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 disallowance of traveling and entertainment expenses. The Revenue's appeal was dismissed, and the Tribunal concluded that the expenses were legitimate business expenditures under the Income-tax Act, 1961. The order was pronounced on January 22, 2021.

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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 RSCPL
The 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 Expenses
The 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.

Conclusion
The 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.

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