9911796707
TMI Blog2006 (4) TMI 51X X X X Extracts X X X X X X X X Extracts X X X X ..... amily migrated to India and settled in different parts of India like Shimla, Chandigarh, Delhi, Lucknow, Calcutta, Bombay etc. where every one was carrying on his own business of manufacturing ice-cream and running of restaurants. The Chandigarh branch of the family started manufacturing ice-cream under the brand name "Kwality" and the ice-cream was being sold in the following territories: Towns Cities Himachal Pradesh Haryana Punjab U. P. Parwanoo Hissar, Fathabad, Panchkula, Sirsa, Shahbad, Pipli, Kurukshetra, Kaithal, Pinjore, Karnal (Haiyana Tourist Complex only), Yamunanagar Rahpura, Patiala , Sangrw. Gobindgarh, Kurali, Ropar Nangal, Mohali (SAS Nagar) Saharanpur 3 For good time each group continued to carry on the business in their defined areas without any disturbance. However, some difference arose between Lambas at Chandigarh (the assessee) and Shri P. L. Lamba group of Delhi, latter having opened a factory at Ludhiana in 1968 and starting manufacturing ice-cream with the ostensible purpose of selling the ice- cream in areas of the assessee group. Probably, the Lambas of Delhi wanted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time, Shri P. L. Lamba group of Delhi had entered into a strategic alliance agreement with Brooke Bond Lipton India Ltd. (a subsidiary of Hindustan Lever Ltd.) on October 14, 1994. As per the said agreement Shri P. L. Lamba group of Delhi undertook the task of buying the rights for Brooke Bond Lipton India Ltd. to manufacture ice-cream and the brand name from the following parties (i) Jayanti Food Processing P. Ltd., Kota (ii) Kwality Ice-cream Company P. Ltd., Jaipur (iii) Rake Foods Industries, Jammu (iv) Hukson Foods India P. Ltd., Varanasi, UP. 4 It is relevant to point out that in the said agreement, the name of the assessee does not figure. 5 It appears that the assessee had realised that it would be in their interest to become a party to the proposed deal for the sale and assignment of the trade mark "Kwality". It entered into an agreement (MOU) with Shri P. L. Lamba group of Delhi on May 31, 1995, for; (i) relinquishment of trade mark user right and interest; and (ii) termination of ice-cream manufacturing facilities under the brand name "Kwality". 6 As per the said agreement, the assessee could not use the trade mark "Kwality" with effect from June 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer referred to the observations of the Supreme Court in the case of Gillanders Arbuthnot and Co. Ltd. [1964] 53 ITR 283 as under (page 291) "There is no immutable principle that compensation received on cancellation of an agency must always be regarded as capital. In each case, the question has to be determined in the light of the attendant circumstances." 8 The Assessing Officer has also further referred to the following observations of the hon'ble Supreme Court in the case of CIT v. Best and Co. P. Ltd. [1966] 60 ITR 11 "Whether the compensation received by an assessee for the loss of agency is a capital receipt or a revenue receipt depends on the circumstances of each case. Before coming to a conclusion one way or other, many questions have to be asked and answered : what was the scope of the earning apparatus or structure, from physical, financial, commercial and administrative standpoint ? What was the impact of giving up of an agency on the structure of the entire business ? Did it amount to a loss of an enduring asset causing an unabsorbed shock, dislocating the entire or a part of the earning apparatus or structure ? or was it loss due to an ordinary incide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income-tax (Appeals) has held that the assessee has himself apportioned Rs. 10 lakhs on account of good will which is liable to tax under the head "Capital gains". The balance amount of Rs. 45 lakhs has been held to have been received for the assignment/sale of income earning apparatus and for non-competition and, therefore, a capital receipt not liable to tax. 13 The Revenue is aggrieved by the order of the Commissioner of Income- tax (Appeals). The learned Departmental representative contended that the assessee is a private limited company. It was in business from 1948 in Chandigarh. The relatives of the assessee had also started the ice-cream business at various other places such as Ludhiana, Delhi etc. A writ petition was filed in the Himachal Pradesh High Court by M/s. Kwality Ice cream, Ludhiana and others against the assessee for restraining the assessee from using the trade name "Kwality" on their wrappers, cartoons, advertisements publicity in respect of ice-cream and other frozen products manufactured by them. Miscellaneous Petition No. 59 of 1981 had been filed in the High Court seeking interim injunction. The hon'ble High Court vide its order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 to support the contention that the transfer of user rights of trade marks is a revenue receipt. It was further contended that there was no cessation of whole business as such the receipt for partial closure of business was a revenue receipt. For this proposition reliance was placed on the following decisions (i) CIT v. Siewart and Dholakia P. Ltd. [1974] 95 ITR 573 (Cal) (ii) Bush, Beach and Gent, Ltd. v. Road [1940] 8 ITR (E. C.) 36 (KB); and (iii) Blue Star Ltd. v. CIT [1996] 217 1TR 514 (Bom). 