Section 50 Inapplicable; Capital Gains on Trademarks Acquired Pre-1998 Treated as Long-Term

By | March 12, 2025
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 Section 50 Inapplicable; Capital Gains on Trademarks Acquired Pre-1998 Treated as Long-Term

Issue: Whether Section 50 of the Income-tax Act, 1961, applies to the sale of trademarks acquired before April 1, 1998, when depreciation was not allowed on intangible assets prior to that date.

Facts:

  • The assessee sold two trademarks during the assessment year 2011-12 and offered the capital gains as long-term capital gains.
  • The Assessing Officer (AO) opined that the expenses incurred for acquiring the trademarks were capital expenses and that the allowances granted were depreciation.
  • The AO held that the capital gains fell under Section 50 because the assessee had availed depreciation on the cost of acquisition.
  • Both trademarks were acquired by the assessee before April 1, 1998.

Decision:

  • The court held that depreciation on intangible assets was granted only after the amendment by the Finance (No. 2) Act, 1998, and was applicable only to intangible assets acquired on or after April 1, 1998.
  • The court further held that the term “block of assets” included intangible assets only after the same amendment, effective from April 1, 1999.
  • In the year of acquisition of the trademarks, there was no provision mandating the inclusion of intangible assets in the block of assets, and no question arose for the allowance of depreciation on such assets.
  • Therefore, Section 50 had no applicability, and the capital gains arising from the transfer of the trademarks were to be treated as long-term capital gains.

Key Takeaways:

