Income Tax Appellate Tribunal - Chandigarh
Joint Commissioner Of Income-Tax, ... vs Kwality Cafe And Restaurant (P.) Ltd. on 7 April, 2006
Equivalent citations: [2007]105ITD169(CHD)
ORDER
M.A. Bakshi, Vice President
1. The appeal of the revenue for assessment year 1996-97 is directed against the order dated 22-3-2000 of Commissioner of Income-tax (Appeals), Chandigarh. The only dispute is relating to the nature of Rs. 55 lakhs received by the assessee on the basis of the agreement(s) executed between the parties, and its taxability.
2.The relevant facts in this case are that the respondent family hailed from that part of India which is now in Pakistan and was carrying on the business of manufacture of ice-cream for the past many generations. It was a large family and at the time of partition various branches of the family migrated to India and settled in different parts of India like Shimla, Chandigarh, Delhi, Lucknow, Calcutta, Bombay etc. where every one was carrying on his own business of manufacturing ice-cream and running of restaurants. The Chandigarh branch of the family started manufacturing ice-cream under the brand name "Kwality" and the icecream was being sold in the following territories:
Towns Cities
Himachal Pradesh Parwanoo
Haryana Hissar, Fathabad, Panchkula, Sirsa,
Shahbad, Pipli, Kurukshetra,
Kaithal, Pinjore, Karnal (Haryana
Tourist Complex only),
Yamunanagar
Punjab Rahpura, Patiala, Sangrur,
Gobindgarh, Kurali, Ropar, Nangal,
Mohali (SAS Nagar)
U.P. Saharanpur
3. For good time each group continued to carry on the business in their defined areas without any disturbance. However, some difference arose between Lambas at Chandigarh (the assessee) and Shri P.L. Lamba Group of Delhi, latter having opened a factory at Ludhiana in 1968 and starting manufacturing icecream with the ostensible purpose of selling the ice-cream in areas of the assessee group. Probably, the Lambas of Delhi wanted to wrest the business from the assessee group, therefore, a writ was filed in the Himachal Pradesh High Court seeking a restraint on the assessee group's production facilities of ice-cream. The Hon'ble H.P. High Court, after due consideration of the facts opined that both the families have independent identities and were running business independently and accordingly refused to grant temporary injunction against the assessee vide order dated 26-5-1981 in M.A. No. 59 of 1981. As per the aforementioned order the writ petition was to be decided on merits subsequently. It has been claimed that there was out of court settlement between the parties on the basis of which an agreement was executed on 29-7-1982 between S/Shri Peshori Lai Lamba, Sunil Lamba residing at N-23, Panch Shila Park, New Delhi and the assessee group through Shri Swatantar Kumar Lamba, Mrs. Swaraj Vatui Lamba, Mrs. Rewa Lamba and Mrs. Rupa Lamba. By virtue of the said agreement it was agreed by the parties that each group shall operate in their distinct areas and shall submit the registered user's documents along with all other necessary documents to the Registrar of Trade Marks for being registered in the Register of Trade Marks. By virtue of the said agreement, the assessee group was assigned three trade marks for exclusive use in the specified areas. As per Clause 11 of the aforementioned agreement, the agreement was to subsist so long the Trade Marks remain subsisting on the register of Trade Marks. In other words, the agreement was impliedly to be in perpetuity. There was no dispute between the parties till the year 1994. In the year 1994, it is claimed that the assessee had read in the newspaper that M/s. Hindustan Lever Ltd. was negotiating with a group of their Delhi relatives for purchasing the 'Kwality' brand name. On the basis of the said information the assessee had faxed a letter to the Managing Director of M/s. Hindustan Level' Ltd. informing that it had exclusive right on the 'Kwality' brand name within the territories mentioned elsewhere in this order. M/s. Hindustan Lever Ltd. had been informed not to enter into any agreement with any party by passing the assessee and in case the rights of the assessee were jeopardized, proper legal action would be taken. The opinion of M/s. Remfry and Sagar, Attorneys-at-laws, was obtained by the assessee. In the mean time, Shri P.L. Lamba Group of Delhi had entered into a Strategic Alliance Agreement with Brooke Bond Lipton India Ltd. (a subsidiary of Hindustan Lever Ltd.) on 14-10-1994. As per the said agreement Shri P.L. Lamba Group of Delhi undertook the task of buying the rights for Brooke Bond Lipton India Ltd. to manufacture ice-cream and the brand name from the following parties:
(i) Jayanti Food Processing (P.) Ltd., Kota
(ii) Kwality Ice-cream Company (P.) Ltd., Jaipur
(iii) Rake Foods Industries, Jammu
(iv) Hukson Foods India (P.) Ltd., Varanasi, UP.
It is relevant to point out that in the said agreement, the name of the assessee does not figure.
4. It appears that the assessee had realized that it would be in their interest to become a party to the proposed deal for the sale and assignment of the trademark 'Kwality'. It entered into an agreement (MOU) with Shri P.L. Lamba Group of Delhi on 31-5-1995 for; (i) Relinquishment of Trade Mark user right and interest; and (ii) Termination of ice-cream manufacturing facilities under the brand name 'Kwality'.
5. As per the said agreement, the assessee could not use the trade mark 'Kwality' with effect from 1-6-1995 and also had to stop manufacturing operation of the ice-cream. At the time of signing of the said agreement, a sum of Rs. 10 lakhs was paid to the assessee by cheque, dated 31-5-1995. A further sum of Rs. 35 lakhs was paid to the assessee vide Demand Draft dated 7-7-1995. The balance amount of Rs. 10 lakhs was also paid to the assessee on 19-8-1995. As per MOU dated 31-5-1995, final agreement was to be entered into between the parties defining the rights of the parties. It is claimed that on the basis of negotiations and discussions with the representatives of Brooke Bond Lipton India Ltd. and other concerned parties, the agreement entered on 31-5-1995 was considered to be hurried agreement and formal agreement was decided to be executed clearly defining the rights of the parties. It was claimed that several drafts were exchanged and after prolonged negotiations a formal agreement was entered into on 17-2-1997 clearly spelling out the terms which were agreed upon by the parties. As per the said agreement, the assessee was to close the business of manufacturing ice-cream under the trade mark 'Kwality'. However, the assessee was allowed to use the brand name 'Kwality' in respect of the hotel business without the starburst logo without any hindrance from the parties to the agreement.
6. In the return of income for the year under appeal filed on 29-11-1996, the assessee had offered Rs. 10 lakhs as long-term capital gains for surrender of goodwill of 'Kwality' trademark and Rs. 45 lakhs towards termination of ice-cream manufacturing under the brand name of 'Kwality' treated as capital receipt not liable to tax. The Assessing Officer was of the view that the agreement dated 17-2-1997 had been executed by the parties in order to avoid tax. The Assessing Officer has pointed out that the agreement dated 17-2-1997 was executed much alter the filing of the return and that the said agreement has been executed merely to give colour to tax-avoidance planning. The Assessing Officer has pointed out that the assessec has given colour to the payment of Rs. 45 lakhs as for negative convenant to benefit from the decision of the Supreme Court in the case of CIT v. Best & Co. (P.) Ltd. and in the case of Gillanders Arbuthnot & Co. Ltd. v. CIT . The Assessing Officer referred to the observations of the Supreme Court in the case of Gillanders Arbuthnot & Co. Ltd. (supra) as under:
There is no immutable principle that compensation received on the cancellation of an agency must always be regarded as capital receipt. In each case, the question has to be determined in the light of the attendant circumstances.
