2012 (9) TMI 765 - SC - Income Tax

Deduction u/s 37(1) - welfare expenses towards providing education to its employees children & Payments to other educational institutions where the children of its employees were studying- Held that - From the assessment order for AY 1985-1986 and from the Order of CIT (A) that the assessee has made payments to schools other than Sandur Residential School and Sandur Education Society, which fact has not been discussed either in the Order of ITAT or in the Order of the High Court. The interpretation of Section 40A(9) clearly brings out a dichotomy between contribution and reimbursement - Section 40A(9) was inserted as a measure for combating tax avoidance - In the present case how the ITAT and the High Court have come to the conclusion that these payments made by the assessee constituted reimbursement. As for the AY 1985-1986, the AO records that an amount of Rs. 11,40,641/- has been incurred by payments to other educational institutions and not by way of payments made to school or the society promoted by the assessee. For each assessment year, therefore, the ITAT will have to record a separate finding as to whether the claim for deduction is being made for payments to the school promoted by the assessee or to some other educational institutions/schools and thereafter apply Section 40A(9) which has not been done in the present case - in favour of assessee.

Summary

Issues:
1. Interpretation of Section 37(1) of the Income Tax Act for deduction claims.
2. Differentiating between 'contribution' and 'reimbursement' under Section 40A(9) of the Act.
3. Application of Section 40A(9) of the Act in combating tax avoidance.
4. Review of judgments by ITAT and High Court regarding reimbursement claims.

Analysis:
1. The case involved civil appeals by an assessee pertaining to various Assessment Years. The assessee, a limited company engaged in mining, claimed deductions under Section 37(1) for welfare expenses towards providing education to employees' children. The company established educational institutions but made payments to other schools as well, not discussed in previous orders.

2. The judgment highlighted the dichotomy between 'contribution' and 'reimbursement' under Section 40A(9) of the Act. This section was inserted to prevent tax avoidance through irrevocable trusts for employee welfare. The court emphasized the need to establish whether payments were contributions or reimbursements, directing a clear distinction for each assessment year.

3. Section 40A(9) was viewed as a measure against tax avoidance, requiring a foundation of facts before its application. The court noted the absence of clarity on whether payments were reimbursements or contributions to the assessee's promoted schools. The ITAT was directed to reevaluate the matter for each assessment year, considering the nature of payments made.

4. The judgments of the High Court and ITAT were set aside for lack of clarity on reimbursement claims. The ITAT was instructed to conduct a fresh review, distinguishing between payments to the assessee's promoted schools and other institutions. The court refrained from delving into the scope of Section 40A(9) without a proper factual foundation, ultimately allowing the assessee's appeals with a cost to the Department.