15 It was further contended that in the case of CIT v. Oberoi Hotels ( India ) P. Ltd. [1994] 209 ITR 732, the Calcutta High Court held that the compensation received for termination of agency was a revenue receipt. 16 Reliance was also placed on the decision of the Supreme Court in the case of Gillanders Arbuthnot and Co. Ltd. v. CIT [1964] 53 ITR 283, and also on the following decisions in support of the contention that compensation received for stopping the business activities was a revenue receipt (i) CIT v. Lakshminarayana Mining Co. [1987] 165 ITR 326 (Karn); and (ii) CIT v. Motor and General Finance Ltd. [1967] 63 ITR 394 (Punj) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 34 of the Indian Trade Marks Act, it was pointed out that the prior user of the trade marks gets preference over the subsequent registration of the trade mark. It was contended that the assessee had received the money for stopping the manufacturing activities of the ice-cream in the particular area. Referring to the details of assets owned by the assessee after the execution of the agreement, it was contended that all the machinery relating to the manufacture of ice-cream had been transferred/sold. The assessee got distributorship from M/s. Hindustan Lever Ltd. for the purpose of which only frozen rooms were required for storage of ice- cream. It was contended that the contention advanced on behalf of the Revenue that the assessee had not suffered loss of source of income as it had obtained distributorship from M/s. Hindustan Lever Ltd. is bereft of substances viewed in the context of future developments. It was contended that the said distributorship had been terminated in the year 2002-03 without payment of any compensation by M/s. Hindustan Lever Ltd. According to learned counsel, the subsequent events clearly demonstrate that the assessee was an ordinary distributor of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order wherein the Assessing Officer has recorded that the assessee had received the amount for breach of contract executed in the year, 1982. It was contended that there was no breach of contract in so far as there was no violation in terms of the Trade Marks Act, 1958/1999 in particular section 34 of the Act. Our attention was invited to the Delhi High Court judgment as reported in Senor Laboratories Ltd. v. Jagsonpaul Pharmaceuticals Ltd., AIR 1999 Delhi 102 paragraph 9 to support the contention. It was further contended that even if it is assumed that there was breach of contract then the assessee had only a right to sue for breach of contract. Relying upon the decision of the Gujarat High Court in the case of Baroda Cement and Chemicals Ltd. v. CIT [1986] 158 ITR 636, it was contended that the right to sue cannot be transferred. Reliance was also placed on the decision of the Delhi High Court in the case of CIT v. J. Dalmia [1984] 149 ITR 215 to support the contention that right to sue was not an actionable claim. Learned counsel further invited our attention to section 55(2)(a) of the Income-tax Act, 1961, which has been amended with effect from Apr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, first proceed to resolve the factual matrix. It may be relevant to point out that it is not disputed that Lamba family had been carrying on the business of manufacturing of ice-cream under the brand name "Kwality" after the partition, for many generations, at various different places like Shimla, Chandigarh, Delhi, Lucknow, Calcutta, Bombay etc. Each family group was carrying on its own business of manufacturing ice-cream and running of restaurants within its territorial areas. The assessee's family had started the business of restaurants and manufacturing of ice-cream under the brand name "Kwality" in the fifties and ice-cream was sold in various territories referred to elsewhere in this order. There was no interference from any other family groups who were running the business in their respective areas. It appears that there arose a difference between Shri P. L. Lamba group based in Delhi and the assessee as a result of which the P. L. Lamba group (Delhi) had set up a factory in Ludhiana in the year 1968. The writ petition was also filed by P. L. Lamba Delhi group in the Himachal Pradesh High Court seeking a restraint upon the assessee for production of ice-cream under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the issue involved in this case. On October 14, 1994, P. L. Lamba group of Delhi entered into a strategic alliance agreement with Brooke Bond Lipton India Ltd. (unit of HLL). By virtue of this agreement P. L. Larnba group of Delhi had undertaken to procure franchisees marketing assets including rights to vendor licences/vending licences and municipal trade licences for a gross consideration of Rs. 2 crores payable on acquisition of such assets. Clause 2 of the agreement provides list of the, parties from whom the release of trade mark licences and transfer of marketing and distribution of assets in favour of BBLIL was to be acquired which is as under "Amount payable Rs. in lakhs Franchisees Trade Mark Assets/Rights Total Jayanthi Food Processing P. Lid., Kota Kwality Ice-cream Company P. Ltd., Jaipur. Raks Foods Industries, Jammu Hukson Foods India P. Ltd., Varanasi - U. P. 10 25 20 5 25 65 35 15 35 90 55 20 60 140 200" 23 The above list does not include the name of the assessee. Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h were in pipeline at various stations at that time. The Assessing Officer has recorded a finding that a sum of Rs. 55 lakhs received by the assessee is from P. L. Lamba group of Delhi and not from Brooke Bond Lipton India Ltd. or M/s. Digital Securities P. Ltd. The Assessing Officer has not stopped at that. He has further recorded a finding that the agreement between the assessee, P. L. Lamba group of Delhi, M/s. Digital Securities P. Ltd., Bombay and Brooke Bond Lipton India Ltd., Calcutta was a device to give colour to the transaction for the purpose of tax avoidance. In our considered view, in the memorandum of understanding dated May 31, 1995, placed on record, there is no reference of M/s. Digital Securities P. Ltd. or of Brooke Bond Lipton India Ltd. The user rights of three trade marks were owned by P. L. Lamba group of Delhi. The assessee had agreed to give up its rights in the said trade marks specifically conferred upon it vide agreement dated July 29, 1982, by P. L. Lamba group of Delhi. The assessee had also agreed to terminate the manufacturing of ice-cream business under the brand name "Kwality" with effect from June 1, 1995. It is, therefore, evident from the materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the dispute between P. L. Lamba group of Delhi and the assessee stood resolved and assignment of rights in favour of Brooke Bond Lipton India Ltd./Digital Securities P. Ltd. secured from possible litigation. 24 On the analysis of the above discussion and material on record, we record the following conclusions on facts (i) That the assessee had relinquished trade mark user rights and interest and had also agreed the termination of ice-cream manufacturing facilities under the brand name "Kwality" with. effect from June 1, 1995, in consideration of Rs. 55 lakhs in favour of P. L. Lamba group of Delhi. (ii) That the payment of Rs. 55 lakhs was received by the assessee from P. L. Lamba group of Delhi and not from Brooke Bond Lipton India Ltd. That in turn P. L. Lamba group of Delhi may have received the payments from Brooke Bond Upton India Ltd./Digital Securities P. Ltd. But since P. L. Lamba group of Delhi was bound to make the payment to the assessee it cannot be said that the payment to the assessee was made by Brooke Bond Lipton India Ltd. or Digital Securities P. Ltd. (iii) That the agreement dated February 17, 1997, was necessitated by business consideration and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aceuticals Ltd., AIR 1999 Delhi 102, it was held as under "By a catena of decisions, it is now settled that prior user of trade mark has rights even over latter registered user." 29 Therefore, the violation of agreement was in regard to three trade marks specifically allotted to the assessee for use by virtue of the agreement. The assessee had a remedy against the breach of agreement. The right of the assessee was right to sue for the breach. As held by the Gujarat High Court in the case of Baroda Cement and Chemicals Ltd. v. CIT [1986] 158 ITR 636, "the right to sue is not actionable claim and, therefore, cannot be transferred". Similar view has been taken by the Delhi High Court in the case of CIT v. J. Dalmia [1984] 149 ITR 215. Therefore, it cannot be said that the assessee had transferred the right to sue to P. L. Lamba group of Delhi. 30 Even otherwise, the assessee has neither transferred the right to sue,- nor initiated any action for specific performance or for claiming damages. Negotiations have taken place between parties and ultimately, the assessee has agreed to surrender the user rights in respect of the trade marks and has also agreed to the termi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r (headnote) "The appellant-company formed with the object, inter alia, of carrying on the business of managing agencies, was the managing agent of six companies including the Fort William Jute Co. Pursuant to an arrangement with Mugneeram Bangur and Co., whereby the latter agreed (1) to purchase the entire holding of shares of the appellant in the Fort William Jute Co., the managed company, (ii) to procure repayment of all loans made by the appellant to that managed company, and (iii) to procure that the managed company will compensate the appellant for loss of office by the payment of the sum of Rs. 3,50,000 after the appellant resigned its managing agency and reimburse that amount to the managed company, the appellant company tendered resignation of the managing agency, and received the sum of Rs. 3,50,000 from the managed company. Under the terms of the managing agency agreement, the managed company was not obliged to pay any compensation to the appellant for voluntary resignation of the managing agency. The question was whether the amount received by the appellant to relinquish the managing agency was a revenue receipt liable to tax." In the above facts, the hon'ble Suprem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e price paid for the loss of a capital asset, they were of the nature of income. There is no immutable principle that compensation received on cancellation of an agency must always be regarded as capital." 