The Bombay High Court recently ruled that contributions to a public welfare fund, if linked to the assessee’s business or resulting in benefits to the business, should be eligible for deduction under Section 37 of the Income Tax Act. This decision arose from a case involving contributions of Tata Engineering & Locomotive to its workers’ union under a settlement agreement.
Section 37 of the Income Tax Act allows deductions for business expenditures incurred wholly and exclusively for business purposes, excluding capital expenditures and personal expenses.
Ready to Grow? Choose a Course That Fits Your Goals!
In this case, Tata Engineering & Locomotive had made payments specified in the Memorandum of Settlement with its workers’ union, defending them as revenue expenditures aimed at local community development and welfare, benefiting its business operations.
The Assessing Officer had initially disallowed these deductions under Section 40A(9). However, both the Commissioner of Income-tax (Appeals) and the Tribunal concurred that these expenses did not fall under Section 40A(9) of the Income Tax Act but were allowable under Section 37(1) of the Income Tax Act.
The High Court observed that the expenses, directed towards community services and social welfare in the vicinity of its operations, were not solely for employee welfare but contributed to the company’s broader social responsibilities. These expenditures were seen as enhancing the company’s local presence and facilitating harmonious business operations.
Ready to Grow? Choose a Course That Fits Your Goals!
Justices G S Kulkarni and Somasekhar Sundaresan of the Division Bench observed that commitments to welfare measures outlined in a Memorandum of Settlement with a workers’ union do not automatically categorise payments as part of that settlement or obligatory under labour laws, or simply as employer payments.
The Court noted that payments disallowed under Section 40A(9) of the Income Tax Act were those made explicitly “as an employer” towards certain funds or institutions. In contrast, the payments in question here were for broader local welfare measures, aligning with the company’s business interests and benefiting its operations.
In conclusion, the High Court Division Bench upheld the lower authorities’ findings that these payments were linked to the company’s business and brought benefits to it. It dismissed the Revenue’s appeal, affirming that the nature and character of these expenditures did not fall under Section 37(1) or attract Section 40A(9) of the Income Tax Act due to their commercial nexus with the business operations of the assessee.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
