2013 (9) TMI 79 - AT - Income Tax

Disallowance of expediture - Acquisition of brand name/trade mark Libra - Held that - The said brand had been acquired by the assessee vide agreement dated June 1, 1998. A perusal of the agreement placed at page 15 of the paper book shows that the assessee had been allowed only exclusive licence to use the brand name. Thus, as per agreement the assessee had been allowed the use of brand name for a period of five years and was not the owner of the brand. However, subsequently on expiry of the five year period, the assessee sold the business along with brand name to a third party. Based on such action, it has been concluded by authorities below that the assessee was actually owner of the brand - no useful purpose will be served in disturbing the claim made by the assessee, which is at a rate lower than the rate of depreciation allowable to the assessee even if the assessee is treated as owner of the asset. The orders of the Commissioner of Income-tax (Appeals) disallowing the claim cannot therefore be upheld - Decided in favour of assessee. Disllowance of loss - Foreign exchange fluctuation - Held that - The dispute is regarding allowability of loss on account of foreign exchange fluctuation in respect of foreign currency loan taken by the assessee. The assessee had been restating foreign exchange loan liability on the balance-sheet date which resulted into loss which has been claimed as deduction. The loss/gain on account of foreign exchange fluctuation on restatement of the loan liability on the balance-sheet date is required to be taken into account in computation of income if the loan is on revenue account or is a working capital loan. Loss is allowable as deduction under section 37(1) as held by the hon ble Supreme Court in the case of Woodward Governor India P. Ltd. 2009 (4) TMI 4 - SUPREME COURT . The loan in this case had been taken as working capital loan as is clear from the loan agreement wherein the purpose of the loan is clearly mentioned to use it as a working capital to finance the activities of the company. As held by the hon ble Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT 1978 (9) TMI 1 - SUPREME Court , foreign currency fluctuation loss is allowable as deduction if the foreign currency is held on revenue account or as trading asset or as part of circulating capital employed in the business. As regards the year of allowability, the claim has to be allowed on the basis of restatement of the liability on the balance-sheet date as held by the hon ble Supreme Court in the case of Woodward Governor India P. Ltd. Thus the claim of the assessee is allowable. In case there is gain in a year and the assessee has not offered it to tax, the Revenue is free to take action under law. In these years, admittedly there is loss which is allowable as deduction - Decided in favour of assessee. Sale of personal weighing scale business - Slump sale - Held that - the entire personal scale business had been sold as a going concern for a lump sum amount of Rs.30 lakhs and no part of the consideration was attributable to any particular asset or liability. Thus it was a case of a slump sale as defined in section 2(42C) and the profit arising from such slump sale is chargeable to tax as capital gain under the provisions of section 50B which is applicable from the assessment year 2000-01. Therefore, in our view, the capital gain has to be computed in accordance with the provisions of section 50B which is applicable in the case of the assessee. - matter restored before AO for re-computation - Decided in favor of revenue.

Summary

Issues Involved:
1. Disallowance of expenditure incurred for trade mark.
2. Disallowance of foreign exchange fluctuation loss.
3. Addition on account of capital gain in relation to sale of personal weighing scale business.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure Incurred for Trade Mark:

The assessee entered into an agreement on June 1, 1998, to acquire the brand "Libra" for Rs. 1 crore, which was written off over several assessment years. The Assessing Officer (AO) disallowed the expenditure, treating it as capital expenditure, noting that the brand acquisition was a capital asset. The Commissioner of Income-tax (Appeals) upheld this view, stating the brand was an asset used to conduct business and thus capital in nature. The assessee argued that the brand was only licensed for use, not owned, and claimed depreciation under section 32 of the Act. The Tribunal found that whether the brand was owned or licensed, the assessee was entitled to depreciation under section 32(1)(ii) as the brand was acquired after April 1, 1998. The claim was at a rate lower than the allowable depreciation, causing no prejudice to Revenue. Thus, the Tribunal allowed the assessee's claim, setting aside the Commissioner's order.

2. Disallowance of Foreign Exchange Fluctuation Loss:

The assessee claimed foreign exchange fluctuation losses for the assessment years 2002-03 and 2003-04. The AO disallowed these claims, considering them notional losses, only allowable upon actual loan repayment. The Commissioner of Income-tax (Appeals) upheld the disallowance, noting inconsistencies in the assessee's accounting policy and the contingent nature of the liability. The Tribunal, referencing the Supreme Court's judgment in Woodward Governor India P. Ltd., allowed the claim, stating that the loss on restatement of the loan liability at the balance-sheet date is allowable if the loan is for working capital. The Tribunal noted that the loan was for working capital, and the assessee consistently followed this accounting policy, thus setting aside the Commissioner's order and allowing the claim.

3. Addition on Account of Capital Gain in Relation to Sale of Personal Weighing Scale Business:

The AO treated Rs. 30 lakhs received from the sale of the personal weighing scale business as a capital gain, with the cost of acquisition considered nil. The assessee argued that the amount was a capital receipt, not taxable, as it represented the extinction of a profit-earning source. The Commissioner of Income-tax (Appeals) agreed, stating the amount could not be taxed as the cost of acquisition could not be determined. However, the Tribunal found that the sale was a slump sale under section 2(42C), and profits from such sales are taxable as capital gains under section 50B. Thus, the Tribunal set aside the Commissioner's order and remanded the matter to the AO for fresh computation of capital gain under section 50B.

Conclusion:

The Tribunal allowed the assessee's appeals regarding the disallowance of expenditure on the trade mark and foreign exchange fluctuation loss, setting aside the Commissioner's orders. The Tribunal also remanded the capital gain issue back to the AO for fresh computation under section 50B, allowing the Revenue's appeal for statistical purposes. The orders were pronounced in the open court on September 28, 2012.