Contribution For Community Services By Employer Under MOU With Workers Union Is Business Expenditure : Bombay HC

The High Court held so while deciding on the taxability of the contribution made by the employer/assessee (Tata Engineering & Locomotive) to its workers union under a memorandum of settlement.

Section 37 of Income tax Act states that any business expenditure, excluding capital expenditure and the individual's personal expenses, that is spent or set out solely and entirely for the business's operations shall be applicable for deduction.

The Division Bench of Justice G S Kulkarni and Justice Somasekhar Sundaresan observed that “merely because commitment to continue welfare measures is recited in Memorandum of Settlement (MoS) with Workmen's Union, payments would not partake character of payments made under MoS or payment required to be made under labour law, or for that matter, payment that is made "as an employer". (Para 11)

Facts of the case:

The Assessee had made payments envisaged under a Memorandum of Settlement between the Assessee and the trade union of the workers employed by the Assessee. The expenses were primarily defended as being revenue expenditure as expenses towards development and welfare of the local population in the vicinity of the factory with benefits flowing the business. As per the Assessee, it had been expending various amounts towards "Community Services" and "Social Welfare" and this was recited in the Memorandum of Settlement, with a statement that such measures would continue.

However, owing to the linkage of the expenses with the settlement entered into with the Workmen's Union, the AO opined that Section 40A(9) would disallow deduction of such expenditure in the computation of income under the Act. However, both, the Commissioner of Income-tax(A) and the Tribunal have returned concurrent findings that these expenses do not fall within the jurisdiction of Section 40A(9) and that they ought to be allowed u/s 37(1) of the Act.

Observations of the High Court:

The Bench found 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", and 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.

The Bench noted that the expenditure on community services and social welfare, in the context of the Assessee's business in that region, was being undertaken even before the execution of the Memorandum of Settlement, and the document merely recited that the Company would continue to spend on such measures.

However, the expenses were not aimed at employee welfare alone but formed part of the Company making its presence felt by discharging a wider range of social responsibilities in the area of its operation, added the Bench.

The Bench also found from a plain reading of the Section 40A(9) that the subject matter of what is positively disallowed under the provision is payments made by an assessee "as an employer", and the payments that are disallowed u/s 40A are payments made towards setting up, forming or contributing to any fund, trust, company, association of persons, body of individuals, society or other institution for any purpose, but in every case, in the 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, added the Bench.

The Bench observed that both CIT(A) and the ITAT 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 the instant case too, “the payments made by the Assessee were for public causes in the locality of the business operations and benefits flowed from it to the business of the Assessee. 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 Assessee and the business of the Assessee”, added the Bench.

Finding that the social welfare and community expenses had benefited Assessee's conduct of business, and merely because such expenditure finds a place in the Memorandum of Settlement, the High Court observed that 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 High Court refused to interfere with the concurrent views expressed by the CIT(A) and the Tribunal, and dismissed Revenue's appeal.

Counsel for Revenue/ Appellant: Advocates Suresh Kumar and Samiksha Kanani

Counsel for Assessee/ Respondent: Advocate Srihari Iyer

Case Title: CIT vs. Tata Engineering & Locomotive

Case Number: ITA No. 321 of 2008

Citation :2024 LiveLaw (Bom) 423

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