We have carefully considered the rival contention and perused the orders
of the lower authorities. Issue involved in this appeal is whether the
expenditure incurred by the assessee is allowable u/s 37 (1) of the act or
not. Allowability of an expenditure incurred by the assessee u/s 37 (1) of
the act is required to be tested in accordance with nature and scale of
the business/ profession of the assessee. It may be a case that in case
of one assessee, particular expenditure is “ wholly and exclusively “
incurred for the purposes of business and in another case it may not
be so. Undoubtedly, assessee is a noted international lawyer who has
set up a scholarship for creating his visibility in international arena
and his social standing. The assessee has specifically submitted that it
has increased lot of value of the CV of the assessee and the government
of Singapore has appointed him on certain committees of repute. Even
otherwise, it is not open to the revenue to adopt a subjective standard of
reasonable as and decide whether the type of the expenditure of the
assessee should incur and in what circumstances. The opinion of the
learned assessing officer that attending the conferences et cetera would
have added more weightage to the professional profile of the assessee is
devoid of any merit. It is not the AO but the assessee is carrying on the
profession. He knows better that what kind of expenditure he should
incur for furtherance of his business. To judge allowability of an
expenditure, the learned assessing officer should put himself into the
shoes of the assessee and then decide that whether the expenditure
incurred by the assessee is necessary or not for the business of the
assessee. Thus, allowability of expenditure should always be judged
from the mindset of the assessee. The AO cannot put his thinking to say
that the expenditure incurred by the assessee is not wholly and
exclusively incurred for his profession, unless, he brings his level of
thinking to the level of the professional, like assessee. The requirement
of incurring the expenditure by a professional/businessman changes by
the changes in the dynamics of the business, its complexities and its
uniqueness. 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. He has
also shown that the student to moving the scholarship has been granted
has helped him in famous case of Vodafone represented by him.
Therefore, we are of the opinion that the assessee has incurred the above
expenditure wholly and exclusively for the purposes of the business. 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 valueadded
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. 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. Further 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.
INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH “F ”: NEW DELHI
BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER
AND
SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
ITA No. 2285/Del/2016 ( By Assessee)
&
ITA No. 2392/Del/2016 ( By AO)
(Assessment Year: 2011-12)
Shri Harish Narinder salve vs The Assistant Commissioner
of Income tax
Date of pronouncement 13/08/2019
O R D E R
PER PRASHANT MAHARISHI, A. M.
1. These are the cross appeals filed by the assessee, Shri Harish Narinder
Salve and the Asst Commissioner of Income Tax, circle 61 (1), New Delhi
(the AO) against the order of The Commissioner of Income Tax (Appeals) –
20, New Delhi dated 23/2/2016 for assessment year 2011 – 12.
2. The assessee has raised the following 2 grounds of appeal in ITA number
2285/del/2016:-
i. That on the facts and circumstances of the case and in law, the
learned CIT – A grossly erred in holding that the expenditure on
scholarship amounting to Rs. 2845372/– was incurred to bring
into existence and advantage for the enduring benefit of the
profession, thus treating the same as capital expenditure.
ii. That on the facts and circumstances of the case and in law, the
learned CIT (A) erred in not appreciating that expenditure incurred
by the appellant was for the furtherance of profession incurred
wholly and exclusively for the purpose of business and ought to be
allowed under section 37 of the income tax act, 1961.
3. In ITA number 2392/del/2016 the learned assessing officer has
effectively raised following 2 grounds of appeal:-
i. In the facts and circumstances of the case, the learned CIT (A) has
erred in treating the sum of rupees to 845872/– as capital
expenditure instead of disallowance of the same as gift
(scholarship) expenses not wholly and exclusively act that in
related to the profession.
ii. In the facts and circumstances of the case, the learned CIT – A has
erred in deleting the addition of INR 1 371818/– made by the
assessing officer on account of foreign exchange loss.
