2012 (7) TMI 463 - HC - Income Tax

Computation of capital gains - self generated assets like trade mark or brand name - Held that - Where the cost of acquisition of the capital asset is nil then the computation provision fails and the transfer of goodwill not give rise to capital gains tax. Prior to the amendment made to Section 55(2) by the Finance Act, 2001 effective from 1/4/2002 by adding the words trade mark or brand name associated with the business self generated assets such as trademark did not have any cost of acquisition - as amendment bringing self generated intangible assets such as trademark to capital gains tax only with effect from AY 2002-03 onwards in this case AY is 1999-2000 and therefore, the amendment would not have any effect - in favour of assessee.

Issues:
1. Whether the consideration received on transfer of trade mark and design is chargeable to capital gains tax.
2. Whether the provisions for computation of capital gains in the case of the assessee are applicable.
3. Whether the sale proceeds of self-generated assets like trade mark can be taxed.

Issue 1:
The appeal challenges the order passed by the Income Tax Appellate Tribunal regarding the taxability of the consideration received for the transfer of trade mark and design. The Tribunal held that the trade mark "Colin" was a self-generated asset with a cost deemed to be nil, making it impossible to compute capital gains under Section 48 of the Income Tax Act. The Tribunal also noted that the amendment to Section-55(2)(a) of the Act, effective from 1/4/2002, made trade marks chargeable to tax prospectively. The appellant argued that the sale of self-generated assets like trade mark should be subject to capital gains tax even prior to the amendment, as the cost of acquisition is considered nil. However, the respondent contended that prior to 1/4/2002, self-generated assets were not liable to capital gains tax due to the failure of the computation provision under Section 48.

Issue 2:
The CIT (A) allowed the respondent's appeal by holding that the consideration received for the transfer of trade mark and design was not chargeable to capital gains tax as they were self-generated assets. This decision was based on the principles established by the Supreme Court in CIT V/s. B.C. Srinivasa Shetty. The appellant argued that the sale of trademark and designs should be subject to capital gains tax, emphasizing that the cost of acquisition of self-generated assets is nil. On the other hand, the respondent contended that the sale of design was not subject to capital gains tax as the cost of acquisition of self-generated designs had not been defined under Section-55 of the Act.

Issue 3:
The judgment analyzed the charging section of the Income Tax Act, Section 45, which imposes capital gains tax and the computation provision under Section 48. The Supreme Court's decision in B.C. Srinivasa Shetty highlighted that where the cost of acquisition of a capital asset is nil, the computation provision fails, leading to no capital gains tax liability. The amendment to Section 55(2) introduced trade marks as capital assets with nil cost of acquisition, effective from 1/4/2002, making them subject to capital gains tax. However, the judgment clarified that this amendment was prospective and did not apply to sales of self-generated trade marks prior to 1/4/2002. The judgment also referenced a circular explaining the amendment and emphasized that self-generated intangible assets like trademarks were brought under capital gains tax only from Assessment Year 2002-03 onwards.

In conclusion, the High Court of Bombay held that the consideration received for the transfer of self-generated trade marks and designs during the Assessment Year 1999-2000 was not chargeable to capital gains tax. The judgment emphasized that the amendment introducing self-generated intangible assets to capital gains tax was effective only from 1st April 2002 onwards and did not have retrospective effect. Therefore, the sale of self-generated trade marks and designs prior to the amendment date was not subject to capital gains tax. The re-framed question was answered in favor of the respondent/assessee, and the appeal was disposed of with no order as to costs.

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