7. The Assessing Officer has also further referred to the following observations of the Hon'ble Supreme Court in the case of Best & Co. (P.) Ltd. (supra):
Whether the compensation received by an assessee for the loss of agency is a capital receipt or a revenue receipt depends on the circumstances of each case. Before coming to a conclusion one way or other, many questions have to be asked and answered; what was the scope of the earning apparatus or structure from Physical, Financial, Commercial and administrative standpoint. What was the impact of giving up of an agency on the structure of the entire business? Did it amount to a loss of an enduring asset causing an unabsorbed shock, dislocating the entire or a part of the earning apparatus or structure or was it loss due to an ordinary incident in the course of business? The answers to these questions would enable one to come to a conclusion whether the loss of a particular agency was incidental to the business or whether it amounted to the loss of an enduring asset. If it was the former, the compensation paid would be a revenue receipt; if it was the latter, it would be a capital receipt.
8. In para 6 of the assessment order, the Assessing Officer has referred to the comparative sale figures of the assessee for assessment years 1995-96 to 1997-98 as under:
Financial year Sales of KICC under negative covenant Total Sales Including KICC (Rs. in lakhs) (Rs. in lakhs) 1995-96 137.19 217.73 1996-97 174.87 252.94 1997-98 187.98 279.90
9. On the basis of above findings, it was held that the assessee was in no way disadvantaged in its profits making structure after the operation of the agreement/According to the Assessing Officer there was no loss of any enduring asset which could be treated as a capital loss. The Assessing Officer further held that the assessee had received the payment of Rs. 55 lakhs from Shri P.L. Lamba Group of Delhi and not from M/s. Brooke Bond India Ltd. and that the assessee has decided on its own to offer Rs. 10 lakhs as capital gain on account of sale of goodwill and that there was no basis for the bifurcation. He accordingly held that the amount of Rs. 55 lakhs received by the assessee was not for any negative covenants but a revenue receipt for determination of the agreement with Shri P.L. Lamba Group of Delhi. Thus, the amount of Rs. 55 lakhs was assessed as a revenue receipt.
10. The assessee appealed to the Commissioner of Income-tax (Appeals) and the latter decided the issue in favour of the assessee by holding that "the appellant had lost the right to manufacture ice-cream and other products in the 'Kwality' brand name and had been debarred in perpetuity to manufacture ice-cream in any other name and to carry out any competition directly or indirectly or pass on secret formula to any other person". He accordingly held that the assessee had lost the source itself and the income earning apparatus and had abrogated the right to carry on said business for all times and, therefore, the receipt was a capital receipt.
11. In para 4.11, the Commissioner of Income-tax (Appeals) has held that the assessee has himself apportioned Rs. 10 lakhs on account of goodwill which is liable to tax under the head "Capital Gains". The balance amount of Rs. 45 lakhs has been held to have been received for the assignment/sale of income earning apparatus and for non-competition and, therefore, a capital receipt not liable to tax.
12. The revenue is aggrieved by the order of the Commissioner of Income-tax (Appeals). The learned Departmental Representative contended that the assessee is a Private Limited Company. It was in business from 1948 in Chandigarh. The relatives of the assessee had also started the ice-cream business at various other places such as Ludhiana, Delhi etc. Writ Petition was filed in the Himachal Pradesh High Court by M/s. Kwality Ice-cream, Ludhiana and others against the assessee for restraining the assessee from using the trade name 'Kwalky' on their wrappers, cartoons, advertisements publicity in respect of ice-cream and other frozen products manufactured by them. The Misc. Petition No. 59 of 1981 had been filed in the High Court seeking interim injunction. The Hon'ble High Court vide its order dated 26-5-1981 declined to grant the temporary injunction on the ground that the assessee was using the name since the inception of their business. It was further stated that there was out of court settlement between the parties and an agreement was executed on 29-7-1982 by virtue of which the assessee was allowed to operate in the specified areas exclusively in the 'Kwality' products manufactured by it. The learned Departmental Representative pointed out that the assessee had received the payment of Rs. 55 lakhs by virtue of the agreement dated 31-5-1995 for breach of contract and the subsequent agreement executed on 17-2-1997 is a made up affair to avoid tax. Referring to the decision of the Himachal Pradesh High Court, dated 20-7-1982 in M.A. No. 59 of 1981, it was contended that the Hon'ble High Court has specifically mentioned that "Kwality" was not a registered trademark. The agreement dated 29-7-1982 was executed by the assessee for use of certain trademarks in consideration of Rs. 1,000 per annum. The learned Departmental Representative further pointed out that the assessee had received the entire payment of Rs. 55 lakhs by 19-8-1995 and, therefore the subsequent agreement was apparently an afterthought to avoid taxation. It was further contended that the assessee had not lost the entire business. The assessee had eight restaurants and was allowed to use the trademark 'Kwality' in such business. Besides the assessee was given dealership for the sale of ice-cream for the specified area and had in fact earned more income than before execution of the agreement as demonstrated by the Assessing Officer in the assessment order.
13. It was further contended that a licence to use trademark is not a capital asset. Therefore, any amount paid for the user of the trademark is allowable as revenue expenditure. It was contended that similarly the receipt on account of giving up the rights for using trademarks was a revenue receipt. Relying upon the decision of the Supreme Court in the case of CIT v. British India Corporation Ltd. , it was contended that whether a particular receipt is a capital receipt or a revenue receipt is to be viewed from the facts of each case. Reliance was also placed on the decision of the Madras High Court in the case of CIT v. II. Miller & Co. Ltd. to support the contention that the transfer of user rights of trademarks is a revenue receipt.
It was further contended that there was no cessation of whole business as such the receipt for partial closure of business was a revenue receipt. For this proposition reliance was placed on the following decisions:
(1) CIT v. Siewart & Dholakia (P.) Ltd.
(ii) Bush, Beach & Gent. Ltd. v. Road [1940] 8 ITR 36 (King's Bunch Division)
(iii) Blue Star Ltd. v. CIT
14. It was further contended that in the case of CIT v. Oberoi Hotels (India) (P.) Ltd. Calcutta High Court held that the compensation received for termination of agency was a revenue receipt.
15. Reliance was also placed on the decision of the Supreme Court in the case of Gillanders Arbuthnot & Co. Ltd. v. CIT , and also on the following decisions in support of the contention that compensation received for stopping the business activities was a revenue receipt.:
(i) CIT v. Lakshminarayana Mining Co. [1987] 165 ITR 3263 : [1986] 28 Taxman 99(Kar.)
(ii) CIT v. Motor & General Finance Ltd. [1967] 63 ITR 394 (Punjab)
16. The learned Departmental Representative further contended that the Commissioner of Income-tax (Appeals) has wrongly held that the assessee had received the payment from Brooke Bond Lipton India Ltd. (BBLIL). The finding recorded by the Commissioner of Income-tax (Appeals), according to the learned Departmental Representative is contrary to the facts on record. It was further contended that in the alternative the assessee having incurred expenditure for the acquisition of trademarks and also having paid advertisement expenses, the amount received was assessable to tax under Section 41. In support, reliance was also placed on the decision of the Supreme Court in the case of Polyflex (India) (P.) Ltd. v. CIT . The learned Departmental Representative further contended that the Commissioner of Income-tax (Appeals) had called for the Remand report from the Assessing Officer and had also obtained comments from the assessee. The Assessing Officer had objected to the admission of additional evidence but according to the learned Departmental Representative the Commissioner of Income-tax (Appeals) has neither referred to the remand report nor to the rejoinder furnished by the assessee. The objection of the revenue for admission of additional evidence in the Remand Report has also not been dealt with by the Commissioner of Income-tax (Appeals). It was according pleaded that the order of the Commissioner of Income-tax (Appeals) may be set aside and that of the Assessing Officer restored.
