Costs incurred for community services and social welfare in accordance with the settlement with workmen are permissible under Section 37. HC

A court case concerning income tax deductions for social welfare expenses incurred by a company.

The Case

• The assessee (company) made payments towards community services and social welfare in the vicinity of its factory.
• The Income Tax Department disallowed these deductions under Section 40A(9) of the Income Tax Act, 1961.
• This section disallows deductions for payments made by an employer towards setting up or contributing to various funds or institutions.
• The assessee challenged this disallowance, arguing that the payments were for broader social welfare and not exclusively for employees.

The Court's Decision

• The court ruled in favor of the assessee.
• The court held that Section 40A(9) did not apply because the payments were not made by the company in its capacity as an employer.
• The court considered the purpose of the payments: to improve the local ecosystem and enable harmonious business operations.
• The court relied on a Supreme Court judgment (Sri Venkata Sathyanarayana Rice Mill Contractors Co. v. Commissioner of Income Tax) which allowed deduction for contributions to a public welfare fund if connected to the assessee's business.

Income tax Case Law Tata Engineering and Locomotive Co. Ltd.

Citation-2024 TAXONATION 269 (BOMBAY)

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