2011 (4) TMI 503 - HC - Income Tax

Court rules sale of intangible assets as capital gain, not business income under Asset Transfer Agreement.

Commissioner of Income-tax Versus Mediworld Publications (P.) Ltd.

The High Court upheld the decision of the ITAT and CIT(A), ruling that the amount received from the sale of intangible assets under an Asset Transfer ... Asset Transfer Agreement - Capital Gains or Business income - distinct and separate business of Healthcare Journals and Communication - As far as Healthcare Journal and Communication business is concerned, it had been given up in entirety in favour of the transferee - The right to carry on the Healthcare Journals & Communications Business was only one part of the agreements - The main part of the agreements was transfer of all intangible assets being trademarks, brands, copyrights and the associated goodwill of its Healthcare Journals & Communications business - It follows that the consideration of Rs. 3,80,02,500 was not received; only for giving up the right to carry on the Healthcare Journals & communications business but was mainly for the transfer of all intangible assets being trademarks, brands, copyright and the associated goodwill of the Healthcare Journals & communications business. As per the law, the consideration for the transfer of intangible assets being trademarks, brands, copyrights and the associated goodwill of Healthcare Journals & Communications business is also taxable as long term capital gain by virtue of section 55(2)(a) read with clause (i) of the proviso to section 28(va) - The Revenue has also relied on the provisions of section 45(1) read with sections 2(14), 2(11)(9b), 48 and section 55(2)(ii) of the Act - The combined reading of the above provisions and of section 28(va) leaves no ambiguity that law makers specifically excluded the income from the purview of main section 28(va) - Hence, appeal is dismissed accordingly. Issues Involved:- Whether ITAT was correct in law and on facts in deleting the additions/disallowance made by the Assessing Officer amounting to Rs. 3,80,02,500 in respect of the amount received by the assessee company in pursuance of the Asset Transfer Agreement thereby treating the same to be assessed as 'Business Income'.- Whether income arising from Asset Transfer Agreement shall be taxable under the heads 'Capital Gains'.Issue-wise Detailed Analysis:1. Deletion of Additions/Disallowance by ITAT:The Assessing Officer (AO) had treated the income received by the assessee from the Asset Transfer Agreement as 'Business Income' under section 28(va) of the Income-tax Act, 1961. The AO observed that the assessee had not sold the whole of its business but only surrendered its right regarding publication of the journals. The AO also noted that the assessee had received a royalty-free, non-exclusive license to use the data comprised of advertisers and pharmaceutical companies for its clinical trials business. Based on these observations, the AO concluded that the income received was business income.However, the CIT(A) and ITAT disagreed with the AO's view and held that the receipt in question was not business income but long-term capital gain on the transfer of assets. The ITAT observed that the assessee had sold all its intangible assets like trademarks, brands, copyrights, and goodwill, thereby depriving itself of any earnings in subsequent years. The ITAT noted that the business of Healthcare Journals & Communications was distinct and separate from the clinical trial business, which the assessee continued to carry on. Therefore, the ITAT concluded that section 28(va) did not apply.2. Taxability of Income under 'Capital Gains':The High Court upheld the view taken by the CIT(A) and ITAT, agreeing that the sum received from the sale of intangible assets amounted to long-term capital gain. The court noted that the assessee had sold/transferred the rights of trademark, brands, copyrights, etc., in the journals and publications, which were registered with RNI and indexed by INSDC. These were considered capital assets as defined under section 2(14) and intangible assets under section 2(11)(b) of the Act.The court emphasized that trademarks, brands, copyright, and goodwill constitute assets of the business and are profit-earning apparatus. The court also referred to section 55(2)(a) of the Act, which recognizes the 'right to carry on any business' as a capital asset for assessing and computing capital gains. The court concluded that the brand names, trademark, copyright, and goodwill sold/transferred by the assessee were capital assets, and the gain therefrom would be computed as capital gain.The court further highlighted that the consideration of Rs. 3,80,02,500 was mainly for the transfer of all intangible assets and not just for giving up the right to carry on the healthcare journals & communications business. The court noted that the agreement dated 10-3-2006 defined 'Business' to mean the business of publishing, distributing, and selling periodicals and products, and termed these publications as 'Business Intellectual Property Rights' or 'Specified assets'. The agreement clearly transferred all specified assets to the transferee, making it the sole and undisputed owner of these assets.Conclusion:The High Court dismissed the appeal, holding that the sum received from the sale of intangible assets amounted to long-term capital gain and not business income. The court found no merit in the revenue's appeal and concluded that no substantial question of law arose.