Income Tax Appellate Tribunal - Mumbai
Addl. Cit vs Kwality Frozen Foods Ltd. on 5 October, 2004
Equivalent citations: [2005]1SOT243(MUM)
ORDER
Dr. O.K. Narayanan, A.M. This appeal is filed by the revenue. The relevant assessment year is 1995-96. This appeal is directed against the order passed by the CIT (A)-XLIV at Mumbai on 28-5-2001 and arises out of the assessment completed under section 143(3) of the Income Tax Act, 1961.
2. The assessee-company in this case is involved in the manufacture of icecream. During the previous year relevant to the assessment year under appeal, the assessee-company along with its sister concerns had formed a consortium designated as Kwality (West) for the purpose of disposing of various assets and trademark to indenting parties. The assignments of the assets and rights as proposed by the consortium was made in favour of M/s. Brooke Bond Lipton India Limited for a consideration of Rs. 24.70 crores. The sum total of the consideration of Rs. 24.70 crores as stated above consisted of various payments made towards transfer of assets and rights such as trademark, lease of vehicles, sourcing deposit, non-compete agreement, franchisees arrangement, marketing assets etc. The amounts were received by M/s. Kwality Frozen Foods Limited, the assessee in this case, and its sister concerns viz. M/s. G.L. Ice Creams, M/s. Pure Foods & Ice Creams and PIC Gujarat Limited. The amount received by the assessee-company was Rs. 16.20 crores. The details of the receipt are as follows :-
Rs.
On account of Trademark
3.70 crore On account of Lease of Vehicles 3.00 crore On account of Sourcing Deposit 3.00 crore On account of Non-Competition agreement 2.50 crore On account of Franchisees 4.00 crore Total 16.20 crore
3. In the course of assessment, the assessing officer examined the nature of above receipts. The assessing officer agreed with the argument of the assessee that various deposits included in the receipts would not be taxable. The assessing officer also agreed with the assessee that noncompetition fees was not taxable. But the assessing officer did not accept the contention of the assessee that the amount of Rs. 3.70 crore received by the assess ee-company on sale of trademark rights was not taxable. The assessee contended before the assessing officer that there was no cost of acquisition for the trademark rights and it being a capital receipt, the same could not be taxed in view of the decision of the Hon'ble Supreme Court in the case of CIT v. B. C. Srinivasa Shetty (1981) 128 ITR 294 (SC). The assessee further submitted before the assessing officer that even after the amendment brought in section 55(2) of the Act, by which the goodwill, tenancy rights, stage carriage permits and loom hours have been brought under the ambit of taxation, the sale of trademarks would still be outside the purview of long term capital gains as the said item trademark was not specifically covered by the amendment.
4. The assessing officer did not accept the contentions advanced by the assessee. He held that the assessee's contention that the amendment of section 55(2) referred only to goodwill of the business and trademark is out of the purview of the amendment, is not tenable. The assessing officer held that in commercial and accounting parlance, as well as in legal understanding, the term "goodwill" is a comprehensive term encompassing within it all rights and advantages attaching to the business.
5. The assessing officer relied on "Accountancy", authored by William Pickles, Third Edition, in support of his proposition. The said commentary states that Goodwill arises mainly for patent and trademark protection and the purchaser of goodwill acquires the trademarks, patents, copyrights etc. of the business as well as the benefits of contracts and all the benefits accruing from the location, reputation, connection, organization and other exceptional features of the business. The assessing officer further relied on various authorities as follows :-
(i) Advanced Accounting (Sixth Edition) - By Yorston, Smyth & Brown
(ii) Advanced Accounts (Twelfth Edition) - By Shukla, Grewal, Gupta
(iii) The Valuation of Company Shares and Business (Sixth Edition) - By A.V. Adamson and M.S. Adamson.
6. In all the above authorities, it has been held that trademark is in the nature of intangible assets and in many instances its value is indistinguishable from that of goodwill.
7. The assessing authority further relied the following authorities on law:-
(i) Judicial Dictionary (Tenth Edition) - By K.J. Myar.
