The Delhi High Court has upheld an order by the Income Tax Appellate Tribunal (ITAT) allowing the deduction of a license fee paid for the use of goodwill under Section 37 of the Income Tax Act, 1961.
The Revenue has appealed against the order passed by the Income Tax Appellate Tribunal (ITAT) for the assessment year (AY) 2010-11, which favored the assessee, M/s Remfry & Sagar, a law firm.
The issue in this case revolves around the license fee paid by Remfry & Sagar to Remfry & Sagar Consultants Private Limited (RSCPL) for the use of the firm’s name and associated goodwill. The Assessing Officer (AO) had initially disallowed the deduction, arguing that the transaction was a colourable device aimed at diverting funds to the children of Dr. V. Sagar, the original owner of the goodwill. The AO contended that since RSCPL was not engaged in legal practice, it could not claim any goodwill.
The Commissioner of Income Tax (Appeals) [CIT(A)] overturned the AO’s decision, ruling that the goodwill acquired by Dr. V. Sagar was transferable and could be validly gifted.
Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here
The Revenue appealed this decision to the ITAT, which upheld the CIT(A)’s ruling, stating that the arrangement was not for tax avoidance or profit diversion.
It was submitted by the Revenue that the expenditure was a method used to divert funds and violated the Bar Council of India Rules, which prohibit advocates from sharing remuneration with non-advocates.
The High Court observed that the primary purpose of the expenditure was to use the goodwill associated with the name “Remfry & Sagar,” which had been built over decades of legal practice.
The court noted that the goodwill was a valuable asset that could be monetized and that the payment of the license fee was for the legitimate purpose of deriving benefits from this goodwill. The court also noted that the Bar Council of India Rules were not violated, as the license fee was not a sharing of remuneration but a payment for the use of goodwill.
The court further observed that the validity of the gift deed transferring the goodwill to RSCPL was not in question, as the primary issue was the legitimacy of the expenditure. The court found no evidence that the expenditure was incurred for an unlawful purpose or to circumvent any legal prohibition.
Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here
The Delhi High Court, comprising Justice Yashwant Varma and Justice Ravinder Dudeja, dismissed the Revenue’s appeals, upholding the ITAT’s decision to allow the deduction of the license fee under Section 37 of the Income Tax Act.
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