BRAND NAME IS ALWAYS TREATED AS CAPITAL ASSET.

[DR.MARIAPPAN GOVINDARAJAN]

                        Sec. 2(14) of the Income Tax Act, 1961 defines the term ‘capital asset’.  The intangible properties like that of good will, patent etc., are treated as capital assets.   The issue to be discussed in this article is whether a brand name particularly a name of the person used in the business as a brand name will be treated as capital asset with reference to case law decided by Chennai Tribunal in ‘Assistant Commissioner of Income Tax V. S.P. Sambandam’ – (2011) 9 ITR (Trib) 420 (Chennai). 

                        In the above said case the assessee is one of the promoters of ‘Sambandam Spinning Mills Limited’ which was incorporated during the year 1973.  The assessee allowed to use his name ‘Sambandam’ for the name of the company.   The Registrar of Companies approved the name of company containing the word ‘Sambandam’ only after obtaining the assessee’s no objection and other consent to use this name.   From the year of incorporation the company is using the said name.  The said company was converted into a public limited company.   At this stage the assessee objected to use his name ‘Sambandam’ in the company’s name vide his letter 28.12.1992.  The Board of Directors of the Company requested the assessee to allow using the said name at least up to such time the assessee is associated with the active management of the company.   The assessee accepted the same on 9.1.1993. 

                         The assessee came out of the company’s active management during the year 2003.   He informed the company not to use his name as a part of the company’s name.   The Directors of the Board took a decision to pay a consideration for using his name and it was decided to pay Rs.1,35,45,000/- which was accepted by the assessee.  The assessee treated this receipt as capital receipt being consideration for the use of his name which has assumed importance and almost has become a trade name in the market.  But the Assessing Officer treated this receipt otherwise.   He treated the same as other receipt.  The assessee put forth the following arguments to substantiate the receipt is of capital nature- 

• Explanation 3 appended to Section 32(1)(ii) of the Income Tax Act, 1961 provided that a trade name/commercial right comes under the definition of ‘intangible assets’.   Thus in lieu of relinquishment of his rights, interest he had in the company from very inception thereof, after receipt of this consideration in lieu thereof;
• Intangible assets include know how, patents, copy rights, trade marks, licences, franchises or any other business or commercial rights of similar nature;
• The receipt qualified under the definition of capital receipt as defined in Section 2(14) of the Act;
• In ‘S.C. Cambatta and Co. P. Limited V. Commissioner of Excess Profits Tax’ – 1960 -TMI - 49534 – (SUPREME Court) the Supreme Court held that the payment for goodwill/patent right is a capital receipt and the profit arising so, out of it, is taxable as capital gains;
• ‘Sambandam’ has assumed ominous importance in the commercial sense as the correspondence between the parties clearly shows that this name has assumed the status of an ‘intangible asset’;
• If one customer goes into market and asks the shopkeeper that he wants ‘Sambandam’ he would immediately understand he wants yarn with the name ‘Sambandam’;
• Thus it became a trade name and has assumed greater importance in commercial sense.  This being intangible asset and when the assessee allowed to retain the name in the name of the company, the very same day this had been stood transferred when the consideration was received by the assessee;
• Only capital gain has arisen which is taxable under this head. 

However, the Assessing Officer did not convince with the arguments and he taxed this receipt as income from other sources. 

                          The Commissioner of Income Tax (Appeals) allowed the appeal of the assessee and the assessee was in successful in the appeal in which the receipt was treated as capital receipt.   The revenue aggrieved against this order filed the present appeal before the Tribunal.   The revenue put forth the following grounds for their side: 

• The assessee forfeited  his claim for the ‘Name’ when he allowed the ‘Name’ to be used by the company, when it became public, i.e., during 1992;
• Evaluating the ‘1992’ goodwill in the year 2002 is erroneous one;
• If at all goodwill was created in the name of ‘Sambandan’ the same should have been accounted for in the statement of accounts/annual reports of the company in the year 1992 when it was converted into public limited company;
• The good will was reflected neither in the statement of accounts of the company relevant for the year 1992 nor in any of the subsequent years till 2002;
• The company follows the mercantile system of accounting.   If at all any goodwill arises, it should have been properly accounted in that year itself.   The company cannot claim the same after the lapse of 10 years;
• As per Accounting Standard 26 internally generated good will is not recognized as an asset because it is not an identifiable resource controlled by the enterprise that can be measured reliably at cost;  According to this standard, the situation to evaluate the goodwill of the company never arose;
• The company safely created the goodwill theory to by pass Central Government restriction for amount of ex-gratia.  This is a colorable device as held by the Supreme Court in ‘McDowell and Co. Ltd., V. CTO’ 1985 -TMI - 40038 – (SUPREME Court);
• The Commissioner of Income Tax (Appeals) failed to appreciate that the Assessing Officer has come to correct conclusion  that the transaction is an ex-gratia payment as per the Supreme Court in ‘Devidas Vithaldas and Co V. Commissioner of Income Tax’ 1972 -TMI - 6338 – (SUPREME Court);
• The goodwill should have been evaluated by Cost Accountant as per the High Court in ‘Commissioner of Income Tax V. K. Rathnam Nadar’ 1968 -TMI - 7323 – (MADRAS High Court) as against the valuation made by statutory auditors;
• The Commissioner of Income Tax (Appeals) failed to note, that there is no transfer of asset as per Section 2(47) of the Income Tax Act;
• There is no change in the assessee’s share holding in the company; only he retired from the post of Managing Director;
• The transfer took place in the year 1992 as per ‘Transfer of Property act’.   Hence the claim cannot be made now;
• ‘Sambandam’ is not a patent name and it has not been proved that his name has earned ‘goodwill’ in the market;
• What has been transferred by the assessee and the time when the same had been transferred was not evidenced in the record and as such Section 45 of the Act is not applicable. 

The Tribunal held that the correspondence between the company and the assessee as well as the requirement of no objection from the assessee from the Registrar’s office to register the company’s name shows that this word ‘Sambandam’ had assumed colossal, commercial importance in the local market.   The brand name is always treated as capital asset as defined in Section 2(14) of the Act.   The words used in Section 55(2)(a) were ‘the cost of acquisition in relation to a capital asset, being goodwill of a business or a trade mark or a brand name associated with a business’.  That definition makes the word ‘Sambandam’ a brand name associated with the business of the company during the year.  Even if the assessee continues to use his name for his personal purposes but allow use of the name in the company as per the correspondence between them, although a rider the assessee can withdraw the benefit when, in future, in the opinion of the Tribunal, the transfer of partial right is exigible to capital gains.  The Tribunal upheld the order of the Commissioner of Income Tax (Appeals)