(ii) Mitra's Legal & Commercial Dictionary (Fifth Edition) - By A.N. Saha.
8. The assessing officer further relied on the decision of the Honble Supreme Court in the case of Rustom Cavasiee Cooper v. Union of India (1970) 40 Comp. Cas. 325 (SC) (also known as Bank Nationalisation cases), where the court has held that Goodwill of a business is an intangible asset it is the whole advantage of the reputation and connection formed with the customers together with the circumstances making the connection durable.
9. In the light of the above discussion, the assessing officer held that trademark is indistinguishable from goodwill and, therefore, the amended provisions contained in section 55(2)(a) are operative and the amount of Rs. 3.70 crore received by the assessee- company against the sale of trademark is taxable for long term capital gains for the assessment year under appeal. He further held that as there is no cost of acquisition in the present case, the benefit of indexation would not be available to the assessee. Therefore, he brought the entire amount of Rs. 3,27,76,923 to taxation under the head 'long term capital gains'.
10. The issue was taken in first appeal. The assessee-company made detailed argument before the CIT (A). The assessee- company contended that trademark is distinct from goodwill and the assessing authority has erred in treating trademark analogous to goodwill. The amendment brought into section 55(2), with reference to goodwill of a business is effective from the assessment year 1995-96. The said provision will not apply against the assessee as trademark is distinct from goodwill. The sale of trademark as such was brought into the provisions of section 55(2) through the amendment by the Finance Act, 2001. The said amendment brought in by the Finance Act, 2001 is effective only from assessment year 2002-03. The impugned assessment year 1995-96. Therefore, the said specific amendment brought in by the Finance Act, 2001 with effect from assessment year 2002-03, to cover the sale of trademark also for the purpose of levy of long term capital gains would not apply in the present case. The assessee reiterated its reliance on the decision of the Honble Supreme Court in the case of B.C. Srinivasa Shetty (supra). After considering the contentions of the assessee in detail, the CIT (A) came to a conclusion that the term "Goodwill" does not encompass the word "Trademark". The conclusion arrived at by the CIT (A) is extracted below:-
I have considered the facts of the case and the arguments of the appellant. The term 'goodwill'does not encompass the word 'trademark'. The trademark and goodwill are distinct intangible assets and it would be incorrect to hold that the trademark and goodwill are the same things. In fact, trademark has been defined under the Trade Marks Act of 1999. Trade Mark is connected with the goods or services which are sold whereas goodwill consists also reputation and connection with the customers. Goodwill is also connected with business, personality and the reputation of the owners, the character of the business the name and fame and the reputation of the business etc. Goodwill depends on a variety of circumstances. Therefore, goodwill and trade mark are two different things though both are intangible assets. Under section 55(2)(a) prior to 1-6-2001, trademark was not to be treated on par with goodwill. In fact the Finance Act of 2001 amended section 55(2)(a) of the Income Tax Act to include trade mark and brand names. This meant that prior to 1-6-2001 trademark was to be treated differently from the goodwill. As the cost of the trademark or Brand in Nil, the question of computing capital gains does not arise as held in the case of B.C Srinivasa Shetty 128 ITR 294 (SC). As on the basis of the Income Tax Act trade marks were not to be included in the year under consideration under section 55(2)(a) of the Income Tax Act, the question of taxing the same underthe head'capital gains', does not arise. The addition of Rs. 3,27,76,923 is therefore, without any basis and is deleted."
11. Accordingly, the CIT (A) accepted the contention of the assessee and deleted the addition of Rs. 3,27,76,923 made by the assessing officer.
12. It is against the above that the revenue has come in appeal before us.
13. The ground raised by the revenue is extracted below :-
"On the facts and in the circumstances of the case and in law the learned CIT (A) has erred in deleting the addition of Rs. 3,27,76,923 without appreciating the fact that the law concerning goodwill etc. and its taxability has been amended through the insertion of section 55(2)(a)(ii). Further trade mark is nothing but goodwill built over a number of years and crystallized as trade mark."
