Commissioner Of Income Tax vs M/S Mediworld Publications Pvt. ...
2011 Latest Caselaw 1962 Del

                            Reportable

*              IN THE HIGH COURT OF DELHI AT NEW DELHI

                         {ITA 549 OF 2011}

                                   Judgment delivered on: 05.4.2011

COMMISSIONER OF INCOME TAX                        . . . APPELLANT

                        Through:    Mr. N.P.   Sahni, Sr.   Standing
                                    Counsel.

                             VERSUS

M/S MEDIWORLD PUBLICATIONS PVT. LTD. . . RESPONDENT

                        Through:    Mr. C.S. Aggarwal, Advocate
                                    with  Mr.  Prakash   Kumar,
                                    Advocate.

CORAM:-
    HON'BLE MR. JUSTICE A.K. SIKRI
    HON'BLE MR. JUSTICE M.L. MEHTA

       1.      Whether Reporters of Local newspapers may be
               allowed
               to see the Judgment?
       2.      To be referred to the Reporter or not?
       3.      Whether the Judgment should be reported in the
               Digest?

A.K. SIKRI, J. (ORAL)

1. Present appeal is filed under Section 260 (A) (1) of the

Income Tax Act, 1961 (hereinafter referred to as „the Act‟), against

the impugned order dated 2nd July, 2010 passed by the ITAT. The

following substantial questions of law are being raised for our

consideration:-

" (a) Whether ITAT was correct in law and on facts in deleting the additions/disallowance made by the AO amounting to ` 3,80, 02, 500/- in respect of the amount received by the assessee company in pursuance of the Asset Transfer Agreement thereby treating the same to be assessed as "Business Income"?

(b) Whether income arising from Asset Transfer Agreement shall be taxable under the heads „Capital Gains‟?"

2. To recite the genesis of the instant appeal, following facts

are concisely recapitulated herein under:-

The respondent/assessee is a private limited company

incorporated in the year 1995 vide certificate of incorporation

issued by ROC, Delhi & Haryana and is engaged in the business of

Healthcare, print media & electronic media communications. It

would be pertinent to mention here, in order to portray the

assessee‟s work that the business of print media communications

comprises of publication of regular journals and customized

publications for the industries & professional groups;. electronic

media communication also includes production of customized

audio video healthcare communications. On 10th March 2006, the

assessee company entered into a „Specified Assets Transfer

Agreement‟ with one M/S CMP MEDICA INDIA PRIVATE LIMITED,

Bangalore, for the sale of all its rights, titles and interest in

specified assets of its Healthcare Journals & Communications

business. These assets, as narrated in the agreement, were (a)

the periodicals (b) the products (c) the business intellectual

property rights along with the goodwill and all rights (d) the

customer database (e) the records (f) the editorial materials & (g)

the contracts. Pursuant to aforesaid agreement, wo separate

deeds namely „Deed of Assignment of Copyrights‟ & „Deed of

Assignment of Trademarks‟ were executed on the same date..

Furthermore, the respondent company had also assigned the

copyrights and trademarks pertaining to its Healthcare Journals &

Communication business, which they had been running for ten

years.

The assessee by the aforementioned „Specified Asset

Transfer Agreement also relinquished for six years the right to

carry on any business involving or relating to or competing with

the transferred specified assets. While the entire assets were

transferred as above, the assessee retained a limited & non

exclusive right to use the pharmaceuticals companies solely for

the purpose of its clinical trials business and for no other purpose.

In consideration of the above said transfer, the assessee had

received ` 3,80,02,500/- from CMP Medical India(P) Ltd.

The assessee filed the return of income for the assessment

year 2006-07 on 19.11.2006 declaring its income of ` 11,69,453.

During the course of assessment proceedings, it was noticed by

Assessing Officer that the assessee had shown the income from

Long Term Capital Gains @ ` 3,80,02,500/-. Moreover, AO

observed that this income should be made taxable under the head

„Business and Professions‟ vis-a-vis „Capital Gain‟ as taken by the

assessee. Thereafter, AO had taxed the same u/s 28 (va) of the

Income Tax Act, 1961 treating the same as business income and

recomputed the taxable income of the assessee company.

