TaxTMI 
TaxTMI 
2006 (4) TMI 51
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....he Chandigarh branch of the family started manufacturing ice-cream under the brand name "Kwality" and the ice-cream was being sold in the following territories: Towns Cities Himachal Pradesh Haryana Punjab U. P. Parwanoo Hissar, Fathabad, Panchkula, Sirsa, Shahbad, Pipli, Kurukshetra, Kaithal, Pinjore, Karnal (Haiyana Tourist Complex only), Yamunanagar Rahpura, Patiala, Sangrw. Gobindgarh, Kurali, Ropar Nangal, Mohali (SAS Nagar) Saharanpur 3 For good time each group continued to carry on the business in their defined areas without any disturbance. However, some difference arose between Lambas at Chandigarh (the assessee) and Shri P. L. Lamba group of Delhi, latter having opened a factory at Ludhiana in 1968 and starting manufacturing ice-cream with the ostensible purpose of selling the ice- cream in areas of the assessee group. Probably, the Lambas of Delhi wanted to wrest the business from the assessee group, therefore, a writ was filed in the Himachal Pradesh High Court seeking a restraint on the assessee group's production facilities of ice-cream. The hon'ble Himachal Pradesh High Court, after due consideration of the facts opined that b....
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....or Brooke Bond Lipton India Ltd. to manufacture ice-cream and the brand name from the following parties (i) Jayanti Food Processing P. Ltd., Kota (ii) Kwality Ice-cream Company P. Ltd., Jaipur (iii) Rake Foods Industries, Jammu (iv) Hukson Foods India P. Ltd., Varanasi, UP. 4 It is relevant to point out that in the said agreement, the name of the assessee does not figure. 5 It appears that the assessee had realised that it would be in their interest to become a party to the proposed deal for the sale and assignment of the trade mark "Kwality". It entered into an agreement (MOU) with Shri P. L. Lamba group of Delhi on May 31, 1995, for; (i) relinquishment of trade mark user right and interest; and (ii) termination of ice-cream manufacturing facilities under the brand name "Kwality". 6 As per the said agreement, the assessee could not use the trade mark "Kwality" with effect from June 1, 1995, and also had to stop manufacturing operation of the ice-cream. At the time of signing of the said agreement, a sum of Rs. 10 lakhs was paid to the assessee by cheque, dated May 31, 1995. A further sum of Rs. 35 lakhs was paid to the assessee vide demand draft dated July 7, 1995. The bala....
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....mined in the light of the attendant circumstances." 8 The Assessing Officer has also further referred to the following observations of the hon'ble Supreme Court in the case of CIT v. Best and Co. P. Ltd. [1966] 60 ITR 11 "Whether the compensation received by an assessee for the loss of agency is a capital receipt or a revenue receipt depends on the circumstances of each case. Before coming to a conclusion one way or other, many questions have to be asked and answered : what was the scope of the earning apparatus or structure, from physical, financial, commercial and administrative standpoint ? What was the impact of giving up of an agency on the structure of the entire business ? Did it amount to a loss of an enduring asset causing an unabsorbed shock, dislocating the entire or a part of the earning apparatus or structure ? or was it loss due to an ordinary incident in the course of business ? The answers to these questions would enable one to come to a conclusion whether the loss of a particular agency was incidental to the business or whether it amounted to the loss of an enduring asset. If it was the former, the compensation paid would be a revenue receipt; if it was the latte....
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.... order of the Commissioner of Income- tax (Appeals). The learned Departmental representative contended that the assessee is a private limited company. It was in business from 1948 in Chandigarh. The relatives of the assessee had also started the ice-cream business at various other places such as Ludhiana, Delhi etc. A writ petition was filed in the Himachal Pradesh High Court by M/s. Kwality Ice cream, Ludhiana and others against the assessee for restraining the assessee from using the trade name "Kwality" on their wrappers, cartoons, advertisements publicity in respect of ice-cream and other frozen products manufactured by them. Miscellaneous Petition No. 59 of 1981 had been filed in the High Court seeking interim injunction. The hon'ble High Court vide its order dated May 26, 1981, declined to grant the temporary injunction on the ground that the assessee was using the name since the inception of their business. It was further stated that there was out of court settlement between the parties and an agreement was executed on July 29, 1982, by virtue of which the assessee was allowed to operate in the specified areas exclusively in the "Kwality" products manufactured by it. The lea....