14. Shri V.S. Singh, the learned CIT appearing for the revenue argued the case at length. The learned CIT contended that Trademark is nothing but one of the manifestation of Goodwill. The element of goodwill is always embedded in a frame of trademark. Relying on the Law Lexicon authored by Y.V. Chandrachud, the learned CIT submitted that goodwill means the benefit which arises from the establishment of particular trades or occupations. It is the intrinsic value of the good repute and custom of an established trade or business. He stated that goodwill of a business means every affirmative advantage as contrasted with negative advantage that has been acquired in carrying on the business, whether connected with the premises of the business or its name or style and everything connected with or carrying with it the benefit of the business. The learned CIT laid great emphasis on the expression "goodwill of a business means every affirmative advantage He stated that Trademark is nothing but one of the affirmative advantages of a business. He further stated on the basis of Law Lexicon that goodwill means every positive advantage that has been acquired by the old firm in carrying on the business whether connected with the premises in which the business was carried on or with the name or any other matter, carrying with it the benefit of the business. It is the connection thus formed together with the circumstances whether of habit or otherwise which tend to make it permanent that constitute the goodwill.
15. Relying on the same Law Lexicon, the learned CIT quoted on trademark as: A trademark is the name, symbol, figure, letter, form oi device adopted and used by the manufacturer or merchant in order to designate the goods that he manufactures or sells, and to distinguish therr from those manufactured or sold by another, to the end that they may be known in the market as his, and thus enable him to secure such profits as result from a reputation for superior skill, industry, or enterprise.
16. In the light of the above explanations on the subject of goodwill as well as trade mark, the learned CIT submitted that trademark is in fact the reflection of the goodwill and there cannot be two different aspects such as goodwill and trademark in contradistinction.
17. The learned CIT contended that as trademark is also very much part of the goodwill, the sale of the trademark involved in this case is covered by the provisions of section 55(2) as amendment with effect from the assessment year 1995-96 in which the goodwill of a business is also treated as a capital asset. He, therefore, submitted that levy of capital gains tax on the sales consideration of trademark isjust and proper in law.
18. Without prejudice to the above contention, the learned CIT further argued that at any rate 'trademark and brand" as particular species have been included in the provisions of section 55(2), treating them as capital assets, for the purpose of levy of capital gain tax. Those inclusions were brought in the provisions of section 55(2) by the Finance Act, 2001. The said amendment is clarificatory or explanatory in nature. The amendment is in fact explaining the different manifestations of the expression "goodwill' and reiterating the applicability of the expression on "trademark and brand". Therefore, the later amendment brought in by the FinanceAct, 2001 is only explaining the provisions already existed from the assessment year 1995-96 onwards. Therefore, the said amendment is retrospective in effect and on that ground also the assessing officer is justified in levying capital gains tax on the sales consideration of trademark.
19. He further argued that as evident there is no cost of acquisition for the trademark in the hands of the, assessee-company and, therefore, the assessee is not entitled for the benefit of indexation and accordingly, the assessing officer has rightly brought the entire sales consideration for the computation of taxable gains.
20. Ms. Shobha Jagtiani, the learned counsel appearing for the assessee company contended that the whole case of the revenue is built on the basis of certain general propositions. In fact goodwill and trademark are different for the purpose of general understanding as well as for taxation purposes. Trademark is a specific right to property owned by a business. Trademark is having its own form and substance either by way of graphic representation or by way of any other pictorial representation or by way of any other distinguishable features. The impression of a trademark is visible to the consumers. It is always identified with a particular product. It is not something very abstract like goodwill. It has got a shape. It has got an identity. It is registered under the Trademark Act. It is registrable unlike goodwill. She submitted that it is quite unfair to argue that trademark is nothing but goodwill. She argued that the trademark of a business which enjoys goodwill alone may be successful in the market. That does not mean that trademark and the goodwill are same.
