Delhi High Court
Principal Commissioner Of Income Tax, … vs M/S Remfry And Sagar on 31 January, 2025
Author: Yashwant Varma
Bench: Yashwant Varma
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment reserved on: 16 October 2024
Judgment pronounced on 31 January, 2025
+ ITA 199/2017
PR. COMMISSIONER OF INCOME TAX -21 .....Appellant
Through: Mr. Indruj Singh Rai, SSC with
Mr. Sanjeev Menon, Mr. Rahul
Singh, Mr. Anmol Jagga, JSCs
versus
M/S.REMFRY & SAGAR .....Respondent
Through: Mr. Ajay Vohra, Sr. Adv. with
Mr. Aditya Vohra and Mr.
Shashwat Dhamija, Advs.
+ ITA 449/2022
PRINCIPAL COMMISSIONER OF INCOME TAX,
DELHI-12 .....Appellant
Through: Mr. Abhishek Maratha, Adv
Senior Standing Counsel Ms.
Nupur Sharma, Mr. Parth
Semwal, Jr. St. Counsel, Mr.
Apoorv Agarwal, Jr. St. Counsel,
Mr. Gaurav Singh, Mr.
Bhanukaran Singh, Ms. Muskan
Goel, Ms. Parithi Kohli, Mr.
Himanshu Gaur, Advs
versus
M/S REMFRY AND SAGAR .....Respondent
Through: Mr. Ajay Vohra, Sr. Adv. with
Mr. Aditya Vohra and Mr.
Shashwat Dhamija, Advs.
CORAM:
HON'BLE MR. JUSTICE YASHWANT VARMA
HON'BLE MR. JUSTICE RAVINDER DUDEJA
JUDGMENT
YASHWANT VARMA, J.
1. These two appeals have been instituted by the Principal
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By:KAMLESH KUMAR
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Commissioner of Income Tax and call in question the correctness of the
judgment rendered by the Income Tax Appellate Tribunal1 on 06
September 2016 pertaining to Assessment Year2 2009-10 [ITA
199/2017] and order dated 26 July 2019 pertaining to AY 2011-12 [ITA
449/2022].
2. The appeals had come to be admitted on the following three
primary questions as is evident from the order dated 07 March 2017
passed in ITA 199/2017 and which is reproduced hereinbelow:-
“(i) Did the ITAT fall into error in allowing the license fee paid to
M/s. Remfry & Sagar for use of goodwill by the assessee, having
regard to the provisions in the Bar Council Rules and the Advocate’s
Act, 1961?
(ii) Did the ITAT overlook the effect of first Explanation to Section
37 of the Income Tax Act, 1961, in the circumstances of the case?
(iii) Whether the ITAT fell into error in holding that the existence or
otherwise of a devise, i.e. use of goodwill, was irrelevant in the
circumstances of the case.”
3. On hearing learned counsels for parties, we find that the
following would appear to be the undisputed facts relevant for the
purposes of deciding whether the expenditure claimed by the
respondent/assessee was liable to be disallowed in view of Explanation
1 to Section 37 of the Income Tax Act, 19613.
4. Those facts are the following. From the material placed before
us, we gather that a sole proprietorship came to be established in 1827
under the name of „Grant & Remfry‟ by a British immigrant, Mr. Henry
Oliver Remfry. That sole proprietorship was subsequently converted
into a partnership firm and was operated by five generations of the
1
Tribunal
2
AY
3
Act
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Remfry family upto the year 1957. In that 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 Limited4 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 entered into a partnership with Mr.