17. The learned Counsel for the assessee, on the other hand, contended that the assessee company was a successor to partnership firms. The restaurant business had been started by the assessee from 28-3-1994. In the year 1994 itself two partnership firms had merged. It was pointed out that Lamba family had started ice-cream business in the year 1964. Referring to the Himachal Pradesh High Court order dated 26-5-1981, it was stated that 'Kwality' was not a registered trade name. In the year 1982 an agreement was executed between two Lamba families providing for exclusive rights for the manufacture and sale of ice-cream to the assessee for specified areas. The said agreement was to operate in perpetuity. According to the learned Counsel a monopoly was created for the assessee for use of 'Kwality' brand name in the specified areas. Inviting our attention to Section 34 of Indian Trade Marks Act, it was pointed out that the prior user of the trademarks gets preference over the subsequent registration of the trademark. It was contended that the assessee had received the money for stopping the manufacturing activities of the ice-cream in the particular area. Referring to the details of assets owned by the assessee alter the execution of agreement, it was contended that all the machinery relating to the manufacture of ice-cream had been transferred/sold. The assessee got distributorship from M/s. Hindustan Lever Ltd. for the purpose of which only frozen looms were required for storage of ice-cream. It was contended that the contention advanced on behalf of the revenue that the assessee had not suffered loss of source of income as it had obtained distributorship from M/s. Hindustan Lever Ltd. is bereft of substances viewed in the context of future developments. It was contended that the said distributorship had been terminated in the year 2002-03 without payment of any compensation by M/s. Hindustan Lever Ltd. According to the learned Counsel, the subsequent events clearly demonstrate that the assessee was an ordinary distributor of ice-cream appointed by M/s. Hindustan Lever Ltd. and the said agreement could be terminated at will. It is, therefore, clear from the facts on record that the assessee had lost the source of income i.e., the loss of business of manufacturing of ice-cream and other frozen products. According to the learned Counsel the source of income was totally destroyed by execution of the agreement. There was a complete ban for manufacture of ice-cream anywhere in India. Dealership given to the assessee was a new business. Relying upon the authorities mentioned hereafter, it was contended that it is well-settled principle of law that the amount received for destruction of source of income is a capital receipt. Relying upon the decision of the Supreme Court in the case of P.H. Divecha v. CIT , it was submitted that the issue relating to the taxability of the receipt has got to be seen from the view of the payee and not of the payer. It was contended that the facts in the aforementioned decision of the Supreme Court are similar with the facts of the assessee's case. Therefore, the decision of the Commissioner of Income-tax (Appeals) does not warrant any interfere. It was further contended that the assessee had not received any compensation in the course of carrying on of any business. Reliance was placed on the decision of the Supreme Court in the case of Senairam Doongarmall v. CIT to support the contention that the receipt was, therefore, not taxable as a revenue receipt. It was further pointed out that the decision of the Calcutta High Court relied upon by the learned Departmental Representative CIT v. Oberai Hotels (India) (P.) Ltd. has been reversed by the Hon'ble Supreme Court in the case of Oberoi Hotel (P.) Ltd. v. CIR . It was further contended that there is distinction between partial destruction of source of income and complete loss of business. It was contended that in the above mentioned case only one of the hotels had been sold by the assessee and not the entire chain of hotels. It was pointed out that if one were in the acquisition of the businesses, then the discontinuance of one of the businesses would undoubtedly bear character of a revenue receipt.
18. Our attention was invited to the finding of the Assessing Officer in para 7.1 of the assessment order wherein the Assessing Officer has recorded that the assessee had received the amount for breach of contract executed in the year, 1982. It was contended that there was no breach of contract insofar as there was no violation in terms of the Trade Marks Act, 1958/1999 in particular Section 34 of the Act. Our attention was invited to Delhi High Court judgment in Senor Laboratories Ltd. v. Jagsonpaul Pharmaceutical AIR 1922 Delhi 102 para 9 to support the contention. It was further contended that even if it is assumed that there was breach of contract then the assessee had only a right to sue for breach of con tract. Relying upon the decision of the Gujarat High Court in the case of Baroda Cement & Chemicals Ltd. v. CIT , it was contended that the right to sue cannot be transferred. Reliance was also placed on the decision of the Delhi High Court in the case of CIT v. J. Dahlia to support the contention that right to sue was not an actionable claim. The learned Counsel further invited our attention to Section 55(2)(a) of the Income-tax Act, 1961 which has been amended with effect from 1-4-1998 and partly with effect from 1-4-2002 applicable prospectively. It was contended that the Legislature has recognized brand name as a capital asset and, therefore, the consideration received for its transfer is a capital receipt. Similarly, consideration for cessation of right to carry on business is also considered as capital asset and liable to tax. These amendments are applicable prospectively. It was further contended that the decision of the Madras High Court in the case of CIT v. H. Miller & Co. Ltd. relied upon by the Departmental Representative is distinguishable on facts. It was further contended that Section 41 of the Income-tax Act, 1961 is not applicable in this case. Referring to the contention advanced on behalf of the revenue that the Commissioner of Income-tax (Appeals) has admitted additional evidence in violation of Rule 46A, it was contended that a ledger account of BBLIL had been filed before the Commissioner of Income-tax (Appeals) and nothing turns upon the same for deciding the issue. It was accordingly pleaded that the appeal of the revenue may be dismissed.
19. In counter reply, the learned Departmental Representative re-iterated the contention that there was no destruction of the business of the assessee under the brand name 'Kwality'. The assessee had not acquired any capital asset by making payment of Rs. 1,000 per annum for the use of trademarks and, therefore, there was no acquisition of capital asset. It was further contended that in any case Rs. 10 lakhs disclosed by the assessee for goodwill was not sufficient as it was without any basis. It was further contended that the amendment in Section 55(2)(a) and Section 32 of the Act clearly indicate the legislative intent. It was accordingly pleaded that the appeal of the revenue may be allowed.
