Providing scholarships to students in foreign university is a business expenditure

Harish N. Salve Vs ACIT (ITAT Delhi)

Conclusion: In present facts of the case, the Hon’ble Tribunal held that providing scholarships to students in foreign university is a business expenditure.

Facts: Assessee is an Advocate by profession and is stated to derive income from Business, Capital Gain and Other Sources. Assessee filed his return of income for A.Y. 2015-16 on 30.09.2015 declaring total income of Rs. 93,05,67,910/-. Thereafter assessee filed revised return of income on 31.03.2017 revising the total income of Rs.93,40,35,870/-. The case was selected for scrutiny and thereafter assessment was framed u/s 143(3) of the Act vide order dated 27.11.2017 and the total income was determined at Rs.94,40,20,730/-. Aggrieved by the order of AO, assessee carried the matter before CIT(A) who vide order dated 27.09.2018 in Appeal No.10174/2017-18 dismissed the appeal of the assessee. Aggrieved by the order of CIT(A), assessee is now in appeal.

The Hon’ble Tribunal after taking submissions of both sides into consideration on the issue of the disallowance of Rs.99,84,863/- being the amount paid under the head ‘Assistance to Law Students’ which was disallowed by AO and confirmed by CIT(A). relied on the Co-ordinate Bench of Tribunal, wherein it was held as under:

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 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. 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.”

On basis of the above, the Hon’ble Tribunal and for similar reasons direct the AO to delete the addition. Thus the ground of assessee was allowed.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal filed by the assessee is directed against the order dated 27.09.2018 of the Commissioner of Income Tax (Appeals)-20, New Delhi relating to Assessment Year 2015-16.

2. The relevant facts as culled from the material on records are as under :

3. Assessee is an Advocate by profession and is stated to derive income from Business, Capital Gain and Other Sources. Assessee filed his return of income for A.Y. 2015-16 on 30.09.2015 declaring total income of Rs. 93,05,67,910/-. Thereafter assessee filed revised return of income on 31.03.2017 revising the total income of Rs.93,40,35,870/-. The case was selected for scrutiny and thereafter assessment was framed u/s 143(3) of the Act vide order dated 27.11.2017 and the total income was determined at Rs.94,40,20,730/-. Aggrieved by the order of AO, assessee carried the matter before CIT(A) who vide order dated 27.09.2018 in Appeal No.10174/2017-18 dismissed the appeal of the assessee. Aggrieved by the order of CIT(A), assessee is now in appeal and has raised the following grounds:

“1. That on facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals) [‘CIT(A)’] erred in confirming the action of the Assessing Officer (‘AO’) in disallowing a sum of Rs.99,84,863/- and adding back the same to the income of the Appellant by treating expense incurred under the head “Scholarship Expenses” as having not been incurred wholly and exclusively for the purpose of the profession of the Appellant.

2. That the CIT(A) and the AO grossly erred in disallowing the aforesaid amount of Rs.99,84,863/-, incurred on account of scholarship granted to further the professional interest of the Appellant, terming the same as gift and disallowing it under section 37 of the Income Tax Act, 1961 (‘Act’).

3. That on the facts and circumstances of the case & in law, the CIT(A) and the AO erred in not appreciating that the expenditure incurred was to support the Appellant in establishing the international practice and developing contacts and was incurred wholly & exclusively for the purpose of profession and ought to be allowed under Section 37 of the Act

4. That on the facts and circumstances of the case and in law, the CIT(A) erred in no adjudicating the ground of appeal raised by the Appellant challenging the action of the AO in not allowing credit for the entire TDS of Rs 6,66,17,666/- as claimed by the

5. That on the facts and circumstances of the case and in law, the CIT(A) erred in no adjudicating the ground of appeal raised by the Appellant challenging the action of the AO in not allowing relief of Rs.8,57,07,736/- under section 90 of the Act for taxes paid in the United Kingdom.”

4. Before us, at the outset, Learned AR submitted that Ground No.1 to 3 are interconnected and is with respect to the disallowance of “Scholarship Expenses”.

