TaxTMI 
TaxTMI 
2026 (3) TMI 896
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....d vide order dated 25.03.2008: "Whether the Appellate Tribunal is right in law and on facts in reversing the order of CIT(A) wherein it was held that the consideration of Rs. 29.10 crores received by the assessee for assignment of trademark / brand name was liable to tax as capital gain?" (3) In Tax Appeal No.1235 of 2007, this Court framed the following substantial questions of law vide order dated 25.03.2008: A) Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by the CIT(A) directing to allow short term capital loss of Rs. 2,50,45,545 as claimed by the assessee? B) Whether the Appellate Tribunal is right in law and on fact confirming the order passed by the CIT(A) directing to treat the trade receipt on account of sale of trademark of Rs. 29.10 Crore as capital gain?" Thus, one of the substantial questions of law relating to the consideration of Rs. 29.10 crores to be liable to tax as capital gain is common in the captioned Tax Appeals. BRIEF FACTS (4) The respondent-M/s. Cadila Health Care along with Ambalal Sarabhai Enterprise Ltd., had formed 50:50 Joint Venture Company called 'Sarabhai Zydus Anim....
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....learned senior standing counsel Mr. Varun K Patel. i) Regarding the substantial question of law relating to taxability of consideration of Rs. 29.10 crores for assignment trademarks along with the goodwill of business, learned senior standing counsels Mr. Varun K Patel has submitted that in the present case, the assessee along with Ambalal Sarabhai Enterprise Ltd., had formed 50:50 Joint Venture Company called 'Sarabhai Zydus Animal Health Ltd.' (hereinafter referred to as 'JV Company'). While referring to the Deed of Assignment dated 15.06.2000, it is contended that the assessee had agreed to assign and transfer about 22 veterinary trademarks 'along with goodwill of the business' concerned in the goods for which the said trademarks are registered and/or being used, to the JV Company for the consideration of Rs. 29.10 crores. By this deed, the assessee had transferred its veterinary/ animal health business to the JV Company. ii) That the said consideration of Rs. 29.10 crores received by the assessee for transfer of Trademark along with goodwill to its JV company is taxable as 'income from the business and profession' under section 28(iv) and/or under section 41(1....
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....s not open for the assessee to contend that the entire amount of Rs. 29.10 crores is received for transfer of trademark only. Rather, it is clear from the said valuation report that the entire consideration of Rs. 29.10 crores is received by the assessee only towards transfer of goodwill as the said value of consideration is derived applying methodology for valuation of goodwill. vi) That the burden is on the assessee to provide and prove such bifurcation of consideration towards Trademarks and / or goodwill separately. However, the assessee has failed to discharge said burden. vii) It is also relevant to submit that subsequent to the decision of the Supreme Court in the case of B.C. Srinivasa Setty (supra), there is an amendment in Section 55(2) of the Act by the Finance Act, 1987, and it is not in dispute that by virtue of the said amendment, the transfer of self-generated goodwill is now taxable as capital gain by taking cost of acquisition of such self-generated asset as nil. viii) It is contended that without prejudice to the aforesaid contentions, even if it is assumed without admitting that the said consideration of Rs. 29.10 crore was received by ....
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....ibunal is erroneous and unsustainable in law. The Tribunal ought to have upheld the Assessment Order treating the said consideration of Rs. 29.10 crores received by the assessee as business income; or in alternative, the Tribunal ought to have directed to tax the said consideration as capital gain. (8) Regarding admitted substantial question of law - A in Tax Appeal No.1235 of 2007 - with respect to short term capital loss of Rs. 2,50,45,545/-, learned advocate for the appellant-Revenue has fairly admitted that the appellant-Revenue is not in a position to controvert the applicability of decision of Supreme Court in the case of CIT vs. Walfort Share and Stock Brockers Pvt. Ltd., 326 ITR 1 (SC). SUBMISSIONS ON BEHALF OF THE ASSESSEE: (9) Responding to the foregoing submissions, per contra learned Senior Advocate Mr. R.K. Patel has submitted that the judgement and order passed by the Tribunal does not call for any interference since the same is appropriately passed after considering the assignment deed and the legal precedent. a) It is submitted that the respondent-assessee has transferred by way of sale 22 self-generated trade marks for Rs. 29.10 crores, as appeari....
