India: Gift Of Brand To Corpus Of A Private Irrevocable Trust Is A Non-taxable Capital Receipt

A. FACTS OF THE CASE

• The taxpayer is a private discretionary trust, which was settled for the exclusive benefit of the members of the promoter family.
• The Group Holding Company (HCo) was holding the brand including all registered and unregistered trademarks, copyrights, service marks, certification marks, design, trade names relating to the logo and slogans (hereinafter referred to as 'Brand') since 1996. HCo had contributed the Brand to the corpus of the taxpayer as a voluntary gift without any consideration. As the Brand was settled without any consideration, it was not recognized in the financials of the taxpayer.
• Consequently, the taxpayer had entered into brand licensing agreements with operative group entities. A nonexclusive license to use the Brand was granted to the licensees in consideration of which license fees was earned by the taxpayer (the trust). The license fees earned by the trust was accounted as per the cash system of accounting in accordance with the provisions of Section 145(1) of the Income-tax Act, 1961 (IT Act).
• The Tax Officer (TO) passed the Assessment Order under Section 143(3) of the IT Act and held that since the definition of 'income' under Section 2(24) of the IT Act is very wide in nature, receipt of Brand contributed by HCo to the taxpayer as a voluntary gift without any consideration, was in the nature of income taxable under the head 'Income from other sources' under section 56(1) of the IT Act.
• Aggrieved by the said order, the taxpayer filed an appeal before the Commissioner of Income-tax (Appeal) (CIT(A)). On account of additional evidence submitted by the taxpayer, the CIT(A) remanded the matter back to the TO. TO vide its remand report submitted that the receipt of Brand by the taxpayer was chargeable to tax under Section 28(iv) and 56(2)(vii) of the IT Act. On perusal of the submissions made by TO and the taxpayer, CIT(A) decided the appeal in the favour of taxpayer and held as follows:
  "(B)The receipt of the Brand is on capital account and, therefore, not covered within the definition of "income" in section 2(24) of the Act and, consequently, is not chargeable to tax under section 56(1) of the Act. (C) The trademark and copyright are not chargeable to tax under section 56(2)(vii) of the Act as they are not in the nature of "work of art". (D) The provisions of section 28(iv) are not applicable as the receipt of the Brand is not arising during the course of carrying on of any business."
• Aggrieved by the order of CIT(A), TO filed an appeal before Income-Tax Appellate Tribunal (ITAT), Mumbai raising multiple grounds. Further, TO also filed additional grounds before the ITAT, which were dismissed by the ITAT.

To see the full article click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.