Income Tax Appellate Tribunal - Kolkata
Ici India Ltd. vs Deputy Commissioner Of Income Tax on 18 October, 2001
Equivalent citations: [2002]81ITD348(KOL)
ORDER
B.R. Mittal, J.M.
1. The assessee has filed this appeal for the asst. yr. 1993-94 against the order of learned CIT(A), dt. 31st Oct., 1996.
2. In ground Nos. 1, 2 and 3 of the appeal the only issue involved is as to whether the amount of compensation received by the assessee-company for withdrawal of right to use trade-mark 'Savlon' is exigible to capital gains tax or not.
3. The relevant facts giving rise to this appeal are that M/s 1CI UK granted to the assessee-company pursuant to an agreement dt, 23rd Feb., 1979, the right to use its trade-mark 'Savlon'. In the assessment year under appeal, the assessee-company received a compensation of Rs. 112.99 lacs for withdrawal of licence to use the trade-mark 'Savlon'. The assessee-company claimed that although the licence used the above trade-mark was a capital asset and withdrawal of the licence was transfer of capital asset falling within the definition of Section 2(14) of the Act, the amount received by it was not exigible to capital gains as no consideration had been paid by the assessee-company to ICI UK for acquisition of the said right to use the trade-mark 'Savlon'. In support of its contention, the assessee-company placed reliance on the decision of the Supreme Court in the case of CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC). However, the AO did not accept the contention of the assessee. Being aggrieved, the assessee filed appeal before the first appellate authority.
4. The assessee contended that the said trade-mark 'Savlon' was always remained the property of ICI UK and had not been sold or transferred to the assessee-company for any consideration and the assessee-company had been only permitted to use the trade-mark and that too because of the relationship between ICI UK and the assessee-company. Hence, the consideration received for the extinguishment or termination of such right was a capital receipt but not liable to capital gains. The assessee contended that the amendment made in 1987 to bring in goodwill to capital gain tax and further amendment in 1993 to include tenancy rights, stage carriage permits or loom hours within the ambit of capital gains tax clearly indicated that the consideration received for sale/transfer did not give rise to capital gains tax liability if no amount was paid at the time of acquisition. The learned CIT(A) considered the submissions of the assessee and stated that when goodwill had already been expressly included in the definition of cost of acquisition of Section 55 by Finance Act, 1987 w.e.f. 1st April, 1988 and also considering the fact that the right to use trade-mark was in the shape of the property which was later on lost and as such it was a transfer within the meaning of Section 2(47) of the Act, the said transfer constitutes goodwill and as such the compensation of Rs. 112.99 lacs was the consideration for the said transfer. Accordingly, he upheld the action of the AO to tax the said compensation of Rs. 112.99 lacs is exigible to capital gain tax. Hence, the assessee is in further appeal before the Tribunal.
5. During the course of hearing of the appeal, the learned senior counsel Dr. D. Paul disputed the orders of the authorities below and submitted that the principle laid down by the apex Court in the case of B.C. Srinivasa Setty (supra) apply to the case of the assessee as the assessee acquired the right to use the trade-mark 'Savlon' from ICI UK at no cost and as such the amount of compensation received by the assessee-company on surrender of the licence to use the said trade-mark could not be considered for capital gain. To substantiate his submission the learned senior counsel placed reliance on the decision of the Full Bench of the Madras High Court in the case of Addl. CTT v. K.S. Shekh Mahideen (1978) 115 ITR 243 (Mad) (FB) and submitted that no capital gain tax could be levied on the money received on account of transfer of import entitlement certificate if there was no cost of acquisition. The learned senior counsel also substantiated his submission placing reliance on the decision of the apex Court in the case of Addl. CIT v. Ganapathi Raju Jogi (1993) 200 ITR 612 (SC) and submitted that if no amount was paid to acquire route permits for buses by the operator, in such a case, the consideration received in terms of money on its transfer could not be brought to tax as capital gains. He further submitted that the legislature had made the amendments in 1987 to bring in goodwill and in 1995 and by Finance Act, 1994 to bring in, inter alia, tenancy rights, stage carriage permits or loom hours within the scope of capital gain tax liability by specific amendment under Section 55(2) of the Act but the legislature have made the amendment to make the amount of compensation received on trade-mark or brand name associated with the business within the ambit of capital gain tax when there is no cost of acquisition only by making amendment w.e.f. 1st April, 2002 by the Finance Act, 2001. He submitted that prior to the said amendment made by the legislature the principle as laid down by the Supreme Court in the case of B.C. Siinivasa Setty (supra) applied to the compensation received on surrender of trade-mark when there was no cost of acquisition of it. He submitted that the amount of Rs. 112-99 lacs as received by the assessee would not be subject to capital gain tax, On the other hand, the learned Departmental Representative relied on the order of the authorities below and submitted that after the amendments made by the Finance Act, 1987, w.e.f. 1st April, 1988, to make the goodwill of a business subject to capital gain, the compensation received by the assessee on surrender of its right to use the trade-mark is liable for capital gain tax.
6. We have carefully considered the submissions of the learned representatives of the parties and have gone through the orders of the authorities below. We have also gone through the cases relied on by the learned representatives of the parties in support of their submissions.
7. Section 45 of the Act is a charging section and charges the profits or gains arising from the transaction of a capital asset to income-tax. The asset must be one which falls within the contemplation of this section. Further, for the purpose of imposing the charge, the detailed provisions have been enacted in the Act in order to compute the profits or gains under the head 'capital gains'. No existing principle or provision at variance with them could be applied for determining the chargeable profits and gains. Therefore, all the transactions encompassed by Section 45 must fall under the governance of its computation provisions. A transaction to which those provisions could not be applied must be regarded as never intended by Section 45 to be the subject of the charge. Thus, the charging section and the computation provision together constitute an integrated code. The apex Court has held in the case of B.C. Siinivasa Setty (supra) that when the computation provision could not apply to a case, in that event it is evident that such a case was not entitled to fall within the charging section. Otherwise, one would be driven to conclude that while a certain income seems to fall within the charging section, there is no scheme of computation for qualifying it.
8. The mode of computation and deductions are provided in Section 48 for quantifying the income chargeable under the head 'capital gains' which, inter alia, provide that the income chargeable under the head 'capital gains' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, "the cost of acquisition of the capital asset". We observe that on the basis of the above interpretation put by the apex Court in the case of B.C. Siinivasa Setty (supra) that none of the provisions pertaining to the head 'capital gains' suggest that they include an asset in the acquisition of which no cost at all could be conceived. Following the said principle the consideration received on transfer of a goodwill in a business was held not to be exigible to capital gain tax. Since the said case was decided prior to the amendment made in Section 55(2) of the Act, w.e.f. 1st April, 1988, by which the consideration received on transfer of a goodwill of a business even if there was no cost to acquire it was incurred exigible to tax, we are of the view that the principle as laid down by the apex Court in the said case still holds good that no capital gain tax could be levied under Section 45 of the Act in respect of those capital asset for which no cost of acquisition is incurred by the assessee. In order to bring the other capital asset viz., tenancy right, stage carriage permits or loom hours within the ambit of Section 45 for the purpose of charging capital gain tax, the legislature included the above asset by making further amendments by Finance Act, 1994 w.e.f. 1st April, 1995. He further observe that the list was further expanded by inserting further capital assets viz., their right to manufacture, produce or process any article or thing by the Finance Act, 1997 w.e.f. 1st April, 1998.
9. There is no dispute to the fact that a licence to use trade-mark is a capital asset under Section 2(14) of the Act. There is also no dispute to the fact that surrendering of the said right to use trade-mark 'Savlon' is also a transfer within the meaning of Section 2(47) of the Act. There is no dispute that the assessee incurred no cost to acquire the said right to use trade-mark 'Savlon' from ICI UK. The learned CIT(A) has brought the compensation received by the assessee from ICI UK on surrender of its right to use trade-mark within the ambit of capital gain tax by treating the said right to use trade-mark at par with goodwill. Since the legislature have made an amendment under Section 55(2) of the Act by the Finance Act, 2001 w.e.f. 1st April, 2002 under Section 55(2)(a) by inserting the words after the words goodwill of the business, the words 'or a trade-mark or brand name associated with a business' which clearly establishes that as per the intention of the legislature the trade-mark would not be equated at goodwill or trade-mark is not comprised within the word 'goodwill'. The legislature by the said amendment has stated that the cost of acquisition in relation to a trade-mark or brand name associated with a business shall be taken to be the purchase price in case the asset is purchased from a previous owner and nil in any other case.
10. Since the assessee received the amount of Rs. 112.99 lacs on account of surrender of the right to use trade-mark in the asst. yr. 1993-94, we hold that the said amount of compensation could not be charged to capital gain tax in the assessment year under appeal as the principle laid down by the apex Court in the case of B.C. Srinivasa Setty (supra) apply to the case of the assessee. Accordingly, we allow ground Nos. 1, 2 and 3 of the appeal by reversing the orders of the authorities below.
11. Ground Nos. 4 and 6 of the appeals are as under :--
"4. That the learned CIT(A) erred in not allowing the claim of the company regarding the correct carry forward of investment allowance.
