Delhi High Court: Two appeals were filed by the Principal Commissioner of Income Tax questioning the correctness of the judgment rendered by the Income Tax Appellate Tribunal on 06—09-2016 pertaining to Assessment Year 2009-10 and order dated 26-07-2019 pertaining to AY 2011-12. A division bench of Yashwant Varma and Ravinder Dudeja, JJ., dismissed the appeals upholding the impugned orders and ruling that the license fees paid by law firm Remfry & Sagar for the use of its founder’s name and goodwill qualify as a legitimate business expense under Section 37 of the Income Tax Act.
The dispute traces back to the historical evolution of Remfry & Sagar, originally established in 1827 as Grant & Remfry, a sole proprietorship that evolved into a partnership over generations. In 1973, Dr. V. Sagar acquired the firm along with its goodwill, later merging it with his own practice in 1990. In 2001, he transferred the goodwill to Remfry & Sagar Consultants Pvt. Ltd. (RSCPL), a company largely owned by his non-lawyer children. Subsequently, a partnership was formed to continue the legal practice under a licensing agreement, whereby the partners paid RSCPL for the right to use the “Remfry & Sagar” name and associated goodwill. The core issue in the present appeals is whether these payments qualify as allowable business expenses under Section 37 of the Income Tax Act or if they are inadmissible in light of statutory restrictions and the nature of the transaction.
Thus, the present appeals arise from a dispute between the Principal Commissioner of Income Tax and the respondent-assessee, Remfry & Sagar, regarding the tax treatment of license fees paid for the use of goodwill. The controversy stems from the Income Tax Appellate Tribunal’s (ITAT) decisions, which upheld the assessee’s claim that the payments were legitimate business expenses. The Principal Commissioner of Income Tax has challenged the correctness of ITAT’s orders and the appeals were admitted based on three key questions, primarily concerning the applicability of the Bar Council Rules, the Advocates Act, 1961, and the first Explanation to Section 37 of the Income Tax Act, 1961, in determining the legitimacy of the claimed expenditure.
The Court noted that that the disallowance which is contemplated under Section 37 of IT Act is expenditure incurred for any purpose which is an offense or a purpose prohibited by law. It is thus manifest that it is principally the purpose for which the expenditure is incurred which would be decisive of whether it is liable to be disallowed. The Court said that regard must also be had to the fact that the expression “prohibited by law” is coupled to the commission of an offence. It is, therefore, apparent that the expenditure which the provision intends to be ignored and disallowed is that which may be expended for commission of an offense or like motive. Thus, it is important to consider whether consideration parted for use of goodwill would fall within the scope of that expression as well as whether the asserted violation of the Bar Council of India Rules would have justified the disallowance.
The Court remarked that “it is not the case of the appellants that an offence, as generally understood, was committed. According to them, a violation of the Bar Council of India rules amounted to the respondent acting in violation of a statutory prohibition and thus the expenditure liable to be disallowed.”
On the aspect that whether the payment of license fee could be regarded as an expenditure incurred for a purpose prohibited by law, the Court noted that a payment made for use of goodwill cannot possibly be viewed as being an illegal purpose or one prohibited by law. A person would be obliged to part with consideration for the use of goodwill if it seeks to derive benefit and advantage therefrom. Undisputedly, Remfry & Sagar had acquired a reputation and goodwill in the field of legal services. What the respondent assessee thus sought to do was to derive advantage and benefit of association as also the use of a name which carried a reputation in the legal arena. The agreement to utilise and derive benefits of goodwill cannot therefore be viewed as a ruse or one aimed at tax avoidance.
The Court also remarked that it was permissible for Dr. Sagar to monetise the goodwill acquired and earned. The goodwill thus represented an asset held by Dr. Sagar and which could have been validly gifted to his children. It was the resultant firm which sought to derive benefit from the goodwill attached to that name. The consideration paid for the use of the same, thus, can neither be said to be for an unlawful purpose nor one motivated by the intent to overcome a prohibition raised by law.
Thus, the Court dismissed the appeals and concluded that insofar as the Bar Council of India Rules are concerned, they are concerned with a sharing of revenue and fee. What BCI rules proscribe is the sharing of remuneration earned by a firm of lawyers with one who is not a member of the legal profession. However, in the facts of the present case, the primary purpose of referring to the total billing of the law firm was to provide a firm, definite and fixed basis to compute the consideration liable to be paid for use of goodwill. The consideration so paid is thus clearly not liable to be characterized as a sharing of revenue derived from the practice but fundamentally for the exercise of the right to exploit and derive advantage from goodwill.
[Commissioner of IT v. Remfry and Sagar, 2025 SCC OnLine Del 490, decided on 31-01-2025]
Advocates who appeared in this case:
Mr. Indruj Singh Rai, SSC with Mr. Sanjeev Menon, Mr. Rahul Singh, Mr. Anmol Jagga, JSCs
Mr. Ajay Vohra, Sr. Adv. with Mr. Aditya Vohra and Mr. Shashwat Dhamija, Advocates for respondents