3. We may record that before taking the aforesaid view the AO

asked the assessee company as to why sale shown as long term

capital gain be not treated as business income for the year in

question In the reply submitted by it, the assessee explained that

it was publishing the journals since 1995 onwards, but in all the

journals published, the period of starting the journals was more

than three years from the date of transfer of these assets.

Further, all the journals were initiated by the company itself and

were not in existence earlier. These journals are registered with

the Registrar of Newspapers of India (RNI), before registration,

the brand name/titles of journals are approved by the RNI. Thus,

the assessee was the owner of brand name of these journals which

were also registered/indexed with Indian National Scientific

Documentation Centre, Govt. of India (hereinafter referred to as

the INSDOC). Thus, the assessee was exclusively holder of the

copyrights in all the journals and was also the exclusive holder of

Trade Marks of all the journals. These were, therefore, intangible

assets within the meaning of Section 55 (2) (a) of the Act. The

cost of acquisition of these assets was „Nil‟ and the consideration

received on the sale of these intangible assets therefore, should

be treated as long term capital gain. The AO, however, did not

accept the aforesaid contention of the assessee. He examined the

features of the agreement entered into between the assessee and

the transferee of the aforesaid assets on the basis of which he

noticed as under:-

"a) The assessee has not sold of whole of his business but only surrendered his right regarding publication of the journals.

b) As seen from the clause (5) of above, in return CMP Medica has granted the assessee a royalty free, non-exclusive license to use the data comprised of the advertisers and pharmaceutical companies which the assessee shall use in respect of its clinical trials business."

4. On that basis, the AO formed an opinion that the amount

received was business income within the meaning of Section 28

(va) of the Act which had been notified w.e.f. assessment year

2003-04 and as per which any sum, received or receivable in cash

or kind, under an agreement for not carrying out any activity in

relation to any business or not sharing any know-how, patent etc.

would be treated as business income since the assessee had

received the amount for carrying out any activity in relation to the

business of the assessee as publication of the journal was only a

part of the business of the assessee. The assessee had also

secured a royalty free, non-exclusive license from the transferee

to use the data comprised of the advatizers and pharmaceutical

companies its clinical trial business. The agreement also contained

„non compete‟ clause. From all these, he concluded that the

income received would be treated as business income as per the

provisions of Section 28 (va) of the Act and passed the

assessment order accordingly. The assessee preferred appeal

against this action on the part of the Assessing Officer. The CIT

(A) accepted the contention of the assessee and held that the

receipt in question was not business income but long term capital

gain on transfer of the assets. This decision of the CIT (A) has

been upheld by the ITAT also dismissing the appeal of the

Revenue vide impugned order dated 19th December, 2009. The

ITAT downrightly observed that assessee seems to be the elite

owner of the Trademark & Copyright of these publications. Also

publications i.e. journals were undeniably capital assets of the

assesee‟s business duly registered with the Trademark Authorities.

It was also established by the ITAT that assessee has sold all its

intangible assets like trademarks, brands, copyrights & goodwill.

By doing this exercise, the assessee company has deprived itself

of any earnings in the subsequent years. It was also revealed by

ITAT the assessee company has wholly given up its right to carry

on Healthcare Journals and Communications business for a

specified period. The ITAT was of the clear view that there is no

connection between the two businesses i.e. Business of Healthcare

Journals & Communications was clearly a distinct and separate

business as before sale of intangible like trademarks, brands,

copyrights and goodwill. The ITAT further concluded that assessee

has lost the source of income and section 28(va) does not apply.

5. It is under these circumstances, the Revenue has preferred

the present appeal under Section 260-A of the Act.

6. After hearing the counsel for the parties and going through

the orders of the authorities below, we are of the opinion that the

view taken by the CIT (A) as well as ITAT is without any blemish

and in the facts of this case, it is rightly held by these two

authorities that a sum of about ` 3.80 crores received as sale of

the aforesaid intangible assets amounted to long term capital

gain. It is to be borne in mind that vide agreement entered into

by the assessee in favour of M/s CMP Medica Pvt. Ltd, the

assessee had sold/transferred the rights of trade mark, brands,

copyrights etc. in the journals and publications which the

assessee had. All the journals were registered with RNI. These

publications were indexed by the INSDC and were also published

as property of the assessee. The assessee also had copyrights

therein.

