Fee paid by law firm Remfry & Sagar for use of name, goodwill is business expense: Delhi High Court

The Delhi High Court recently ruled that the fee paid by Intellectual Property (IP) law firm Remfry & Sagar to a company run by family members of its founder, is a legitimate business expense deductible under the Income Tax Act, 1961. (PCIT v. Remfry Sagar).A Bench of Justices Yashwant Varma and Ravinder Dudeja held, “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 to his children. It was the resultant firm which sought to derive benefit from the goodwill attached to that name. The consideration paid for the use of the same, thus, can neither be said to be for an unlawful purpose or one motivated by the intent to overcome a prohibition raised by law.”.The firm "Remfry & Sagar" has a history dating back to 1827, when it was established as a sole proprietorship by British immigrant Henry Oliver Remfry. In 1973, the entire business, including its assets, name and goodwill, was transferred to Dr V Sagar, a legal practitioner. Sagar acquired the firm and continued its operations under the name "Remfry & Sons."In 1990, Sagar merged his sole proprietorship practice, "Sagar & Co," with "Remfry & Sons" and renamed the firm "Remfry & Sagar.”.In 2001, Sagar gifted the goodwill associated with "Remfry & Sagar" to a private limited company, Remfry & Sagar Consultants Private Limited (RSCPL), through a registered instrument. RSCPL was substantially owned by Sagar's children, who were not legal practitioners. This transfer was part of Sagar's efforts to institutionalise the firm's goodwill and ensure its continuity.The 2001 partnership deed outlined the terms under which the new firm, "Remfry & Sagar," would operate.The partners were permitted to use the name "Remfry & Sagar" and its associated goodwill, which was owned by RSCPL. RSCPL agreed to provide office equipment, facilities and support services to the partnership. The firm agreed to pay RSCPL a license fee equivalent to 25% of the bills raised by it for the use of goodwill and infrastructure..The dispute centred around whether the license fees paid by the law firm "Remfry & Sagar" to RSCPL for the use of goodwill and associated rights were legitimate business expenses under Section 37 of the Income Tax Act, 1961. The Assessing Officer (AO) had initially disallowed the deductions, arguing that the arrangement was a "colourable transaction" aimed at diverting funds to the children of Sagar, the original owner of the goodwill. The AO also contended that RSCPL, not being a legal practitioner, could not claim goodwill.However, the Commissioner of Income Tax (Appeals) [CIT(A)] overturned this decision, ruling that the goodwill acquired by Sagar over decades was transferable and could be gifted. The CIT(A) also noted that the license fees had already been taxed in the hands of RSCPL, and disallowing the deduction would result in double taxation.The Income Tax Appellate Tribunal (ITAT) upheld the decision, prompting an appeal by the department before the Delhi High Court. .The Court upheld the ITAT's decision, emphasising that the primary purpose of the expenditure was to utilise the goodwill associated with the name "Remfry & Sagar." It found no evidence that the arrangement was aimed at tax avoidance or violated any legal provisions. According to the judgment, a payment for the use of goodwill cannot be considered illegal, and if a business aims to benefit from goodwill, it must compensate the owner. Remfry & Sagar, a well-established law firm, sought to leverage its reputation and name. The agreement to utilise goodwill was legitimate and not a scheme for tax avoidance“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.”On the IT department's contention that revenues from law practice could not be shared with non-lawyers as per Bar Council of India Rules, the Court held that the revenue in this case was only for computation of license fee payable. “However in the facts of the present case, we find that the reference to a percentage of the revenue earned by the law practise was intended to principally provide for a basis to compute the consideration liable to be paid for use of goodwill and the utilisation of the name. The primary purpose of referring to the total billing of the law firm was to provide a firm, definite and fixed basis to compute the consideration liable to be paid for use of goodwill.”.The Court also pulled up the revenue for questioning the motive of the gift deed. “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.”It thus upheld the ITAT’s ruling and dismissed the appeal..The IT department was represented by Advocates Indruj Singh Rai, Abhishek Maratha, Sanjeev Menon, Rahul Singh, Anmol Jagga, Nupur Sharma, Parth Semwal, Apoorv Agarwal, Gaurav Singh, Bhanukaran Singh, Muskan Goel, Parithi Kohli and Himanshu Gaur. Remfry and Sagar was represented by Senior Advocate Ajay Vohra, with Advocates Aditya Vohra and Shashwat Dhamija..[Read Judgment]