Section 40A (9) of Income Tax Act 1961: Disallowance of Contribution

Section 40A(9)  of the Income Tax Act 1961:-

No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) [or clause (iva)] or clause (v) of sub-section (1) of section 36, or as required by or under any other law for the time being in force.

Question : Does the Provision for Retirement benefit is eligible for deduction under Income Tax Act 1961 ?

Answer:  No

Commissioner of Income Tax, Coimbatore Vs. M/s. Pricol Ltd., Tax Case (Appeal) No. 343 of 2007, Date of Order: 01.04.2014, High Court of Madras

Provision for retirement benefit created on the basis of service weight age of an employee couldn't be allowed to be deducted as it was just a provision and could not be termed as gratuity fund or any other welfare fund under section 40A(9).

In a case the scheme is not a recognised one, but one reached as per the agreement between the parties. It is not denied by the assessee that a provision was made in the accounts as regards the gratuity payable based on the service weightage. Being a provision made for payment of gratuity to the employees on the retirement or termination of their employment, the claim stands clearly hit by Section 40A(7)(a).When the question of deductibility is a matter of dispute and being a pure question of law, on the facts found, the Court has the jurisdiction to consider the applicability of section 40A(7) too to the facts of the case. What was created was admittedly only a provision in the books of accounts, hence, not a fund or a contribution to a fund to be considered under Section 40A(9). The only other provision, which would hit the claim of the assessee herein would be section 40A(7). Thus, even though the assessee succeeds on the applicability of section 40A (9), the case of the assessee fails in view of section 40A(7).

Question : Does the Contribution made to Employees Welfare Co-op. Society are not hit by the provisions of Section 40A(9) and hence the deduction should be allowed for such contribution?

Answer No As per Instruction: No. 1799, dated 3-10-1988.

Instances have come to the notice of the Board, where Assessing Officers have allowed deduction in respect of contributions made to Employees’ Welfare Co-operative Society at the time of making assessment of the employer company. The deduction was allowed on the presumption that contribution to Employees’ Welfare Co-operative Society are not hit by the provisions of section 40A(9). The Board is of the view that the phrases “Association of persons” and “Body of individuals” appearing in section 40A(9) are wide enough to include an Employees’ Welfare Co-operative Society. Therefore, any contribution made to such Employees’ Welfare Society should not be allowed as a deduction in the case of the employer company in view of section 40A(9), unless such contribution is required by or under any other law for the time being in force. In respect of completed assessments, wherever possible, remedial action should be taken to withdraw the deduction already allowed in respect of such contributions.

Question : If the Empoyer Contribute towards the pension Scheme does this contribution qualify for deduction  and will not be hit by the provisions of Section 40(A)(9)?

Answer:  yes . As per Section 36(1)(iva) Deduction shall be allowed of any sum paid by the assessee as an employer by way of contribution towards a pension scheme, as referred to in section 80CCD, on account of an employee to the extent it does not exceed ten per cent of the salary of the employee in the previous year.

Explanation.—For the purposes of this clause, “salary” includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites;]

Question: Whether contribution made by assessee/employer towards benevolent fund created in favour of employee is entitled to deduction under section 40A(9) though there is no compulsion under any other law for making such a contribution?

Answer : Yes, [2014] 43 taxmann.com 324 (Karnataka) HIGH COURT OF KARNATAKA Commissioner of Income-tax, Central Circle v. Motor Industries Co. Ltd.  IT APPEAL NO. 756 OF 2007 , FEBRUARY  14, 2014 

Contribution made by assessee as an employer, towards Karmchari Welfare Funds falls within expression 'as required by or under any other law' for purpose of section 40A(9) and, therefore, such contribution is deductible as business expenditure [2013] 38 taxmann.com 328 (Pune - Trib.) IN THE ITAT PUNE BENCH 'B' Maharashtra State Warehousing Corporation v. Deputy Commissioner of Income-tax

Question : Can the donation given by assessee employer  (Which was wholly and exclusively for welfare of its employees) be disallowed under Section 40A(9) ?

Answer No the Donation can not be disallowed.  Section 40A(9) of the Income-tax Act, 1961 - Business disallowance - Contribution to employees welfare trust, etc. - Assessment year 1986-87 - Assessee made donation for providing financial assistance to education society for setting up a technical wing in its school on a condition that society would not charge admission fees or donation from children of employees of assessee - Assessing Officer disallowed deduction of donation made to education society holding it as a contribution contemplated by section 40A(9) - Whether since apart from giving donation, assessee had no connection with Society, donation given by assessee was wholly and exclusively for welfare of its employees and also for carrying on business of assessee more efficiently by having contended labour force - Held, yes - Whether thus donation was not covered under section 40A(9) - Held, yes , [In favour of assessee]

 [2014] 41 taxmann.com 190 (Karnataka) HIGH COURT OF KARNATAKA Commissioner of Income-tax, Central Circle v. Wipro Ltd.

Question : Due to some dispute with the employees the Assessee paid the bonus to Employees bonus trust instead to Employees to comply with the provisions of Section 43B (Payment of expenses before due date of filing the return to claim the deduction) . Can this contribution of bonus to trust be disallowed under Section 40(A) (9) ?

Answer , Yes, Section 40A(9), read with section 43B, of the Income-tax Act, 1961 - Business disallowance - Contribution to employees’ welfare trust, etc. - Assessment years 1999-2000 and 2001-02 - Whether section 40A(9) is an overriding section to section 43B - Held, yes - Whether payment of bonus payable to employees to an employees bonus trust would be hit by section 40A(9) even if such payment was made to comply with provisions of section 43B - Held, yes [2011] 199 TAXMAN 107 (Mad.) HIGH COURT OF MADRAS Commissioner of Income-tax , Chennai v. Shasun Chemicals & Drugs Ltd.