R. Sampath Kumar, Mrs. Ashwin Julka, Mr. Ramit Nagpal and Mr.
Prem Nath Sewak. The partnership deed which came to be executed
and constituted the genesis of the firm “Remfry & Sagar” coming into
existence, embodied the following significant clauses:-
“III. By a Deed of Gift executed by him on the first day of June,
2001, Dr V Sagar has granted, conveyed, transferred, given and4
RSCPL
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assured by way of gift unto and to the use of Remfry & Sagar
Consultants Private Limited (hereinafter referred to as “R&S
Consultants”) a company incorporated under the Companies Act,
1956 freely, voluntarily and without consideration the said Goodwill
and R&S Consultants has executed the said Deed of Gift in token of
acceptance thereof:
IV. Dr V Sagar has sold and transferred to R&S Consultants the
infrastructure associated with the said Practice in the form of office
equipment and facilities including the library (hereinafter referred to
collectively as “the said Infrastructure”):
V. The Partners are desirous of forming themselves into a
partnership (“the Partnership”) to carry on the practice and
profession of attorneys-at-law with specialisation in the areas of
intellectual property law ·and corporate law with the object of
carrying on with effect from June 1,2001 in the National Capital
Region and Mumbai the said Practice (hitherto carried on by Dr V
Sagar) without a break in its continuity; the practice and profession
to be carried on by the Partners being hereinafter referred to as “the
Continued Practice”;
xxxx xxxx xxxx
VIII. Pursuant to a request by the Partners, R&S Consultants has
agreed to:
(a) permit the Partners and the Partnership to use the name
“Remfry & Sagar” in the carrying on of the Continued Practice and
in connection therewith on terms and conditions incorporated in an
Agreement being entered into between the Partners and R&S
Consultants contemporaneously with the execution of this Deed of
Partnership
(b) make available to the Partners and the Partnership the use of
secretarial, accounting and other supporting services 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; and
(c) make available to the 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
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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 Consultants shall prevail and the remaining
Partners shall respect such decision.”
7. This was followed by the execution of an instrument titled
“License of the Use of Goodwill” between RSCPL and the individual
partners who had come together to constitute the firm referred to above.
We deem it apposite to extract the following covenants which formed
part of this License Agreement:-
“I. Dr V Sagar was carrying on the practice and the profession of
attorneys-at-law with specialisation in the areas of intellectual
property law and corporate law under the name and style of Remfry
& Sagar (hereinafter referred to as “the said Practice”) at New Delhi
in the National Capital Region and Mumbai;
II. The goodwill in the name “Remfry & Sagar‟ and all rights
associated therewith (including intellectual property rights) belonged
exclusively to Dr Sagar;
III. By a Deed of Gift executed by him on the first day of June,2001
by Dr V Sagar has granted, conveyed, transferred, given and assured
by way of gift unto and to the use of R&S Consultants, freely,
voluntarily and without consideration the goodwill in the name
“Remfry & Sagar” and all rights associated therewith (including
intellectual property rights) and R&S Consultants has executed the
said Deed of Gift in token of acceptance thereof;
IV. Contemporaneously with the execution of this Agreement, the
said Legal Practitioners have entered into an agreement to form a
partnership to carry on the practice and profession of attorneys-at-
law with specialisation in the areas of intellectual property law and
corporate law with the object of carrying on with effect from June
1,2001 in the National Capital Region and Mumbai the said Practice
(hitherto carried on by Dr Sagar) without a break in its continuity,
the partnership agreed to be formed by the said Legal Practitioners
being hereinafter referred to as “the said Partnership” and the
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practice and profession to be carried on by the said Legal
Practitioners being hereinafter referred to as the “Continued
Practice”;
V. The said Legal Practitioners and the said Partnership have
requested R&S Consultants to permit them to use the name “Remfry
& Sagar” in the carrying on of the Continued Practice and in
connection therewith.”
8. The aforenoted prefatory clauses were followed by the following
substantive provisions which constituted 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 rate
of 25% of the amount of bills raised by the said Partnership during
the currency of this Agreement. The payment shall be made on
monthly basis within fifteen days of the end of each month in respect
of bills raised during the previous month.
14.2 Rates of fees to be charged by the said Partnership both for
scheduled work and non-scheduled work – shall be decided upon by
the Senior Partner of the Continued Practice in consultation with the
other partners thereof and no deviation therefrom shall be made
without his approval.”
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By:KAMLESH KUMAR
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9. The Assessing Officer5 was called upon to scrutinize a return
which came to be filed by the respondent/assessee and which had
claimed deductions in terms contemplated under Section 37 of the Act
in respect of the license fee paid for use of goodwill as well as for the
utilization of infrastructure and support services which were governed
by separate yet similar license agreements which were executed in
favour of the firm. The said return is stated to have been selected for
scrutiny and on culmination of assessment, the AO denied the
deductions in respect of license fee holding the same to be a colourable
transaction aimed at diversion of funds for the personal benefit of the
children of Dr. V. Sagar. The AO further held that since RSCPL was
not engaged in the practice of law, it could not claim any goodwill.
