ITAT Bangalore Allows Section 80G CSR Deduction, Remands Repairs Claims, Rejects Education Cess

Infinera India Pvt. Ltd. Vs JCIT (ITAT Bangalore)

The assessee challenged the assessment order dated 23.10.2019 passed by the Assessing Officer for assessment year 2015-16 pursuant to directions of the Dispute Resolution Panel. The appeal involved transfer pricing adjustment, disallowance of repairs and maintenance expenditure, deduction under section 80G of the Income-tax Act, 1961, an alternative depreciation claim and deduction of education cess.

The assessee withdrew all grounds relating to transfer pricing adjustment after submitting that a bilateral Advance Pricing Agreement for assessment years 2016-17 to 2020-21, with a rollback option covering assessment years 2014-15 and 2015-16, had dissolved the transfer pricing adjustment for the year under consideration. The Tribunal permitted withdrawal of those grounds and dismissed them as not pressed.

On repairs and maintenance expenditure, the Assessing Officer had initially disallowed 50% of the expenditure as capital in nature. After the assessee furnished details before the DRP, the Assessing Officer accepted Rs.2.28 crores as revenue expenditure and reported Rs.1.40 crores as capital expenditure. The DRP found Rs.64.26 lakhs of the latter amount to be revenue in nature and confirmed disallowance of Rs.75,24,807/-. The Tribunal confirmed the items accepted by the assessee as capital expenditure and restored the remaining 32 items to the Assessing Officer for verification.

On the section 80G claim relating to CSR payments, the Tribunal followed the coordinate Bench decision in Allegis Services India Pvt. Ltd. Vs. ACIT and directed the Assessing Officer to allow deduction under section 80G in respect of contributions made under the CSR scheme after examining whether the payments were eligible under section 80G.

On education cess, the Tribunal followed the Kolkata Bench decision in Kanoria Chemicals & Industries Ltd Vs. Addl. CIT and held that education cess, including secondary and higher education cess, was not allowable as a deduction. The appeal was consequently treated as partly allowed for statistical purposes.

Background and Assessment Proceedings

The assessee is a subsidiary of Infinera Corp. & Infinera International Corporation, U.S. It is registered with the Software Technology Park of India Scheme and provides software development services, including embedded network management, technical documentation, system verification testing and associated hardware design for products conceptualized and developed by Infinera Corporation.

The assessee filed its return of income declaring total income of Rs.27.67 crores. In the draft assessment order, the Assessing Officer determined total income at Rs.47.11 crores. Following the directions of the DRP, total income was determined at Rs.41.99 crores. The assessee thereafter filed the appeal before the Tribunal.

Transfer Pricing Adjustment Withdrawn

The assessee sought permission to withdraw all grounds relating to transfer pricing adjustment in accordance with Rule 10RA of the Income-tax Rules. It submitted that it had entered into a bilateral Advance Pricing Agreement for assessment years 2016-17 to 2020-21 with a rollback option covering assessment years 2014-15 and 2015-16, and that the transfer pricing adjustment for the year under consideration had consequently been dissolved under the APA proceedings.

The Tribunal accepted the request and permitted withdrawal of the transfer pricing grounds. The grounds relating to transfer pricing adjustment were accordingly dismissed as not pressed.

Repairs and Maintenance Expenditure

The assessee had claimed repairs and maintenance expenditure of Rs.3.68 crores. The Assessing Officer, after the assessee did not furnish the requested details during the draft assessment proceedings, disallowed 50% of the expenditure, amounting to Rs.1.84 crores, treating it as capital in nature.

Before the DRP, the assessee furnished the details. The DRP directed the Assessing Officer to examine them and furnish a remand report. In the remand proceedings, the Assessing Officer accepted Rs.2.28 crores under the head “Repairs & Maintenance Expenses” as revenue expenditure and reported the remaining Rs.1.40 crores as capital expenditure.

The DRP further examined the expenditure and found that Rs.64.26 lakhs out of the amount reported as capital expenditure was actually revenue in nature. It therefore confirmed the disallowance of Rs.75,24,807/- as capital expenditure.

Tribunal’s Findings on the Remaining Items

At the hearing, the assessee furnished a statement containing the break-up of Rs.75,24,807/-. The assessee itself accepted 23 items as capital in nature and contended that the remaining 32 items were revenue expenditure. In support of its claim regarding the 32 items, the assessee relied upon the decisions in City Financial, Amway, APL India & Verizon.