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.... C.) 36 (KB); and (iii) Blue Star Ltd. v. CIT [1996] 217 1TR 514 (Bom). 15 It was further contended that in the case of CIT v. Oberoi Hotels (India) P. Ltd. [1994] 209 ITR 732, the Calcutta High Court held that the compensation received for termination of agency was a revenue receipt. 16 Reliance was also placed on the decision of the Supreme Court in the case of Gillanders Arbuthnot and Co. Ltd. v. CIT [1964] 53 ITR 283, and also on the following decisions in support of the contention that compensation received for stopping the business activities was a revenue receipt (i) CIT v. Lakshminarayana Mining Co. [1987] 165 ITR 326 (Karn); and (ii) CIT v. Motor and General Finance Ltd. [1967] 63 ITR 394 (Punj). 17 The learned Departmental representative further contended that the Commissioner of Income-tax (Appeals) has wrongly held that the assessee had received the payment from Brooke Bond Lipton India Ltd. (BBLIL). The finding recorded by the Commissioner of Income-tax (Appeals), according to the learned Departmental representative is contrary to the facts on record. It was further contended that in the alternative the assessee having incurred expenditure for the acquisiti....
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....had been transferred/sold. The assessee got distributorship from M/s. Hindustan Lever Ltd. for the purpose of which only frozen rooms were required for storage of ice- cream. It was contended that the contention advanced on behalf of the Revenue that the assessee had not suffered loss of source of income as it had obtained distributorship from M/s. Hindustan Lever Ltd. is bereft of substances viewed in the context of future developments. It was contended that the said distributorship had been terminated in the year 2002-03 without payment of any compensation by M/s. Hindustan Lever Ltd. According to learned counsel, the subsequent events clearly demonstrate that the assessee was an ordinary distributor of ice-cream appointed by M/s. Hindustan Lever Ltd. and the said agreement could be terminated at will. It is, therefore, clear from the facts on record that the assessee had lost the source of income, i.e., the loss of business of manufacturing of ice-cream and other frozen products. According to learned counsel, the source of income was totally destroyed by the execution of the agreement. There was a complete ban for manufacture of ice-cream anywhere in India. Dealership given to t....
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....ontention. It was further contended that even if it is assumed that there was breach of contract then the assessee had only a right to sue for breach of contract. Relying upon the decision of the Gujarat High Court in the case of Baroda Cement and Chemicals Ltd. v. CIT [1986] 158 ITR 636, it was contended that the right to sue cannot be transferred. Reliance was also placed on the decision of the Delhi High Court in the case of CIT v. J. Dalmia [1984] 149 ITR 215 to support the contention that right to sue was not an actionable claim. Learned counsel further invited our attention to section 55(2)(a) of the Income-tax Act, 1961, which has been amended with effect from April 1, 1998, and partly with effect from April 1, 2002, applicable prospectively. It was contended that the Legislature has recognised brand name as a capital asset and, therefore, the consideration received for its transfer is a capital receipt. Similarly, consideration for cessation of right to carry on business is also considered as capital asset and liable to tax. These amendments are applicable prospectively. It was further contended that the decision of the Madras High Court in the case of CIT v. H. Miller's Co....
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....business of restaurants and manufacturing of ice-cream under the brand name "Kwality" in the fifties and ice-cream was sold in various territories referred to elsewhere in this order. There was no interference from any other family groups who were running the business in their respective areas. It appears that there arose a difference between Shri P. L. Lamba group based in Delhi and the assessee as a result of which the P. L. Lamba group (Delhi) had set up a factory in Ludhiana in the year 1968. The writ petition was also filed by P. L. Lamba Delhi group in the Himachal Pradesh High Court seeking a restraint upon the assessee for production of ice-cream under the brand name of "Kwality". Interim stay was also sought by P. L. Lamba group of Delhi from the Himachal Pradesh High Court. The hon'ble High Court while passing the order in M. A. No. 59 of 1981, dated May 26, 1981, declined to grant any interim stay after recording a finding that the assessee as well as P. L. Lamba group of Delhi had been carrying on the business of manufacturing of ice-cream under the brand name "Kwality" in different places for a long time and, therefore, no temporary injunction could be issued to the as....
