2024 (12) TMI 1600 - AT - Income Tax

Deduction u/s 80G towards donations made to Reliance Foundation - voluntary donation eligible for deduction u/s 80G - whether CSR spend being claimed as a deduction u/s 80G is against the intention of the legislature which restricts the same to be claimed as a deduction u/s 37 - argument of the revenue is that the payment are made to comply with the mandate under the Companies Act and therefore it cannot be treated as donations which are voluntary payments HELD THAT - The word donation has not been defined under the Act. However the Hon ble Supreme Court in the context of Expenditure Tax Act in the case of P.V.G. Raju 1975 (9) TMI 53 - SUPREME COURT has described the meaning of the word donation . Only contention of the revenue is that the contributions are made as part of a mandate and not voluntary - Hon ble Supreme Court in the above case has laid down the basic principle that a payment made without any material return and without any consideration and not for quid pro quo is a donation. Therefore in our considered view the payment made whether voluntarily or as part of a mandate does not negate the intention of the contribution made. The reliance placed by the ld DR on the decision of Agilent Technologies (International) Pvt. Ltd 2023 (12) TMI 1090 - ITAT DELHI is factually distinguishable. Now coming to the intention of legislature while amending the provisions of section 37 whereby the CSR spend are not allowed to be claimed as a deduction under the said section. Finance (No. 2) Act 2014 brought in the amendment to section 37 by inserting Explanation 2 to the said section w.e.f. 01.04.2015. The intention of the legislature is not to restrict the right of the assessee to claim deduction towards the CSR spend if the payment is otherwise allowable under a specific provision of the Act. Further wherever the intention is to restrict the claim of deduction under any other provisions of the Act the same is explicitly provided for to that effect by the legislature. This view is supported by the Explanatory Memorandum Finance Bill 2015 which brought in the specific restriction for claiming deduction under section 80G of the Act towards the CSR spend towards donation to Swachh Bharat Kosh and Clean Ganga Fund. Therefore we are unable to appreciate the contention that the CSR spend being claimed as a deduction under section 80G of the Act is against the intention of the legislature which restricts the same to be claimed as a deduction under section 37 of the Act. Whether the impugned payments are otherwise eligible for deduction u/s 80G? - It is relevant to note that though there is a statutory obligation of CSR expenditure under section 135 of Companies Act 2013 there are many prescribed modes and activities under Schedule VII of the Companies Act for spending the CSR expenditure (the list is not exhaustive but inclusive). Further neither section 135 of the Companies Act nor Schedule VII to the Companies Act nor the CSR Rules mandates donations to the institutes/funds prescribed under section 80G of the Act. Therefore in our considered view there is merit in the submission of the ld. AR that though the quantum of CSR spend is mandatory there is no mandate on how amount is to be spent or to whom the contribution is to be made. From the perusal of CSR Rules as applicable in assessee s case we notice that the monitoring of the CSR spend is to ensure that the same is as per the CSR policy of the company and it does not provide for monitoring the utilization of the funds by the third party donees. In any case the donations made for a specific cause does not result denial of deduction which is otherwise allowable as per the provisions of section 80G of the Act. Provisions of section 37 computation provision whereas section 80G is a beneficial provision which allows deduction towards payments made by the assessee for charitable purposes and therefore these two sections are independent of each other. Let us assume a situation when a company which is not required to comply with the provisions of section 135 of the Companies Act 2013 makes a donation or a company makes donations in excess of 2% even then the payment may get disallowed under section 37 but in that case the revenue would not impose any restriction to evaluate the payment for claiming deduction under section 80G. If the same analogy is applied to the CSR spend in our view the assessee should be able to claim deduction under section 80G if the other conditions are fulfilled. Denying the claim for the reason that there is a specific mention under section 37 for disallowance and that the payments are made in compliance with section 135 of the Companies Act in our view is not legally tenable unless there is an explicit provision for e.g. contributions towards Swacha Bharat Kosh and Clean Ganga Fund . We are of the view that there is no infirmity in the order of the CIT (A) in allowing the deduction under section 80G to the assessee towards donations made to M/s. Reliance Foundation and M/s. Shyam Kothari Foundation by placing reliance on the decision of the coordinate bench in the case of M/s. Naik Seafoods Pvt Ltd 2021 (11) TMI 1168 - ITAT MUMBAI - Decided in favour of assessee. Disallowance u/s 14A r.w.r 8D - assessee submitted that during the year under consideration the assessee has not earned any exempt income and therefore the provisions of section 14A cannot be invoked - AO held that the amendment to section 14 by Finance Act 2022 is clarificatory having retrospective impact thus made addition - CIT(A) deleted addition - HELD THAT - The Hon ble Delhi High Court in the case of M/s Era Infrastructure India Ltd 2022 (7) TMI 1093 - DELHI HIGH COURT has held that the amendment to section 14A is prospective to be applicable from AY 2022-23 and onwards. Considering the judicial precedence we are of the view that the CIT (A) has correctly deleted the disallowance made by the AO u/s 14A. Decided in favour of Assessee.

