License fee for goodwill and name usage allowed as business expenditure under primary purpose test

ITAT Delhi allowed assessee's appeal regarding license fee expenditure paid for use of goodwill and name "Remfry & Sagar." The tribunal held that linking consideration to revenue percentage was merely a basis for computing payment, not revenue sharing, thus not violating Bar Council rules. The primary purpose test determined the expenditure was allowable. The tribunal also ruled against 10% ad-hoc disallowance of foreign travel expenses where books weren't disputed, and upheld TDS credit entitlement where corresponding income was offered for taxation.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals are as follows:

(a) Whether the expenditure incurred by the assessee towards license fee paid for use of goodwill and the name "Remfry & Sagar" is allowable as a business expenditure under the Income-tax Act, or whether it should be disallowed under Section 37 on the ground that it was incurred for a purpose prohibited by law or in violation of the Bar Council of India Rules.

(b) Whether an ad-hoc disallowance of 10% of foreign travelling expenses claimed by the assessee is sustainable in the absence of any specific evidence or dispute regarding the genuineness of such expenses.

(c) Whether the assessee is entitled to claim credit for Tax Deducted at Source (TDS) in respect of income already offered to tax and assessed, in terms of Rule 37BA(3) of the Income-tax Rules, 1962 read with Section 199 of the Income-tax Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Allowability of License Fee Expenditure for Use of Goodwill

Relevant legal framework and precedents: The primary statutory provision considered is Section 37 of the Income-tax Act, which allows deduction of any expenditure incurred wholly and exclusively for the purpose of business or profession, subject to exceptions including expenditure incurred for an offense or purpose prohibited by law. The Explanation to Section 37 clarifies that expenditure incurred for any purpose which is an offense or prohibited by law shall not be allowed. The Bar Council of India Rules, which regulate legal practice, prohibit sharing of legal fees or revenue with non-lawyers.

The Tribunal relied heavily on a prior judgment of the Hon'ble Jurisdictional High Court dated 31st January, 2025, which had considered the identical issue for assessment year 2009-10 in the assessee's own case. The Supreme Court judgment in Apex Laboratories was also discussed by the parties but distinguished by the Tribunal.

Court's interpretation and reasoning: The Tribunal emphasized the "principal purpose test" under Section 37, which requires that disallowance under the Explanation applies only if the expenditure was incurred for commission of an offense or a purpose prohibited by law. The Court noted that a breach of Bar Council Rules is not classified as an offense in law and thus does not automatically trigger disallowance.

The Tribunal observed that the license fee was paid solely to use the goodwill and the name "Remfry & Sagar," which was a valuable, transferable asset validly acquired and gifted by Dr. Sagar. The validity of the gift deed was held irrelevant to the question of allowability of the expenditure. The Tribunal rejected the Revenue's contention that the gift was a ruse or that the expenditure was aimed at tax avoidance.

Regarding the Bar Council Rules, the Tribunal clarified that the prohibition relates to sharing of legal fees or remuneration with non-lawyers, not to payment of consideration for use of goodwill or a firm's name. The reference to a percentage of revenue in the license fee agreement was held to be a method to calculate consideration, not a sharing of revenue. Thus, the expenditure did not violate the Bar Council Rules.

The Tribunal distinguished the Apex Laboratories case, noting that it involved a statutory prohibition on medical practitioners receiving gifts or benefits, which is not analogous to the present facts.

Key evidence and findings: The undisputed facts included the valid acquisition and gifting of goodwill, the execution of a gift deed, the partnership of unrelated parties agreeing to use the goodwill, and the payment of license fee calculated as a percentage of revenue. No evidence was found that the expenditure was for an unlawful purpose or that the Bar Council Rules were violated.

Application of law to facts: Applying the principal purpose test, the Tribunal found that the expenditure was incurred for a lawful business purpose-to derive benefit from goodwill-and not for commission of an offense or a prohibited purpose. The Bar Council Rules did not prohibit the payment made, and no tax avoidance motive was established.

