Providing of scholarships is a revenue expenditure allowable under Section 37 (1) of the Income Tax Act: ITAT

The question before the Income Tax Appellate Tribunal (ITAT) was whether amount paid by an assessee as scholarships would be allowable under Section 37(1) of the Income Tax Act 1961 (IT Act). The Tribunal answered in the affirmative.

Harish Salve (assessee) had paid for scholarships of two students in terms of scholarship agreement entered into by him with The Exeter College, the University of Oxford. According to that, he had committed to providing annual funding for scholarship of graduate student at Oxford University for top Indian student on annual basis.

The assessing officer (AO) held that the money incurred towards scholarship is a gift given by the assessee to that college and was not allowable under Section 37 (1) of the IT Act.

The assessee challenged the same before the Commissioner of Income Tax (Appeals) (CIT – A) alleging that these expenditures were wholly and exclusively incurred for his profession and hence should be allowable under section 37 (1) of the Income Tax Act.

The CIT-A held that the expenditure was incurred to bring into existence and advantage for enduring benefit of the profession and therefore he held it to be capital in nature.

Salve filed two grounds of appeal against the order of Commissioner of Income Tax (Appeals) (CIT-A) with the Income Tax Appellate Tribunal citing that-

(a) The expenditure on scholarship amounting to Rs. 28,45,372/- was incurred to bring into existence and advantage for the enduring benefit of the profession, thus treating the same as capital expenditure.

(b) That the learned CIT-A erred in not appreciating that expenditure incurred by the assessee was for the furtherance of profession incurred wholly and exclusively for the purpose of business and ought to be allowed under section 37 of the Income Tax Act, 1961.

The Tribunal ruled that in the present case there is a nexus between the expenditure incurred by Salve and his professional services rendered. It further held that “In the professional field there are innovative ways visualized by the professionals to make themselves visible in the professional circle and to build their own professional profile for generating higher and value- added business. 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.”

Further Salve had specifically submitted that it has increased lot of value of in his career and the government of Singapore has appointed him on certain committees of repute. He also said that the student to whom the scholarship was granted had helped him in the famous case of Vodafone represented by him. Therefore, the Tribunal opined that Salve had incurred the above expenditure wholly and exclusively for the purposes of the business.

According to the Tribunal, requirement of incurring the expenditure by a professional/businessman changes by the dynamics of the business, its complexities and its uniqueness. 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 assessee had incurred the above expenditure wholly and exclusively for the purposes of the business. The ITAT held that the expenditure incurred by the assessee is a revenue expenditure allowable u/s 37 (1) of the Income Tax Act.

The Tribunal cited that in a similar case before the Honourable Delhi High Court where a noted lawyer contributed to the building of a professional body, the expenditure was held to be allowable as revenue expenditure.

The ITAT affirmed that the expenditure incurred by the assessee by way of providing scholarships is a revenue expenditure and therefore allowable under Section 37 (1) of the Income Tax Act.