2024 (8) TMI 433

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....ppellant-Revenue in respect of the other four assessment years 1983-84, 1984-85, 1986-87 and 1990-91 came to be withdrawn on the premise of the tax effect being below the thresholds stipulated for continuing with litigation. 3. The two Appeals that are being disposed of by this judgement involve identical questions of law. The amount of disallowance of expenditure involved in the two relevant assessment years, marginally varies. 4. By an order dated 16 October, 2008 passed by this Court in Income Tax Appeal No. 321 of 2008 and by an order dated 17 March, 2008, Income Tax Appeal (L.) No. 720 of 2006 (Registered No. 2070 of 2009, the Appeals were admitted on common questions of law. For convenience, the questions of law in Appeal No. 321 of 2008 are extracted below: "(A) Whether the ITAT was justified in law in upholding the action of the CIT(A) in deleting the disallowance of Rs. 1,96,71,842/- made under section 40A (9) of the Act ? (B) Whether a payment made under a memorandum of settlement under the Industrial Disputes Act can be said to be a payment required by or under any law ?" [Emphasis Supplied] 5. The short point that arises for considera....

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....at such expenditure should be allowed as revenue expenditure. Apart from these submissions the Respondent-Assessee also claimed that such expenditure, having been envisaged in the Memorandum of Settlement entered into with the Workmen's Union of the employees, the expenditure could also be defended as payments made under the law in terms of the settlement reached with the employees. Towards this end, the following extracts from the Memorandum of Settlement are relevant and set out below:- 9.17 COMMUNITY SERVICES/SOCIAL WELFARE 9.17.1 The Company shall continue to discharge its social responsibilities for the development and welfare of the population residing in the Telco Township and the adjoining bustees. It shall continue to render assistance in providing facilities such as roads, drinking water, improved sanitation, maintenance and extension of school buildings etc. in the bustees mainly inhabited by the Company's workmen. 9.17.2 The Company shall continue to extend financial grants to -- 9.17.2.1 GRAM VIKAS KENDRA, JAMSHEDPUR, for planning and execution of development programmes (agriculture, irrigation, health services, primary education, skill training, rural indu....

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....he Tribunal have returned concurrent findings to state the nature of these expenses do not fall within the jurisdiction of Section 40A (9) and that they ought to be allowed under Section 37 (1) of the Act. 9. It would be seen from Paragraph 9.17 from the Memorandum of Settlement, that the very heading of the recitals of the local welfare measures was that of "community services" and "social welfare". Such expenses were already being incurred and the Memorandum of Settlement recorded that it would continue to be incurred. It will be seen from Paragraph 9.17.2.1 of the Memorandum of Settlement, that the expenditure under that head, was towards planning and execution of agriculture, irrigation, health services and primary education in forty villages across three administrative blocks in the vicinity of Jamshedpur. Likewise, under Paragraph 9.17.2.2, it is apparent that expenditure would cover laproscopic operation for women from rural areas and non-employees' families. Similarly, one of the heads of expenditure was towards leprosy patients' settlements in the vicinity and for conduct of education programmes in the city to increase awareness and to remove social stigma attached to l....

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....ratuity fund. These are specifically legislated as allowable expenses and have therefore been kept out of the mischief of Section 40A (9). Yet, it cannot be overlooked that for any payment to first fall within the mischief of what has to be positively disallowed under Section 40A (9), the payment ought to be have been made by the assessee "as an employer". 12. We are unable to see how the payments under the heads listed in the table extracted earlier in this judgement could be regarded as payments made by the Respondent-Assessee in its exclusive capacity as an employer. 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". 13. Expenditure not covered by Section 30 to Section 36, and expendit....

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.... such a donation. The mere fact that making of a donation for charitable or public cause or in public interest results in the government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under Section 37 (1) of the Act when such payment had been made for the purpose of assessee's business." [Emphasis Supplied] 14. In the instant case too, 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 fal....