The Assessing Officer has disallowed our contribution to a local school under s.40A(9) because it is a payment to an institution. Does s.40A(9) really catch staff welfare spending of this kind?
Not on these facts. The Mumbai Tribunal held that payments to local schools near the company's remote generating stations, where the employees' children study, are a staff welfare measure and are deductible, following the jurisdictional Bombay High Court in PCIT v State Bank of India. The disallowance of Rs 38,85,333 under s.40A(9) was deleted.
Decided by the ITAT (M. Balaganesh AM and Ram Lal Negi JM (ITAT Mumbai 'E' Bench)) on 2019-11-29, reported as ITA Nos.3452/Mum/2012 and 3453/Mum/2012, ITA No.5691/Mum/2013, ITA Nos.4058/Mum/2012 and 4070/Mum/2012; assessment years 2006-07 and 2007-08. It bears on section 40A(9), section 37(1) of the Income Tax Act 1961, in Deductions & Disallowances and Assessment & Scrutiny matters.
s.40A(9) is drafted very widely — no deduction for any sum paid as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, registered society or other institution for any purpose, except where the payment is for the purposes and to the extent provided by s.36(1)(iv), (iva) or (v) or as required by any other law. Read literally it catches almost every contribution an employer makes to an outside body, and Assessing Officers use it exactly that way on staff welfare spending. The line this order draws is that a direct payment for the welfare of employees, not a contribution to a fund or trust set up by the employer, does not attract the section. The provision was enacted with s.40A(10) and (11), which are transitional and refer to sums paid before 1 March 1984 — a reminder that the section was aimed at employer-created welfare funds, not at every payment to an institution. Practitioners should note the Tribunal decided this by following a jurisdictional High Court decision rather than by construing the section itself, so the reasoning available to a bench outside Bombay is thinner.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee made payments to local schools in the locality in which its hydro generating stations are situated, and the children of its employees studied in those schools. Because the units were in a remote location and the employees had to be stationed there with their families, the assessee took up what the Tribunal described as the moral responsibility of contributing to the schools in that locality so that the employees' children could study. The Assessing Officer applied s.40A(9) and disallowed Rs 38,85,333. The disallowance was carried in the assessee's appeal as grounds 4(a) and 4(b).
The assessee is entitled to the deduction of Rs 38,85,333 in respect of payments made to schools in which children of the employees of the assessee are studying, among others, and grounds 4(a) and 4(b) were allowed (para 6.2).
The Tribunal found on the undisputed facts that the payments were made to local schools serving the children of employees stationed at remote hydro generating stations, and characterised the expenditure as more of a staff welfare measure contributed by the assessee than a contribution of the kind s.40A(9) is aimed at (para 6.1). It then noted that the issue had been considered by the jurisdictional Bombay High Court in PCIT v. State Bank of India (109 Taxmann.com 11, dated 18 June 2019) and, respectfully following that decision, held the deduction allowable (paras 6.1 and 6.2).
So this is more of staff welfare measure contributed by the assessee.
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Handle my notice → Ask a CA on WhatsAppNot on these facts. The Mumbai Tribunal held that payments to local schools near the company's remote generating stations, where the employees' children study, are a staff welfare measure and are deductible, following the jurisdictional Bombay High Court in PCIT v State Bank of India. The disallowance of Rs 38,85,333 under s.40A(9) was deleted. This was decided by the ITAT (M. Balaganesh AM and Ram Lal Negi JM (ITAT Mumbai 'E' Bench)) and bears on section 40A(9), section 37(1) of the Income Tax Act 1961. It is reported as ITA Nos.3452/Mum/2012 and 3453/Mum/2012, ITA No.5691/Mum/2013, ITA Nos.4058/Mum/2012 and 4070/Mum/2012; assessment years 2006-07 and 2007-08. s.40A(9) is drafted very widely — no deduction for any sum paid as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, registered society or other institution for any purpose, except where the payment is for the purposes and to the extent provided by s.36(1)(iv), (iva) or (v) or as required by any other law. Read literally it catches almost every contribution an employer makes to an outside body, and Assessing Officers use it exactly that way on staff welfare spending. The line this order draws is that a direct payment for the welfare of employees, not a contribution to a fund or trust set up by the employer, does not attract the section. The provision was enacted with s.40A(10) and (11), which are transitional and refer to sums paid before 1 March 1984 — a reminder that the section was aimed at employer-created welfare funds, not at every payment to an institution. Practitioners should note the Tribunal decided this by following a jurisdictional High Court decision rather than by construing the section itself, so the reasoning available to a bench outside Bombay is thinner. If it applies to you, the first step is this: Characterise the payment precisely: a contribution to a fund, trust or society formed or set up by the employer is the target of s.40A(9); a direct payment to an unconnected institution for the benefit of employees is not, on this reasoning.
