TaxTMI 
TaxTMI 
2026 (3) TMI 958
X X X X Extracts X X X X
X X X X Extracts X X X X
....Appeals) (for short "the CIT(A)"), in which the ITAT partly allowed the Appeals. 2. In Tax Appeal No. 640 of 2022 the following substantial questions of law were formulated vide order dated 22.01.2024: (a) Whether in the facts and circumstances of the case, was the Income Tax Appellate Tribunal right in confirming dis-allowance of Rs. 5,49,22,119/- in relation to the payment for gratuity and leave encashment? (b) Whether in the facts and circumstances of the case, was the Income Tax Appellate Tribunal right in law in holding that Receipt of Rs. 25 crores on account of transfer of trademarks were not capital receipt in nature? (c) Whether in the facts and circumstances of the case, was the Income Tax Appellate Tribunal right in law in holding that Receipt of Rs. 20 crores on account of transfer of marketing rights were not capital receipt in nature? (d) Whether in the facts and circumstances of the case, was the Income Tax Appellate Tribunal right in law in holding that Receipt of Rs. 2 crores on account of transfer of marketing rights were not capital receipt in nature? 3. In Tax Appeal No. 113 of 2023, this Court framed the following subst....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y under the payment of Gratuity Act, and Rs. 30,93,624/- was paid as Leave Encashment and Rs. 4,77,96,977/- at the time of Voluntary Retirement. Thus, it is contended that the assessee claimed 1/5th of Rs. 4,77,96,977/- as claim under Section 35DDA of the Act and claimed full amounts of Rs. 1,77,62,048 and Rs. 30,93,624/- as expenses wholly and exclusively expended for the purpose of business. That the AO held that 1/5th of the entire amount of Rs. 6,86,52,649/- is eligible for deduction under Section 35DDA of the Act and amounts of Rs. 1,77,62,048/- and Rs. 30,93,624/- are not allowable as they are business expenses done separately, which is erroneous as the assessee has given clear bifurcation based upon the nature of expenses and, therefore, payment of Gratuity and Leave Encashment, although paid at the time of end of the service, they are not part of VRS as such. b) That the reliance placed by CIT(A) and the ITAT on the provision of Section 43B(f) of the Act since Section 43B of the Act states that certain expenses are allowable on payment basis as opposed to accrual. The insertion of Section 43B(f) of the Act provides for additional condition for allowability of expen....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... only sell the goodwill without actually selling the running business. f) That the observations of the ITAT to the extent that the assignment of Trademark is Revenue Receipt (Business Income) is ex-facie wrong in view of the ITAT decision in the case of Cadila Healthcare Ltd. - ITA No. 642/AHD/2005. The same reasoning holds true for the present assessee (being the second party to the same arrangement) as well. Further, the amendment brought in Section 55(2)(a) of the Act from AY 2002-03 conclusively shows that the said transaction does not give rise to the Revenue Receipt, but Capital gain which too is taxable only from AY 2002-03. g) It was submitted that the argument of the Revenue that know-how is same as trademark is fundamentally erroneous, since assignment of Trademark is recognised under Trade and Merchandise Marks Act, 1958. That the assessee has entered into two separate agreements, one for the transfer of trademarks and one for the transfer of know-how, and by transferring know-how the assessee only shares knowledge which it could have shared without assignment of trademark. Therefore, it is completely wrong to argue that once the Appellant has assigned ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (I) Regarding the substantial question of law relating to taxability of consideration of Rs. 25 crores for assignment trademarks along with the goodwill of business received by the assessee for transfer of Trademark along with goodwill of business to its JV company is taxable as 'income from the business and profession' under section 28(iv) and/or under section 41(1) of the Act; and alternatively, the said consideration is taxable as capital gain since the benefit accruing from business activities carried out by it over the years, is converted into money and therefore, the same is taxable as benefit accruing/arising from business under section 28(iv) of the Act. Therefore, the benefit which accrued to the assessee on transfer of said Trademark / brand name is also liable to be taxed under section 41(1) of the Act. (II) It is further submitted that in the present case, over and above, the agreement to transfer trademark to the JV, assessee has also entered into an agreement with the JV for transfer of "know-how" for transfer of "know-how" qua the very same 46 trademarks and the same is already shown as revenue receipt by the assessee and hence, it is submitted that ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... has