Appeal Details
Counselvise Citation
[2015] 134 COUNSELVISE.COM (IT) 0980 (ITAT-PUNE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
11 year(s) 8 month(s) 23 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
30-10-2015
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
B
Next Hearing Date
01-09-2015
Assessment Year
2001-2002
Appeal Filed On
06-02-2004
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, PUN E , , !'#'' $ , % & BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM / ITA NO. 195/PN/2004 %' ( ')( / ASSESSMENT YEAR : 2001-02 D.S. THAKUR (HUF), 1217, SHUKRAWAR PETH, PUNE PAN : AABHT2414C ....... / APPELLANT ' / V/S. ITO, WARD 5(3), PUNE / RESPONDENT / ITA NO. 321/PN/2004 %' ( ')( / ASSESSMENT YEAR : 2001-02 INCOME TAX OFFICER, WARD 5(3), PUNE ....... / APPELLANT ' / V/S. SHRI DATTATRAYA S. THAKUR, 1217, SHUKRAWAR PETH, PUNE PAN : AABHT2414C / RESPONDENT / ITA NO. 1792/PN/2005 %' ( ')( / ASSESSMENT YEAR : 2001-02 INCOME TAX OFFICER, WARD 5(3), PUNE ....... / APPELLANT ' / V/S. SHRI DATTATRAYA S. THAKUR (HUF), 1217, SHUKRAWAR PETH, PUNE PAN : AABHT2414C / RESPONDENT 2 ITA NOS. 195 & 321/PN/2004 AND 1792/PN/2005, A.Y. 2001-02 ASSESSEE BY : SHRI C.H. NANIWADEKAR REVENUE BY : SHRI B.C. MALAKAR / DATE OF HEARING : 01-09-2015 / DATE OF PRONOUNCEMENT : 30-10-2015 * / ORDER PER VIKAS AWASTHY, JM : ITA NO. 195/PN/2004 HAS BEEN FILED BY THE ASSESSEE AGAIN ST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS)-II, PUNE D ATED 05-12-2003 FOR THE ASSESSMENT YEAR 2001-02. THE REVE NUE HAS FILED CROSS-APPEAL AGAINST THE SAME ORDER OF COMMISSIONER OF I NCOME TAX (APPEALS) IN ITA NO. 321/PN/2004. THE REVENUE HAS FILED AP PEAL IN ITA NO. 1792/PN/2005 ASSAILING THE ORDER OF COMMISSIONER O F INCOME TAX (APPEALS)-II, PUNE DATED 15-09-2005 FOR THE ASSESSM ENT YEAR 2001- 02 WHEREBY THE PENALTY LEVIED U/S. 271(1)(C) OF THE INCOME T AX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) AGAINST THE ASSESSEE HAS BEEN DELETED. 2. WE FIRST TAKE UP THE APPEALS OF THE ASSESSEE AND REV ENUE IN ASSESSMENT PROCEEDINGS. THE ASSESSEE IN GROUNDS OF AP PEAL HAS TAKEN SEVERAL GROUNDS. HOWEVER, DURING THE COURSE OF MAKING SU BMISSIONS THE LD. AR OF THE ASSESSEE HAS CONFINED HIS SUBMISSIONS IN R ESPECT OF FOLLOWING GROUNDS ONLY: 1. THE LEARNED CIT(A) ERRED IN HOLDING THAT THE CAP ITAL GAINS OF RS.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 WOR KS 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 3 ITA NOS. 195 & 321/PN/2004 AND 1792/PN/2005, A.Y. 2001-02 THE YEAR IN QUESTION THE CAPITAL GAINS IN THIS CASE WERE NOT CHARGEABLE TO TAX. 1B. HE WAS NOT JUSTIFIED IN HOLDING THAT THE APPELL ANT HAD TRANSFERRED THE RIGHTS TO MANUFACTURE BIDIDS AND HENCE, IN VIEW OF THE PROVISIONS OF SECTION 55(2), CAPITAL GAINS WAS CHARGEABLE TO TAX. 1C. HE FAILED TO APPRECIATE THAT THE RATIO OF S.C. IN THE CASE OF B.C. SHRINIWAS SHETTY 128 ITR 294 WAS SQUARELY APPLICABLE TO THE F ACTS OF THE CASE. THE OTHER GROUNDS RAISED IN THE APPEALS BY THE ASSESSE E WERE NOT PRESSED. 3. THE REVENUE HAS RAISED FOLLOWING GROUNDS IN ITS APPEAL: 1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE CIT(A) ERRED IN NOT UPHOLDING THE DECISION OF THE ASSESSIN G OFFICER IN ASSESSING THE RECEIPT OF RS.1 CRORE AS BENEFIT ARISING TO THE ASSESSOR FROM 'BUSINESS' WITHIN THE MEANING OF SECTION 28(IV). TH E ASSESSING OFFICER HAD HELD THAT THE ASSESSEE HUF HAD NOT SOLD ANY 'CA PITAL 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 THAKU R, (ASSIGNEE) WERE ENTITLED TO PRODUCE, MANUFACTURE, PROCESS, DISTRIBU TE AND SELL THE BIDIS OF SPECIFIED BRANDS IN A SPECIFIED AREA OF RAJASTHAN. THE ASSESSING OFFICER HELD THAT THE ASSESSOR HAD ONLY ASSIGNED HIS RIGHTS IN THE USE OF TRADE MARK, WHICH WAS TREATED AS 'NORMAL SALE OF BENEFIT' IN THE 'NORMAL CONDUCT OF BUSINESS'. 2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE CIT(A) ERRED IN NOT UPHOLDING THE DECISION OF THE ASSESSIN G OFFICER IN ASSESSING THE RECEIPT OF RS.1 CRORE AS BENEFIT ARISING TO THE ASSESSEE FROM 'BUSINESS' WITHIN THE MEANING OF SECTION 28(IV), W HEN IN FACT, THERE WAS NO 'NO TRANSFER OF CAPITAL ASSET' TO THE ASSIGNEE. FURTHER, THE DOCUMENTS WERE EXECUTED ON CAPITAL IN NON-JUDICIAL STAMP PAPE R 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 A ND IN LAW, THE CIT(A) ERRED IN NOT UP HOLDING THE DECISION OF THE ASSESSI NG OFFICER IN ASSESSING THE RECEIPT OF RS.1 CRORE RECEIVED BY THE ASSESSEE ON ACCOUNT OF 'TRANSFER OF CAPITAL ASSET' AND THEREFORE, IS ASSESSABLE UNDE R THE HEAD OF 'INCOME FROM CAPITAL GAINS', WHEN IN FACT, THE ASSESSEE HAS DERIVED BENEFIT OUT OF 4 ITA NOS. 195 & 321/PN/2004 AND 1792/PN/2005, A.Y. 2001-02 EXTINGUISHMENT OF HIS SHARE-HOLDING IN THE FORM OF THE RIGHTS TO USE THE TRADE MARK AND LABLES OF SPECIFIED BRAND OF BIDIS I N SPECIFIED AREA OF RAJASTHAN. THE 'RIGHT TO USE LABLES OF SPECIFIED BR AND OF BIDIS FOR MANUFACTURING AND SELLING ETC. IN THE SPECIFIED ARE A IS NOT A SELF GENERATED ASSETS NOR WAS IT ACQUIRED BY THE ASSESSE E ON TRANSFER. 4) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE CIT(A) ERRED IN HOLDING THAT THE RECEIPT OF RS.1 CRORE REC EIVED BY THE ASSESSEE IS NOT ASSESSABLE AS 'BUSINESS' INCOME WITHIN THE MEAN ING OF SECTION 28(IV), FOLLOWING THE DECISION OF THE MUMBAI HIGH C OURT IN THE CASE OF MAHINDRA & MAHINDRA (261 ITR 501), WHEREIN THE PURC HASE CONSIDERATION RELATED TO CAPITAL ASSETS, WHEN THE F UELS OF THIS PRESENT CASE ARE TOTALLY DIFFERENT. 5) THE ORDER OF THE CIT(A) MAY BE VACATED AND THAT OF THE ASSESSING OFFICER BE RESTORED. 6) THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER OR DELETE ANY OF (HE ABOVE GROUNDS OF APPEAL DURING THE COURSE OF APPELL ATE PROCEEDINGS. 4. THE BASIC ISSUE INVOLVED IN THE PRESENT SET OF APPEALS IS TAXABILITY OF RS.1 CRORE RECEIVED BY THE ASSESSEE ON TRANSFER OF TR ADE MARK TO M/S. THAKUR V.S. BIDI WORKS. THE ASSESSEE HAS CLAIMED THE SAID AMOUNT AS CAPITAL RECEIPT EXEMPT FROM TAX 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 ASSESS ING OFFICER HAS HELD THE AMOUNT RECEIVED BY THE ASSESSEE ON TRANSFER O F TRADE MARK AS BUSINESS INCOME TAXABLE U/S. 28(IV) OF THE ACT. AGGRIEVED BY THE ASSESSMENT ORDER DATED 31-03-2003, T HE ASSESSEE PREFERRED AN APPEAL BEFORE THE COMMISSIONER OF I NCOME TAX (APPEALS). THE COMMISSIONER OF INCOME TAX (APPEALS) VIDE IMPUG NED ORDER HAS HELD THAT THE AMOUNT RECEIVED BY THE ASSESS EE ON TRANSFER OF TRADE MARK IS CAPITAL RECEIPT TAXABLE U/S. 45 R.W.S. 55(2) OF THE ACT. T HE COMMISSIONER OF INCOME TAX (APPEALS) HELD THAT THE AMOUNT RECEIVED BY THE ASSESSEE IS THE CONSIDERATION FOR TRANSFER OF RIG HTS TO 5 ITA NOS. 195 & 321/PN/2004 AND 1792/PN/2005, A.Y. 2001-02 MANUFACTURE, PRODUCE OR PROCESS SPECIFIED BRANDS OF BIDIS AND SELL SUCH BIDIS IN SPECIFIED AREAS. 5. THE BACKGROUND AND HISTORY OF THE CASE AS TO HOW T HE ASSESSEE HAS ACQUIRED OWNERSHIP RIGHTS IN TRADE MARK THAT IS SUBJ ECT MATTER OF TRANSFER IN THE PRESENT APPEAL HAS BEEN EXPLAINED IN SUFFICIE NT DETAIL IN THE ASSESSMENT ORDER AND THE ORDER OF FIRST APPELLATE A UTHORITY. THEREFORE, FOR THE SAKE OF BREVITY, WE ARE NOT REITERATING T HE SAME IN THIS ORDER. THE ASSESSEE AND SHRI VIJAY S. THAKUR JOINTLY A CQUIRED OWNERSHIP OF TRADE MARK AND CERTAIN BRANDS OF BIDIS FOR SA LE IN THE THREE DISTRICT OF RAJASTHAN I.E. UDAIPUR, JAISALMER AND JODHP UR. SHRI VIJAY S. THAKUR STARTED HIS BUSINESS OF MANUFACTURING AND SELLING BIDIS IN SPECIFIED AREAS IN THE NAME OF HIS PROPRIETORSHIP FIRM M/S. THAKUR V. S. BIDI WORKS. SINCE, THE ASSESSEE WAS THE CO-OWNER OF TRADEMARKS A ND BRAND NAME OF BIDIS WITH A RIGHT TO DO BUSINESS IN THAT SP ECIFIED AREAS, M/S. THAKUR V. S. BIDI WORKS PAID ROYALTY TO THE ASSESSEE . THEREAFTER, M/S. THAKUR V. S. BIDI WORKS AND THE ASSESSEE ENTERED IN TO AN AGREEMENT ON 02-10-1997 VIDE WHICH ASSESSEE AGREED TO ASSIGN AND TRANSFER ITS RIGHTS IN TRADE MARK OF THE SPECIFIED BIDI BRA NDS AND SELL THEM IN THE SPECIFIED AREAS TO M/S. THAKUR V. S. BIDI WORKS FOR A TOTAL CONSIDERATION OF RS.1 CRORE TO BE PAID IN PHASED MANNER STARING FROM THE DATE OF EXECUTION OF THE AGREEMENT TILL 31-12-2000. I T WAS MUTUALLY AGREED BETWEEN THE PARTIES THAT FOR THE INTERMITTENT PE RIOD 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 AREA. A SEPARATE BRAND USER AG REEMENT WAS ALSO EXECUTED BETWEEN THE PARTIES ON 10-03-1998. THE AMOUNT RECEIVED BY THE ASSESSEE DURING THIS PERIOD AS ROYALTY WAS OFFERED TO TAX 6 ITA NOS. 195 & 321/PN/2004 AND 1792/PN/2005, A.Y. 2001-02 BY THE ASSESSEE. FINALLY, IN THE PERIOD RELEVANT TO THE ASSESSMENT YEAR 2001-02, M/S. THAKUR V. S. BIDI WORKS PAID THE FULL CONSIDER ATION FOR ASSIGNMENT OF RIGHTS IN ACCORDANCE WITH THE AGREEMENT DA TED 02-10-1997. THE ASSESSEE DISCLOSED THE SAID AMOUNT IN IT S RETURN OF INCOME FOR ASSESSMENT YEAR 2001-02 AS CAPITAL RECEIPT AN D 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 RS.1 CRORE RECEIVED BY THE ASSESSEE IN PURSUA NCE TO THE ASSIGNMENT AGREEMENT DATED 02-10-1997 WHICH IS THE SUB JECT MATTER OF DISPUTE IN THE PRESENT APPEAL. 6. THE STAND OF THE ASSESSEE IS THAT THE TRADE MARK T HAT HAS BEEN ASSIGNED BY THE ASSESSEE IS A SELF GENERATED ASSET FOR W HICH COST CANNOT BE ASCERTAINED. THUS, IN VIEW OF THE RATIO LAID DOWN IN THE CASE OF CIT VS. B. C. SRINIVASA SETTY (SUPRA), THE CONSIDERATION RECEIVED BY THE ASSESSEE ON ASSIGNMENT AND TRANSFER OF ITS RIGHTS IN TRAD EMARK OF THE SPECIFIED BRAND OF THE BIDIS AS WELL AS THE SPECIFIED AREAS IS NOT TAXABLE. DURING SCRUTINY ASSESSMENT PROCEEDINGS, THE ASSESSING OFFIC ER REJECTED THE CONTENTIONS OF THE ASSESSEE AND HELD THAT THE SAID RECEIPTS ARE TAXABLE AS BUSINESS INCOME U/S. 28(IV) OF THE ACT. THE ASSESSING OFFICER REJECTED THE CONTENTIONS OF THE ASSESSEE FOR THE FOLLOWING REASONS : THE ASSESSEE HAD ACQUIRED THE ALLEGED BRAND NAME IN A C ONSENT 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 HE NCE, IT CANNOT BE SAID THAT THEY ARE THE ASSETS OF THE ASSESSEE. THE ASSESSEE HAS RECEIVED MONETARY BENEFIT FOR EXTINGUISH MENT OF SHAREHOLDING IN THE FORM OF RIGHTS TO USE THE TRADE MARK IN SPECIFIED AREAS. 