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TMI Blog2016 (1) TMI 982X X X X Extracts X X X X X X X X Extracts X X X X ..... as “asset” within the meaning of section 45 of the Act and thus, the transfer of goodwill initially generated in a business does not give rise to a capital gain for the purposes of income-tax. Thus, ratio laid down in the case of ‘goodwill’ squarely applies on ‘trademarks’ also, as both are intangible assets and are generated in similar manner over the period of time. In view of the facts of the case and the decisions referred above, we hold that the amount of ₹ 1 crore received by the assessee on transfer of rights in trademark is a ‘capital receipt’ not liable for tax u/s. 45 under the provisions of section 55(2) of the Act. - ITA No. 195/PN/2004, ITA No. 321/PN/2004, ITA No. 1792/PN/2005 - - - Dated:- 30-10-2015 - SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM For The Assessee : Shri C.H. Naniwadekar For The Revenue : Shri B.C. Malakar ORDER PER VIKAS AWASTHY, JM : ITA No. 195/PN/2004 has been filed by the assessee against the order of Commissioner of Income Tax (Appeals)-II, Pune dated 05-12-2003 for the assessment year 2001-02. The Revenue has filed cross-appeal against the same order of Commissioner of Income Tax (Appeals) in ITA No. 321/P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of benefit' in the 'normal conduct of business'. 2) On the facts and in the circumstances of the case and in Law, the CIT(A) erred in not upholding the decision of the Assessing Officer in assessing the Receipt of ₹ 1 crore as benefit arising to the assessee from Business within the meaning of Section 28(iv), when in fact, there was no 'no transfer of capital asset' to the assignee. Further, the documents were executed on capital in Non-Judicial Stamp Paper and not registered with the Registration Authority, nor any Stamp Duty nor Registration Fees had been paid. 3) On the facts and in the circumstances of the case and in Law, the CIT(A) erred in not up holding the decision of the Assessing Officer in assessing the Receipt of ₹ 1 crore received by the assessee on account of 'transfer of Capital Asset' and therefore, is assessable under the head of 'Income from Capital Gains', when in fact, the assessee has derived benefit out of extinguishment of his share-holding in the form of the rights to use the Trade Mark and Lables of specified brand of bidis in specified area of Rajasthan. The 'right to use lables of specifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trade mark and certain brands of bidis for sale in the three district of Rajasthan i.e. Udaipur, Jaisalmer and Jodhpur. Shri Vijay S. Thakur started his business of manufacturing and selling bidis in specified areas in the name of his proprietorship firm M/s. Thakur V. S. Bidi Works. Since, the assessee was the co-owner of trademarks and brand name of bidis with a right to do business in that specified areas, M/s. Thakur V. S. Bidi Works paid royalty to the assessee. Thereafter, M/s. Thakur V. S. Bidi Works and the assessee entered into an agreement on 02-10-1997 vide which assessee agreed to assign and transfer its rights in trade mark of the specified bidi brands and sell them in the specified areas to M/s. Thakur V. S. Bidi Works for a total consideration of ₹ 1 crore to be paid in phased manner staring from the date of execution of the agreement till 31-12-2000. It was mutually agreed between the parties that for the intermittent period starting from October, 1997 till the time entire consideration is paid, the parties shall remain joint owners of the trademarks/brand of the bidis. M/s. Thakur V. S. Bidi Works shall pay royalty to the assessee for use of the trademark and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he name of Thakur Savadekar Co. were not transferred in favour of the assessee. The family settlement simply allowed the assessee to use the said brands in the specified areas. The assessee received just the rights to use the lables of the specified brands of Thakur Savadekar Co. in the specified area. Thus, the rights to use the lebles of the specified brand of bidis for manufacturing and selling in the specified area is not a self generated asset nor it was acquired by the assessee on transfer. Therefore, the amount of ₹ 1 crore received by the assessee is liable to be taxed as benefit arising during the course of business within the meaning of section 28(iv) of the Act. 7. The Assessing Officer also rejected the agreements on which the assessee has placed reliance in support of its submissions, on the ground that they are not registered. The Assessing Officer observed that the assessee never owned the trade mark as its capital assets, nor carried any business after the order of CLB using specified brands of the bidis in the specified