7. It cannot be disputed that trademarks/brands, copyright and

good will constitute assets of the business and are profit earning

apparatus. Section 2 (14) of the Act defines "Capital Asset" and

Section 2 (11) (b) of the Act defines "intangible asset". These

provisions read as under:-

"Section 2 (14): "capital asset" means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include-

(i) Any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession;

(ii) Personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes

(a) Jewellery;

(b) Archeological collections;

(c) Drawings;

(d) Paintings;

(e) Sculptures; or

(f) Any work of art.

Explanation : For the purposes of this sub- clause, "Jewellery" includes -

(a) Ornaments made of gold, silver, platinum or any other precious metal or any alloy

containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;

(b) Precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;

(iii) Agricultural land in India, not being land situate -

(a) In any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the 1st day of the previous year; or

(b) In any area within such distance, not being more than eight kilometres from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify 20 in this behalf by notification in the Official Gazette;

(iv) 6 1/2 per cent Gold Bonds, 1977, issued by the Central Government;

(v) Special Bearer Bonds, 1991, issued by the Central Government;

(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government."

Section 2 (11): "block of assets" means a group of assets falling within a class of assets comprising-

(a) .....

(b) Intangible assets, being know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed".

8. It can also be said that the „right to carry on any business‟

has been recognized by the legislature as capital asset for the

purposes of assessing and computing the capital gains as is clear

from the reading of Section 55 (2) (a) of the Act, which is in the

following terms:-

(2) For the purposes of sections 48 and 49, "cost of acquisition", -

(a) In relation to a capital asset, being goodwill of a business, or a right to manufacture, produce or process any article or thing, tenancy rights, stage carriage permits or loom hours, -

(i) In the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and

(ii) In any other case [not being a case falling under sub-clauses (i) to (iv) of sub-section (1) of section 49], shall be taken to be nil"

9. This provision clearly provides determining the cost of any

relation to a capital asset being the right to manufacture,

produce or process any article or thing or right to carry on any

business.

10. Once we accept the fact that the brand names, trademark,

copyright and good will in the aforesaid journals sold/transfered

by the assessee to the transferee, it would clearly be a case of

sale of capital asset and the gain therefrom would be computed

as capital gain. In the present case, following facts are not in

dispute which will clearly establish that it was a case of sale of

capital assets resulting into capital gain:-

(a) That the assessee has sold and transferred permanently and forever all its existing assets and contracts of the Healthcare journals and Communication business in terms of an agreements dated 10th March, 2006.

(b) That the main part of the agreements was the transfer of all intangible assets being trademarks, brands, copyrights and the associated goodwill of its Healthcare Journals & Communication business.

(c) That the consideration of ` 3,80,02,500/- was not received only for giving up the right to carry on the Healthcare Journals & Communications business but was mainly for the transfer of all intangible assets being trademarks, brands,

copyrights and the associated goodwill of the Healthcare journals & communications business.

(d) That the consideration for the transfer of intangible assets being trademarks, brands, copyrights and the associated goodwill of Healthcare journals& communications business was taxable as long term capital gain.

(e) That for the purposes of journals etc. published by the appellant company it had to go through the following procedures which proves the authenticity of the appellant‟s claim of the assets being in the nature of intangible capital assets of business:-

(i) Statutory Title Clearance for all publications was obtained prior to the commencement of publication from the office of the Registrar of Newspapers for India.

(ii) All these publications were registered with the RNI.

(iii) The appellant had also filed "from B‟ declaration before the DCP (Licensing), Delhi.

(iv) All publications were indexed by INSDOC.

(v) Publications have been published as property of the appellant company in Trade Mark Journal No. 1328 Suppl.

(vi) All publications have a copyright declaration.

