JOHNSON AND JOHNSON PRIVATE LIMITED (AS SUCCESSOR OF NR JET ENTERPRISES PVT. LTD.),MUMBAI vs. CIT(APPEALS) NFAC, DELHI

In this appeal, the assessee has raised the following grounds: - “

Ground no.1, raised in assessee’s appeal, is general in nature. Therefore, the same needs no separate adjudication.

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.

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.

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.

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.

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.

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.

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.

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.”

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: –

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.

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.

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:–

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: –

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: –

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-à-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: –

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: -

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 long- term 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 short- term capital gains are quashed. As a result, grounds no.2 and 3, raised in assessee’s appeal are allowed.

In view of our aforesaid findings, the without prejudice ground no.4 raised by the assessee is rendered academic and therefore is left open.

Grounds no.5 and 6 were not pressed during the hearing. Accordingly, the same are dismissed as not pressed.

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.

In the result, the appeal by the assessee is partly allowed. Order pronounced in the open Court on 10/02/2025