Facts of the Case

The Revenue filed multiple appeals under Section 260A of the Income-tax Act, 1961 against a common assessee, M/s Remfry & Sagar, for different assessment years. The assessee, a law firm, had paid licence fee to Remfry & Sagar Consultants Pvt. Ltd. (RSCPL) for the use of the goodwill and name “Remfry & Sagar”, which had been built over decades of legal practice. The Assessing Officer disallowed the expenditure under Section 37 read with Explanation 1, holding that the payment violated the Bar Council of India Rules and the Advocates Act by allegedly amounting to sharing of legal fees with non-advocates.

The CIT(A) and the ITAT allowed the assessee’s claim, holding that the payment was for use of goodwill and did not amount to an offence or an act prohibited by law. Aggrieved, the Revenue filed the present appeals.

Issues Involved

Whether licence fee paid for use of goodwill and firm name is allowable as business expenditure under Section 37, whether such payment violates the Bar Council of India Rules or the Advocates Act, and whether Explanation 1 to Section 37 disallows the expenditure as being for a purpose prohibited by law.

Appellant’s Arguments

The Revenue contended that payment of licence fee calculated as a percentage of gross receipts amounted to indirect sharing of professional fees with non-lawyers, which is prohibited under the Bar Council of India Rules. It was argued that such violation rendered the expenditure inadmissible under Explanation 1 to Section 37, as being incurred for a purpose prohibited by law. Reliance was placed on the Supreme Court decision in Apex Laboratories.

Respondent’s Arguments

The assessee submitted that the sole purpose of the payment was to use and exploit the goodwill attached to the name “Remfry & Sagar”, which constituted a valuable commercial asset. It was argued that the Bar Council Rules prohibit sharing of professional fees, not payment of consideration for use of goodwill. The percentage-based computation was only a mechanism to quantify consideration and did not amount to fee sharing. The assessee relied on the “purpose test” laid down by courts while interpreting Section 37.

Court Order / Findings

The Delhi High Court held that Explanation 1 to Section 37 disallows only those expenditures which are incurred for the purpose of committing an offence or for a purpose prohibited by law. The Court found that violation of the Bar Council Rules, even if assumed, does not constitute an offence.

The Court applied the “purpose test” and held that the primary and sole purpose of the licence fee was to enable the firm to use and derive commercial benefit from the goodwill associated with the name “Remfry & Sagar”. The goodwill was recognised as a transferable and monetisable asset. The Court rejected the Revenue’s contention that the arrangement amounted to sharing of legal fees, holding that reference to revenue was only a measure to compute consideration and not a division of professional income.

The Court distinguished Apex Laboratories, noting that the said case involved an express statutory prohibition, whereas no such prohibition existed in the present case. It concluded that the expenditure was neither unlawful nor prohibited by law.

Important Clarification

The Court clarified that Bar Council of India Rules prohibit sharing of professional fees with non-advocates but do not prohibit payment of consideration for use of goodwill. Where expenditure is incurred for a legitimate commercial purpose and not for committing an offence or violating a statutory prohibition, Explanation 1 to Section 37 is not attracted.

Final Outcome

All the appeals filed by the Revenue were dismissed. The Delhi High Court upheld the orders of the ITAT allowing deduction of licence fee paid by M/s Remfry & Sagar for use of goodwill, holding that no substantial question of law arose and the expenditure was allowable under Section 37 of the Income-tax Act.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1769503647_PR.COMMISSIONEROFINCOMETAX21VsMS.REMFRYSAGAR.pdf

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