21. She submitted that when the law relating to capital gains was amended consequent to the judgment of the Honble Supreme Court in the case of B.C. Srinivasa Shetty, neither the expression goodwill nor trademark found place in the statute. Thereafter the term 'goodwill'was brought in to the provisions by the Finance Act, 1994. The said amendment was with effect from 1-4-1995. The goodwill was liable to be treated as a capital asset for the purpose of capital gains only with effect from assessment year 1995-96. Still the process was not complete. The term "trademark" was not considered in the amendment brought in by the Finance Act, 1994. It is in order to overcome this lacuna that a further amendment was brought in by the Finance Act, 2001 and inserted "trademark and brand" in section 55(2). The law has made it very clear that the said amendment was operative from the assessment year 2002-03 alone. She submitted that from the above history of amendments itself, it is clear that trademark is to be treated as a separate asset for the purpose of capital gains tax and the said asset is amenable for capital gain tax only with effect from assessment year 2002-03.
22. The learned counsel submitted that the levy of capital gains tax on the sales consideration of trademark in the impugned assessment year 1995-96 is therefore against the provisions of law.
23. The learned counsel stated that the issue is directly covered by the decision of the ITAT Delhi 'A' Bench in the case of Sunil Lamba v. Dy. CIT (2003) 131 Taxman 35 (Del). In the said case, the assessee was engaged in the marketing and distribution of ice-cream and other related products. Under an agreement, he assigned rights of marketing to BBL with the conditions that he will not engage himself directly or indirectly in such activities for a period of 10 years not only in relation to the products of the affiliated concerns but of any other concern. A sum of Rs. 1 crore was received in consideration thereof. As regards the taxability of the amount received on the assignment of trademark, the Tribunal held as follows :-
"... There was a consistent view that the amount received on assignment of trademark was not taxable to capital gains as the cost of acquisition was nil. The provisions of section 55(2)(a) were amended with effect from 1-4-1998. After the amendment for the purpose of sections 48 and 49, the cost of acquisition in relation to capital asset being goodwill of the business, tenancy right, state carriage permit or loom hours has to be adopted at nil. The amount received by the assessee on account of assignment of trademark for prohibition to manufacture, produce or process any article or thing or right to carry on any business was not exigible to capital gain tax. With effect from 1-4-1998, the amount received on account of assigning the right to manufacture, produce or process any article or thing became exigible to capital gains tax. Similarly, with effect from 1-4-2003, any amount received to assign the right to carry on any business also became exigible to capital gains tax. The amount received on assigning trademark became taxable w.e.f, 1-4-2002. But these amendments were prospective in nature and will not apply to the assessment year in question. This was clarified by the Board vide its Instruction No. 1964, dated 17-5-1999. In view of the facts mentioned above, the sale proceeds of trademark cannot be brought to capital gains tax ......
24. The learned counsel submitted that the above judgment of the Tribunal answers the argument advanced by the revenue on the nature of trademark as well as the prospectivity or retrosepectivity of the amendment made in section 55(2).
25. She also referred to the decision of the ITAT Mumbai Bench 'A in the case of Voltas Ltd. v. Dy. CIT( 1998) 64 ITD 232 (Mum). In the said case also there was an assignment of trademark and the Tribunal held that the amount .received by the assessee would be in the nature of capital as had been held by the Hon'ble Supreme Court in B.C. Srinivasa Shetty's case.
26. The learned counsel therefore submitted that as far as the impugned assessment year is concerned, trademark cannot be considered for levying capital gains tax.
27. She submitted that this is because of the judgment of the Honble Supreme Court in the case of B.C. Srinivasa Shetty (supra) where it was held that in the case of Nil cost of acquisition, capital gains cannot e computed. The learned counsel also relied on the following decisions:
(i) Addl. CIT v. Ganapathi Raju Jogi (1993) 200 ITR 612 (SC).
(ii) CITv. Suman Tea and Plywood Industries (P) Ltd.( 1997) 226 ITR 34 (Cal).
(iii) Addl CITv. K.S. Sheik Mohideen (1978) 115 ITR 243 (Mad.)(FB).
