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2016 (11) TMI 1236 - ITAT DELHI

2016 (11) TMI 1236 - ITAT DELHI - TMI - Deduction of license fee paid as per the agreement of license for the use of goodwill in the Remfry & Sagar - Held that:- We have to necessarily hold, that the argument of Revenue that the arrangement was for avoidance of tax and diversion of profits and hence the deduction was rightly denied by the Assessing Officer, has to be rejected. Even otherwise, it has been demonstrated by the assessee that the Revenue has accepted that both the entities i.e. the a .....

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and carry on its profession as the goodwill is not owned by it the payment made in pursuance of an agreement which enables the assessee firm to carry on its profesions, in the manner in which it is now doing, is definitely an expenditure laid down wholly and exclusively for the purpose of business or profession. The argument of the Ld. Special Council that the purpose test contemplated u/s 37 of the Act is not satisfied is devoid of merit. Irrespective of whether the gift of Dr. V.Sagar to RSCPL .....

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assessee of license fee paid to M/s RSCPL has to be allowed as a deduction U/s 37 of the Act.- Decided in favour of assessee - Addition on account of secretarial, accounting & other support services - Held that:- we uphold the same as Ld. Departmental Representative could not controvert the factual finding. The CIT(A) at page 56 has recorded that the addition was made by the A.O on the ground that, this is not authorized by the partnership deed. Such ground of the disallowance cannot be sus .....

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d by the assessee. I.T.A Nos.-3667/Del/2013, 3666/Del/2013, 3668/Del/2013, 3669/Del/2013, 367/Del/2012 & 4680/Del/2012 are filed by the Revenue. The issue in all these appeals is common. Hence for the sake of convenience these appeals are heard together and disposed of by this common order. Both parties submitted that, ITA 1561/ Del/2011 filed by the assessee for the Assessment Year 2007-08 against the CIT(A) s XXVIII, New Delhi dated 14/2/2011 is the lead case and hence we shall first deal .....

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not business expenditure allowable under section 37 of the Income Tax Act, 1961 and ignoring that the License Fee was paid pursuant to a valid agreement and had direct nexus to the income of the Appellant Firm. 3. Holding that the agreement to pay License Fee is a sham and the transaction is a colorable one for evading taxes even though it was proved to him that if the transaction is considered as a whole there was no loss of revenue. 4. Holding that payment of License Fee to RSCPL is a colourab .....

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IT(A) that the purpose of paying the License Fee was to reduce the income of the firm is clearly unwarranted and misleading and not borne out from the facts on record. 5. Perversely ignoring the fact that the Appellant firm and RSCPL together have paid ₹ 20, 86,47,812/- as taxes whereas they would have paid ₹ 20,63,59,286/- as taxes if the License Fee had not been paid; the revenue has thereby gained ₹ 22,28,526/-. Hence, the allegation by the Ld. CIT(A) that the purpose of pay .....

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missible in law. 7. Alleging that the transaction in question is a colourable device for evasion of tax without any basis. 8. Holding that goodwill in Remfry and Sagar is synonymous with the persona of Dr. V. Sagar, whereas in fact it embodies a practice established in 1827 with which hundreds of attorneys, scientists, patent agents and other experts in patents, trademarks and copy right have been associated to service more than 7000 clients spread all over the world. 9. Holding that the gift of .....

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Apex Court in Azadi Bachao Andolan (263 ITR 706), CIT vs. Walfort Shares & Stock Broker (326 ITR 1) and CIT Vs. M/s Glaxo Smith Kline Asia (P) Ltd. [Appeal (Civil) No. 18121/2007] which were specially brought to his notice. 12. Acting perversely by refusing to admit evidence in the form of valuation reports of the goodwill in Remfry and Sagar obtained periodically by the assessee from independent experts despite the fact that these valuation reports were referred o in the submissions before .....

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firm providing legal service. It describes itself as a leading law firm specializing in intellectual property and corporate laws. It is a fullservice intellectual property firm engaged inter alia in, advising clients worldwide on their trademarks, patents, designs, copyright, geographical indications, domain names and unfair competition issues. 3.2 A British immigrant, Mr. Henry Oliver Remfry established the sole proprietorship firm under the name and style of Grant and Remfry in the year 1827 .....

