TMI Blog2016 (7) TMI 337X X X X Extracts X X X X X X X X Extracts X X X X ..... rdinary course of business, therefore compensation received under a negative covenant for impairment of right to use the word ‘LONGMAN’ is in the nature of capital receipt. We find support for this proposition from the decision of coordinate bench in case of Govindbhai C. Patel vs. Dy. CIT Ahmedabad bench (2009 (10) TMI 637 - ITAT AHMEDABAD) wherein it was held that compensation received towards relinquishment of the assessee's right to sue it in the Court of law cannot be treated as revenue receipt taxable as business income under S. 28(va). - Decided in favour of assessee. - ITA No. 252/Hyd/2012, ITA No. 731/Hyd/2014, ITA No. 732/Hyd/2014 - - - Dated:- 6-7-2016 - Shri D. Manmohan, Vice President And Shri Pradip Kumar Kedia, Accountant Member For the Appellant : Shri A. V. Sadasiva Shri MV Anil Kumar For the Respondent : Shri K. J. Rao Smt. U. Minichandran ORDER Per Pradip Kumar Kedia, Accountant Member These three appeals filed by the assessee are directed against similar but separate orders of the Commissioner of Incometax( Appeals) V, Hyderabad dated 21.12.2011 for the assessment years 2008-09 and dated 31.10.2013 for the assessment years 2009-10 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d assessment due to revision of return. 4.1. During the year under consideration, the assessee received an amount of ₹ 5,38,27,108 as compensation in terms of settlement agreement dated 22.11.2007 from M/s. Longman Communications Limited, London(LCL), which is presently known as Pearson Group. The LCL was stated to be taken over by the Pearson Group, U.K. The assessee was previously named and styled as Orient Longman Pvt. Ltd. The assessee was required to change the name of the entity excluding the word Longman as per a Tomlin Order. Accordingly, the name of this assessee was changed to Orient Blackswan Pvt. Ltd. The genesis of the present dispute lies in a trade mark held by the assessee in the name of ORIENT LONGMAN . The assessee had registered the trade mark with the Trade Marks authority in India since in 1980. As submitted, there were pending disputes regarding the use of the trade marks and use of the name Longman by the assessee in the courts of United Kingdom and India. Subsequently, these disputes were stated to be settled by means of a settlement agreement dated 22.11.2007 between Pearson group and assessee, followed by a compromise order known as Tomlin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourse of reassessment proceedings as to why the impugned amount of ₹ 5,38,27,108 received from Pearson Group during the relevant assessment year, viz. 2008-09 should not be treated as business income in view of the recently inserted provisions of S.28(va) of the Act. 4.3. In reply, the assessee inter alia contended that the consideration was received as per the settlement agreement and vetted by Tomlin order of the Court of U.K. in consideration of restraining the assessee from the use of the name Longman and as such, it is a capital receipt not liable to tax at all. Assessee filed submissions on this aspect before the Assessing Officer, which are noted hereunder- 5. During the course of assessment proceedings, vide order sheet entry dated 03.11.2010 the assessee was asked to explain how the amount of ₹ 5,38,27,108/- received from M/s Longman Group was not treated as revenue receipt but treated as capital receipt keeping in view theprovisionsofSec.28 of the 1. T. Act: 5.1 In response. the assessee furnished a note contending as under: The provisions of sec 28 of the Income tax Act, 1961 do not apply to the facts of the case. Section 28 of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer therefore took a view that after the insertion of clause (va) to S.28, the law has changed its course and such receipts are liable to be taxed as revenue receipts. He accordingly rejected the contention of the assessee that the receipt in question are capital in nature. He accordingly brought the aforesaid receipt to tax as business income of the assessee. 5. Aggrieved thereby, the assessee preferred appeal before the CIT(A). The assessee reiterated that the amount received from Longman Group is towards restraining the assessee from using the name Longman is in the nature of a capital receipt and such receipts are therefore not covered within the ambit of S.28(va)(b) of the Act. It was submitted before the CIT(A) that all capital receipts are not automatically converted into revenue receipts under the provisions of S.28(va). 5.1. The CIT(A) cited case-laws as recorded in para 4.4 of his order and held that the impugned receipts arose as compensation in the course of business and are in the nature of a revenue receipt. The CIT(A) also examined the matter from a different perspective. He noted that when a person registers or purchases a trade mark, the expenditure i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the assessee company is engaged in the business of publishing and trading in educational and academic books and a trade mark was registered with the Indian authorities in 1980 in the name of Orient Longman and the trade mark encompasses the word Longman . The learned AR submitted that the controversy revolves around the nature of receipt emanating from the settlement agreement with Longman Communications Ltd., London, which is presently known as Pearson Group. He submitted that such receipts were bestowed on the assessee towards foregoing the right to use the trade mark or trade marks, which include the word Longman and any word or phrase confusingly similar to the word Longman in India or anywhere else in the world. In consideration thereto, M/s. Pearson Group had agreed to pay ₹ 16,14,81,323 in aggregate in three equal annual intalments of ₹ 5,38,27,108 each falling in three successive assessment years under appeal. The learned Authorised Representative submitted that these receipts cannot be considered as revenue income in nature of business income in the facts of the case as such receipts do not fall within the purview of S.28(va) of the Act. Learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquisition is clearly free from the levy capital gains tax in the light of the decision of the Apex Court in the case of B.C.Srinivasa Setty (128 ITR 294)(SC). On the issue of receipt of compensation towards loss due to a restrictive covenant being a receipt of capital nature, he heavily relied upon the decision of the Hon'ble Supreme Court in the case of CIT V/s. BEST Co.