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TMI Blog2025 (2) TMI 194X X X X Extracts X X X X X X X X Extracts X X X X ..... ense, as generally understood, was committed. According to them, a violation of the Bar Council of India rules amounted to the respondent acting in violation of a statutory prohibition and thus the expenditure liable to be disallowed. As was rightly contended the primary, nay, sole purpose for incurring expenditure towards license fee was to use the words "Remfry & Sagar" and derive benefit of the goodwill attached to it. The appellant do not dispute that Dr. Sagar had validly acquired the goodwill and that the same constituted a valuable asset which was transferable. The execution of the gift deed is also not questioned. What the appellant seeks to contend is that the gift to RSCPL was a ruse. 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. The solitary transaction which arose for scrutiny was the payment of license fee. We fail to appreciate how the appellants could have meandered down the path of questioning the validity of the gift or doubting the motive, purpose and intent underlying the same. Whether the same was a measure adopted for the purpose of monetis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... split, divide, dividend or equity in the revenue that may be generated by a law practise. 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 consideration so paid is thus clearly not liable to be characterised as a sharing of revenue derived from the practise but fundamentally for the exercise of the right to exploit and derive advantage from goodwill. The linking of the consideration for the aforesaid purpose to the revenue earned by the firm only constituted a basis and a measure to determine the consideration that was to be paid. The arrangement was clearly not driven by a motive to share revenues earned by the legal firm. It was purely consideration paid for use of the goodwill attached to the name "Remfry & Sagar". We thus find ourselves unable to accept the argument of the appellant that the Bar Council of In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat year, four partners, Mr. Holloway, Mrs. Silverstone, Mr. Bernier and Mr. Burrington came to join 'Remfry & Sons'. Mr. Bernier and Mr. Burrington are stated to have retired in 1970 as a consequence of which the surviving partners entered into a fresh deed of partnership. In 1973, Mr. Holloway and Mrs. Silverstone transferred the entire business of that partnership along with all the assets including the name and goodwill to Dr. V. Sagar. 'Remfry & Sons' thus came to be acquired by Dr. V Sagar with effect from 01 April 1973 along with the goodwill that had been earned and acquired by that firm over the years. 5. In 1990, Dr. V. Sagar is stated to have merged his sole proprietorship practice being run under the name of 'Sagar & Co.' with 'Remfry & Sons' and changed the name of the proprietorship to 'Remfry and Sagar'. On 01 June 2001, Dr. V. Sagar gifted the goodwill vesting in 'Remfry & Sagar' to a private limited company, Remfry & Sagar Consultants Private Limited [RSCPL] by way of a registered instrument. It is pertinent to note that the shareholding of RSCPL was substantially held by Dr. Sagar's children who were not legal practitioners. 6. Soon thereafter, Dr. V. Sagar ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Partners and the Partnership use· of the said Infrastructure for the purpose of carrying on of the Continued Practice on terms and conditions contained in an Agreement being. entered into between the Partners and R&S Consultants contemporaneously with the execution of this Deed of Partnership. xxxx xxxx xxxx 4. The Partnership shall always have a "Senior Partner". He shall be nominated unanimously by the Partners and approved by R&S Consultants. If the Partners fail to achieve unanimity R&S Consultants shall nominate in writing one of the Partners as Senior Partner. The Partners hereby nominate Dr V Sagar as the first Senior Partner and hereby acknowledge that R&S Consultants has given its approval to said nomination. In the event of Dr V Sagar's disassociation from the said Practice on account of retirement or death, the remaining Partners will forthwith unanimously nominate a Senior Partner from amongst themselves and review the powers to be exercised by him. Should such remaining Partners fail to achieve unanimity either with respect to the nomination of a Senior Partner and/or with respect to the powers to be exercised by him, the decision of R&S Consu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tituted the grant of license:- "1. R&S Consultants shall permit the said Legal Practitioners and the said Partnership to use the name "Remfry & Sagar" in the carrying on of the Continued Practice and in connection therewith on terms and conditions contained herein. 