Is ‘Assistance to Law Expenditure’ allowable as a business expenditure eligible for deduction u/s 37?

Section 37 of the Income Tax Act pertains to general allowability of business expenditure while computing Profits or Gains from Business or Profession. According to Section 37(1), any expenditure, not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.

Let us refer to the case of Harish N. Salve Vs ACIT (ITAT Delhi), where the applicability of Section 37 was questioned.

Facts of the Case:

The assessee was an Advocate by profession and derived income from business or profession, house property, capital gains and also income from other sources.
During the course of assessments, the Assessing Officer (AO) found that the assessee claimed Rs. 34,19,730 for the AY 2013-14 and Rs. 84,40,301 for AY 2014-15 under the head “Assistance to Law Students”, and when asked, submitted that the assistance paid to law students Diksha Sharma and Krishna Prasad K. V. at Oxford as the justification for such claim.
It was further stated by the AO that the very same plea was taken by assessee for AY 2014-15 also.
While disallowing such a claim of assessee, the AO observed that the facts for this year were similar to the ones in earlier assessment years and therefore, similar disallowance had to be made on the ground that the assistance to law students, who were nowhere related to the profession of the assessee, and such claim as a business expense was not acceptable to have been incurred wholly and exclusively for the purpose of business/profession of the assessee.
The CIT(A) did not accept the plea taken by the assessee and dismissed the same.
Hence, assessee preferred an appeal before the Income Tax Appellate Tribunal (ITAT).

Observations of the ITAT

On perusal of the orders, ITAT was satisfied that the facts and questions of law involved in these two AY’s on hand were identical to the ones involved for earlier assessment years. A coordinate Bench had observed as follows:

Issue involved in this appeal was whether the expenditure incurred by the assessee was allowable u/s 37 (1) or not.
Allowability of an expenditure incurred by the assessee u/s 37 (1) was 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 was “wholly and exclusively” incurred for the purposes of business and in another case it may not be so.
Undoubtedly, assessee was a noted international lawyer who had set up a scholarship for creating his visibility in international arena and his social standing.
The assessee had specifically submitted that it had increased lot of value of the CV of the assessee and the government of Singapore had appointed him on certain committees of repute.
Even otherwise, it was 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 AO that attending the conferences would have added more weightage to the professional profile of the assessee was devoid of any merit.
It was not the AO but the assessee who was carrying on the profession. He knew better that what kind of expenditure he should incur for furtherance of his business.
To judge allowability of an expenditure, the AO should put himself into the shoes of the assessee and then decide that whether the expenditure incurred by the assessee was 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 could not say that the expenditure incurred by the assessee was not wholly and exclusively incurred for his profession, unless, he bought 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 was carrying on the profession, perhaps, he might not have thought it proper to increases visibility by attending the conferences, seminars etc.
He thought fit to set up a scholarship to Indian students in Oxford University.
Thus, in the present case definitely there was a nexus between the expenditure incurred by the assessee and the professional services rendered by the assessee.
He had also shown that the student to whom the scholarship was granted had helped him in famous case of Vodafone represented by him.

What was the conclusion of the Coordinate Bench for the earlier AY’s?

The Bench was of the opinion that the assessee had 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.
Therefore, it was apparent that at least in the case of the professionals, the way they promote themselves, was changing very fast and the benefits of such expenditure were huge and wide.
Therefore, according to the Bench, the impugned expenditure incurred by the assessee was a revenue expenditure allowable u/s 37 (1) of the income tax act.
They did not subscribe to the view of the CIT(A), that these expenditures were capital in nature.
The expenditure incurred by the assessee was the routine day-to-day expenditure incurred by the assessee for promoting his professional profile.
These expenditures could not be held to be capital expenditure in nature as no fresh new fixed assets was created by paying the scholarship sum.
Further merely because in the agreement it was mentioned as an annual gift in the form of scholarship, it did not become a gift.
In fact, it was the expenditure incurred by the assessee in furtherance of his business.
Hence, they reversed the order of the lower authorities, and direct the AO to delete the above disallowance.

Conclusion by ITAT in the present case

For the AY 2012-13 also, such a view was followed by ITAT. On the parity of facts of the cases on hand with the facts of earlier years, ITAT was of the considered opinion that the consistent view taken by the ITAT for earlier assessment years could not be disturbed. Following the same, ITAT directed the AO to delete the addition.

Hence, ITAT allowed expenditure on ‘Assistance to Law Expenditure’ as business expenditure eligible for deduction u/s 37.

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