5. During the course of assessment proceedings and on perusal of the ‘Profit & Loss’ account, AO noticed that assessee had claimed Rs. 99,84,863/- under the head ‘Assistance to Law Students’. The assessee was asked to justify as to how the facts for earlier years was different from the year under consideration and why the aforesaid expenses not be disallowed as in earlier years. Assessee filed detailed submissions and inter alia submitted that assessee was focusing on building an international practice and spent considerable amount of time on international arbitration. As a measure of developing an international profile, the assessee decided to increase his involvement with the Oxford University and has thus decided to provide funding to Indian students admitted to the Exeter College of Law in Oxford. It was further submitted that such step would provide an international platform to the assessee and at the same time will help Indian students to attain academic excellence. The submissions of the assessee was not found acceptable to AO. AO noted that identical issue arose in assessee’s own case in A.Y. 2012-13 & 2014-15 and while deciding the issue in A.Y. 2012-13, AO had noted that there was no specific provision on allowability of scholarship paid to students under any Section of the I.T. Act and the expense on account of scholarship was actually gift by the assessee. AO was of the view that the alleged gift cannot be construed to be “Wholly and exclusively” for the purpose of business and the scholarship given to individuals who were in no way related to the profession of the assessee could not be said to have been expended for training/skill development of the employee of the assessee. It was thus held that the amount given in the form of Scholarship and claimed as a business expense was not incurred “Wholly and exclusively” for the purpose of business or profession. AO thereafter noted that facts for A.Y. 2014-15 were similar to the facts of the earlier years. He therefore, following the decision of his predecessor, disallowed the claim of expense amounting to Rs.99,84,863/- and made its addition.

6. Aggrieved by the order of AO, assessee carried the matter before CIT(A). CIT (A) dismissed the ground of assessee and upheld the order of AO by inter alia noting that the facts of the case were identical to assessee’s own case for A.Y. 2011-12 to 2014-15 wherein his predecessor had confirmed the addition made by AO. He accordingly upheld the order of AO.

7. Aggrieved by the order of CIT(A), assessee is now in appeal before us.

8. Before us, at the outset, Learned AR submitted that identical issue arose in assessee’s own case in A.Y. 2011-12, 2013-14 & 2014-15 before the Hon’ble Tribunal. He submitted that the Co-ordinate Bench of Tribunal in ITA No.2285 & 2392/Del/2016 order dated 13.08.2019 for A.Y. 2011-12 had decided the issue in favour of the assessee. He thereafter submitted that while deciding the issue in A.Y. 2013-14 & 2014­15 in ITA No.1007 & 1008/Del/2018 order dated 24.02.2021, the Tribunal following the order of Co-ordinate Bench for A.Y. 2011­12 had decided the issue in favour of the assessee and had directed the AO to delete the addition. He pointed to the relevant orders placed in the paper book. He therefore submitted that since the facts of the case in the year under consideration are identical to that of earlier years as has been admitted by the lower authorities, therefore, following the decision of the Co-ordinate Bench of Tribunal in assessee’s own case for earlier years, the issue be decided in assessee’s favour.

9. Learned DR on the other hand did not controvert the submissions made by Learned AR but further supported the order of lower authorities.

10. We have heard the rival submissions and perused the material available on record. The issue in the present ground is with respect to the disallowance of Rs.99,84,863/- being the amount paid under the head ‘Assistance to Law Students’ which was disallowed by AO and confirmed by CIT(A). We find that the Co-ordinate Bench of Tribunal while deciding the issue for A.Y. 2013-14 & 2014-15 in ITA No.1007 & 1008/Del/2018 order dated 24.02.2021 had decided the issue in favour of the assessee by following the order of the Co-ordinate Bench of Tribunal for A.Y. 2011-12. The relevant observation are as under:-

“9. We have gone through the records in the light of submissions made on either side. On perusal of the orders, we are satisfied 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 and by order dated 13.08.2019 in ITA Nos. 2285 and 2392/Del/2016 for assessment year 2011-12, the coordinate Bench observed as follows :

“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 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. 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.”

10. For the assessment year 2012-13 also in ITA No. 2505/Del/2017, such a view was followed by Tribunal. On the parity of facts of the cases on hand with the facts of earlier years, we are of the considered opinion that the consistent view taken by the Tribunal for earlier assessment years cannot be disturbed. While respectfully following the same, we direct the Assessing Officer to delete the addition.”

11. Before us, no distinguishing feature in the facts of the case in the year under consideration and that of earlier years has been pointed out by Revenue. Further, Revenue has also not placed any material on record to demonstrate that the order of Tribunal in assessee’s own case for earlier years has been set aside/overruled or stayed by higher judicial forum. We therefore following the order of Co-ordinate Bench of Tribunal and for similar reasons direct the AO to delete the addition. Thus the ground of assessee is allowed.