20. We have given our careful consideration to the rival contentions. In this case, there is no dispute about the receipt of Rs. 55 lakhs. The dispute relates to the nature of the said receipt. As pointed earlier the assessee had disclosed a sum of Rs. 10 lakhs as capital gains on transfer of goodwill and Rs. 45 lakhs has been disclosed as a capital receipt not liable to tax. Before we consider the legal principles for determination of the issue about the nature of receipt, it would be necessary to first sort out some disputed facts. We therefore first proceed to resolve the factual matrix. It may be relevant to point out that it is not disputed that Lamba family had been carrying on the business of manufacturing of ice-cream under the brand name 'Kwality' after the partition, for many generations, at various different places like Shimla, Chandigarh, Delhi, Lucknow, Calcutta, Bombay etc. Each family group was carrying on its own business of manufacturing ice-cream and running of restaurants within its territorial areas. The assessee's family had started the business of restaurants and manufacturing of ice-cream under the brand name 'Kwality' in fifties and ice-cream was sold in various territories referred to elsewhere in this order. There was no interference from any other family groups who were running the business in their respective areas. It appears that there arose a difference between Shri P.L. Lamba group based in Delhi and the assessee as a result of which the P.L. Lamba group (Delhi) had set up a factory in Ludhiana in the year 1968. The writ petition was also filed by P.L. Lamba Delhi group in the Himachal Pradesh High Court seeking a restraint upon the assessee for production of ice-cream under the brand name of 'Kwality'. Interim stay was also sought by P.L. Lamba Group of Delhi from the Himachal Pradesh High Court. The Hon'ble High Court while passing the order in M.A. No. 59 of 1981, dated 26-5-1981 declined to grant any interim stay after recording a finding that the assessee as well as P.L. Lamba Group of Delhi had been carrying on the business of manufacturing of ice-cream under the brand name 'Kwality' in different places for a long time and, therefore, no temporary injunction could be issued to the assessee group for stopping the manufacturing of ice-cream at Chandigarh. The fate of writ petition is not known as no order on the writ petition barring the order on M.A. No. 59 of 1981 dated 26-5-1981 has been placed on record. So however, in the year 1982, there was an agreement between Shri P.L. Lamba and Shri SuniJ Lamba with the assessee (the copy of the agreement is placed on record). The said agreement has been executed on 29-7-1982. In the said deed, there is a reference of consignment deed dated 22-4-1982 between Pure ice-cream 1967 Co. having its registered office at Bombay by virtue of which S/Shri P.L. Lamba and Suriil Lamba had been assigned absolutely and irrevocable to use all three trademarks in the territories of J & K, State of Himachal Pradesh, Haryana, Punjab, Rajasthan, Uttar Pradesh and Union territories ol Delhi and Chandigarh. By virtue of the agreement dated 29-7-1982, P.L. Lamba Group of Delhi allowed the assessee to use these three trademarks which are as under:
Trade Mark No. 178269 255297 255298 The territories assigned exclusively to the assessee for carrying on the business have also been referred to elsewhere in this order. As per the said agreement the assessee was required to pay Rs. 1,000 per annum to P.L. Lamba Group of Delhi for the use of trademarks. As per Clause 7 of the agreement P.L. Lamba Group of Delhi was required to incur expenditure on publicity through Radio, T.V. and other media for promotion of 'Kwality' ice-cream throughout the areas including the areas in which the assessee was operating exclusively. The said clause also provided that the assessee would bear t he cost of publicity to the extent of terms of memorandum attached to the said agreement. Copy of that memorandum is not available on record. So however, it has no bearing on the issue involved in this case. On 14-10-1994, P.L. Lamba Group of Delhi entered into a Strategic Alliance Agreement with Brooke Bond Lipton India Ltd. (unit of H.L.L.). By virtue of this agreement P.L. Lamba Group of Delhi had undertaken to procure franchisees marketing assets including rights to vendor licences/vending licences and municipal trade licences for a gross consideration of Rs. 2 crores payable on acquisition of such assets. Clause-2 of the agreement provides list of the parties from whom the release of trademark licences and transfer of marketing and distribution of asset sin favour of BBLIL was to be acquired which is as under:
Amount Payable Rs. Lakhs
Franchisees Trade Mark Assets/Rights Total
Jayanthi Food Processing 10 25 35
(P.) Limited, Kota
Kwality Ice-cream Company 25 65 90
(P.) Ltd., Jaipur.
Raks Foods Industries, 20 35 55
Jammu
Hukson Foods India (P.) Ltd., 5 15 20
Varanasi - U.P.
____ ____ ____
60 140 200
The above list does nol include the name of the assessee. Copy of the deed of assignment dated 14-10-1994 is also on record. As per this deed, P.L. Lamba Group of Delhi had assigned and transferred unto the assignees their entire rights, claim, benefit, goodwill and the said trademark as per the details recorded in the schedule. In this agreement it was specifically provided that P.L. Lamba Group of Delhi had licensed user of trademark rights to the parties as per Appendix-3 forming part of the agreement. In Schedule-3, the name of the assessee is also included as a party "under dispute". It appears that there were negotiations between the assessee and P.L. Lamba Group of Delhi and on the basis of mutual understanding between the parties a memorandum of understanding was recorded in writing on 31-5-1995. By virtue of the memorandum of understanding, the assessee agreed to desist from making any claim, right or interest in the trademark 'Kwality' with effect from 31-5-1995. The assessee also agreed to terminate with effect from 1-6-1995 all activities direct or indirect relating to manufacturing operations of ice-cream, lollies and other allied ice-cream products under the mark 'Kwality'. P.L. Lamba Group of Delhi had agreed to pay a sum of Rs. 55 lakhs to the assessee in consideration of giving up the claim in respect of the trademarks as well as for stopping the manufacturing of ice-cream under the mark of 'Kwality' with effect from 1-6-1995. A sum of Rs. 10 lakhs was paid to the assessee at the time of signing of the memorandum of understanding. In this memorandum of understanding, it is clearly indicated that a formal deed for relinquishment of trademark user rights and interest and termination of ice-cream manufacturing operation under the brand name 'Kwality' would be executed by the parties. Subsequently, an agreement dated 17-2-1997 has been executed between (i) assessee group company (ii) P.L. Lamba Group of Delhi (iii) M/s. Digital Securities Pvt. Limited and (iv) Brooke Bond Lipton India Ltd. [(iii) and (iv) units of H.L.L.]. By virtue of this agreement, not only the contents of the memorandum of understanding between P.L. Lamba Group of Delhi and the assessee have been reiterated, the assessee has been specifically allowed to use the name of 'Kwality' without using the star-burst for six existing restaurants and future establishments of hotel/ restaurant business which were in pipeline at various stations at that time. The Assessing Of ficer has recorded a finding that a sum of Rs. 55 lakhs received by the assessee is from P.L. Lamba Group of Delhi and not from Brooke Bond Lipton India Ltd. or M/s. Digital Securities Pvt. Ltd. The Assessing Officer has not stopped at that. He has further recorded a finding that the agreement between the assessee, P.L. Lamba Group of Delhi, M/s. Digital Securities Pvt. Ltd., Bombay and Brooke Bond Lipton India Ltd., Calcutta was a device to give colour to the transaction for the purpose of tax avoidance. In our considered view, in the memorandum of understanding dated 31-5-1995 placed on record, there is no reference of M/s. Digital Securities Pvt. Ltd. or of Brooke Bond Lipton India Ltd. The user rights of three trademarks were owned by P.L. Lamba Group of Delhi. The assessee had agreed to give up its rights in the said trademarks specifically conferred upon [{vide agreement dated 29-7-1982 by P.L. Lamba Group of Delhi. The assessee had also agreed to terminate the manufacturing of ice-cream business under the brand name 'Kwality' with effect from 1-6-1995. It is, therefore, evident from the material on record that a sum of Rs. 55 lakhs was agreed to be paid by P.L. Lamba Group of Delhi to the assessee and not by M/s. Digital Securities India Pvt. Ltd. or by Brooke Bond Lipton India Ltd. The assessee had received the payment on the basis of memorandum of understanding between P.L. Lamba Group of Delhi and the assessee from P.L. Lamba Group of Delhi and not from other companies. It is a different matter that P.L. Lamba Group of Delhi had an understanding with the Digital Securities Pvt. Ltd. and Brooke Bond Lipton India Ltd. Of course, the benefit of the understanding ultimately accrued to Digital Securities Pvt. Ltd. and Brooke Bond Lipton India Ltd. So however, the payment to the assessee was agreed to be made by P.L. Lamba Group of Delhi by virtue of memorandum of understanding without which the Jailer could not have completed the transaction with DSPL and BBLIL. We are therefore, not in agreement with the finding of the Commissioner of Income-tax (Appeals) that the assessee had received the payment from Brooke Bond Lipton India Ltd. and not from P.L. Lamba Group of Delhi. We are, however, not in agreement with the finding of the Assessing Officer that subsequent agreement dated 17-2-1997 was merely a made up agreement purportedly as a tax planning device. It has to be borne in mind that as per the memorandum of understanding between P.L. Lamba Group of Delhi and the assessee, it had been agreed by the assessee to relinquish the trademark rights and interest as well as termination of ice-cream manufacturing facilities under the brand name 'Kwality' with effect from 1-6-1995. As pointed out earlier, the assessee had agreed to execute a formal agreement subsequently. So however, the formal agreement executed on 17-2-1997 was not merely the affirmation of the memorandum of understanding but it also incorporated several aspects, such as the permission to the assessee to continue the user name of 'Kwality' in respect of its restaurant/hotel business. Therefore, it appears that signing the agreement with P.L. Lamba Group of Delhi, Digital Securities Pvt. Ltd. and Brooke Bond Lipton India Ltd. was with the view to secure the user name 'Kwality' by the assessee for its restaurant/hotel business without any hinderance. The Digital Securities Pvt. Ltd. and Brooke Bond Lipton India Ltd. were also benefited by the agreement insofar as the dispute between P.L. Lamba Group of Delhi and the assessee stood resolved and assignment of rights in favour of Brooke Bond Lipton India Ltd./Digital Securities Pvt. Ltd. secured from possible litigation.
