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2016 (1) TMI 982 - ITAT PUNE

2016 (1) TMI 982 - ITAT PUNE - TMI - Receipts for transfer of trademark - assessed as capital receipt or business income - Held that:- The assessee has acquired rights in trademarks/brands through family arrangement and settlement.It is a well settled law that goodwill and the trademarks are intangible assets and are shown as Assets in the balance sheet. Thus, any income generated on transfer of rights attached to capital assets is a capital receipt. The Commissioner of Income Tax (Appeals) has .....

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Court ) the Hon'ble Supreme Court of India has held that where goodwill is generated in a newly commenced business, it cannot be described 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 .....

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ar 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/PN/2004. The Revenue has filed appeal in ITA No. 1792/PN/2005 assailing the order of Commissioner of Income Tax (Appeals)-II, Pune dated 15-09-2005 for the assessment year 2001- 02 where .....

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8377; 1 Cr. was chargeable to tax in the hands of the appellant. 1A. He failed to appreciate that the appellant had assigned his rights in specified trade marks to M/s. Thakur V. S. Bidi Works by an Agreement and the amendment to section 55(2) for binging the trade marks in capital gain tax net was brought on stature w.e.f. 2002-03 and hence, for the year in question the capital gains in this case were not chargeable to tax. 1B. He was not justified in holding that the appellant had transferred .....

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olding the decision of the Assessing Officer in assessing the Receipt of ₹ 1 crore as benefit arising to the assessor from "Business" within the meaning of Section 28(iv). The Assessing Officer had held that the assessee HUF had not sold any "Capital asset" in the form of Trade Mark, since a Trade Mark was not an "acquired asset. The assessee HUF of D.S. Thakur & Shri Vijaykumar Thakur, (assignee) were entitled to produce, manufacture, process, distribute and s .....

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ss" 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 rece .....

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d assets nor was it acquired by the assessee on transfer. 4) On the facts and in the circumstances of the case and in Law, the CIT(A) erred in holding that the Receipt of ₹ 1 crore received by the assessee is not assessable as "Business" income within the meaning of Section 28(iv), following the decision of the Mumbai High Court in the case of Mahindra & Mahindra (261 ITR 501), wherein the purchase consideration related to capital assets, when the fuels of this present case a .....

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by placing reliance on the decision of Hon'ble Supreme Court of India in the case of CIT Vs. B. C. Srinivasa Setty, 128 ITR 294 (SC). On the other hand the Assessing Officer has held the amount received by the assessee on transfer of trade mark as business income taxable u/s. 28(iv) of the Act. Aggrieved by the assessment order dated 31-03-2003, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) vide impugned order has .....

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ransfer in the present appeal has been explained in sufficient detail in the assessment order and the order of First Appellate Authority. Therefore, for the sake of brevity, we are not reiterating the same in this order. The assessee and Shri Vijay S. Thakur jointly acquired ownership of 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 a .....

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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 specified .....

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and claimed the same as exempt in the light of decision of Hon'ble Supreme Court of India in the case of CIT Vs. B. C. Srinivasa Setty (supra). It is this amount of ₹ 1 crore received by the assessee in pursuance to the assignment agreement dated 02-10-1997 which is the subject matter of dispute in the present appeal. 6. The stand of the assessee is that the trade mark that has been assigned by the assessee is a self generated asset for which cost cannot be ascertained. Thus, in view o .....

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assessee for the following reasons: The assessee had acquired the alleged brand name in a consent order from the Company Law Board (CLB). The CLB is not a platform for deciding the rights of the shareholders. Thus, the brand names were never owned by the assessee and hence, it cannot be said that they are the assets of the assessee. The assessee has received monetary benefit for extinguishment of shareholding in the form of rights to use the trade mark in specified areas. Since, the assessee was .....

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see 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 .....

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s resorted to colourable methods to avoid payment of taxe and applied the ratio laid down in the case of Mc Dowell and Co. Ltd. Vs. CTO reported as 154 ITR 148 (SC) 8. Apart from the above addition, the Assessing Officer further made disallowances/addition on sales return of ₹ 4,63,174/-, closing stock of tobacco ₹ 4,40,632/-, advertisement ₹ 4,62,724/-, bad debts ₹ 2,47,919/- and depreciation ₹ 56,073/-. 9. Aggrieved by the assessment order dated 31-03-2003, the as .....