Summary

The core legal questions considered by the Appellate Tribunal (AT) in these appeals pertain primarily to the allowability of deductions claimed by the assessee under section 80G of the Income Tax Act, 1961 (the Act) in respect of Corporate Social Responsibility (CSR) spending mandated under section 135 of the Companies Act, 2013. Additionally, the Tribunal examined the validity of disallowances made under section 14A of the Act concerning expenditure incurred to earn exempt income. The key issues are:

1. Whether CSR expenditure mandated under the Companies Act, 2013 qualifies as a "donation" eligible for deduction under section 80G of the Income Tax Act, despite the statutory obligation and the amendment to section 37(1) of the Act disallowing CSR expenditure as a business expense.

2. Whether the deduction under section 80G requires the contribution to be voluntary and not mandatory, and if mandatory CSR spending can be considered a donation for the purposes of section 80G.

3. The legislative intent behind the amendment to section 37(1) of the Act, which disallows CSR expenditure as a deduction under business income computation, and whether this amendment implicitly bars deduction under section 80G.

4. Whether the disallowance under section 14A read with Rule 8D of the Act, relating to expenditure incurred to earn exempt income, is justified in the facts of the case.

5. Applicability of judicial precedents and circulars issued by the Ministry of Corporate Affairs (MCA) and the Central Board of Direct Taxes (CBDT) relating to CSR expenditure and deductions under the Income Tax Act.

Issue-wise Detailed Analysis:

1. Allowability of Deduction under Section 80G for CSR Expenditure

Legal Framework and Precedents: Section 80G of the Income Tax Act provides for deduction of donations made to certain funds or charitable institutions. Section 37(1) allows deduction of business expenditure, but Explanation 2 to section 37(1), inserted by the Finance Act, 2014, specifically disallows CSR expenditure as a business expense. The Companies Act, 2013 mandates CSR spending under section 135. The Supreme Court's decision in Commissioner of Expenditure Tax vs. PVG Raju (1975) 101 ITR 465 (SC) defines "donation" as a transfer of money without material return or quid pro quo.

Court's Interpretation and Reasoning: The Tribunal examined whether CSR expenditure, though mandatory, constitutes a "donation" under section 80G. It held that the statutory mandate to spend on CSR does not negate the voluntary nature of the donation for the purposes of section 80G. The Supreme Court's definition was applied to find that a payment without material return or consideration qualifies as a donation, regardless of whether it is mandated by law.

Key Evidence and Findings: The assessee made donations to entities registered under section 80G, such as Reliance Foundation and Shyam Kothari Foundation. There was no evidence or contention that the assessee received any material benefit in return for these contributions. The Revenue's argument rested solely on the mandatory nature of CSR spending and the legislative intent to disallow CSR expenditure as a business expense.

Application of Law to Facts and Treatment of Competing Arguments: The Tribunal distinguished the facts from the decision in Agilent Technologies (International) Pvt. Ltd., where payments were held not to be donations due to quid pro quo arrangements. Here, no such quid pro quo existed. The Tribunal also noted that the legislative amendment to section 37(1) was to prevent CSR expenditure from being claimed as a business expense, not to restrict deductions under other provisions such as section 80G.

Conclusion: CSR expenditure can qualify as donations under section 80G, provided other conditions of section 80G are fulfilled. The mandatory nature of CSR spending does not preclude the claim of deduction under section 80G.

2. Legislative Intent Behind Amendment to Section 37(1) and Its Impact on Section 80G Deductions

Legal Framework and Precedents: Explanation 2 to section 37(1) disallows CSR expenditure as a deduction under business income computation. The Finance (No. 2) Act, 2014, and the Explanatory Notes issued by CBDT clarify that CSR expenditure is not incurred wholly and exclusively for business purposes and hence not deductible under section 37(1). However, the Notes also clarify that CSR expenditure eligible under other sections (e.g., sections 30 to 36) may still be allowed.

Court's Interpretation and Reasoning: The Tribunal emphasized that section 37(1) and section 80G operate independently. Section 37 deals with business income computation, while section 80G provides a beneficial deduction from gross total income. The legislature explicitly restricted CSR expenditure under section 37 but did not impose a blanket bar on all deductions related to CSR under other provisions. The Tribunal also noted that specific restrictions on section 80G deductions for CSR donations are explicitly mentioned only for certain funds like Swachh Bharat Kosh and Clean Ganga Fund.

Key Evidence and Findings: The Tribunal relied on the CBDT Circular No. 01/2015 explaining the amendment and the FAQs issued by MCA clarifying that no specific tax exemptions have been extended to CSR expenditure per se, but donations qualifying under sections like 80G continue to enjoy deductions.

