Coveted Tax Relief For Covid-Care Policies: An Employers’ Perspective

[Kavya Mathur and Pragya Chandak are law graduates from National Law University, Jodhpur]

The unprecedented Covid-19 health crisis has had a grim impact on all facets of life, including the disruption of business, people’s livelihoods and even the loss of life. While employers are persevering to stay afloat themselves, there is undoubtedly also an element of altruism and sincere concern for the well-being of their employees. 

Borosil and Borosil Renewable were the first in the market to announce a Covid-19 Care Policy for the family members of their deceased employees. As an organization, an arrangement was made to continue providing the salary and other perquisites, which the deceased employee was entitled to, for two years to their family members, along with shouldering the responsibility of educating their children until graduation. Correspondingly, Tata Steel, a part of the Tata Group – known globally for its philanthropy, announced that the company shall be paying the last drawn salary of the deceased employees, to their respective family members, until 60 years of age of the said deceased employee. Along with this, other amenities like housing, medical benefits and education expenses shall also be offered generously by the company. In the wake of this rising open-handed support coming from the employers, other companies such as Bajaj AutoTech MahindraSun PharmaTVS Motors and L&T, have also followed this pursuit and announced suitable policies.

It should be noted that while the companies are sparing no effort in reducing the brunt of these unparalleled circumstances, uncertainty now looms over the income tax implications for such company policies on the company itself. This concern primarily stems from the fact that while diversion of funds towards battling Covid-19 is eligible to be categorised as a ‘corporate social responsibility activity’ under the Companies Act, 2013, rule 2 of the Companies (Corporate Social Responsibility Policy) Rules, 2014 categorically disallows expenses for the benefit of the employees and their families to be classified in a similar manner. The Income Tax Department has neither issued any clarification about the taxability and treatment of such policies nor provided any straight-out exemption to the companies as on date. However, it is inferable that the Government might allow such expenses to be covered within the bounds of section 37 of the Income Tax Act, 1961 (“Act”). 

Accordingly, this post attempts to specifically analyze the tax treatment of Covid-Care policies taken out by various organizations for family members of the deceased employees on the basis of the current legal regime, and whether the same can fall within the contours of section 37. 

Essential Ingredients of Section 37

Section 37 of the Act stipulates that a ‘non-capital expense’, not covered under sections 30-36 of the Act, undertaken ‘wholly for the business’ benefit shall be a deductible expense. It has now become a settled position of law, that an expenditure will be covered under section 37 if the same is:

  1. not already covered under sections 30-36 of the Act;

  2. not capital or personal in nature; and

  3. undertaken exclusively and wholly for the purposes of business/profession (CIT v. Patel Brothers & Co. Ltd., AIR 1995 SC 1829).
It is worthwhile to note here that the courts have not restricted the scope of the terms ‘wholly for the business’ to any mandatory legal or contractual obligation and has also recognized voluntary expenditures within the ambit of this section (CIT, Kerala v. Malayalam Plantations Ltd., (1964) 53 1 TR 140).

The next obvious step is to examine whether the said company policies tick all the above mentioned boxes of section 37. 

Gratuitous amount paid to the family of the deceased employee

In these competing times, where the formula for success of every company is its top level management and employees, corporations have been incurring various expenditures to hire and retain key employees. Sometimes, the companies have also appreciated the loyalty of employees by making ex-gratia payments to the legal heirs of the deceased employees. The courts at various instances have upheld these expenses as deductible expenditures. For instance, in the case of Commissioner of Income Tax v Hindustan Motors (1989 175 ITR 411 Cal), the Calcutta High Court allowed the ex-gratia pension payment to the wife of the deceased employee as deductible under section 37. Similarly, the Bombay High Court in Commissioner of Income Tax v Fairdeal Corporation (1977 108 ITR 280 Bom) acknowledged the ex-gratia payment made to the wife of the deceased ex- managing director of the company as a deductible business expenditure.

Education expenses of the children of the deceased employee

Time and again, employers have taken various steps to ensure that potential employees feel inclined to come aboard and the existing employees are motivated to give their best. While enunciating that the terms ‘for the purpose of the business’ in the said provision do not solely attribute to ‘earning profits’ but also cover any other expenditure incurred voluntarily, various Income Tax Tribunals and High Courts have appreciated the commercial expediency behind employers making expenditures to provide for education of their employees’ children. For instance, in a case before Karnataka High Court (Mysore Kirloskar Ltd. v. CIT, 166 ITR 836 (Kar.)), wherein the employer had established a trust for the sole purpose of contributing towards the education of the children of its employees and ex-employees, the Court held that the amount so invested would qualify as a ‘deductible expenditure’. Similarly, the Bombay High Court in CIT v. Mahindra and Mahindra Limited, (2006) 200 CTR Bom 28, has recognized that the initial contribution made by the employer for operating a school for the children of employees equates to an expenditure incurred for employee welfare.