10. The aforesaid view was assailed by the respondent/assessee
before the Commissioner of Income-Tax (Appeals)6. The CIT(A)
came to hold that since the goodwill as acquired by Dr. V. Sagar was
amenable to purchase and sale, it could have been validly gifted. It thus
came to the conclusion that consequent to Dr. V. Sagar gifting the said
goodwill to RSCPL with an intent to institutionalize it in perpetuity, the
partnership was liable to pay license fee to RSCPL.
11. The CIT(A) also observed that since the receipts representing
license fee had already been taxed in the hands of RSCPL and if that
assessee were to be allowed a deduction, it would result in tax being
levied twice over. For all the aforesaid reasons, the CIT(A) proceeded
to overrule the view that had been expressed by the AO.
12. In the appeal which came to be preferred by the Revenue before
5
AO
6
CIT(A)
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the Tribunal, the appellants appear to have asserted that the expenditure
was merely a ruse wholly disconnected with the furtherance of business
interest and 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
the deceased father but they cannot be regarded as the lawful owners
of the goodwill or having the rights of owning the goodwill or to
license the same. In our view, we find a contradiction in these
submissions. When it contended that the legal heirs of a practitioner
are entitled to receive consideration for goodwill on behalf of the
deceased parent, it would be difficult to hold that, the goodwill
cannot be separated from the legal practice and the fruits of such
goodwill cannot be enjoyed by the legal heirs of the legal
practitioner or that it can be enjoyed by the legal heirs only in a
particular manner.”
14. The Tribunal, however, proceeded to negate the challenge as
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mounted by the Revenue including those in terms of which it was
sought to be asserted that the gift was essentially an arrangement for
avoidance of tax and diversion of profits. This becomes apparent from a
perusal of paras 8.16 to 8.18 and which are extracted hereunder: –
“8.16. Applying the propositions laid down in this case law to the
facts of the case, 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.
8.17. Though the Ld. Special Counsel for the Revenue argued that
good will of a profession cannot· be sold to a company which does
not have a right to carry on practice, no specific law or section was
brought to the notice of the Bench in support of the argument. Only
several submissions have been made. Certain judgements of Foreign
Courts were cited, which were based on “ethical considerations” and
not legal prohibition. In any event, the ITAT has no power or
authority to adjudicate the issue as to whether, the gift of goodwill
by Dr. V. Sagar of his profession of law, to a company is violating
the Advocates Act, 1961 or the Bar Council Rules. No authority has
held that 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
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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 RSCPI,. Hence the payment
has to be held as that which is incurred wholly .and exclusively for
the purpose of business or profession.”
15. Appearing in support of the appeal, it was the aforenoted
contentions which were reiterated by Mr. Rai. However, the principal
argument which was addressed by Mr. Rai before us revolved upon
Explanation 1 to Section 37 and proceeded along the following lines.
Mr. Rai firstly drew our attention to Chapter 3 comprised in the Bar
Council of India Rules and which while setting out conditions for a
right to practice provides for what he termed to be a prohibition in law.
The provision on which Mr. Rai‟s submissions principally rested reads
as follows: –
“Chapter III (Conditions for right to practice)
(Rules under Section 49(1) (ah) of the Act)
2. An advocate shall not enter into a partnership or any other
arrangement for sharing remuneration with any person or legal
practitioner who is not an advocate.”
16. According to Mr. Rai, the aforesaid condition contained in
Chapter 3 is liable to be viewed as a prohibition introduced by law and
the expenditure thus falling foul of Explanation 1. The aforesaid
contention was premised on the relevant clauses comprised in the
license agreements entered into between RSCPL and the partners of the
firm and which had linked the consideration payable for the permissive
use of the name “Remfry & Sagar” to 25% of the amount billed and
earned by the partnership firm. According to Mr. Rai, the aforesaid
clause would clearly fall within the ambit of the prohibition of sharing
of remuneration with a person who was neither a legal practitioner nor
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an advocate.
17. Mr. Rai also relied upon the following principles as enunciated
by the Supreme Court in Apex Laboratories Private Limited Vs
Deputy Commissioner of Income Tax7 and which had an occasion to
explain the scope of Explanation 1 of Section 37. It becomes pertinent
to note that Apex Laboratories was concerned with the providing of
extravagant amenities and “freebies” to medical practitioners in
exchange for prescribing expensive branded medication. While dealing
with the issue of whether 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) [P.V. Narasimha
Rao v. State (CBI/SPE), (1998) 4 SCC 626 : 1998 SCC (Cri) 1108] .
Prior to the 2018 Amendment [Subs. Section 8, Act 16 of 2018,
w.e.f. 26-7-2018.] , the PC Act only punished the bribe-taker who
was a public servant, and not the bribe-giver. Reliance was placed on
this to acquit the appellant bribe-giver. Rejecting such an
interpretation, this Court held:
7
(2022) 7 SCC 98
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“145. Mr Rao submitted that since, by reason of the
provisions of Article 105(2), the alleged bribe-takers had
committed no offence, the alleged bribe-givers had also
committed no offence. Article 105(2) does not provide that
what is otherwise an offence is not an offence when it is
committed by a Member of Parliament and has a connection
with his speech or vote therein. What is provided thereby is
that a Member of Parliament shall not be answerable in a
court of law for something that has a nexus to his speech or
vote in Parliament. If a Member of Parliament has, by his
speech or vote in Parliament, committed an offence, he
enjoys, by reason of Article 105(2), immunity from
prosecution therefor. Those who have conspired with the
Member of Parliament in the commission of that offence
have no such immunity. They can, therefore, be prosecuted
for it.
xxxx xxxx xxxx
147. Mr Rao submitted that the alleged bribe-givers had
breached Parliament’s privilege and been guilty of its
contempt and it should be left to Parliament to deal with
them. By the same sets of acts the alleged bribe-takers and
the alleged bribe-givers committed offences under the
criminal law and breaches of Parliament’s privileges and its
contempt. From prosecution for the former, the alleged bribe-
takers, Ajit Singh excluded, enjoy immunity. The alleged
bribe-givers do not. The criminal prosecution against the
alleged bribe-givers must, therefore, go ahead. For breach of
Parliament’s privileges and its contempt, Parliament may
proceed against the alleged bribe-takers and the alleged
bribe-givers.
xxxx xxxx xxxx
150. To repeat what we have said earlier, Mr Rao is right,
subject to two caveats, in saying that Parliament has the
power not only to punish its Members for an offence
committed by them but also to punish others who had
conspired with them to have the offence committed : first, the
actions that constitute the offence must also constitute a
breach of Parliament’s privilege or its contempt; secondly, 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
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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 done
in a certain manner, also implies (even in the absence of any express
terms), that the other forms of doing it are impermissible.
28. In this regard the decision of this Court in Jamal Uddin
Ahmad v. Abu Saleh Najmuddin [Jamal Uddin Ahmad v. Abu Saleh
Najmuddin, (2003) 4 SCC 257] is of some relevance. There, the
scope of Section 81 of the Representation of the People Act, 1951
was examined in the light of powers of the High Court to administer
election petitions by invoking the rule of implied prohibition. The
Court observed that:
“11. Dealing with “Statutes conferring power; implied
conditions, judicial review”, Justice G.P. Singh states in
the Principles of Statutory Interpretation (8th Edn., 2001, at
pp. 333, 334) that a power conferred by a statute often
contains express conditions for its exercise and in the absence
of or in addition to the express conditions there are also
implied conditions for exercise of the power. An affirmative
statute introductive of a new law directing a thing to be done
in a certain way mandates, even if there be no negative
words, that the thing shall not be done in any other way. This
rule of implied prohibition is subservient to the basic
principle that the Court must, as far as possible, attach a
construction which effectuates the legislative intent and
purpose. Further, the rule of implied prohibition does not
negative the principle that an express grant of statutory power
carries with it by necessary implication the authority to use
all reasonable means to make such grant effective. To
illustrate, an Act of Parliament conferring jurisdiction over an
offence implies a power in that jurisdiction to make out a
warrant and secure production of the person charged with the
offence; power conferred on the Magistrate to grant
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Procedure, 1973 to prevent vagrancy implies a power to
allow interim maintenance; power conferred on a local
authority to issue licences for holding “hats” or fairs implies
incidental power to fix days therefor; power conferred to
compel cane growers to supply cane to sugar factories
implies an incidental power to ensure payment of price. In
short, conferment of a power implies authority to do
everything which could be fairly and reasonably regarded as
incidental or consequential to the power conferred.
