Trademark transfer not taxable as capital receipt. Penalty under section 271(1)(c) deleted. Appeal partly allowed.

The Tribunal held that the Rs. 1 crore received by the assessee on transferring the trademark was a capital receipt not taxable under section 45 read with section 55(2) of the Income Tax Act. The penalty imposed under section 271(1)(c) was deleted by the CIT(A) and upheld by the Tribunal, as there were no grounds for levying the penalty. The appeal of the assessee was partly allowed, and the Revenue's appeals were dismissed.

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Issues Involved:
1. Taxability of Rs. 1 crore received by the assessee on transfer of trademark.
2. Treatment of the amount as capital receipt or business income.
3. Applicability of section 55(2) of the Income Tax Act, 1961.
4. Levy of penalty under section 271(1)(c) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Taxability of Rs. 1 crore received by the assessee on transfer of trademark:
The primary issue in the appeals was whether the Rs. 1 crore received by the assessee on transferring the trademark to M/s. Thakur V.S. Bidi Works should be treated as a capital receipt exempt from tax or as business income taxable under section 28(iv) of the Income Tax Act, 1961. The assessee claimed it as a capital receipt based on the Supreme Court's decision in CIT Vs. B. C. Srinivasa Setty, arguing that the trademark was a self-generated asset with no ascertainable cost. The Assessing Officer (AO) contended that the amount should be taxed as business income under section 28(iv) since the assessee had not sold any "capital asset" but only assigned rights to use the trademark.

2. Treatment of the amount as capital receipt or business income:
The Commissioner of Income Tax (Appeals) [CIT(A)] held that the amount received was a capital receipt taxable under section 45 read with section 55(2) of the Act. The CIT(A) concluded that the amount was consideration for transferring rights to manufacture, produce, or process specified brands of bidis and sell them in specified areas. The Tribunal upheld the CIT(A)'s decision, rejecting the AO's findings that the receipt should be taxed as business income under section 28(iv). The Tribunal noted that the trademarks were intangible assets, and any income generated from their transfer should be treated as a capital receipt.

3. Applicability of section 55(2) of the Income Tax Act, 1961:
The Tribunal examined whether the capital receipt was taxable under section 45 read with section 55(2)(a) of the Act. The Tribunal held that the amendment to section 55(2)(a) by the Finance Act, 2001, which included "trademark or brand name associated with a business," was effective from April 1, 2002. Since the assessment year in question was 2001-02, the amended provisions did not apply. The Tribunal relied on the Bombay High Court's decision in CIT Vs. Fernhill Laboratories & Industrial Establishment, which held that the amendment was effective from the assessment year 2002-03 onwards. Consequently, the Rs. 1 crore received by the assessee was not liable to tax under section 45.

4. Levy of penalty under section 271(1)(c) of the Income Tax Act, 1961:
The AO had levied a penalty of Rs. 25,00,000 under section 271(1)(c) on two counts: treating the Rs. 1 crore as capital receipt exempt from tax and valuation of closing stock of tobacco. The CIT(A) deleted the penalty on both counts. The Tribunal upheld the CIT(A)'s decision, noting that since the addition made in the assessment proceedings was deleted, there was no ground for levying the penalty on the said issue. Regarding the valuation of closing stock of tobacco, the Tribunal agreed with the CIT(A) that no penalty could be imposed as the stock was valued at market price, and the assessee had not furnished inaccurate particulars.

Conclusion:
The Tribunal concluded that the Rs. 1 crore received by the assessee on transferring the trademark was a capital receipt not liable to tax under section 45 read with section 55(2) of the Act. The Tribunal also upheld the deletion of the penalty levied under section 271(1)(c) by the CIT(A). The appeal of the assessee was partly allowed, and both appeals of the Revenue were dismissed.

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