7 ITA NOS. 195 & 321/PN/2004 AND 1792/PN/2005, A.Y. 2001-02 SINCE, THE ASSESSEE WAS NOT THE OWNER OF ANY BRAND NAM E/TRADE MARK THE CONSIDERATION OF RS.1 CRORE RECEIVED BY THE ASS ESSEE HAS TO BE TAXED AS BUSINESS U/S. 28(IV) OF THE ACT. SINCE, THE ASSESSEE WAS NOT CARRYING ON ANY BUSINESS IN THE SPECIFIED AREA, NO ONE COULD PREVENT M/S. THAKUR V. S. BIDI WORKS TO CARRY ON ITS BUSINESS IN THE SAID AREA. THE TRADE MARK AND LABLES REGISTERED IN THE NAME OF THAK UR SAVADEKAR & CO. WERE NOT TRANSFERRED IN FAVOUR OF THE A SSESSEE. THE FAMILY SETTLEMENT SIMPLY ALLOWED THE ASSESSEE TO USE THE SAID BRANDS IN THE SPECIFIED AREAS. THE ASSESSEE RECEIVED J UST THE RIGHTS TO USE THE LABLES OF THE SPECIFIED BRANDS OF THAKUR SAVADEKAR & CO. IN THE SPECIFIED AREA. THUS, THE RIGHTS T O USE THE LEBLES OF THE SPECIFIED BRAND OF BIDIS FOR MANUFACTURING AN D SELLING IN THE SPECIFIED AREA IS NOT A SELF GENERATED ASSET NOR IT WAS ACQUIRED BY THE ASSESSEE ON TRANSFER. THEREFORE, T HE AMOUNT OF RS.1 CRORE RECEIVED BY THE ASSESSEE IS LIABLE TO BE TAX ED AS BENEFIT ARISING DURING THE COURSE OF BUSINESS WITHIN THE ME ANING OF SECTION 28(IV) OF THE ACT. 7. THE ASSESSING OFFICER ALSO REJECTED THE AGREEMENTS ON WHICH THE ASSESSEE HAS PLACED RELIANCE IN SUPPORT OF ITS SUBMISSIONS , ON THE GROUND THAT THEY ARE NOT REGISTERED. THE ASSESSING OFFIC ER OBSERVED THAT THE ASSESSEE NEVER OWNED THE TRADE MARK AS ITS CAPITAL ASSETS, NOR CARRIED ANY BUSINESS AFTER THE ORDER OF CLB USING SPECIFIED BRANDS OF THE BIDIS IN THE SPECIFIED AREA. THE ASSESSING OFFICER FURTHE R HELD THAT THE ASSESSEE HAS RESORTED TO COLOURABLE METHODS TO AV OID PAYMENT OF TAXE AND APPLIED THE RATIO LAID DOWN IN THE CASE OF MC DOW ELL AND CO. LTD. VS. CTO REPORTED AS 154 ITR 148 (SC) 8 ITA NOS. 195 & 321/PN/2004 AND 1792/PN/2005, A.Y. 2001-02 8. APART FROM THE ABOVE ADDITION, THE ASSESSING OFFICER FURT HER MADE DISALLOWANCES/ADDITION ON SALES RETURN OF RS.4,63,174/-, CLOSIN G STOCK OF TOBACCO RS.4,40,632/-, ADVERTISEMENT RS.4,62,724/-, BAD DE BTS RS.2,47,919/- AND DEPRECIATION RS.56,073/-. 9. AGGRIEVED BY THE ASSESSMENT ORDER DATED 31-03-200 3, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE COMMISSIONER OF I NCOME TAX (APPEALS). THE COMMISSIONER OF INCOME TAX (APPEALS) VIDE IMPUG NED ORDER REJECTED THE FINDINGS OF ASSESSING OFFICER WITH REGAR D TO TAXABILITY OF RS.1 CRORE U/S. 28(IV) OF THE ACT. THE COMMISSIONER OF INC OME TAX (APPEALS) HELD THAT THE AMOUNT RECEIVED BY THE ASSESSEE ON ASSIGNMENT OF TRADE MARK AND BRAND NAMES IS A CAPITAL RECEIPT. THE COMMISSIONER OF INCOME TAX (APPEALS) HELD THAT THE RATIO LAID DOWN IN THE CASE OF CIT VS. B. C. SRINIVASA SETTY (SUPRA) WILL NOT APPLY IN THE PRESEN T CASE. THE COMMISSIONER OF INCOME TAX (APPEALS) OBSERVED THAT BOTH T HE ASSESSEE AND SHRI VIJAY S. THAKUR, PROPRIETOR OF M/S. THAKUR V. S . BIDI WORKS WERE HOLDING SIMILAR RIGHTS TO MANUFACTURE SPECIFIED BRANDS O F BIDIS TO BE SOLD IN THE SPECIFIED AREAS OF RAJASTHAN STATE IN ACCO RDANCE 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 SPECIFIED AREA THAT HAS COME TO ITS SHARE. IN THE AGREEMENT BETWEEN THE ASSESSEE AND M/S. THAKUR V. S. BIDI WORKS DA TED 02-10-1997, WHAT HAS BEEN TRANSFERRED TO THE ASSIGNEE IS NOT NEW RIGHTS BUT ONLY A GUARANTEE THAT THE ASSESSEE WOULD N OT COMPETE WITH THE ASSIGNEE. THERE WAS NO RESTRICTION ON THE ASSIGNEE IN THE FAMILY ARRANGEMENT REGARDING THE QUANTITY OF BIDIS TO BE MANUFA CTURED IN THE SPECIFIED AREA ALLOTTED TO HIM. THE AGREEMENT DATED 02-10 -1997 DOES NOT CONFER FURTHER RIGHTS ON THE ASSIGNEE. THE ASSIGNEE DID NOT PURCHASE ANY TRADE MARK OR BRAND NAMES BECAUSE HE W AS ALREADY IN 9 ITA NOS. 195 & 321/PN/2004 AND 1792/PN/2005, A.Y. 2001-02 POSSESSION OF SIMILAR BRANDS/TRADE MARK. THE COMMISSIONER OF INCOME TAX (APPEALS) FINALLY CONCLUDED THAT THE ASSESSEE HAS RECE IVED A SUM OF RS.1 CRORE AS CONSIDERATION FOR TRANSFER OF ITS RIGHTS TO M ANUFACTURE, PRODUCE OR PROCESS SPECIFIED BRANDS OF BIDIS AND SELLS SUC H BIDIS FOR SPECIFIED AREAS TO THE ASSIGNEE AND SUCH CONSIDERATION IS TO BE BROUGHT TO TAX UNDER THE HEAD INCOME FROM CAPITAL GAINS. THE COMMISSIONER OF INCOME TAX (APPEALS) WHILE HOLDING SO, APPLIED THE PROVISIONS OF SECTION 55(2) OF THE ACT. 10. IN SO FAR AS THE OTHER GROUNDS RAISED BY THE ASSE SSEE IN FIRST APPEAL, THE COMMISSIONER OF INCOME TAX (APPEALS) UPHELD THE ADDITIONS/DISALLOWANCES IN RESPECT OF SALES RETURN, VALUATION OF CLOSING STOCK OF TOBACCO, ADVERTISEMENT EXPENSES AND DEPRECIATIO N. AGAINST THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS), BOTH, THE ASS ESSEE AND THE REVENUE ARE IN APPEAL BEFORE US. 11. SHRI C.H. NANIWADEKAR APPEARING ON BEHALF OF THE ASSESS EE SUBMITTED THAT THE ASSESSEE HAD ACQUIRED SHARE IN TRAD E 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 BU SINESS OF MANUFACTURING OF BIDIS IN THE YEAR 1955 IN PARTNERSHIP UND ER 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 THREE PERSONS DEV ELOPED SEVERAL TRADEMARKS