2. The said Legal Practitioners and the said Partnership shall use the name "Remfry & Sagar" exclusively for the purpose of the Continued Practice and for no other purpose whatsoever. xxxx xxxx xxxx 5.1 The said Legal Practitioners and the said Partnership agree that all rights in the name "Remfry & Sagar" and all rights associated therewith (including intellectual property rights) belong exclusively to R&S Consultants who alone are entitled to make use thereof or any of them in any manner whatsoever except as is envisaged by this Agreement. xxxx xxxx xxxx 14.1 In consideration of R&S Consultants permitting the said Legal Practitioners and the said Partnership to use the name "Remfry & Sagar" in the carrying on of the Continued Practice and in connection therewith, the said Legal Practitioners and the said Partnership shall pay to R&S Consultants a sum calculated at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merely aimed at diversion of funds to the children of Dr. V. Sagar. It was thus urged that the said expenditure could not possibly be characterized as sums expended wholly and exclusively for the purposes of business. The appellants appear to have also urged that for the purposes of examining the legitimacy of the expenditure incurred, it would be the 'purpose test' which would apply and tested on that anvil, the view as taken by the CIT(A) was clearly unsustainable. 13. Before the Tribunal, although the appellants appear to have conceded that the legal heirs of Dr. V. Sagar would be entitled to consideration for goodwill on behalf of their deceased father. However, it was urged that they could not possibly be regarded as lawful owners of the goodwill or claim a right to license the same. This becomes evident from a reading of para 8.11 of the judgment of the Tribunal which is reproduced hereinbelow: - "8.11. At the same time, the revenue concedes that the legal heirs of the advocates would be entitled to the benefit of the goodwill earned and created by the legal practitioner. It was submitted that the legal heirs may be entitled to consideration for the goodwill on behalf of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this arrangement violates any Act or law of the land, though the assessee firm has been carrying on its profession of Attorneys at law under this arrangement for the last many years. 8.18. Another important fact that has to be considered is that, Dr. V. Sagar had the sole and exclusive rights to the said goodwill. The goodwill was held by him. Without· legal authorization from him, the assessee firm could not use the name and style of "Remfry & Sagar" along with its goodwill and other assets and rights. The assessee firm had to seek permissions and licences to continue and carry on its profession under as the goodwill is not owned by it the payment made in pursuance of an agreement which enable the assessee firm to carry on its professions, in the manner in which it is now doings 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 po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such benefits could be legitimately claimed as business expenses, the Supreme Court held as follows:- "24. This Court is of the opinion that such a narrow interpretation of Explanation 1 to Section 37 (1) defeats the purpose for which it was inserted i.e. to disallow an assessee from claiming a tax benefit for its participation in an illegal activity. Though the memorandum to the Finance Bill, 1998 elucidated the ambit of Explanation 1 to include "protection money, extortion, hafta, bribes, etc.", yet, ipso facto, by no means is the embargo envisaged restricted to those examples. It is but logical that when acceptance of freebies is punishable by the MCI (the range of penalties and sanction extending to ban imposed on the medical practitioner), pharmaceutical companies cannot be granted the tax benefit for providing such freebies, and thereby (actively and with full knowledge) enabling the commission of the act which attracts such opprobrium. 25. The illogicality and completely misconceived nature of such an interpretation was dealt with in a similar interpretation of the provisions of the PC Act, by a Constitution Bench of this Court in P.V. Narasimha Rao v. State (CBI/SPE) [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, the action that Parliament will take and the punishment it will impose is for the breach of privilege or contempt. There is no reason to doubt that the Lok Sabha can take action for breach of privilege or contempt against the alleged bribe-givers and against the alleged bribe-takers, whether or not they were Members of Parliament, but that is not to say that the courts cannot take cognizance of the offence of the alleged bribe-givers under the criminal law." 26. Even if Apex's contention were to be accepted--that it did not indulge in any illegal activity by committing an offence, as there was no corresponding penal provision in the 2002 Regulations applicable to it--there is no doubt that its actions fell within the purview of "prohibited by law" in Explanation 1 to Section 37 (1). 27. Furthermore, if the statutory limitations imposed by the 2002 Regulations are kept in mind, Explanation 1 to Section 37 (1) of the IT Act and the insertion of Section 20-A of the Medical Council Act, 1956 [Inserted vide Medical Council (Amendment) Act, 1964.] (which serves as parent provision for the Regulations), what is discernible is that the statutory regime requiring that a thing be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the preface to his celebrated work on Legal Maxims --'In the legal science, perhaps more frequently than in any other, reference must be made to first principles.' The fundamentals or the first principles of law often articulated as the maxims are manifestly founded in reason, public convenience and necessity. Modern trend of introducing subtleties and distinctions, both in legal reasoning and in the application of legal principles, formerly unknown, have rendered an accurate acquaintance with the first principles more necessary rather than diminishing the values of simple fundamental rules. The fundamental rules are the basis of the law; maybe either directly applied, or qualified or limited, according to the exigencies of the particular case and the novelty of the circumstances which present themselves. In Dhannalal v. Kalawatibai [Dhannalal v. Kalawatibai,2002) 6 SCC 16] this Court has held that : '20. … When the statute does not provide the path and the precedents abstain to lead, then sound logic, rational reasoning, common sense and urge for public good play as guides of those who decide'." 