Orissa High Court Allows Expenditure Towards Contribution For Running Of School As Business Expenditure

The Orissa High Court has held that the expenditure towards the contribution for the running of the school is a business expenditure.

The bench of Justice S.K. Panigrahi and Justice G. Satapathy has observed that expenditure towards contribution for the running of the school is an expenditure for the smooth functioning of the business of the assessee and also an expenditure wholly and exclusively for the welfare of the employees of the assessee and, thus, allowable under Section 37(l) as well as Section 40A(10) of the Income Tax Act as business expenditure.

The respondent or assessee is in the business of manufacturing and trading fertilizers.

The assessee raised the issue of whether “school expenses” can be treated as business expenditures.

The issue arose due to the disallowance of Rs. 2,84,34,453 by the AO, which was incurred by the respondent in running a school for the benefit of its employees as an incidental and additional business expenditure under Section 40A(9) of the Income Tax Act, 1961, read with Section 37(1). As the deduction was not allowed by the AO, the respondent felt aggrieved and filed an appeal. The ITAT overturned the ruling of the AO and allowed the deduction.

In allowing the deduction under Section 40A(9) of the IT Act, the ITAT relied on its decision in a similar case involving the respondent for the assessment year 2010–2011. The tribunal held that the amount that was being incurred for education and being paid to DAV School was for the welfare of the staff, which would ultimately result in the smooth functioning of the business. As it was incurred for the purpose, it was an allowable business expenditure. Therefore, the tribunal held in favor of the respondent and allowed the deduction.

The department contended that the running of the school by the DAV School Management is within the premises of the respondent and has no direct nexus with the business. The expenditure incurred was debited to the profit and loss account. Thus, it is not an allowable deduction as per Section 40A(9) and Section 37(1) of the Income Tax Act, 1961.

The assessee contended that the payment to DAV School Management is neither under “setting up” nor under “formation of” nor under “as contribution to” any fund or trust. As a result, it is outside the purview of Section 40A(9) of the Income Tax Act. The running of a school for the benefit and welfare of the staff is a business expenditure. Thus, it is an allowable deduction under Section 40A(10) and Section 37(1).

The court held that somebody other than the assessee who also benefits from or incidentally takes advantage of the provision made should not come in the way of the expenditure being allowed as a deduction under Section 37(1) of the Act. But, nevertheless, it must be an "expenditure" allowable as a deduction under the Income Tax Act.

The court held that the Tribunal is fully justified in allowing the expenditure towards contributions for the running of the school.

Counsel For Appellant: T.K. Satapathy

Counsel For Respondent: P.R. Patro

Case Title: Principal Commissioner of Income Versus Paradeep Phosphates Limited

Case No.: ITA No.1 of 2019 ITA No.3 of 2019 ITA No.4 of 2019 ITA No.42 of 2023

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