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o Dr. V. Sagar the business along with the goodwill in Remfry and son . Mr. V. Sagar became the sole and absolute proprietor of this business of Remfry & Son along with the goodwill attached to it. He continued the business of Remfry & Son till 31st of December 1989. 3.3 Prior to the acquisition of Remfry & Son , Dr. V. Sagar was a practicing attorney under the name and style of Sagar & Co. On 1/1/1990 Dr. V. Sagar merged his own practice into Remfry & Son , and changed the n .....

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dvice, it was thought fit to safeguard and institutionalize the goodwill in Remfry & Sagar for perpetuity. Various legal options were examined and with an intention of segregating the goodwill in Remfry & Sagar from the attorney s (including Dr. V. Sagar), and for institutionalizing the goodwill in perpetuity by way of corporatization, a deed of gift was executed on 1/6/2001 by Dr. Sagar in favour of Remfry & Sagar (consultants Private Ltd hereinafter referred to as ( RSCPL ) whereby .....

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term of 5 years. This agreement was revised and renewed w.e.f 1/4/2008 and under the renewed arrangement, license fee was payable @ 28% of the amount of bills raised. The assessee firm in all these years under appeal filed paid the license fee as a percentage of gross receipts and claimed the same as an expense. 3.6 The primary issue before us is whether the Assessing Officer was right in disallowing the deduction of license fee paid by the assessee to RSCPL as per the agreement of license for .....

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e assessee firm to the family members of Dr. V. Sagar, who held majority shares in RSCPL and to evade tax. The observations of the A.O are as follows: a) goodwill of the law practice did not belong to RSCPL as it has no capability; b) no activity was carried out by RSCPL to enhance the goodwill of the law practice in the name of the Remfry & Sagar c) the goodwill, if any, was of Dr. V. Sagar which could not have been separated from him, much less by way of gift to M/s RSCPL and d) Dr. V. Sag .....

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carried the matter in appeal. The first appellate authority for the Assessment Year 2007-08 and 2010-11 upheld the orders passed by the Assessing Officer, for the various reasons given in those orders. However, for the Assessment Years 2003-04 and 2006-07 and for the Assessment Year 2008-09 and 2009-10, the first appellate authority deleted the aforesaid disallowance made by the Assessing Officer. Aggrieved both the assessee as well as the revenue are in appeal before us for all there assessment .....

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in advising the clients worldwide on their trademarks, patents, designs, copyright, geographical indications, domain names and unfair competition issues. After discussing the dates and events, the Ld. Counsel pointed out that the origin of the firm was in the year 1827. 5.2. He submitted that there are four points to be looked into in respect of goodwill aspect. These are: (i) Goodwill is an intangible asset developed over a period of time, due to distinct reputation gained on account of severa .....

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iginal partners/founder and the death of Dr. V. Sagar has not affected the business of the firm which has been growing even after his demise. 5.3. That the professional firms in the present day, across the globe, enjoy goodwill, and are being continued to be run in the name of the original founders, despite the fact that the founding fathers are no longer part of the practice. For example, Mulla & Mulla, Little & Co. Ernst & Young, etc. 5.4. That Dr. V. Sagar is entitled to gift a go .....

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able consideration and this demonstrates that the goodwill of the firm was an intangible asset, capable of alienation. Thereafter Dr. V. Sagar carried on the said business under the name and style of Remfry & Sons between 1973 to 1990 as a sole proprietor. Thereafter on merger of his own practice as sole proprietor in the name of Sagar & Co. in the year 1990 and carried on practice in the name of Remfry & Sagar . 5.5. Mr. Vohra, argued that the goodwill attached to the name Remfry &a .....

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odwill and the rights associated therewith Remfry and Sagar have been legally vested in RSCPL. The company was, in law entitled to license the said goodwill, in order to practice in the name of Remfry & Sagar and to enjoy the goodwill associated therewith, the assessee had necessarily to obtain the right to use thereof against payment of consideration. 5.8. He listed out the essential conditions of the newly constituted partnership and submitted that even if it is assumed for the sake of ass .....

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even in that hypothetical situation, the firm would necessarily have to pay Dr. V. Sagar, (in his individual capacity), fee for license to use Firm s name and goodwill. 5.9. That personal goodwill of Dr. V. Sagar would not become property of the firm and no other partners could have claimed any right in such goodwill. Upon the demise of Dr. V. Sagar (assuming the goodwill was not alienated), goodwill vesting exclusively in Dr. V. Sagar would have devolved on his legal heirs and the partnership a .....

