Facts of the Case

Milk Food Ltd., engaged in the business of manufacturing and marketing milk products, entered into agreements with Brooke Bond Lipton India Ltd. effective from 1 April 1995.

Under these agreements:

  • The assessee assigned its trademark “Milk Food 100% Ice Cream” to Brooke Bond Lipton India Ltd.
  • A separate non-compete agreement was executed restricting the assessee from manufacturing, selling, or distributing ice cream and frozen desserts for a specified period.

For these arrangements, the assessee received:

  • ₹5 Crores towards assignment of the trademark.
  • ₹8 Crores towards the non-compete covenant.

The trademark assignment was for eight years, while the non-compete restriction was to operate for ten years.

During assessment proceedings for Assessment Year 1996-97, the assessee contended that the amounts received were capital receipts not chargeable to tax. The Assessing Officer rejected the claim and treated the receipts as taxable income.

 

Issues Involved

  1. Whether the consideration received for transfer of a trademark and under a non-compete agreement constituted taxable capital gains for Assessment Year 1996-97.
  2. Whether CBDT circulars and instructions clarifying the taxability of such receipts were binding on the Revenue authorities.
  3. Whether the Revenue could challenge an appellate order passed in accordance with binding CBDT instructions issued under Section 119 of the Act.
  4. Whether any substantial question of law arose for consideration by the High Court.

 

Petitioner’s Arguments (Revenue)

The Commissioner of Income Tax argued that:

  • The receipts arising from assignment of trademark rights and non-compete agreements were liable to taxation.
  • The CBDT instructions relied upon by the assessee did not correctly interpret Section 55 of the Income-tax Act.
  • Consequently, the Commissioner (Appeals) and the Tribunal erred in granting relief merely on the basis of CBDT instructions.
  • The Revenue was entitled to challenge the interpretation adopted in the CBDT circulars and seek taxation of the receipts in question.

 

Respondent’s Arguments (Assessee)

Milk Food Ltd. contended that:

  • The receipts were capital in nature and not chargeable to tax for the relevant assessment year.
  • CBDT had issued specific instructions clarifying that receipts arising from transfer of trademarks and restrictive covenants became taxable only after the statutory amendments made to Section 55 with effect from Assessment Year 1998-99 onwards.
  • The appellate authorities correctly followed the binding CBDT instructions.
  • The Revenue could not maintain an appeal contrary to binding circulars issued under Section 119 of the Act.

 

Court Order / Findings

The Delhi High Court dismissed the Revenue’s appeal and upheld the orders of the Commissioner (Appeals) and the Income Tax Appellate Tribunal.

The Court observed that:

  • CBDT instructions specifically covered cases involving transfer of trademarks and restrictive covenants.
  • The Commissioner (Appeals) and the Tribunal had rightly relied upon those instructions while holding that the receipts were not taxable for the relevant assessment year.
  • The Supreme Court in Commissioner of Customs v. Indian Oil Corporation Ltd. & Another (267 ITR 272/273) had clearly held that the Revenue is bound by circulars and instructions issued by the Board and cannot argue against them while such circulars remain in force.
  • Revenue authorities cannot maintain appeals contrary to binding CBDT instructions.
  • Since the appellate authorities had followed the CBDT instructions and the law declared by the Supreme Court, no substantial question of law arose for consideration.

Accordingly, the appeal filed by the Revenue was dismissed.

 

Important Clarification

1. Binding Nature of CBDT Circulars

The judgment reiterates that:

  • CBDT circulars issued under Section 119 are binding upon the Income Tax Department.
  • Revenue authorities cannot contend that a circular is invalid or contrary to the statute while it remains operative.

2. Revenue Cannot Appeal Contrary to CBDT Instructions

The Court emphasized that:

  • The Department cannot pursue litigation contrary to binding instructions issued by the CBDT.
  • Orders passed in conformity with such instructions cannot ordinarily be challenged by the Revenue.

3. Taxability of Non-Compete and Trademark Transfer Receipts

For periods prior to the amendment of Section 55, receipts arising from:

  • Transfer of trademarks, and
  • Restrictive/non-compete covenants

were treated as capital receipts not chargeable to capital gains tax in accordance with the CBDT instructions applicable at the relevant time.

4. Reliance on Supreme Court Precedent

The Court relied substantially upon:

  • Commissioner of Customs v. Indian Oil Corporation Ltd.

which held that departmental authorities are bound by Board circulars and cannot litigate against them.

Sections Involved

  • Section 55, Income-tax Act, 1961 – Cost of acquisition for capital assets and taxation of certain intangible assets.
  • Section 119, Income-tax Act, 1961 – Power of CBDT to issue instructions and circulars binding on the Revenue authorities.
  • Capital Gains Provisions under the Income-tax Act, 1961

Link to download the order -  https://delhihighcourt.nic.in/app/case_number_pdf/2005:DHC:14169-DB/61308112005ITA1532005_151802.pdf 

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.