Treatment of competing arguments: The Revenue's argument that the expenditure should be disallowed due to violation of Bar Council Rules and that the gift deed was a ruse was rejected as irrelevant or unsupported. The Tribunal gave weight to the prior High Court ruling and the lack of any offense committed. The assessee's reliance on precedent and the nature of the expenditure was accepted.

Conclusions: The expenditure towards license fee for use of goodwill and firm name is allowable under Section 37. The disallowance raised by the Revenue is without merit and is dismissed.

Issue (b): Ad-hoc Disallowance of 10% of Foreign Travelling Expenses

Relevant legal framework and precedents: Business expenditure must be substantiated and genuine to be allowed. However, ad-hoc disallowances require some basis or evidence. The Tribunal relied on its earlier order dated 22nd September, 2021 in the assessee's own case for assessment year 2014-15, which dealt with the same issue.

Court's interpretation and reasoning: The Tribunal held that no disallowance can be made merely on surmises or assumptions without evidence disputing the genuineness of the foreign travel expenses. The Assessing Officer had not challenged the books of account or the expenditure claimed. The earlier order had deleted the ad-hoc disallowance and the Tribunal found no reason to deviate from that finding.

Key evidence and findings: The assessee's books of account were undisputed, and no material was placed to show that the foreign travel expenses were not incurred for business purposes.

Application of law to facts: Since the expenditure was supported by books and no contrary evidence was presented, the ad-hoc disallowance was not sustainable.

Treatment of competing arguments: The Revenue's reliance on the ad-hoc disallowance was rejected due to lack of evidence and the precedent of the Tribunal's earlier order.

Conclusions: The ad-hoc disallowance of 10% of foreign travel expenses is not justified and is dismissed.

Issue (c): Claim of TDS Credit

Relevant legal framework and precedents: Rule 37BA(3) of the Income-tax Rules, 1962 read with Section 199 of the Income-tax Act governs entitlement to claim credit for TDS when the corresponding income is offered to tax and assessed.

Court's interpretation and reasoning: The Tribunal upheld the finding of the learned CIT(A) that since the income corresponding to the TDS credit claimed was offered to tax and assessed by the Assessing Officer, the assessee was entitled to claim the TDS credit.

Key evidence and findings: The income in respect of which TDS was deducted was disclosed and assessed in the relevant assessment year.

Application of law to facts: The statutory provisions clearly entitle the assessee to claim TDS credit under these circumstances.

Treatment of competing arguments: The Revenue's challenge to the TDS credit was not sustained.

Conclusions: The claim of TDS credit is allowable and the Revenue's appeal on this ground is dismissed.

3. SIGNIFICANT HOLDINGS

"We at the outset note that the disallowance which is contemplated under Section 37 is expenditure incurred for any purpose which is an offense or a purpose prohibited by law. It is thus manifest that it is principally the purpose for which the expenditure is incurred which would be decisive of whether it is liable to be disallowed."

"A payment made for use of goodwill cannot possibly be viewed as being an illegal purpose or one prohibited by law."

"The Bar Council of India Rules proscribe sharing of remuneration earned by a firm of lawyers with one who is not a member of the legal profession. The arrangement for payment of license fee based on revenue was a basis to compute consideration for use of goodwill and did not amount to sharing of revenue."

"None of the expenditure claimed by the assessee as business expenditure can be disallowed merely on the basis of surmises."

Core principles established include the application of the principal purpose test under Section 37 for disallowance, the distinction between prohibited sharing of legal fees and payment for use of goodwill, and the requirement of evidence to sustain ad-hoc disallowances.

The Tribunal dismissed all appeals of the Revenue, upholding the allowability of license fee expenditure, rejecting ad-hoc disallowance of foreign travel expenses, and confirming entitlement to TDS credit.

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