Taxability of Compensation Received u/s 28(va)
1. 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 S. 28(va)
2. Section 28(va)(b) only deals with payment received for not sharing trade mark etc.
3. This would presuppose that the assessee should own the trade mark and for a given consideration, has agreed no to share it with any other person
4. The word ‘sharing’ postulates there must be someone to use the trade mark. But in the present case, the sharing or otherwise is not possible when trade mark itself ceases to exist
1. Solitary issue arising for consideration is 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 is business income or a capital receipt not liable to tax
2. Assessee company is 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 earns commission
3. For the financial year 2007-08 relevant to assessment year 2008-09, the assessee originally filed return of income under S.139(1) of the Act disclosing total income of Rs.6,18,83,754 under the normal provisions of the Income Tax Act,1961 and book profit of Rs.6,30,10,217 for the purposes of S.115JB of the Act
4. Subsequently, however, 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
5. The case was reopened by issuance of a notice under S.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 has escaped assessment due to revision of return
6. 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
7. The LCL was stated to be taken over by the Pearson Group, U.K.
8. The assessee was previously named and styled as Orient Longman Pvt. Ltd
9. The assessee was required to change the name of the entity excluding the word ‘Longman’ as per a Tomlin Order
10. Accordingly, the name of this assessee was changed to Orient Blackswan Pvt. Ltd
11. The genesis of the present dispute lies in a trade mark held by the assessee in the name of ‘ORIENT LONGMAN’
12. The assessee had registered the trade mark with the Trade Marks authority in India since in 1980
13. As submitted, 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
14. 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
15. As per this agreement, the assessee has undertaken not to use any trade mark or trade marks which include the word ’Longman’ or any word or phrase confusingly similar to the word ’Longman’ in India or any where in the world
16. 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
17. 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
18. Hence, the assessee was estopped from using the trade mark which includes the word ’Longman’ and similarly, the Longman Group or Pearson Group were estopped from using the word ‘Orient’ in combination with ‘Longman’
19. 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
20. 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
21. 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 assessment year 2009-10) and the last one on 23.11.2009 (falling in assessment year 2011-12)
22. 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 assessment year 2008-09
23. Similarly balance instalments were received in subsequent assessment years as agreed
24. In the original return filed on 22.9.2008, this amount was considered as ‘business income’ by the assessee
25. 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
26. It is in this background, the case was reopened alleging escapement
27. The Assessing Officer however observed that the provisions of S.28(va) have been inserted in the Income Tax Act,1961 with effect from 1.4.2003 relevant to assessment year 2003-04 onwards
28. The aforesaid provision has superseded rulings of various judicial fora which held that a sum received for a restrictive covenant is capital receipt
29. The Assessing Officer therefore took a view that after the insertion of clause (va) to S.28, the law has changed its course and such receipts are liable to be taxed as revenue receipts
30. 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
31. Aggrieved thereby, the assessee preferred appeal before the CIT(A)
32. CIT(A) confirmed the action of AO
33. Aggrieved Assessee preferred appeal before the ITAT
34. Honb. ITAT held that the sum received by the Assessee by way of compensation is Not Revenue Receipt but Capital Receipt and thus not liable for Taxation.
Observation by CIT(A)
The CIT(A) cited case-laws as recorded in para 4.4 of his order and held that the impugned receipts arose as compensation in the course of business and are in the nature of a revenue receipt. The CIT(A) also examined the matter from a different perspective. He noted that when a person registers or purchases a trade mark, the expenditure incurred for this purpose would fall within the class of revenue expenditure as it does not create an asset. Thereafter the CIT(A) examined the issue with reference to the settlement agreement and came to the conclusion that the settlement agreement vetted by the Tomlin Order of the U.K. Court does not come in the way of carrying on of the business of the assessee at all. It was observed that there is absolutely no covenant or restriction on the assessee to print books or to engage in the business in which it is already engaged. The CIT(A) noted that from the agreement, it emerges that only after the specified period, the assessee company shall not use the words ’Orient Longman’ or the word ’Longman’.
The CIT(A) thereafter observed that the assessee was not being allowed to use the word ‘Longman’ because the Pearson Group of UK which has originally owned the assessee company and has its trade mark ‘Longman’ has sold its entire share holding in the assessee company to the directors of the assessee company. Therefore, the real transaction is that of the sale of shareholding of the Pearson Group in the assessee company. Hence, the real owner of the trade mark was Pearson Group and once they have no stake in the assessee company, they wanted that after a fixed time frame, the assessee company is not entitled to use the word ’Longman’ in its name. In these circumstances, in three equal instalments of Rs.5.38 cores each, compensation was agreed to be paid to the assessee company.
The CIT(A) observed that in the light of the aforesaid factual background, there is no restrictive covenant on the assessee to carry on the trade or business of the assessee per se. The CIT(A) concluded that in view of clause (va) of S.28, receipts in the nature of non-compete fee and fees for exclusivity rights have been brought within the purview of taxation with effect from assessment year 2003- 04.