4. The brief facts of the case shows that assessee is a leading advocate ,
derived income from business or profession, income from house property,
capital gain and other sources. He filed his return of income on
30/9/2011 declaring income of INR 50,52,50,407/–. The return was
subsequently revised on 31/3/2013 at INR 50,05,33,812/–. The
assessment u/s 143 (3) of the act was passed by the learned Assessing
Officer on 10/3/2014 determining the total income of the assessee at
5. The learned Assessing Officer made three disallowances to the total
income of the assessee which were contested by the assessee before the
learned CIT – A, who passed an order on 23/2/2016. Result of these
three disallowance before him is as under :-
i. Disallowance of Rs. 28,45,872/– incurred by the assessee towards
the scholarship expenditure claimed by the assessee as wholly and
exclusively incurred for the purposes of the business/profession of
the assessee. Learned AO was of the view that it is not allowable
u/s 37 (1) of the act. The learned CIT – A held it to be a capital
expenditure. Therefore, both the parties aggrieved with the order
of the learned CIT – A are in appeal before us.
ii. Disallowance of expenses of INR 2090/– which have not been
paid in the relevant financial year as assessee is following the cash
system of accounting. This addition is deleted by the learned CIT –
A and is not the subject matter of appeal before us.
iii. Disallowance /addition of INR 13,71,818/– on account of foreign
exchange loss, being the difference in exchange at the time of
raising of the bill and at the time of realization of billed amount.
Though assessee is following cash system of accounting, however
bills raised to foreign clients are prepared on the basis of foreign
exchange rates prevailing on the date of the billing, when amount
is realized at the time of actual receipt, there is bound to be
difference in exchange, which is written off or back to the profit
and loss account. Thus, assessee is recording the cash received
only as income. The AO disallowed the same holding that in cash
system, it is not allowable. The learned CIT – A allowed the claim
as during the year, the transactions have settled after recording of
billing and its receipt. Therefore, learned AO is in appeal before
us.
6. Now we come to the first ground of appeal of the assessee and the
learned assessing officer. The brief facts of the issue revolve around the
claim of the assessee of Rs 2845872/– as deductible expenditure under
the head scholarship expenses.
7. The Brief facts shows that assessee has paid a scholarship of INR 1
867392/– to Ms Deeksha Sharma and Rs 978480/– to Ms Jasdeep
Kaur Randhawa in terms of scholarship agreement entered into by the
assessee with The Exeter College, the University of Oxford dated
19/03/2009. According to that, the assessee has committed to providing
annual funding for scholarship of graduate student at Oxford University
for top Indian student on annual basis. According to the agreement,
there is a selection criteria also provided and it is linked to Clarendon
Scholarship for maximum 3 years. Assessee has given a justification for
claiming the above expenditure as deductible expenditure u/s 37 (1) of
The Income Tax Act. Such justification is as under:-
1) Since 2003, I have focused on increasing my international
practice and for which purpose I spent considerable amount of
time, taking on international arbitration work in London and
other international centers such as Singapore.
2) Is not well known in the United Kingdom, in order to become
known to the legal fraternity, Indian senior counsel generally
attend international conferences, and for which the expenses
incurred are claimed as a deduction from the taxable income.
3) I have however not found this a suitable way of developing
international contacts. Instead, I have developed contacts in
the legal fraternity in the UK by making friends in the
academia the fact that I was admitted to the UK barring 2013
on the basis of my Indian qualifications, without any
requirement of any training of pupilage in the UK is a
testimony to the success of my efforts. I have also been
admitted as a non-resident tenant of the Blackstone
Chambers.
4) I was introduced to the Rector of Exeter College in Oxford; she
told me that the Oxford University is looking for people who
could provide financial assistance to Indian students who
aspire to study in Oxford.
5) 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.
6) 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.
7) Secondly, it also increased the number of Indian students who
have had the benefit of international education. My Indian
practices strongly supported by the number of juniors who are
in my Chambers. I have presently for juniors who have
educated themselves in either Oxford University (3) or other
international universities (1). I do hope that some of the
juniors who passed out of Oxford will join my Chambers at
some point. In fact, the very first scholar, Ms Deeksha
Sharma, did her Masters in International taxation with focus
on the Vodafone case. When I was preparing that case for
arguing the appeal in the Supreme Court, she sat in the
meetings and made valuable contributions.
8) All these activities add a lot of value to my CV. Recently the
government of Singapore appointed me on committee
constituted to recommend the establishment of international
commercial courts in Singapore. None of this would have
happened if I did not have the visibility, which I have been able
to achieve in this manner.
9) 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.