11. The CIT (A) as well as ITAT have rightly held that in this

backdrop provisions of Section 28(va) would not apply to the

instant case. In this behalf, it is to be borne in mind that the

clinical trial business which the assessee continues to carry on was

distinct and separate from the business of Healthcare Journals and

Communication. As far as Healthcare Journal and Communication

business is concerned, it had been given up in entirety in favour of

the transferee. Therefore, the Assessing Officer was wrong in

holding that the assessee had given up only one of the activities in

relation to its business. In such circumstances, the proviso to

Section 28(va) becomes applicable which stipulates that Section

28 (va) was not applied to any sum received on account of

transfer of right to carry on any business which is chargeable

under the head "capital gains". Section 55 (2) (a) of the Act has

to be read in conjunction with this proviso. We are in agreement

with the following analysis of the CIT (A) in this behalf:-

"5.2 It is also quite clear that giving up the right to carry on the Healthcare Journals & Communications Business was only one part of the agreements. The main part of the agreements was transfer of all intangible assets being trademarks, brands, copyrights and the associated goodwill of its Healthcare Journals & Communications business. It follows that the consideration of ` 3,80,02,500/- was not received; only for giving up the right to carry on the Healthcare Journals & communications business but was mainly for the transfer of all intangible assets being trademarks, brands, copyright and the associated goodwill of the Healthcare Journals & communications business. As per the law, the consideration for the transfer of intangible assets being

trademarks, brands, copyrights and the associated good will of Healthcare Journals & Communications business is also taxable as long term capital gain by virtue of section 55 (2) (a) read with clause (i) of the proviso to Section 28 (va). The AR has also relied on the provisions of section 45 (1) read with 2 (14), 2 (11) 9b), 48 and Section 55 (2) (ii) of the Act. The combined reading of the above provisions and of section 28 (va) leaves no ambiguity that law makers specifically excluded the income from the purview of main section 28 (va)."

12. It would also be worthwhile to mention that the parties had

entered into agreement dated 10th March, 2006 which was

captioned as "Specified Asset Transfer Agreement". This

agreement defines "Business" to mean the business of publishing,

distributing and selling the periodical and products as carried on

by the seller (assessee). It also termed all these publications as

"Business Intellectual Property Rights" which were treated as

„Specified assets". As per clause (2) of the agreement, all these

specified assets were transferred in the following manner:-

"2.TRANSFER OF SPECIFIED ASSETS 2.1 The Seller shall sell or procure the sale with full right, title, interes and guarantee and CMP Medica shall purchase the following assets and with a view to CMP Medica carrying on the business pertaining to the Specified Assets as going concern from the seller with effect from the closing date:

(a) the Periodicals;

(b) the Products;

(c) the Business Intellectual Property Rights alongwith the Goodwill and all interests and benefits attached and appurtenant to the Business Intellectual Property Rights;

(d) the Customer Database;

(e) The Records;

(f) the Editorial Materials; and

(g) the Contracts.

2.2 The Seller as the beneficial owner, agrees to assign, transfer and convey to CMP Medica all is rights, title, and interests to the Specified Assets including other intangible benefits and, or, rights related to the Specified Assets to the end and intent the CMP Medica shall be the sole, full and undisputed owner of the Specified Assets effective as at the close of the business hours on the Closing Date and entitled as such effective as at the close of the business hours on the Closing Date and entitled as such to deal with the Specified Assets in the manner deemed fit by CMP Medica without any hindrance, interference or disturbance or objections from the seller and, or any person claiming on behalf of or in trust for the Seller in any manner whatsoever subject to CMP Medica fulfilling its obligations under Clause 3 hereunder".

13. So much so, the "Customer Data Base" held by the assessee

was also shared with the transferee. Thus, there was a clear

transfer of the exclusive assets and on transfer it is the transferee

who had become the sole and undisputed owner of these assets

which were the business assets of the assessee.

14. We, thus, find no merit in this appeal and dismiss the same

as no substantial question of law arises.

(A.K. SIKRI) JUDGE

(M.L. MEHTA) JUDGE APRIL 5, 2011 skb