INCLUDING THE BRAND, LANGAR OR ANCHOR. T HE SAID TRADEMARKS/BRANDS WERE JOINTLY OWNED BY THE ABOVE SA ID THREE PERSONS AND THESE RIGHTS WERE NEVER TRANSFERRED TO THE FIRM OR COMPANY. THE ASSESSING OFFICER WHILE RECORDING THE FACTS HAS ERRED IN MEN TIONING THAT THE TRADEMARKS WERE REGISTERED IN THE NAME OF COMPANY. THE ASSESSEE 10 ITA NOS. 195 & 321/PN/2004 AND 1792/PN/2005, A.Y. 2001-02 AND SHRI VIJAY S. THAKUR ARE THE LEGAL HEIRS OF SHRI S.R. TH AKUR. THE COMPANY FOR THE USE OF TRADEMARKS/BRANDS PAID ROYALTY T O THE 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 COMPA NY LAW BOARD BY THE LEGAL HEIRS OF SHRI S.R. THAKUR (HEREINAFTER R EFERRED 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. SAVAD EKAR AND HIS LEGAL HEIRS (HEREINAFTER REFERRED TO AS KBS GROUP). BEFORE THE COMPANY LAW BOARD THE MATTER WAS AMICABLY SETTLED BETWEEN THE PARTIES BY FAMILY ARRANGEMENT WHICH WAS REDUCED TO WRITING ON 17-08 -1997. ACCORDING TO THE FAMILY SETTLEMENT, THE TRADEMARK WAS DIV IDED TERRITORY WISE BETWEEN THE WARRING FACTIONS. CONSEQUENTLY, SRT GR OUP RECEIVED EXCLUSIVE OWNERSHIP OF THE TRADEMARK/BRANDS FOR CERTAIN D ISTRICTS OF RAJASTHAN. THEREAFTER, SRT GROUP ENTERED INTO A FAMILY ARRANGEMENT BETWEEN THEMSELVES ON 18-08-1997, WHEREIN THE ASSESSEE AND THE SHRI V.S. THAKUR JOINTLY GOT 1/3 RD AREA FALLING IN 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 AS SIGNMENT AND TRANSFER OF RIGHTS IN TRADEMARKS/BRANDS IS A BUSINESS INCOME. THE ASSESSING OFFICER HAS ERRED IN HOLDING THAT THE ASSESSEE IS NOT THE OWNER OF BRANDS/TRADEMARKS THAT HAVE BEEN TRANSFERRED . THE ISSUE OF OWNERSHIP OF TRADEMARKS/BRANDS HAS BEEN CONCLUSIVELY DE CIDED BY THE ADDITIONAL DISTRICT JUDGE, PUNE IN TRADE MARK SUIT NO. 9 OF 1 991 11 ITA NOS. 195 & 321/PN/2004 AND 1792/PN/2005, A.Y. 2001-02 DECIDED ON 22-12-1995. BEFORE THE COMPANY LAW BOARD, T HE MATTER WAS NOT WITH RESPECT TO OWNERSHIP OF TRADEMARK RIGHTS B UT WAS DISPUTE AMONGST THE SHAREHOLDERS OF THE COMPANY. THE ASSESSING OFFICER WHILE HOLDING THAT THE ASSESSEE IS NOT OWNER OF TRADEMARKS/BR ANDS HAS NOT STATED THE NATURE OF BUSINESS OF THE ASSESSEE FROM WHICH THE INCOME OF RS.1 CRORE HAS ARISEN. ON THE ONE HAND THE ASSESSING O FFICER HOLDS THAT THE RIGHT TO USE TRADEMARK IS DUE TO EXTINGUISHMEN T 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 O F HIS ORDER HAS OBSERVED THAT THE ASSESSEE IS NOT DOING ANY BUSIN ESS. THE FINDINGS OF THE ASSESSING OFFICER ARE SELF CONTRADICTORY. THE ASSESS ING OFFICER HAS OVERLOOKED THE FACT THAT THE BRAND WAS JOINTLY OWN ED BY THE ASSESSEE AND ASSIGNEE. THE ASSESSEE WAS RECEIVING ROYA LTY FROM THE ASSIGNEE TILL THE TIME ENTIRE MUTUALLY AGREED CONSIDERATION WAS PAID . 11.2 THE LD. AR CONTENDED THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS RIGHTLY HELD THAT THE AMOUNT OF RS.1 CRORE R ECEIVED BY THE ASSESSEE IS CAPITAL IN NATURE. HOWEVER, THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN COMING TO THE CONCLUSION THAT T HE SAID AMOUNT HAS BEEN RECEIVED AS A CONSIDERATION FOR TRANSFER OF RIGHT TO MANUFACTURE, PRODUCE OR PROCESS SPECIFIED BRANDS OF BIDIS A ND SALE OF SUCH BIDIS IN THE SPECIFIED AREAS. THERE IS A DIFFERENCE BETW EEN RIGHT TO MANUFACTURE AND RIGHT TO CARRY ON THE BUSINESS. THE EX PRESSION RIGHT TO CARRY ON BUSINESS IS OF VITAL IMPORT AND CONNOTATION AS COMPARED TO RIGHT TO MANUFACTURE. THE ASSESSEE HAS ASSIGNED AND TR ANSFERRED ITS ENTIRE BUNDLE OF RIGHTS ATTACHED TO THE TRADE MARKS/BRA NDS INCLUDING RIGHT TO MANUFACTURE, SALE OF SPECIFIED BRANDS OF BIDIS IN A SP ECIFIED AREA. THE ASSESSEE HAD ACQUIRED THOSE RIGHTS IN TRADEM ARKS/BRANDS THROUGH FAMILY ARRANGEMENT. TRADEMARK IS A SELF GENERATE D ASSET OVER 12 ITA NOS. 195 & 321/PN/2004 AND 1792/PN/2005, A.Y. 2001-02 THE PERIOD OF TIME COMMENCING FROM YEAR 1955. THE PROVISIO NS OF SECTION 55(2)(A) ARE NOT APPLICABLE IN THE PRESENT CASE, AS THE WORD TRADEMARK WAS INSERTED IN CLAUSE (A) OF SUB-SECTION (2) BY FINANCE ACT, 2001 W.E.F. 01-04-2002. THE ISSUE REGARDING THE APPLICABILITY OF AMENDED PROVISIONS OF SECTION 55(2)(A) WHEN THE WORDS OF T RADEMARK OR BRAND NAME WERE INSERTED HAS BEEN ADJUDICATED IN VAR IOUS 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 EFFECT IVE FROM ASSESSMENT YEAR 2002-03 ONWARDS. PRIOR TO AMENDMENT OF SECTION 55(2)(A) W.E.F. 1 ST APRIL, 2002, SALE OF SELF GENERATED TRADE MARK WAS NOT LIABLE TO CAPITAL GAINS TAX. SIMILAR VIEW HAS BEEN TAKEN BY T HE MUMBAI BENCH OF TRIBUNAL IN THE CASE OF BOMBAY OIL INDUSTRIES LT D. VS. DY. CIT REPORTED AS 28 SOT 383 (MUM.) AND THE BANGALORE BENCH O F THE TRIBUNAL IN THE CASE OF KWALITY BISCUITS (P.) LTD. VS. ACIT REPO RTED AS 135 ITD 35 (BANGALORE) (TM). THE LD. AR SUBMITTED THAT THE CASE OF THE ASSESSEE IS SQUARELY COVERED BY THE DECISION OF HON'BLE SUPREME COURT OF INDIA IN THE CASE OF CIT VS. B. C. SRINIVASA SETTY (SUPR A) AND THEREFORE, TRANSFER OF TRADEMARKS/BRANDS WILL NOT BE SUBJE CT TO INCOME TAX UNDER THE HEAD CAPITAL GAINS. 