Delhi High Court Upholds Deductibility Of License Fees Paid By Remfry & Sagar for Use Of Founder’s Name And Goodwill Under IT Act

Delhi High Court Upholds Deductibility of License Fees Paid by Remfry & Sagar for Use of Founder’s Name and Goodwill Under IT Act

The Delhi High Court has dismissed appeals filed by the Principal Commissioner of Income Tax challenging the Income Tax Appellate Tribunal’s (ITAT) rulings concerning the tax treatment of license fees paid by law firm Remfry & Sagar for the use of its founder’s name and goodwill. The division bench, comprising Justices Yashwant Varma and Ravinder Dudeja, upheld the ITAT’s decisions regarding Assessment Years 2009-10 and 2011-12, affirming that these payments qualify as legitimate business expenses under Section 37 of the Income Tax Act.

The case traces its origins to the historical evolution of Remfry & Sagar, which was originally established in 1827 as Grant & Remfry. Over the years, it transitioned from a sole proprietorship to a partnership. In 1973, Dr. V. Sagar acquired the firm and its goodwill, later merging it with his own practice in 1990. In 2001, he transferred the goodwill to Remfry & Sagar Consultants Pvt. Ltd. (RSCPL), a company largely owned by his non-lawyer children.

 A subsequent licensing agreement allowed the firm’s partners to pay RSCPL for the right to use the “Remfry & Sagar” name and its associated goodwill.

The key issue in the appeals was whether these payments should be considered allowable business expenses or if they violated statutory restrictions, particularly the Bar Council of India Rules, the Advocates Act, 1961, and the first Explanation to Section 37 of the Income Tax Act, 1961. The tax department contended that the payments were inadmissible, arguing that they violated legal provisions prohibiting revenue sharing with non-lawyers.

However, the High Court clarified that disallowance under Section 37 applies to expenditures incurred for an offense or a purpose prohibited by law. The Court emphasized that a payment made for the use of goodwill cannot be deemed illegal or prohibited, as businesses often pay to derive benefits from established goodwill. The Court further noted that Dr. Sagar had the right to monetize the goodwill he had built, and the firm’s payment for its use was a legitimate business transaction rather than a tax avoidance measure.

Addressing the Bar Council of India Rules, the Court ruled that the regulations primarily prohibit lawyers from sharing professional fees with non-lawyers. However, in this case, the license fee was a fixed business expenditure for the use of goodwill rather than a revenue- sharing arrangement. Since the payments were made for the right to utilize a well- established name in the legal field, the Court concluded that they were legitimate business expenses.

With these findings, the Delhi High Court dismissed the appeals, affirming the ITAT’s rulings in favour of Remfry & Sagar.