gone from the balance of the assessee and has found its place in the balance sheet of the assignee i.e. (JV). In absence of any documentary evidence, the CIT(A) and Tribunal has rightly held the said transaction as capital gain. (VII) It is also relevant to submit that subsequent to the decision of the Supreme Court in the case of CIT vs. B.C. Srinivasa Setty, [1981] 128 ITR 294 (SC), 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. It is submitted that the said amendment is clarificatory / declaratory nature and by virtue of the said amendment in Section 55(2) of the Act by the Finance Act, 2001, the legislature has merely clarified / declared that the cost of acquisition in relation to self-generated trademark is Nil. It is therefore submitted that applying the said amendment retrospectively, even if the entire amount of consideration of Rs. 25 crore is treated as received towards the transfer of Trademarks only and the same is taxable as cap....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eave encashment, however, such benefits are ancillary, which are paid on voluntary retirement/retirement. The intent of section 35DDA of the Act, is that the payment of expenditure to an employee should have been made in connection with his voluntary retirement under a scheme of such retirement. On fulfilment of these conditions, one-fifth of the expenditure would fall for allowance in the year of payment and the balance will be allowed in four equal annual instalments. In the instant case, there are two components of the VRS. One is the payment of compensation to the employees who opt for VRS, whereas the second is the payment of gratuity and leave encashment towards the service rendered by the employees, which an employee is otherwise entitled on retirement, whether voluntary or in retirement in due course on reaching the age of superannuation. Thus, the benefit of gratuity and leave encashment are the post-retirement benefits accruing from the actual service rendered by an employee. These benefits are governed by respective rules/clauses of the employment. The assessee has offered bifurcation of the amount under VRS and the amount of leave encashment and gratuity however, the AO....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 12. The appellants - assessee - Ambalal Sarabhai Enterprise Ltd. and M/s Cadila Health Care formed 50:50 Joint Venture Company called 'Sarabhai Zydus Animal Health Ltd.' vide Deed of Assignment dated 29.01.2000, by selling/ transferring 46 veterinary trademarks/ brand names 'along with goodwill of the business' for the consideration of Rs. 73 crores, out of which 25 crores are paid for assignment of trademarks and were claimed as capital receipt. However, the same has been treated as revenue receipt. The Revenue has considered that the factum of non-registration of 40 trademark out of 46 trademark and not offering the value of trademarks depending on their scope and commercial value; 13. Before, we answer the foregoing question, we may mention similar issue was examined by the ITAT in case of same parties i.e M/s Cadila Health Care along with Ambalal Sarabhai Enterprise Ltd., which had formed 50:50 Joint Venture Company called 'Sarabhai Zydus Animal Health Ltd.' vide Deed of Assignment dated 15.06.2000, by selling/ transferring 22 veterinary trademarks/ brand names 'along with goodwill of the business' for the consideration of Rs. 29.10 crores. By the judgement and order dat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ey 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 explained in the land mark judgement of the Apex Court in B.C. Srinivasa Setty (Supra). The following ratio of the said judgment in regard to the evaluation of "Goodwill" would squarely apply in the case of the evaluation of intangible assets such as trade mark/brand name: "In a progressing business goodwill tends to show progressive increase and in a failing business it may begin to wane. Its value may fluctuate from one moment to another depending on changes in the reputation of the business. It is affected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socio- ec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....out the payment of money. That kind of case is covered by Section 49 and its cost, for the purpose of Section 48 is determined in accordance with those provisions. There are other provisions which indicate that Section 48 is concerned with an asset capable of acquisition at a cost. sec. 50 is one such provision. So also is sub-sec. (2) of Section 55. None of the provisions pertaining to the head "Capital gains" suggests that they include an asset in the acquisition of which no cost at all can be conceived. Yet there are assets which are acquired by way of production in which no cost element can be identified or envisaged. From what has gone before, it is apparent that the goodwill 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e mark or brand name associated with the business" self-generated assets such as trademark did not have any cost of acquisition. Therefore, for the period under consideration the computation provision under Section 48 of the said Act fails resulting in such transfer of trade marks not being chargeable to capital gains tax. Consequent to amendment made to Section 55(2) with effect from 1/4/2002 by which the words trade mark or brand name associated with the business was introduced into it, the computation provision becomes workable and the consideration received for the sale of trade mark would be subject to capital gains tax. However, for the period prior to 1/4/2002 the sale of self 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, t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....'s business in context of the aforesaid provisions has held thus: "14. A reading of these provisions would make it clear that any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income tax under the head 'capital gains'. The income chargeable under the head 'capital gains' shall be computed as per the provisions of Section 48 of the Act. In the present case, the said computation shall be, deducting the cost of acquisition of the asset from the full value of consideration. The cost of acquisition in relation to a 'capital asset' in case of goodwill of a business, shall be taken to be 'Nil', as the question 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 assessm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....asy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old established business from a new business at its first start..... if there is one attribute common to all cases of goodwill it is the attribute of locality. For goodwill has no independent existence. It cannot subsist by itself. It must be attached to a business. Destroy the business, and the goodwill perishes with it, though elements remain which may perhaps be gathered up and be revived again". 21. Section 37 of the Trade and Merchandise Marks Act, 1958 provides for assignability and transmissibility of registered trademarks 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 "good....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nal that in fact, the assessee has transferred the trademark, but not the good will. From the assignment deed, it is evident that what is transferred is 46 self-generated trade marks for Rs. 25 crores, as appearing at Schedule to the Deed of "Assignment of Trademarks" dated 15.06.2000. The assessee is a manufacturing pharmaceutical company and the 46 trademarks are transferred along with goodwill of the business concerned in the goods for which these trademarks were transferred. The pharmaceutical business of the assessee is not entirely transferred, and it retains substantial business with it. 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. 19. 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 capita....
X X X X Extracts X X X X
X X X X Extracts X X X X
....-clauses(i) to (iv) of sub-section (1) of section 49, shall be taken to be nil;" 20. Thus, none of the provisions pertaining to the head "Capital gains" suggests that they include an asset in the acquisition of which no cost at all can be conceived. 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' having prospective effect. 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. 21. On the facts and in the circumstances of the assessee's case, the AO was not justified in taxing the consideration of Rs. 25 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 Revenue has relied upon the provisions of Sections 28(iv) and 41(1) of the Act. In our view, none of the provisions under either of these sections can be applied on the facts o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Act w.e.f. 01.04.2002 would not be subject to capital gains tax. 24. Thus, on an overall analysis of recital of assignment deed, the statutory provisions and legal precedent, we are of the opinion that both the CIT(A) and ITAT have taken an erroneous view in treating the receipt of Rs. 25 crores on account of transfer of trademarks as revenue receipts and not capital receipt. Hence the substantial question of law (b) and substantial question of law (a) in Tax Appeal No. 113 of 2023 is answered in favour of the assessee, and against the revenue. Answer to Substantial Question of Law (c & d) 25. The assessee has claimed Rs. 20 cores and Rs. 2 crores for assignment of marketing rights as capital receipt, whereas the revenue has held in converse. The assessee had offered that the acquisition in respect of the market rights were Nil, and the assessee had an exclusive right to market the products of ABIC, Bomac and Bristol Myers Squibb which allowed the assessee to market their products in specific regions, and the marketing rights are given to the assessee without any cost. The assessee before the revenue had contended that that the marketing rights are capital asset and sour....