11.3 THE LD. AR STATED AT THE BAR THAT EXCEPT FOR GROU ND NO. 1 INCLUDING GROUND NOS. 1A, 1B AND 1C, NO OTHER GROUNDS RAIS ED IN THE APPEAL ARE PRESSED. 12. AU CONTRAIRE SHRI B.C. MALAKAR REPRESENTING THE DEPARTMENT VEHEMENTLY DEFENDED THE FINDINGS OF ASSESSING OFFICER IN TREA TING THE AMOUNT OF RS.1 CRORE RECEIVED BY THE ASSESSEE ON TRANS FER OF TRADEMARK AS BUSINESS INCOME TAXABLE U/S. 28(IV) OF THE ACT. THE LD. D R 13 ITA NOS. 195 & 321/PN/2004 AND 1792/PN/2005, A.Y. 2001-02 SUBMITTED THAT THE ASSESSEE HAS NOT BEEN ABLE TO SHOW THAT TRADEMARKS ARE OWNED BY THE INDIVIDUALS AND NOT BY THE COMPANY. T HE LD. DR STRONGLY SUPPORTED THE FINDINGS OF THE ASSESSING OFFICER AN D PRAYED FOR ACCEPTING THE APPEAL OF THE REVENUE AND DISMISSING THE AP PEAL OF THE ASSESSEE. THE LD. DR FURTHER SUBMITTED THAT THE CASE LAWS ON WHICH T HE LD. AR OF THE ASSESSEE HAS PLACED RELIANCE ARE NOT APPLICAB LE IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. 13. THE LD. AR CONTROVERTING THE SUBMISSIONS OF THE LD. DR SUBMITTED THAT THE TRADEMARKS AND BRANDS WERE OWNED BY THE IND IVIDUALS AND NOT BY THE COMPANY. THE TRADEMARKS/BRANDS WERE DEVELOPED OVER THE PERIOD OF TIME STARING FROM YEAR 1955. THE COMPANY THAKU R SAVADEKAR & CO. LTD. WERE INCORPORATED SOMEWHERE IN THE YEAR 19 80. THE COMPANY HAS BEEN PAYING ROYALTY FOR THE USE OF TRADEMARK S. 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 COMPAN IES ACT, 1956 IS PLACED AT PAGE 59. IN ITEM NO. 8 OF THE SAID ST ATEMENT IT HAS BEEN STATED THAT THE BOMBAY HIGH COURT (APPELLATE SIDE) V IDE A CONSENT ORDER DATED 22 ND JANUARY, 1996 HAS ORDERED THE COMPANY TO PAY AN AMOUNT OF RS.15 LAKHS PER ANNUM AS ROYALTY TO THE PLAINT IFFS GROUP IN TRADE MARK SUIT NO. 9 OF 1991 COMMENCING FROM 1 ST NOVEMBER, 1995 FOR USE OF LANGAR AND ALLIED TRADEMARKS. AT PAGE 60 OF THE PAPER BOOK IS THE EXTRACTS OF EXPENDITURE FOR THE PERIOD RELEVANT TO THE FINANCIAL YEAR 1994-95 AND 1995-96. THE LD. AR POINTED THAT IN TH E ITEM OF EXPENDITURE, LABEL HIRE CHARGES ARE MENTIONED. THE SA ME REPRESENT PAYMENT OF ROYALTY. THE LD. AR ALSO DRAWS OUR ATTENTION T O 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 O F THE LIS AND THE ABRIDGED FINDINGS OF THE CIVIL COURT ARE GIVEN. 14 ITA NOS. 195 & 321/PN/2004 AND 1792/PN/2005, A.Y. 2001-02 14. WE HAVE HEARD THE SUBMISSIONS MADE BY THE RIVAL SIDE S AT LENGTH. WE HAVE ALSO PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND HAVE CONSIDERED THE DECISIONS ON WHICH THE LD. AR HAS PLACED RELIANCE. FRO M THE GROUNDS OF APPEAL AND THE SUBMISSIONS MADE TWO ISSU ES EMERGE FOR ADJUDICATION BEFORE US: I. WHETHER THE AMOUNT OF RS.1 CRORE RECEIVED BY THE ASSES SEE FOR TRANSFER OF TRADEMARK TO M/S. THAKUR V.S. BIDI WORKS IS TO BE ASSESSED AS CAPITAL RECEIPT OR BUSINESS INCOME? II. IF THE AFORESAID AMOUNT IS HELD TO BE CAPITAL RECEIPT, WHETH ER THE SAME IS EXEMPT FROM TAX IN VIEW OF THE DECISION OF HON'BLE SUPREME COURT OF INDIA IN THE CASE OF CIT VS. B. C. SRINIVAS A SETTY (SUPRA) OR IS TAXABLE UNDER THE AMENDED PROVISIONS OF SECTION 55(2)(A) OF THE ACT? 15. THE ASSESSEE HAS ACQUIRED RIGHTS IN TRADEMARKS/BRAN DS THROUGH FAMILY ARRANGEMENT AND SETTLEMENT. THE BRANDS/TRADEMAR KS UNDER DISPUTE WERE DEVELOPED/GENERATED OVER THE PERIOD OF TIME STARING FROM THE YEAR 1955 BY THREE PERSONS VIZ: SHRI G.B. THAKUR, SHR I K.B. SAVADEKAR AND SHRI S.R. THAKUR. THE ASSESSEE IS ONE OF T HE LEGAL HEIRS OF SHRI S.R. THAKUR. THE AFORESAID THREE PERSONS WERE ENG AGED IN THE BUSINESS OF MANUFACTURING BIDIS SINCE 1955 IN PARTNERSHIP UN DER THE NAME AND STYLE OF THAKUR SAVADEKAR & CO. OVER THE PER IOD OF TIME THESE THREE PERSONS DEVELOPED TRADEMARKS, NOTABLY THE LANGAR OR ANCHOR. THE TRADEMARKS/BRANDS DEVELOPED WERE JOINTL Y OWNED BY THE AFORESAID THREE PERSONS AND PURPORTEDLY WERE NEVER TR ANSFERRED TO THE PARTNERSHIP FIRM OR THE COMPANY WHICH SUBSEQUENTLY, TOOK OVER THE BUSINESS OF THE SAID PARTNERSHIP FIRM. THROUGHOUT THE TRADEMARKS/BRANDS WERE OWNED BY THE AFORESAID THREE P ERSONS AND SUBSEQUENTLY BY THEIR LEGAL HEIRS. THIS FACT IS EVIDENT FROM THE 15 ITA NOS. 195 & 321/PN/2004 AND 1792/PN/2005, A.Y. 2001-02 JUDGMENT OF THE ADDITIONAL DISTRICT JUDGE, PUNE IN TRADE MA RK SUIT NO. 9 OF 1991 DECIDED ON 22-12-1995 TITLED SHRI VIJAYKUMAR S HANKARRAO THAKUR AND ORS. VS. THAKUR SAVADEKAR & COMPANY LIMITED AND ORS. THERE WAS DISPUTE BETWEEN THE FAMILIES OF SHRI G.B. THAKUR, S HRI K.B. THAKUR AND SHRI S.R. THAKUR. THE LEGAL HEIRS OF SHRI S.R. TH AKUR FILED A PETITION BEFORE THE COMPANY LAW BOARD AGAINST M/S. THA KUR SAVADEKAR AND CO. LTD., GBT GROUP AND KBS GROUP. BEFOR E THE CLB THE MATTER WAS MUTUALLY SETTLED AND A CONSENT ORDER W AS PASSED BY THE CLB ON 30 TH MAY, 1997. UNDER THE TERMS OF SETTLEMENT THE TRADEMAR K WAS DIVIDED TERRITORY WISE BETWEEN THE WARRING FACTIONS. S UBSEQUENT TO THE CONSENT ORDER DATED 30-05-1997 THERE WAS A FAMILY ARRANGEMENT AMONGST THE LEGAL HEIRS OF SHRI S.R. THAKUR ON 18-08-1997 WHEREIN THREE DISTRICTS OF RAJASTHAN I.E. UDAIPUR, JAISALMER AND JODH PUR CAME TO THE SHARE OF ASSESSEE AND