(60 ITR 1). He submitted that in that case, the question of compensation received due to loss of agency business was discussed by the Hon'ble Supreme Court which has useful application in the present case. In that case, the receipt arose on account of loss of particular agency out of several agencies, which was in the course of and incidental to the ordinary business and therefore, was held to be a revenue receipt in nature. However, where the amount is received owing to loss of any enduring asset, it would be in the nature of capital receipt as observed by the Supreme Court. In the instant case, the compromise order resulted in the loss of an enduring asset and hence, the receipt in question is a capital asset. 9. Per contra, the Learned Departmental Representative vehemently supported the orders o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use the word Longman it will not be entitled to use the word Longman in combination with the word Orient or any name confusingly similar to the name Orient in India or any where else in the world. In this background the question that arises for our consideration is whether the amount received in consideration of losing the right to use the word Longman which is part of its trade mark hitherto is an income chargeable to income-tax under the head Profits and gains of business or profession in terms of S.28(va) of the Act or not. 10.1 Since the issue revolves around the applicability of S.28(va) of the Act, it will be apt to reproduce the relevant portion of the provision hereunder- 28. Profits and gains of business or profession The following income shall be chargeable to income- tax under the head Profits and gains of business or profession ,- (i) to (v) . (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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the registration of the trade marks is cancelled or surrendered as soon as reasonably practicable thereafter. (b) not use the Orient Longman Name or any name which includes the word Longman or any word or phrase confusingly similar to the word Longman : in India or anywhere else in the world after expiry of the Primary Period, but Orient may, at its absolute discretion, continue to use the term formerly Orient Longman: and./or formerly Orient Longman Private Limited: until the expiry of the Secondary Period. after which it shall not use either term or any confusingly similar term in India or any where else in the world. (c) and to provide PEL a copy of the certificate granted by the ROC for the new corporate name as soon as reasonably practicable following receipt of the same. (d) in any event not hereafter use the name or sign Longman: or OL or any name or sign confusingly similar to the name or sign Longman or OL in India or anywhere else in the world for any purpose after the expiry of the Secondary Period (e) not hereafter assign, licence or grant nay rights to anyone in any of the Trade marks the Orient Lognman Name or the Orient doma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se or entitle anyone else to do any of the aforesaid (save as required above) 6 Pearsons obligations: 6.1 Pearson shall procure that: (a) it pays, as Orient may direct, the Settlement Sum to the Designated account ( or such other account as Orient may direct in writing) in three equal instalments of 53,827,108 Indian Rupees within 5 working days of the settlement date, 22 November 2008 and 23 November 2009 respectively; (b) it transfers the entire legal and beneficial ownership in the Shares for no consideration to the recipient or recipients (hereinafter referred to as the Orient Shareholder ) as directed by a resolution of the board of Orient within 21 days of receiving a copy of such resolution and subject to the laws and regulations pertaining to the transfer of shares from a non-resident party in India or Sri Lanka; (c) it does not, pending the transfer of the Shares, exercise or purport to exercise any rights that it may have as a shareholder in Orient; (d) Its representative directors, namely John Crowther Makinson and Peter James Field resign within 5 working days from the board of directors of Orient and all Parties agree to take all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement has not been entered into in the ordinary course of business, therefore compensation received under a negative covenant for impairment of right to use the word LONGMAN is in the nature of capital receipt. We find support for this proposition from the decision of coordinate bench in case of Govindbhai C. Patel vs. Dy. CIT Ahmedabad bench 1 ITR 34 (2010) wherein it was held that compensation received towards relinquishment of the assessee's right to sue it in the Court of law cannot be treated as revenue receipt taxable as business income under S. 28(va). The decision in the case of Best Co. 60 ITR 1 (SC) and Guffic Chem. 332 ITR 602 referred to on behalf of the Assessee lays down that a capital receipt is not taxable in the hands of Assessee. Hence, such receipt towards relinquishment of right to use word LONGMAN cannot be taxed unless it is shown that it falls within the purview of section 28(va)(b) of the Act. 10.4 To determine the applicability of S. 28(va)(b) in the context of the facts of the present case, We notice that the assessee has been restrained from using the word Longman by the court from doing so. As a sequel to the court order, the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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