In a significant tax ruling, the Delhi High Court has dismissed five appeals filed by the Principal Commissioner of Income Tax (PCIT) against leading law firm Remfry & Sagar, affirming that payments made for the use of goodwill are not illegal or in violation of Bar Council rules. The division bench of Justice V. Kameswar Rao and Justice Vinod Kumar delivered the verdict on October 15, 2025, ending a long-standing dispute over whether such licence fees should be treated as prohibited expenditure under the Income Tax Act.
Background
The appeals numbered ITA 525/2025, 526/2025, 527/2025, 528/2025, and 531/2025 arose from the Revenue Department's objections to deductions claimed by Remfry & Sagar for licence fees paid to use the firm’s goodwill and name after its reconstitution.
The Revenue contended that such payments amounted to sharing of remuneration in breach of the Bar Council of India Rules and thus violated Explanation 1 of Section 37 of the Income Tax Act, which disallows expenses incurred for purposes prohibited by law.
Appearing for the Revenue, Mr. Indruj Singh Rai, standing counsel, argued that the license fee was essentially a revenue-sharing arrangement disguised as goodwill payment. On the other hand, Senior Advocate Ajay Vohra, representing the assessee, maintained that the fee was a legitimate business expense incurred solely to use the goodwill associated with the firm’s name nothing more, nothing less.
Court's Observations
The bench noted that the same issue had already been settled in ITA 199/2017 (Principal Commissioner of Income Tax v. Remfry & Sagar), where the Court had ruled in favour of the firm. Following the reasoning in that judgment, Justice Kameswar Rao read out key findings that formed the basis for dismissing the present batch of appeals.
"The primary, nay, the sole purpose for incurring expenditure towards licence fee was to use the words ‘Remfry & Sagar’ and derive benefit of the goodwill attached to it," the bench observed. It added that there was no evidence suggesting that the payment was made for any unlawful purpose or that it violated any statutory prohibition.
The Court also clarified that the Bar Council's rules only prohibit lawyers from sharing fees with non-lawyers, not from paying consideration for the use of an established firm’s goodwill.
"The linking of consideration to the firm’s revenue was merely a basis to calculate payment, not a profit-sharing device," Justice Rao remarked.
Rejecting the Revenue’s reliance on the Apex Laboratories judgment, where the Supreme Court had disallowed expenses incurred on freebies to doctors, the bench said that comparison was clearly misplaced since the medical regulations in that case expressly prohibited such conduct.
Here, no such express prohibition existed.
"A payment made for use of goodwill cannot possibly be viewed as being an illegal purpose or one prohibited by law," the Court held.
On Travel and Entertainment Expenses
In ITA 531/2025, the Revenue raised a separate issue concerning the firm’s travel and entertainment expenses, arguing that auditors had flagged a lack of documentation and that some expenses could be personal. The Assessing Officer had disallowed 5% of the total expenses (₹12.89 lakh) on an ad hoc basis.
However, both the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT) had rejected the disallowance. Upholding those findings, the High Court noted that the Assessing Officer had offered "no evidence whatsoever" of personal use.
"Any expenditure or part of it cannot be disallowed on mere presumptions or assumptions," the bench said, concurring with the lower authorities.
Decision
Finding that no substantial question of law arose, the Delhi High Court dismissed all five appeals filed by the Income Tax Department.
The Court’s order effectively reaffirms that goodwill payments made by law firms for legitimate business purposes are permissible deductions and that tax authorities cannot disallow expenses purely on conjecture.
"The appeals shall stand dismissed," Justice Rao concluded.
Case Title:- Principal Commissioner of Income Tax versus M/s. Remfry and Sagar