21. On the analysis of the above discussion and material on record, we record the following conclusions on facts:
(i) That the assessee had relinquished trademark user rights and interest and had also agreed the termination of icecream manufacturing facilities under the brand name 'Kwality' with effect from 1-6-1995 in consideration of Rs. 55 lakhs in favour of P.L. Lamba Group of Delhi.
(ii) That the payment of Rs. 55 lakhs was received by the assessee from P.L. Lamba Group of Delhi and not from Brooke Bond Lipton India Ltd. That in turn P.L. Lamba Group of Delhi may have received the payments from Brooke Bond Lipton India Ltd./Digital Securities Pvt. Ltd. But since P.L. Lamba Group of Delhi was bound to make the payment to the assessee it cannot be said that the payment to the assessee was made by Brooke Bond Lipton India Ltd. or Digital Securities Pvt. Ltd.
(iii) That the agreement, dated 17-2-1997 was necessitated by business consideration and not necessarily as a tax avoidance device.
We hold accordingly.
22. We now proceed to consider another factual aspect that is as to whether there was a breach of contract by P.L. Lamba Group of Delhi with the assessee. As mentioned earlier, the assessee was useiof the name 'Kwality' within its area for a long time even prior to the execution of the agreement with P.L. Lamba Group of Delhi. This fact is stated by the Hon'ble Himachal Pradesh High Court (writ petition filed by P.L. Lamba Group of Delhi in M.A. No. 59 of 1981, order dated 26-5-1981). By virtue of the agreement dated 29-7-1982, the assessee got the assignment of user rights in respect of three trademarks, namely; (i) 178269 of 31-1-1957 (ii)(a) 255297 and (ii)(b) 255298 of 11-3-1969. P.L. Lamba Group of Delhi had entered into an agreement with Brooke Bond Lipton India Ltd./Digital Securities Pvt. Ltd. for relinquishment of trademark user rights. In the agreement dated 29-7-1982 between the assessee and P.L. Lamba Group of Delhi Clause 11 of the agreement provided as under:
This agreement shall remain in force so long was the three trademarks remain subsisting on the register of trademarks.
23. Clause 5 of the said agreement also provided as under:
It is understood that during the term of this agreement the proprietors shall not grant any registered user licence to anyone else, nor shall the proprietors manufacture sell or market ice-cream under the abovesaid three trademarks in the territories allotted to the user.
24. In the above clauses proprietors are "P.L. Lamba Group of Delhi" and the users "the assessee". Therefore, there is clear prohibition to P.L. Lamba Group of Delhi for the transfer of the three trademarks which were allowed to be used by the assessee in the specified territories. We therefore, hold that there was a breach of agreement by P.L. Lamba Group of Delhi when the user rights of trademarks specifically allotted to the assessee had been transferred to H.L.L. (Group).
25. So however, we are not in agreement with the finding of the Assessing Officer that the payment received by the assessee was for breach of the agreement. As pointed out earlier, the assessee had been using the brand name 'Kwality' right from 1948. As per the decision of the Delhi High Court in the case of Senor Laboratories Ltd. v. Jagsonpaul Pharmaceutical AIR 1922 Delhi 102, it was held as under:
By Catena of decisions, it is now settled that prior user of trademark has rights even over latter registered user.
26. Therefore, the violation of agreement was in regard to three trademarks specifically allotted to the assessee for use by virtue of the agreement. The assessee had a remedy against the breach of agreement. The right of the assessee was right to sue for the breach. As held by Gujarat High Court, in the case of Baroda Cement & Chemicals Ltd. v. CIT , "the right to sue is not actionable claim and, therefore, cannot be transferred". Similar view has been taken by the Delhi High Court in the case of CIT v. J. Dalmia . Therefore, it cannot be said that the assessee had transferred the right to sue to P.L. Lamba Group of Delhi.
27. Even otherwise, the assessee has neither transferred the right to sue, nor initiated any action for specific performance or for claiming damages. Negotiations have taken place between parties and ultimately, the assessee has agreed to surrender the user rights in respect of the trademarks and has also agreed to the termination of manufacturing activities relating to ice-cream etc. in the brand name 'Kwality'. Therefore, we are of the considered view that the amount of Rs. 55 lakhs received by the assessee cannot be said to be on account of breach of contract.
28. Taking the totality of the facts and circumstances of this case into consideration, we are of the view that the amount of Rs. 55 lakhs received by the assessee from P.L. Lamba Group of Delhi is on account of surrender of user rights/goodwill as well as for giving up the right to manufacture of ice-cream and other allied products under the brand name of 'Kwality'.
29. In order to determine the taxability of the receipt on the basis of the above conclusion of facts, it would now be necessary to consider the principles of law laid down by the Hon'ble Supreme Court in particular and other High Courts in regard to the taxability of receipt as a capital receipt or as a revenue receipt.
30. In the case of CIT v. Rai Bahadur Jairam Valji , their Lordships held:
(1) In the determination of the question whether a receipt is capital or income, it is not possible to lay down any single test as infallible or any single criterion as decisive. The question must ultimately depend on the facts of the particular case and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. That, however, is not to say that the question is one of fact, for these questions between capital and income, trading profit or no trading profit, are questions which, though they may depend to a very great extent on the particular facts of each case, do involve a conclusion of law to be drawn from those facts.
In this case, it was further held:
(2) Generally, payments made in settlement of rights under a trading contract are trading receipts and are assessable to revenue. But where a person who is carrying on business is prevented from doing so by external authority in exercise of a paramount power and is awarded compensation therefor, whether the receipt is a capital receipt or a revenue receipt will depend upon whether it is compensation for injury inflicted on a capital asset or on a stock-in-trade.