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....mark licences and transfer of marketing and distribution of assets in favour of BBLIL was to be acquired which is as under "Amount payable Rs. in lakhs Franchisees Trade Mark Assets/Rights Total Jayanthi Food Processing P. Lid., Kota Kwality Ice-cream Company P. Ltd., Jaipur. Raks Foods Industries, Jammu Hukson Foods India P. Ltd., Varanasi - U. P. 10 25 20 5 25 65 35 15 35 90 55 20 60 140 200" 23 The above list does not include the name of the assessee. Copy of the deed of assignment dated October 14, 1994, is also on record. As per this deed, P. L. Lamba group of Delhi had assigned and transferred unto the assignees their entire rights, claim, benefit, goodwill and the said trade mark as per the details recorded in the schedule. In this agreement it was specifically provided that P. L. Lamba group of Delhi had licensed user of trade mark rights to the parties as per appendix 3 forming part of the agreement. In schedule 3, the name of the assessee is also included as a party "under dispute". It appears that there were negotiations between the assessee and P. L. Lamba group of Delhi and on the basis of mutual understanding between the parti....
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....of M/s. Digital Securities P. Ltd. or of Brooke Bond Lipton India Ltd. The user rights of three trade marks were owned by P. L. Lamba group of Delhi. The assessee had agreed to give up its rights in the said trade marks specifically conferred upon it vide agreement dated July 29, 1982, by P. L. Lamba group of Delhi. The assessee had also agreed to terminate the manufacturing of ice-cream business under the brand name "Kwality" with effect from June 1, 1995. It is, therefore, evident from the material on record that a sum of Rs. 55 lakhs was agreed to be paid by P. L. Lamba group of Delhi to the assessee and not by M/s. Digital Securities India P. Ltd. or by Brooke Bond Lipton India Ltd. The assessee had received the payment on the basis of the memorandum of understanding between P. L. Lamba group of Delhi and the assessee from P. L. Lamba group of Delhi and not from other companies. It is a different matter that P. L. Lamba group of Delhi had an understanding with the Digital Securities P. Ltd. and Brooke Bond Lipton India Ltd. Of course, the benefit of the understanding ultimately accrued to Digital Securities P. Ltd. and Brooke Bond Lipton India Ltd. So however, the payment to th....
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....group of Delhi and not from Brooke Bond Lipton India Ltd. That in turn P. L. Lamba group of Delhi may have received the payments from Brooke Bond Upton India Ltd./Digital Securities P. Ltd. But since P. L. Lamba group of Delhi was bound to make the payment to the assessee it cannot be said that the payment to the assessee was made by Brooke Bond Lipton India Ltd. or Digital Securities P. Ltd. (iii) That the agreement dated February 17, 1997, was necessitated by business consideration and not necessarily as a tax avoidance device. We hold accordingly. 25 We now proceed to consider another factual aspect that is as to whether there was a breach of contract by P. L. Lamba group of Delhi with the assessee. As mentioned earlier, the assessee was a user of the name "Kwality" within its area for a long time even prior to the execution of the agreement with P. L. Lamba group of Delhi. This fact is stated by the hon'ble Himachal Pradesh High Court (writ petition filed by P. L. Lamba group of Delhi in M.A. No. 59 of 1981, order dated May 26, 1981). By virtue of the agreement dated July 29, 1982, the assessee got the assignment of user rights in respect of three trade marks, namely (i) 17....
