Capital gain: Sections 48 and 55(2): A.Y. 1999- 00: Transfer of self acquired trademark and design: No cost of acquisition: Capital gain not chargeable to tax.

In the previous year relevant to the A.Y. 1999-00, the assessee transferred self acquired trademark and designs for the considerations of Rs.15 crore and Rs.20 lakh, respectively. The assessee claimed that the capital gain on such transfer is not chargeable to tax in view of the judgment of the Supreme Court in the case of CIT v. B. C. Srinivasa Setty, 128 ITR 249 (SC). The Assessing Officer rejected the assessee’s claim and held that the capital gain is chargeable to tax. The CIT(A) and the Tribunal accepted the assessee’s claim.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under: “

(i) Prior to the amendment made to section 55(2) by the Finance Act, 2001 effective from 1-4-2002 by adding the words ‘trademark or brand name associated with the business’ self-generated assets such as trademark did not have any cost of acquisition. Therefore, for the period under consideration the computation u/s.48 fails resulting in such transfer of trademarks not being chargeable to capital gains tax.

 (ii) Consequent to amendment made to section 55(2) w.e.f. 1-4-2002 by which the words trademark or brand name associated with the business was introduced into it, the computation provision becomes workable and the consideration for the sale of trademark would be subject to capital gains tax.

(iii) In fact, when the amendment was made to section 55 by the Finance Act, 2001 the CBDT had issued Circular bearing No. 14-2001 explaining the provisions of the Finance Act, 2001. From the said Circular it would be clear that the amendment bringing self-generated intangible assets such as trademarks to capital gains tax only w.e.f. A.Y. 2002-03 onwards. In this case we are concerned with the A.Y. 1999-00 and therefore, the amendment would not have any effect. Consequently, the sale of self-generated trademarks during the A.Y. 1999-00 are not chargeable to capital gains tax.

(iv) So far as the sale of self-generated designs (i.e., not acquired) the same is also not chargeable to capital gains tax not only for the reasons applicable to trademarks, but for the fact that even till this date, no amendment has been made to section 55(2) of the said Act, defining cost of acquisition of design as in the case of trademark, goodwill, etc.”