TaxTMI 
TaxTMI 
2025 (2) TMI 194
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....022]. 2. The appeals had come to be admitted on the following three primary questions as is evident from the order dated 07 March 2017 passed in ITA 199/2017 and which is reproduced hereinbelow:- "(i) Did the ITAT fall into error in allowing the license fee paid to M/s. Remfry & Sagar for use of goodwill by the assessee, having regard to the provisions in the Bar Council Rules and the Advocate's Act, 1961? (ii) Did the ITAT overlook the effect of first Explanation to Section 37 of the Income Tax Act, 1961, in the circumstances of the case? (iii) Whether the ITAT fell into error in holding that the existence or otherwise of a devise, i.e. use of goodwill, was irrelevant in the circumstances of the case." 3. On hearing learned counsels for parties, we find that the following would appear to be the undisputed facts relevant for the purposes of deciding whether the expenditure claimed by the respondent/assessee was liable to be disallowed in view of Explanation 1 to Section 37 of the Income Tax Act, 1961 [Act]. 4. Those facts are the following. From the material placed before us, we gather that a sole proprietorship came to be established in 1827....
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....ereinafter referred to collectively as "the said Infrastructure"): V. The Partners are desirous of forming themselves into a partnership ("the Partnership") to carry on the practice and profession of attorneys-at-law with specialisation in the areas of intellectual property law and corporate law with the object of carrying on with effect from June 1,2001 in the National Capital Region and Mumbai the said Practice (hitherto carried on by Dr V Sagar) without a break in its continuity; the practice and profession to be carried on by the Partners being hereinafter referred to as "the Continued Practice"; xxxx xxxx xxxx VIII. Pursuant to a request by the Partners, R&S Consultants has agreed to: (a) permit the Partners and the Partnership to use the name "Remfry & Sagar" in the carrying on of the Continued Practice and in connection therewith on terms and conditions incorporated in an Agreement being entered into between the Partners and R&S Consultants contemporaneously with the execution of this Deed of Partnership (b) make available to the Partners and the Partnership the use of secretarial, accounting and other supporting services for the ....
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....e,2001 by Dr V Sagar has granted, conveyed, transferred, given and assured by way of gift unto and to the use of R&S Consultants, freely, voluntarily and without consideration the goodwill in the name "Remfry & Sagar" and all rights associated therewith (including intellectual property rights) and R&S Consultants has executed the said Deed of Gift in token of acceptance thereof; IV. Contemporaneously with the execution of this Agreement, the said Legal Practitioners have entered into an agreement to form a partnership to carry on the practice and profession of attorneys-at-law with specialisation in the areas of intellectual property law and corporate law with the object of carrying on with effect from June 1,2001 in the National Capital Region and Mumbai the said Practice (hitherto carried on by Dr Sagar) without a break in its continuity, the partnership agreed to be formed by the said Legal Practitioners being hereinafter referred to as "the said Partnership" and the practice and profession to be carried on by the said Legal Practitioners being hereinafter referred to as the "Continued Practice"; V. The said Legal Practitioners and the said Partnership have req....
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....executed in favour of the firm. The said return is stated to have been selected for scrutiny and on culmination of assessment, the AO denied the deductions in respect of license fee holding the same to be a colourable transaction aimed at diversion of funds for the personal benefit of the children of Dr. V. Sagar. The AO further held that since RSCPL was not engaged in the practice of law, it could not claim any goodwill. 10. The aforesaid view was assailed by the respondent/assessee before the Commissioner of Income-Tax (Appeals) [CIT(A)]. The CIT(A) came to hold that since the goodwill as acquired by Dr. V. Sagar was amenable to purchase and sale, it could have been validly gifted. It thus came to the conclusion that consequent to Dr. V. Sagar gifting the said goodwill to RSCPL with an intent to institutionalize it in perpetuity, the partnership was liable to pay license fee to RSCPL. 11. The CIT(A) also observed that since the receipts representing license fee had already been taxed in the hands of RSCPL and if that assessee were to be allowed a deduction, it would result in tax being levied twice over. For all the aforesaid reasons, the CIT(A) proceeded to overrule the vi....
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....hich are extracted hereunder: - "8.16. Applying the propositions laid down in this case law to the facts of the case, we have to necessarily hold, that the argument of Revenue that the arrangement was * for *avoidance of tax and diversion of profits and hence the deduction was rightly denied by the Assessing Officer, has to be rejected. Even otherwise, 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. * The taxes due to the Government have not been avoided or evaded by this arrangement. Thus the disallowance made on the ground of diversion of profits is devoid of merit. 8.17. Though the Ld. Special Counsel for the Revenue argued that good will of a profession cannot* be sold to a company which does not have a right to carry on practice, no specific law or section was brought to the notice of the Bench in support of the argument. Only several submissions have been made. Certain judgements of Foreign Courts were cited, which were based on "ethical considerations" and not legal prohibition.....
