Emphasising that the consideration received for selling ownership rights in self-generated trademarks and trade names was a capital receipt, not royalty or commuted annuity, the Guajrat High Court (Ahmedabad Bench) has upheld the non-taxability of Rs. 50 crores Nirma trademark sale receipt. The Court clarified that Rs. 50 crores was a capital receipt from the sale of assessee’s ownership rights in trademarks and trade names, assessable, if at all, only under ‘long-term capital gains’.
However, because the cost of acquisition was unascertainable and the subsequent amendment to Section 55(2)(a) could not be applied retrospectively to deem that cost as nil, the receipt was not taxable for Assessment Year 2001–2002. The Court’s concluding finding was that the sale concerned trademarks and trade names, not goodwill or tenancy rights.
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Briefly, Shantaben K. Patel received Rs. 50 crores from the sale of her ownership rights in the ‘Nirma’ and ‘Nima’ trademarks and brands under a tripartite agreement dated 26 March 2001. The dispute concerned Assessment Year 2001–2002. She claimed that the receipt was not taxable because the assets were self-generated and their cost of acquisition could not be determined.
The Assessing Officer treated the amount as commutation of her right to receive annual payments under Clause (7) of the dissolution deed dated 7 February 1980, taxable as ‘income from other sources’, or alternatively as long-term capital gains. The CIT(Appeals) upheld taxation under ‘income from other sources’, but the Tribunal deleted the addition. The Revenue challenged that decision and the deletion of the related penalty under Section 271(1)(c).
The Division Bench comprising Justice Bhargav D. Karia and Justice Pranav Trivedi observed that Clause (7) of the dissolution deed assigned only the right to use the intangible assets to the trust, and the ownership remained with the assessee. There was no fixed lump-sum sale price, definite payment period or provision addressing what would happen to the assets if the business ceased.
The annual payment of 2.5% of net profits or Rs. 10,000, whichever was higher, was variable and therefore was not an annuity. The Rs. 50 crores received in 2001 was consideration for selling ownership rights in the trademarks and brands, not royalty, future licence fees or commutation of an annuity. It could therefore not be taxed as ‘income from other sources’.
The Court accepted that the arbitration award was binding between its parties. Although the Revenue, as a third party, was not bound by the award, it could not question its genuineness without investigation or supporting evidence. The Court also upheld the finding that the assets were self-generated and their acquisition cost was unascertainable.
The amendment to Section 55(2)(a), introducing trademarks and brand names with effect from 1 April 2002, was not retrospective and did not apply to the March 2001 sale. The allegation that the transaction was a colourable device was unsupported by specific evidence, added the Court.