xxxx xxxx xxxx
21. Herbert Broom states 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 its aid
to a party that roots its cause of action in an immoral or illegal act
(ex dolo malo non oritur actio) meaning that none should be allowed
to profit from any wrongdoing coupled with the fact that statutory
regimes should be coherent and not self-defeating. Doctors and
pharmacists being complementary and supplementary to each other
in the medical profession, a comprehensive view must be adopted to
regulate their conduct in view of the contemporary statutory regimes
and Regulations. Therefore, denial of the tax benefit cannot be
construed as penalising the assessee pharmaceutical company. Only
its participation in what is plainly an action prohibited by law,
precludes the assessee from claiming it as a deductible expenditure.
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30. This Court also notices that medical practitioners have a quasi-
fiduciary relationship with their patients. A doctor’s prescription is
considered the final word on the medication to be availed by the
patient, even if the cost of such medication is unaffordable or barely
within the economic reach of the patient –such is the level of trust
reposed in doctors. Therefore, it is a matter of great public
importance and concern, when it is demonstrated that a doctor’s
prescription can be manipulated, and driven by the motive to avail
the freebies offered to them by pharmaceutical companies, ranging
from gifts such as gold coins, fridges and LCD TVs to funding
international trips for vacations or to attend medical conferences.
These freebies are technically not “free”–the cost of supplying such
freebies is usually factored into the drug, driving prices up, thus
creating a perpetual publicly injurious cycle. The threat of
prescribing medication that is significantly marked up, over effective
generic counterparts in lieu of such a quid pro quo exchange was
taken cognizance of by the Parliamentary Standing Committee on
Health and Family Welfare [ 45th Report on Issues Relating to
Availability of Generic, Generic-Branded and Branded Medicines,
their Formulation and Therapeutic Efficacy and Effectiveness, dated
4-8-2010.] which made the following observations:
“The Committee also notes that despite there being a code of
ethics in the Medical Council Rules introduced in December
2009 forbidding doctors from accepting any gift, hospitality,
trips to foreign and domestic destinations, etc. from
healthcare industry, there is no let-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
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pertinently observed: –
“34. The impugned judgment, along with the judgments of the
Punjab & Haryana High Court (Kap Scan [CIT v. Kap Scan &
Diagnostic Centre (P) Ltd., 2010 SCC OnLine P&H 12926 : (2012)
344 ITR 476] ) and the Himachal Pradesh High Court
(Confederation [Confederation of Indian Pharmaceutical Industry
(SSI) v. Central Board of Direct Taxes, 2012 SCC OnLine HP 8007
: (2013) 353 ITR 388] ) have correctly addressed the important
public policy issue on the subject of allowance of benefit for supply
of freebies. The impugned judgment’s [Apex Laboratories (P)
Ltd. v. CIT, 2019 SCC OnLine Mad 38980] reasoning is quoted as
follows: (Apex Laboratories case [Apex Laboratories (P)
Ltd. v. CIT, 2019 SCC OnLine Mad 38980] , SCC OnLine Mad para
3)
“3. … 8. A perusal of the decision [Apex Laboratories (P)
Ltd. v. CIT, 2017 SCC OnLine ITAT 20260] of Co-ordinate
Bench of this Tribunal in the assessee’s own case as also the
decision [Confederation of Indian Pharmaceutical Industry
(SSI) v. Central Board of Direct Taxes, 2012 SCC OnLine
HP 8007 : (2013) 353 ITR 388] of the Hon’ble Himachal
Pradesh High Court clearly shows that the basic intention of
the decision was that the receiving of the gifts/freebies by
Professionals is against public policy as also against the
law insofar as the amendment by the Medical Council Act,
1956 to the Indian Medical Council (Professional Conduct,
Etiquette and Ethics) Regulations, 2002, once receiving of
such gifts have been held to be unethical obviously the
corollary to this would also be unethical, being giving of such
gifts or doing such acts to induce such Doctors and Medical
Professionals to violate the Medical Council Act, 1956.”
