Harish N. Salve gets relief from ITAT. Funding law students abroad allowed u/s 37(1)

Harish Salve gets relief from ITAT. Funding education of Indian law students abroad allowed as business expenditure u/s 37(1) as goodwill measure 

ABCAUS Case Law Citation
ABCAUS 3462 (2021) (03) ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming disallowance of expenditure u/s 37(1) of the Income Tax Act, 1961 (the Act)

The appellant was a well known lawyer of international fame. For the relevant assessment years, he derived income from business and profession house property, capital gains and also income from other sources.

During the course of assessment proceedings, the Assessing Officer found that the assessee claimed large amount as business expenses under the head “Assistance to Law Students”.

The assessee submitted that the assistance was paid to two law students at Oxford.

The Assessing Officer (AO) disallowed such claim and observed that similar disallowance was made in earlier year on the ground that the assistance to law students, who are nowhere related to the profession of the assessee, and such claim as a business expense is not acceptable to have been incurred wholly and exclusively for the purpose of business/profession of the assessee.

On first appeal, the CIT(A) did not accept the plea taken by the assessee and dismissed the same holding the expenses to be capital in nature.

Before the Tribunal, the assessee submitted that he was an established Sr. Counsel inIndiaand was focusing  on international  practice and spent considerable amount of time, taking on  international arbitration work in London and other international centers such as Singapore.

It was stated that in this process, since the whole profession is based on developing contacts and UK being a center wherein the academicians are an active part of legal fraternity, the assessee decided to provide funding for education of Indian students in the Oxford University.

It was submitted that the support was provided to top Indian students interested in pursuing law degree in UK. This move was not only to support the assessee in creating goodwill amongst  academia in UK and in turn creating a name/develop contacts in legal fraternity but also to support the juniors in chambers who  may  go abroad become technical sound and help in preparing the cases involving complex issue of international taxation and commercial laws.

Thus, it was contended that in all circumstances, the decision to fund the students was a business decision to support the assessee in his profession as a lawyer and therefore, expense incurred for this purpose was claimed as an expenditure.

It was further submitted that when a similar disallowance was made in earlier assessment year, the coordinate Bench of the Tribunal deleted the disallowance and the facts and question of law remained the same and such order has been followed by other coordinate Bench.

The Tribunal stated that the facts and questions of law involved in these two assessment years on hand are identical to the ones involved for earlier assessment years.

It was noted that the Coordinate Bench had held that 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.\

The Coordinate Bench observed that the assessee was a noted international lawyer who had set up a scholarship for creating his  visibility  in international arena and his social standing.

The Coordinate Bench stated that to judge allowability of an expenditure, the AO should put himself into the shoes of the assessee and then decide that whether the expenditure is necessary or not for the business of the assessee. The AO cannot put his thinking to say that the expenditure incurred 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 Coordinate Bench stated that 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 assessee has a different vision of carrying himself in the professional field to increases visibility and social status.

The Coordinate Bench held that definitely there was a nexus between the expenditure incurred by the assessee and the professional services rendered by the assessee.

The Coordinate Bench opined that 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.

The Coordinate Bench stated that the assessee also shown that the students scholarship had helped him in famous case of Vodafone represented by him. Therefore, the assessee had incurred the above expenditure wholly and exclusively for the purposes of the business.

In view of the above decision of the Coordinate Bench, the Tribunal, on the parity of facts of the cases on hand with the facts of earlier years, opined that the consistent view taken by the Tribunal for earlier assessment years cannot be disturbed. 

Accordingly, following the same, the Tribunal directed AO to delete the addition and allowed the appeal in the favour of the assessee.

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