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....er III (Conditions for right to practice) (Rules under Section 49 (1) (ah) of the Act) 2. An advocate shall not enter into a partnership or any other arrangement for sharing remuneration with any person or legal practitioner who is not an advocate." 16. According to Mr. Rai, the aforesaid condition contained in Chapter 3 is liable to be viewed as a prohibition introduced by law and the expenditure thus falling foul of Explanation 1. The aforesaid contention was premised on the relevant clauses comprised in the license agreements entered into between RSCPL and the partners of the firm and which had linked the consideration payable for the permissive use of the name "Remfry & Sagar" to 25% of the amount billed and earned by the partnership firm. According to Mr. Rai, the aforesaid clause would clearly fall within the ambit of the prohibition of sharing of remuneration with a person who was neither a legal practitioner nor an advocate. 17. Mr. Rai also relied upon the following principles as enunciated by the Supreme Court in Apex Laboratories Private Limited Vs Deputy Commissioner of Income Tax (2022) 7 SCC 98 and which had an occasion to explain the scope of Explanati....
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....t. If a Member of Parliament has, by his speech or vote in Parliament, committed an offence, he enjoys, by reason of Article 105 (2), immunity from prosecution therefor. Those who have conspired with the Member of Parliament in the commission of that offence have no such immunity. They can, therefore, be prosecuted for it. xxxx xxxx xxxx 147. Mr Rao submitted that the alleged bribe-givers had breached Parliament's privilege and been guilty of its contempt and it should be left to Parliament to deal with them. By the same sets of acts the alleged bribe-takers and the alleged bribe-givers committed offences under the criminal law and breaches of Parliament's privileges and its contempt. From prosecution for the former, the alleged bribe-takers, Ajit Singh excluded, enjoy immunity. The alleged bribe-givers do not. The criminal prosecution against the alleged bribe-givers must, therefore, go ahead. For breach of Parliament's privileges and its contempt, Parliament may proceed against the alleged bribe-takers and the alleged bribe-givers. xxxx xxxx xxxx 150. To repeat what we have said earlier, Mr Rao is right, subject to two caveats, in s....
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....on to the express conditions there are also implied conditions for exercise of the power. An affirmative statute introductive of a new law directing a thing to be done in a certain way mandates, even if there be no negative words, that the thing shall not be done in any other way. This rule of implied prohibition is subservient to the basic principle that the Court must, as far as possible, attach a construction which effectuates the legislative intent and purpose. Further, the rule of implied prohibition does not negative the principle that an express grant of statutory power carries with it by necessary implication the authority to use all reasonable means to make such grant effective. To illustrate, an Act of Parliament conferring jurisdiction over an offence implies a power in that jurisdiction to make out a warrant and secure production of the person charged with the offence; power conferred on the Magistrate to grant maintenance under Section 125 of the Code of Criminal Procedure, 1973 to prevent vagrancy implies a power to allow interim maintenance; power conferred on a local authority to issue licences for holding "hats" or fairs implies incidental power to fix days therefo....
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....lationship with their patients. A doctor's prescription is considered the final word on the medication to be availed by the patient, even if the cost of such medication is unaffordable or barely within the economic reach of the patient -such is the level of trust reposed in doctors. Therefore, it is a matter of great public importance and concern, when it is demonstrated that a doctor's prescription can be manipulated, and driven by the motive to avail the freebies offered to them by pharmaceutical companies, ranging from gifts such as gold coins, fridges and LCD TVs to funding international trips for vacations or to attend medical conferences. These freebies are technically not "free"-the cost of supplying such freebies is usually factored into the drug, driving prices up, thus creating a perpetual publicly injurious cycle. The threat of prescribing medication that is significantly marked up, over effective generic counterparts in lieu of such a quid pro quo exchange was taken cognizance of by the Parliamentary Standing Committee on Health and Family Welfare [45th Report on Issues Relating to Availability of Generic, Generic-Branded and Branded Medicines, their Formulation....