Application of Law to Facts and Treatment of Competing Arguments: The Revenue argued that allowing deduction under section 80G defeats the purpose of the amendment to section 37. The Tribunal rejected this contention, observing that if the legislature intended to bar section 80G deductions for CSR spending, it would have explicitly done so, as it did for certain funds. The Tribunal further noted that the assessee disallowed the CSR expenditure under section 37, thereby correctly reflecting the business income, and claimed deduction under section 80G separately.

Conclusion: The amendment to section 37(1) does not preclude deduction under section 80G for CSR donations. Both provisions are independent, and the legislature's intent was to restrict only the business expense deduction under section 37.

3. Voluntariness of Donations under Section 80G

Legal Framework and Precedents: Section 80G does not explicitly require donations to be voluntary. The Supreme Court in PVG Raju clarified that voluntariness is not a prerequisite if there is no quid pro quo or material return.

Court's Interpretation and Reasoning: The Tribunal held that the mandatory nature of CSR spending does not negate the voluntary character of donations for section 80G purposes. The assessee's choice to donate to particular section 80G registered entities was voluntary within the permissible modes under CSR rules.

Key Evidence and Findings: The Tribunal noted that neither the Companies Act nor CSR rules mandate donations to specific entities registered under section 80G. The assessee exercised discretion in selecting donees, and the donations were made without conditions or material returns.

Application of Law to Facts and Treatment of Competing Arguments: The Revenue argued that CSR spending is controlled by the company's board and hence not voluntary. The Tribunal distinguished this from the nature of donation, emphasizing that monitoring of CSR spend by the board does not affect the voluntary nature of the contribution to the donee. The Tribunal also relied on judicial decisions supporting this view.

Conclusion: The absence of a requirement of voluntariness under section 80G and the lack of quid pro quo establish that CSR donations can qualify for deduction under section 80G.

4. Disallowance under Section 14A r.w.r Rule 8D

Legal Framework and Precedents: Section 14A disallows expenditure incurred to earn exempt income. The Finance Act, 2022 amended section 14A with retrospective effect, but the Delhi High Court in Principal Commissioner of Income-Tax (Central) -2 vs. M/s Era Infrastructure India Ltd held the amendment to be prospective from AY 2022-23.

Court's Interpretation and Reasoning: The Tribunal followed the judicial precedent holding that the amendment is prospective and not applicable retrospectively. Since the assessee did not earn exempt income during the year, section 14A disallowance was not justified.

Key Evidence and Findings: The assessee's submission that no exempt income was earned was accepted, and the CIT(A) rightly deleted the disallowance.

Application of Law to Facts and Treatment of Competing Arguments: The Revenue's argument based on retrospective amendment was rejected in view of binding judicial decisions.

Conclusion: Disallowance under section 14A was rightly deleted by CIT(A), and the Revenue's appeal on this ground was dismissed.

5. Applicability of Precedents and Circulars

The Tribunal relied on the coordinate bench decision in M/s Naik Seafoods Pvt Ltd vs. Pr.CIT, which allowed deduction under section 80G for CSR donations. The Tribunal also considered the CBDT circulars and MCA FAQs, which clarified that CSR expenditure is not deductible under section 37 but may qualify for deduction under other provisions, including section 80G, if conditions are met. The decision in Agilent Technologies (International) Pvt. Ltd was distinguished on facts, and the decision of Blue Dart Express Ltd was cited to reinforce the independence of sections 37 and 80G.

Significant Holdings:

"When a person gives money to another without any material return, he donates that sum. An act by which the owner of a thing voluntarily transfers the title and possession of the same from himself to another, without any consideration, is a donation... Wholly motiveless donation is rare, but material return alone negates a gift or donation." (Supreme Court, PVG Raju)

"Section 37(1) and Section 80G of the Act are independent and the principles governing what is not allowable u/s. 37(1) have been provided in the section itself... Denying the claim for the reason that there is a specific mention under section 37 for disallowance and that the payments are made in compliance with section 135 of the Companies Act is not legally tenable unless there is an explicit provision." (Tribunal)

"There is no precondition that claim for deduction u/s. 80G on a donation should be voluntary. It is independent of computation of business income as it is allowed from Gross Total Income." (Tribunal, relying on Blue Dart Express Ltd)

"Though the quantum of CSR spend is mandatory, there is no mandate on how amount is to be spent or to whom the contribution is to be made... the act of the assessee to choose donees which are eligible under section 80G is voluntary and not mandated by section 135 of the Companies Act." (Tribunal)

The Tribunal finally held that the assessee is entitled to claim deduction under section 80G for donations made to entities registered under that section, even if the donations form part of CSR expenditure mandated under the Companies Act. The disallowance under section 14A was also rightly deleted. Consequently, the appeals of the Revenue for assessment years 2018-19 and 2020-21 were dismissed.