SHRI VIJAY S. THAKUR. TH E SAID PERSONS COULD MANUFACTURE AND SELL BIDIS UNDER THE TRADEMARKS/BRA NDS IN THE AFORESAID THREE DISTRICTS. THE ASSESSEE DECIDED TO ASSIG N 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 02-10-19 97. ACCORDING TO THE SAID AGREEMENT THE ASSIGNEE WOULD PAY RS.1 CRORE TO THE ASSIGNOR I.E. THE ASSESSEE, IN LIEU OF ASSIGNMENT AND TRA NSFER OF RIGHTS IN TRADEMARKS OF SPECIFIED BRANDS OF BIDIS AND SELL THE M IN THE SPECIFIED AREAS. THE TOTAL CONSIDERATION OF RS.1 CRORE WAS PAID BY THE ASSIGNEE OVER PERIOD OF TIME STARTING FROM 02-10-1997 TO 31-12-2000. THUS, THE ENTIRE AMOUNT OF RS.1 CRORE WAS PAID TO THE AS SESSEE IN THE PERIOD RELEVANT TO THE ASSESSMENT YEAR 2001-02. A PER USAL OF THE AGREEMENT DATED 02-10-1997 FOLLOWED BY AGREEMENT FOR AS SIGNMENT OF RIGHTS DATED 26-03-2001 SHOWS THAT THE AGREEMENTS WE RE IN RESPECT OF 16 ITA NOS. 195 & 321/PN/2004 AND 1792/PN/2005, A.Y. 2001-02 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 TRADEM ARKS 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 RIGHTLY REJECTED THE FINDINGS OF ASSESSING OFFICER IN HOLDING THAT THE RECEIPT OF RS.1 CRORE BY THE ASSESSEE ON TRANSFER OF TRA DEMARKS IS TAXABLE U/S. 28(IV) AS BUSINESS INCOME. AS COROLLARY TO ABO VE FINDINGS WE HOLD THAT THE INCOME GENERATED FROM TRANSFER OF RIGHTS IN TRADEM ARKS TO M/S. THAKUR V. S. BIDI WORKS IS A CAPITAL RECEIPT. 17. THE NEXT ISSUE BEFORE US IS; WHETHER THE CAPITAL RECEIP T IS TAXABLE U/S. 45 R.W.S. 55(2)(A) OF THE ACT. THE COMMISSIONER OF INCOME TAX (APPEALS) IN HIS ORDER HAS OBSERVED THAT BOTH THE ASSIGNO R I.E. THE ASSESSEE AND THE ASSIGNEE WERE THE OWNERS OF TRADEMAR KS/BRANDS AND HAD SIMILAR RIGHTS FROM THE YEAR 1997. THE AGREEMENT UND ER CONSIDERATION CONFERS NO FRESH RIGHTS TO THE ASSIGNEE. WH AT HAS BEEN TRANSFERRED TO THE ASSIGNEE WAS NOT A NEW RIGHT BUT ON LY A GUARANTEE THAT THE APPELLANT WOULD NOT COMPETE WITH THE ASSIGNEE. AS SUCH THE CONSIDERATION FOR TRANSFER IS ONLY IN RESPECT OF RIGHT TO M ANUFACTURE PRODUCE OR PROCESS SPECIFIED BRANDS OF BIDIS IN SPECIFIED ARE AS. WE DO NOT CONCUR WITH THE OBSERVATIONS OF THE COMMISSIONER OF I NCOME TAX (APPEALS). IT IS AN UNDISPUTED FACT THAT BOTH THE ASSIGNOR AND THE ASSIGNEE WERE HAVING SIMILAR RIGHTS QUA THE TRADEMARKS/BR ANDS AND THE AREA IN WHICH BOTH THE ASSIGNOR AND ASSIGNEE HAVE T O OPERATE. 17 ITA NOS. 195 & 321/PN/2004 AND 1792/PN/2005, A.Y. 2001-02 ACCORDING TO THE FAMILY ARRANGEMENT DATED 18-08-1997 B OTH THE ASSIGNOR AND ASSIGNEE WERE THE JOINT OWNERS OF THE TRAD EMARKS/BRANDS FOR THEIR USE IN SPECIFIED AREAS. THE AMOUNT PAID BY THE ASSIGNEE TO THE ASSIGNOR WAS IN LIEU OF ASSIGNOR-ASSESSEE RELINQUISHING HIS R IGHTS OVER THE TRADEMARKS/BRANDS JOINTLY OWNED WITH THE ASSIGNEE AND THE AREA OF OPERATION WHICH WAS EARMARKED TO BOTH OF THEM UNDER FAM ILY ARRANGEMENT. A PERUSAL OF AGREEMENT DATED 02-10-1997 AT PAGES 20 TO 22 OF THE PAPER BOOK SHOWS THAT THE CONSIDERATION OF RS .1 CRORE IS PAID IN LIEU OF ASSESSEE ASSIGNING AND TRANSFERRING ITS RIGHTS IN T RADEMARKS OF THE SPECIFIED BRANDS AND TO SELL THE PRODUCTS ITS SPECIFIED AREAS. THUS, IT IS A CASE OF ABSOLUTE TRANSFER OF RIGHTS AND NOT ONLY T HE TRANSFER OF RIGHTS TO MANUFACTURE OR PRODUCE SPECIFIED BRANDS AND T HEIR MARKETING IN SPECIFIED AREAS. A FURTHER PERUSAL OF AGREEMENT FOR ASSIG NMENT OF RIGHTS DATED 26-03-2001 BETWEEN THE PARTIES I.E. THE ASS ESSEE AND M/S. THAKUR V. S. BIDI WORKS SHOWS THAT THE ASSIGNOR ON TRA NSFER OF ALL HIS RIGHTS WOULD HAVE NO LIEN AS A BENEFICIAL OWNER OF TRADEMAR KS FOR MANUFACTURING AND SELLING GOODS WITHIN THE SPECIFIED AREAS. T HE ASSIGNEE BECAME ENTITLED TO USE THE TRADE MARKS FOR THE BUSINESS & MANUFACTURE SPECIFIED GOODS AND MARKET THE SAME IN SPECIFIE D AREA TO THE EXCLUSION OF ASSIGNOR/ASSESSEE. THE ASSIGNOR HAD FURT HER AGREED NOT TO CARRY ON ANY BUSINESS OF PRODUCING, MANUFACTURING, PROCESSING, DISTRIBUTING AND/ OR SELLING BIDIS AND COMPETING WITH THE BUS INESS OF ASSIGNEE. THUS, IN THE SAID AGREEMENT THERE WAS A COVE NANT WITH RESPECT TO NON-COMPETING AS WELL. 18. THE PROVISIONS OF SECTION 55(2)(A) WERE AMENDED BY THE FINANCE ACT, 2001 W.E.F. 01-04-2002 WHEREBY THE WORDS OR A TRAD EMARK OR BRAND NAME ASSOCIATED WITH BUSINESS WERE INSERTED. THE RELEVANT EXTRACT OF SECTION 55(2)(A) READS AS UNDER: 18 ITA NOS. 195 & 321/PN/2004 AND 1792/PN/2005, A.Y. 2001-02 SECTION 55(2) - FOR THE PURPOSES OF SECTIONS 48 AN D 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 THIN G] [OR RIGHT TO CARRY ON ANY BUSINESS], TENANCY RIGHTS, STAGE CARRIAGE PERMI TS 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 PURC HASE PRICE ; AND (II) IN ANY OTHER CASE [NOT BEING A CASE FALLING UN DER SUB-CLAUSES (I) TO (IV) OF SUB-SECTION (1) OF SECTION 49], SHALL BE TAKEN T O 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 T RADEMARK HAS TO BE DETERMINED IN ACCORDANCE WITH THE PROVISIONS OF SAID SECTION. HOWEVER, THIS AMENDMENT HAS BEEN BROUGHT W.E.F. 01-04-200 2. THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. FERNHILL