The Delhi High Court dismissed a series of appeals filed by the Principal Commissioner of Income Tax against the law firm Remfry & Sagar, upholding the firm’s right to claim deductions on licence fees paid for using its name and goodwill. The appeals challenged the decisions of the Income Tax Appellate Tribunal, which had earlier ruled in favour of the firm, allowing such payments as legitimate business expenditure under Section 37 of the Income Tax Act, 1961.
The case centred around the payments made by Remfry & Sagar to an entity owned by family members of the firm’s founder. These payments were described as licence fees for using the firm’s established name and goodwill. The tax department contended that these payments effectively amounted to the sharing of professional fees with non-lawyers, an act allegedly in violation of the Bar Council of India Rules. Based on this argument, the department claimed that the expenditure was not allowable as a deduction, since Explanation 1 to Section 37 disallows deductions for any expense incurred for a purpose prohibited by law.
In its defence, Remfry & Sagar maintained that the goodwill associated with its name constituted an independent intangible asset that could legally be transferred or licensed. The firm argued that the payments were made solely for the right to use this goodwill and were not related to any sharing of professional income. The law firm stressed that it was a commercial arrangement, distinct from the distribution of fees to non-lawyers, and that it fell well within the bounds of lawful business practice.
The High Court examined whether the payments contravened any legal or professional restriction. It held that the test under Section 37 focuses on the “purpose” of the expenditure—specifically, whether it was incurred for an unlawful or prohibited act. The Court concluded that no offence or illegality was committed in the transaction. The Bar Council Rules, it clarified, prohibit the sharing of professional fees with non-lawyers but do not restrict payments made for the use of a firm’s brand name or goodwill. Therefore, the payment for the goodwill licence did not amount to a violation of professional ethics or statutory provisions.
The Court also observed that similar issues involving the same assessee had already been settled in prior proceedings. Since the facts and legal position remained consistent, the Court found no substantial question of law that warranted further consideration. Consequently, it dismissed the appeals filed by the tax department.
Through this judgment, the Delhi High Court reaffirmed that the expenditure incurred by Remfry & Sagar for the use of its goodwill was a legitimate business cost, properly deductible under Section 37 of the Income Tax Act. The decision distinguishes between prohibited sharing of professional fees and lawful payments for the use of intangible business assets, providing clarity for professional firms on how such arrangements are to be treated under tax law.
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