In the case, of Kettlewell Bullen & Co. Ltd. v. CIT . The relevant facts are as under:
The appellant-company formed with the object, inter alia, of carrying on the business of managing agencies, was the managing agent of six companies including the Fort William Jute Co. Pursuant to an arrangement with Mugneeram Bangur and Co., whereby the latter agreed (i) to purchase the entire holding of shares of the appellant in the Fort William Jute Co., the managed company, (ii) to procure repayment of all loans made by the appellant to that managed company, and (iii) to procure that the managed company will compensate the appellant for loss of office by the payment of the sum of Rs. 3,50,000 from the managed company. Under the terms of the managing agency agreement, the managed company was not obliged to pay any compensation to the appellant for voluntary resignation of the managing agency. The question was whether the amount received by the appellant to relinquish the managing agency was a revenue receipt liable to tax.
In the above facts, the Hon'ble Supreme Court held:
Held, on the facts, that the arrangement with Mugneeram Bangur and Co. was not in the nature of a trading transaction, but was one in which the appellant parted with an asset of an enduring value. What the assessee was paid was to compensate it for loss of a capital asset and was not, therefore, in the nature of a revenue receipt. It mattered little that the appellant did continue to conduct the remaining managing agencies after the determination of its agency with the Fort William Jute Co.
In the case oiGillanders Arbuthnot & Co. Ltd. v. CIT , the relevant facts are as under:
The appellant-company carried on business in diverselines, besides acting as managing agents, shipping agents, purchasing agents, and secretaries, the company also acted as importers and distributors on behalf of foreign principals and bought and sold on its own account. Under an unwritten agreement which was terminable at will the appellant acted as sold agents and distributors of explosives manufactured by the Imperial Chemical Industries (Export) Ltd. That agency was terminated and by way of compensation the Imperial Chemical Industries (Export) Ltd. paid for the first three years after the termination of the agency two-fifths of the commission accrued on its sales in the territory of the appellant's agency computed at the rates at which the appellant had formerly been paid and in addition in the third year full commission for the sales effected in that year at the same rates. The Imperial Chemical Industries (Export) Ltd. had intended to take a formal undertaking from the appellant to refrain from selling or accepting any agency for explosives or other competitive commodities, but no such agreement in writing was taken or insisted upon. The question was whether the amounts received by the appellant for those three years were of the nature of capital or revenue.
On the above facts, the Hon'ble Supreme Court held as under:
That, having regard to the vast array of business done by the appellant as agents, the acquisition of agencies was in the normal course of business and determination of individual agencies a normal incident not affecting or impairing its trading structure. The amounts received by the appellant for the cancellation of the explosives agency therefore did not represent the price paid for the loss of a capital asset. They were of the nature of income. There is no immutable principle that compensation received on cancellation of an agency must always be regarded as capital.
In the case of P.H. Divecha v. CIT , the relevant facts are as under:
A firm which was conducting business in electrical goods including electric lamps entered into an agreement in 1938 with Philips Electrical Co. under which the firm was given exclusive rights to purchase and sell electric lamps manufactured by Philips in certain areas. By a letter which formed an annexure to the agreement the firm was entitled to a commission of 121/2 per cent on the gross invoice amount and a further discount of 2 per cent. On the net invoice prices to cover breakage of fault in manufacture. If the company sold any goods directly to the buyers in those areas the firm was entitled to compensation of 5 per cent. Of the net amount of invoices covering such sales. The firm on its part undertook to sell only Philips lamps in those areas and to prevent re-exportation of the lamps by third parties. The agreement was to continue unless determined by either party by giving three months' notice. There was no provision in the agreement for the payment of compensation to the firm on the termination of the agreement nor was compensation payable for temporary suspension of supplies. This agreement continued for a period of sixteen years. Philips Electrical Co. decided to take over the distribution of lamps in those areas and served a notice upon the firm terminating the agreement with effect from 30-6-1954. The firm was, however, free to deal in their lamps as regular lamp dealers. As a result of discussion between the firm and Philips Electric Co. certain minutes were recorded coveting, inter alia, the furnishing by the firm and names of dealers over the past six months, the execution of local orders, certain outstanding contracts and the payment of commission on such contracts, and the disposal of stocks of the firm. As a gesture of goodwill Philips Electrical Co. agreed to pay in instalments Rs. 40,000 per annum for a period of three years to each of the partners of (he firm. The minutes further recorded that 'the three years' remuneration' would be in addition to the profit the firm would realise as regular lamp dealers. The question was whether the sum of Rs. 20,000 received in the accounting year ended 31-12-1954, by each of the assessees, who were partners of the firm, was assessable to income-tax.
On these facts, their Lordships held as under:
In determining whether a payment amounts to a return for loss of a capital asset or is income, profits or gains liable to income-tax, one must have regard to the nature and quality of the payment. If the payment was not received to compensate for a loss of profits of business the receipt in the hands of the recipient cannot properly be described as income, profits or gains as commonly understood. To constitute income, profits or gains, there must be a source from, which the particular receipt has arisen, and a connection must exist between the quality of the receipt and the source. If the payment is by another person it must be found out why that payment has been made. It is not the motive of the person who makes the payment that is relevant. More relevance attaches to the nature of the receipt in the hands of the person who receives it though in trying to find out the quality of the receipt one may have to examine the motive out of which the payment was made.
In the case of Oberoi Hotel (P.) Ltd. v. CIT , (he relevant facts are as under:
The assessee-company was operating, managing and administering many hotels belonging to others for a fee at several places. As per the memorandum of association of the company, it was authorized to run hotels on its own account and also to operate, manage and administer hotels belonging to others for a fee. In terms of an agreement dated 2-11-1970, the company agreed to operate the hotel known as Hotel Oberoi Imperial for which the assessee-company was to receive a certain fee called management fee which was calculated on the basis of gross operating profits as provided in the agreement. The agreement was to run for an initial period of ten years; the assessee had the option to ask for renewal of the said agreement for two further periods of 10 years each by mutual agreement. Article XVIII of the said agreement gave the assessee a right to exercise the option of purchasing the hotel in case its owners desired to transfer the same during the currency of the agreement. Thereafter on 14-9-1975, a supplementary agreement was executed between the assessee and the receiver who had been appointed for the property. The right to exercise its option was given up by the assessee. It was agreed that the receiver would be at liberty to sell or otherwise dispose of the said property at such price and or such terms as he may deem fit and was not under any obligation requiring the purchaser thereof to enter into any agreement with the operator (assessee) for the purpose of operating and managing the hotel or otherwise and in its return agreed consideration as to be paid to the assessee. On the basis of the agreement, the assessee received the amount of Rs. 29,47,500 and claimed that it was a capital receipt. The Income-tax Officer rejected the claim but the Commissioner of Income-tax (Appeals) and the Tribunal upheld it. The High Court arrived at the conclusion that it was a revenue receipt assessable to income-tax as business income for the assessment year 1979-80.
On the above facts, it was held as under:
Held, reversing the decision of the High Court, that the amount received by the assessee was the consideration for giving up its right to purchase and/or to operate the property or for getting it on lease before it was transferred or let out to other persons. It was not for settlement of rights under a trading contract, but the injury was inflicted on the capital asset of the assessee and giving up the contractual right on the basis of the principal agreement had resulted in loss of source of the assessee's income. The receipt in the hands of the assessee was a capital receipt.