In CIT v. India Radiators Ltd., 236 ITR 719 (Mad.), where the assessee (the employer) had made a contribution to the panchayat for upgradation of an elementary school wherein the children of the employees would be given a preference in the admission process, the Madras High Court held that such an expenditure can be classified as employee welfare expenditure and, hence, is deductible under section 37. The Court recognized that in modern times the admission process in good academic institutions is a complex process, and the employer by making such a contribution has attempted to reassure the employees that the education of their children is being taken care of. This responsive act of the employer not only caters to the mental satisfaction of the employees, but also boosts the goodwill of the business and, hence, should be recognized as a well-founded deductible business expenditure. 

Payments made towards insurance policy of the family members of deceased employees

While it is not a very common practice that employers finance insurance policies of family members of their employees, it cannot be ruled out that the same would also result in enhanced satisfaction of the employees and, consequently, a more committed workforce. It is for the same reason that the payments made by the employer towards insurance premiums for family members of the employees were identified as deductible business expenditure (Loesche India Pvt. Ltd. V. ACIT (ITAT Delhi), ITAT No, 295/Del/ 2016 decided on August 13, 2018) and is thus qualified as a deduction under section 37(1) of the Act. The legitimacy of the business needs of the assessee, as has been rightly upheld by the Supreme Court in CIT v. Indian Molasses Co. (P.) Ltd., [1970] 78 ITR 474 (SC), must be judged from the point of view of the business, and not from the Income Tax Department’s viewpoint. 


These unprecedented times have forced people to pull out all stops to ensure enough financial security to support themselves and their families, while some big corporations have gone a step ahead and recognized the employees’ needs by extending financial support to the families of deceased employees. Various industry associations likeConfederation of Indian Industry and Bombay Chamber of Commerce and Industry have been demanding tax exemption on such amounts in the hands of both the employer and the families of the deceased employees.

In 1990, the Central Board of Direct Taxes (“CBDT”) had released a circular to exempt a lump sum payment made gratuitously or by way of compensation or otherwise, to the legal heirs of a deceased employee from tax as an ‘income’ under the Act in the hands of the legal heirs of the deceased employee.[1] However, the circular has raised more concerns than providing answers, as only ‘lump-sum’ payments received by the legal heirs were explicitly exempted by the CBDT and there was no clarity on the treatment of assistance received by the heirs on a more periodic basis. To bridge this gap, various adjudicating bodies have held that it is the quality and nature of the payment (Padmraje R. Kadambande v. CIT, 195 ITR 877 SC; P.H. Divecha v. CIT, (1963) 48 ITR 222 (SC)), instead of the periodicity (DCIT v. Laxmi M. Aiyar, (2011) 142 TTJ 780), which should determine its taxability. Even in consonance with the definition of ‘income’ under section 2(24) of the Act, there is no forthright distinction between a lump-sum payment or any other periodic payment. Further, considering the object and purpose of making such payments, it is evident that they do not relate to any ‘business’ done, or to any ‘loss’ or ‘profits’ as commonly understood, and are not even for any compensation for services rendered by the legal heirs (CIT v. Mrs. Jaya Bhaskaran, (1987) 168 ITR 256). Thus, such voluntary compassionate payments, for any length of the period as the employers and the legal heirs in their discretion deem fit, do not bear any ‘revenue’ character and, accordingly, they are ‘capital’ receipts and not assessable to tax (DCIT v. Laxmi M. Aiyar, above). 

The CBDT has stepped up again and renounced similar tax relaxations for the amount granted by the employers in the hands of the legal heir of the deceased employees. Through its circular dated June 25, 2021, the CBDT announced exemptions on the ex-gratia payments received by the legal heirs of the deceased employee from the employers and other persons (to the aggregate of INR 10 lakhs) for the financial year 2019-20 and all the subsequent years. Unlike the previous circular, this circular also clarifies that it covers lump sum payments as well as periodic payments. 

If such a relaxation can be granted by the Government to the legal heirs of the deceased employees, it only makes sense to extend the same to the employers as well. The Covid-19 pandemic has triggered a momentous demand for a kickback on related remedial and restitutive measures. However, in view of the above, if the scheme of taxation available to the corporates continues restricting their compassionate spending, then it merits a reconsideration. This would go a long way in impelling the corporations to broaden their footprint in terms of direct social contribution.

– Kavya Mathur & Pragya Chandak

[1] Income Tax Department, Taxability of lump sum payment made gratuitously or by way of compensation or otherwise to widow/other legal heirs of an employee, Circular No. 573 (Issued on August 21, 1990). 

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