By AJAY R. SINGH
Advocate
15. The Pr. CIT-2 vs. M/s State Bank of India
[Income tax Appeal No. 718 of 2017;
Date of order: 18th June,
2019
(Bombay High Court)]
M/s State Bank of India vs. ACIT
Mum., ITAT
Section 40A(9) – Business
disallowance – Contribution to a fund created for the healthcare of the retired
employees – The provision was not meant to hit genuine expenditure by an
employer for the welfare and benefit of the employees
The assessee
claimed deduction of expenditure of Rs. 50 lakhs towards contribution to a fund
created for the healthcare of retired employees. The Revenue contented that
such fund not being one recognised u/s 36(1)(iv) or (v), the claim of
expenditure was hit by the provisions of section 40A(9) of the Income-tax Act.
The CIT(A) upheld the AO’s order.
On appeal, the
Tribunal held that the assessee had made such contribution to the medical
benefit scheme specially envisaged for the retired employees of the bank.
Sub-section (9) of section 40A of the Act, in the opinion of the Tribunal, was
inserted to discourage the practice of creation of bogus funds and not to hit
genuine expenditure for welfare of the employees. The AO had not doubted the bona
fides of the assessee in the creation of the fund and that such fund was
not controlled by the assessee-bank. The Tribunal proceeded on the basis that
the AO and the CIT(A) had not doubted the bona fides in creation of the
trust or that the expenditure was not incurred wholly and exclusively for the
employees. The Tribunal thus allowed the assessee’s appeal on this ground and
deleted the disallowance.
Aggrieved with
the ITAT order, the Revenue filed an appeal in the High Court. The Court held
that sub-section (9) of section 40A disallows deduction of any sum paid by an
assessee as an employer towards setting up of or formation of or contribution
to any fund, trust, company, etc. except where such sum is paid for the
purposes and to the extent provided under clauses (iv) or (iva) or (v) of
sub-section (1) of Section 36, or as required by or under any other law for the
time being in force. It is clear that the case of the assessee does not fall in
any of the above-mentioned clauses of sub-section (1) of section 36. However,
the question remains whether the purpose of inserting sub-section (9) of
section 40A of the Act was to discourage genuine expenditure by an employer for
the welfare activities of the employees. This issue has been examined by the
Court on
multiple occasions.
The very
purpose of insertion of sub-section (9) of section 40A thus was to restrict the
claim of expenditure by the employers towards contribution to funds, trusts,
associations of persons, etc. which was wholly discretionary and did not impose
any restriction or condition for expanding such funds which had possibility of
misdirecting or misuse of such funds, after the employer claimed benefit of
deduction thereof. In plain terms, this provision was not meant to hit genuine
expenditure by an employer for the welfare and the benefit of the employees.
In the case of
Commissioner of Income Tax vs. Bharat Petroleum Corporation Limited (2001) Vol.
252 ITR 43, the Division Bench of this Court considered a similar issue
when the assessee had claimed deduction of contribution towards staff sports
and welfare expenses. The Revenue opposed the claim on the ground that the same
was hit by section 40A(9) of the Act. The High Court had allowed the assessee’s
appeal.
In the case of
Commissioner of Income-tax-LTU vs. Indian Petrochemicals Corporation
Limited (2019) 261 Taxman 251 (Bombay), the Division Bench of the
Bombay High Court considered the case where the assessee-employer had
contributed to various clubs meant for staff and family members and claimed
such expenditure as deduction. Once again the Revenue had resisted the
expenditure by citing section 40A(9) of the Act. The Court had confirmed the
view of the Tribunal and dismissed Revenue’s appeal.
In view of same, the Revenue appeal was dismissed.
