assessee is an irrevocable discretionary trust formed on 29thMarch 2012. The brands which are the property of the EIL were gifted to the assessee vide its board resolution and shareholders resolution dated 29th March 2012. In the backdrop of the fact that the assessee trust was formed on the same day when the brands were gifted to it by EIL, it cannot be held that they were generated out of the business carried on by the assessee. As per section 28(iv) of the Act, the value of any benefit or perquisite arising frombusiness or exercise of a profession shall be chargeable to income-tax under the head Profit gains of business or profession. However, as in the case before us, the brand Essar was contributed as a gift by EIL to the assessee trust on the same day on which the assessee trust had commenced its operations, therefore, it cannot be considered that the brands are the benefit which arose from the business carried on by the assessee. Apart from that, as we have categorized the receipt of brand by the assessee from EIL as a profit-making apparatus i.e a capital asset and a capital transaction, therefore, on the said count also we are inclined to reject the arguments of the revenue qua the present ground and, accordingly, dismiss the same. The Ground of appeal No. 5 is dismissed. Method of accounting - non-applicability of the accounting standard 9 - in order to claim the TDS credit for the year, the assessee had offered for tax the aforesaid TDS amount as its income for this year, even though it had not received/collected any part of the aforesaid amount - HELD THAT - There may be certain difference in the method of accounting adopted by the service receiver and service provider, but then, the same cannot be a reason to conclude that there has been tax avoidance on the part of the assessee trust. In this case, the assessee had not received any funds, though, brand license fees had been credited by the brand licensees i.e the group entities in the account of the assessee as appearing in their respective books of accounts. Technically, the assessee during the year under consideration should not have declared any income, however, since the group companies that were following mercantile system of accounting had claimed the license fees as an expense in their respective books of accounts i.e on accrual basis, and consequently deducted tax at source on the same as per the mandate of law, therefore, the assessee in order to match the tax liability was forced to declare the income to the extent of TDS amount that was deducted and deposited by the group companies i.e as reflected in the Form 26A. We do not see any mistake or any infirmity in the method of accounting adopted by the assessee, which, thus, by no means can be considered as tax avoidance on its part. The difference highlighted by the Ld D.R is due to timing difference. Hence, the argument put forth by the department representative has no force. Accordingly, the Ground of appeal No. 6 is dismissed.

Summary

Issues Involved:
1. Admission of Additional Evidence
2. Taxability under Section 56(1) and Section 2(24) of the Income Tax Act
3. Applicability of Section 56(2)(vii) of the Income Tax Act
4. Applicability of Section 28(iv) of the Income Tax Act
5. Method of Accounting and Taxability of License Fees

Detailed Analysis:

1. Admission of Additional Evidence:
The CIT(A) admitted additional evidence submitted by the assessee to substantiate the ownership of the "Essar" brand by EIL and its subsequent transfer to the assessee. The Revenue objected, arguing that the assessee had sufficient opportunities during the assessment to submit this evidence. However, the CIT(A) found that the AO did not request further evidence after the initial submission and that the additional evidence was crucial for adjudicating the appeal. The Tribunal upheld the CIT(A)'s decision, noting that the additional evidence did not introduce new facts but substantiated existing ones, and the AO had not provided any material to prove the documents were fake.

2. Taxability under Section 56(1) and Section 2(24) of the Income Tax Act:
The AO argued that the value of the "Essar" brand received by the assessee constituted taxable income under Section 56(1) and Section 2(24) of the Act. The CIT(A) disagreed, holding that the brand was a capital receipt and not income. The Tribunal upheld this view, emphasizing that the brand, being a profit-making apparatus, was a capital asset and did not fall under the definition of income. The Tribunal also found that the AO's reliance on various case laws was misplaced as they were distinguishable on facts.

3. Applicability of Section 56(2)(vii) of the Income Tax Act:
The AO contended that the "Essar" brand, registered as an 'artistic work' under the Copyrights Act, fell within the category of "any work of art" under Section 56(2)(vii) of the Act. The CIT(A) rejected this, stating that the brand was not an artistic innovation and did not possess artistic quality. The Tribunal concurred, noting that the definition of "artistic work" under the Copyrights Act was broader and included works without artistic quality, which did not align with the narrower definition of "any work of art" for tax purposes. Additionally, the Tribunal observed that the method used by the AO to value the brand did not comply with Rule 11UA(1)(b).

4. Applicability of Section 28(iv) of the Income Tax Act:
The AO argued that the value of the "Essar" brand was taxable under Section 28(iv) as a benefit arising from business. The CIT(A) rejected this, noting that the assessee had not commenced any business operations before receiving the brand. The Tribunal upheld this view, emphasizing that the brand was a capital asset and not a benefit arising from business. The Tribunal also noted that the brand was received as a gift, which is a capital receipt and not taxable under Section 28(iv).

5. Method of Accounting and Taxability of License Fees:
The AO rejected the cash method of accounting followed by the assessee, arguing that the license fees should be taxed on an accrual basis. The CIT(A) upheld the cash method, noting that it was consistently followed by the assessee and accepted in subsequent years. The Tribunal agreed, stating that the assessee was entitled to choose its method of accounting under Section 145 of the Act. The Tribunal also found that the AO's reliance on Accounting Standard 9 was misplaced, as it did not apply to trusts. The Tribunal dismissed the Revenue's argument that the cash method led to tax avoidance, noting that the assessee had declared its income based on actual receipts.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all grounds. The additional evidence was rightly admitted, the brand was correctly treated as a capital receipt, and the cash method of accounting was appropriately followed by the assessee.