The Tribunal confirmed the addition relating to the 23 items which the assessee itself accepted as capital in nature. In respect of the remaining 32 items, the Tribunal held that they required verification by the Assessing Officer in light of the decisions relied upon by the assessee and restored that issue to the Assessing Officer.

Alternative Claim for Depreciation

The assessee had alternatively claimed depreciation on the amount treated as capital expenditure and disallowed from repairs and maintenance expenditure.

The Tribunal held that the alternative claim was in accordance with law and restored the issue to the Assessing Officer with a direction to allow depreciation thereon in accordance with law.

Section 80G Deduction for CSR Contributions

The assessee had incurred expenditure towards corporate social responsibility. It submitted that the payments aggregating to Rs.36,56,801/- had been disallowed while computing income from business, but deduction under section 80G had been claimed to the extent of Rs.21,36,801/-.

The Assessing Officer took the view that the payments were made as CSR expenditure under the Companies Act and were not eligible for deduction under section 80G. According to the Assessing Officer, a donation involved a voluntary act and the payments made for fulfilling corporate social responsibility did not contain the element of charity. The Assessing Officer, however, considered the contribution of Rs.6,16,801/- made to the Prime Minister’s Relief Fund as allowable and disallowed the remaining section 80G claim of Rs.15,20,000/-.

The assessee relied upon the coordinate Bench decision in Allegis Services India Pvt. Ltd. Vs. ACIT, in which the coordinate Bench had held that payments forming part of CSR expenditure could qualify for deduction under section 80G subject to fulfilment of the relevant conditions.

Tribunal’s Decision on Section 80G

The Tribunal noted that the coordinate Bench had held that expenditure incurred under the CSR scheme under the Companies Act was also eligible for deduction under section 80G of the Act. Following that decision, the Tribunal directed the Assessing Officer to allow deduction under section 80G in respect of contributions made under the CSR scheme after examining the assessee’s claim that the payments were eligible for deduction under section 80G.

The Tribunal therefore restored the verification of the section 80G eligibility to the Assessing Officer rather than treating CSR expenditure itself as an absolute bar to the claim.

Education Cess Deduction Rejected

The assessee also claimed deduction of education cess, including secondary and higher education cess, on income tax while computing total income.

The Tribunal considered the decision of the Kolkata Bench in Kanoria Chemicals & Industries Ltd Vs. Addl. CIT, which had held that education cess was an additional surcharge levied on income tax and therefore partook the character of income tax. The Kolkata Bench had accordingly held that education cess was not allowable as a deduction.

The Tribunal also noted the decisions of the Bombay High Court in Sesa Goa Ltd. 117 Taxmann.com 96 and the Rajasthan High Court in Chambal Fertilisers & Chemicals Ltd. Vs. JCIT (ITA No.52/2018 dated 31.7.2018), in which education cess had been held allowable as a deduction. However, the Kolkata Bench had observed that the decision of the Supreme Court in CIT Vs. K. Srinivasan (1972) 83 ITR 346 had not been brought to the notice of those High Courts and had expressed the view that the Supreme Court decision would prevail.

Following the Kolkata Bench decision in Kanoria Chemicals & Industries Ltd Vs. Addl. CIT, the Tribunal held that payment of education cess, including secondary and higher education cess, was not allowable as a deduction and rejected this ground of the assessee.

Final Decision

The Tribunal permitted withdrawal of the transfer pricing grounds and dismissed them as not pressed. In relation to repairs and maintenance expenditure, it confirmed the items accepted by the assessee as capital in nature and restored the remaining 32 items to the Assessing Officer for examination. The alternative depreciation claim was also restored to the Assessing Officer with a direction to allow depreciation in accordance with law.

For the section 80G claim relating to CSR contributions, the Tribunal directed the Assessing Officer to allow the deduction after examining whether the payments were eligible under section 80G. The claim for deduction of education cess, including secondary and higher education cess, was rejected.

In the result, the appeal filed by the assessee was treated as partly allowed for statistical purposes. The order was pronounced in the open court on 23rd Feb, 2022.

