The Income Tax Appellate Tribunal (ITAT) has held that the sum of money paid by Senior Advocate Harish Salve towards scholarships of two students at Oxford University is to be treated as revenue expenditure for the purposes of Section 37(1) of the Income Tax Act.

In an order dated February 23, 2016, the Commissioner of Income Tax had held that the money spent by Harish Salve – amounting to Rs. 28,45,372 – towards scholarships for two Indian students at Exeter College, Oxford University, was to be treated as capital expenditure. Therefore, he could not claim deductions for the same under Section 37(1) of the Act.

As per Section 37(1), expenses that are not specifically allowed as deductions can be claimed as deductions, provided certain criteria are fulfilled. These include the condition that the expense is revenue and not capital in nature, is not personal expense of the assessee, and has been expended wholly and exclusively for the purposes of business or profession of the assessee.

Cross appeals were filed by Harish Salve and the Assistant Commissioner of Income Tax (Assessing Officer), challenging the CIT’s 2016 order. Salve claimed that the CIT erred in not appreciating that the expenditure incurred by him was for the furtherance of his profession and ought to be allowed under Section 37 of the Act. The Assessing Officer assailed the order claiming that the expenditure should have been treated as a gift.

Salve claimed that he had entered into an agreement with Exeter College to provide funding for Indian graduate students at Oxford University. With respect to the assessment year in question (2011-12), Salve had funded the scholarships of two students – Deeksha Sharma and Jasdeep Kaur Randhawa.

The Senior Counsel also detailed how he has been making efforts to further his international practice since 2003. He stated in his appeal,

“It 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.

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 and the fact that I was admitted to the UK bar in 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.”

He further stated that he met the Rector of Exeter College, who told me him that Oxford University was looking for people who could provide financial assistance to Indian students who aspire to study at the University. Funding such scholarships has had many advantages, Salve claims. Among these are,

“…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…In fact, the very first scholar, Ms. Deeksha Sharma, did her Masters in International taxation with a 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. All these activities add a lot of value to my CV…

…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.”

He goes on to detail the tangible and intangible factors that contribute to the success of a lawyer.

“…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.”

Since the funding of the scholarships allowed him to further his presence as an international lawyer, Salve claimed that the expense ought to be treated as revenue expenditure.

The Assessing Officer, on his part, claimed that that the money paid towards the scholarship ought to be treated as a gift given by Salve to Exeter College.

While determining whether the expenditure was revenue or capital in nature, the ITAT Bench of Judicial Member Amit Shukla and Accountant Member Prashant Maharishi held,

“Undoubtedly, assessee (Salve) is a noted international lawyer who has set up a scholarship for creating his visibility in the international arena and his social standing. The assessee has specifically submitted that it has increased a lot of value of the CV of the assessee and the government of Singapore has appointed him on certain committees of repute.”

The Bench further observed that it was not open for the revenue department to adopt a subjective standard to decide the type of expenditure of an assessee. It was held that to judge allowability of an expenditure, the Assessing Officer should put himself into the shoes of the assessee and then decide whether or not the expenditure is necessary for the business of the assessee.

“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 a 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 the 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.”

Therefore, the ITAT held that the amount expended by Harish Salve is a revenue expenditure allowable under Section 37(1) of the Act. Dismissing the claim of the AO that the amount ought to be treated as a gift, the ITAT held,

“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..”

Read the ITAT order: