2025 (2) TMI 443 - AT - Income Tax

Applicability of the provisions of section 50 - Treating gains on sale of trademarks as Short Term Capital Gains instead of Long Term Capital Gains - HELD THAT - As evident that prior to the amendment by the Finance (No. 2) Act 1998 neither the depreciation nor the block of assets included within its ambit the intangible assets. Further as noted in the foregoing paragraph such intangible assets for the purpose of depreciation are also required to be acquired on or after 01/04/1998. Undisputedly in the present case both trademarks i.e. Coldarin and Raricap were acquired by the assessee vide purchaser agreements prior to 01/04/1998. Further in the year of acquisition of the aforesaid trademarks i.e. the financial year 1992-93 and 1997-98 there was no provision in the Act which mandated the inclusion of the intangible assets in the block of assets. Consequently no question arises for allowance of depreciation on the block of assets which includes intangible assets in the present case. Therefore the other two conditions for the applicability of the provisions of section 50 of the Act are not satisfied in the present case. Section 50 of the Act has no applicability to the facts of the present case. Thus we find merits in the submissions of the assessee in treating the capital gains as long term capital gains and offering the same to tax accordingly. The findings of the lower authorities in taxing the capital gains accrued to the assessee on the transfer of trademarks i.e. Coldarin and Raricap as short term capital gains are quashed. As a result grounds raised in assessee s appeal are allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment were:

1. Whether the gains from the sale of trademarks "Coldarin" and "Raricap" should be treated as short-term capital gains under section 50 of the Income Tax Act, 1961, or as long-term capital gains as claimed by the assessee.

2. The applicability of section 50 of the Act to the capital gains arising from the sale of trademarks that were acquired before 01/04/1998 and whether these should be considered part of a block of assets for depreciation purposes.

3. The treatment of interest on electricity deposits and whether it was appropriately reported and taxed.

4. The levy of interest under sections 234B, 234C, and 234D of the Act.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 and 2: Treatment of Capital Gains on Sale of Trademarks

- Relevant Legal Framework and Precedents: The primary legal framework involves section 50 of the Income Tax Act, which pertains to the computation of capital gains in the case of depreciable assets. The judgment also references section 32, which deals with the depreciation of assets, including intangible assets like trademarks.

- Court's Interpretation and Reasoning: The Court examined whether the trademarks "Coldarin" and "Raricap" formed part of a block of assets for which depreciation was allowed under the Act. It was noted that depreciation on intangible assets was only introduced by the Finance (No. 2) Act, 1998, effective from 01/04/1999. Thus, since the trademarks were acquired before this date, they did not form part of such a block.

- Key Evidence and Findings: The trademarks were acquired in 1992 and 1998, before the introduction of depreciation for intangible assets. The cost of these trademarks was not included in the block of assets for depreciation purposes during the relevant financial years.

- Application of Law to Facts: The Court found that the conditions for section 50's applicability were not met, as the trademarks were not part of a block of assets for which depreciation was allowed. Consequently, the gains should be treated as long-term capital gains.

- Treatment of Competing Arguments: The Revenue argued that the amortization of trademark costs was akin to depreciation, but the Court disagreed, emphasizing the legislative intent and the specific provisions of sections 32 and 50.

- Conclusions: The Court concluded that section 50 did not apply, and the gains from the trademark sales should be taxed as long-term capital gains.

Issue 3: Interest on Electricity Deposit

- This issue was not pressed during the hearing, and therefore, it was dismissed as not pressed.

Issue 4: Levy of Interest under Sections 234B, 234C, and 234D

- These issues were deemed consequential and did not require separate adjudication.

SIGNIFICANT HOLDINGS

- The Court held that section 50 of the Income Tax Act does not apply to the trademarks "Coldarin" and "Raricap" as they were acquired before the introduction of depreciation on intangible assets. Thus, the gains from their sale should be treated as long-term capital gains.

- The Court emphasized that the legislative intent and specific provisions of the Act must be respected, particularly regarding the treatment of intangible assets and the applicability of section 50.

- The appeal was partly allowed, with the Court quashing the findings of the lower authorities on the treatment of capital gains from the sale of the trademarks.