I-T - Only such transactions which involve transfer of trade mark by assignment for a consideration are to be taxed as capital gains u/s 55(2)(a): HC
By TIOL News Service
NEW DELHI, MAR 28, 2019: THE ISSUE IS - Whether only those transactions which involve transfer of trademark by assignment for a consideration will be taxable under the head of capital gains u/s 55(2)(a. YES IS THE ANSWER.
Facts of the case
The individual assessee is a partner in Kwality Restaurant and Ice Cream Co. which was started by his deceased father. The company owns the trademark KWALITY which is a known name in the ice cream business. For the FY 1994-95, the assessee entered into two agreements of non-competition with one Brooke Bond Lipton India Ltd. and a trademark assignment agreement with one Digital Securities Pvt. Ltd. For both the contracts, due consideration was received by the assessee.
For the relevant AY 1995-96,the assessee filed return and claimed exemption on amounts received as non-compete fee as well as amount on account of the assignment of trademark KWALITY. During the scrutiny assessment, the AO accepted the assessee's return without making any addition. Subsequently, the assessment order was reopened by issuance of notice u/s 263 by the CIT. The assessee filed a detailed reply pointing out that the two receipts had been duly disclosed to the return and that they were not liable to tax in terms of the law applicable during the relevant AY. The Assessee contended that intangible asset like trademark was self-generated and not acquired from others and could be brought to tax only with effect from April 01, 1998. Such replies were rejected by the CIT which set aside the assessment order. The CIT held that the trade mark of KWALITY was not a self-generated asset of the assessee since there was no attachment of the assessee when the trade mark was initially registered. The Tribunal, however, accepted the assessee's plea and set aside the CIT's order.
On hearing the appeal, the High Court held that,
++ on the first issue of assumption of jurisdiction u/s 263, the view taken by the AO on the nature of the non-compete fee and the consideration for assignment of trademark was a plausible one. There was no occasion for the CIT to assume jurisdiction u/s 263. The jurisdictional High Court in PCIT v. Delhi Airport Metro Express Pvt. Ltd. had held that the CIT had to come to a prima facie finding as regards the merits of an issue before seeking to set aside an assessment order. This is absent in the case on hand. Thus, the issue is decided against the Revenue;
++ on the second issue of interpretation of agreements regarding non-compete and trademarks, the devolvement of trade mark on the assessee was in his capacity as partner of Kwality Ice Cream Company. These vested in the assessee for no consideration and were subsequently assigned by the assessee for a certain consideration. There was deemed to be a nil cost of acquisition in respect of a self-generated trademark u/s 55(2)(a) as amended by the Finance Act, 2001. Consequently, from AY 2002-03 onwards any amount received for assignment/transfer of a trademark would be taxable under 'capital gains'. This amendment was clearly prospective. Both the receipts were disclosed by the assessee in Part-IV of the return for the relevant AY. With the trademark being 'self-generated' and not acquired for consideration, the cost of acquisition of the marks could not be substituted as the market value as on April 01, 1981 so as to attract capital gains. Following the decision of the Apex Court in PNB Finance Limited v. CIT, the plea of the Revenue that the non-compete fee and the consideration for the assignment of the mark were both capital receipts was rejected. Therefore, the issue is decided against the Revenue.
(See 2019-TIOL-680-HC-DEL-IT)
