ITAT Holds Payment to Labour Union for Resolving Labour Issues as Allowable Business Expenditure

The Income Tax Appellate Tribunal (ITAT), Mumbai, offered relief to an assessee company by deleting an addition made by the AO against an expenditure incurred to resolve the labour issues.

The assessee, Alex Grinders Pvt. Ltd, had made a payment of Rs 26,60,000 to Maharashtra Rajya Sramik Mathadi Transport, Suraksha Rakshan Aani General Kamghar Union, to solve labour issues at its Lonavala Factory. There were some constant disruptions of work, due to which the production was affected. The Assessing Officer had disallowed this payment under section 37(1), saying that the payment was not wholly and exclusively for business purposes. The AO also claimed that there was no evidence submitted by the assessee to prove that the payment was made only for the purposes of the assessee’s business.

The assessee approached the CIT(A), which upheld the addition. Therefore, the petitioner filed an appeal before the Income Tax Appellate Tribunal (ITAT), Mumbai.

The assessee submitted a copy of the Memorandum of Settlement under the Industrial Disputes Act, 1947. This settlement involved 26 workers who were union members and agreed to resign with agreed legal dues and ex-gratia payments. The Tribunal agreed with the assessee and concluded that the assessee company had reached a settlement with its workers with the help of the labour union and the amount paid to the labour union for facilitating the settlement is clearly an expenditure incurred wholly and exclusively for the assessee’s business. This means that the said expenditure is allowable under section 37(1) of the Income Tax Act.

Based on these facts, the addition made by AO and sustained by the CIT(A) was deleted, and the AO was ordered to provide the necessary relief to the assessee company.