The Tax Publishers2020 TaxPub(DT) 2603 (Coch-Trib) : (2020) 185 ITD 0910 : (2020) 207 TTJ 0107 : (2020) 079 ITR (Trib) 0022 INCOME TAX ACT, 1961
Section 2(42A) Section 45
For intangible assets transferred by the assessee, the holding period should be determined as per Explanation I(i)(b) to section 2(42A) to determine whether or not an asset is a short-term capital asset and since the period of holding was much more than 36 months when the relinquishment/sale took place (on 18-5-2010). The AO was therefore, ought not to have taxed such receipts as STCG but should have taxed it as LTCG.
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Capital gains - Short-term or long-term - Transfer of intangible assets with right to carry on business - Amalgamation, whether financial asset
The High Court of Kerala had sanctioned a scheme of amalgamation with appointment date being 1-4-2008, whereby all the assets and liabilities of two transferor companies were transferred and vested with the assessee (the transferee company). The assessee vide a manufacturing and assets transfer agreement sold to another company, its 'brand name', 'package design, 'know-how', etc. and also 'product intangibles' and 'marketing intangibles'. Since there was no cost of acquisition, the assessee offered the entire sale consideration as long-term capital gain (LTCG), in the return of income filed. AO held that the period of holding of the assets transferred was less than 36 months and same being financial assets, the sale proceeds were to be treated as short-term capital gain (STCG). CIT(A) held that on the facts and circumstances of the case Explanation 1(i)(b) to section 2(42A) was applicable and the period of holding of the said asset will include also the period held by the transferor company. Accordingly, the CIT(A) treated the sale of asset as LTCG. Held: The 'financial asset' has been described in the Act as share or security and the assets transferred by the assessee does not fall in the category of 'financial asset'. This view is further affirmed by section 2(11) which defines the term 'block of asset' for the purpose of depreciation. Since the intangible assets are covered in the definition of 'block of asset' eligible for depreciation, the same cannot be again covered under the definition of 'financial asset' as per Explanation (1) (i) (d) to section 2(42A). Assets transferred by the assessee, the period of holding cannot be determined as per Explanation 1(i)(e) to section 2(42A) as contended by the AO. The holding period should be determined as per Explanation 1(i) (b) to section 2(42A) to determine whether or not an asset is a short-term capital asset. The assessee's case was a scheme of amalgamation and assessee was an Indian company. The term 'amalgamation' is defined in section 2(IB) and the assessee's case fall under the said definition. Therefore, there was no transfer taking place on 1-4-2008. The period of holding was much more than 36 months when the relinquishment/sale took place (on 18-5-2010). The AO ought not to have taxed such receipts as STCG but should have taxed it as LTCG. Here the previous owner was the amalgamating company and this company did not acquire it in a mode referred to in clause (i) or clause (ii) or clause (iii) or clause (iv) of section 49(1). However, as no purchase price was paid by the amalgamating company, the cost of acquisition was taken as 'NIL' as required under section 55(2)(a)(ii). Transfer of intangible assets with right to carry on business was taxable as LTCG. The CIT(A) was therefore, justified in treating the sale of assets as LTCG.
Followed:CIT v. Mediward Publication (P) Ltd. [ITA No. 549 of 2011 judgment, dated 5-4-2011] : 2011 TaxPub(DT) 1503 (Del-HC)
REFERRED :
FAVOUR : In assessee's favour.
A.Y. : 2011-12
IN THE ITAT, COCHIN BENCH
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