P&H High Court Ruling on Trademark Compensation and Depreciation Claims

The Punjab and Haryana High Court recently delivered a significant judgment regarding the classification of compensation received for the termination of trademark usage rights. In the case of PCIT-2 Vs Smithkline Beecham Consumer Healthcare Ltd., the Court adjudicated whether a substantial sum received by the assessee for surrendering rights to popular brands constituted a revenue receipt or a capital receipt, specifically in the context of the statutory provisions existing prior to 2003.

Background of the Dispute

The Revenue filed an appeal under Section 260A of the Income Tax Act 1961, challenging the findings of the Income Tax Appellate Tribunal (ITAT), Chandigarh, dated 05.04.2016. While the Revenue raised multiple questions of law regarding various accounting and tax treatments—including excise duty valuation and deduction claims under Section 80-I—the primary focus of the litigation centered on two specific issues: the tax treatment of compensation for trademark termination and the timing of depreciation allowances.

It was noted at the onset that several questions raised by the Revenue (Questions 3 through 8) had already been settled by previous rulings of the High Court or the Supreme Court, or were to be aligned with the Court's earlier order dated 27.11.2025 in ITR No. 62 to 65 of 1995. Consequently, the judicial analysis focused principally on the first two questions.

Issue 1: Classification of Compensation for Trademark Termination

The core controversy involved a sum of ₹4.5 crore received by the assessee. The Revenue argued that this amount represented a revenue receipt and should be taxable as such.