In a recent ruling, the Gujarat High Court has held that the pre‑2002 transfer of self‑generated trademarks and marketing rights cannot be taxed as capital receipts, clarifying that such assets were not recognised as taxable capital assets under law before the April 2002 amendment.

The matter arises after appellant Ambalal Sarabhai Enterprises Ltd. transferred its veterinary trademarks, marketing rights, and know‑how to a joint venture with Cadila Healthcare in 2000, receiving ₹25 crore for trademarks, ₹20 crore for marketing rights, and ₹2 crore for additional marketing rights.

But the assessing officers treated these receipts as taxable revenue and stated that trademarks were akin to know‑how and not capital assets.

The assessee, Ambalal Sarabhai Enterprises Ltd, stated that gratuity and leave encashment paid to employees were ordinary retirement benefits, distinct from Voluntary RetirementScheme (VRS) compensation, and therefore fully deductible as business expenses.

Govt Revises Public Shareholding Rules: New Rules for CompaniesUnder Securities Contracts (Regulation) Amendment, 2026 [Read Order]

On the ₹25 crore received for trademarks, it contended that these were self‑generated assets built over decades, not purchased, and hence outside the scope of capital gains taxation before the April 2002 amendment to Section 55(2) of the Income Tax Act.

They also pointed out that separate agreements existed for trademarks, know‑how, and marketing rights, and that equating trademarks with know‑how was fundamentally erroneous.

On the other hand, the respondent argued that the ₹25 crore received for assignment of trademarks was taxable, either as business income under Section 28(iv) or as capital gains under Section 41(1), since the consideration represented conversion of business benefits into money.

The department stressed that no specific valuation or bifurcation of trademarks was provided, making it difficult to accept that the entire sum was for trademarks alone and not goodwill. It further submitted that amendments to Section 55(2) clarified that self‑generated assets like goodwill and trademarks had nil cost of acquisition, making their transfer taxable as capital gains even retrospectively.

After considering all the submission the High Court noted that gratuity and leave encashment are post‑retirement benefits arising from service rendered by employees, and cannot be treated as part of the Voluntary Retirement Scheme (VRS) compensation.

Penalty u/s 271(1)(c) NotJustified For Indian Overseas Bank’s Mistaken DTAA Claim on Hong Kong Income:Madras HC [Read Order]

The bench justice A.S. Supehia and Justice Pranav Trivedi opined that "merely, because the transfer is of an unregistered trademark, the same will not ipso facto make such transfer chargeable to capital gains. The nature of non-registered trademark will remain as an intangible asset. The consideration received on transfer of non-registered trademark prior to the amendment made to Section 55(2) of the Act w.e.f. 01.04.2002 would not be subject to capital gains tax."

Consequently, their transfer in 2000 amounted to non‑taxable capital receipts, not business income or capital gains.

Accordingly, the Court allowed the assessee's appeal, set aside the impugned order passed by the Tribunal, and decided the substantial questions of law in favour of the assessee and against the Revenue.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates