The assessee-firm paid licence fees to the heirs of the erstwhile proprietor for use of the name and goodwill “R&S”. The Assessing Officer disallowed the expenditure invoking the Explanation to section 37(1) on the ground that the arrangement violated the Bar Council of India Rules prohibiting sharing of professional fees with non-lawyers. The Tribunal allowed the claim. On appeal, the High Court held that disallowance under the Explanation to section 37(1) applies only where expenditure is incurred for commission of an offence or for a purpose prohibited by law and the decisive test is the principal purpose of the expenditure. A breach of Bar Council of India Rules is not classified as an offence in law and payment made for commercial exploitation of goodwill cannot be regarded as expenditure incurred for an unlawful or prohibited purpose. The licence fee was consideration paid for use of a valuable transferable asset, namely goodwill, and the reference to firm revenue merely provided a mechanism for quantification of consideration and did not amount to sharing of professional fees. The Revenue erred in questioning the validity or motive of the gift of goodwill since the only issue was deductibility of expenditure. As the payment was made wholly for business purposes and not for committing an offence or circumventing law, deduction was allowable and the order of the Tribunal was affirmed. (AY. 2009-10)