6- That the learned CIT(A) erred in reducing company's depreciation claim on income-tax paid and capitalized on overseas technical know-how even though no such depreciation claim was made by the appellant in 1993-94 assessment year."
11.1. During the course of hearing of the appeal, the learned authorized representative of the assessee submitted that the ground Nos. 4 and 6 are not pressed for. In view of the above submissions, the ground Nos. 4 and 6 are dismissed as not pressed for.
12. The ground No. 5 of the appeal is as under :
"That the learned CIT(A) erred in not allowing recoveries from employees for their stay in guest-houses to be deducted from guest-house expenses."
12.1. The tax audit report pointed out that a sum of Rs. 87,72,610 had been incurred as expenditure on maintenance of guest-house. The assessee added back an amount of Rs. 46,86,923 in the computation of income. The assessee stated that the difference of the amount of Rs. 32,62,602 had been accounted for as there was notional recoveries for employees stayed in guest-house while on official tour. The assessee explained the procedure before the AO in respect of the recovery of Rs. 32,62,602 which is as under :
"The procedure generally is that if an employee goes on tour he draws as advanced for the purpose and when he submits his expenses sheet later, if he has used outside accommodation the charge for the same is debited to travelling account.
If, however he has used the accommodation of a division, other than his own, a recovery then is made by the guest-house of the division where he stayed against the division from where the employee came. This is done by the guesthouse at quarterly intervals' by drawing recovery bills against the particular Division from where the employee came. It is for this reason that the sum oi Rs. 32,62,602 has been referred to 'recoveries', but while described in this manner because of the accounting procedure involved, there is no doubt that the charge for recovery by the guest-house providing the accommodation is justified, because actual services have been rendered by the guest-house providing the accommodation for which the charge has been made."
12.2. The AO did not accept the assessee's explanation on the ground that the recoveries shown were not actual recoveries but only notional recoveries and as such he considered the claim for deduction of Rs. 32,62,602 as disallowable expenditure on maintenance of guest-house. Being aggrieved, the assessee filed appeal before the first appellate authority.
12.3. The learned CIT(A) upheld the order of the AO. Hence, the assessee is in further appeal before the Tribunal.
12.4. During the course of hearing of the appeal, the learned counsel for the assessee submitted that there was several divisions of the assessee-company and each division was maintaining its own separate accounts. The assessee-company was having several guest-houses situated in different locations which were independent units of particular division of the assessee-company and for accounting purposes each division was maintaining its own accounts and produced its own trading results. If any employee of one division was to stay in any guest-house of another division while on official duty, then the division which maintains the guest-house recovers charges in respect of stay of employees from the division to whom the employee belongs. The said recovery was made from the employee was restricted to the prescribed rates under r. 6D of the IT Rules, 1962. The learned senior counsel submitted that the assessee after considering the recoveries for the stay of the employees on official duty outside their headquarters which was shown as a deduction from the guesthouse expenditure, the net amount under the guest-house expenditure was added back to the income of the assessee-company. He submitted that the said recoveries made from the employees could not be considered as expenditure to maintain guest-house under Section 37(4) of the Act. In support of his submission the learned counsel placed reliance on the decision of the Calcutta High Court in the case of CIT v. Orient Paper Mills Ltd. (1988) 171 ITR 181 (Cal). On the other hand, the learned Departmental Representative placed reliance on the decision of the authorities below.
12.5. We have carefully perused the orders of the authorities below and have considered the submissions of the learned representatives of the parties. The facts as stated hereinabove that the said recovery of Rs. 32,62,602 was shown by the assessee by way of adjustment in the book entries. There is also no dispute that the said recovery made by the assessee-company was from the employees when they went on official duty and stayed in the guest-house of the assessee-company and the recovery was also restricted to the prescribed rates under Rule 6D of the IT Rules, 1962. There is also no dispute to the fact that the assessee recovered the said aggregate amount of Rs. 32,62,602 when the employees stayed in the guest-house on official duty outside their headquarters. It is not the contention of the Department that the recoveries was shown to be made from the employees by providing the accommodation in the guest-house of the assessee-company on account of any entertainment or relaxation. We observe that the said amount was recovered for providing the facilities at the guest-house to only those employees when they were on official duties. In case, the said employees had not stayed in the guest-house of the assessee-company and would have stayed outside, the assessee-company was to reimburse the expenses to them. Considering the above facts, we hold that the said amount of Rs. 32,62,602 has rightly been deducted from the total expenditure incurred by the assessee for maintenance of the guest-house and as such the said amount is not hit by the provision of Section 37(4) of the Act. Accordingly, we reverse the order of the authorities below and allow ground No. 5 of the appeal.
13. In the result, the appeal filed by the assessee is allowed in part as indicated above.