2023 (2) TMI 1335 - AT - Income Tax

Disallowance on account of expenses on Corporate Social Responsibility - CSR expenses are not incidental to the business are incurred for non-business purpose CSR expenses are application of income are not expenses at all - HELD THAT - Since the CSR expenditure are mandatory for companies incorporated as per the Companies Act 2013 and the expenditure have been incurred by the assessee as envisaged under the Companies Act 2013. So we are of the opinion that it has to be allowed and we take note that the Tribunal in Jindal Power Ltd 2016 (7) TMI 203 - ITAT RAIPUR has already held that the introduction of explanation 2 to sec. 37(1) of the Act w.e.f. from 1st August 2015 cannot be held to be retrospective in operation. Therefore the expenditure incurred by assessee on account of CSR and substantive development expenses as envisaged u/s. 135 of the Companies Act 2013 need to be allowed as deduction. CSR and substantive development expenses which the assessee company was obliged to discharge because it was a statutory obligation upon the assessee company so the deduction should have been allowed as per the law in force for this assessment year and we direct the AO to allow the expenditure. Therefore the appeal of assessee is allowed.

Summary

Issues:
Disallowance of expenses on Corporate Social Responsibility (CSR) and sustainable development under section 37(1) of the Income Tax Act for the assessment year 2013-14.

Analysis:
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) confirming the disallowance of Rs. 3,00,00,000/- for CSR expenses and Rs. 53,64,000/- for sustainable development expenses. The main issue was whether these expenses were allowable deductions under section 37(1) of the Income Tax Act.

During assessment proceedings, the Assessing Officer (AO) observed the expenses debited under CSR and sustainable development heads and questioned the purpose of these expenses. The assessee explained that the CSR fund was earmarked for CSR activities as per government guidelines, and the expenses were incurred in compliance with the guidelines issued by the Department of Public Enterprises, Government of India.

However, the AO disallowed the expenses, stating they were not wholly and exclusively for the business purpose. The Commissioner of Income Tax (Appeals) upheld the AO's decision, leading to the appeal before the Appellate Tribunal.

The Tribunal noted that the genuineness of the expenses was not doubted, but the disallowance was based on the premise that the expenses were not solely for the business purpose. The Tribunal referred to a previous decision where similar expenses were allowed, emphasizing that being a good corporate citizen can benefit the business by creating goodwill in the community.

The Tribunal held that since CSR expenses were mandatory under the Companies Act, 2013, and incurred as per statutory obligations, they should be allowed as deductions. The introduction of Explanation 2 to section 37(1) of the Act was deemed not retrospective in operation, and thus, the expenses were allowed as deductions for the assessment year in question.

Consequently, the Tribunal allowed the appeal of the assessee, directing the AO to allow the CSR and sustainable development expenses as deductions, considering them as statutory obligations and not discretionary expenses.

In conclusion, the Tribunal's decision favored the assessee, allowing the expenses on CSR and sustainable development as deductions for the assessment year 2013-14.