Business income from trademark exploitation and deferred sale consideration turns on continuing commercial activity and actual accrual

Where a business continued in substance after sale of the manufacturing unit, exploitation of the trade mark, interest on deferred sale consideration, and small-scale cloth trading were treated as business income, and past unabsorbed depreciation and business losses were allowed to be set off on the same facts. Notional royalty for the post-expiry period of the trade mark licence was rejected because no contractual accrual could be presumed after the licence lapsed. Interest on unpaid sale consideration was held taxable on accrual, while the related interest payable by the assessee required fresh examination of the contractual liability and civil dispute. Normal business expenditure remained allowable, subject to the guest house disallowance.

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Issues: (i) Whether income from licence fee and royalty on exploitation of the trade mark, interest on unpaid sale proceeds of fixed assets, and income from small-scale cloth trading were assessable as business income and whether past unabsorbed depreciation and business loss could be set off; (ii) Whether the notional royalty addition for the post-expiry period of the trade mark licence was sustainable; (iii) Whether the interest income on unpaid sale consideration was taxable on accrual basis in full, and whether the related interest payable by the assessee required fresh examination; (iv) Whether the expenditure claim was allowable in full except for guest house maintenance.

Issue (i): Whether income from licence fee and royalty on exploitation of the trade mark, interest on unpaid sale proceeds of fixed assets, and income from small-scale cloth trading were assessable as business income and whether past unabsorbed depreciation and business loss could be set off.

Analysis: The business was held to have continued notwithstanding sale of the manufacturing unit, as the trade mark remained a commercial asset and its exploitation yielded business income. Interest on deferred sale consideration was treated as arising from the same business, and the small trading activity in cloth was also regarded as part of the continuing business. The prior years had already accepted the same treatment on identical facts, and the principle of finality was applied to avoid a contrary view in the absence of a change in circumstances. The unabsorbed depreciation claim was also accepted in accordance with the binding jurisdictional precedent.

Conclusion: The issue was decided in favour of the assessee.

Issue (ii): Whether the notional royalty addition for the post-expiry period of the trade mark licence was sustainable.

Analysis: The licence was for a fixed term, with an optional extension that was not exercised. Once the agreement lapsed, no further contractual accrual of royalty could be presumed. Taxation could not be based on hypothetical income that had neither accrued nor materialised.

Conclusion: The addition was not sustainable and the issue was decided in favour of the assessee.

Issue (iii): Whether the interest income on unpaid sale consideration was taxable on accrual basis in full, and whether the related interest payable by the assessee required fresh examination.

Analysis: Interest on the deferred sale consideration accrued under the sale agreement and was taxable in full for the year. However, the corresponding interest allegedly payable by the assessee to the purchaser on amounts paid on its behalf required independent scrutiny because its allowability depended on the subsisting contractual liability and the effect of the civil dispute and suit. The matter was therefore restored for fresh adjudication on that limited aspect.

Conclusion: The interest income was taxable, but the deduction issue was remitted for fresh decision.

Issue (iv): Whether the expenditure claim was allowable in full except for guest house maintenance.

Analysis: Once the business was held to continue, normal business expenditure remained allowable under the Act, except for the specifically disallowable guest house expense under the relevant statutory bar.

Conclusion: The issue was decided substantially in favour of the assessee, subject to the guest house disallowance.

Final Conclusion: The appeals succeeded only to a limited extent, with the principal income-characterisation issues decided for the assessee, one issue remitted for reconsideration, and the remainder of the Revenue's challenge rejected.

Ratio Decidendi: Where a business continues in substance and a commercial asset is exploited after restructuring, the resulting receipts may retain the character of business income, and completed positions on identical facts should ordinarily not be unsettled absent a material change in circumstances; hypothetical income cannot be taxed, though actual accrual must be assessed according to the governing agreement and liability.

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