28. We considered the rival contentions in detail. Goodwill and Trademark, both related to the intrinsic worth of a business. Goodwill is the sum total of the reputation of a business concern. Reputation is built on so many factors such as quality of the product/ service, pricing, dependability of delivery, post sales services, adoptability, customer relations, discharge of social obligation etc. It is built over the hard work of years and years. The term is comprehensive enough to include any virtuous aspects of a business concern. Goodwill is an intangible asset.
29. But trademark is more specific. Trademark also possesses mark of the attributes of goodwill. Goodwill and Trademark may both belong to the same genealogical specie. But still, trademark is a narrower expression than goodwill. Trademark is specifically motivated to customer acceptance. It is a legal right registrable under the Trademark Act. It has a graphic, pictorial or any other similar expression. It can be seen. That, it is represented by an identifiable, visible, distinguishable, graphic/pictorial impression. It has a shape. It has a commercial personality.
30. Therefore, even though goodwill and trademark can be treated as blood relatives, they are not one and the same. If goodwill can be treated as a family, trademark is one of the important members of the family.
31. Therefore, it is not possible to extend the meaning of the terms .,goodwill" to "trademark". We are examining the meaning of the terms "goodwill" and "trademark" in the context of a specific legislation i.e., Income Tax Act. They are not being examined in a general sense or in a worldly manner. Therefore, it is not possible to add or subtract anything to/from an expression used in the legislation unless the circumstances so warrant. It is not possible to hold the view that goodwill included trademark also and therefore, it is amenable for levy of capital gains tax in the assessment year 1995-96 by way of drawing an analogy. The term "trademark" is conspicuous by its absence in the provisions of law contained in section 55(2), as it stood for the assessment year 1995-96. It is not permissible to make good the absence by reading down the provisions of law. The law should be understood in its plain meaning. Any interference or interpretation is called for only when the plain reading of the law gives an absurd meaning of the expression orif working of the law itself is impaired. In the present case, the absence of the word "trademark" does not make the provisions of law absurd or it does not make the operation of the law impossible. Therefore, it is not permissible to go beyond the written expression contained in the provisions of law.
32. We have found in the above discussion that goodwill is an established custom or popularity of a business whereas trademark is a device, word or companion of words secured by legal registration or established by use, which is used to distinguish the goods of/or represent a particular manufacture or trader. They are commercially different. Therefore, levy of capital gains tax in the impugned case cannot be made treating the trademark equivalent to goodwill. The first limb of the argument raised by the revenue is therefore rejected.
33. Next ground raised by the revenue is that the amendment brought in by the Finance Act, 2001 is explanatory in nature and therefore, retrospective in operation. The term "trademark" has been brought in section 55(2) by the Finance Act, 2001 through section 35 thereof. Section 32 of the Finance Act, 2001 reads as follows:
"....Amendment of section 55.In section 55 of the Income Tax Act, in sub. Section (2), in clause (a), after the words"goodwill of a business", words"of a trademark or brand name associated with a business" shall be inserted with effect from the 1-4-2002."
34. If we go through the clarifications issued by the CBDT vide its instruction No. 1964, dated 17-3-1999, it would be clear that the said amendment is only prospective. When the law was amended to overcome the impact of the decision of the Honble Supreme Court in B. C Srinivasa Shetty case, the term "goodwill" was not included therein. It is after noticing the lacuna that law was amended and "goodwill' was broughtin section 55 with effect from 1995-96 onwards. Even at that point of time the term "trademark" was absent. This absence was noticed again and therefore, came the amendment in 2001.
35. The above sequence of legislative amendment itself is a clear testi. mony in support of the argument of the assessee that all these different expressions used in section 55 are different by themselves and indepen. dent each other. Therefore, the second contention regarding the retrosepctivity of the amendment brought in by the Finance Act, 2001 is also not sustainable in law.
36. in the facts and the circumstances of the case, we find that the order passed by the CIT (A) is just and proper and it is to be upheld.
37. In result, the appeal filed by the revenue is liable to be dismissed, order accordingly.