10) For a senior professional, there are number of tangible and
intangible factors that contribute to building the overall
persona. 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.
11) There is complete transparency in the process, the students
were given the assistance are selected by the college, and are
deserving students who but for such assistance would not be
able to afford education in Oxford University.”
Therefore, he submitted that these expenditure are wholly and
exclusively incurred for the profession of the assessee and hence is
allowable under section 37 (1) of the act.
8. The learned AO held that assessee has paid scholarship to some
students for studying in the Exeter University of Oxford is a gift given by
the assessee to that college. The AO referred to the memorandum of
understanding entered into by the assessee with that college which refers
the above scholarship as a gift. Therefore, he is of the view that it is an
act of compassion with philanthropic attitude. He submitted that these
two individuals to whom the scholarship are given are no way related to
the profession of the assessee and therefore it cannot be said that it has
been expended for training/skill development of the employees/retainers
of the assessee who would have held him in his profession. He also
negated the argument of the assessee that some of the students may join
his chamber at some point of time, as there was no agreement between
the assessee and those students. He also negated the argument of the
assessee that it gives a professional recognition to the assessee. The AO
was of the view that going into the conference will enhance the
knowledge of the assessee and gives contacts but this scholarship being
a gift is totally unrelated to the profession of the assessee. He further
held that giving scholarships to the students cannot be a factor, which
will lead to building the overall persona of the assessee contributing to
the professional stature of the assessee. In nutshell, he held that the
above amount of scholarship of INR 2845872/– incurred by the assessee
is not an expenditure wholly and exclusively incurred for the purpose of
the profession and not allowable u/s 37 (1) of the act. Therefore, he
disallowed it.
9. Aggrieved, assessee challenged the same before the learned CIT – A. The
assessee raised the similar argument. The learned CIT – A held that the
aim and object of the expenditure incurred by the assessee is
(1) Future expansion of the business,
(2) Prolonging the life of an existing business,
(3) Forming a conceivable nucleus for posterior profit earning,
(4) conduct of the business,
(5) Avoiding inroads and incursions on its concrete presence,
(6) Commercial expediency,
(7) Profit earning advancement.
The learned CIT further held that on going through the aims and objects
of the incurring of the expenditure according to him it is incurred to
bring into existence and advantage for enduring benefit of the profession
and therefore he held it to be capital in nature. Therefore, AO as well as
the assessee are in appeal on this issue.
10. The learned authorised representative submitted that assessee is noted
lawyer of highest professional standing nationally as well as
internationally. He further referred the recent incident of “Kuldeep
Jadhav Case” where India was represented before International Court Of
Justice by the assessee. He referred this for the simple reason that how
the professional recognition of the lawyer of such a stature enhances in
the eye of society. He further stated that the profession of lawyers is a
regulated profession where the solicitation of clients and advertisement is
prohibited, the professional recognitions is earned by a professional by
speaking and attending seminars, conferences and workshops.
Contributing to journals and periodicals. Looking to the stature of the
assessee, who is recognized internationally, he found a way of enhancing
his professional image by setting up a scholarship in an internationally
renowned university by helping the Indian students to get them
educated, so that in future they may join him. According to him, it has
happened and one of the student to whom this scholarship is awarded
has helped him in a famous Vodafone case, he therefore submitted that,
the expenditure incurred by the assessee is wholly and exclusively for the
purposes of the business. He further stated that expenditure is revenue
in nature no enduring benefit has resulted to the assessee in creating
any tangible or intangible asset; therefore, definitely it is not a capital
expenditure. He further submitted that the revenue authorities have
failed to understand the nature and the level of the professional services
provided by the assessee to appreciate the close and intimate
connectivity of such expenditure with the profession. He therefore
submitted that above expenditure is allowable to the assessee u/s 37 (1)
of the act. He hastened to add that that the scheme of selection of the
student is not by the assessee and none of the students to whom this
scholarship is is not at all related to the assessee. He therefore
submitted that orders of the lower authorities may be set aside.
11. The learned authorised representative submitted that identical issue of
contribution by a professional has been considered by the coordinate
bench in ITA number 1382/del/2012 for assessment year 2009 – 10
when a noted lawyer contributed to the building of a professional body,
which was held to be allowable as revenue expenditure. He further
submitted that the above decision has been approved by the honourable
Delhi High Court in ITA number 50/2014 dated 11/8/2015 and
therefore the issue is squarely covered in favour of the assessee. He
submitted that issue is squarely covered in favour of the assessee.
