2025 (6) TMI 238 - AT - Income Tax

Allowability of expenditure of license fee paid to the assessee - license fee paid for use of goodwill and the name Remfry Sagar - HELD THAT -This issue is squarely covered by the order passed by the Hon ble ITAT as well as confirmed by the Hon ble Jurisdictional High Court 2025 (2) TMI 194 - DELHI HIGH COURT for assessment year 2009-10 2016 (11) TMI 1236 - ITAT DELHI it is the principal purpose test which would be determinative of whether the expenditure was one which could have been disallowed. We find that 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. The linking of the consideration for the aforesaid purpose to the revenue earned by the firm only constituted a basis and a measure to determine the consideration that was to be paid. The arrangement was clearly not driven by a motive to share revenues earned by the legal firm. It was purely consideration paid for use of the goodwill attached to the name Remfry Sagar . We thus find ourselves unable to accept the argument of the appellant that the Bar Council of India Rules were violated. The sheet anchor of the submissions advanced by Mr. Rai was the judgment of the Supreme Court in Apex Laboratories 2022 (2) TMI 1114 - SUPREME COURT and where the freebies provided to legal practitioners was found to be an expenditure incurred for a purpose prohibited by law. In our considered opinion the reliance placed on Apex Laboratories is clearly misplaced since the said judgment turned upon Regulation 6.8 of the Indian Medical Council (Professional Conduct Etiquette and Ethics) Regulations 2002 and which clearly prohibited a medical practitioner from receiving gifts travel expenses hospitality as well as cash or other monetary grants. It was that prohibition in law which was found to have been violated. In view of all of the above we find ourselves unconvinced of the challenge that stands raised in these appeals. Decided in favour of assessee. Ad-hoc disallowance being 10% of the foreign travelling expenses - When AO has not disputed the books of account qua the expenditure claimed by the assessee in any manner ad hoc disallowance to the extent of 10% of the foreign travel expenses is not sustainable in the eyes of law. Decided in favour of assessee. Claim of TDS credit - It is observed that CIT(A) while dealing with this issue has clearly held that since the corresponding income has already been offered to tax by the assessee and also assessed by the AO in this assessment year the assessee was entitled to TDS credit in terms of Rule 37BA(3) of the Income-tax Rules 1962 r/w Section 199 of the Act. We find no infirmity in the finding of the learned CIT(A) and while upholding the same we dismiss this ground of the Revenue s appeal.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals are as follows:

(a) Whether the expenditure incurred by the assessee towards license fee paid for use of goodwill and the name "Remfry & Sagar" is allowable as a business expenditure under the Income-tax Act, or whether it should be disallowed under Section 37 on the ground that it was incurred for a purpose prohibited by law or in violation of the Bar Council of India Rules.

(b) Whether an ad-hoc disallowance of 10% of foreign travelling expenses claimed by the assessee is sustainable in the absence of any specific evidence or dispute regarding the genuineness of such expenses.

(c) Whether the assessee is entitled to claim credit for Tax Deducted at Source (TDS) in respect of income already offered to tax and assessed, in terms of Rule 37BA(3) of the Income-tax Rules, 1962 read with Section 199 of the Income-tax Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Allowability of License Fee Expenditure for Use of Goodwill

Relevant legal framework and precedents: The primary statutory provision considered is Section 37 of the Income-tax Act, which allows deduction of any expenditure incurred wholly and exclusively for the purpose of business or profession, subject to exceptions including expenditure incurred for an offense or purpose prohibited by law. The Explanation to Section 37 clarifies that expenditure incurred for any purpose which is an offense or prohibited by law shall not be allowed. The Bar Council of India Rules, which regulate legal practice, prohibit sharing of legal fees or revenue with non-lawyers.

The Tribunal relied heavily on a prior judgment of the Hon'ble Jurisdictional High Court dated 31st January, 2025, which had considered the identical issue for assessment year 2009-10 in the assessee's own case. The Supreme Court judgment in Apex Laboratories was also discussed by the parties but distinguished by the Tribunal.

Court's interpretation and reasoning: The Tribunal emphasized the "principal purpose test" under Section 37, which requires that disallowance under the Explanation applies only if the expenditure was incurred for commission of an offense or a purpose prohibited by law. The Court noted that a breach of Bar Council Rules is not classified as an offense in law and thus does not automatically trigger disallowance.

The Tribunal observed that the license fee was paid solely to use the goodwill and the name "Remfry & Sagar," which was a valuable, transferable asset validly acquired and gifted by Dr. Sagar. The validity of the gift deed was held irrelevant to the question of allowability of the expenditure. The Tribunal rejected the Revenue's contention that the gift was a ruse or that the expenditure was aimed at tax avoidance.

