2004 (10) TMI 543 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of the amount received on the sale of trademark rights.
2. Whether the term "goodwill" encompasses "trademark" for the purpose of capital gains tax.
3. Retrospective application of the amendment to section 55(2) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Taxability of the Amount Received on the Sale of Trademark Rights:
The assessee-company received Rs. 3.70 crore on account of the sale of trademark rights. The Assessing Officer (AO) contended that this amount was taxable under the head 'long term capital gains'. The AO rejected the assessee's argument that the sale of trademark rights was not taxable due to the absence of a cost of acquisition, referencing the Supreme Court's decision in CIT v. B.C. Srinivasa Shetty. The AO held that the term "goodwill" includes "trademark" and thus, the amount received was taxable under section 55(2) of the Income-tax Act, 1961. However, the CIT(A) disagreed, stating that "goodwill" and "trademark" are distinct intangible assets and that the specific amendment to include "trademark" in section 55(2) was effective only from assessment year 2002-03. Consequently, the CIT(A) deleted the addition of Rs. 3,27,76,923 made by the AO.

2. Whether the Term "Goodwill" Encompasses "Trademark" for the Purpose of Capital Gains Tax:
The AO argued that "goodwill" is a comprehensive term that includes "trademark," relying on various accounting and legal authorities. The AO cited the Supreme Court's decision in Rustom Cavasjee Cooper v. Union of India, which described goodwill as an intangible asset encompassing all rights and advantages of a business. However, the CIT(A) held that "goodwill" and "trademark" are distinct and that the term "goodwill" does not encompass "trademark." The CIT(A) noted that the Finance Act, 2001 specifically amended section 55(2) to include "trademark" and "brand names," indicating that prior to this amendment, "trademark" was not treated on par with "goodwill" for tax purposes.

3. Retrospective Application of the Amendment to Section 55(2) of the Income-tax Act, 1961:
The Revenue contended that the amendment to section 55(2) by the Finance Act, 2001, which included "trademark" and "brand names," was clarificatory and therefore retrospective. The learned Commissioner argued that the amendment was merely explaining the different manifestations of "goodwill" and should apply retrospectively from the assessment year 1995-96. However, the CIT(A) and the Tribunal rejected this argument, noting that the amendment was explicitly stated to be effective from April 1, 2002. The Tribunal emphasized that legislative amendments should be understood in their plain meaning and that the absence of the term "trademark" in section 55(2) for the assessment year 1995-96 means it cannot be taxed under capital gains for that year.

Conclusion:
The Tribunal upheld the CIT(A)'s order, concluding that "goodwill" and "trademark" are distinct terms and that the amendment to section 55(2) by the Finance Act, 2001, which included "trademark," is prospective and not retrospective. Therefore, the amount received by the assessee on the sale of trademark rights for the assessment year 1995-96 is not taxable under the head 'long term capital gains'. The appeal filed by the Revenue was dismissed.