(O&M) THE COMMISSIONER OF INCOME TAX-1 V. M/S SWIFT FORMATION PVT. LTD.

ITA/398/2005

AI Insights

The case revolves around the interpretation of Section 55(2)(a) of the Income Tax Act, 1961, concerning the sale of trademarks and its classification as goodwill or a capital asset. The Commissioner of Income Tax, Chandigarh, appealed against the decision of the Income Tax Appellate Tribunal, which had ruled in favor of M/s Swift Formation (P) Limited, stating that the sale of trademarks 'Amibex' and 'Elusin' for \\u20b97,50,000 did not fall under the definition of a capital asset or goodwill for the assessment year 1997-98. The Tribunal's decision was based on the fact that the relevant amendments to the Act, which included trademarks and brand names as capital assets, were made effective from April 1, 2002, and thus did not apply retrospectively to the earlier period.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 730203 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 27-08-2014
• Assessment Year: misc
• Other Referred Cases: Jogta Coal Co. Limited vs. CIT, West Bengal, Seethalakshmi Ammal vs. Controller of Estate Duty, Madras, CIT, Bangalore vs. B.C. Srinivasa Setty, Vysali Chemotherapeutics (P) Limited vs. Commissioner of Income Tax
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: S K MUKHI
• Assessee Lawyers: URVASHI DHUGGA
• Keywords: Assessment Year; Brand Name; Capital asset; Goodwill; Income Tax; Trade Marks
• Section: 260A; 55(2)(a)

