Welfare expenses can take the form of direct payment to workers and other employees or it may take the form of expenses which bring benefit to those who are in need, like housing. Instead of owning assets like schools, hospitals or houses, the trend is towards divesting ownership by making a contribution to the government or a local authority, like municipality, on the condition that the amount should be utilised for the purpose of constructing schools, hospitals or houses, which would be used for the benefit of employees.

Therefore, there is a definite link between the expenditure being incurred and benefit for a business purpose. As always in such matters, litigationhas arisen on the question of deductibility of the contribution made to third parties for setting up the educational or medical institutions or for putting up residential complexes for employees. Some of the important decisions are discussed in this article which throw light on the issue of deductibility of the amount contributed.

In CIT vs India Radiators Ltd (236 ITR 719), during the previous year relevant to assessment year 1973-74, the assessee made a contribution of Rs 35,000 to the panchayat, where its factory and its premises were situated. The assessee made the said expenditure for upgrading the elementary school of the panchayat to a high school.

The assessee claimed the contribution made to the panchayat as a revenue expenditure. The income tax officer held that the expenditure was not incurred wholly and exclusively for the assessee's business and that the expenditure could not be regarded as staff welfare expenditure on the basis that the school or the panchayat not only served the wards ofthe employees of the assessee but it was open to the general public as well.

On a reference, the Madras High Court observed that the only question that had to be decided was whether the expenditure was incurred for the purposes of the business of the assessee. The finding of the Appellate Tribunal was that by making the contribution to the panchayat for upgrading the elementary school, the assessee-company was assured by the school that it would give preference to the children of the employees for admission into the school.

By the donation, the assessee's employees were given the satisfaction that their employers had taken full care of the education of their wards and such mental satisfaction of the employees would generate goodwill and the expenditure could be regarded as staff-welfare expenditure and allowable as business expenditure.

The Supreme Court in Sri Venkata Satyanarayana Rice Mill Contractors Co vs CIT (223 ITR 101), has taken the same view. In that case, the Supreme Court held that whereany contribution was made by the assessee to a welfare fund, which was directly connected with the carrying on of the business or which resulted in a benefit to the assessee's business, the expenditure had to be regarded as an allowable deduction under the provisions of section 37 (1) of the Income Tax Act.

The Madras High Court observed that the contribution made by the assessee to the panchayat had resulted in a benefit to the assessee's business in the sense that the assessee's employees were the beneficiaries in getting preferential admission into the school. The fact that the benefit had percolated to the general public, did not stand in the way of the assessee getting the necessary deduction once the expenditure was held to be business expenditure. Hence, the court was of the opinion that the Appellate Tribunal had come to the correct conclusion that the expenditure incurred by the assessee was a revenue expenditure.

It was also held that the contribution made to the panchayat was not incontravention of any law, nor was it opposed to public policy. In this view of the matter, the court concluded that the contribution made by the assessee to the panchayat for the upgradation of the school should be regarded as an allowable business expenditure under the provisions of section 37(1) of the IT Act.

In ITAT vs B Hill and Co (P) Ltd (142 ITR 185), the assessee- company which had set up two schools with a view to provide educational facilities to its labourers and their children made donations to the schools and claimed the same as business expenditure under section 37. The assessee contended that though some of the directors of the assessee-company were on the management of the schools, yet that was for the purposes of facilitating the smooth running of their business. The Tribunal held that though part of the donations were made for the purpose of constructing buildings for the schools, yet by making donations the assessee had not brought into existence any asset of enduring nature.

On areference, the Allahabad High court held that the donations were made the assessee-company in its character as a trader with a view to facilitate the smooth running of its business. The expenditure was incurred to give facilities to the labourers and their children and was motivated by considerations of commercial expediency and was an allowable deduction under section 37.

The income tax officer disallowed the expense on the ground that it was incurred for providing quarters to the assessee's employees and this gave it a perennial advantage. The appellate assistant commissioner was also of the view that the advantage derived was of a permanent character and that it was incurred once and for all and, hence, it was capital in nature.

The high court upheld the finding of the tribunal and held that the expenditure was not of a capital nature and that it was on revenue account as its was incurred on grounds of commercial expediency. The assessee did not have any right or interest in the asset which came intoexistence by incurring the expenditure and, secondly, such expenditure was made in the normal course of business as it was intended to provide a benefit to its workers. In the modern world of changing business operations, such expenditure had to be incurred as a matter of commercial expediency and hence, it had to be allowed as revenue expenditure.

The Orissa High court took the same view in the case of CIT vs Rupsa Rice Mills (104 ITR 249). In this case, the assessee had donated an amount for the construction of a hospital which was in the vicinity of the mill premises of the assessee. The employees of the assessee could, therefore, take advantage of the hospital, and since the assessee was required under the Employee's State Insurance Act to maintain a hospital for its staff, the assessee thought it expedient to donate this amount to the government rather than construct and maintain the hospital itself.

The tribunal held that the amount was deductible as revenue expenditure as it was incurred for agenuine business purpose and that any expenditure which was even remotely related to the business would be deductible if it was necessary for the purpose of carrying on the business.

In CIT vs Hingir Rampur Coal Co Ltd (140 ITR 73), the assessee was a colliery owner who incurred certain expenditure on the construction of 100 tenements for housing its workers under an agreement reached between the assessee-company and the Coal Mines Labour Housing Board, for which the board was to give a certain subsidy. The ownership of the houses vested in the board and the assessee had a 15 year lease on them.

On a reference to the Bombay High court, it was held that the agreement between the assessee and the Coal Mines Labour Housing Board was to remain in force for 15 years only and the assessee would not have any legal right to allot the quarters to its staff beyond this period.

The court held that the expenditure was incurred mainly for the welfare of the employees, and it made no difference whether theexpenditure was incurred on account of a statutory obligation or on a voluntary basis out of the assessee's desire to provide extra facilities to its employees.

It is thus clear that the recent trend of judicial opinion is in favour of taking a broad view of the concept of business expenditure. If an expenditure results in the bringing into existence of a capital asset, this would not result in disallowance where the asset does not belong to the assessee but the use of such asset is meant for business use or employee welfare.

The author is a Supreme Court advocate