2019 (2) TMI 1652 - HC - Income Tax

Bombay High Court affirms Tribunal decision on expenditure for employee education; aligns with Income Tax Act.

The Pr. Commissioner of IncomeTax-14 Versus Indian Oil Corporation Ltd.

The High Court of Bombay upheld the Tribunal's decision regarding the allowability of expenditure incurred by an oil exploration and refining company ... Expenditure incurred by the assessee toward the grant-in-aid to the school/institution - whether allowable u/s 37(1) and the provision of section 40A(9) are not attracted? - HELD THAT:- Assessee had incurred the expenditure in question for providing basic education to the children of the employees. The revenue's objection to such expenditure being allowed in views of Section 40A(9) was overruled by the Tribunal holding that the same was not towards contribution to any fund. Tribunal was of the opinion that the expenditure could be stated to have been incurred for the purpose of business of the assessee. In the process, the Tribunal referred to and relied upon various judgments of the different High Courts touching on similar issue. We notice that in case of P. Balakrishnan, Commissioner of Income Tax Vs. Travancore Cochin Chemicals Ltd. [1999 (10) TMI 33 - KERALA HIGH COURT] had examined whether the amounts spent by the assessee towards contribution to school in which children of the employees were studying, would be hit by Section 40A(9) of the Act and therefore, not allowable as deduction u/s 37. Holding allowability of expenses it was held that the expenditure met by the assessee was wholly and exclusively for the welfare of its employees and also for carrying on the business of the assessee company more efficiently by having a contented labour force. It was neither a donation covered u/s 40A(9) nor of a capital in nature not covered u/s 37(1). Also see CIT Vs. Bharat Petroleum Corporation Limited [2001 (3) TMI 20 - BOMBAY HIGH COURT] - Decided in favour of the assessee and against the Department. Issues:1. Allowability of expenditure incurred by the assessee towards grant-in-aid to school/institution under section 37(1) of the Income Tax Act and applicability of section 40A(9).Analysis:The High Court of Bombay addressed the appeal filed by the Revenue challenging the judgment of the Income Tax Appellate Tribunal (ITAT) regarding the allowability of expenditure incurred by the assessee towards grant-in-aid to school/institution under section 37(1) of the Income Tax Act and the applicability of section 40A(9). The respondent, an oil exploration and refining company, claimed deductions for amounts spent on providing basic education in Kendriya Vidyalaya Schools for employees' children. The Assessing Officer raised concerns under section 40A(9) of the Act. The Tribunal allowed the appeal, citing the expenditure as allowable under section 37(1) and not hit by section 40A(9). The High Court noted that the revenue did not appeal the earlier assessment year's judgment, raising questions on the necessity of the present appeal. However, upon independent examination, the Court found the expenditure aimed at providing basic education to employees' children and not a contribution to any fund. Referring to precedents, including the Kerala High Court and Bombay High Court judgments, the Court upheld the Tribunal's decision, emphasizing the expenditure's alignment with business purposes and employee welfare.The Court highlighted the Kerala High Court's decision in a similar case involving contribution to a school for employees' children, where the expenditure was allowed under section 37(1) and not considered capital in nature. Additionally, the Court referred to the Bombay High Court judgment involving an undertaking establishing a club for staff welfare activities, where the expenditure was claimed under section 37(1) despite limitations under section 40A(9). In both cases, the Courts ruled in favor of the assessee, emphasizing the expenditure's direct link to business operations and employee welfare. The High Court found no error in the Tribunal's decision, concluding that no legal question arose, and dismissed the Income Tax Appeal.