Fees Paid By Law Firm Remfry & Sagar To Use Name & Goodwill Of Founder Is Business Expense, Deductible U/S 37 Of Income Tax Act: Delhi HC

The Delhi High Court has held that the fees paid by IPR law firm Remfry & Sagar to acquire the goodwill vested in a company run by the family members of its deceased founder, is a business expense deductible under Section 37 of the Income Tax Act.A division bench of Justices Yashwant Varma and Ravinder Dudeja observed, “the primary, nay, sole purpose for incurring expenditure towards license fee was to use the words “Remfry & Sagar” and derive benefit of the goodwill attached to it. The appellant do not dispute that Dr. Sagar had validly acquired the goodwill and that the same constituted a valuable asset which was transferable.”The bench was referring to Dr. V. Sagar, who acquired all the assets including the name and goodwill 'Remfry & Sons' from a British immigrant and constituted 'Remfry and Sagar'. The goodwill of 'Remfry and Sagar' was eventually gifted to Remfry & Sagar Consultants Private Limited (RSCPL)- which was substantially held by Dr. Sagar's children who were not legal practitioners.Soon thereafter, Dr. V. Sagar entered into a partnership and constituted the genesis of the law firm “Remfry & Sagar”. This firm executed a “License of the Use of Goodwill” with RSCPL on a Revenue sharing basis and sought deduction under Section 37.The deduction came to be disallowed by the Assessing Officer, terming the whole transaction as a ruse to divert funds for personal benefit of Dr. Sagar's children and avoid tax.As CIT(A) and ITAT ruled in favour of the law firm, the matter reached the High Court. The AO contended that since RSCPL was not engaged in the practice of law, it could not claim any goodwill. It was further submitted that the license agreement on revenue sharing basis was violative of Chapter 3 comprised in the Bar Council of India Rules which stipulates that an advocate shall not enter into a partnership or any other arrangement for sharing remuneration with any person or legal practitioner who is not an advocate.Counsel appearing for the firm argued that the word “purpose” embodied in the provision would have to necessarily be read as envisaging expenditure incurred for a purpose which is prohibited by law. It relied on Explanation to Section 37 which prohibits an expenditure which may have been incurred for the purposes of commission of an offense or an action prohibited by law.The counsel contended that payment of licence fee was solely for the purposes of enabling the newly constituted firm to derive benefits of the goodwill attached to the name “Remfry & Sagar”. Bearing in mind the same constituting the primary purpose for payment of license fee, it was submitted the same could not be possibly construed as being an expenditure prohibited by law.FindingsAt the outset the High Court noted that the disallowance which is contemplated under Section 37 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. Regard must also be had to the fact that the expression “prohibited by law” is coupled to the commission of an offense. 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,” Court observed.Court also rejected Revenue's contention that the license to use goodwill was a ruse to avoid tax. It observed, “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.”On Revenue's objection to Revenue sharing model vis-a-vis the Bar Council Rules, the High Court observed that prohibition relates to an arrangement where a lawyer agrees to share the fee earned from a practise with someone who is not a lawyer. “It prohibits a split, divide, dividend or equity in the revenue that may be generated by a law practise,” Court said. However in the facts of the present case, it noted, “the reference to a percentage of the revenue earned by the law practise was intended to principally provide for a basis to compute the consideration liable to be paid for use of goodwill and the utilisation of the name. 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 characterised as a sharing of revenue derived from the practise but fundamentally for the exercise of the right to exploit and derive advantage from goodwill.”Accordingly, Revenue's appeal was dismissed.Appearance: Mr. Indruj...

Fees Paid By Law Firm Remfry & Sagar To Use Name & Goodwill Of Founder Is Business Expense, Deductible U/S 37 Of Income Tax Act: Delhi HC

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