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....o the decision [Confederation of Indian Pharmaceutical Industry (SSI) v. Central Board of Direct Taxes, 2012 SCC OnLine HP 8007 : (2013) 353 ITR 388] of the Hon'ble Himachal Pradesh High Court clearly shows that the basic intention of the decision was that the receiving of the gifts/freebies by Professionals is against public policy as also against the law insofar as the amendment by the Medical Council Act, 1956 to the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, once receiving of such gifts have been held to be unethical obviously the corollary to this would also be unethical, being giving of such gifts or doing such acts to induce such Doctors and Medical Professionals to violate the Medical Council Act, 1956." 35. Thus, one arm of the law cannot be utilised to defeat the other arm of law-doing so would be opposed to public policy and bring the law into ridicule. [Biharilal Jaiswal v. CIT, (1996) 1 SCC 443 : 1995 Supp (5) SCR 285] In Maddi Venkataraman & Co. (P) Ltd. v. CIT [Maddi Venkataraman & Co. (P) Ltd. v. CIT, (1998) 2 SCC 95], a fine imposed on the assessee under the Foreign Exchange Regulation Act, 1947 was sought to....
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.... on the fact that the assessee was helpless and coerced to pay the amount in order to save its employee's life. Thus, the assessee was not a wilful participant in commission of an offence or activity prohibited by law. The same is not applicable to the present facts. Pharmaceutical companies have misused a legislative gap to actively perpetuate the commission of an offence. In Vishwanath Sharma [CIT v. Vishwanath Sharma, 2008 SCC OnLine All 200], a Division Bench of the Allahabad High Court was faced with the question of whether payment of commission to government doctors could be exempted under Section 37 (1). At the time, there was no statutory provision prohibiting doctors engaged in private practice from accepting such commission. Hence, the High Court held that while the assessing officer had correctly allowed such deduction for private doctors, the same could not be allowed for government doctors : (Vishwanath Sharma case [CIT v. Vishwanath Sharma, 2008 SCC OnLine All 200] , SCC Online All paras 11 & 16) "11. In the present case, payment of commission to government doctors cannot be placed on the same pedestal. A distinction has already been made by the authoriti....
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.... on the provision embodying the word "purpose" and which according to Mr. Vohra would have to necessarily be read as envisaging expenditure incurred for a purpose which is prohibited by law 22. It was contended that undisputedly and in terms of the license agreements, the remuneration which was paid to RSCPL was in lieu of the grant of license to utilize the goodwill represented by the name "Remfry & Sagar". Mr. Vohra submitted that the name "Remfry & Sagar" had earned substantial goodwill which had been acquired over several decades as a result of delivering exceptional legal services. It was thus submitted that the payment of licence fee was solely for the purposes of enabling the newly constituted firm to derive benefits of the goodwill attached to the name "Remfry & Sagar". Bearing in mind the same constituting the primary purpose for payment of license fee, Mr. Vohra submitted the same could not be possibly construed as being an expenditure prohibited by law. 23. It was his submission that the appellants were wholly unjustified in seeking to interpret the provisions of the license agreement as embodying an intent of sharing of remuneration with RSCPL or the heirs of Dr V....
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....tal expenditure as follows: 'You do not use it "for the purpose of" your concern, which means, for the purpose of carrying on your concern, but you use it to acquire the concern.' (2) Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade : vide Viscount Cave, L.C., in Atherton v. British Insulated & Helsby Cables Ltd. [Atherton (Inspector of Taxes) v. British Insulated & Helsby Cables Ltd., 1926 AC 205 : 10 TC 155 (HL)] If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. Thus, if labour saving machinery was acquired, the cost of such acquisition cannot be deducted out of the profits by claiming that it relieves the annual labour bill, the business has acquired a new asset, that is, machinery. The expressions "enduring benefit" or "of a permanent character" were introduced....
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....to existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would be of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated." 25. Mr. Vohra also cited for our consideration the decision rendered by this Court in Shriram Refrigeration Industries Ltd Vs CIT (1981) 127 ITR 746 (Del) and where the test was formulated as warranting a determ....
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....d derive benefit of the goodwill attached to it. The appellant do not dispute that Dr. Sagar had validly acquired the goodwill and that the same constituted a valuable asset which was transferable. The execution of the gift deed is also not questioned. What the appellant seeks to contend is that the gift to RSCPL was a ruse. 30. We at the outset note that the validity of the gift deed was clearly an unwarranted digression since the primary question which arose for consideration was the validity of the expenditure incurred. The solitary transaction which arose for scrutiny was the payment of license fee. We fail to appreciate how the appellants could have meandered down the path of questioning the validity of the gift or doubting the motive, purpose and intent underlying the same. Whether the same was a measure adopted for the purpose of monetising the goodwill or a part of legacy planning were clearly not issues germane to the question whether the expenditure was liable to be disallowed. We, in this regard, also bear in consideration the undisputed fact that four unrelated parties joined the partnership and unanimously decided to make use of the goodwill and the name of the firm....