area. The Assessing Officer further held that the assessee has resorted to colourable methods to avoid payment of taxe and applied t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Income from Capital Gains . The Commissioner of Income Tax (Appeals) while holding so, applied the provisions of section 55(2) of the Act. 10. In so far as the other grounds raised by the assessee in first appeal, the Commissioner of Income Tax (Appeals) upheld the additions/disallowances in respect of sales return, valuation of closing stock of tobacco, advertisement expenses and depreciation. Against the findings of Commissioner of Income Tax (Appeals), both, the assessee and the Revenue are in appeal before us. 11. Shri C.H. Naniwadekar appearing on behalf of the assessee submitted that the assessee had acquired share in trade mark by way of family arrangement. Three persons viz: Shri G.B. Thakur, Shri K.B. Savadekar and Shri S.R. Thakur together started the business of manufacturing of bidis in the year 1955 in partnership under the name and style of Thakur Savadekar Co. Subsequently, the partnership firm was converted into a limited company under the name and style of Thakur Savadekar Co. Ltd. These three persons developed several trademarks including the brand, Langar or Anchor . The said trademarks/brands were jointly owned by the above said three persons and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 1 crore has arisen. On the one hand the Assessing Officer holds that the right to use trademark is due to extinguishment of shares and on the other hand the Assessing Officer observes that it is benefit out of the business. Further, the Assessing Officer in para 4.5 of his order has observed that the assessee is not doing any business. The findings of the Assessing Officer are self contradictory. The Assessing Officer has overlooked the fact that the brand was jointly owned by the assessee and assignee. The assessee was receiving royalty from the assignee till the time entire mutually agreed consideration was paid. 11.2 The ld. AR contended that the Commissioner of Income Tax (Appeals) has rightly held that the amount of ₹ 1 crore received by the assessee is capital in nature. However, the Commissioner of Income Tax (Appeals) has erred in coming to the conclusion that the said amount has been received as a consideration for transfer of right to manufacture, produce or process specified brands of bidis and sale of such bidis in the specified areas. There is a difference between right to manufacture and right to carry on the business. The expression right to carry on bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appeal of the Revenue and dismissing the appeal of the assessee. The ld. DR further submitted that the case laws on which the ld. AR of the assessee has placed reliance are not applicable in the facts and circumstances of the present case. 13. The ld. AR controverting the submissions of the ld. DR submitted that the trademarks and brands were owned by the individuals and not by the company. The trademarks/brands were developed over the period of time staring from year 1955. The company Thakur Savadekar Co. Ltd. were incorporated somewhere in the year 1980. The company has been paying royalty for the use of trademarks. In support of his contentions the ld. AR referred to pages 59 and 60 of the paper book. An explanatory statement u/s. 173(2) of the Companies Act, 1956 is placed at page 59. In Item No. 8 of the said statement it has been stated that the Bombay High Court (Appellate Side) vide a consent order dated 22nd January, 1996 has ordered the company to pay an amount of ₹ 15 Lakhs per annum as royalty to the plaintiffs group in Trade Mark Suit No. 9 of 1991 commencing from 1st November, 1995 for use of Langar and allied trademarks. At page 60 of the paper book is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Company Limited and Ors. There was dispute between the families of Shri G.B. Thakur, Shri K.B. Thakur and Shri S.R. Thakur. The legal heirs of Shri S.R. Thakur filed a petition before the Company Law Board against M/s. Thakur Savadekar and Co. Ltd., GBT Group and KBS Group. Before the CLB the matter was mutually settled and a consent order was passed by the CLB on 30th May, 1997. Under the terms of settlement the trademark was divided territory wise between the warring factions. Subsequent to the consent order dated 30-05-1997 there was a family arrangement amongst the legal heirs of Shri S.R. Thakur on 18-08-1997 wherein three districts of Rajasthan i.e. Udaipur, Jaisalmer and Jodhpur came to the share of assessee and Shri Vijay S. Thakur. The said persons could manufacture and sell bidis under the trademarks/brands in the aforesaid three districts. The assessee decided to assign and transfer his rights in trademarks/brands to Shri