  • Retrospective Application of Depreciation: Depreciation on intangible assets was not allowed retrospectively; it applied only to assets acquired after April 1, 1998.
  • Block of Assets: The inclusion of intangible assets in the “block of assets” was effective only from April 1, 1999.
  • Section 50 Applicability: Section 50 applies only when depreciation has been allowed on the asset. If no depreciation was allowed under the law at the time of acquisition, Section 50 is inapplicable.
  • Long-Term Capital Gains: Capital gains arising from the sale of trademarks acquired before April 1, 1998, are to be treated as long-term capital gains.
  • Legislative Intent: The court’s decision reflects the legislative intent behind the amendments, ensuring that the new provisions do not apply retrospectively to assets acquired before their enactment.
  • The court is taking a strict interpretation of the law, and not allowing the revenue to apply provisions retroactively.
IN THE ITAT MUMBAI BENCH ‘F’
Johnson & Johnson (P.) Ltd.
v.
Dy. Commissioner of Income-tax, Circle – 7(1)
SANDEEP SINGH KARHAIL, Judicial Member
and Smt. Renu Jauhri, Accountant Member
IT Appeal NO.1756 (MUM) of 2023
[Assessment Year 2011-12]
FEBRUARY  10, 2025
Nikhil Tiwari and Pranay Gandhi for the Appellant. Prashant Barate, Sr. DR for the Respondent.
ORDER
Sandeep Singh Karhail, Judicial Member.- The assessee has filed the present appeal challenging the impugned order dated 22/03/2023, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [“learned CIT(A)”], for the assessment year 2011-12.
2. In this appeal, the assessee has raised the following grounds: –
“Based on the facts and in the circumstances of the case, Johnson & Johnson Private Limited [as successor of Ne Jet Enterprises Private Limited) (hereinafter referred to as the ‘Appellant) craves leave to prefer an appeal against the order dated 22 March 2023 passed by the Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (hereinafter referred to as the learned CIT(A)] under section 250 of the Income-tax Act, 1961 (hereinafter referred to as the ‘Act), on the following grounds. each of which are without prejudice to one another.
On the facts and in the circumstances of the case and in law the learned CIT(A) has:
General
1. erred in confirming the assessed income of INR 24,27,74,650 as determined by the Assessing Officer without providing sufficient opportunity:
Treating gains on sale of trademarks as Short Term Capital Gains’ instead of ‘Long Term Capital Gains
2. erred in upholding the action of the learned AO of treating the gains on sale of trademarks viz. Coldarin’ and ‘Raricap as Short Term Capital Gains by invoking the provisions of section 50 of the Act as against Long Term Capital Gains claimed by the Appellant;
3. ought to have appreciated that provision of section 50 of the Act cannot be invoked in the present case since the said trademarks did not form part of the block of intangible assets and therefore, the Appellant has never claimed depreciation thereon;
4. without prejudice to the above, should the provisions of section 50 of the Act be applicable, then the gains ought to be taxed at 20% applicable to long term capital assets instead of 30% as levied by the learned AO since the deeming fiction created by section 50 of the Act cannot bar the application of the concessional tax rate provided in section 112 of the Act;
Addition of interest on electricity deposit
5. erred in confirming an addition of INR 19,647 towards interest on electricity deposit on the ground that it has not been reported in the income side of the Profit & Loss account;
6. ought to have appreciated that the interest amounting to INR 17,682 [INR 19,647 less INR 1,965 (TDS)] has been duty offered to tax by way of adjustment of interest against electricity charges payable;
Levy of excessive interest under section 234B of the Act amounting to INR 92,14,092
7. ought to have directed the learned AO to delete the levy of interest under section 234B of the Act;
Levy of excessive interest under section 234C of the Act amounting to INR 22,56,331
8. ought to have directed the learned AO to delete the levy of interest under section 234C of the Act;”
Levy of interest under section 234D of the Act amounting to INR 1,66,921
9. ought to have directed the learned AO to delete the levy of interest under section 234D of the Act;
The above grounds are distinct and separate and without prejudice to each other. The Appellant craves leave to add, amend, delete, rectify, substitute and modify any of the aforesaid grounds or add a new Tribunal or grounds at any time before or at the time of hearing before the Hon’ble Income Tax Appellate Tribunal.”
3. Ground no.1, raised in assessee’s appeal, is general in nature. Therefore, the same needs no separate adjudication.
4. The issue arising in grounds no.2 and 3, raised in assessee’s appeal, pertains to the applicability of the provisions of section 50 of the Act.
5. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is engaged in the business of manufacturing and sale of pharmaceutical formulations. For the year under consideration, the assessee e-filed its return of income on 30/09/2011 declaring a total income of INR 24,27,39,058. The return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, upon perusal of the profit and loss account and computation of income, it was observed that during the relevant previous year, the assessee sold two trademarks “Coldarin” and “Raricap”. The gains accrued on the transfer of both these capital assets gave rise to income chargeable to tax under the head “Capital Gains”. Accordingly, the assessee offered an income under the head “Capital Gains” amounting to INR 3,28,00,000 and INR 20,99,39,058 on the sale of trademarks “Coldarin” and “Raricap”, respectively, as long-term capital gains. Accordingly, during the assessment proceedings, the assessee was asked to furnish the sale agreement of “Coldarin” and “Raricap” along with the justification for offering this income as long-term capital gains and not as short-term capital gains. In response, the assessee submitted that “Coldarin” trademark was acquired on 16/03/1998 and “Raricap” was acquired on 29/07/1992. Thus, it was submitted that the provisions of section 32(1)(ii) of the Act do not apply to the aforementioned trademarks as the assessee acquired the same before 01/04/1998, i.e. before the provision in respect of depreciation on intangible assets was introduced. Accordingly, the assessee submitted that capital gains arising from the sale of the aforementioned trademarks do not attract the provisions of section 50 of the Act, and hence, the said gains are treated as long-term capital gains. During the assessment proceedings, the assessee also furnished a copy of the purchase agreement of the trademarks along with the date of acquisition, accounting treatment given to the said acquisition in the assessee’s books for the assessment year of purchase, and clarification of whether the trademarks were shown under the head “fixed assets” and whether any depreciation was claimed.