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....of CBDT Circular itself regarding the applicability of provision vide explanatory notes on provision by way of a circular is prospective in nature as can be seen more particularly at Paragraph No.39(e) of the decision. e) That the Respondent assessee has never incurred any cost of acquisition for the 22 trademarks that are transferred during the AY 2001-02. Even after setting aside of the proceedings by the CIT (Appeals) and directing the AO to determine the cost of acquisition of trademarks transferred by the assessee, the AO has taken NIL as cost of acquisition of trademark by the order dated 07.03.2005 filed before this Court. f) It is submitted that the meaning of "Adjusted", "Cost of Improvement" and "Cost of Acquisition", as envisaged under Section 55 of the Act is amended from time to time with special reference to amendment under Section 55(2)(a) of the Act, wherein it is clearly visible that legislature has intended to rope into tax net different intangible assets at different point of time like goodwill of the business w.e.f. 01.04.1995, trademark or brand name associated with the business w.e.f. 01.04.2002. Legislature has consciously made the scope and....
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....ling/transferring 22 veterinary trademarks/brand names 'along with goodwill of the business' for the consideration of Rs. 29.10 crores. By this deed, the assessee had transferred its veterinary/ animal health business to the JV Company. (12) The Assessing Officer passed the assessment order dated 31.03.2004 under section 143(3) of the Act by taking support from the assignment deed that the "Trade marks have been sold along with goodwill", and from the generation of brand name, it cannot be said that no cost has been incurred. The Assessing Officer has also invoked the provisions of section 55(2)(a) of the Act will apply to the assessee, and the trademark or brand name developed during the course of business will be taxable under the head of "capital gains", by taking cost as 'Nil'. It is held that the amendment introduced vide Finance Act,2001 is only clarificatory, and the money realized by the assessee is taxable under section 28(iv) of the Act as business income, and was not a capital receipt. (13) Thus, the entire controversy rests on the Deed of Assignment dated 15.06.2000, vide which the assesee has sold the Trade Marks along with goodwill of business for consideration ....
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....generated in a new business has been so regarded. The elements which create it have already been detailed. In such a case, when the asset is sold and the consideration is brought to tax, what is charged is the capital value of the asset and not any profit or gain. 12. In the case of goodwill generated in a new business there is the further circumstance that it is not possible to determine the date when it comes into existence. The date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gains. It is possible to say that the "cost of acquisition" mentioned in sec. 48 implies a date of acquisition, and that inference is strengthened by the provisions of Ss. 49 and 50 as well as sub-sec. (2) of Section 55. 13 It may also be noted that if goodwill generated in a new business in regarded as acquired at a cost and subsequently passes to an assessee in any of the modes specified in sub-sec. (1) of Section 49, it will become necessary to determine the cost of acquisition to the previous owner. Having regard to the nature of the asset, it will be impossible to determine such cost of acquisition. Nor can sub-sec. (3)....
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....f 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 Customs had issued a circular bearing No. 14/2001 explaining the provision of the Finance Act, 2011 relating to direct taxes provided as under: "42- Providing for cost of acquisition of certain intangible 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 capital asset, being goodwill of a business or a right to manufacture, produce or process any article or thing, tenancy rights, stage carriage permits or loom hours, 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 may 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 sub-section (2) to provide that....
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....involved is relating to the transfer of goodwill of a business. 15. Section 55(2) of the Act is amended by Finance Act, 2001 inserting the words 'or a trademark or brand name associated with a business'. Thus, it is clear that the cost of acquisition in relation to a trademark or brand name associated with the business comes within the tax net subsequent to 1.4.2002. Admittedly, the said amendment is not applicable to the present case. Hence, the assessment to capital gains can be sustained only if the capital asset transferred was the 'goodwill of the business' of the company. 16. The expression 'goodwill' has been considered and explained by the Apex Court in 'S.C. Cambatta & Co. (P.) Ltd.'s case (supra), wherein their Lordships having considered the Judgments of various Courts, have held as under: "6. It will thus be seen that the goodwill of a business depends upon a variety of circumstances or a combination of them. The location, the service, the standing of the business, the honesty of those who run it, and the lack of competition and many other factors go individually or together to make up the goodwill, though many other factors go individually or....
