The Bombay High Court has held that merely because such expenditure finds a place in the Memorandum of Settlement, the nature and character of such expenditure would not be altered, so as to fall under Section 37(1) or to attract Section 40A(9) of the Income Tax Act.
The court observed that the mere fact that making a donation for charitable or public cause or in public interest results in the government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under Section 37(1) of the Income Tax Act when such payment had been made for the purpose of the assessee’s business.
Facts
The respondent-assessee had been expending various amounts towards “community services” and “social welfare,” and this was recited in the Memorandum of Settlement with a statement that such measures would continue. There is no commitment of any specific amount that would be spent under these heads of expenses. Owing to the linkage of the expenses with the settlement entered into with the Workmen’s Union, the appellant/department has argued that Section 40A(9) would disallow deduction of such expenditure in the computation of income under the Act. Both the Commissioner of Income-tax, Appeals, and the Tribunal have returned concurrent findings to state that the nature of these expenses does not fall within the jurisdiction of Section 40A(9) and that they ought to be allowed under Section 37(1).
As per the Memorandum of Settlement, the very heading of the recitals of the local welfare measures was that of “community services” and “social welfare.” The expenses were already being incurred, and the Memorandum of Settlement recorded that they would continue to be incurred. The expenditure under that head was towards the planning and execution of agriculture, irrigation, health services, and primary education in forty villages across three administrative blocks in the vicinity of Jamshedpur.
The respondent/assessee submitted that the payments could also be regarded as payments required to be made under law, on the ground that the payments were envisaged under a Memorandum of Settlement between the respondent-assessessee and the trade union, namely, TELCO-Workers’ Union, Jamshedpur, of the workers employed by the assessee. The expenses were primarily defended as revenue expenditures as expenses towards the development and welfare of the local population in the vicinity of the factory, with benefits flowing from the business. The expenditure was claimed to have helped the respondent-assessee get the benefit of goodwill and local harmony in the conduct of its business operations in the local ecosystem by justifying the claim that such expenditure should be allowed as revenue expenditure.
The assessee claimed that the expenditure, having been envisaged in the Memorandum of Settlement entered into with the Workmen’s Union of the employees, could also be defended as payments made under the law in terms of the settlement reached with the employees.
Section 40A(9) states that the subject matter of what is positively disallowed under the provision is payments made by an assessee “as an employer.” The very core ingredient to attract the jurisdiction of the provision is that the payment ought to have been made by the assessee in the capacity of an employer. The payments that are disallowed under Section 40A are payments made towards setting up, forming, or contributing to any fund, trust, company, association of persons, body of individuals, society, or other institution for any purpose, but in every case, in the capacity of an employer.
Conclusion
The court held that the payments are made towards wider local welfare measures that would boost its presence in the local ecosystem and enable harmonious conduct of its factory and business operations in the vicinity. Merely because a commitment to continue such welfare measures is recited in the Memorandum of Settlement with the Workmen’s Union, these payments would not partake the character of payments made under the Memorandum of Settlement or payment required to be made under labour law, or for that matter, payment that is made “as an employer.”.
The court while ruling against the department held that a payment made under a memorandum of settlement under the Industrial Disputes Act cannot be a payment required by or under any law.
CASE DETAILS
Case Title: CIT Versus M/s. Tata Engineering & Locomotive Company Ltd.
Case No.: Income Tax Appeal No. 321 Of 2008
Counsel For Appellant: Suresh Kumar
Counsel For Respondent: Srihari Iyer
Judges: G. S. Kulkarni & Somasekhar Sundaresan
Decision Date: 30 July, 2024