36 In the case of P. H. Divecha v. CIT [1963] 48 ITR (SC) 222, the relevant facts are as under (headnote) A firm which was conducting business in electrical goods including lamps entered into an agreement in 1938 with Philips Electrical Co. under which the firm was given exclusive rights to purchase a sell electric lamps manufactured by Philips in certain areas. By a letter an annexure to the agreement the firm was entitled of 12 per cent. on the gross invoice amount and a further discount of 2 per cent. On the net invoice prices to cover breakage of fault in manufacture. If the company sold any goods directly to the buyers in those areas the firm was entitled to compensation of 5 per cent. Of the net amount of invoices covering such sales. The firm on its part undertook to sell only Philips lamps in those areas and to prevent re-exportation of the lamps by third parties. The agreement was to continue unless determined by either party by giving three months' notice. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hotel P. Ltd. v. CIT [1999] 236 ITR 903 (SC) relevant facts are as under (headnote) "The assessee-company was operating managing and administering many hotels belonging t others for a fee at several places. As per the memorandum of association of the company, it was authorized to run hotels on its own account and also to operate, manage and administer hotels belonging to others for a fee. In terms of an agreement dated November 2, 1970, the company agreed to operate the hotel known as Hotel Oberoi Imperial for which the assessee-company was to receive a certain fee called management fee which was calculated on the basis of gross operating profits as provided in the agreement. The agreement was to run for an initial period of ten years ; the assessee had the option to ask for renewal of the said agreement for two further periods of 10 years each by mutual agreement. Article XVIII of the said agreement gave the assessee a right to exercise the option of purchasing the hotel in case its owners desired to transfer the same during the currency of the agreement. Thereafter on September 14, 1975, a supplementary agreement was executed between the assessee and the receiver who had been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt." 38 In the case of CIT v. Vazir Sultan and Sons [1959] 36 ITR 175 (SC), the relevant facts are as under (headnote) "In 1931, under the terms of a resolution of the board of directors of a cigarette manufacturing company, the assessee a registered firm was appointed the sole selling agents and sole distributors for the Hyderabad State for the cigarettes manufactured by the company and they were allowed a discount of 2 per cent. on the gross selling price. In 1939 another arrangement was arrived at between the assessee and the company whereby the assessee was given a discount of 2 per cent., not only on the goods sold in the Hyderabad State but on all the goods sold in the Hyderabad State and outside the Hyderabad State. In 1950, the assessee and the company reverted to the old arrangement confining the sole agency of the assessee to the Hyderabad State and the assessee was paid a sum of Rs. 2,19,343 'by way of compensation' for the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipts taxable in the hands of the assessee." On the above facts, their Lordships held as under (headnote) (i) that the first consideration before holding a receipt to be profits or gains of business within section 10 of the Income-tax Act was to see if there was a business at all of which it could be said to be income. The primary condition of the application of section 10 was that tax was payable by an assessee under the head 'Profits and gains of a business' in respect of a business carried on by him. Where an assessee did not carry on business at all, the section could not be made applicable, and any compensation for requisition of assets that he received could not bear the character of profits of a business. (ii) That 'business' denoted an activity with the object of earning profit. To say that a business was being carried on, meant no more than that profit was to be earned by a process of production. The business of a tea-grower and manufacturer was not merely to grow tea plants but to collect tea leaves and render them fit for sale. The tending of his tea gardens to preserve the plants, was not a continuation of the business of the assessee