The allowability of any expenditure as a business expense is dependent on whether the same is revenue in nature in addition to being incurred wholly and exclusively for business purpose.
The decision of whether the expenditure is incurred solely for business purposes depends on the facts and circumstances of the case. No one expenditure can be deemed to have been incurred for business purpose in every case in complete disregard of the circumstances that happen to be case-specific. One needs to be considerate about the dynamics of the environment in which businesses and professions operate these days.
An AO is in no position to outrightly decide whether or not an expenditure has been incurred for business purpose until and unless he places himself in the shoes of the business owner/ professional. An informed decision in this regard can be made aptly only when the same is thought about with the right mindset i.e. with the mindset similar to that of the person incurring such expense.
In the case of Harish N. Salve Vs ACIT, the subject matter was the allowability of scholarship provided by the assessee (Advocate) to Indian students studying abroad in foreign university. As per the assessee’s claims and submissions, the very purpose of incurring the expenditure in form of scholarship was to create a social standing for the assessee. The assessee believed that such an act would lead to goodwill creation. By way of providing assistance to law students, he justified his intentions.
In the matter, ITAT held that the AO cannot disallow the expenditure incurred on the ground that the same is not incurred wholly and exclusively for business purposes until he places himself in the shoes of the assessee. The ITAT Order emphasised the fact that how such scholarship led to the visibility of the Advocate’s efforts on an international level. Moreover, it explicitly put forth the relevance of dynamism, uniqueness, and complexities involved in businesses and professions as crucial factors while arriving at a decision regarding the purpose behind incurring any expenditure.
The ITAT made it clear that how creating visibility in professional circle by innovative methods in order to build profile and for promotion sake so as to increase the revenue flows is in the nature of expenditure allowable as deduction under section 37(1).
Hence, whether any expenditure incurred falls within the scope of Section 37(1) cannot be generalized but depends on the facts and circumstances of the case.