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....ia [1984] 149 ITR 215. Therefore, it cannot be said that the assessee had transferred the right to sue to P. L. Lamba group of Delhi. 30 Even otherwise, the assessee has neither transferred the right to sue,- nor initiated any action for specific performance or for claiming damages. Negotiations have taken place between parties and ultimately, the assessee has agreed to surrender the user rights in respect of the trade marks and has also agreed to the termination of manufacturing activities relating to ice-cream etc. in the brand name "Kwality". Therefore, we are of the considered view that the amount of Rs. 55 lakhs received by the assessee can not be said to be on account of breach of contract. 31Taking the totality of the facts and circumstances of this case into consideration, we are of the view that the amount of Rs. 55 lakhs received by the assessee from P. L. Lamba group of Delhi is on account of surrender of user rights/goodwill as well as for giving up the right to manufacture of ice- cream and other allied products under the brand name of "Kwality". 32 In order to determine the taxability of the receipt on the basis of the above conclusion of facts, it would now be nec....
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.... of the managing agency, and received the sum of Rs. 3,50,000 from the managed company. Under the terms of the managing agency agreement, the managed company was not obliged to pay any compensation to the appellant for voluntary resignation of the managing agency. The question was whether the amount received by the appellant to relinquish the managing agency was a revenue receipt liable to tax." In the above facts, the hon'ble Supreme Court held (headnote) "Held, on the facts, that the arrangement with Mugneeram Bangur and Co. was not in the nature of a trading transaction, but was one in which the appellant parted with an asset of an enduring value. What the assessee was paid was to compensate it for loss of a capital asset and was not, therefore, in the nature of a revenue receipt. It mattered little that the appellant did continue to conduct the remaining man aging agencies after the determination of its agency with the Fort William Jute Co." 35 In the case of Gillanders Arbuthnot and Co. Ltd. v. CIT [1964] 53 ITR 283 (SC)), the relevant facts are as under (headnote) : "The appellant-company carried on business in diverselines, besides acting as managing agents, shipping age....
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....of fault in manufacture. If the company sold any goods directly to the buyers in those areas the firm was entitled to compensation of 5 per cent. Of the net amount of invoices covering such sales. The firm on its part undertook to sell only Philips lamps in those areas and to prevent re-exportation of the lamps by third parties. The agreement was to continue unless determined by either party by giving three months' notice. There was no provision in the agreement for the payment of compensation to the firm on the termination of the agreement nor was compensation payable for temporary suspension of supplies. This agreement continued for a period of sixteen years. Philips Electrical Co. decided to take over the distribution of lamps in those areas and sewed a notice upon the firm terminating the agreement with effect from June 30, 1954. The firm was, however, free to deal in their lamps as regular lamp dealers. As a result of discussion between the firm and Philips Electrical Co. certain minutes were recorded covering inter alia, the furnishing by the firm of names of dealers over the past six months, the execution of local orders, certain outstanding contracts and the payment of comm....
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....sk for renewal of the said agreement for two further periods of 10 years each by mutual agreement. Article XVIII of the said agreement gave the assessee a right to exercise the option of purchasing the hotel in case its owners desired to transfer the same during the currency of the agreement. Thereafter on September 14, 1975, a supplementary agreement was executed between the assessee and the receiver who had been appointed for the property. The right to exercise its option was given up by the assessee. It was agreed that the receiver would be at liberty to sell or otherwise dispose of the said property at such price and on such terms as he may deem fit and was not under any obligation requiring the purchaser thereof to enter into any agreement with the operator (assessee) for the purpose of operating and managing the hotel or otherwise and in its return agreed consideration as to be paid to the assessee. On the basis of the agreement, the assessee received the amount of Rs. 29,47,500 and claimed that it was a capital receipt. The Income-tax Officer rejected the claim but the Commissioner of Income-tax (Appeals) and the Tribunal upheld it. The High Court arrived at the conclusion t....
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.... the assessee was given a discount of 2 per cent., not only on the goods sold in the Hyderabad State but on all the goods sold in the Hyderabad State and outside the Hyderabad State. In 1950, the assessee and the company reverted to the old arrangement confining the sole agency of the assessee to the Hyderabad State and the assessee was paid a sum of Rs. 2,19,343 'by way of compensation' for the loss of the agency for the territory outside the Hyderabad State. The question being whether the sum of money thus received by the assessee was a revenue receipt assessable to income- tax or a capital receipt not so assessable." On these facts, the hon'ble Supreme Court held as under (head note) "the agency agreement in respect of the territory outside the Hyderabad State was as much an asset of the assessee's business as the agency business within .the Hyderabad State and though the expansion of the territory of the agency in 1939 and the restriction thereof in 1950 could be treated as grant of additional territory in 1939 and withdrawal thereof in 1950, both these agency agreements constituted but one employment of the assessee as the sole selling agents of the company; the agency agreem....
