Law Firm in India

Can Foreign Scholarships be deducted as Business Expenditure under Income Tax Act?

When considering whether foreign scholarships are deductible under section 37 of the ITA, the tribunal held that such scholarships are expenses undertaken to help boost the profile of a professional and it was a deductible expenditure.

The Income Tax Appellate Tribunal (ITAT) recently allowed a deduction under Section 37(1) of the Income Tax Act, 1961 (ITA) for the amount of money given as foreign scholarships towards law students pursuing education abroad.

This comes after the ITAT had allowed a similar deduction for the FY 2019-2020, the previous year. The matter considered by the tribunal was regarding whether such expenses qualify as expenditure undertaken ‘wholly for the business or profession’.

Deductions under Section 37 (1) of the ITA:

Section 37(1) of ITA allows that any expenditure (not being personal expenses or capital expenditure or expenditures covered under Section 30 to 36 of the ITA which is wholly and exclusively used for the business or profession, will be an allowable expenditure.

Section 37 of the ITA acts as a residuary clause, meant to allow business or professional expenditures that have not been covered under the previous sections.

Conditions to avail Section 37 under Income Tax Act:

  • Expenditure should not already be covered by Sections 30-36 – if the taxpayer has already availed a deduction under any specific section, then it cannot be claimed under the residuary section.
  • The expenditure has to be used for the business; it cannot be expenses of a personal nature.
  • The expenditure cannot be a capital expenditure i.e., expenses incurred in lieu of capital assets will not be allowed.
  • It must be expenditure incurred during the previous year.

Expenditures that will not be allowed under Section 37 of the Income Tax Act:

  • Any expenditure incurred by a taxpayer for purposes that are offences under the Indian law, will not be allowable under Section 37.
  • Any expenditure incurred by a taxpayer regarding corporate social responsibility (as required under Section 135 of the Companies Act, 2013) will not be allowable under Section 37.

Harish Salve vs. ACIT (2020):

The Appellate Tax Tribunal of Delhi (ITAT) was considering the allowability of a foreign scholarship set up by the taxpayer (Mr Harish salve) to fund the international legal education of Indian law students.

Facts of the case:

  • The taxpayer is an advocate by profession and is a highly regarded Senior Advocate of the Supreme Court of India. As part of his income tax filings, he is deriving income from business or profession, income from house property, income from capital gains and income from other sources.
  •  Nearly INR 19.5 lakhs was claimed by the taxpayer as a deduction for business expenditure under Section 37 of the ITA, under the head of ‘scholarship expense’.
  • The scholarship was set up to cover the costs of an Indian law student’s studies on an annual basis, and it was offered in tandem with the University of Oxford Clarendon Scholarship at the University of Oxford.
  • The taxpayer contended that the scholarship expenditure helped grow his own international business and hence should be allowed as business expenditure under Section 37 of the ITA.
  • The assessing officer disallowed the claim stating that the scholarship had not been incurred wholly for his profession.

Holding by the Tribunal:

ITAT held that the scholarship helped boost the profile of Mr Harish Salve internationally and hence could be considered an expenditure that was undertaken wholly for his profession.

The tribunal relied on a previously held ruling for adjudicating the same matter in FY 2011-2012. Even then, the assessing officer had alleged that the expenditure was not deductible under Section 37 of the ITA. The ITAT in that case had analysed the effect of the scholarship in boosting the profile of Mr Harish Salve.

They found that the scholarship had:

  • Created greater international visibility for the lawyer and improved his social standing.
  • Increased the value of his CV and helped in appointments with various committees of the government of Singapore.
  • The student receiving the scholarship had also helped the taxpayer in handling his very famous Vodafone case.

The tribunal held that the funding of such foreign scholarships was wholly like expenditure for a business or profession and that the taxpayer was entitled to the deduction. The tribunal stated that when deciding whether expenditure had been wholly undertaken for the profession, the assessing officers must analyse the nexus between the expenditure incurred and the effects on the professional efforts undertaken by the taxpayer.

Similarly, they held that when considering the effect of such expenditure on the taxpayer it has to be considered from the ‘shoes of the taxpayer’. The effects felt by a professional will also be wildly different from that of a business. Professionals may use myriad methods to increase visibility for themselves and their standing in their sector, and all such efforts are undertaken wholly ‘for their profession’.

Furthermore, such expenditures cannot be considered a capital expenditure or a gift. A one-time payment of an annual scholarship does not create a capital asset or any new fresh assets and cannot be accounted for as such. And, merely because the agreement of scholarship states it is a gift, does not mean it is like a ‘gift’.

Decision of the Tribunal:

Even though the tribunals have ruled multiple times that such foreign scholarship is an allowable expenditure under section 37, the amount was again deleted for Mr Harish Salve for the assessment of FY 2020-21.

When appealed to the tribunal, they referred to the previous judgements and upheld the allowability of the expenditure. They underlined that when considering whether an expense was ‘wholly used for the business or profession’; the assessing officer has to consider it through the shoes of the professional and his mindset. If the expenditure directly contributes to the profession, then the deduction should not be deleted.


The important takeaway from the rulings for these matters is the rule that the tribunals have created when considering business expenditure under Section 37 of the ITA. This is a residual section and is meant to allow expenditures that are undertaken wholly for the business or the profession, which are also not further caught under Sections 30-36 of the ITA.

To analyse the purpose of the expenditure in the case of professionals, the assessing officer has to consider it through the mindset of the professional. They have to analyse whether it has helped the professional or increased visibility or led to greater growth, etc. If it is found to have done so, then the expenditure should be allowed.

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