2019 (3) TMI 1254 - HC - Income Tax

Revision u/s 263 - debatable issue - non-compete and trademarks - capital receipt - erroneous or prejudicial to the interest of the Revenue - intangible assets like trademark, brand names etc. were self-generated and not acquired from others could be brought to tax only with effect from 1st April, 1998 - Applicability of amendment u/s 55(2)(a) - ITAT held that The non-compete fee was not taxable in law and the trademark was self generated is not taxable in AY 1995-96 - HELD THAT - Section 55(2) (a) of the Act was amended by the Finance Act, 2001 with effect from 1st April, 2002 whereby there was deemed to be a nil cost of acquisition in respect of a self-generated trademark. Consequently, from AY 2002-03 onwards any amount received for assignment/transfer of a trademark would be taxable under capital gains . This amendment was clearly prospective. Both receipts i.e. the non-compete fee and the payment towards assignment of trademark were disclosed by the Assessee in Part-IV of the return for the AY in question. With the trademark being self-generated and not acquired for consideration, the cost of acquisition of the said marks could not be substituted as the market value as on 1st April, 1981 so as to attract capital gains. PNB Finance Limited v. CIT 2008 (11) TMI 7 - SUPREME COURT followed - decided in favour of the Assessee The view taken by the AO on the nature of the non-compete fee and the consideration for assignment of trademark was a plausible one. There was no occasion for the CIT to assume jurisdiction under Section 263 of the Act. In PCIT v. Delhi Airport Metro Express Pvt. Ltd. 2017 (9) TMI 529 - DELHI HIGH COURT it was held that the CIT had to come to a prima facie finding as regards the merits of an issue before seeking to set aside the same and remanding it to the AO for de novo adjudication. That is absent in the case on hand - answered in favour of the Assessee

Summary

Issues Involved:
1. Whether the Tribunal is correct in law in holding that assumption of jurisdiction by the CIT, under Section 263 of the Act, was illegal?
2. Whether the Tribunal has correctly interpreted the two agreements regarding non-compete and trademarks?

Issue-wise Detailed Analysis:

1. Assumption of Jurisdiction by the CIT under Section 263 of the Act:

The Revenue appealed against an order by the ITAT, which had set aside the CIT's assumption of jurisdiction under Section 263 of the Income Tax Act, 1961. The CIT had issued a notice under Section 263, questioning the AO's acceptance of the Assessee's return without taxing certain receipts. The CIT argued that the AO's order was erroneous and prejudicial to the Revenue's interests. However, the ITAT found that the AO had applied his mind and that the view taken was plausible and supported by judicial precedents. The High Court upheld the ITAT's decision, citing the Supreme Court's rulings in Malabar Industrial Co. Ltd. v. CIT and CIT vs. Max India Ltd., which state that jurisdiction under Section 263 cannot be assumed in respect of a 'debatable issue.' The Court concluded that the CIT had no valid grounds to assume jurisdiction under Section 263, as the AO's view was reasonable and supported by law.

2. Interpretation of Agreements Regarding Non-Compete and Trademarks:

The Assessee had entered into two agreements in the relevant assessment year: a Non-Competition Agreement and a Deed of Assignment of the 'Kwality' trademark. The AO accepted the Assessee's claim that the receipts from these agreements were exempt from tax, supported by Supreme Court judgments. The CIT, however, contended that the trademarks and brand names were not self-generated and had a determinable cost of acquisition, thus making them taxable. The ITAT disagreed, finding that the trademarks were indeed self-generated and that the receipts were not taxable under the law applicable at the time. The High Court affirmed this view, noting that the trademarks were self-generated by the Assessee's father and his partner, and any amount received for such assets was not liable to tax in the absence of a cost of acquisition. The Court cited several precedents, including CIT v. B.C. Srinivasa Setty, which held that self-generated assets with no ascertainable cost of acquisition are not subject to capital gains tax. The amendment to Section 55(2)(a) of the Act, which deemed a nil cost of acquisition for self-generated trademarks, was prospective and applicable from AY 2002-03 onwards. Therefore, the receipts in question for AY 1995-96 were not taxable.

Conclusion:

Both questions were answered in favor of the Assessee and against the Revenue. The appeal was dismissed with no order as to costs. The Court upheld that the CIT had no valid grounds to assume jurisdiction under Section 263 and that the receipts from the Non-Competition Agreement and the assignment of the 'Kwality' trademark were not taxable under the law applicable for the relevant assessment year.