The Words ‘Not Sharing’ In Section 28(va)(b) Control The Extended Meaning Of Taxable Income As Appearing In This Section
The clause (va) has been inserted in section 28 of the Income Tax Act, 1961(herein referred to as ‘the Act’) by the Finance Act, 2002 with effect from 1.4.2003 relevant to A.Y. 2003-04. Section 28 of the Act enlists certain incomes chargeable to Income Tax under the head “Profits and gains of business or profession”. Section 28(va)(b), subject to its Proviso and Explanation, deals with payment received for not sharing trade mark etc.
Recently, in Orient Blackswan Private Limited, Hyderabad vs. ACIT, Hyderabad [ITA No.252/Hyd/2012; A.Y.2008-09, ITA No.731/Hyd/2014; A.Y. 2009-10, ITA No.732/Hyd/2014; A.Y. 2010-11, Date of Pronouncement 06.07.2016], the three appeals were filed by the assessee/ appellant against similar but separate orders of the CIT(A) V, Hyderabad dated 21.12.2011 for the A.Y.s 2008-09 and dated 31.10.2013 for the A.Y.s 2009-10 and 2010-11. Since common issues were involved in these appeals involving common factual background, these appeals were disposed of by the common order for the sake of convenience.
Solitary issue arising for consideration in all these appeals was whether the compensatory sum received in terms of settlement agreement for not using the word ‘Longman’ in the name or trade mark of the assessee was business income or a capital receipt not liable to tax.
Facts in brief of the case, relevant to the issue in dispute, as taken from the appeal for the A.Y. 2008-09, were that the assessee company was engaged in the business of publishing and trading of educational and academic books on its own as well as on behalf of other publishers for which the assessee earned commission. For the financial year 2007-08 relevant to A.Y. 2008-09, the assessee originally filed return of income under section 139(1) of the Act disclosing total income of Rs.6,18,83,754 under the normal provisions of the Act,1961 and book profit of Rs.6,30,10,217 for the purposes of section 115JB of the Act. Subsequently, the assessee revised the said return on 9.3.2009, admitting total income under the normal provisions of the Act of Rs.80,56,646 only and book profit of Rs.6,01,46,772 only. The case was reopened by issuance of a notice under section 148 of the Act on 1.12.2009 on the belief that income to the extent of Rs.5,38,27,108 chargeable to tax had escaped assessment due to revision of return. During the year under consideration, the assessee received an amount of Rs.5,38,27,108 as compensation in terms of settlement agreement dated 22.11.2007 from M/s. Longman Communications Limited, London(LCL), which is presently known as Pearson Group. The LCL was stated to be taken over by the Pearson Group, U.K. The assessee was previously named and styled as Orient Longman Pvt. Ltd. The assessee was required to change the name of the entity excluding the word ‘Longman’ as per a Tomlin Order. Accordingly, the name of this assessee was changed to Orient Blackswan Pvt. Ltd. The genesis of the dispute lied in a trade mark held by the assessee in the name of ‘ORIENT LONGMAN’. The assessee had registered the trade mark with the Trade Marks authority in India since in 1980. There were pending disputes regarding the use of the trade marks and use of the name ‘Longman’ by the assessee in the courts of United Kingdom and India. Subsequently, these disputes were stated to be settled by means of a settlement agreement dated 22.11.2007 between Pearson group and assessee, followed by a compromise order known as ‘Tomlin Order’ passed by the High Court of Justice, Chancery Division U.K. giving effect to the settlement agreement dated 22.11.2007. As per this agreement, the assessee had undertaken not to use any trade mark or trade marks which included the word ’Longman’ or any word or phrase confusingly similar to the word ’Longman’ in India or anywhere in the world. The assessee and its associate entities were obliged to cancel or surrender the registration of exiting trade mark after the expiry of some time frame referred as ‘primary period ‘and ‘secondary period’ as per settlement agreement. Similarly, the Person Group on its part undertook that it shall not use the name ’Longman’ in combination with the name ‘Orient’ or any name confusingly similar to name ‘Orient’ in India or anywhere else in the world. Hence, the assessee was estopped from using the trade mark which included the word ’Longman’ and similarly, the Longman Group or Pearson Group were estopped from using the word ‘Orient’ in combination with ‘Longman’. A ‘Tomlin order’ as per consent terms of the parties set out in the settlement agreement was passed by the U.K. Court in this regard. Under the terms of settlement deed, the assessee was entitled to receive a sum quantified at Rs.16,14,81,323 in aggregate towards impugned settlement. This amount was agreed to be paid to the assessee in three equal instalments of Rs.5,38,27,108, with the first instalment becoming receivable by the assessee within five working days from the settlement date, second instalment on 21.11.2008 (falling in A.Y. 2009-10) and the last one on 23.11.2009 (falling in A.Y. 2011-12). In pursuance of the settlement agreement, the assessee received first instalment of Rs.5,38,27,108 from Orient Longman Communications during the previous year relevant to A.Y. 2008-09. Similarly balance instalments were received in subsequent A.Y.s as agreed. In the original return filed on 22.9.2008, this amount was considered as ‘business income’ by the assessee. However, subsequently this amount was withdrawn by the assessee from the ambit of chargeability by filing a revised return on 9.3.2009 on the ground that it is a capital receipt not forming part of the total income. It is in this background, the case was reopened alleging escapement of income/ tax. A query was raised by the AO in the course of reassessment proceedings as to why the impugned amount of Rs.5,38,27,108 received from Pearson Group during the relevant A.Y., viz. 2008-09 should not be treated as business income in view of the recently inserted provisions of section 28(va) of the Act. In reply, the assessee inter alia contended that the consideration was received as per the settlement agreement and vetted by Tomlin order of the Court of U.K. in consideration of restraining the assessee from the use of the name ‘Longman’ and as such, it is a capital receipt not liable to tax at all.