LABORATORIES & INDUSTRIAL ESTABLISHMENT (SUPRA) HAS HELD THAT THE AMEN DMENT IS EFFECTIVE FROM ASSESSMENT YEAR 2002-03 ONWARDS. THE RELE VANT EXTRACT OF THE FINDINGS OF THE HON'BLE HIGH COURT ARE AS UNDER: 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. SECTI ON 45 OF THE ACT IS A CHARGING SECTION FOR THE PURPOSE OF LEVYING CAPITAL GAINS. HOWEVER TO IMPOSE THE CHARGE, PARLIAMENT HAS ENACTED PROVISION TO COMPUTE PROFITS OR GAINS UNDER THAT HEAD. SECTION 48 OF THE SAID AC T PROVIDES THE MANNER IN WHICH THE INCOME CHARGEABLE UNDER THE HEAD CAPIT AL 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 SHET TY (SUPRA) WAS DEALING WITH THE ISSUE WHETHER THE TRANSFER OF THE GOODWILL BY PARTNERSHIP FIRM CAN GIVE RISE TO A CAPITAL GAIN TA X UNDER SECTION 45 OF THE SAID ACT. THE APEX COURT HELD THAT WHERE THE CO ST OF ACQUISITION OF THE CAPITAL ASSET IS NIL THEN THE COMPUTATION PROVISION FAILS AND THE TRANSFER OF GOODWILL NOT GIVE RISE TO CAPITAL GAINS TAX. PRI OR TO THE AMENDMENT MADE TO SECTION 55(2) BY THE FINANCE ACT, 2001 EFFE CTIVE FROM 1/4/2002 BY ADDING THE WORDS 'TRADE MARK OR BRAND NAME ASSOC IATED WITH THE BUSINESS' SELF GENERATED ASSETS SUCH AS TRADEMARK D ID NOT HAVE ANY COST OF ACQUISITION. THEREFORE FOR THE PERIOD UNDER CONS IDERATION THE COMPUTATION PROVISION UNDER SECTION 48 OF THE SAID ACT FAILS RESULTING IN 19 ITA NOS. 195 & 321/PN/2004 AND 1792/PN/2005, A.Y. 2001-02 SUCH TRANSFER OF TRADE MARKS NOT BEING CHARGEABLE T O 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 NAM E ASSOCIATED WITH THE BUSINESS WAS INTRODUCED INTO IT, THE COMPU TATION PROVISION BECOMES WORKABLE AND THE CONSIDERATION RECEIVED FOR THE SALE OF TRADE MARK WOULD BE SUBJECT TO CAPITAL GAINS TAX. HOWEVER , FOR THE PERIOD PRIOR TO 1/4/2002 THE SALE OF SELF GENERATED TRADEMARK IS NOT LIABLE TO CAPITAL GAINS TAX. IN FACT, WHEN THE AMENDMENT WAS MADE TO SECTION 55 BY FINANCE ACT, 2001 THE CENTRAL BOARD OF EXCISE AND C USTOMS HAD ISSUED A CIRCULAR BEARING NO.14/2001 EXPLAINING THE PROVIS ION OF THE FINANCE ACT, 2011 RELATING TO DIRECT TAXES PROVIDED AS UNDE R: '42. PROVIDING FOR COST OF ACQUISITION OF CERTAIN I NTANGIBLE CAPITAL ASSERTS UNDER SECTION 55 42.1 UNDER THE EXISTING PROVISIONS OF SUB SECTION (2) OF SECTION 55 OF THE INCOME TAX ACT, THE COST OF ACQUISITION OF AN INTANGIBLE C APITAL ASSET, BEING GOODWILL OF A BUSINESS OR A RIGHT TO MANUFACTURE, PRODUCE OR PROC ESS ANY ARTICLE OR THING, TENANCY RIGHTS, STAGE CARRIAGE PERMITS OR LOOM HOUR S, 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 TRADEMARK MA Y NOT BE CONSIDERED TO FORM PART OF THE GOODWILL OF A BUSINESS AND CONSEQUENTLY IT MAY NOT BE POSSIBLE TO COMPUTE CAPITAL GAINS ARISING FROM THE TRANSFER OF SUCH ASSETS. 42.2 THE ACT HAS THEREFORE AMENDED CLAUSE (A) OF SU B SECTION (2) TO PROVIDE THAT THE COST OF ACQUISITION IN RELATION TO TRADEMARK OR BRAND NAME ASSOCIATED WITH A BUSINESS SHALL ALSO BE TAKEN TO BE THE PURCHASE PRI CE IN CASE THE ASSET IS PURCHASED FROM A PREVIOUS OWNER AND NIL IN ANY OTHE R CASE. 42.3 THIS AMENDMENT 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 T RADEMARK TO CAPITAL GAINS TAX ONLY WITH EFFECT FROM ASSESSMENTS YEAR 20 02 03 ONWARDS. IN THIS CASE, WE ARE CONCERNED WITH ASSESSMENT YEAR 19 99 2000 AND THEREFORE, THE AMENDMENT WOULD NOT HAVE ANY EFFECT. FURTHER AS HELD BY THE SUPREME COURT IN THE MATTER OF DY. CIT V/S. COR E HEALTH CARE LTD. REPORTED IN 298 ITR 194 THAT A PROVISION INTRODUCED WITH EFFECT FROM A PARTICULAR DATE WOULD NOT HAVE RETROSPECTIVE EFFECT UNLESS IT IS EXPRESSLY STATED TO BE SO. CONSEQUENTLY, THE SALE OF SELF GEN ERATED TRADE MARKS DURING THE ASSESSMENT YEAR 1999 2000 ARE NOT CHARGEABLE TO CAPITAL GAINS TAX. SO FAR AS THE SALE OF SELF GENERATED DES IGNS (I.E. NOT ACQUIRED) THE SAME IS ALSO NOT CHARGEABLE TO CAPITAL GAINS TA X NOT ONLY FOR THE REASONS APPLICABLE TO TRADE MARKS BUT FOR THE FACT THAT EVEN TILL THIS DATE, 20 ITA NOS. 195 & 321/PN/2004 AND 1792/PN/2005, A.Y. 2001-02 NO AMENDMENT HAS BEEN MADE TO SECTION 55(2) OF THE SAID ACT DEFINING COST OF ACQUISITION OF DESIGN AS IN THE CASE OF TRA DEMARK 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 ALSO REFERRED TO THE DECISION OF HYDERAB AD BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. DR. B.V. RAJU REPORT ED AS 135 ITD 1 TO SUBMIT THAT EVEN FOR HAVING NON-COMPETE COVEN ANT IN THE AGREEMENT THE AMOUNT WOULD NOT BE TAXABLE IN THE IMPUGN ED ASSESSMENT YEAR. THE PROVISIONS OF SECTION 28(VA) WERE IN TRODUCED BY THE FINANCE ACT, 2002 W.E.F. 01-04-2003 THUS, THE SAME WOU LD NOT BE APPLICABLE IN THE ASSESSMENT YEAR 2000-01. 