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manufacture and sell products in India using technology and know-how licensed by the licensor are allowable as business expenditure. On the same anology this expenditure is allowable. 5.11. On the finding of the Assessing Officer that goodwill is attached to the persona of Dr. V. Sagar, it was submitted that since inception of the practice in 1827, there have been lot of changes in the partners of the firm, which form time to time, varied from 20 partners to even 100 partners. He submitted that .....

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l is not associated with the persona Dr. V. Sagar. 5.13. That the Assessing Officer was wrong in coming to a conclusion that the gift of goodwill by Dr. V. Sagar in favour of RSCPL and the assessee obtaining right to use such goodwill from RSCPL in consideration of payment of license fee are legally valid and binding transactions and that the question of the same being colourable transactions entered into to evade taxes, does not arise. Hence, the allegations are without any basis. Mr. Ajay Vohr .....

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d style of Remfry & Sagar , at New Delhi i.e in the National Capital Region and at Mumbai since 1973 as a sole proprietor. Mr. Remfry, in the year, 1827 started his business of patent and Trade mark agents under the name and style of Remfry & /Son . Mr. Remfry was not in the practice of law but was in the business of trademark and patent agents. Dr. V. Sagar after purchasing this business in the year 1973, did not carry on the old business of Patent & Trade mark Agency, but carried o .....

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ft was made to ensure continuity of the said practice. The partnership firm was constituted on 5th June 2001 by Dr. V. Sagar and his erstwhile associates in the practice of Attorney-at-law under the name and style of Remfry & Sagar . 6.4. Dr. V. Sagar also sold to RSCPL, the entire infrastructure of the said practice in the form of office equipment and facilities including the library. 6.5. RSCPL in turn made available this infrastructure to the assessee by way of a separate agreement for sp .....

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enditure would depend on the fulfillment of the conditions laid down in Section 37 of the Act. The provisions contained in Section 37(1) stipulate that any expenditure, not being a capital expenditure of the assessee, laid out wholly and exclusively for the purposes of business or profession shall be allowed as a deduction. 6.8. That the purpose test contemplated in Section 37 of the Act should be applied and for the same, the events that unfolded in the year 2001 have to be examined. Thus he ar .....

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e firm. 6.10. RSPCL has done nothing to develop or maintain the goodwill of the legal practice. The payment of license fees has increased from year to year. 6.11. Goodwill of a business and the goodwill of a law practice or a professional are entirely different. In case of legal practice, the value depends solely on account of capabilities and skills of a person s carrying out the legal practice. Thus, attempt to separate the goodwill of a law firm, from the legal practice is a colourable device .....

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by them, belonged to them and never derived from the legal practice they carried on RSCPL had no other alternative but to lease back the goodwill to Dr. V. Sagar s firm as all these arrangements admittedly constituted an integral part. 6.15. Goodwill is a current right but it can have value when the business is transferred and it is an intangible asset to a business. 6.16. In the case of a professional or personal service partnerships, goodwill is likely to be personal to the partners individual .....

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law practice once divested of the legal profession is of no value and if artificially separated and transferred, the entire value would be lost, because of the loss of reputation and the client base. 6.18. The son and daughter of Dr. V. Sagar who formed the company were not entitled to carry on the legal profession u/s 29 of the Advocates Act, 1961 . Neither did the legal profession was owned or retained or developed or put to any use by the company i.e RSCPL. Only artificial rights have been c .....

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goodwill has been gifted to a person or entity not entitled to carry on legal profession. The goodwill representing the loyalty of the customer or the reputation of legal practice will really have no meaning to a person or entity not entitled to practice law. 6.20. License fee paid by the assessee is a mode of Revenue sharing and not an expense of the assessee. This is a profit sharing arrangements and such an arrangement is not permissible under Rule 2 of Chapter III of Part VI of the Bar Coun .....

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recognize the deceased person s right in the profits of the firm because of his contribution in the development of the goodwill and the legal heirs only receive the money as heirs of the deceased and not as partners on in their individual rights. He argued that after the death of Dr. V. Sagar, hi legal heirs may be entitled to receive the consideration for goodwill on behalf of their deceased father, but they cannot be regarded as being lawful owners of the goodwill or having the right to own th .....

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to transfer profits of the firm from the assessee to the company belonging to Dr. V. Sagar s children. 6.24. He reiterated his arguments that the legal heirs of Dr. V. Sagar had every right to share the goodwill after his death or after his retirement, but even at this stage, it could not be regarded as an expense of the firm within the meaning of Section 37 of the Act. He submitted that the Assessing Officer has rightly disallowed the claim of the assessee as expenses by way of license fees pa .....

