IMPORTANT POINT
Payments made for community welfare, linked to business operations, are allowable as deductions under Section 37(1) and do not fall under the disallowance provisions of Section 40A(9).

JUDGMENT :

SOMASEKHAR SUNDARESAN, J.

1. With the consent of the parties, Income Tax Appeal No. 2070 of 2009 (relating to Assessment Year 1987-88), which is not on Board but involves the very same question of law involved in Income Tax Appeal No. 321 of 2008 (relating to Assessment Year 1988-89), also is taken on Board for hearing and final disposal.

2. Both Appeals are directed against a common order dated 26th October, 2004 (“Impugned Order”) passed by the Income-tax Appellate Tribunal (“Tribunal”). In fact, the Impugned Order relates to the six assessment years between 1983-84 to 1990-91. Appeals filed by the Appellant-Revenue in respect of the other four assessment years 1983-84, 1984-85, 1986-87 and 1990-91 came to be withdrawn on the premise of the tax effect being below the thresholds stipulated for continuing with litigation.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 consideration is whether payments made to various institutions by the Respondent-Assessee under six heads, could have been treated as allowable expenses. The expenditure disallowed was Rs.1,91,18,284/- in respect of AY 1987-88, and Rs. 1,96,71,852/- in respect of AY 1988-89. For felicity, a chart summarizing the payments disallowed across the six assessment years, as set out in the Impugned Order, is extracted below:

6. While the core question was whether the aforesaid payments could be allowed as revenue expenditure under Section 37(1) of the Act, the disallowance canvassed by the Appellant-Revenue is based on the purported applicability of Section 40A(9) of the Act.

7. Upon a careful perusal of the record, it is apparent that Respondent-Assessee had canvassed (among other arguments) that these payments could also be regarded as payments required to be made under law, on the ground that the payments were envisaged under a Memorandum of Settlement dated 31st March, 1986 between the Respondent-Assessee and the trade union, namely, TELCO-Workers’ Union, Jamshedpur (“Workmen’s Union”) of the workers employed by the Respondent-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. Such expenditure was claimed to have helped the Respondent- Assessee getting the benefit of goodwill and local h