35. Thus, one arm of the law cannot be utilised to defeat the other
arm of law–doing so would be opposed to public policy and bring
the law into ridicule. [Biharilal Jaiswal v. CIT, (1996) 1 SCC 443 :
1995 Supp (5) SCR 285] In Maddi Venkataraman & Co. (P)
Ltd. v. CIT [Maddi Venkataraman & Co. (P) Ltd. v. CIT, (1998) 2
SCC 95] , a fine imposed on the assessee under the Foreign
Exchange Regulation Act, 1947 was sought to be deducted as a
business expenditure. This Court held : (Maddi Venkataraman
case [Maddi Venkataraman & Co. (P) Ltd. v. CIT, (1998) 2 SCC 95]
, SCC p. 105, para 24)
“24. Moreover, it will be against public policy to allow the
benefit of deduction under one statute, of any expenditure
incurred in violation of the provisions of another statute or
any penalty imposed under another statute. In the instant
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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 perceived
immorality/violation of public policy. Apex repeatedly relied
on T.A. Quereshi [T.A. Quereshi v. CIT, (2007) 2 SCC 759]
, Khemchand Motilal Jain [CIT v. Khemchand Motilal Jain, 2011
SCC OnLine MP 681 : (2011) 4 MP LJ 691] and CIT v. Vishwanath
Sharma [CIT v. Vishwanath Sharma, 2008 SCC OnLine All 200] .
We find that none of these judgments find much favour with the case
of the appellant. T.A. Quereshi [T.A. Quereshi v. CIT, (2007) 2 SCC
759] addressed a business “loss”, not a business “expenditure” as
envisioned under Section 37(1). In Khemchand Motilal
Jain [CIT v. Khemchand Motilal Jain, 2011 SCC OnLine MP 681 :
(2011) 4 MP LJ 691] , the ransom money paid to kidnappers of the
employee of the assessee company was allowed deduction primarily
based on the fact that the assessee was helpless and coerced to pay
the amount in order to save its employee’s life. Thus, the assessee
was not a wilful participant in commission of an offence or activity
prohibited by law. The same is not applicable to the present facts.
Pharmaceutical companies have misused a legislative gap to actively
perpetuate the commission of an offence. In Vishwanath
Sharma [CIT v. Vishwanath Sharma, 2008 SCC OnLine All 200] , a
Division Bench of the Allahabad High Court was faced with the
question of whether payment of commission to government doctors
could be exempted under Section 37(1). At the time, there was no
statutory provision prohibiting doctors engaged in private practice
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from accepting such commission. Hence, the High Court held that
while the assessing officer had correctly allowed such deduction for
private doctors, the same could not be allowed for government
doctors : (Vishwanath Sharma case [CIT v. Vishwanath Sharma,
2008 SCC OnLine All 200] , SCC Online All paras 11 & 16)
“11. In the present case, payment of commission to
government doctors cannot be placed on the same pedestal. A
distinction has already been made by the authorities while
allowing deduction to the assessee in respect to commission
which the assessee has paid to private doctors since in their
case, payment of commission cannot be said to be an offence
under any statute but in respect to government doctors such
payment could not have been allowed as it is an offence
under the statutes as stated above.
xxxx xxxx xxxx
16. We are, therefore, clearly of the opinion that payment as
commission to government 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
proscription comprised in the Bar Council of India Rules with respect
to sharing of remuneration had clearly been violated and consequently
the expenditure was liable to be disallowed in terms contemplated by
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Explanation 1 forming part of Section 37.