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. Srinivasa Setty (supra) will not apply in the present case. The Commissioner of Income Tax (Appeals) observed that both the assessee and Shri Vijay S. Thakur, Proprietor of M/s. Thakur V. S. Bidi Works were holding similar rights to manufacture specified brands of bidis to be sold in the specified areas of Rajasthan State in accordance with the Memorandum of family arrangement dated 17-08-1997. The assessee was not engaged in the manufacturing and selling of specified brand of bidis in the spe .....

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The assignee did not purchase any trade mark or brand names because he was already in possession of similar brands/trade mark. The Commissioner of Income Tax (Appeals) finally concluded that the assessee has received a sum of ₹ 1 crore as consideration for transfer of its rights to manufacture, produce or process specified brands of bidis and sells such bidis for specified areas to the assignee and such consideration is to be brought to tax under the head Income from Capital Gains . The C .....

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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 t .....

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owners/legal heirs of the trademarks/brands. Consequent to the dispute between the three families controlling the company, Thakur Savadekar & Co. Ltd., a petition was filed before the Company Law Board by the legal heirs of Shri S.R. Thakur (hereinafter referred to as SRT group) against the company, Shri G.B. Thakur and his legal heirs (hereinafter referred to as GBT group) and Shri K.B. Savadekar and his legal heirs (hereinafter referred to as KBS group). Before the Company Law Board the ma .....

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n the share of SRT Group comprising in the districts of Udaipur, Jaisalmer and Jodhpur. Thus, the assessee and Shri V.S. Thakur were permitted to use trademarks/brands in the three district of Rajasthan i.e. Udaipur, Jaisalmer and Jodhpur. 11.1 The ld. AR further submitted that the Assessing Officer has erred in coming to the conclusion that the income arising from assignment and transfer of rights in trademarks/brands is a business income. The Assessing Officer has erred in holding that the ass .....

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nature of business of the assessee from which the income of ₹ 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 overlo .....

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eration 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 business is of vital import and connotation as compared to right to manufacture. The assessee has assigned and transferred its entire bundle of rights attached to the trade marks/brands including right to manufacture, sale of specified brands .....

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brand name were inserted has been adjudicated in various cases. The Hon'ble Bombay High Court in the case of CIT Vs. Fernhill Laboratories & Industrial Establishment reported as 76 DTR (Bom) 398 has held that the amendment provisions of section 55(2)(a) are effective from assessment year 2002-03 onwards. Prior to amendment of section 55(2)(a) w.e.f. 1st April, 2002, sale of self generated trade mark was not liable to capital gains tax. Similar view has been taken by the Mumbai Bench of T .....

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tal gains . 11.3 The ld. AR stated at the Bar that except for ground no. 1 including ground nos. 1A, 1B and 1C, no other grounds raised in the appeal are pressed. 12. Au contraire Shri B.C. Malakar representing the Department vehemently defended the findings of Assessing Officer in treating the amount of ₹ 1 crore received by the assessee on transfer of trademark as business income taxable u/s. 28(iv) of the Act. The ld. DR submitted that the assessee has not been able to show that tradema .....

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wned 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 h .....

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abel Hire charges are mentioned. The same represent payment of royalty. The ld. AR also draws our attention to pages 55 to 57 of the paper book. On the said pages only the title page of Trademark Suit No. 9 of 1991 giving the details of parties of the lis and the abridged findings of the Civil Court are given. 14. We have heard the submissions made by the rival sides at length. We have also perused the orders of the authorities below and have considered the decisions on which the ld. AR has plac .....

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or is taxable under the amended provisions of section 55(2)(a) of the Act? 15. The assessee has acquired rights in trademarks/brands through family arrangement and settlement. The brands/trademarks under dispute were developed/generated over the period of time staring from the year 1955 by three persons viz: Shri G.B. Thakur, Shri K.B. Savadekar and Shri S.R. Thakur. The assessee is one of the legal heirs of Shri S.R. Thakur. The aforesaid three persons were engaged in the business of manufactu .....

