TaxTMI 
TaxTMI 
TaxTMI 
2025 (10) TMI 1064
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....cording to Mr. Indruj Rai, SSC, an additional substantial question of law has been proposed, are governed by judgment of this Court in ITA no. 199/2017 and connected appeal, with regard to the respondent/assessee herein. Mr. Rai states that the proposed substantial questions can be summed up as noted by this Court in paragraph 2 of the aforesaid judgment which we reproduce as under : "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."" 4. In view of the fact that Mr. Rai states that the issue whi....
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....ding to Mr. Vohra, clearly overlooks the principal purpose for which license fee was agreed to be paid and which was to use and exploit the goodwill attached to the name "Remfry & Sagar". It was thus his contention that if the purpose of payment of license fee were borne in consideration, the Court would come to the inevitable conclusion that the same was for utilizing goodwill and which could by no stretch of imagination be said to be an offence or an act prohibited by law. 24. Mr. Vohra also commended for our consideration the well settled precept of courts being obliged to look at and discern the real nature of a transaction, the aim and object underlying the expenditure incurred in order to answer the issue of whether the expenditure was for the purpose of business. Our attention in this respect was firstly drawn to the decision of the Supreme Court in Assam Bengal Cement Co Ltd Vs CIT and where the aforesaid principle was explained in the following terms:- "22. In Benarsidas Jagannath, In re [Benarsidas Jagannath, In re, 1946 SCC OnLine Lah 71 : (1947) 15 ITR 185 (Lah)], a Full Bench of the Lahore High Court attempted to reconcile all these decisions and dedu....
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....acquired must have enough durability to justify its being treated as a capital asset. (3) Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or floating capital is what he makes profit of by parting with it or letting it change masters. Circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it." 23. This synthesis attempted by the Full Bench of the Lahore High Court truly enunciates the principles which emerge from the authorities. In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital a....
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....id. It was thus contended that Courts have consistently applied the "purpose test" in order to ascertain the legitimacy of an expenditure stated to have been incurred in the course of and in furtherance of business. It is these rival submissions which fall for our consideration. 26. 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. Regard must also be had to the fact that the expression "prohibited by law" is coupled to the commission of an offense. It is, therefore, apparent that the expenditure which the provision intends to be ignored and disallowed is that which may be expended for commission of an offense or like motive. We would, therefore, have to consider whether consideration parted for use of goodwill would fall within the scope of that expression as well as whether the asserted violation of the Bar Council of India Rules would have justified the disallowance. 27. We at the o....
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....derable reputation. The appellants thus, and in our considered opinion, clearly committed an error in seeking to question the motive underlying the gift made by Dr. Sagar. 31. We then revert to the fundamental issue of whether the payment of license fee could be regarded as an expenditure incurred for a purpose prohibited by law. A payment made for use of goodwill cannot possibly be viewed as being an illegal purpose or one prohibited by law. A person would be obliged to part with consideration for the use of goodwill if it seeks to derive benefit and advantage therefrom. Undisputedly, Remfry & Sagar had acquired a reputation and goodwill in the field of legal services. What the respondent assessee thus sought to do was to derive advantage and benefit of association as also the use of a name which carried a reputation in the legal arena. The agreement to utilise and derive benefits of goodwill cannot therefore be viewed as a ruse or one aimed at tax avoidance. 32. We have already found that it was permissible for Dr. Sagar to monetise the goodwill acquired and earned. The goodwill thus represented an asset held by Dr. Sagar and which could have been validly gifted....
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....practitioners was found to be an expenditure incurred for a purpose prohibited by law. In our considered opinion, the reliance placed on Apex Laboratories is clearly misplaced since the said judgment turned upon Regulation 6.8 of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 and which clearly prohibited a medical practitioner from receiving gifts, travel expenses, hospitality as well as cash or other monetary grants. It was that prohibition in law which was found to have been violated. In view of all of the above, we find ourselves unconvinced of the challenge that stands raised in these appeals. 37. We would consequently answer the questions posed for our consideration in the negative and against the appellants. The appeals shall stand dismissed." 5. As no substantial question of law arises, the appeals are dismissed. ITA 531/2025 6. In this appeal the additional substantial question of law proposed are in the following manner : "Whether the Hon'ble ITAT has erred in ignoring the cautious note given by Auditors in Form 3CD report that infers that the auditors themselves have not examined the nature of the expen....