21. Appearing for the respondent assessee, Mr. Vohra, learned senior
counsel submitted that it would be wholly incorrect to view the Bar
Council of India Rules as amounting to a prohibition imposed by law
and thus fall within the ken of Explanation 1. Mr. Vohra submitted that
the Explanation to Section 37 prohibits an expenditure which may have
been incurred for the purposes of commission of an offense or an action
prohibited by law. Learned senior counsel essentially laid emphasis on
the provision embodying the word “purpose” and which according to
Mr. Vohra would have to necessarily be read as envisaging expenditure
incurred for a purpose which is prohibited by law
22. It was contended that undisputedly and in terms of the license
agreements, the remuneration which was paid to RSCPL was in lieu of
the grant of license to utilize the goodwill represented by the name
“Remfry & Sagar”. Mr. Vohra submitted that the name “Remfry &
Sagar” had earned substantial goodwill which had been acquired over
several decades as a result of delivering exceptional legal services. It
was thus submitted that the payment of licence fee was solely for the
purposes of enabling the newly constituted firm to derive benefits of the
goodwill attached to the name “Remfry & Sagar”. Bearing in mind the
same constituting the primary purpose for payment of license fee, Mr.
Vohra submitted the same could not be possibly construed as being an
expenditure prohibited by law.
23. It was his submission that the appellants were wholly unjustified
in seeking to interpret the provisions of the license agreement as
embodying an intent of sharing of remuneration with RSCPL or the
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heirs of Dr V. Sagar. This, according to Mr. Vohra, clearly overlooks
the principal purpose for which license fee was agreed to be paid and
which was to use and exploit the goodwill attached to the name
“Remfry & Sagar”. It was thus his contention that if the purpose of
payment of license fee were borne in consideration, the Court would
come to the inevitable conclusion that the same was for utilizing
goodwill and which could by no stretch of imagination be said to be an
offence or an 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 CIT8 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 that were cited
before us for each case has been decided on its peculiar facts.
Some broad principles can, however, be deduced from what
the learned Judges have laid down from time to time. They
are as follows:
8
(1954) 2 SCC 672
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(1) Outlay is deemed to be capital when it is made for the
initiation of a business, for extension of a business, or for a
substantial replacement of equipment : vide Lord Sands
in IRC v. Granite City Steamship Co. Ltd. [IRC v. Granite
City Steamship Co., 1927 SC 705 : 13 TC 1 at p. 14] at TC p.
14. In City of London Contract Corpn. v. Styles [City of
London Contract Corpn. v. Styles, (Surveyor of Taxes),
(1887) 2 TC 239 at p. 243 (CA)] at TC p. 243, Bowen L.J.
observed as to the capital expenditure as follows:
„You do not use it “for the purpose of” your concern, which
means, for the purpose of carrying on your concern, but you
use it to acquire the concern.‟
(2) Expenditure may be treated as properly attributable to
capital when it is made not only once and for all, but with a
view to bringing into existence an asset or an advantage for
the enduring benefit of a trade : vide Viscount Cave, L.C.,
in Atherton v. British Insulated & Helsby Cables
Ltd. [Atherton (Inspector of Taxes) v. British Insulated &
Helsby Cables Ltd., 1926 AC 205 : 10 TC 155 (HL)] If what
is got rid of by a lump sum payment is an annual business
expense chargeable against revenue, the lump sum payment
should equally be regarded as a business expense, but if the
lump sum payment brings in a capital asset, then that puts the
business on another footing altogether. Thus, if labour saving
machinery was acquired, the cost of such acquisition cannot
be deducted out of the profits by claiming that it relieves the
annual labour bill, the business has acquired a new asset, that
is, machinery.
The expressions “enduring benefit” or “of a permanent
character” were introduced to make it clear that the asset or
the right acquired must have enough durability to justify its
being treated as a capital asset.
(3) Whether for the purpose of the expenditure, any capital
was withdrawn, or, in other words, whether the object of
incurring the expenditure was to employ what was taken in as
capital of the business. Again, it is to be seen whether the
expenditure incurred was part of the fixed capital of the
business or part of its circulating capital. Fixed capital is what
the owner turns to profit 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.”
