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2016 (7) TMI 337 - ITAT HYDERABAD

2016 (7) TMI 337 - ITAT HYDERABAD - TMI - Compensatory sum received in terms of settlement agreement for not using the word ‘Longman’ in the name or trade mark of the assessee - business income or a capital receipt not liable to tax - Held that:- The agreement was towards settling various disputes on the use of name ‘ Longman’ and does not relate to any transfer of trade mark etc. While the assessee is precluded from using the name ‘Longman’, the corresponding Pearson Group is also precluded fro .....

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o exist. - We note that the settlement agreement 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 (2009 (10) TMI 637 - ITAT AHMEDABAD) wherein it was held that compensation received towards relinquishment .....

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ntant 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 and 2010-11. Since common issues are involved in these appeals involving common factual background, these appeals are being disposed of by this common order for the sake of convenience. Condonation : 2. At the outset, it may be noted th .....

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sufficient cause for the delay in the filing of these appeals exists. No mala fide can be imputed in the cause narrated. Cause of substantial justice deserves to be preferred over technical considerations in the facts of the present case. We accordingly condone the delay in terms of S.253(5) of the Act and proceed to dispose of these appeals on merits. 3. Solitary issue arising for consideration in all these appeals is whether the compensatory sum received in terms of settlement agreement for n .....

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ent year 2008-09, the assessee originally filed return of income under S.139(1) of the Act disclosing total income of ₹ 6,18,83,754 under the normal provisions of the Income Tax Act,1961 and book profit of ₹ 6,30,10,217 for the purposes of S.115JB of the Act. Subsequently, however, the assessee revised the said return on 9.3.2009, admitting total income under the normal provisions of the Act of ₹ 80,56,646 only and book profit of ₹ 6,01,46,772 only. The case was reopened .....

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on 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, t .....

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ee has undertaken not to use any trade mark or trade marks which include the word Longman or any word or phrase confusingly similar to the word Longman in India or any where in the world. The assessee and its associate entities were obliged to cancel or surrender the registration of exiting trade mark after the expiry of some time frame referred as primary period and secondary period as per settlement agreement. Similarly, the Person Group on its part undertook that it shall not use the name Lon .....

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t deed, the assessee was entitled to receive a sum quantified at ₹ 16,14,81,323 in aggregate towards impugned settlement. This amount was agreed to be paid to the assessee in three equal instalments of ₹ 5,38,27,108, with the first instalment becoming receivable by the assessee within five working days from the settlement date, second instalment on 21.11.2008 (falling in assessment year 2009-10) and the last one on 23.11.2009 (falling in assessment year 2011-12). In pursuance of the .....

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n 9.3.2009 on the ground that it is a capital receipt not forming part of the total income. It is in this background, the case was reopened alleging escapement. A query was raised by the Assessing Officer in the course 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 .....

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as 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 starts by stating that "the following incomes shall be chargeable to income tax under the head &quo .....

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e, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or tiling or right to carry on any business, which is chargeable under the head "Capital Gains ", Thus it can be seen that the categories of items to be charged under the head profits and gains of business should ab-initio be in the nature of income". As explained earlier the consideration for the payment was having its origin in an order passed by the High Court of justice Chanc .....

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rly, the Honourable S.C. in Maharaja Chintamani Saran Nath Sahoeo Vs. CIT 1961 41 ITR 506 (SC) held that license fees given under right to enter upon land and mine the land was capital receipt. It may also be submitted that there is no transfer of a 'trade mark' or a license as such but a settlement of the right to acquire a 'trade mark' or register a trademark by Orient Longman (now Orient Blackswan). " 4.4. The Assessing Officer however observed that the provisions of S.28 .....

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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 .....

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e would fall within the class of revenue expenditure as it does not create an asset. Thereafter the CIT(A) examined the issue with reference to the settlement agreement and came to the conclusion that the settlement agreement vetted by the Tomlin Order of the U.K. Court does not come in the way of carrying on of the business of the assessee at all. It was observed that there is absolutely no covenant or restriction on the assessee to print books or to engage in the business in which it is alread .....

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ore, the real transaction is that of the sale of shareholding of the Pearson Group in the assessee company. Hence, the real owner of the trade mark was Pearson Group and once they have no stake in the assessee company, they wanted that after a fixed time frame, the assessee company is not entitled to use the word Longman in its name. In these circumstances, in three equal instalments of ₹ 5.38 cores each, compensation was agreed to be paid to the assessee company. 5.3 The CIT(A) observed t .....

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IT(A), assessee preferred second appeal before this Tribunal. 7. Learned Authorised Representative, Shri A.V.Sadasiva, at the outset submitted that the Assessing Officer has wrongly invoked the provisions of S.28(va)(b) to include the sum received in terms of the Settlement agreement/Tomlin Order of U.K. Court within the purview of taxation. He submitted that the assessee company is engaged in the business of publishing and trading in educational and academic books and a trade mark was registere .....