Cases Discussed

• Allegis Services India Pvt. Ltd. Vs. ACIT (ITA No.1693/Bang/2019 dated 29.4.2020)
• Kanoria Chemicals & Industries Ltd Vs. Addl. CIT (ITA No.2184/Kol/2018 dated 26.10.2021)
• Sesagoa Ltd. 117 Taxmann.com 96
• Chambal Fertilisers & Chemicals Ltd. Vs. JCIT (ITA No.52/2018 dated 31.7.2018)
• CIT Vs. K. Srinivasan (1972) 83 ITR 346

Alternative SEO Titles

ITAT Bangalore Allows Section 80G CSR Claim Subject to Eligibility Verification

ITAT Bangalore Remands Repairs Disallowance and Allows Depreciation Claim

ITAT Bangalore Rejects Education Cess Deduction, Allows CSR Section 80G Verification

ITAT Bangalore Partly Allows Appeal on Repairs, CSR Deduction and Education Cess

ITAT Bangalore Remands 32 Repairs Items, Allows Section 80G CSR Claim

FULL TEXT OF THE ORDER OF ITAT BANGALORE

The assessee has filed this appeal challenging the assessment order dated 23.10.2019 passed by the A.O. for asses sment year 2015-16 in pursuance of directions given by Ld. Dispute Resolution Panel (”DRP”). The grounds of appeal and additiona l grounds of appeal urged by the assessee give rise to the following issues:-

a) Addition on account of transfer pricing adjustment

b) Disallowance of part of repairs and maintenance expenses treating it as capital in nature.

c) Disallowance of deduction u/s 80G of the Income-tax Act,1961 [‘the Act’ for short] https:))taxgurugin)

d) Alternative claim to allow depreciation on amount disallowed from repairs and maintenance expenses. e) Claim for deduction of Education Cess.

2. The assessee is a subsidiary of Infinera Corp. & Infinera International Corporation, U.S. It is registered w ith Software Technology Park of India Scheme. It provides software development services, which include embedded network management, technical documentation and system verification test and asso ciated hardware design for products that are conceptualize d and developed by Infinera Corporation.

3. The assessee filed its return of income for the year under consideration declaring total income of Rs.27.67 crores. In the draft assessment order, the A.O. determined the total income of the assessee of Rs.47.11 crores. After direction given by Ld. DRP, the total income was determined at Rs.41.99 crores. Ag grieved, the assessee has filed this appeal before us.

4. The first issue relates to addition made on account of transfer pricing adjustment. The assessee has filed a letter dated 24.9.2021 wherein the assessee has sought permission from the bench for withdrawing all grounds relating to transfer pricing adjustment in accordance with Rule 10RA of the I.T. Rules. The reason given is that it had entered into bilateral Advance Pricing Agreement (APA) for assessment years 2016-17 to 2020-21 with roll back option for 2 years covering assessment years 2014-15 & 2015-16. Accordingly, it is submitted that the year under consideration is covered in the roll back period and accordingly the transfer pricing adjustment made in this year has since been dissolved under APA proceedings. In view of the above, we allow the assessee to withdraw the grounds relating to Transfer pricing adjustment. According ly the said httpsj33taxgurucin 3 grounds relating to transfer pricing adjustments are dismissed as not pressed.

5. The next issue relates to disallowance of repair s & maintenance expenses to the tune of Rs.75,24,807/- treating it as capital in nature. The facts relating thereto are that the assessee had claimed repairs & maintenance expenses of Rs.3. 68 crores. The A.O., in the draft assessment order, asked the assessee to furnish the details of repairs expenses. Since the assessee did not furnish the details, A.O. disallowed 50% of the same amounting to Rs.1.84 crores treating it as capital in nature. Before Ld. DRP, the assessee furnished the details and hence Ld. DRP asked the A.O. to examine the same and furnish a remand report. The A.O., in the remand proceedings, accepted that the expenses debited under the head <Repairs & Maintenance Expenses= to the tune o f Rs.2.28 crores are revenue in nature. Accordingly he repor ted in the remand report that the remaining amount of Rs.1.40 crores are capital in nature.