22. AT THIS JUNCTURE, WE WOULD LIKE TO REFER TO THE PROV ISIONS OF SECTION 28(VA) INSERTED BY THE FINANCE ACT, 2002 W.E.F. 01-04-2003: (VA) ANY SUM, WHETHER RECEIVED OR RECEIVABLE, IN CA SH OR KIND, UNDER AN AGREEMENT FOR (A) NOT CARRYING OUT ANY ACTIVITY IN RELATION TO AN Y BUSINESS; OR (B) NOT SHARING ANY KNOW-HOW, PATENT, COPYRIGHT, TR ADE-MARK, LICENCE, FRANCHISE OR ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF SIMILAR NATURE OR INFORMATION OR TECHNIQUE LIKELY TO ASSIST IN THE MA NUFACTURE OR PROCESSING OF GOODS OR PROVISION FOR SERVICES: PROVIDED THAT SUB-CLAUSE (A) SHALL NOT APPLY TO (I) ANY SUM, WHETHER RECEIVED OR RECEIVABLE, IN CAS H OR KIND, ON ACCOUNT OF TRANSFER OF THE RIGHT TO MANUFACTURE, PRODUCE OR PR OCESS ANY ARTICLE OR THING OR RIGHT TO CARRY ON ANY BUSINESS, WHICH IS C HARGEABLE UNDER THE HEAD CAPITAL GAINS; A BARE READING OF PROVISO (I) SHOWS THAT AFORESAID CLAUSE (A) IS NOT APPLICABLE IN RESPECT OF : 21 ITA NOS. 195 & 321/PN/2004 AND 1792/PN/2005, A.Y. 2001-02 (I) ANY SUM RECEIVED ON ACCOUNT OF TRANSFER OF THE RIGHTS TO MANUFACTURE, PRODUCE OR PROCESS ANY ARTICLE OR THING WHIC H IS CHARGEABLE AS CAPITAL GAIN AND (II) ANY SUM RECEIVED ON ACCOUNT OF TRANSFER OF A RIGHT TO CA RRY 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) TH E HON'BLE SUPREME COURT OF INDIA HAS HELD THAT WHERE GOODWILL IS GEN ERATED IN A NEWLY COMMENCED BUSINESS, IT CANNOT BE DESCRIBED AS AS SET WITHIN THE MEANING OF SECTION 45 OF THE ACT AND THUS, THE TRANS FER OF GOODWILL INITIALLY GENERATED IN A BUSINESS DOES NOT GIVE RISE TO A C APITAL 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 OF TIME. 24. IN VIEW OF THE FACTS OF THE CASE AND THE DECISIONS RE FERRED ABOVE, WE HOLD THAT THE AMOUNT OF RS.1 CRORE RECEIVED BY THE A SSESSEE ON 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 R AISED BY THE ASSESSEE IN ITS APPEAL IS ALLOWED. SINCE, OTHER GROUNDS IN THE APPEALS WERE NOT PRESSED. THE SAME ARE DISMISSED AS NO T 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 IMPUGNING THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS)-II, PUNE IN DELETING TH E PENALTY 22 ITA NOS. 195 & 321/PN/2004 AND 1792/PN/2005, A.Y. 2001-02 LEVIED U/S. 271(1)(C) OF THE ACT. THE ASSESSING OFFICER HAS LEVIED PENALTY ON THE ASSESSEE ON TWO COUNTS: I. IN TREATING THE AMOUNT OF RS.1 CRORE ON TRANSFER OF TRAD EMARKS AS CAPITAL RECEIPT EXEMPT FROM TAX. II. VALUATION OF CLOSING STOCK OF TOBACCO. 27. THE ASSESSING OFFICER VIDE ORDER DATED 31-03-2005 LEVIE D PENALTY OF RS.25,00,000/- U/S. 271(1)(C) OF THE ACT. AGGRIEVED BY THE PENALTY ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS). THE COMMIS SIONER OF INCOME TAX (APPEALS) VIDE IMPUGNED ORDER DELETED THE PE NALTY ON BOTH THE COUNTS. NOW, THE REVENUE IS IN APPEAL BEFORE US AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) IN DELETING TH E PENALTY U/S. 271(1)(C) OF THE ACT. 28. AS FAR AS THE LEVY OF PENALTY WITH RESPECT TO RS.1 CRO RE AS CAPITAL RECEIPT IS CONCERNED, SINCE ADDITION MADE IN ASSESSMENT PR OCEEDINGS HAS BEEN DELETED BY US, THEREFORE, NO GROUND FOR LEVY OF P ENALTY ON THE SAID ISSUE SURVIVES. ONCE, THE SUBSTRATUM FOR LEVY OF PEN ALTY IS ERODED, THE PENALTY IS NOT SUSTAINABLE. 29. IN SO FAR AS SECOND GROUND FOR LEVY OF PENALTY I.E. VALUA TION OF CLOSING STOCK OF TOBACCO IS CONCERNED THE COMMISSIONER OF INCOME TAX (APPEALS) HAS DELETED THE PENALTY BY OBSERVING AS UNDER: 9. AS REGARDS THE CLOSING STOCK, FROM THE SUBMISSI ON OF THE APPELLANT AND THE MATERIAL ON RECORD, IT IS CLEAR THAT THE ST OCK WHICH WAS VALUED AT RS.6,60,946/- WAS SUBSEQUENTLY SOLD FOR RS.5,19,792 /-. IT IS THE SUBMISSION OF THE APPELLANT THAT THIS STOCK WAS VAL UED AT MARKET PRICE. THE ASSESSING OFFICER HAS MADE THE ADDITION BY VALU ING THE STOCK AT COST PRICE. VALUATION OF STOCK AT COST OR MARKET PRICE W HICHEVER IS LOWER, IS AN 23 ITA NOS. 195 & 321/PN/2004 AND 1792/PN/2005, A.Y. 2001-02 ACCEPTED PRINCIPLE OF STOCK VALUATION AND THIS IS M ENTIONED IN THE TAX AUDIT REPORT. THE ASSESSING OFFICER HAS MENTIONED I N PAGE 9 OF THE ASSESSMENT ORDER THAT W AS PER AUDIT REPORT CLOSING STOCK OF TOBACCO STOOD AT 24179.405 KGS BUT THE ASSESSEE HAD VALUED THE SA ME AT 60% AT RS.6,60,946/-.' IN VIEW OF THIS AND IN VIEW OF THE FACT THAT THE STOCK WAS SUBSEQUENTLY SOLD AT MUCH LOWER AMOUNT, I AM OF THE CONSIDERED VIEW THAT ON THESE FACTS, NO PENALTY CAN BE IMPOSED IN R ESPECT OF UNDERVALUATION OF CLOSING STOCK BECAUSE ON GIVEN FA CTS, IT CANNOT BE SAID THAT INACCURATE PARTICULARS WERE FURNISHED IN RESPE CT OF STOCK WITHIN THE MEANING OF SECTION 271(L)(C). WE DO NOT FIND ANY ERROR IN THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS) IN DELETING THE PENALTY. ACCORDINGLY, THE APPEAL O F THE REVENUE AGAINST THE IMPUGNED ORDER DELETING PENALTY IS DISMISSED . 30. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED AND BOTH THE APPEALS OF THE REVENUE ARE DISMISSED. ORDER PRONOUNCED ON FRIDAY, THE 30 TH DAY OF OCTOBER, 2015. SD/- SD/- ( . . / R.K. PANDA) ( ! ' / VIKAS AWASTHY) #' / ACCOUNTANT MEMBER $ % #' / JUDICIAL MEMBER / PUNE; &# / DATED : 30 TH OCTOBER, 2015 RK *+,%-.#/#)- / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. ' () / THE CIT(A)-II, PUNE 4. ' / THE CIT-III, PUNE 5. !*+ %%,- , ,- , . ./0 , / DR, ITAT, B BENCH, PUNE. 6. + 1 23 / GUARD FILE. #4 / BY ORDER, //TRUE COPY// %5 ,0 / PRIVATE SECRETARY, ,- , / ITAT, PUNE