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r 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 with .....

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tially, the compensation was not derived for ot sharing the trade mark per se. The learned Authorised Representative emphasised that the assessee is entitled to use the word Orient , which the other party shall not be entitled to use or share. He next stridently contended that in order to fall within the purview of (via) of S.28, the receipt must be in the nature of income which is chargeable to tax under the head profits and gains of business or profession . The learned Authorised Representativ .....

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e results in any transfer of any trade mark to other party. In substance, the learned Authorised Representative exhorted that this provision applies to a receipt in consideration of not sharing of a patent or a trade mark or rights of similar nature, which is not the case here and therefore, a receipt, which is otherwise capital in nature cannot be taxed by virtue of S.28(va) of the Act. 8. Without prejudice and notwithstanding the fact that the provisions of S.55(2) have not been invoked by the .....

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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 app .....

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, the receipt in question is a capital asset. 9. Per contra, the Learned Departmental Representative vehemently supported the orders of the authorities below. He submitted that the amount has been clearly received in consideration of losing the right to use the word Longman and this clearly falls within the provisions of S.28(va)(b) of the Act inserted with effect from assessment year 2003-04 with an objective to tax such receipts. The Learned Departmental Representative further submitted that a .....

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consideration has been received towards not sharing trade mark or any other business or commercial rights of similar nature. The Learned Departmental Representative submitted that the case-laws relied upon by the learned Authorised Representative relate to the assessment years prior to the insertion of sub-section (va) of S.28 and therefore are of no relevance in the present context. The impugned receipts squarely falls within the ambit of S.28(va). He therefore pleaded that no interference is .....

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essee or its associates shall not be entitled to use the word Longman while carrying on their business in the field of printing and publishing. It is the case on behalf of the assessee that the trade mark obtained is styled as Orient Longman and not Longman . The assessee in terms of the settlement agreement is required to drop the word Longman , while its right to use the word Orient which is integral part of the trade mark has not been parted with. Likewise without prejudice to the right of Pe .....

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fession 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) .....

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concerned in the present case. The applicability or otherwise of sub clause (b) is in question. It is trite that capital receipts are not chargeable to tax save and except express provision for taxability in this regard. Therefore, a capital receipt can be brought to taxation only when such receipts strictly falls within the purview of such provision which in the instant case is S. 28(va)(b) of the Act. While the revenue holds that such receipts falls under the provision of S. 28(va)(b) of the A .....

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r otherwise does not arise at all. It is the case of the assessee that the trade mark ORIENT LONGMAN can neither be used by the assessee nor by the Longman/ Pearson group. The trade mark per se has not been released in favour of Pearson group. As a result of the settlement, while the word Orient will be exclusively available to the assessee, the right to use of other word Longman will stand extinguished. It will be relevant to extract the relevant obligation clauses of each party to the agreemen .....

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iry of the Secondary Period and shall procure that 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 Lo .....

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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 domain name and shall it purport to do so. (f) not print any books under the Orient Longman Name, whether under licence from any third party or in its own publications, after 31 July, 2008. (g) not reprint any more books under licence from PEL and/or LCL from and including 1 December 2007 and it .....

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rint or stockpile any publications bearing the Orient Longman imprint in quantities exceeding those it would ordinarily print or stockpile in the normal course of business. (j) not subject to any rights that orient may have under Clause 6.2, seek to challenge PEL s., LCL s, DKL s or any Associated Entities use of the Longman name nor seek to oppose, challenge , revoke or invalidate any of their trade marks or trade ark applications in any way in India or in any other jurisdiction in so far as Or .....

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nternet users to Orient s new website; and they shall not use Orient s domain name at all after the expiry of secondary period and shall procure that the registration of the Orient domain name is cancelled as soon as reasonably practicable thereafter; (m) not hereafter apply for or register any trade mark, internet domain name, corporate name or business name in India or anywhere else in the world which incorporates the name Longman or any name confusingly similar thereto. (n) not hereafter proc .....

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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 .....

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he name Orient in India or anywhere else in the world for any purpose and it undertakes to procure that none of its Associated Entities, whether now or in the future, will, at any time, attempt to sue the name Longman in combination with the name Orient or with any name confusingly similar to the name Orient in India or anywhere else in the world for any purpose: (b) It will not at any time attempt to sue the Trade Marks or any other trade marks registered in India by Orient including but not li .....

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rient . 6.3 Pearson hereby irrevocably waives any and all rights, whether contemplated or not, to the payment of any dividend, royalty or other payment that may be due by Orient that arises out of or in connection with its Shares in Orient, Orient s printed publications under license, and Orient s distribution of any Pearson s book. 6.4 For the avoidance of doubt, Pearson shall have no objection to Orient making the necessary modifications/ amendments to Orient s Articles of Association as may b .....

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the agreement. 10.3 We note that the settlement agreement 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&# .....

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