which had come to an end for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual cases. We, therefore, do not consider necessary to refer to such judgments in so far as the broad principles for determining the issue have been laid down by the hon'ble Supreme Court which are summarised as under: (i) The question whether a receipt is of capital nature or of revenue nature depends on the facts of the particular case The judicial decisions bearing on the question are valuable as these indicate the basic parameters to be taken into account in reaching a decision. (ii) In a trading contract, when the payments are made in supplement of rights, generally the receipt is assessable as a revenue receipt. So how- ever, when a person who is carrying on the business is prevented from doing so by awarding compensation therefore, the nature of the receipt will depend upon whether it is the compensation for the injury inflicted on a capital asset or on a stock-in-trade (iii) There is no immutable principle that compensation received on cancellation of agency must always be regarded as capital receipt. When the assessee is having several managing agencies and one of which is relinquished by the assessee on receipt of compensation for the same, the receipt would be of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived for the transfer of the same would be a capital receipt. 43 Now let us proceed to consider the nature of receipt of Rs. 55 lakhs in the hands of the assessee on the basis of the above principles of law. In order to recapitulate, the assessee was in the business of manufacturing ice-cream and other allied products in the name of Kwality right from the year 1948. In the year 1981, the assessee specifically acquired the user rights in respect of the three trade marks referred to elsewhere in this order. On the basis of the circumstances and the later developments, the assessee had entered into an agreement with P. L. Lamba group of Delhi by virtue of which the assessee gave away its rights in the trade mark/trade name/goodwill as well as its right to manufacture ice-cream in the name of Kwality in specified areas. The assessee having relinquished trade mark/ goodwill, for a consideration, on the basis of the principles laid down by the hon'ble Supreme Court referred to above, would amount to transfer of capital asset. The finding of the Assessing Officer that the receipt for transfer of user rights in respect of trade name/trade marks is a revenue receipt when tested in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see continued to carry on the restaurant business in the name of Kwality and also obtained distributorship of ice-creams from Hindustan Lever Ltd./Brooke Bond India Ltd. for the same area for which the right of manufacture of ice-cream was given up. In our considered view, the case of the assessee does not fall within the exception to the general rule as laid down by the hon'ble Supreme Court (supra). The assessee was not in the business of buying and selling of businesses. The business of manufacturing of ice cream and other allied products was an age old business of the assessee. Restaurant business was a separate business started later on by the assessee. By giving up the right to manufacture ice-cream and other allied products, the assessee lost a source of income. Losing a source of income in the case of a person, who is not in the business of buying and selling of businesses, would amount to the transfer of a capital asset and the compensation received therefor, in our view, clearly falls within the ambit of a capital receipt. The distributorship of ice-creams is totally a different line of business than manufacturing of ice-cream. Moreover, the later events have established ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have referred to clause 2 of the agreement between P. M. Lamba group of Delhi and Brooke Bond Lipton India Ltd. A bifurcation in respect of four concerns between the trade mark and other rights is indicated in the agreement as reproduced in the order. We find that in the case of Rake Foods Industries, Jammu, the sum of Rs. 55 lakhs is bifurcated as Rs. 20 lakhs for trade mark and Rs. 35 lakhs for assets and rights. In the case of Hukson Foods India P. Ltd., Varanasi, the bifurcation given is Rs. 5 lakhs and Rs. 15 lakhs for trade mark and rights respectively. Similarly, in the case of Kwality Ice-cream Company P. Ltd., Jaipur, the bifurcation given is Rs. 25 lakhs and 1 65 lakhs for trade marks and other rights respectively out of Rs. 2.60 crores bifurcated towards trade marks arid Rs. 190 lakhs for other assets. This way the ratio works out to 30 per cent. Taking these facts as the. basis, we are of the considered view that it will be just and reasonable to apportion Rs. 15 lakhs out of the total consideration of Rs. 55 lakhs towards the goodwill/trade name/trade mark and the remaining amount On account of surrender of right to manufacture ice- cream and other allied products und ..... X X X X Extracts X X X X X X X X Extracts X X X X
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