2021 (1) TMI 1032 - AT - Income Tax

Tribunal allows license fee deduction & rejects disallowance of travel expenses under Income-tax Act.

The Tribunal upheld the CIT(A)'s decision, allowing the license fee paid to RSCPL as a deductible revenue expenditure and rejecting the ad hoc ... Nature of expenditure - expenditure as license fee payment to M/s. Remfry and Sagar Consultants Pvt. Ltd. (RSCPL) for use of goodwill of ‘Remfry & Sagar’ and to practice in this name - revenue or capital expenditure - HELD THAT:- We are of the considered view that amount of deduction claimed by the assessee on the amount of licence fee paid to RSCPL is allowable as expenditure u/s 37 of the Income-tax Act, 1961. So, ground no.1 is determined against the Revenue. Travelling expenses and entertainment expenses - ad hoc disallowance of 5% - HELD THAT:- We are of the considered view that none of the expenditure can be disallowed merely on the basis of surmises. Perusal of the impugned order passed by the ld. CIT (A) shows that he has followed the earlier year’s order passed by the ld. CIT (A) allowing the identical expenditure. When undisputedly entries in the books of account qua the claimed expenditure have not been questioned in any manner whatsoever ad hoc disallowance made by the AO to the extent of 5% of the expenditure of travelling expenses and entertainment expenses is not sustainable in the eyes of law. So, we find no scope to interfere into the findings returned by the ld. CIT (A), hence ground no.2 is determined against the Revenue. Issues Involved:1. Disallowance of license fee paid to Remfry & Sagar Consultants Pvt. Ltd. (RSCPL).2. Disallowance of traveling and entertainment expenses.Issue-Wise Detailed Analysis:1. Disallowance of License Fee Paid to RSCPLThe Revenue challenged the deletion of the addition made on account of the disallowance of Rs. 27,56,00,686/- paid as a license fee to RSCPL. The Revenue argued that the assessee, a law firm, was using the goodwill of RSCPL, a company prohibited from practicing law in India as per the Advocates Act, 1961 and Bar Council Rules. The AO disallowed the license fee on the grounds that it increased year after year without any corresponding efforts by RSCPL to enhance the goodwill.The Tribunal referred to the earlier year’s order in the assessee’s own case (ITA No.2979/Del/2016 for AY 2015-16) where it was concluded that the license fee paid to RSCPL is allowable as revenue expenses. The Tribunal reiterated that the agreement dated June 5, 2001, between the assessee and RSCPL for the use of goodwill was valid and still in operation. The Tribunal upheld the CIT(A)'s decision, emphasizing that the license fee is a legitimate business expenditure under Section 37 of the Income-tax Act, 1961, as it was necessary for the assessee to continue using the name and goodwill of 'Remfry & Sagar' for its legal practice.The Tribunal dismissed the Revenue's argument that the arrangement was a mere revenue-sharing device and found no violation of the Bar Council Rules. The Tribunal noted that the goodwill, initially a business asset, was integrated into the legal practice and could be legitimately licensed to the assessee firm. Hence, the Tribunal concluded that the license fee paid to RSCPL is allowable as a revenue expenditure.2. Disallowance of Traveling and Entertainment ExpensesThe AO made an ad hoc disallowance of 5% of the traveling expenses (Rs. 2,51,28,394/-) and entertainment expenses (Rs. 6,59,463/-), totaling Rs. 12,89,393/-, on the assumption that these expenses included a personal element. The CIT(A) deleted this addition, following the precedent set in the earlier year’s order.The Tribunal upheld the CIT(A)’s decision, stating that disallowance based on mere assumptions and surmises is not sustainable. The Tribunal emphasized that the AO did not dispute the entries in the books of account regarding the claimed expenses. Therefore, the ad hoc disallowance of 5% was deemed unsustainable in the eyes of the law.ConclusionThe appeal filed by the Revenue was dismissed, and the Tribunal upheld the CIT(A)’s order, allowing the license fee paid to RSCPL as a deductible revenue expenditure and rejecting the ad hoc disallowance of traveling and entertainment expenses. The Tribunal pronounced the order in open court on January 22, 2021.