Facts of the Case

The Revenue filed multiple appeals under Section 260A of the Income-tax Act, 1961 for various assessment years challenging a common order of the Income Tax Appellate Tribunal in the case of M/s Remfry & Sagar, a law firm. The assessee had paid licence fee to Remfry & Sagar Consultants Pvt. Ltd. for use of the goodwill and name “Remfry & Sagar”, which had been built over several decades of legal practice.

The Assessing Officer disallowed the licence fee under Section 37 read with Explanation 1, alleging that the arrangement amounted to sharing of professional fees with non-advocates in violation of the Bar Council of India Rules and the Advocates Act. The CIT(A) and the ITAT allowed the deduction. Aggrieved, the Revenue filed the present appeals. There was substantial delay in filing the appeals, which was condoned by the High Court.

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, whether Explanation 1 to Section 37 is attracted, and whether any substantial question of law arose for consideration.

Appellant’s Arguments

The Revenue contended that payment of licence fee calculated as a percentage of the firm’s revenue 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 to submit that expenditure incurred in violation of professional regulations is not allowable.

Respondent’s Arguments

The assessee submitted that the sole and dominant 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” consistently applied by courts while interpreting Section 37.

Court Order / Findings

The Delhi High Court held that Explanation 1 to Section 37 disallows only such expenditure as is incurred for the purpose of committing an offence or for a purpose prohibited by law. The Court observed that a breach of the Bar Council of India Rules is not an offence as understood in law.

Applying the “purpose test”, the Court held that the primary and sole purpose of the licence fee was to enable the firm to derive commercial benefit from the goodwill associated with the name “Remfry & Sagar”. The Court noted that goodwill is a recognised, transferable and monetisable asset, and payment of consideration for its use cannot be regarded as unlawful.

The Court rejected the Revenue’s contention that the arrangement amounted to sharing of professional fees, holding that reference to a percentage of revenue was merely a basis to compute consideration and not a division of professional income. The Court distinguished Apex Laboratories on the ground that it involved an express statutory prohibition, unlike the present case.

On the additional issue raised in one of the appeals relating to ad hoc disallowance of travelling and entertainment expenses, the Court upheld the concurrent findings of the CIT(A) and the ITAT that such disallowance was based on conjectures and surmises without any evidence of personal use.

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 under Section 37 and also upheld deletion of ad hoc disallowance of travelling and entertainment expenses, holding that no substantial question of law arose for consideration.

Link to download order- https://www.mytaxexpert.co.in/uploads/1769506016_PRINCIPALCOMMISSIONEROFINCOMETAXVsREMFRYANDSAGAR.pdf

 

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