The assessee made payments to local schools in the locality in which its hydro generating stations are situated, and the children of its employees studied in those schools. Because the units were in a remote location and the employees had to be stationed there with their families, the assessee took up what the Tribunal described as the moral responsibility of contributing to the schools in that locality so that the employees' children could study. The Assessing Officer applied s.40A(9) and disallowed Rs 38,85,333. The disallowance was carried in the assessee's appeal as grounds 4(a) and 4(b). The matter was decided on 2019-11-29 by the ITAT (M. Balaganesh AM and Ram Lal Negi JM (ITAT Mumbai 'E' Bench)). On those facts the ITAT held as follows. The assessee is entitled to the deduction of Rs 38,85,333 in respect of payments made to schools in which children of the employees of the assessee are studying, among others, and grounds 4(a) and 4(b) were allowed (para 6.2).
The Tribunal found on the undisputed facts that the payments were made to local schools serving the children of employees stationed at remote hydro generating stations, and characterised the expenditure as more of a staff welfare measure contributed by the assessee than a contribution of the kind s.40A(9) is aimed at (para 6.1). It then noted that the issue had been considered by the jurisdictional Bombay High Court in PCIT v. State Bank of India (109 Taxmann.com 11, dated 18 June 2019) and, respectfully following that decision, held the deduction allowable (paras 6.1 and 6.2). In the words reproduced by the source cited on this page: "So this is more of staff welfare measure contributed by the assessee." The decision followed or applied PCIT v. State Bank of India (109 Taxmann.com 11), Bombay High Court, dated 18 June 2019 — followed.
It was decided by the ITAT on 2019-11-29 and is reported as ITA Nos.3452/Mum/2012 and 3453/Mum/2012, ITA No.5691/Mum/2013, ITA Nos.4058/Mum/2012 and 4070/Mum/2012; assessment years 2006-07 and 2007-08. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 40A(9), section 37(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The assessee is entitled to the deduction of Rs 38,85,333 in respect of payments made to schools in which children of the employees of the assessee are studying, among others, and grounds 4(a) and 4(b) were allowed (para 6.2). It arises in Deductions & Disallowances and Assessment & Scrutiny matters, on section 40A(9), section 37(1) of the Income Tax Act 1961, and was decided by M. Balaganesh AM and Ram Lal Negi JM (ITAT Mumbai 'E' Bench). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Document the employee nexus — who benefits, how many, why the expenditure was necessary (here, a remote generating station where employees had to be stationed with their families). Where the payment IS to an employer-created fund, check whether it is a contribution to a recognised provident fund or approved superannuation fund under s.36(1)(iv), a pension scheme under s.36(1)(iva), or an approved gratuity fund under s.36(1)(v), or is required by or under any other law — those are the only exceptions in the sub-section. If the payment is to a gratuity fund, deal with s.40A(7) separately: it bars a deduction for a provision for gratuity except a contribution to an approved gratuity fund or gratuity that has become payable during the year. Take the s.37(1) argument in the alternative on the same facts, since s.40A(9) is a disabling provision and the expenditure must still independently be wholly and exclusively for the business.
Validity check could not be completed. Later treatment was NOT checked. The Tribunal decided the point by following a Bombay High Court decision whose reasoning I could not read, so the strength of the underlying authority has not been verified independently. A separate Mumbai Tribunal order in Industrial Development Bank of India v. DCIT (ITA Nos.3371/Mum/2004 and others, pronounced 2 January 2020) reaches the same result on contributions to a Voluntary Health Scheme Fund, Disability Assistance Fund, Staff Welfare Fund and Dr Ambedkar B.C. Fund, setting aside the CIT(A) and directing the Assessing Officer to allow the expenditure; that order was read only in the paragraphs dealing with s.40A(9). No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The order deals with many grounds across five appeals; only the s.40A(9) ground is covered here. Paragraph 6.1 sets out the facts and then reproduces the Bombay High Court's decision in PCIT v. State Bank of India, reported at 109 Taxmann.com 11, dated 18 June 2019; the reproduced passage from that judgment was NOT transcribed by the fetch and has NOT been read, so the High Court's reasoning is not stated here — the Tribunal's own conclusion at para 6.2 is. The Tribunal's own paragraphs on this ground are 6, 6.1 and 6.2; the surrounding paragraph numbering of the whole order was not established, and no paragraph number outside 6 to 6.2 is cited. The citation '109 Taxmann.com 11' is reproduced only as a neutral reference string appearing inside the Tribunal's order. The full text of s.40A(7) to (11) was separately read on the Department's page at incometaxindia.gov.in/w/section-40a-63, which reports the Act as the Income-tax Act 1961, the heading as 'Expenses or payments not deductible in certain circumstances' and a 'Year: 2026' stamp. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The assessee is entitled to the deduction of Rs 38,85,333 in respect of payments made to schools in which children of the employees of the assessee are studying, among others, and grounds 4(a) and 4(b) were allowed (para 6.2).
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