The Delhi High Court has allowed the income tax deduction as the license fees paid by law firms to use goodwill of the founder is a business expense.
The bench of Justice Yashwant Varma and Justice Ravinder Dudeja has observed that 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.
A sole proprietorship came to be established in 1827 under the name of „Grant & Remfry‟ by a British immigrant, Mr. Henry Oliver Remfry. That sole proprietorship was subsequently converted into a partnership firm and was operated by five generations of the Remfry family upto the year 1957. In that year, four partners, Mr. Holloway, Mrs. Silverstone, Mr. Bernier and Mr. Burrington came to join ‘Remfry & Sons’.
Mr. Bernier and Mr. Burrington are stated to have retired in 1970 as a consequence of which the surviving partners entered into a fresh deed of partnership. In 1973, Mr. Holloway and Mrs. Silverstone transferred the entire business of that partnership along with all the assets including the name and goodwill to Dr. V. Sagar. ‘Remfry & Sons’ thus came to be acquired by Dr. V Sagar with effect from 01 April 1973 along with the goodwill that had been earned and acquired by that firm over the years.
In 1990, Dr. V. Sagar is stated to have merged his sole proprietorship practice being run under the name of ‘Sagar & Co.’ with ‘Remfry & Sons’ and changed the name of the proprietorship to ‘Remfry and Sagar’.
On 01 June 2001, Dr. V. Sagar gifted the goodwill vesting in ‘Remfry & Sagar’ to a private limited company, Remfry & Sagar Consultants Private Limited by way of a registered instrument. It is pertinent to note that the shareholding of RSCPL was substantially held by Dr. Sagar’s children who were not legal practitioners.
The Assessing Officer was called upon to scrutinize a return which came to be filed by the respondent/assessee and which had claimed deductions in terms contemplated under Section 37 of the Income tax Act in respect of the license fee paid for use of goodwill as well as for the utilization of infrastructure and support services which were governed by separate yet similar license agreements which were executed in favour of the firm.
The return is stated to have been selected for scrutiny and on culmination of assessment, the AO denied the deductions in respect of license fee holding the same to be a colourable transaction aimed at diversion of funds for the personal benefit of the children of Dr. V. Sagar. The AO held that since RSCPL was not engaged in the practice of law, it could not claim any goodwill.
The CIT(A) also observed that since the receipts representing license fee had already been taxed in the hands of RSCPL and if that assessee were to be allowed a deduction, it would result in tax being levied twice over. For all the reasons, the CIT(A) proceeded to overrule the view that had been expressed by the AO.
The ITAT held the legal heirs of the advocates would be entitled to the benefit of the goodwill earned and created by the legal practitioner. It was submitted that the legal heirs may be entitled to consideration for the goodwill on behalf of the deceased father but they cannot be regarded as the lawful owners of the goodwill or having the rights of owning the goodwill or to license the same. In our view, we find a contradiction in these submissions. When it contended that the legal heirs of a practitioner are entitled to receive consideration for goodwill on behalf of the deceased parent, it would be difficult to hold that, the goodwill cannot be separated from the legal practice and the fruits of such goodwill cannot be enjoyed by the legal heirs of the legal practitioner or that it can be enjoyed by the legal heirs only in a particular manner.”
The court held 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.
The court stated 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. We would, therefore, have 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.
Case Details
Case Title: PCIT Versus M/S. Remfry & Sagar
Case No.: ITA 199/2017
Date: 31 January, 2025
Counsel For Appellant: Indruj Singh Rai
Counsel For Respondent: Sr. Adv. Ajay Vohra
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