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ctice and it was only in the year 1990 that this legal practice in the name of Sagar & Co got merged into Remfry & Sons . 7.1. He submitted that the goodwill in the name of Remfry & Sons pertains to the business carried on by the concern and the said goodwill is related to the field of trade mark and patents and had considerable value, even for the legal practice carried on by Dr. V. Sagar in the same field. He emphasized that, if the aforesaid goodwill of business of Remfry & So .....

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ful and legal owner of goodwill vesting in the name Remfry & Sagar , being distinct tangible asset, which was acquired by them post gift deed executed by Dr. V. Sagar. He reiterated that there is no bar under any law, including the Advocates Act, 1961, that has been specifically pointed out by the Revenue, which prohibits ownership in goodwill attaching to a legal practice vesting in an independent entity, other than the proprietors/partners carrying on the legal profession. He submitted tha .....

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nsideration for obtaining license/right to use the name Remfry & Sagar , and the goodwill associated therewith, being owned by RSCPL. 8. We have heard both the parties at length. We have considered the written submission, the papers on record as well as the case laws cited by both parties. On a careful consideration of the same we hold as follows: 8.1. Before we adjudicate the issue as to whether the disallowance of license fee paid by the assessee to RSCPL for license to practice as Remfry .....

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and Mr. Burrington joined Remfry & Son (the name of the partnership firm at that time) as partners. Year 1970: Mr. Bernier and Mr. Burrington retired. Mr. Holloway, Mr. Silverstone and Mrs. Remfry entered into a fresh deed of partnership. As per the partnership deed, Mr. Holloway and Mrs. Silverstone were entitled and empowered to sell all or any of the assets of the partnership firm, including the name and goodwill of the business. Year 1973: Mr. Holloway and Mrs. Silverstone transferred a .....

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private limited company, viz., Remfry & Sagar Consultants Private Limited ( RSCPL ), wherein substantial shareholding was held by Dr. Sagar s children, viz., Ms. Rosemary Sagar and Mr. Hemant Sagar, who were not lawyers. At the time of the said transfer, goodwill was valued at ₹ 45 crores on which stamp duty of ₹ 90 lakhs was paid by Dr. V. Sagar. (ii) On June 5, 2001, Dr. V. Sagar entered into partnership with Mr. R. Sampath, Mrs. Ashwin Julka, Mr. Ramit Nagpal and Mr. Prem Sewa .....

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ion of secretarial, accounting and other supporting services. Feb 2011: Demise of Dr. V. Sagar _In pursuance of the aforesaid license agreement dated June _5, 2001 entered into between the appellant and RSCPL, the _appellant paid license fee for use of goodwill to RSCPL w.e.f. _assessment year 2002-03, which continues till date, even _after the demise of Dr. V. Sagar. 8.2. M/s Remfry & Sons , was carrying on a business of patent agents. Vide terms of the deed of partnership dated 6th April 1 .....

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only in two partners of the firm and not the firm. This is clear from reading of Clause 2 & 3 of the said partnership deed. 8.3. On the fourth day of April 1973, Mr. Vidya Sagar purchased by way of sale, from Mr. Holloway and Mrs. Silver Stone, the business carried on under the name and style of Remfry & Sons along with all its assets including capital asset as on 31st March 1973 and the name and goodwill thereof which was referred to as the said business in that agreement for a total c .....

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me and style of Remfry & Sons and changed the name of the proprietorship into Remfry and Sagar . Dr. V. Sagar was carrying practice and profession of Attorneys-at-Law with specialization in the areas of intellectual Property Law and Corporate Law under the name and style of Remfry & Sagar , in New Delhi and Mumbai. The goodwill in the name of Remfry & Sagar and all the rights associated thereof (including intellectual property rights) belong exclusively to Dr. V. Sagar. Dr. V. Sagar .....

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sion of Attorney-At-law, which included the business of Remfry and Sons acquired by him. In other words, prior to 1st June, 1990, the Goodwill of Remfry and Sons was goodwill of business and not of advocacy profession, but thereafter there is a merger of the profession of law and the business of trade mark and patent. Agents and this was carried on as a profession of law. 8.7. Vide Partnership dated 5th June 2001 between Dr. V. Sagar and four other partners it was agreed to carry on the practice .....

