ITAT rules Capital Gains from Trademark Sale by Johnson & Johnson as Long-Term, Stating Non-Eligibility for Depreciation u/s 50 [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal(ITAT)ruled that the capital gains from the sale of trademarks "Coldarin" and "Raricap" by Johnson & Johnson should be treated as long-term capital gains, as the trademarks were acquired before 01/04/1998 and were not eligible for depreciation under section 50 of the Income Tax Act,1961.

Johnson & Johnson Private Limited,appellant-assessee,filed its return of income for the year on 30/09/2011, declaring INR 24,27,39,058. The return was selected for scrutiny, and notices under sections 143(2) and 142(1) were issued.

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During the assessment, it was noted that the appellant had sold two trademarks, “Coldarin” and “Raricap,” and offered the gains from their sale as long-term capital gains—INR 3,28,00,000 for “Coldarin” and INR 20,99,39,058 for “Raricap.” The assessee was asked to submit the sale agreements and explain why the gains were classified as long-term capital gains instead of short-term.

The assessee clarified that “Coldarin” was acquired in 1998 and “Raricap” in 1992, before the introduction of depreciation on intangible assets. Therefore, the assessee argued that the gains were long-term capital gains and not subject to section 50 of the Act.

The assessee also provided the purchase agreements, acquisition dates, and accounting details for the trademarks. However, the Assessing Officer(AO), in the order dated 25/11/2013, ruled that the expenses for acquiring the trademarks were capital in nature, and the depreciation claimed made the gains subject to short-term capital gains tax under section 50 of the Act.

The assessee appealed before the Commissioner of Income Tax(Appeals)[CIT(A)] who upheld the AO’s decision. Aggrieved by the same, the assessee appealed before the tribunal

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The two member bench comprising Sandeep Singh Karhail(Judicial Member) and Renu Jauhri(Accountant Member) reviewed the case and the submissions from both sides. The assessee had bought the trademark "Raricap" from Ethnor Ltd. for INR 5000 in 1992 and claimed the cost as a deduction in the financial year 1992-93.

Similarly, the assessee bought the trademark "Coldarin" from Johnson & Johnson in 1998 for INR 9.84 crore and amortized the cost over seven years, while disallowing the amortization for tax purposes and claiming deductions under section 35AB of the Act.

The Revenue argued that the amortized cost should be treated as depreciation, making the capital gains from the trademarks taxable as short-term capital gains under section 50. However, the assessee disagreed, stating that since both trademarks were acquired before 01/04/1998, they did not qualify for depreciation, and therefore, section 50 did not apply. The assessee also argued that since the trademarks were held for over three years, the capital gains should be long-term.

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The appellate tribunal found that the trademarks were not part of a block of assets eligible for depreciation, as intangible assets like trademarks were not included before 01/04/1998. Since the conditions for applying section 50 were not met, the ITAT agreed with the assessee's view.

In short,the appeal filed by the assessee was allowed.

As a result, the Tribunal ruled that the capital gains from the transfer of the trademarks should be treated as long-term capital gains and quashed the lower authorities' decision to tax them as short-term capital gains.

In short,the appeal filed by the assessee was allowed.

To Read the full text of the Order CLICK HERE

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