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....that a business was being carried on, meant no more than that profit was to be earned by a process of production. The business of a tea-grower and manufacturer was not merely to grow tea plants but to collect tea leaves and render them fit for sale. The tending of his tea gardens to preserve the plants, was not a continuation of the business of the assessee which had come to an end for the time being. (iii) That the measure and method of its payment was not decisive of the character of a payment of compensation. (iv) That the compensation paid to the assessee did not partake of the character of profits because, business not having been done by the assessee, no question of profits taxable under section 10 arose. (v) That the amounts of compensation received by the assessee were not revenue receipts and did not comprise any element of income." 40 In the case of Addl. CIT v. Ganapathi Raju Jogi [1993] 200 ITR 612 (SC), route permit to ply buses was held to constitute capital assets since no amount was paid for route permit, consideration received was held not assessable to tax as capital gains. In this case, their Lordships held as under (headnote) "that though route permits for ....
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.... injury inflicted on a capital asset or on a stock-in-trade (iii) There is no immutable principle that compensation received on cancellation of agency must always be regarded as capital receipt. When the assessee is having several managing agencies and one of which is relinquished by the assessee on receipt of compensation for the same, the receipt would be of capital nature and not of a revenue nature notwithstanding the fact that the assessee continues to conduct the remaining managing agencies after termination of one of the agencies. Ordinarily, compensation for loss of office or agency is a capital receipt but this rule is subject to an exception that payment received even for termination of an agency agreement would be revenue and not capital in a case where the agency was one of many which the assessee held and its termination did not impair the profit-making structure of the assessee provided that the purchase and sale of agencies is necessary incident of business of the assessee. However, it will be for the income-tax authorities to establish that the case fell within the exception to the ordinary rule and that the compensation received for termination of the agency is o....
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....ee having relinquished trade mark/ goodwill, for a consideration, on the basis of the principles laid down by the hon'ble Supreme Court referred to above, would amount to transfer of capital asset. The finding of the Assessing Officer that the receipt for transfer of user rights in respect of trade name/trade marks is a revenue receipt when tested in the light of the aforementioned principles of law laid down by the apex court does not stand the test of scrutiny. In our considered view, the receipt of consideration for transfer of goodwill/trade marks and trade name is a capital receipt and not a revenue receipt. We hold accordingly. 44 The next issue that requires consideration is as to whether the compensation received for giving up the right to manufacture ice-cream and other allied products in specified areas is revenue receipt As pointed out earlier, the hon'ble Supreme Court has laid down the general principles that giving up the right to carry on the business or termination of an agency, which is the business apparatus, is on capital account. In this case, when general principles are applied, the only conclusion that follows is that compensation received for giving up the r....
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....ss of buying and selling of businesses, would amount to the transfer of a capital asset and the compensation received therefor, in our view, clearly falls within the ambit of a capital receipt. The distributorship of ice-creams is totally a different line of business than manufacturing of ice-cream. Moreover, the later events have established that the assessee got the distributorship of ice-creams from Hindustan Lever Ltd. which was later on cancelled without payment of any compensation to the assessee. 46 Taking the totality of the facts and circumstances of the case into consideration, we are of the considered view that the amount of Rs. 55 lakhs received by the assessee was on account of (i) surrender of goodwill/user of trade mark rights/brand name, etc., and (ii) for giving up the right to manufacture ice-cream in the brand name of Kwality. We are, therefore, in agreement with the finding of the Commissioner of Income-tax (Appeals) that the receipt of Rs. 55 lakhs is a capital receipt. 47 The only other question that remains for our consideration is the bifurcation of the receipt for the purpose of taxation. The assessee had bifurcated Rs. 10 lakhs on account of surrender of....