The issue arose due to the disallowance of ₹ 2,84,34,453 by the AO which was incurred by the respondent in running of a school for the benefit of its employees as an incidental and additional business expenditure under Section 40A(9) of the Income Tax Act, 1961 read with Section 37(1) of the Income Tax Act,1961. As this deduction was not allowed by the AO, the respondent felt aggrieved and filed an appeal. The Income Tax Appellate Tribunal (ITAT) overturned the ruling of the AO and allowed the deduction.
In allowing the deduction under Section 40A(9) of the Income Tax Act, the ITAT relied on its decision in a similar case involving the respondent for the assessment year 2010-2011. The tribunal held that the amount that was being incurred for education and being paid to DAV School was for the welfare of the staff which would ultimately result in the smooth functioning of the business. As it was incurred for the aforementioned purpose, it was an allowable business expenditure. Therefore, the tribunal held in favour of the respondent and allowed the deduction. Aggrieved by the order, the appellants have filed this appeal.
The counsel for the appellant submitted that the running of the school by the DAV School Management is within the premises of the respondent and it has no direct nexus with the business. Further, the expenditure incurred was being debited to the profit and loss account. Thus, it is not an allowable deduction as per Section 40A(9) and Section 37(1) of the Income Tax Act, 1961.
The counsel for the respondent submitted that the payment to DAV School Management is neither falling under “setting up” nor under “formation of” nor under “as contribution to” any fund/trust. As a result of this, it is outside the purview of Section 40A(9) of the Income Tax Act. Further, the running of a school for the benefit and welfare of the staff is a business expenditure. Thus, it is an allowable deduction under Section 40A(10) and Section 37(1) of the Income Tax Act.
A Division Bench comprising Justices Dr. S.K. Panigrahi and G. Satapathy observed that “This Court is of the view that the Tribunal is fully justified in allowing the above expenditure towards contribution for the running of the school, as an expenditure for the smooth functioning of the business of the assessee and also an expenditure wholly and exclusively for the welfare of the employees of the assessee and, thus, allowable under Section 37(l) as well as Section 40A(10) as business expenditure. Thus, the tribunal decided correctly and there is no reason to set aside the orders of the Tribunal.”
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