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....arks which is as under: "Notwithstanding anything in any other law to the contrary, a registered trade mark shall subject to the provisions of this chapter, be assignable and transmissible, whether with or without the goodwill of the business concerned and in respect either of all the goods in respect of which the trade mark is registered or of only some of those goods". 22. The meaning of the expression "goodwill" as explained in these judgments referred to above vis-à-vis the provision of Trade and Merchandise Marks Act, 1958 makes it clear that the 'trade mark' and 'goodwill' are two distinct separate concepts. Section 55(2)(b) of the Act prior to the amendment provided for the levy of tax on capital gains in relation to a capital asset, being goodwill of a business. Insertion of the words, "registered trademarks or brand name associated with the business" by the Finance Act, 2001 depicts the intention of the Legislature to levy tax in relation to capital asset, being a trade mark or brand name associated with the business, which was not exigible to tax during the relevant assessment year. xxxxxx 27. We have perused the relevant clauses....
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.... is transferred on transfer of the 22 registered trademarks. It is settled legal precedent that goodwill has no independent existence, and it cannot subsist by itself, and is attached to a business, and if the business is destroyed the goodwill also perishes with it, though some elements remain which may perhaps be gathered up and be revived again. In the present case, thus, the Tribunal has precisely held that there has been transfer of trademarks and not the goodwill of the business. (18) Section 2(47) of the Act classifies transfer in relation to categories of capital gains. Section 2(24)(vi) of the Act mentions that income includes any capital gains chargeable under Section 45 of the Act. Section 45 of the Act stipulates that any profits and gains arising from the transfer of capital assets shall be chargeable to income tax under the head of capital gain. Capital asset has been defined under section 2(14) of the Act. Thus, there has to be transfer of capital asset for satisfied capital gains. Section 48 of the Act provides the Mode of Computation on the income chargeable under the head "Capital gains" by deducting from the full value of the consideration received or accruing....
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....associated with a business', which has prospective effect from 01.04.2002. Thus, it is apparent that that the cost of acquisition in relation to a trademark or brand name associated with the business comes within the purview of taxability subsequent to 01.04.2002. In the instant case, the amendment is not applicable since the entire transaction is prior to the cut-off date. (20) On the facts and in the circumstances of the assessee's case, the AO was not justified in taxing the consideration of Rs 29.10 crores received for assignment of Trade Marks as business income of the assessee. For justifying his reasoning for taxing the said receipt as business income, the Assessing Officer has attempted to invoke the provisions of Section 28(iv) and Section 41(1) of the Act. In our view, none of the provisions under either of these sections can be applied on the facts of the case, since the Section 28(iv) of the Act provides that "the value of any benefit or perquisite, whether convertible into money or not, arising from the exercise of a business or a profession" shall be chargeable to Income tax under the head "profits and gains of business or profession." The sale consideration for as....
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.... include an asset in the acquisition of which no cost at all can be conceived. "If the asset under consideration is a self generated asset, it does not fall within the purview of section 45 r.w.s. 48 of the Income tax Act. The issue for consideration, therefore, is whether the trade marks/brand names under consideration can be classified as "self generated assets" it has not been disputed even by the Assessing Officer that the trade marks/brand names were in any manner purchased or acquired by the appellant for any consideration. The Assessee has rightly contended that in respect of the trade marks/brand names of its Veterinary Division, which came to be assigned to Sarabhai Zydus Animal Health Ltd., no cost of acquisition was incurred by it and they were generated or evolved in the business over the years. The Assessing Officer has tried to take the view that for building brand name, systematic efforts in terms of man, maternal and money are needed and, therefore, in his view, it was not proper to say that for generating trade marks/brand names, no cost has been incurred. However, the finer aspect of the evaluation of the intangible assets such as trade marks has been lucidly expl....