PCIT Vs Remfry & Sagar (Delhi High Court)
The Delhi High Court dealt with a batch of appeals filed under Section 260A of the Income Tax Act, 1961, in which the Revenue challenged orders of the Income Tax Appellate Tribunal allowing deduction of licence fees paid for the use of goodwill. The respondent sought early hearing on the ground that the substantial questions of law framed in 2017 were already covered by a later judgment of the same Court in the assessee’s own cases for different assessment years. The Revenue did not object to early hearing and fairly conceded that the issues stood concluded against it.
The substantial questions of law related to whether licence fees paid for use of goodwill were allowable in light of the Bar Council of India Rules and the Advocates Act, whether Explanation 1 to Section 37 of the Income Tax Act applied, and whether the existence of a device to use goodwill was relevant. The Court noted that these very questions had been examined in detail in earlier judgments involving the same assessee.
In those decisions, the Court held that disallowance under Section 37 applies only where expenditure is incurred for the commission of an offence or for a purpose prohibited by law. The decisive factor is the “purpose test”, namely the real and primary purpose for which the expenditure is incurred. The Court found that the licence fee was paid solely to use and exploit the goodwill attached to a well-established name, which constituted a valuable and transferable asset. The expenditure was not incurred for any unlawful purpose, nor did it amount to sharing of professional fees prohibited under the Bar Council Rules.