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ame and style of Remfry & Sagar and this partnership deed has come into force on 1st June 2001. Thus what is licensed by RSCPL to the assesse firm is Goodwill and its associated rights to practice as Attorneys-at-law and not to do business of trademark and Patent Agents. 8.8. Vide agreement dated 5th June 2001, RSCPL permitted to use of goodwill to the partnership and permitted them to use the name of Remfry & Sagar with retrospective effect i.e. 1st June 2001. While Clause No. 16.1 of t .....

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actice of law. Such well considered and thought out arrangements cannot be said to be colourful devices. These are transparent and legally documented arrangements. 8.10. The issue for consideration is whether such an arrangement is permissible in law. The pith and substance of the argument of the revenue is that such segregation of goodwill from the legal practice cannot be permitted. It is further argued that under the Advocates Act, 1961, the goodwill earned by an advocate cannot be alienated .....

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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. 8.12. Be it as .....

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Sagar unless specifically authorized to do so by the owner of the goodwill. As rightly pointed out by the Ld. Counsel for the assessee that in the present day professional practice and professional firms across the globe are in the names of the original founders, though they are no longer part of the practice. This name and goodwill helps in the practice. The partnership was formed to continue the law practice of Dr. V. Sagar and this could be done only if the assessee firm is permitted to do s .....

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ofession in the name of Devi Dass & Co. Vide partnership dated 31 January 1948, wherein he retained/reserved the right of goodwill of the profession carried on by him earlier in sole proprietorship. On 2nd June 1951, he retired from the said partnership. The goodwill in the partnership was sold to the other partner and the consideration was to be paid to the Chartered Accountant at the certain rate and after his death to his wife and thereafter his son were to paid annual consideration. The .....

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licence and not a sale of the goodwill and the payments were in the nature of royalty and had to be treated as admissible deductions; because (i) though clause 2 of the deed of dissolution used expressions such as agreed to sell and the purchase price of the goodwill , these expressions were not determinative of the exact nature of the transaction; (ii) neither clause 2 nor any other provision in the deed fixed any lump sum as price in respect of which annual payments were provided; (iii) the du .....

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substance of which is that the entire arrangement was made for evasion of taxes. He held as follows: In my view, it is a very ingenious attempt to avoid payment of tax by making it appear somehow that the payment of purchase money may be treated as payment of a royalty. In the view I take of the deed, it is not necessary to discuss the numerous cases referred to by Shlat J. In my opinion, the High Court came to the correct conclusion and the appeals should be dismissed with costs. 8.15. In the c .....

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cted. Even otherwise, it has been demonstrated by the assessee that the Revenue has accepted that both the entities i.e. the assessee as well as RSCPL, pay taxes, at the maximum rate and that there is no loss of Revenue on account of this arrangement. The taxes due to the Government have not been avoided or evaded by this arrangement. Thus the disallowance made on the ground of diversion of profits is devoid of merit. 8.17. Though the Ld. Special Counsel for the Revenue argued that good will of .....

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ompany is violating the Advocates Act, 1961 or the Bar Council Rules. No authority has held that this arrangement violates any Act or law of the land, though the assessee firm has been carrying on its profession of Attorneys at law under this arrangement for the last many years. 8.18. Another important fact that has to be considered is that, Dr. V. Sagar had the sole and exclusive rights to the said goodwill. The goodwill was held by him. Without legal authorization from him, the assessee firm c .....

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is now doing, is definitely an expenditure laid down wholly and exclusively for the purpose of business or profession. The argument of the Ld. Special Council that the purpose test contemplated u/s 37 of the Act is not satisfied is devoid of merit. Irrespective of whether the gift of Dr. V.Sagar to RSCPL being ethical or not and irrespective of the fact whether the gift is legally valid or not, from the view point of the assessee firm, as it could not have continued and carried on the profession .....

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s is devoid of merit. 8.20. For all these reasons we are of the considered opinion that the deduction claimed by the assessee of license fee paid to M/s RSCPL has to be allowed as a deduction U/s 37 of the Act. 8.21. For the Assessment Year 2008-09, Ground No. 2 of the Revenue s appeal is that, the Ld. CIT(A) erred in deleting the addition of ₹ 6,17,832/- added by the A.O on account of personal nature, entertainment expenses. 8.22. The CIT(A) dealt with this issue which was raised as Groun .....

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