6. The Assessing Officer (“AO”), vide order dated 25/11/2013, passed under section 143(3) of the Act, after taking into consideration the accounting policies adopted by the assessee, held that expenses incurred by the assessee for the acquisition of both trademarks a capital expenses and allowance granted to absorb such expenditure is depreciation and nothing else. The AO further held that the nomenclature used by the assessee does not change the real character of the allowance. Accordingly, the AO held that the capital gains accrued from the transfer of both trademarks fall within the ambit of the provisions of section 50 of the Act, as the assessee has availed depreciation in respect of the cost of acquisition of these trademarks. Consequently, the capital gains accrued to the assessee amounting to INR 24,27,39,058 on the transfer of the trademarks were subjected to tax as short-term capital gains.
7. The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee on this issue. Being aggrieved, the assessee is in appeal before us.
8. We have considered the submissions of both sides and perused the material available on record. The assessee purchased the trademark “Raricap” from Ethnor Ltd vide agreement dated 29/07/1992 for a consideration of INR 5000. In line with the accounting policy regularly followed by the assessee, the cost of the trademark was charged by the assessee to the profit and loss account for the financial year 1992-93. As per the assessee, similar treatment was given in the computation of taxable income for the assessment year 1993-94, and the entire cost of the trademark was claimed as a deduction. Further, the trademark “Coldarin” was purchased by the assessee from Johnson & Johnson (USA) vide purchase agreement dated 16/03/1998 for a total consideration of INR 9,84,61,701. As per the accounting policy, the cost of the trademark “Coldarin” was claimed in the profit and loss account over a period of 7 years in equal instalments. However, for tax purposes, the cost so charged to the profit and loss account as instalments was disallowed every year and added back to the taxable income by the assessee. Further, the deduction was claimed under section 35AB of the Act in six equal instalments from the assessment year 1998-99 to the assessment year 2003-04. There is no dispute among the parties regarding the aforesaid basic facts.
9. As per the Revenue, since the cost incurred by the assessee for the acquisition of both trademarks was amortised by the assessee, the allowance granted to absorb such expenditure is depreciation, and the nomenclature used by the assessee does not change the real character of the allowance. Accordingly, as per the Revenue, the capital gains accrued to the assessee from the transfer of both trademarks squarely fall within the ambit of the provisions of section 50 of the Act and thus are taxable as short-term capital gains. On the contrary, as per the assessee, under section 32 of the Act, only intangible assets acquired on or after 01/04/1998 would be considered for the purpose of depreciation. Since, in the present case, both trademarks were purchased prior to 01/04/1998, therefore they did not form part of the block of assets in respect of which depreciation was allowed under this Act. Accordingly, as per the assessee, provisions of section 50 of the Act have no applicability to the facts of the present case. Further, since both the trademarks, i.e. “Coldarin” and “Raricap”, were held by the assessee for more than 3 years, the said trademarks qualified to be long-term capital assets, and accordingly, the capital gains arising on the transfer of the above trademarks were considered as long-term capital gains.
10. Thus, in order to decide the issue at hand, at the outset, it is relevant to note the provisions of section 50 of the Act, which reads as follows: –
“Special provision for computation of capital gains in case of depreciable assets.
50. Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications :—
(1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely :—
(i)expenditure incurred wholly and exclusively in connection with such transfer or transfers;
(ii)the written down value of the block of assets at the beginning of the previous year; and
(iii)the actual cost of any asset falling within the block of assets acquired during the previous year, such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets;
(2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets.”
11. Therefore, the provisions of section 50 of the Act provide for the procedure for computation of capital gains in case of transfer of capital asset which forms part of the block of assets and in respect of which depreciation has been allowed under the Act. The said intent of this provision is also clear from the “Heading” of the section, which is reproduced as follows: –
“Special provision for computation of capital gains in case of depreciable assets. “
12. Therefore, for the applicability of the provisions of section 50 of the Act, the following conditions are required to be fulfilled: –
(a)There must be a capital asset;
(b)The capital asset must form part of the block of assets; and
(c)Depreciation in respect of the said block of assets has been allowed under this Act.
13. Insofar as the first requirement for the applicability of the provisions of section 50 of the Act is concerned, there is no dispute amongst the parties that the trademarks “Coldarin” and “Raricap” are capital assets. However, the assessee has disputed that such capital assets were not forming part of the block of assets and, therefore, no depreciation was allowed on the said block of assets under the Act. Thus, as per the assessee, since all the pre-conditions for the applicability of the provisions of section 50 are not satisfied in the present case, the AO erred in invoking the provisions of section 50 of the Act and treated the long-term capital gains as short-term capital gains.