12. The learned departmental representative vehemently supported the order
of the learned assessing officer and submitted that assessee has set up
an annual scholarship for the Indian students who are going to study in
that college which is affiliated with the Oxford University. It is a means
of a scholarship to the Indian student, which by no stretch of
imagination can be said to be expenditure wholly and exclusively
incurred for the purpose of the profession of the assessee. He further
stated that the students who are given scholarship are selected by the
University and assessee does not have any say, therefore, it is a gift and
does not have any correlation with the professional stature of the
assessee. He admitted that though the assessee is a noted international
lawyer, but, he submitted that these expenditure are required to be
tested strictly under the provisions of the income tax act and specifically
u/s 37 (1) of the act. He therefore submitted that it is not wholly and
exclusively incurred for the purposes of the business but merely is a
scholarship, which is one of the philanthropic actions of the assessee.
He further submitted that the learned CIT – A has altogether born on
different tangent in considering the above expenditure as capital
expenditure which is totally erroneous on the facts of the case as the
payment is merely a gratitude is payment by the assessee for scholarship
of 2 students.
13. We have carefully considered the rival contention and perused the orders
of the lower authorities. Issue involved in this appeal is whether the
expenditure incurred by the assessee is allowable u/s 37 (1) of the act or
not. Allowability of an expenditure incurred by the assessee u/s 37 (1) of
the act is required to be tested in accordance with nature and scale of
the business/ profession of the assessee. It may be a case that in case
of one assessee, particular expenditure is “ wholly and exclusively “
incurred for the purposes of business and in another case it may not
be so. Undoubtedly, assessee is a noted international lawyer who has
set up a scholarship for creating his visibility in international arena
and his social standing. The assessee has specifically submitted that it
has increased lot of value of the CV of the assessee and the government
of Singapore has appointed him on certain committees of repute. Even
otherwise, it is not open to the revenue to adopt a subjective standard of
reasonable as and decide whether the type of the expenditure of the
assessee should incur and in what circumstances. The opinion of the
learned assessing officer that attending the conferences et cetera would
have added more weightage to the professional profile of the assessee is
devoid of any merit. It is not the AO but the assessee is carrying on the
profession. He knows better that what kind of expenditure he should
incur for furtherance of his business. To judge allowability of an
expenditure, the learned assessing officer should put himself into the
shoes of the assessee and then decide that whether the expenditure
incurred by the assessee is necessary or not for the business of the
assessee. Thus, allowability of expenditure should always be judged
from the mindset of the assessee. The AO cannot put his thinking to say
that the expenditure incurred by the assessee is not wholly and
exclusively incurred for his profession, unless, he brings his level of
thinking to the level of the professional, like assessee. The requirement
of incurring the expenditure by a professional/businessman changes by
the changes in the dynamics of the business, its complexities and its
uniqueness. 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. He has
also shown that the student to moving the scholarship has been granted
has helped him in famous case of Vodafone represented by him.
Therefore, we are of the opinion that the assessee has incurred the above
expenditure wholly and exclusively for the purposes of the business. 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 valueadded
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. 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. Further 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. While issue
arose before coordinate bench in case of another professional firm in ITA
number 1382/Del/2012 for assessment year 2009 – 10 wherein
substantial contribution was made for a building of an association which
promotes the study of taxation. The coordinate bench held that such
expenditure incurred by the assessee is wholly and exclusively incurred
by the assessee for the purpose of its profession. Revenue carried the
matter before the honourable Delhi High Court, which upheld the order
of the ITAT in ITA number 50/2014 dated 11/8/2015. The facts of the
present case are on the far better footing. Hence, we reverse the order of
the lower authorities, and direct the learned assessing officer to delete
the above disallowance. In view of this, we allow ground number 1 of the
appeal of the assessee and dismiss ground number 1 of the appeal of the
learned assessing officer.
14. Thus, we allow ground number 1 and 2 of the ground of appeal of the
assessee and dismiss ground number 1 of the appeal of the revenue.