Their Lordships further held as under:
It may be broadly stated that what is received for loss of capital is a capital receipt; what is received as profit in a trading transaction is taxable income. But the difficulty arises in ascertaining whether what is received in a given case is compensation for loss of a source of income, or profit in a trading transaction. Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue. Where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt.
In the case of CIT v. Vazir Sultan & Sons , the relevant facts are as under:
In 1931, under the terms of a resolution of the board of directors of a cigarette manufacturing company, the assessee a registered firm was appointed the sole selling agents and sole distributors for the Hyderabad State for the cigarettes manufactured by the company and they were allowed a discount of 2 per cent. On the gross selling price. In 1939 another arrangement was arrived at between the assessee and the company whereby the assessee was given a discount of 2 per cent, not only on the goods sold in the Hyderabad State but on all the goods sold in the Hyderabad State and outside the Hyderabad State. In 1950, the assessee and the company reverted to the old arrangement confining the sole agency of the assessee to the Hyderabad State and the assessee was paid a sum of Rs. 2,19,343 'by way of compensation' for the loss of the agency for the territory 'outside the Hyderabad State. The question being whether the sum of money thus received by the assessee was a revenue receipt assessable to income-tax or a capital receipt not so assessable;
On these facts, the Hon'ble Supreme Court held as under:
The agency-agreement in respect of the territory outside the Hyderabad State was as much an asset of the assessee's business as the agency business within the Hyderabad State and though the expansion of the territory of the agency in 1939 and the restriction thereof in 1950 could be treated as grant of additional territory in 1939 and withdrawal thereof in 1950, both these agency agreements constituted but one employment of the assessee as the sole selling agents of the company; the agency agreements were not entered into by the assessee in the carrying on of their business but formed the capital asset of the assessee's business which was exploited by the assessee by entering into contacts with various customers and dealers in the respective territories; it formed part of the fixed capital of the assessee's business and was not the circulating capital or stock-in-trade of their business; and the payment made by the company as and by way of compensation for terminating or cancelling the agreement was a capital receipt in the hands of the assessee. Held further the fact that the agreement was terminable at will and was not of an enduring character was immaterial, and it was also immaterial that only one of the agency agreements was cancelled by the company.
In the case of Senairam Doongarmall v. CIT , the relevant facts are as under:
The assessee, which owned a tea estate consisting of tea gardens, factories and other buildings, carried on the business of growing and manufacturing tea. The factory and other buildings on the estate were requisitioned for defence purposes by the military authorities. Though the assessee continued to be in possession of the tea gardens and tended them to preserve the plants, the manufacture of tea was stopped completely. The assessee was paid compensation for the years 1944 and 1945 under the Defence of India Rules calculated on the basis of the outturn of tea that would have been manufactured by the assessee during that period. The question was whether the amounts of compensation were revenue receipts taxable in the hands of the assessee.
On the above facts, their Lordships held as under:
(i) That the first consideration before holding a receipt to be profits or gains of business within Section 10 of the Income-tax Act was to see if there was a business at all of which it could be said to be income. The primary condition of the application of Section 10 was that tax was payable by an assessee under the head 'Profits and gains of a business' in respect of a business carried on by him. Where an assessee did not carry on business at all, the section could not be made applicable, and any compensation for requisition of assets that he received could not bear the character of profits of a business.
(ii) That 'business' denoted an activity with the object of earning profit. To say that a business was being carried on, meant no more than that profit was to be earned by a process of production. The business of a tea-grower and manufacturer was not merely to grow tea plants but to collect tea leaves and render them fit for sale. The tending of his tea gardens to preserve the plants, was not a continuation of the business of the assessec which had come to an end for the time being.
(iii) That the measure and method of its payment was not decisive of the character of a payment of compensation.
(iv) That the compensation paid to the assessee did not partake of the character of profits because, business not having been done by the assessee, no question of profits taxable under Section 10 arose.
(v) That the amounts of compensation received by the assessee were not revenue receipts and did not comprise tiny element of income.
In the case of Addl. CIT v. Ganapathi Raju Jogi [l993] 200 ITR 612 (SC), route permit to ply buses was held to constitute capital assets since no amount was paid for route permit, consideration received was held not assessable to tax as capital gains. In this case, their Lordships held as under:
That though route permits for buses granted by the road transport authority were capital assets, where no amount was paid by the operator for acquiring a route permit and it was only over a number of years that it acquired some value because of various factors, namely, development of roads, passenger traffic, frequency of the buses, the value of the permit could not be evaluated as on the date of acquisition and in such a case the consideration in terms of money realized on its transfer could not be brought to tax as capital gains, the Department preferred an appeal to the Supreme Court. The Supreme Court dismissed the appeal.
In the case of Karam Chand Thapar & Bros (P.) Ltd. , Their Lordships of Supreme Court laid down the following principles of law:
Ordinarily, compensation for loss of office or agency is regarded as capital receipt, but this rule is subject to an exception that payment received even for termination of an agency agreement would be revenue and not capital in the case where the agency was one of many which the assessee held and its termination did not impair the profit-making structure of the assessee, but was within the framework of the business, it being a necessary incident of the business that existing agencies may be terminated and fresh agencies may be taken. But it is for the income-tax department to clearly establish that the case fell within the exception to the ordinary rule.
31. There are number of High Courts judgments relating to the issue involved in this case decided on the facts of individual cases. We, therefore, do not consider necessary to refer to such judgments insofar as the broad principles for determining the issue have been laid down by the Hon'ble Supreme Court which are summarized as under:
(i) The question whether a receipt is of capital nature or of revenue nature depends on the facts of the particular case. The judicial decisions bearing on the question are valuable as these indicate the basic parameters to be taken into account in reaching a decision.
(ii) In a trading contract, when payments are made in supplement of rights, generally the receipt is assessable as a revenue receipt. So however, when a person who is, carrying on the business is prevented from doing so by awarding compensation therefore, the nature of the receipt will depend upon whether it is the compensation for the injury inflicted on a capital asset or on a stock-in-trade.
(iii) There is no immutable principle that compensation received on cancellation of agency must always be regarded as capital receipt.
When the assessee is having several managing agencies and one of which is relinquished by the assessee on receipt of compensation for the same, the receipt would be of capital nature and not of a revenue nature notwithstanding the fact that assessee continues to conduct the remaining managing agencies after termination of one of the agencies. Ordinarily, compensation for loss of office or agency is a capital receipt but this rule is subject to an exception that payment received even for termination of an agency agreement would be revenue and not capital in a case where the agency was one of many which the assessee held and its termination did not impair the profit-making structure of the assessee provided that the purchase and sale of agencies is necessary incident of business of the assessee. However, it will be for the income-tax authorities to establish that the case fell with the exception to the ordinary rule and that the compensation received for termination of the agency is of capital nature.
(iv) In determining whether a payment amounts to return for loss of a capital asset or is income, profits or gains liable to income-tax, one must have regard to the nature and quality of the payment. If the payment is received to compensate for a loss of profit of business, receipt in the hands of the recipient cannot be described as income. To constitute income there must be a source from which the particular receipt has arisen and a connection must exist between the quality of the receipt and the source. If the payment is by another person, it must be found out why that payment has been made. It is not the motive of the person who makes the payment that is relevant; more relevance attaches to the nature of the receipt in the hands of the person who receives it.