On these premises, the CIT(A) confirmed the action of the Assessing Officer
Learned Authorised Representative, Shri A.V.Sadasiva, at the outset submitted that the Assessing Officer has wrongly invoked the provisions of S.28(va)(b) to include the sum received in terms of the Settlement agreement/Tomlin Order of U.K. Court within the purview of taxation. He submitted that the assessee company is engaged in the business of publishing and trading in educational and academic books and a trade mark was registered with the Indian authorities in 1980 in the name of ‘Orient Longman’ and the trade mark encompasses the word ‘Longman’. The learned AR submitted that the controversy revolves around the nature of receipt emanating from the settlement agreement with Longman Communications Ltd., London, which is presently known as Pearson Group. He submitted that such receipts were bestowed on the assessee towards foregoing the right to use the trade mark or trade marks, which include the word ‘Longman’ and any word or phrase confusingly similar to the word ‘Longman’ in India or anywhere else in the world. In consideration thereto, M/s. Pearson Group had agreed to pay Rs.16,14,81,323 in aggregate in three equal annual intalments of Rs.5,38,27,108 each falling in three successive assessment years under appeal. The learned Authorised Representative submitted that these receipts cannot be considered as revenue income in nature of business income in the facts of the case as such receipts do not fall within the purview of S.28(va) of the Act.
Learned Authorised Representative submitted that the aforesaid amount has not been received towards sharing any trade mark (‘Orient Longman’) or any commercial rights etc. towards provision of services so as to come within the clutches of S.28(va) of the Act. He emphasised that while the assessee is prohibited to use the word ‘Longman” in its trade mark, the other party in the settlement agreement is also not entitled to use the word ‘Orient’. Therefore, essentially, the compensation was not derived for ot sharing the trade mark per se. The learned Authorised Representative emphasised that the assessee is entitled to use the word ‘Orient’, which the other party shall not be entitled to use or share. He next stridently contended that in order to fall within the purview of (via) of S.28, the receipt must be in the nature of income which is chargeable to tax under the head ‘profits and gains of business or profession’. The learned Authorised Representative vociferously contended that the receipt is inherently in the nature of a capital receipt and not a revenue receipt and therefore, there is no scope for taxing the sum as income chargeable to tax. Secondly, it was contended that the receipt has not arisen in the course of business or trade in order to be taxed under the head ‘profits and gains of business or profession’. The compensation has been received by it for abstaining to use a part of trade mark i.e. the word ‘Longman’ which does not per se results in any transfer of any trade mark to other party. In substance, the learned Authorised Representative exhorted that this provision applies to a receipt in consideration of not sharing of a patent or a trade mark or rights of similar nature, which is not the case here and therefore, a receipt, which is otherwise capital in nature cannot be taxed by virtue of S.28(va) of the Act.
Departmental Representative vehemently supported the orders of the authorities below. He submitted that the amount has been clearly received in consideration of losing the right to use the word ‘Longman’ and this clearly falls within the provisions of S.28(va)(b) of the Act inserted with effect from assessment year 2003-04 with an objective to tax such receipts. The Learned Departmental Representative further submitted that a reading of settlement agreement would show that the assessee has been permitted to use the word ‘Longman’ until the expiry of the primary period and it is also entitled to use the term ‘Formerly Orient Longman’ until the expiry of the secondary period. Therefore, the assessee continues to enjoy the word ‘Longman’ on the one hand and has received the consideration on the other hand. The Learned Departmental Representative heavily relied upon the provisions of subsection (va) of S.28 to submit that the consideration has been received towards not sharing trade mark or any other business or commercial rights of similar nature.
The Learned Departmental Representative submitted that the case-laws relied upon by the learned Authorised Representative relate to the assessment years prior to the insertion of sub-section (va) of S.28 and therefore are of no relevance in the present context. The impugned receipts squarely falls within the ambit of S.28(va). He therefore pleaded that no interference is called for.
We note that the settlement agreement has 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’ is in the nature of capital receipt. We find support for this proposition from the decision of coordinate bench in case of Govindbhai C. Patel vs. Dy. CIT 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 S. 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 S. 28(va)(b) in the context of the facts of the present case, We notice that the assessee has been restrained from using the word ‘Longman’ by the court from doing so. As a sequel to the court order, the assessee is required to cancel the trade mark. The trade mark is no longer available for use by the assessee. Notwithstanding the fact that certain capital receipts have brought to tax as chargeable income under S. 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 no to share it with any other person. The word ‘sharing’ postulates there must be someone to use the trade mark. But in the present case, the sharing or otherwise is not possible when trade mark itself ceases to exist.
Hence, in the totality of circumstances, we are of the view that the payment received cannot be brought to tax as business income under section 28(va). Hence, we find merit in the appeal of the assessee.
Cases Referred to