12. Ground No.4 is with respect to not allowing credit for the TDS of Rs.6,66,17,666/-.

13. Before us, Learned AR submitted that before CIT(A) assessee had raised the ground about the AO not granting credit for the TDS but CIT(A) did not adjudicate the issue as the assessee had filed rectification application before AO. Learned AR submitted that though assessee had filed rectification application regarding the claim of TDS before the AO but the same has not been disposed of yet. He therefore submitted that the necessary directions be given to AO to allow the credit of the TDS as reflected in 26AS.

14. Learned DR on the other hand did not controvert the submissions made by Learned AR.

15. We have heard the rival submissions and perused the material available on record. The issue in the present ground is with respect to not allowing credit of TDS amounting to Rs.6,66,17,666/-. We find that issue was raised by the assessee before CIT(A) and CIT(A) vide para 5.2.1 did not adjudicate the issue for the reason that assessee had filed a rectification application before the AO. Before us, it is the submission of the assessee that matter may be remitted to AO with necessary directions for the necessary verification and thereafter giving the credit of the TDS. Considering the submissions of the AR, we direct the AO to grant the credit for the TDS after necessary verification and in accordance with law. Thus ground of assessee is allowed for statistical purposes.

16. Ground No. 5 is with respect to not allowing relief of Rs.8,57,07,736/- u/s 90 of the Act for the taxes paid in the United Kingdom (UK).

17. Assessee had claimed relief of Rs.8,57,07,736/- u/s 90 of the Act which represented proportionate tax credit in respect of tax of Rs.11,71,22,901/- paid by the assessee in United Kingdom, the corresponding income which was already offered to tax by assessee. The AO did not grant credit for taxes paid in UK. When the matter was carried before CIT(A), CIT(A) did not adjudicate the issue as the rectification application filed by the assessee before the AO was pending.

18. Aggrieved by the order of CIT(A), assessee is now before us.

19. Before us, Learned AR submitted that during the year under consideration, assessee had earned overseas income of Rs.25,30,32,449/- in United Kingdom on which it had paid tax of Rs.11,69,22,726.6 (corresponding US £ 12,64,588.63) and apart from that, assessee had also suffered withholding tax to the extent of Rs.2,00,174.8 (corresponding US £ 2,165.01). He submitted that the corresponding income was offered to tax and assessee had only claimed proportionate credit of Rs.8,57,07,736/- out of the total tax of Rs.11,71,22,901/- that was paid by the assessee in United Kingdom as the entire tax paid in UK was not available for set off in India. To support his contention of the overseas income being offered to tax, he pointed to the copy of the Income and Expenditure Account, which is placed at Page 97 of the paper book. He also pointed to the computation of income, a copy of which is placed at page 98-99 of the paper book. From the aforesaid, he pointed to the relief of Rs.85,707,736/- claimed u/s 90 of the Act. In support of his contention of having paid the UK taxes, he pointed to the documents placed at Page 101 to 107 of the paper book. He also pointed to the computation of relief u/s 90 of the Act at page 117 of the paper book. Learned AR therefore submitted that since the assessee had paid the tax in UK, proportionate credit of the taxes paid u/s 90 of the Act on the overseas income which is offered to tax in India be granted to assessee and for that necessary direction be given to lower authorities. He further submitted that though the assessee has made an application for rectification before the AO but the same is yet to be decided by the AO.

20. Learned DR on the other hand did not controvert the submissions made by Learned AR.

21. We have heard the rival submissions and perused the material available on record. The issue in the present ground is with respect to the claim of proportionate tax credit u/s 90 of the Act. It is an undisputed fact that the overseas income earned by the assessee in UK has been offered to tax by the assessee in India and out of the total tax of Rs.11,71,22,901/- paid by assessee in UK, assessee is claiming credit of Rs.8,57,07,736/-u/s 90 of the Act since the corresponding amount of income has already been offered to tax in India and has also been accepted by Revenue. We are of the view that the credit of the taxes paid on such income deserves to be allowed. We therefore restore the issue back to the file of AO and direct him to allow the credit of the foreign taxes paid as claimed by the assessee u/s 90 of the Act as per the provision of Act and in accordance with law. Needless to state that AO shall grant adequate opportunity of hearing to the assessee. Assessee is also directed to promptly furnish all the details called for by the AO. We thus direct accordingly. Thus the ground of assessee is allowed.

22. In the result appeal of the assessee is allowed.

Order pronounced in the open court on 16.12.2021