15. Now we come to the 2nd ground of the appeal of the assessing officer, the
only issue left in this appeals, wherein the learned AO has challenged the
action of the assessing officer in deleting the addition of INR 1 371818/–
on account of foreign exchange loss. It is necessary to mention
important facts of the issue. As it is already stated, that assessee is a
lawyer by profession and he is following the cash system of accounting.
The assessee records the invoices raised on foreign clients in his books of
account at the exchange rate prevailing as on that date of raising of the
invoice. Thus, at that time, he records his service income as per the
exchange rate prevailing on the date of raising of the invoices. When,
subsequently the amount received for services, naturally, they are
received as per prevailing exchange rate on the date of realization of the
foreign invoices. Therefore, naturally, there would be a difference in the
recording of the invoices as income and the amount of fees received of
those invoices. Sometimes, there would be a foreign exchange gain and
on sometimes there would be foreign exchange losses. Therefore, the
necessary accounting implication is that in the year itself, 1st,
professional fees would be recorded at the higher amount of lower
amount and subsequently as soon as the moneys received, it would be
adjusted on the credit side of profit and loss account as exchange gain or
on the debit side of profit and loss account as exchange loss. The
assessee and stated that he is doing this only for maintaining control
over those invoices. Admittedly, during the year the assessee has
incurred foreign exchange loss. The learned assessing officer has
disallowed it for the simple reason that when assessee is maintaining its
books of accounts on cash basis, the assessee should have recorded the
net realization only when the fees are received. Therefore, he disallowed
it. The learned CIT – A understood practice adopted by the assessee and
allows the same. According to him, there is no addition is required to
be made even in cash system of accounting. Aggrieved, the AO is in
appeal before us.
16. The learned departmental representative vehemently supported the order
of the learned assessing officer and submitted that when the assessee is
maintaining the books of accounts on cash basis, the fees is required to
be recorded only at the time of realization of the invoices and there is no
question of any foreign exchange loss or gain incurred by the assessee.
He submitted that there is a violation of cash system of accounting the
movement the assessee records the invoices at the time of preparation of
the bill. He therefore submitted that the learned CIT – A wrongly deleted
the addition.
17. The learned authorised representative submitted that there is no
difference between the income according to the method suggested by the
assessing officer and the method adopted by the assessee. He submitted
that eventually the assessee has recorded the income which is only the
cash received by the assessee. He vehemently supported the order of the
learned CIT – A and referred to the accounting entries made by the
assessee which are recorded at page number 45 and 46 of the order of
the CIT – A. He therefore submitted that there is no error in the order of
the learned CIT – A in deleting the above addition.
18. We have carefully considered the rival contention and perused the orders
of the lower authorities. We have already recorded the method of
accounting adopted by the assessee, which is cash method of
accounting. We have also stated in earlier paragraphs by stating the
facts of the issue that how the entries are made in the books of accounts.
Admittedly, the method of accounting of the invoices raised in foreign
currency adopted by the assessee of recording the same at the foreign
exchange rate prevailing as on the date of raising of the invoice. Further
when there is a realization, naturally, there would be a difference in the
rates of exchange between currencies, such loss or gain would be
accounted for in the profit and loss account itself. Whenever, the bills
are realized the necessary impact of foreign exchange gain or loss going
to profit and loss account will eliminate the difference between the
mercantile method of accounting and the cash basis of accounting, and
the correct revenue would be derived as per the Cash Method of
accounting. Therefore, merely because of the reason that assessee
records the invoices prepared in foreign currency at the rate prevailing
thereon for control purposes and subsequently offsetting it whenever the
bills are realized by debit or credit to the profit and loss account, the net
impact is that whatever is cash received is recorded in the profit and loss
account. Thus, according to us, there is no addition is warranted even in
cash method of accounting adopted by the assessee. In the result we do
not find any infirmity in the order of the learned CIT – A in deleting the
addition of INR 13,71,818/– on account of foreign exchange loss. Thus,
ground number 2 of the appeal of the learned assessing officer is
dismissed.
19. In the result, appeal filed by the assessee is allowed and appeal filed by
the assessing officer is dismissed.
Order pronounced in the open court on 13/08/2019.
-Sd/- -Sd/-
(AMIT SHUKLA) (PRASHANT MAHARISHI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 13/08/2019
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