P&H HC Holds ₹4.5 Cr Compensation for Loss of ‘ENO’ & ‘Fruit Salt’ Trademark Rights in AY 1997-98 is Capital Receipt [Read Order]
The Court held that Rs. 4.5 crore received for loss of ‘ENO’ and ‘Fruit Salt’ trademark rights in AY 1997-98 is a capital receipt and Section 28(va) cannot be applied retrospectively
In a recent ruling, the Punjab and Haryana High Court held that Rs. 4.5 crore received as compensation for loss of the right to use the trademarks “ENO” and “Fruit Salt” in Assessment Year 1997-98 is a capital receipt.
The Revenue filed an appeal challenging the order passed by the Income TaxAppellate Tribunal (ITAT). The main issue was whether the compensation of Rs. 4.5 crore received by the assessee on termination of the trademark agreement should be treated as revenue receipt instead of capital receipt for AY 1997-98.
The respondent-assessee was an Indian subsidiary of Smithkline Beecham Private Limited which owned the trademarks “ENO” and “Fruit Salt.” Under a Trademark Agreement, the assessee was permitted to manufacture and sell products using these trademarks.
The holding company later repudiated the agreement with effect from 22.09.1996 and allowed another subsidiary to use the trademarks. That subsidiary paid Rs. 4.5 crore to the assessee as fair and reasonable compensation for the goodwill created by the assessee through investment and promotion of the brands.
The Assessing Officer treated the Rs. 4.5 crore as revenue receipt and added it to the income of the assessee. The CIT(A) allowed the assessee’s appeal, and the ITAT upheld that order. The Revenue then approached the High Court arguing that the assessee was not the owner of the trademarks but only a user under an agreement, so the compensation should be treated as revenue receipt.
The Division Bench comprising Justice Jagmohan Bansal and Justice Amarinder Singh Grewal observed that the assessee had used the trademarks from 1979 to 1996 and had incurred expenses in promoting them. When the right to use the trademarks was taken away and given to another subsidiary, the assessee was deprived of that business advantage.
The court observed that Section 28(va) which taxes compensation received for not sharing or not using trademarks and similar rights as business income was inserted with effect from 01.04.2003. The court explained that although such receipts may be treated as revenue receipt under the amended provision, it cannot be applied to earlier years .
The court upheld the ITAT’s view and held that the Rs. 4.5 crore compensation was capital receipt for AY 1997-98.
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