Delhi High Court dismisses IT's appeals against law firm Remfry & Sagar over goodwill licence fee

The Delhi High Court recently dismissed a batch of appeals filed by the Principal Commissioner of Income Tax against law firm Remfry & Sagar, upholding that the licence fee paid by the firm for use of its goodwill is a legitimate business expenditure deductible under Section 37 of the Income Tax Act, 1961 [Principal Commissioner of Income Tax Vs Remfry & Sagar]..A Bench of Justices V Kameswar Rao and Vinod Kumar observed that the issue stood covered by an earlier decision of the Court in the case of the same assessee and that no substantial question of law arose for consideration.“As no substantial question of law arises, the appeals are dismissed,” the Bench said..Fee paid by law firm Remfry & Sagar for use of name, goodwill is business expense: Delhi High Court.The Income Tax Department had challenged the order of the Income Tax Appellate Tribunal (ITAT) allowing deduction of licence fees paid by the law firm to Remfry & Sagar Consultants Pvt Ltd (RSCPL) for the use of the firm’s name and goodwill. RSCPL is a company substantially run by family members of Dr. V Sagar, the late founder of the law firm Remfry & Sagar. Notably, those running RSCPL were not legal practitioners. The Department, therefore, contended that the goodwill licensing arrangement between the law firm and RSCPL amounted to sharing of professional fees with non-lawyers, which was prohibited under the Bar Council of India (BCI) Rules, and was therefore disallowable under Explanation 1 to Section 37.Indruj Singh Rai, Senior Standing Counsel for the Revenue, argued that the payment violated the proscription against revenue-sharing and ought to be treated as expenditure incurred for a purpose prohibited by law. Appearing for Remfry & Sagar, Senior Advocate Ajay Vohra submitted that the goodwill in question was a validly acquired and transferable asset, lawfully gifted by the late Dr V Sagar, and that the newly constituted firm merely paid consideration to use the goodwill attached to its established name. The payment, he argued, was not a sharing of professional fees but a business-commercial arrangement to use an intangible asset..In an earlier judgment, the Delhi High Court had already examined the nature of the firm’s arrangement in detail and upheld the allowability of the licence fee as a business expenditure. The Court had found that the goodwill of the firm “Remfry & Sagar” was a valuable, transferable asset validly owned by the late Dr V Sagar and that payments made for the right to use that goodwill were in the nature of commercial consideration, not profit-sharing. It further held that the BCI Rules, which restrict fee-sharing between lawyers and non-lawyers, could not be stretched to bar legitimate commercial use of goodwill.Applying this ruling, the Court proceeded to dismiss the IT Department's latest appeal in the matter as well. .In a related appeal, the Revenue had also questioned the deletion of a five per cent disallowance on the firm’s travel and entertainment expenses. The Commissioner of Income Tax (Appeals) had deleted the disallowance, noting that it was made without any supporting evidence and purely on assumptions. The ITAT had affirmed that conclusion.The High Court upheld those findings, observing that the Assessing Officer had not identified any personal expenditure component. It agreed with the lower authorities that the disallowance was unsustainable in law and dismissed the Revenue’s appeal on this issue as well..The Revenue was represented by Senior Standing Counsel Indruj Singh Rai, along with Advocates Sanjeev Menon, Rahul Singh and Gaurav Kumar..Vohra, who appeared for Remfry & Sagar, was briefed by Advocates Aditya Vohra and Tanmay Dhakras..[Read Judgment].Follow Bar and Bench channel on WhatsAppDownload the Bar and Bench Mobile app for instant access to the latest legal news.