V.S. Thakur in the districts which had fallen in its share jointly with Shri V.S. Thakur. An agreement was entered into between the assessee and Shri V.S. Thakur, Proprietor M/s. Thakur V.S. Bidi Works on 02-10-1997. According to the said agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 18-08-1997 both the assignor and assignee were the joint owners of the trademarks/brands for their use in specified areas. The amount paid by the assignee to the assignor was in lieu of assignor-assessee relinquishing his rights over the trademarks/brands jointly owned with the assignee and the area of operation which was earmarked to both of them under family arrangement. A perusal of agreement dated 02-10-1997 at pages 20 to 22 of the paper book shows that the consideration of ₹ 1 crore is paid in lieu of assessee assigning and transferring its rights in trademarks of the specified brands and to sell the products its specified areas. Thus, it is a case of absolute transfer of rights and not only the transfer of rights to manufacture or produce specified brands and their marketing in specified areas. A further perusal of agreement for assignment of rights dated 26-03-2001 between the parties i.e. the assessee and M/s. Thakur V. S. Bidi Works shows that the assignor on transfer of all his rights would have no lien as a beneficial owner of trademarks for manufacturing and selling goods within the specified areas. The assignee became entitled to use the Trade Marks for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Shetty (supra) was dealing with the issue whether the transfer of the goodwill by partnership firm can give rise to a capital gain tax under Section 45 of the said Act. The Apex Court 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. Therefore for the period under consideration the computation provision under Section 48 of the said Act fails resulting in such transfer of trade marks not being chargeable to capital gains tax. Consequent to amendment made to Section 55(2) with effect from 1/4/2002 by which the words trade mark or brand name associated with the business was introduced into it, the computation provision becomes workable and the consideration received for the sale of trade mark would be subject to capital gains tax. However, for the period prior to 1/4/2002 the sale of self generated trademark is not liable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ins tax not only for the reasons applicable to trade marks but for the fact that even till this date, no amendment has been made to Section 55(2) of the said Act defining cost of acquisition of design as in the case of trademark goodwill etc. 20. We find that the similar view has been taken by the Co-ordinate Bench of the Tribunal in the case of Bombay Oil Industries Vs. DCIT (supra) and Bangalore Bench of the Tribunal (Third Member) in the case of Kwality Biscuits (P.) Ltd. Vs. ACIT (supra). 21. The ld. AR has also referred to the decision of Hyderabad Bench of the Tribunal in the case of ACIT Vs. Dr. B.V. Raju reported as 135 ITD 1 to submit that even for having non-compete covenant in the agreement the amount would not be taxable in the impugned assessment year. The provisions of section 28(va) were introduced by the Finance Act, 2002 w.e.f. 01-04-2003 thus, the same would not be applicable in the assessment year 2000-01. 22. At this juncture, we would like to refer to the provisions of section 28(va) inserted by the Finance Act, 2002 w.e.f. 01-04-2003: (va) any sum, whether received or receivable, in cash or kind, under an agreement for- (a) not carrying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpugning the order of Commissioner of Income Tax (Appeals)-II, Pune in deleting the penalty levied u/s. 271(1)(c) of the Act. The Assessing Officer has levied penalty on the assessee on two counts: i. In treating the amount of ₹ 1 crore on transfer of trademarks as capital receipt exempt from tax. ii. Valuation of closing stock of tobacco. 27. The Assessing Officer vide order dated 31-03-2005 levied penalty of ₹ 25,00,000/- u/s. 271(1)(c) of the Act. Aggrieved by the penalty order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) vide impugned order deleted the penalty on both the counts. Now, the Revenue is in appeal before us against the order of Commissioner of Income Tax (Appeals) in deleting the penalty u/s. 271(1)(c) of the Act. 28. As far as the levy of penalty with respect to ₹ 1 crore as capital receipt is concerned, since addition made in assessment proceedings has been deleted by us, therefore, no ground for levy of penalty on the said issue survives. Once, the substratum for levy of penalty is eroded, the penalty is not sustainable. 29. In so far as second groun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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