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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 either from the point of view of what is acquired or
from the point of view of what is the source from which the
expenditure is incurred. If the expenditure is made for acquiring or
bringing into existence an asset or advantage for the enduring benefit
of the business it is properly attributable to capital and is of the
nature of capital expenditure. If on the other hand it is made not for
the purpose of bringing into existence any such asset or advantage
but for running the business or working it with a view to produce the
profits it is a revenue expenditure. If any such asset or advantage for
the enduring benefit of the business is thus acquired or brought into
existence it would be immaterial whether the source of the payment
was the capital or the income of the concern or whether the payment
was made once and for all or was made periodically. The aim and
object of the expenditure would determine the character of the
expenditure whether it is a capital expenditure or a revenue
expenditure. The source or the manner of the payment would then be
of no consequence. It is only in those cases where this test is of no
avail that one may go to the test of fixed or circulating capital and
consider whether the expenditure incurred was part of the fixed
capital of the business or part of its circulating capital. If it was part
of the fixed capital of the business it would be of the nature of
capital expenditure and if it was part of its circulating capital it
would be of the nature of revenue expenditure. These tests are thus
mutually exclusive and have to be applied to the facts of each
particular case in the manner above indicated.”
25. Mr. Vohra also cited for our consideration the decision rendered
by this Court in Shriram Refrigeration Industries Ltd Vs CIT9 and
where the test was formulated as warranting a determination of the
purpose for which the amount had been paid. It was thus contended that
9
(1981) 127 ITR 746 (Del)
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Courts have consistently applied the “purpose test” in order to
ascertain the legitimacy of an expenditure stated to have been incurred
in the course of and in furtherance of business. It is these rival
submissions which fall for our consideration.
26. We at the outset note that the disallowance which is
contemplated under Section 37 is expenditure incurred for any purpose
which is an offense or a purpose prohibited by law. It is thus manifest
that 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 have
been disallowed. As noticed in the previous parts of this judgment,
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while examining the reach of the Explanation to Section 37, it would
have to be found as a matter of fact that the expenditure was incurred
for the commission of an offense as known in law or for a purpose
prohibited. A breach of the Bar Council of India Rules is admittedly not
classified as an offense. That then leaves us to examine whether the
purpose underlying the expenditure was for a purpose prohibited by
law.
29. As was rightly contended by Mr. Vohra, 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.
30. We at the outset note that the 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 monetising the goodwill or a part of
legacy planning were clearly not issues germane to the question
whether the expenditure was liable to be disallowed. We, in this regard,
also bear in consideration the undisputed fact that four unrelated parties
joined the partnership and unanimously decided to make use of the
goodwill and the name of the firm which had earned a considerable
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reputation. The appellants thus, and in our considered opinion, clearly
committed an error in seeking to question the motive underlying the gift
made by Dr. Sagar.
31. We then revert to the fundamental issue of whether the payment
of license fee could be regarded as an expenditure incurred for a
purpose prohibited by law. A payment made for use of goodwill cannot
possibly be viewed as being an illegal purpose or one prohibited by
law. A person would be obliged to part with consideration for the use of
goodwill 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
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with one who is not a member of the legal profession. The use of the
word “sharing” in that Rule is clearly intended to deal with a situation
where a lawyer intends to part with or enter into an arrangement with
another to claim a part or portion of the fee that may be earned. What
the said Rule envisages is an arrangement where a lawyer agrees to
share the fee earned from a practise with someone who is not a lawyer.
It prohibits a split, divide, dividend or equity in the revenue that may be
generated by a law practise.
34. However in the facts of the present case, 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.
35. 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 India Rules were
violated.
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36. The sheet anchor of the submissions advanced by Mr. Rai was
the judgment of the Supreme Court in Apex Laboratories and where the
“freebies” provided to legal practitioners was found to be an
expenditure incurred for a purpose prohibited by law. In our considered
opinion, the reliance placed on Apex Laboratories is clearly misplaced
since the said judgment turned upon Regulation 6.8 of the Indian
Medical Council (Professional Conduct, Etiquette and Ethics)
Regulations, 2002 and which clearly prohibited a medical practitioner
from receiving gifts, travel expenses, hospitality as well as cash or other
monetary grants. It was that prohibition in law which was found to have
been violated. In view of all of the above, we find ourselves
unconvinced of the challenge that stands raised in these appeals.
37. We would consequently answer the questions posed for our
consideration in the negative and against the appellants. The appeals
shall stand dismissed.
YASHWANT VARMA, J.
RAVINDER DUDEJA, J.
JANUARY 31, 2025 /neha
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