14 Section 37(1) – Licence fee paid by assessee, a partnership law firm; to a private limited company for use of goodwill, which was gifted to private limited by an individual for perpetuity, is an allowable deduction u/s. 37(1) and cannot be disallowed on the grounds that the gift of goodwill by individual, of his profession of law, to a company would possibly be violating the Advocates Act, 1961 or the Bar Council Rules.

([2017)] 162 ITD 324 (Delhi – Trib.)

Remfry & Sagar vs. JCIT

A.Y.s:  2003-04 &
2010-11                                                              

Date
of Order :– 6^th September, 2016

FACTS

The assessee, is a
partnership law firm, specializing in intellectual property and corporate laws.

Dr. ‘V’, a practicing
attorney, was the sole and absolute proprietor of the business of a famous law
firm ‘Remfry & Son’ along with the goodwill attached to it. With an
intention of segregating the goodwill in ‘Remfry & Sagar’ from the
attorney’s, and for institutionalising the goodwill in perpetuity by way of
corporatisation, a gift deed was executed by Dr. ‘V’ in favour of ‘RSCPL’, a
private limited entity, whereby the goodwill in “Remfry & Sagar”
was gifted to a newly incorporated juridical/legal entity  “RSCPL”.

Thereafter, Dr. V. entered into a partnership with four other partners.
This partnership firm (the assessee) entered into an agreement with RSCPL for
grant of license for the use of goodwill of “Remfry & Sagar”
subject to payment of license fee @ 25% of the amount of bills raised. The
agreement was valid for the term of 5 years. This agreement was later on
renewed and under as per the renewal, license fee was payable @ 28% of the
amount of bills raised.

The assessee claimed
deduction of the aforesaid license fee paid u/s. 37(1).

The
AO disallowed license fee paid by the assessee to RSCPL for the use of goodwill
on the ground that the entire transaction was colourable device adopted to
transfer profits of the assessee-firm to the family members of V, who held
majority shares in RSCPL and to evade tax. The CIT-(A) upheld order of the AO.

On appeal by the assessee
before ITAT-

HELD

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. Thus, the disallowance made by
the revenue on the ground of diversion of profits is devoid of merit.

Though the revenue has
argued that goodwill of a profession cannot be sold to a company which does not
have a right to carry on practice, no specific law or section is pointed out in
support of the argument. Only several submissions have been made. Certain
judgments of Foreign Courts are cited, which are based on “ethical
considerations” and not legal prohibition. In any event, the Tribunal has
no power or authority to adjudicate the issue as to, whether; the gift of
goodwill by Dr. V, of his profession of law, to a company 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.

Another important fact that
has to be considered is that, Dr. V had the sole and exclusive rights to the
said goodwill. The goodwill was held by him. Without legal authorisation from
him, the assessee firm could not use the name and style of “Remfry &
Sagar” along with its goodwill and other assets and rights. The
assessee-firm had to seek permissions and licences to continue and carry on
this profession under this name as it is run. Hence obtaining a license is a
must for assessee firm to continue 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 profession, 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 Special Counsel that the
purpose test contemplated u/s. 37 is not satisfied is devoid of merit.
Irrespective of whether the gift of Dr. V to RSCPL is 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 of Attorneys-at-Law in the name of “Remfry &
Sagar” and use its goodwill and all its associated rights without the
impugned agreement with RSCPL. Hence the payment has to be held as that which
is incurred wholly and exclusively for the purpose of business or profession.

For all the aforesaid
reasons the deduction claimed by the assessee, of license fee paid by it to
RSCPL, has to be allowed u/s. 37.