Judgement Text

"ITA No.398 of 2005 (O&M) 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 398 of 2005 (O&M) Date of decision: 27.8.2014 The Commissioner of Income Tax I, Chandigarh ……Appellant Vs. M/s Swift Formation (P) Limited, 78, I.A.II, Chandigarh …..Respondent CORAM: HON’BLE MR. JUSTICE AJAY KUMAR MITTAL HON’BLE MR. JUSTICE FATEH DEEP SINGH Present: Ms. Urvashi Dhugga, Advocate for the appellant. Mr. S.K.Mukhi, Advocate for the respondent. Ajay Kumar Mittal,J. 1. This appeal has been preferred by the revenue under section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 31.3.2005, Annexure A.3 passed by the Income Tax Appellate Tribunal, Chandigarh Bench 'B' (in short, “the Tribunal”) in ITA No.51/Chandi/2002, for the assessment year 1997-98, claiming following substantial questions of law:- “i) Whether amendments in Section 55(2)(a) made by the Finance Act 1997 and Finance Act 2001 indicate that for the GURBAX SINGH 2014.10.28 11:54 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.398 of 2005 (O&M) 2 earlier period the name or brand name associated with a business was included in the expression 'Goodwill' of a business? ii) Whether the Hon'ble ITAT has erred in law that the sale of trade marks of 'AMIBEX' and 'ELUSIN' for a sum of `7,50,000/- did not fall under the definition of capital asset or a sale of goodwill without determining the question as to whether the amendments in Section 55(2)(a) indicate that for the earlier period the name or brand name associated with a business was included in the expression 'goodwill' of a business or not?” 2. A few facts relevant for the decision of the controversy involved as narrated in the appeal may be noticed. The assessee filed its return of income declaring income of ` 3,26,920/- on 25.11.1998. Assessment was completed at total income of ` 10,76,920/- on 16.3.2000, Annexure P.1. It was noticed by the Assessing officer that the assessee firm had debited a sum of ` 7,50,000/- in the account of M/s Ind. Swift Limited on account of sale of trade marks of 'Amibex' and 'Elucin'. According to the appellant, the brand names in the case of a medicine manufacturing company are nothing but goodwill. Their value is basically dependent upon the reputation of the parent company. The reputation is another form of classification for goodwill. As the brand names sold were actually transfer of a part of goodwill, claim of the assessee was disallowed under section 55 (2)(a) of the Act and an addition of ` 7,50,000/- was made to the income of the assessee. Aggrieved by the order, the assessee filed appeal before the Commissioner of Income Tax (appeals) [CIT(A)] who vide order dated 5.10.2001, Annexure P.2 deleted the addition holding that the words “right to manufacture, produce or process any article or thing” have been inserted GURBAX SINGH 2014.10.28 11:54 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.398 of 2005 (O&M) 3 in section 55(2) (a) of the Act by Finance Act, 1997 w. e.f 1.4.1998 i.e. for the assessment year 1998-99 onwards. The CIT(A) further opined that sale of trademark could not be said to be sale of goodwill. Not satisfied with the order, the revenue filed appeal before the Tribunal. The Tribunal dismissed the appeal of the department vide order dated 31.3.2005, Annexure P.3 observing that as per section 55(2)(a) of the Act as on 31.3.1997, the sale of trade marks of 'Amibex' and 'Elusin' did not fall under the definition of 'capital asset' or 'sale of goodwill'. 3. We have heard learned counsel for the parties and perused the record. 4. Learned counsel for the appellant-revenue submitted that the goodwill included trade mark or brand name and therefore after amendment by the Finance Act 1994 effective from 1.4.1995, the sale of brand names 'Amibex' and 'Elusin' for a sum of ` 7,50,000/- by the assessee was part of the goodwill of the business. Support was drawn from judgments of the Apex Court in Jogta Coal Co.Limited vs. CIT, West Bengal, (1959) 36 ITR 521 and Seethalakshmi Ammal vs. Controller of Estate Duty, Madras, (1966) 61 ITR 317. 5. Opposing the prayer made by the learned counsel for the revenue, learned counsel for the assessee on the strength of the judgment of the Apex Court in CIT, Bangalore vs. B.C.Srinivasa Setty, (1981) 128 ITR 294 submitted that goodwill relates to reputation and a variety of elements goes into its making. It was urged that Finance Act 2001 effective from 1.4.2002 had amended Section 55(2)(a) whereby trade mark or brand name was included therein. It was argued that once specifically the trade mark or GURBAX SINGH 2014.10.28 11:54 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.398 of 2005 (O&M) 4 brand name was included in clause (a) of sub section (2) of Section 55 of the Act, the trade mark or brand name could not be held to be included in the term 'goodwill' before the said date. Reliance was placed upon decision of the Kerala High Court in Vysali Chemotherapeutics (P) Limited vs. Commissioner of Income Tax, (2004) 269 ITR 362. 6. After hearing learned counsel for the parties, we do not find any merit in the contention of learned counsel for the revenue. 7. The expression 'cost of acquisition' in relation to a capital asset for the purposes of Sections 48 and 49 has been defined in sub section (2) of Section 55. Looking to the legislative changes brought about in this provision,it may be noted that Finance Act, 1994 effective from 1.4.1995 substituted clauses (a) and (aa). Under clause (a), goodwill of a business, tenancy rights, stage carriage permits and loom hours were included for taxability of capital gains arising on sale thereof. Where the aforesaid capital asset was acquired by the assessee by purchase from the previous owner on payment of certain amount, the cost of acquisition was to be the said amount and in any other case, it was to be taken as nil. Clause (aa) covered capital gain arising from transfer of rights shares and rights renouncements. Under sub clause (iiia) to clause (a), bonus shares were also included by an amendment by Finance Act, 1995 effective from 1.4.1996. 8. Further, Finance Act, 1997 w.e.f 1.4.1998 inserted the words “right to manufacture, produce or process any article or thing” in Section 55 (2) (a) of the Act. This amendment would be applicable to assessment year 1998-99 onwards. 9. Still further, clause (a) of sub section (2) of Section 55 of the GURBAX SINGH 2014.10.28 11:54 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.398 of 2005 (O&M) 5 Act was amended by the Finance Act, 2001 which was made effective from April 1, 2002. The amended provision of clause (a) of sub section (2) of Section 55 which is relevant for adjudicating the present appeal reads thus:- “55(2) For the purposes of sections 48 and 49, 'cost of acquisition' - (a) in relation to a capital asset, being goodwill of a business or a trade mark or brand name associated with a business or a right to manufacture, produce or process any article or thing, or right to carry on any business, tenancy rights, stage carriage 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.” 10. The amended provision of clause (a) of sub section (2) of section 55 provided that for the purposes of sections 48 and 49 “cost of acquisition” in relation to a capital asset, being goodwill of a business or a trade Mark or brand name associated with a business or a right to manufacture, produce or process any article or thing or right to carry on any business, tenancy rights, stage carriage 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. The expression 'right to carry on any business' was inserted in clause (a) of sub section (2) of Section 55 by Finance Act, 2002 w.e.f 1.4.2003. GURBAX SINGH 2014.10.28 11:54 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.398 of 2005 (O&M) 6 11. The amendment by Finance Act, 2001 effective from 1.4.2002 is a substantive provision whereby trade mark or brand name associated with a business has also been brought within the net of chargeability to capital gains tax. Once there was an amendment specifically incorporating trade mark or brand name in the substantive provision, it could not be said that the goodwill included the same prior thereto. It may be noticed that no words are incorporated by the legislature without any purpose or meaning in a statute. It cannot be taken to be either clarificatory or procedural in nature and thus, would have its applicability prospectively. In other words, the amended provision would be applicable to assessment year 2002-03 onwards. Similar view has been expressed by the Kerala High Court in Vyasali Chemotherapeutics (P) Limited's case (supra). Once that is so, it is concluded that the Tribunal was right in holding the issue in favour of the assessee relating to assessment year 1997-98. 12. Adverting to the judgments relied upon by learned counsel for the revenue, in Jogta Coal Co. Limited's case (supra), the issue before the Apex Court was whether right, title and interest in the leasehold property in a coal mine which was purchased by the assessee included an element of goodwill or not when there was no allocation of consideration towards goodwill in the sale deed, which is not the question in the present case. Similarly, in Seethalakshmi Ammal's case (supra), the Madras High Court was seized of the matter primarily relating to distinction between nomination and assignment in case of Insurance policies and whether quota holder of yarn manufactured by reputed mills had any element of goodwill attached to it. The factual matrix and the issue involved being totally GURBAX SINGH 2014.10.28 11:54 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.398 of 2005 (O&M) 7 different, no advantage can be derived by the revenue from these pronouncements. 13. In view of the above, the substantial questions of law are answered against the revenue and in favour of the assessee. Consequently, the appeal stands dismissed. (Ajay Kumar Mittal) Judge August 27, 2014 (Fateh Deep Singh) Judge 'gs' GURBAX SINGH 2014.10.28 11:54 I attest to the accuracy and integrity of this document High Court Chandigarh "