The AO took a view that after the insertion of clause (va) to section 28, the law has changed its course and such receipts are liable to be taxed as revenue receipts. He accordingly rejected the contention of the assessee that the receipt in question are capital in nature. He accordingly brought the aforesaid receipt to tax as business income of the assessee. Aggrieved thereby, the assessee preferred appeal before the CIT(A).
The CIT(A) confirmed the action of the AO. Thereafter, assessee preferred second appeal before ITAT, Hyderabad.
The ITAT observed that while the Revenue holds that such receipts falls under the provision of section 28(va)(b) of the Act, the case of the assessee is three fold. Firstly, the receipt is not an income to trigger section 28 of the Act. Secondly, the alleged receipt did not arise in the course of trade or business per se and therefore not a business receipt. Thirdly, trade mark is registered in the name of ‘ORIENT LONGMAN’ and when the word ‘ORIENT’ which is integral part of the trademark continues to be available to the assessee for its commercial exploitation as going concern, the question of sharing of trade mark or otherwise does not arise at all. It is the case of the assessee that the trade mark ‘ORIENT LONGMAN’ can neither be used by the assessee nor by the Longman/ Pearson group. The trade mark per se has not been released in favour of Pearson group. As a result of the settlement, while the word ‘Orient’ will be exclusively available to the assessee, the right to use of other word ‘Longman’ will stand extinguished. Te learned members of the ITAT noticed that the agreement was towards settling various disputes on the use of name ‘Longman’ and does not relate to any transfer of trade mark etc. While the assessee was precluded from using the name ‘Longman’, the corresponding Pearson Group was also precluded from using the name ‘Orient’. Thus, mutual obligations existed on both parties to the agreement. The settlement agreement had not been entered into in the ordinary course of business, therefore compensation received under a negative covenant for impairment of right to use the word ‘LONGMAN’ was in the nature of capital receipt. The learned members of the ITAT found support for this proposition from the decision of coordinate Bench in case of Govindbhai C. Patel vs. DCIT, Ahmedabad Bench 1 ITR 34 (2010), wherein it was held that compensation received towards relinquishment of the assessee’s right to sue it in the Court of law cannot be treated as revenue receipt taxable as business income under section 28(va). The decision in the case of Best & Co. 60 ITR 1 (SC) and Guffic Chem. 332 ITR 602 referred to on behalf of the assessee lays down that a capital receipt is not taxable in the hands of assessee. Hence, such receipt towards relinquishment of right to use word ‘LONGMAN’ cannot be taxed unless it is shown that it falls within the purview of section 28(va)(b) of the Act. To determine the applicability of section 28(va)(b) in the context of the facts of the case, the learned members further noticed that the assessee had been restrained from using the word ‘Longman’ by the court from doing so. As a sequel to the court order, the assessee was required to cancel the trade mark. The trade mark was no longer available for use by the assessee. Notwithstanding the fact that certain capital receipts have brought to tax as chargeable income under section 28(va) of the Act, the extended meaning of taxable income is controlled by the words ‘not sharing’. Section 28(va)(b) only deals with payment received for not sharing trade mark etc. this would presuppose that the assessee should own the trade mark and for a given consideration, has agreed not to share it with any other person. The word ‘sharing’ postulates there must be someone to use the trade mark. But in this case, the sharing or otherwise is not possible when trade mark itself ceases to exist. Hence, in the totality of circumstances, the learned members finally held that the payment received cannot be brought to tax as business income under section 28(va) of the Act. In the result, all the appeals of the assessee were allowed.
The word ‘sharing’ postulates there must be someone to use the trade mark etc. and the extended meaning of taxable income is controlled by the words ‘not sharing’ in section 28(va)(b) of the Act. The Orient case(supra) is a practical approach to the issue.