2024 (8) TMI 433 - HC - Income Tax

Disallowance u/s 40A(9) v/s 37(1) - Determination of nature and character of expenditure - whether payments made to various institutions by Assessee under six heads, could have been treated as allowable expenses - whether the aforesaid payments could be allowed as revenue expenditure u/s 37(1) but disallowance canvassed by Revenue is based on the purported applicability of Section 40A (9) of the Act? HELD THAT - The payments in question 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 . It is apparent that both forums have found that the payments had a commercial linkage to the business and led to benefits for the conduct of the business of the assessee in those years. The payments made by the Respondent-Assessee were for public causes in the locality of the business operations and benefits flowed from it to the business of the Assessee. In our view, if at all the Memorandum of Settlement is relevant, it would be to show that there was a nexus between such social welfare activity undertaken by the Respondent-Assessee and the business of the Respondent-Assessee. The local harmony and goodwill that the social welfare and community expenses generated, benefited the Respondent-Assessee s conduct of business. That such expenses were being incurred was acknowledged and recited as a continuing commitment. Thus, 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). Therefore, the two concurrent views expressed by the CIT-A and the Tribunal need not be faulted. This Court, in appellate jurisdiction on substantial questions of law should not substitute an alternate view, merely because another view is possible, unless the views expressed in the concurrent findings are not at all a plausible view. As already found above that Section 40A (9) has no application to the facts of the case. But for adjectival arguments about such payments being stretched into the realm of payments made under law governing industrial disputes, in our opinion, there was no scope for considering the relevance of Section 40A (9) to the matter at hand. In these circumstances, also taking into account that the distance of time has already led to four appeals against the same Impugned Order being withdrawn owing to low tax impact, we see no reason to interfere with the two concurrent findings by considering substituting an alternate view. Tribunal was indeed justified in law in upholding the view of the CIT-A in deleting the disallowance made by the Assessing Officer (who had relied upon Section 40A (9) of the Act), of the amounts expended towards the six heads of payments made in the respective assessment years. And the payments made in the facts of this case were not payments required to be made under the Industrial Disputes Act or payment required by or under any other law, but the same is irrelevant for the matter at hand since Section 40A (9) was not at all attracted. Unless it was attracted, there was no necessity to rely on the exception in that section in relation to payments required to be made or under any law. Decided in favour of assessee.

Summary

Issues Involved:
1. Justification of ITAT in upholding the CIT(A)'s deletion of disallowance under Section 40A(9) of the Income Tax Act.
2. Whether payments made under a memorandum of settlement under the Industrial Disputes Act can be considered payments required by or under any law.

Detailed Analysis:

1. Justification of ITAT in upholding the CIT(A)'s deletion of disallowance under Section 40A(9):

The core issue was whether payments made by the Respondent-Assessee under six heads could be treated as allowable expenses. The disallowed expenditures were Rs. 1,91,18,284/- for AY 1987-88, and Rs. 1,96,71,852/- for AY 1988-89. The Appellant-Revenue argued that these payments should be disallowed under Section 40A(9) of the Income Tax Act, which disallows deductions for sums paid by an employer towards the setting up or formation of, or as contributions to, any fund, trust, company, association of persons, body of individuals, society, or other institution for any purpose, except as provided by or under specific clauses of Section 36(1) or any other law.

The Respondent-Assessee contended that these payments were for community services and social welfare, as outlined in a Memorandum of Settlement dated 31st March 1986, with the Workmen's Union. The expenses were argued to be revenue expenditures for the development and welfare of the local population, which indirectly benefited the business by fostering goodwill and local harmony.

The CIT(A) and the Tribunal found that these expenses did not fall under the purview of Section 40A(9) and should be allowed under Section 37(1) of the Act. The Memorandum of Settlement outlined various community service commitments, such as financial grants to Gram Vikas Kendra, Parivar Kalyan Sansthan, and Nav Jagrat Manav Samaj for development programs, family welfare camps, and leprosy relief, respectively. These expenditures were not specific to employee welfare but aimed at broader social responsibilities, benefiting the local ecosystem and the business operations.

The Court observed that the payments were not made in the capacity of an employer but were for wider local welfare measures. The expenses had a commercial linkage to the business and led to benefits for the conduct of the business. The Supreme Court's judgment in Sri Venkata Sathyanarayana Rice Mill Contractors Co. vs. Commissioner of Income Tax was cited, which allowed deductions for contributions to public welfare funds connected to the business. The Court concurred with the CIT(A) and Tribunal's findings, stating that Section 40A(9) was not applicable as the payments were not made "as an employer."

2. Whether payments made under a memorandum of settlement under the Industrial Disputes Act can be considered payments required by or under any law:

The Appellant-Revenue argued that the payments were envisaged under the Memorandum of Settlement with the Workmen's Union, thus falling under the exception in Section 40A(9) for payments required by or under any law. However, the Court found that the Memorandum of Settlement merely recorded the continuation of existing social welfare measures and did not mandate specific amounts to be spent. The expenses were for broader social responsibilities and not solely for employee welfare.

The Court concluded that the payments were not required to be made under the Industrial Disputes Act or any other law. Therefore, Section 40A(9) was not applicable, and the expenses should be allowed under Section 37(1). The concurrent views of the CIT(A) and the Tribunal were upheld, and the Court saw no reason to interfere with these findings.

Judgment:

The Court answered both questions of law against the Revenue and in favor of the Assessee. The ITAT was justified in upholding the CIT(A)'s deletion of disallowance under Section 40A(9), and the payments were not required to be made under the Industrial Disputes Act or any other law. The appeals were disposed of accordingly, with no costs.