(v) The amount received as consideration for giving up a right to purchase or to operate the property or for getting it on lease before it is transferred or let out to other persons would be a capital receipt insofar as the injury is inflicted on the capital asset of the assessee resulting in the loss of source of assessee's income.
(vi) The compensation received for termination of agency which was terminable at will would be a capital receipt notwithstanding the fact that the assessee continues to carry on the business in respect of other agencies.
(vii) The measure and method of payment is not decisive of the payment of compensation.
(viii)That the route permits granted by the road transport authority are capital assets and the compensation received for the transfer of the same would be a capital receipt.
32. Now let us proceed to consider the nature of receipt of Rs. 55 lakhs in the hands of the assessee on the basis of above principles of law. In order to recapitulate, the assessee was in business of manufacturing ice-cream and other allied products in the name of 'Kwality' right from the year 1948. In the year 1981, the assessee specifically acquired the user rights in respect of the three trademarks referred to elsewhere in this order. On the basis of the circumstances and the later developments, the assessee had entered into an agreement with P.L. Lamba group of Delhi by virtue of which the assessee gave away its rights in the trademarks/trade-name/goodwill as well as its right to manufac-ture ice-cream in the name of Kwality' in specified areas. The assessee having relinquished trademark/goodwill for a consideration, on the basis of principles laid down by the Hon'ble Supreme Court referred to above, would amount to transfer of capital asset. The finding of the Assessing Officer that the receipt for transfer of user rights in respect of trade-name/trademarks is a revenue receipt when tested in the light of the aforementioned principles of law laid down by the Apex Court does not stand the test of scrutiny. In our considered view, the receipt of consideration for transfer of goodwill/trademarks and trade-names is a capital receipt and not a revenue receipt. We hold accordingly.
33.The next issue that requires consideration is as to whether the compensation received for giving up the right to manufacture ice-cream and other allied products in specified areas is revenue receipt. As pointed out earlier, the Hon'ble Supreme Court has laid down the general principles that giving up the right to carry on the business or termination of an agency, which is the business apparatus, is on capital account. In this case, when general principles are applied, the only conclusion that follows is that compensation received for giving up the right to manufacture ice-cream is of capital nature. As pointed out earlier, there are exceptions to general rule i.e., in such cases where the assessee has several businesses and one of which is transferred what would be the treatment given to the compensation received in such cases. The following exception to the general rule as to the nature of compensation received for loss of agency or source of business has been laid down by the Hon'ble Supreme Court in the case of Karam Chand Thapar & Bros. (P.) Ltd. (supra). It is quoted hereunder even at the cost of repetition:
Ordinarily, compensation for loss of office or agency is regarded as capital receipt, but this rule is subject to an exception that payment received even for termination of an agency agreement would be revenue and not capital in the case where the agency was one of many which the assessee held and its termination did not impair the profit-making structure of the assessee, but was within the framework of the business, it being a necessary incident of the business that existing agencies may be terminated and fresh agencies may be taken. But it is for the income-tax department to clearly establish that the case fell within the exception to the ordinary rule.
34. In the present case, the only contention advanced on behalf of the revenue is that the assessee was not thrown out of business by giving up the right to manufacture of ice-cream and allied products under the brand name "Kwality". It was contended by the revenue that assessee continued to carry on the restaurant business in the name of 'Kwality' and also obtained distributorship of ice-creams from Hindustan Lever Ltd./Brooke Bond India Ltd. for the same area for which the right of manufacture of ice-cream was given up. In our considered view, the case of the assessee docs not fall within the exception to the General Rule as laid down by the Hon'ble Supreme Court (supra). The assessee was not in the business of buying and selling of businesses. The business of manufacturing of ice-cream and other allied products was an age old business of the assessee. Restaurant business was a separate business started later on by the assessee. By giving up the right to manufacture ice-cream and other allied products, the assessee lost a source of income. Loosing a source of income in the case of a person, who is not in the business of buying and selling of businesses, would amount to the transfer of a capital asset and the compensation received therefor, in our view, clearly falls within the ambit of a capital receipt. The distributorship of ice-creams is totally a different line of business than manufacturing of ice-cream. Moreover, the later events have established that the assessee got the distributorship of ice-creams from Hindustan Lever Ltd. which was later on cancelled without payment of any compensation to the assessee.
Taking the totality of the facts and circumstances of the case into consideration, we are of the considered view that the amount of Rs. 55 lakhs received by the assessee was on account of (i) surrender of goodwill/user of trademark rights/brand name etc. and (ii) for giving up the right to manufacture ice-cream in the brand name of 'Kvvality'. We are, therefore, in agreement with the finding of the CIT(A) that the receipt of Rs. 55 lakhs is a capital receipt.
35. The only other question that remains for our consideration is the bifurcation of the receipt for the purpose of taxation. The assessee had bifurcated Rs. 10 lakhs on account of surrender of goodwill etc. and Rs. 45 lakhs for surrender of the rights in regard to the manufacture of ice-cream under the brand name of 'Kwality'. The Assessing Officer did not get an opportunity to consider the reasonableness of the bifurcation made by the assessee insofar as the entire receipt of Rs. 55 lakhs was considered to be a revenue receipt. The CTT(A) has accepted the amount of Rs. 10 lakhs attributed by the assessee for the transfer of goodwill as reasonable. As pointed out earlier, the Department has questioned the bifurcation made by the assessee. It was contended that the bifurcation made by the assessee is arbitrary and unreasonable. In our considered view, the value of the goodwill of the assessee at the time of surrender could be evaluated by well-accepted methods of determination of the same. The revenue authorities have not made any exercise on those lines as no such occasion arose before the Assessing Officer. The assessee has also not given the basis for evaluation of its goodwill in regard to the manufacture of ice-cream at Rs. 10 lakhs. We would have remanded this issue back to the file of the Assessing Officer for determination of the goodwill on the basis of well-accepted principles for determination of the same. So, however, we feel that it is desirable to decide the issue at this level so as to avoid multiplicity of litigation. In the absence of proper determination of the bifurcation, we will have to resort to reasonable estimation. In para 20 of this order, we have referred to Clause 2 of the agreement between P.M. Lamba group of Delhi and Brooke Bond Lipton India Ltd. A bifurcation in respect of four concerns between the trademark and other rights is indicated in the agreement as reproduced in the order. We find that in the case of Rake Foods Industries, Jammu, the sum of Rs. 55 lakhs is bifurcated as Rs. 20 lakhs for trademark and Rs. 35 lakhs for assets and rights. In the case of Hukson Foods India (P.) Ltd., Varanasi, the bifurcation given is Rs. 5 lakhs and Rs. 15 lakhs for trademark and rights respectively. Similarly, in the case of Kwality Ice-cream Company (P.) Ltd., Jaipur, the bifurcation given is Rs. 25 lakhs and Rs. 65 lakhs for trademarks and other rights respectively out of Rs. 2.60 crores bifurcated towards trademarks and Rs. 190 lakhs for other assets. This way the ratio works out to 30 per cent. Taking these facts as the basis, we are of the considered view that it will be just and reasonable to apportion Rs. 15 lakhs out of the total consideration of Rs. 55 lakhs towards the goodwill/trade-name/trademarks and the remaining amount on account of surrender of right to manufacture ice-cream and other allied products under the brand name "Kwality". We direct the Assessing Officer to recompute the amount assessable to tax accordingly.
36. In the result, the appeal of the revenue is partly allowed.