ITAT Allows Sec.37(1) Deduction For Harish Salve's Foreign Scholarship As Business Expenses To Promote Professional Profile [Read Order]

The Income Tax Appellate Tribunal, New Delhi, has accepted the claim of Senior Advocate Harish Salve for deduction of the foreign scholarship given by him to two Indian students as "expenditure solely and exclusively for the purposes of business".

Allowing the claim for deduction of Rs. 28,45, 372 under Section 37(1) of the Income Tax Act,1961, the ITAT ruled that the scholarship expenses were "incurred by the assesse for promoting his professional profile".

Salve claimed the deduction in the returns of Rs.50,52,50,407 filed for the assessment year 2011-12. 

The Senior Advocate, who recently represented India before the International Court of Justice in the Kulbhushan Jadhav case, argued that the foreign scholarship increased his international visibility and enabled him to develop contacts with academia in UK.

It was submitted in the ITAT on his behalf that :

"From my point of view, this had three distinct advantages. The first advantage was that this held to introduce me to the legal fraternity in the academia in the United Kingdom, this is very influential. I regularly conducted workshops in the Oxford University, some of which were then discussed on blogs by the students.

Through this connectivity, I have had the occasion to meet a number of senior lawyers and judges. Last year I was also invited by the law faculty in Oxford University to deliver lectures."

He also hoped that the students who benefit out of foreign education will join his chambers as juniors. He said that he had entered into an agreement with Exeter College to provide funding for Indian graduate students at Oxford University and had funded the scholarships of two students - Deeksha Sharma and Jasdeep Kaur Randhawa. One of the grantees, Deeksha Sharma, assisted him in the Vodafone case. Therefore, the scholarship had nexus with his profession, the senior counsel argued.

As the third advantage, he said :

"That apart, it is necessary for successful lawyers to be seen as being supportive of the profession – to give back to society in some measure. I felt the best way I could support Indian law student was in this manner."

Such steps will enhance the overall professional profile of a senior counsel, he pointed out :

"The success of a senior counsel in the Supreme Court does not depend only upon the knowledge of law skills in advocacy, senior lawyers in the present times become public figures, and their activities in all fields directly contribute to their professional stature. The kind of fees that senior counsel command has a direct nexus with the stature that such counsel has not just in the profession but in society. Thus, all such expenses that are legitimately incurred for building up the overall personnel of a professional (in the professional field) are legitimate business expenses."

The Assessing Officer had disallowed the claim of deduction on the finding that the scholarship amounted to a gift having no nexus with his professional expenses.

Reversing this finding, the ITAT bench of Judicial Member Amit Shukla and Accountant Member Prashant Maharishi held that revenue has to think from the shoes of the assesee to determine a claim of deduction under Section 37(1) and the issue should be judged from the "mindset of the assesee".

"The level at which the assessee is carrying on the profession, perhaps, he might not have thought it proper to increases visibility by attending the conferences, seminars et cetera. He has different vision of carrying himself in the professional field to increases visibility and social status. He thought fit to set up a scholarship to Indian students in Oxford University. Thus, in the present case definitely there is a nexus between the expenditure incurred by the assessee and the professional services rendered by the assessee.", the ITAT said.

Noting that one of the students who received the scholarship assisted him in the Vodafone case, the ITAT observed that the expenditure was "wholly and exclusively for the purposes of the business".

The CIT(Appeals) had held that the expenses, though had nexus with profession, were "capital expenditure" and hence not deductible under Section 37(1).

Overturning this view, the ITAT held :

"We do not subscribe to the view of the learned CIT – A these expenditure is capital in nature. The expenditure incurred by the assessee is the routine day-to-day expenditure incurred by the assessee for promoting his professional profile. These expenditure cannot be held to be capital expenditure in nature as no fresh new fixed assets is created by paying the scholarship sum."

The ITAT observed that the revenue has to understand that professionals follow "innovative ways" to increase their professional stature, and foreign scholarship was one of such means.

"In the professional field there are innovative ways visualized by the professional to make themselves visible in the professional circle and to build their own professional profile for generating higher and value added business. It may be, sponsoring a seminar, becoming knowledge partners, setting up the prizes and awards, creating the competitive award ceremonies, hosting vibrant summits of various states. Therefore, it is apparent that at least in the case of the professionals, the way they promote themselves, is changing very fast and the benefits of such expenditure are huge and wide. Therefore according to us the impugned expenditure incurred by the assessee is a revenue expenditure allowable u/s 37 (1) of the income tax act."

The Tribunal added that merely because in the agreement it is mentioned as an annual gift in the form of scholarship, it does not become a gift. In fact, it is the expenditure incurred by the assessee in furtherance of his business, it concluded.

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