29. It is also a settled principle of law that no court will lend it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up in this evil practice and the pharma companies continue to sponsor foreign trips of many doctors and shower with high value gifts like air conditioners, cars, music systems, gold chains, etc. to obliging prescribers who then prescribe costlier drugs as quid pro quo. Ultimately all these expenses get added up to the cost of drugs. The Committee's attention was drawn to a news item in Times of India dated 1-7-2010 by Reema Nagarajan giving specific instances of violations of MCI Code. The Committee calls upon the Government to take strict and speedy action on such violations. Since MCI has no jurisdiction over drug companies, the Government should take parallel action through DCGI and the Income Tax Department to penalise those companies that violate the MCI Rules by cancelling drug manufacturing licences and/or disallowing expenses on unethical activities." 18. Proceeding further to hold that the agreement between pharmaceutical companies and medical practitioners would violate Section 23 of the Indian Contract Act, 1872 the Supreme Court pertinently observed: - "34. The impugned judgment, along with the judgments of the Punjab & Haryana High Court (Kap Scan [CIT v. Kap Sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstant case, if the deductions claimed are allowed, the penal provisions of FERA will become meaningless." 36. It is crucial to note that the agreement between the pharmaceutical companies and the medical practitioners in gifting freebies for boosting sales of prescription drugs is also violative of Section 23 of the Contract Act, 1872 (as also noted by the Punjab and Haryana High Court in Kap Scan [CIT v. Kap Scan & Diagnostic Centre (P) Ltd., 2010 SCC OnLine P&H 12926 : (2012) 344 ITR 476]). The provision is as follows: "23. What considerations and objects are lawful, and what not.--The consideration or object of an agreement is lawful, unless-- it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful, is void." 37. Before us, Apex has continually stressed on the need to divorce interpretation of tax provisions from a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vernment doctors for obtaining a favour therefrom by prescribing medicines in which the assessee was dealing cannot be said to be a "business expenditure" and no deduction can be allowed thereof under the Act." (emphasis supplied) The 2002 Regulations, applicable to all medical practitioners (including doctors in private practice), was introduced w.e.f. 14-12-2009." 19. It ultimately came to record the following conclusions: -. "44. In the present case too, the incentives (or "freebies") given by Apex, to the doctors, had a direct result of exposing the recipients to the odium of sanctions, leading to a ban on their practice of medicine. Those sanctions are mandated by law, as they are embodied in the code of conduct and ethics, which are normative, and have legally binding effect. The conceded participation of the assessee--i.e. the provider or donor--was plainly prohibited, as far as their receipt by the medical practitioners was concerned. That medical practitioners were forbidden from accepting such gifts, or "freebies" was no less a prohibition on the part of their giver, or donor i.e. Apex." 20. It was in the aforesaid backdrop, that Mr. Rai urged that the proscriptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (1954) 2 SCC 672 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 deduced the following broad tests for distinguishing capital expenditure from revenue expenditure. The opinion of the Full Bench was delivered by Mahajan, J. as he then was, in the terms following : (ITR pp. 198-99) "… It is not easy to define the term "capital expenditure" in the abstract or to lay down any general and satisfactory test to discriminate between a capital and a revenue expenditure. Nor is it easy to reconcile all the decisions tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at eithe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 outset note that it is not the case of the appellants that an offense, as generally understood, was committed. According to them, a violation of the Bar Council of India rules amounted to the respondent acting in violation of a statutory prohibition and thus the expenditure liable to be disallowed. 28. We find ourselves unable to sustain that contention since, in our considered opinion, it is the principal purpose test which would be determinative of whether the expenditure was one which could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 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. 33. Insofar as the Bar Council of India Rules are concerned, they are concerned with a sharing of revenue and fee. What those rules proscribe is the sharing of remuneration earned by a firm of lawyers with one who is not a member of the legal pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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