Regarding the Bar Council Rules, the Tribunal clarified that the prohibition relates to sharing of legal fees or remuneration with non-lawyers, not to payment of consideration for use of goodwill or a firm's name. The reference to a percentage of revenue in the license fee agreement was held to be a method to calculate consideration, not a sharing of revenue. Thus, the expenditure did not violate the Bar Council Rules.

The Tribunal distinguished the Apex Laboratories case, noting that it involved a statutory prohibition on medical practitioners receiving gifts or benefits, which is not analogous to the present facts.

Key evidence and findings: The undisputed facts included the valid acquisition and gifting of goodwill, the execution of a gift deed, the partnership of unrelated parties agreeing to use the goodwill, and the payment of license fee calculated as a percentage of revenue. No evidence was found that the expenditure was for an unlawful purpose or that the Bar Council Rules were violated.

Application of law to facts: Applying the principal purpose test, the Tribunal found that the expenditure was incurred for a lawful business purpose-to derive benefit from goodwill-and not for commission of an offense or a prohibited purpose. The Bar Council Rules did not prohibit the payment made, and no tax avoidance motive was established.

Treatment of competing arguments: The Revenue's argument that the expenditure should be disallowed due to violation of Bar Council Rules and that the gift deed was a ruse was rejected as irrelevant or unsupported. The Tribunal gave weight to the prior High Court ruling and the lack of any offense committed. The assessee's reliance on precedent and the nature of the expenditure was accepted.

Conclusions: The expenditure towards license fee for use of goodwill and firm name is allowable under Section 37. The disallowance raised by the Revenue is without merit and is dismissed.

Issue (b): Ad-hoc Disallowance of 10% of Foreign Travelling Expenses

Relevant legal framework and precedents: Business expenditure must be substantiated and genuine to be allowed. However, ad-hoc disallowances require some basis or evidence. The Tribunal relied on its earlier order dated 22nd September, 2021 in the assessee's own case for assessment year 2014-15, which dealt with the same issue.

Court's interpretation and reasoning: The Tribunal held that no disallowance can be made merely on surmises or assumptions without evidence disputing the genuineness of the foreign travel expenses. The Assessing Officer had not challenged the books of account or the expenditure claimed. The earlier order had deleted the ad-hoc disallowance and the Tribunal found no reason to deviate from that finding.

Key evidence and findings: The assessee's books of account were undisputed, and no material was placed to show that the foreign travel expenses were not incurred for business purposes.

Application of law to facts: Since the expenditure was supported by books and no contrary evidence was presented, the ad-hoc disallowance was not sustainable.

Treatment of competing arguments: The Revenue's reliance on the ad-hoc disallowance was rejected due to lack of evidence and the precedent of the Tribunal's earlier order.

Conclusions: The ad-hoc disallowance of 10% of foreign travel expenses is not justified and is dismissed.

Issue (c): Claim of TDS Credit

Relevant legal framework and precedents: Rule 37BA(3) of the Income-tax Rules, 1962 read with Section 199 of the Income-tax Act governs entitlement to claim credit for TDS when the corresponding income is offered to tax and assessed.

Court's interpretation and reasoning: The Tribunal upheld the finding of the learned CIT(A) that since the income corresponding to the TDS credit claimed was offered to tax and assessed by the Assessing Officer, the assessee was entitled to claim the TDS credit.

Key evidence and findings: The income in respect of which TDS was deducted was disclosed and assessed in the relevant assessment year.

Application of law to facts: The statutory provisions clearly entitle the assessee to claim TDS credit under these circumstances.

Treatment of competing arguments: The Revenue's challenge to the TDS credit was not sustained.

Conclusions: The claim of TDS credit is allowable and the Revenue's appeal on this ground is dismissed.

3. SIGNIFICANT HOLDINGS

"We at the outset note 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."

"A payment made for use of goodwill cannot possibly be viewed as being an illegal purpose or one prohibited by law."

"The Bar Council of India Rules proscribe sharing of remuneration earned by a firm of lawyers with one who is not a member of the legal profession. The arrangement for payment of license fee based on revenue was a basis to compute consideration for use of goodwill and did not amount to sharing of revenue."

"None of the expenditure claimed by the assessee as business expenditure can be disallowed merely on the basis of surmises."

Core principles established include the application of the principal purpose test under Section 37 for disallowance, the distinction between prohibited sharing of legal fees and payment for use of goodwill, and the requirement of evidence to sustain ad-hoc disallowances.

The Tribunal dismissed all appeals of the Revenue, upholding the allowability of license fee expenditure, rejecting ad-hoc disallowance of foreign travel expenses, and confirming entitlement to TDS credit.