2019 (8) TMI 731 - AT - Income Tax

Allowability of expenditure u/s 37 - expenditure on scholarship - whether expenses incurred to bring into existence and advantage for the enduring benefit of the profession, thus treating the same as capital expenditure - HELD THAT - 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 AO 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. 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. 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) Thus assessee has incurred the above expenditure wholly and exclusively for the purposes of the business.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. - Decided in favour of assessee. Addition on account of foreign exchange loss - assessee is a lawyer by profession and he is following the cash system of accounting - HELD THAT - 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. 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. No infirmity in the order of the learned CIT A in deleting the addition on account of foreign exchange loss - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the expenditure on scholarship amounting to ?28,45,872/- is capital expenditure or revenue expenditure deductible under Section 37(1) of the Income Tax Act, 1961.
2. Whether the addition of ?13,71,818/- on account of foreign exchange loss should be allowed.

Detailed Analysis:

1. Expenditure on Scholarship:

The assessee, a leading advocate, claimed a deduction of ?28,45,872/- as scholarship expenses under Section 37(1) of the Income Tax Act, 1961. The AO disallowed this expenditure, treating it as a gift and not related to the profession. The CIT (A) held it as capital expenditure, asserting that it brought enduring benefits to the profession.

- Assessee's Argument:
- The scholarship was part of a strategic effort to enhance international practice and professional recognition.
- The scholarship helped in building contacts and visibility in the UK legal fraternity.
- It contributed to the professional stature and enhanced the CV, leading to significant professional opportunities, such as being appointed to a committee by the Singapore government.
- The scholarship recipients, like Ms. Deeksha Sharma, contributed to the professional work, e.g., the Vodafone case.

- AO's Argument:
- The scholarship was considered a philanthropic gift with no direct relation to the professional activities of the assessee.
- There was no agreement ensuring that the scholarship recipients would join the assessee’s chambers.
- The expenditure was not seen as enhancing the professional knowledge or contacts directly.

- Tribunal's Decision:
- The tribunal emphasized that the allowability of an expenditure under Section 37(1) should be judged from the perspective of the assessee's profession.
- For a professional like the assessee, enhancing visibility and professional stature through scholarships was deemed a legitimate business expense.
- The tribunal rejected the CIT (A)'s view of the expenditure as capital in nature, stating no new asset was created.
- The expenditure was considered revenue in nature and wholly and exclusively for business purposes.
- The tribunal allowed the deduction of ?28,45,872/- under Section 37(1) and dismissed the AO’s appeal on this ground.

2. Foreign Exchange Loss:

The assessee, following the cash system of accounting, recorded a foreign exchange loss of ?13,71,818/- due to differences in exchange rates at the time of billing and realization.

- Assessee's Argument:
- The invoices raised on foreign clients were recorded at the exchange rate prevailing on the billing date.
- Upon realization, the actual amount received was adjusted, resulting in foreign exchange gains or losses.
- This method was used for maintaining control over invoices and the net impact was correctly reflected in the profit and loss account.

- AO's Argument:
- The AO contended that under the cash system, only the net realization should be recorded, and there should be no foreign exchange loss or gain.
- The AO disallowed the foreign exchange loss, claiming it violated the cash system of accounting.

- Tribunal's Decision:
- The tribunal found no discrepancy in the method adopted by the assessee.
- It was held that the accounting entries for foreign exchange differences were correctly adjusted in the profit and loss account.
- The tribunal upheld the CIT (A)'s decision to allow the foreign exchange loss, dismissing the AO’s appeal on this ground.

Conclusion:

The tribunal allowed the appeal filed by the assessee, permitting the deduction of scholarship expenses under Section 37(1) and upheld the deletion of the addition on account of foreign exchange loss. The appeal filed by the AO was dismissed in its entirety.