Transfer Of Self-Generated Trademark Before April 2002 Not Taxable As Capital Gains: Gujarat High Court

The Gujarat High Court has held that money received from transferring a self-generated trademark before 2002 cannot be taxed as capital gains, as the law allowing such taxation came into force only later.

The Court noted that Section 55(2) of the Income Tax Act was amended with effect from April 1, 2002, to allow taxation of transfers of trademarks by treating their cost of acquisition as nil, and the amendment cannot apply to earlier transactions.

A Division Bench comprising Justice A.S. Supehia and Justice Pranav Trivedi delivered the ruling while allowing the appeal filed by Ambalal Sarabhai Enterprises Ltd. against the Income Tax Department.

The bench examined whether consideration received on the transfer of self-generated trademarks could be taxed as capital gains under Section 45 of the Income Tax Act, 1961, when the cost of acquisition of such assets could not be determined under Section 48 of the Act.

The dispute arose after the assessee and Cadila Health Care Ltd. formed a 50:50 joint venture company, Sarabhai Zydus Animal Health Ltd., and transferred 46 veterinary trademarks and related business rights through a deed of assignment dated 29 January 2000 for a total consideration of Rs. 73 crore.

Out of this amount, Rs. 25 crore was received for the assignment of trademarks and certain amounts for marketing rights were treated by the assessee as capital receipts, while the Revenue treated a substantial portion as taxable revenue income.

The Assessing Officer held that the receipts were revenue in nature, inter alia, on the ground that most trademarks were unregistered and that the transfer did not amount to surrender of the income-earning apparatus.

The Bench observed that trademarks and brand names constitute “capital assets” within the meaning of Section 2(14) of the Income Tax Act, 1961. It further noted that the trademarks transferred by the assessee had been developed over a long period in the course of its business and were therefore self-generated intangible assets.

The Court noted that 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. This, 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.

The bench opined that "merely, because the transfer is of an unregistered trademark, the same will not ipso facto make such transfer chargeable to capital gains. The nature of non-registered trademark will remain as an intangible asset. The consideration received on transfer of non-registered trademark prior to the amendment made to Section 55(2) of the Act w.e.f. 01.04.2002 would not be subject to capital gains tax."

The bench held that since the trademarks in question were self-generated and had no ascertainable cost of acquisition, the machinery provisions contained in Sections 48 and 49 of the Income Tax Act, 1961, could not operate for computing capital gains.

The Court further noted that the legislature subsequently amended Section 55(2) of the Income Tax Act, 1961, to deem the cost of acquisition of self-generated trademarks, brand names, and similar intangible assets as “nil”, thereby enabling taxation of such transfers. However, this amendment came into force only from 1 April 2002 and could not be applied retrospectively to transactions that had taken place prior to that date.

In light of these findings, the High Court held that the consideration received by the assessee for the transfer of self-generated trademarks prior to the amendment to Section 55(2) could not be brought to tax under the head “Capital Gains” under the Income Tax Act, 1961.

The bench stated that "after the transfer of trademark, know-how and the marketing rights, the assessee is prohibited from manufacturing the products relating to 46 trademarks, and thereby precluded from exploiting the source of income. Hence, on transfer of such capital asset it would be taxable as capital receipt and not revenue receipt. Thus, the compensation received by the assessee on the assignment of marketing rights and know-how will not be assessable to tax. Both the CIT(A) and ITAT have taken an erroneous view and hence, the substantial question of law (c & d) is answered in favour of the assessee, and against the Revenue."

The Bench concluded that the Income Tax Appellate Tribunal and the Commissioner (Appeals) had erred in law in upholding the taxability of the receipts.

Accordingly, the Court allowed the assessee's appeal, set aside the impugned order passed by the Tribunal, and decided the substantial questions of law in favour of the assessee and against the Revenue.

Appearances:

For Petitioner: Advocate, Saurabh Soparkar with B.S. Soparkar

For Respondent: Advocate, Maunil G. Yajnik