In a significant ruling, the Delhi High Court clarified the tax treatment of payments made for using the goodwill and trade name of another firm. The Court held that when an assessee merely uses the goodwill of another entity without acquiring ownership rights, the related expenditure is revenue in nature and thus allowable as a deduction under Section 37(1) of the Income Tax Act, 1961. The judgment emphasizes the distinction between acquiring an enduring asset and making payments for temporary or contractual business benefits, reinforcing that only the latter qualifies for revenue deduction.
Case Details
The Delhi High Court held that expenditure incurred for the use of goodwill attached to the name of another firm is allowable as a revenue expenditure under Section 37(1) of the Income Tax Act, 1961.
The assessee had entered into an arrangement with an established firm permitting the use of its trade name and goodwill in business operations. In consideration, the assessee made periodic payments to the said firm. The Assessing Officer disallowed the claim, treating it as capital expenditure on the ground that the payments were for acquiring an enduring benefit.
On appeal, the Tribunal found that the assessee did not acquire ownership or permanent rights in the goodwill — it merely had a right to use the goodwill for the term of the agreement, without any transfer of title. Accordingly, the expenditure was incurred wholly and exclusively for the purpose of business and was revenue in nature.
The High Court upheld the Tribunal’s decision, emphasizing that where no ownership in the goodwill is transferred and the benefit is only temporary or contractual, the payment cannot be treated as capital expenditure. It qualifies for deduction under Section 37(1) as a legitimate business expense.
Key Takeaway
- Payment for use of goodwill, without transfer of ownership, is not capital expenditure.
- Such payments are deductible as business expenditure under Section 37(1).
- The determining factor is whether the assessee acquires an enduring asset or merely uses it for business purposes.
Citation: [2025] 179 taxmann 623 (Delhi)
Reported on: 07 November 2025