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subsequently by their legal heirs. This fact is evident from the judgment of the Additional District Judge, Pune in Trade Mark Suit No. 9 of 1991 decided on 22-12-1995 titled Shri Vijaykumar Shankarrao Thakur and Ors. Vs. Thakur Savadekar & 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 .....

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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 the assignee would pay ₹ 1 crore to the assignor i.e .....

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shows that the agreements were in respect of assignment and transfer of full and absolute rights in the trademarks/brands including the use of trademarks and manufacturing of products under the said trademarks and sale in specified areas. 16. It is a well settled law that goodwill and the trademarks are intangible assets and are shown as Assets in the balance sheet. Thus, any income generated on transfer of rights attached to capital assets is a capital receipt. The Commissioner of Income Tax ( .....

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) in his order has observed that both the assignor i.e. the assessee and the assignee were the owners of trademarks/brands and had similar rights from the year 1997. The agreement under consideration confers no fresh rights to the assignee. What has been transferred to the assignee was not a new right but only a guarantee that the appellant would not compete with the assignee. As such the consideration for transfer is only in respect of right to manufacture produce or process specified brands of .....

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he 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 .....

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itled to use the Trade Marks for the business & manufacture specified goods and market the same in specified area to the exclusion of assignor/assessee. The assignor had further agreed not to carry on any business of producing, manufacturing, processing, distributing and/ or selling bidis and competing with the business of assignee. Thus, in the said agreement there was a covenant with respect to non-competing as well. 18. The provisions of section 55(2)(a) were amended by the Finance Act, 2 .....

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riage permits or loom hours,- (i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price ; and (ii) in any other case [not being a case falling under sub-clauses (i) to (iv) of sub-section (1) of section 49], shall be taken to be nil; 19. Thus, from the perusal of the provisions of sub-section (2) of section 55 it is evident that any cost paid for acquiring trademark has to be determined in accordance with the provisions .....

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pose the charge, parliament has enacted provision to compute profits or gains under that head. Section 48 of the said Act provides the manner in which the income chargeable under the head capital gains is to be computed i.e. by deducting costs of acquisition of the capital asset from the full consideration received on the transfer of the capital asset. The Supreme Court in the matter of B. C. Srinivasa Shetty (supra) was dealing with the issue whether the transfer of the goodwill by partnership .....

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t 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 .....

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isting provisions of sub‐section (2) of section 55 of the Income tax Act, the cost of acquisition of an intangible capital asset, being goodwill of a business or a right to manufacture, produce or process any article or thing, tenancy rights, stage carriage permits or loom hours, is the purchase price in case the asset is purchased by the assessee from a previous owner, and nil in any other case. It was pointed out that certain similar self generated intangible assets like brand name or a .....

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ent will take effect from 1st April, 2002, and will, accordingly, apply in relation to the assessment year 2002‐2003 and subsequent years." 9. From the above circular, it would be clear that the amendment bringing self generated intangible assets such as trademark to capital gains tax only with effect from Assessments Year 2002‐03 onwards. In this case, we are concerned with Assessment Year 1999‐2000 and therefore, the amendment would not have any effect. Further as held b .....

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or 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 a .....

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) 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 out any activity in relation to any business; or (b) not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services: Provided that sub-clause (a) shall not .....

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(ii) any sum received on account of transfer of a right to carry on any business, which is chargeable as capital gains. Although the amendment is w.e.f. 01-04-2003 and shall have no application in the impugned assessment year, however the amount paid herein shall fall in the exception to clause (a). 23. In the case of CIT Vs. B. C. Srinivasa Setty (supra) the Hon'ble Supreme Court of India has held that where goodwill is generated in a newly commenced business, it cannot be described as ass .....

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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. 25. In view of our above detailed findings, the first ground raised by the assessee in its appeal is allowed. Since, other grounds in the appeals were not pressed. The same are dismissed as not pressed. The appeal of the Revenue praying for restoring the findings of assessment order is dismissed. ITA No. 1792/PN/2005 26. Now, we take the appeal of the Revenue impugni .....

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essee 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, theref .....

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