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2019 (8) TMI 731

..... me 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 so .....

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..... g 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. - ITA No. 2285/Del/2016 ( By Assessee) And ITA No. 2392/Del/2016 ( By AO) - 13-8-2019 - Shri Amit Shukla, Judicial Member And Shri Prashant Maharishi, Accountant Member For the Assessee : Shri Sachit Jolly , Adv For the Revenue : Shri Surdendra Pal Sr. DR ORDER PER PRASHANT MAHARISHI, A. M. 1. These are the cross appeals filed by the assessee, Shri Harish Narinder Salve and the Asst Commissioner of Income Tax, circle 61 (1), New Delhi (the AO) against the order of The C .....

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..... view that it is not allowable u/s 37 (1) of the act. The learned CIT - A held it to be a capital expenditure. Therefore, both the parties aggrieved with the order of the learned CIT - A are in appeal before us. ii. Disallowance of expenses of INR 2090/- which have not been paid in the relevant financial year as assessee is following the cash system of accounting. This addition is deleted by the learned CIT - A and is not the subject matter of appeal before us. iii. Disallowance /addition of INR 13,71,818/- on account of foreign exchange loss, being the difference in exchange at the time of raising of the bill and at the time of realization of billed amount. Though assessee is following cash system of accounting, however bills raised to foreign clients are prepared on the basis of foreign exchange rates prevailing on the date of the billing, when amount is realized at the time of actual receipt, there is bound to be difference in exchange, which is written off or back to the profit and loss account. Thus, assessee is recording the cash received only as income. The AO disallowed the same holding that in cash system, it is not allowable. The learned CIT - A allowed the claim as during .....

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..... oduce me to the legal fraternity in the academia in the United Kingdom, this is very influential. I regularly conducted workshops in the Oxford University, some of which were then discussed on blogs by the students. 6) Through this connectivity, I have had the occasion to meet a number of senior lawyers and judges. Last year I was also invited by the law faculty in Oxford University to deliver lectures. 7) Secondly, 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. I have presently for juniors who have educated themselves in either Oxford University (3) or other international universities (1). I do hope that some of the juniors who passed out of Oxford will join my Chambers at some point. In fact, the very first scholar, Ms Deeksha Sharma, did her Masters in International taxation with 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. 8) All these activities add a lot of value to my CV. Recently the government of Singapore appointed me .....

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..... as no agreement between the assessee and those students. He also negated the argument of the assessee that it gives a professional recognition to the assessee. The AO was of the view that going into the conference will enhance the knowledge of the assessee and gives contacts but this scholarship being a gift is totally unrelated to the profession of the assessee. He further held that giving scholarships to the students cannot be a factor, which will lead to building the overall persona of the assessee contributing to the professional stature of the assessee. In nutshell, he held that the above amount of scholarship of INR 2845872/- incurred by the assessee is not an expenditure wholly and exclusively incurred for the purpose of the profession and not allowable u/s 37 (1) of the act. Therefore, he disallowed it. 9. Aggrieved, assessee challenged the same before the learned CIT - A. The assessee raised the similar argument. The learned CIT - A held that the aim and object of the expenditure incurred by the assessee is (1) Future expansion of the business, (2) Prolonging the life of an existing business, (3) Forming a conceivable nucleus for posterior profit earning, (4) conduct of th .....

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..... ssee and none of the students to whom this scholarship is is not at all related to the assessee. He therefore submitted that orders of the lower authorities may be set aside. 11. The learned authorised representative submitted that identical issue of contribution by a professional has been considered by the coordinate bench in ITA number 1382/del/2012 for assessment year 2009 - 10 when a noted lawyer contributed to the building of a professional body, which was held to be allowable as revenue expenditure. He further submitted that the above decision has been approved by the honourable Delhi High Court in ITA number 50/2014 dated 11/8/2015 and therefore the issue is squarely covered in favour of the assessee. He submitted that issue is squarely covered in favour of the assessee. 12. The learned departmental representative vehemently supported the order of the learned assessing officer and submitted that assessee has set up an annual scholarship for the Indian students who are going to study in that college which is affiliated with the Oxford University. It is a means of a scholarship to the Indian student, which by no stretch of imagination can be said to be expenditure wholly and e .....

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..... ws better that what kind of expenditure he should incur for furtherance of his business. To judge allowability of an expenditure, the learned assessing officer 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. The 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. .....

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..... reverse the order of the lower authorities, and direct the learned assessing officer to delete the above disallowance. In view of this, we allow ground number 1 of the appeal of the assessee and dismiss ground number 1 of the appeal of the learned assessing officer. 14. Thus, we allow ground number 1 and 2 of the ground of appeal of the assessee and dismiss ground number 1 of the appeal of the revenue. 15. Now we come to the 2nd ground of the appeal of the assessing officer, the only issue left in this appeals, wherein the learned AO has challenged the action of the assessing officer in deleting the addition of INR 1 371818/- on account of foreign exchange loss. It is necessary to mention important facts of the issue. As it is already stated, that assessee is a lawyer by profession and he is following the cash system of accounting. The assessee records the invoices raised on foreign clients in his books of account at the exchange rate prevailing as on that date of raising of the invoice. Thus, at that time, he records his service income as per the exchange rate prevailing on the date of raising of the invoices. When, subsequently the amount received for services, naturally, they ar .....

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..... ded at page number 45 and 46 of the order of the CIT - A. He therefore submitted that there is no error in the order of the learned CIT - A in deleting the above addition. 18. We have carefully considered the rival contention and perused the orders of the lower authorities. We have already recorded the method of accounting adopted by the assessee, which is cash method of accounting. We have also stated in earlier paragraphs by stating the facts of the issue that how the entries are made in the books of accounts. 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 p .....

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