2016 (11) TMI 1236 - AT - Income Tax

Deduction of license fee paid as per the agreement of license for the use of goodwill in the Remfry & Sagar - Held that - 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. The assessee firm had to seek permissions and licences to coneinue and carry on this profession under this name as it is run doing. Hence obtaining a license is a must for assessee firm to continue and carry on its profession as the goodwill is not owned by it the payment made in pursuance of an agreement which enables the assessee firm to carry on its profesions, in the manner in which it is now doing, is definitely an expenditure laid down wholly and exclusively for the purpose of business or profession. The argument of the Ld. Special Council that the purpose test contemplated u/s 37 of the Act is not satisfied is devoid of merit. Irrespective of whether the gift of Dr. V.Sagar to RSCPL being ethical or not and irrespective of the fact whether the gift is legally valid or not, from the view point of the assessee firm, as it could not have continued and carried on the profession of Attorneys-at-Law in the name of Remfry & Sagar and use its goodwill and all its associated rights without the impugned agreement with RSCPL. Hence the payment has to be held as that which is incurred wholly and exclusively for the purpose of business or profession. Thus the deduction claimed by the assessee of license fee paid to M/s RSCPL has to be allowed as a deduction U/s 37 of the Act.- Decided in favour of assessee Addition on account of secretarial, accounting & other support services - Held that - we uphold the same as Ld. Departmental Representative could not controvert the factual finding. The CIT(A) at page 56 has recorded that the addition was made by the A.O on the ground that, this is not authorized by the partnership deed. Such ground of the disallowance cannot be sustained. - Decided in favour of assessee

Issues Involved
1. Disallowance of License Fees
2. Validity of Goodwill Transfer
3. Allegation of Colorable Device for Tax Evasion
4. Double Jeopardy in Taxation
5. Validity of Goodwill Gift Deed
6. Allowability of Business Expenditure under Section 37
7. Personal Nature and Entertainment Expenses
8. Excessive Payment to Related Company

Detailed Analysis

1. Disallowance of License Fees:
The primary issue was whether the Assessing Officer (A.O.) was justified in disallowing the deduction of license fees paid by the assessee to Remfry & Sagar Consultants Pvt. Ltd. (RSCPL) for the use of goodwill. The A.O. argued that the transaction was a colorable device to transfer profits to the family members of Dr. V. Sagar, thereby evading tax. The Tribunal held that the payment was incurred wholly and exclusively for the purpose of business or profession, and thus, allowable under Section 37 of the Income Tax Act, 1961.

2. Validity of Goodwill Transfer:
The Tribunal examined the history of the firm and the transfer of goodwill from Dr. V. Sagar to RSCPL. It was established that goodwill is an intangible asset that can be alienated and vested in one or more partners. The Tribunal found that the goodwill was legally transferred and that the assessee firm needed to obtain a license to use the name "Remfry & Sagar" and its associated goodwill.

3. Allegation of Colorable Device for Tax Evasion:
The A.O. alleged that the transaction was a colorable device for tax evasion. However, the Tribunal found no loss of revenue as both the assessee and RSCPL paid taxes at the maximum rate. The Tribunal rejected the argument of tax avoidance, stating that the arrangement was transparent and legally documented.

4. Double Jeopardy in Taxation:
The assessee argued that the disallowance of the license fee resulted in double taxation, as the same amount was taxed in the hands of RSCPL. The Tribunal agreed that taxing the same amount twice is not permissible in law and upheld the assessee's contention.

5. Validity of Goodwill Gift Deed:
The Tribunal examined the gift deed executed by Dr. V. Sagar, which transferred the goodwill to RSCPL. It found that the gift was valid and that the goodwill was a distinct intangible asset that could be legally transferred.

6. Allowability of Business Expenditure under Section 37:
The Tribunal held that the license fee paid for the use of goodwill was an expenditure incurred wholly and exclusively for the purpose of business or profession. It was thus allowable as a deduction under Section 37 of the Income Tax Act, 1961.

7. Personal Nature and Entertainment Expenses:
For the Assessment Year 2008-09, the Tribunal upheld the CIT(A)'s decision to delete the addition made by the A.O. on account of personal nature and entertainment expenses. The Tribunal found no infirmity in the CIT(A)'s observation that the expenditure was incurred for the firm's 180th-year celebration and only 1/10th of it was claimed in the year under consideration.

8. Excessive Payment to Related Company:
For the Assessment Years 2005-06 and 2006-07, the Tribunal upheld the CIT(A)'s decision to delete the addition made by the A.O. on account of secretarial, accounting, and other support services paid to M/s IPSS (India) Pvt. Ltd. The Tribunal found that the addition was made on the ground that the payment was not authorized by the partnership deed, which was not a sustainable ground for disallowance.

Conclusion
The Tribunal allowed all the appeals of the assessee and dismissed all the appeals by the Revenue. The order was pronounced in the open court on 6th September 2016.

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