14. In order to examine the plea of the assessee, it is firstly pertinent to note the relevant provisions of section 32 of the Act, which deals with the depreciation of capital assets. From the perusal of section 32 of the Act, it is evident that the same deals with the depreciation of both, tangible assets, such as buildings, machinery, plants of furniture, and intangible assets, such as know-how, patents, copyrights, trademarks, licences, franchises, or any other business or commercial rights of similar nature, owned wholly or partly by the assessee and used for the purpose of the business or profession. We further find that prior to the amendment of the Act by the Finance (No. 2) Act, 1998, the relevant provisions of section 32(1) of the Act read as follows:-
“Depreciation.
32. (1) In respect of depreciation of buildings, machinery, plant or furniture owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed—”
15. Thus, it is evident that prior to the aforesaid amendment, the provisions of section 32(1) only dealt with the depreciation of tangible assets. However, after the amendment by the Finance (No. 2) Act, 1998, with effect from 01/04/1999, the relevant provisions of section 32(1) of the Act read as follows: –
“Depreciation.
32. (1) In respect of depreciation of—
(i)buildings, machinery, plant or furniture, being tangible assets;
(ii)know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed”
16. In this regard, it is also pertinent to note the following extracts of the Memorandum explaining the provisions of the Finance (No. 2) Bill, 1998, which read as follows: –
“Depreciation to be allowed on intangible assets
Under the existing provisions, depreciation is allowable when building, plant, machinery or furniture is used by the assessee for the purposes of his business or profession.
It is proposed to widen the scope of this section so as to provide that depreciation will also be allowed where intangible assets are owned wholly or partly by the assessee and are used by such assessee for the purposes of his business or profession. Intangible assets, such as know-how, patent rights, copyrights, trade marks, licences, franchises or any other business or commercial rights of the assessee will form a separate block of assets. As and when any capital expenditure is incurred by an assessee on acquiring such intangible assets the amount of such expenditure will be added to the block of intangible assets and depreciation will be claimed on the written down value at the end of the financial year.
As a consequence of this amendment, it is proposed to provide that any expenditure of a capital nature incurred before the 1st April, 1998 on the acquisition of patent rights or copyrights used for the purposes of business shall not qualify for deduction under the said section 35A.It is also proposed to amend sub-section (1) of section 35AB accordingly so as to restrict the provisions of that section to lumpsum payments by the assessee in any previous year relevant to assessment year 1998-99.
These amendments will take effect from 1st April 1999 and will, accordingly, apply in relation to assessment year 1999-2000 and subsequent years.”
17. Thus, from the analysis of the provisions of section 32 of the Act, it is evident that only after the amendment by the Finance (No. 2) Act, 1998, depreciation is granted on the intangible assets. Further, it is pertinent to note that such depreciation is available only with respect to the intangible assets which were acquired on or after 01/04/1998 and were owned and used for the purpose of the business or profession by the assessee. Before considering the facts of the case vis-a-vis the aforesaid provisions of the Act, it is also relevant to note the provisions of section 2(11) of the Act, which deals with the meaning of the term “block of assets”. From the perusal of the provisions of section 2(11) of the Act, we find that the said provisions were also amended by the Finance (No. 2) Act, 1998, with effect from 01/04/1999, and prior to the amendment read as follows: –
“(11)”block of assets” means a group of assets falling within a class of assets, being buildings, machinery, plant or furniture, in respect of which the same percentage of depreciation is prescribed;”
18. Therefore, it is only after the amendment by the Finance (No. 2) Act, 1998, with effect from 01/04/1999, that the term “block of assets” includes within its ambit intangible assets. The provisions of section 2(11) of the Act, as it stood after the aforementioned amendment read as follows: –
“(11) “block of assets” means a group of assets falling within a class of assets comprising—
(a)tangible assets, being buildings, machinery, plant or furniture;
(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;”
19. Thus, it is evident that prior to the amendment by the Finance (No. 2) Act, 1998, neither the depreciation nor the block of assets included within its ambit the intangible assets. Further, as noted in the foregoing paragraph, such intangible assets, for the purpose of depreciation, are also required to be acquired on or after 01/04/1998. However, undisputedly, in the present case, both trademarks, i.e. “Coldarin” and “Raricap”, were acquired by the assessee vide purchaser agreements prior to 01/04/1998. Further, in the year of acquisition of the aforesaid trademarks, i.e. the financial year 1992-93 and 1997-98, there was no provision in the Act which mandated the inclusion of the intangible assets in the block of assets. Consequently, no question arises for allowance of depreciation on the block of assets, which includes intangible assets in the present case. Therefore, the other two conditions for the applicability of the provisions of section 50 of the Act are not satisfied in the present case. Thus, in view of the facts and circumstances of the present case and legal position as noted above, we are of the considered view section 50 of the Act has no applicability to the facts of the present case. Thus, we find merits in the submissions of the assessee in treating the capital gains as longterm capital gains and offering the same to tax accordingly. Consequently, the findings of the lower authorities in taxing the capital gains accrued to the assessee on the transfer of trademarks, i.e.”Coldarin” and “Raricap”, as shortterm capital gains are quashed. As a result, grounds no.2 and 3, raised in assessee’s appeal are allowed.
20. In view of our aforesaid findings, the without prejudice ground no.4 raised by the assessee is rendered academic and therefore is left open.
21. Grounds no.5 and 6 were not pressed during the hearing. Accordingly, the same are dismissed as not pressed.
22. Grounds no.7 to 9, raised in assessee’s appeal pertaining to the levy of interest under section 234B, section 234C, and section 234D, are consequential in nature and, therefore, require no separate adjudication.
23. In the result, the appeal by the assessee is partly allowed.