5.1 The assessee disputed the findings given by t he AO in the remand report and hence Ld. DRP further examined th e details of capital expenditure reported by the AO. The Ld. DRP noticed that the out of the expenditure of Rs.1.40 crores reported by the A.O. as capital in nature, a sum of Rs.64.26 lakhs are actually revenue in nature. Accordingly, the Ld. DRP confirmed the disallowance to the tune of Rs.75,24,807/- holding it as capital in nat ure. The assessee is aggrieved by the order passed by the A.O. confirming disallowance of above said amount of Rs.75,24,807/-.

5.2. At the time of hearing, the assessee furnished a statement containing the break-up details of Rs.75,24,807/-. We notice from the details furnished by the assessee that the list contained entries. Out of the same, the assessee itself has accepted that 23 items are capital in nature and remaining 32 items are revenue in nature. In support of its claim that 32 items of expenditure are revenue in nature, the assessee placed reliance on the decision rendered in the case of City Financial, Amway, APL India & Verizon.

5.3 We heard Ld. D.R. on this issue and perused the record. Since the assessee itself is accepting that 23 items found in the list are capital in nature, the addition of above said i tems are confirmed. With regard to remaining 32 items, we are of the view that they require verification at the end of the A.O. in the light of decisions relied upon by the assessee. Accordingly, we restore this issue to the file of A.O. for examining the claim of assessee with regard to the 32 items found in the list.

6. The next issue relates to alternative claim of depreciation on the amount held to be capital in nature, which was disallowed from repairs & maintenance expenditure. Since this clai m of the assessee is in accordance with law, we restore this issue to the file of the A.O. with a direction to allow depreciation thereon in accordance with law.

7. The next issue relates to disallowance of claim for deduction u/s 80G of the Act. The assessee had incurred following expenses on account of corporate social responsibility:-

7.1 It was submitted that the assessee disallowed the above said payments aggregating to Rs.36,56,801/- while comput ing income from business. However, it claimed deduction u/s 80G of the Act to the tune of Rs.21,36,801/- as stated in the table above.

7.2 The A.O. took the view that the assessee hav e made above said payment as ”Corporate Social Responsibility” (CSR) expenses in terms of the provisions of Companies Act and suc h kind of expenses are not eligible for deduction under the Explanation given in sec. 37(1) of the Act. The A.O. took the view that the sums paid by the assessee need to be ”donation”, which means the voluntary act on the part of the donor. In the instant case, the assessee has made this payment for fulfilling the corporate social responsibility imposed on it under the Companies Act and hence the element of <charity= is messing in this payment. Accordingly, he held that the assessee is not eligible for deduction u/s 80G of the Act. However, in respect of contribution made to Prime Minister9s Relief Fund amounting to Rs.6,16,801/-, the AO considered it as allowable as deduction. Accordingly, he disallowed the remaining claim made u/s 80G of the Act amounting to Rs.15,20,000/-.

7.3 We heard the parties on this issue and perused the record. The Ld. A.R. placed his reliance on the decision rendered by the coordinate bench in the case of Allegis Services India Pvt. Ltd. Vs. ACIT (ITA No.1693/Bang/2019 dated 29.4.2020) and su bmitted that the co-ordinate bench has held that payment forming part of CSR are eligible for deduction u/s 80G of the Act.

7.4 We heard Ld D.R on this issue and perused the record. We notice that the co-ordinate bench has held in the above said case that the expenses incurred under Corporate Social Responsibility scheme under the provisions of Companies Act are also eligible for deduction u/s 80G of the Act. The relevant discussions made in the above said case are extracted below:-

“10. Section 135 of Companies Act, 2013 requires companies with CSR obligations, with effect from 01/04/2014.

Finance (No.2) Act, 2014 inserted new Explanation 2 to sub- section (1) of section 37, so as to clarify that for purposes of sub- section (1) of section 37, any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.

11. This amendment will take effect from 1/04/2015 and will, accordingly, apply to assessment year 2015-16 and subsequent years.

12. Thus, CSR expenditure is to be disallowed by new Explanation 2 to section 37(1), while computing Income under the Head ‘Income form Business and Profession’. Further, clarification regarding impact of Explanation 2 to section 37(1) of the Income Tax Act in Explanatory Memorandum to The Finance (No.2) Bill, 2014 is as under:

“The existing provisions of section 37(1) of the Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditure cannot be allowed under the existing provisions of section 37 of the Income-tax Act. Therefore, in order to provide certainty on this issue, it is proposed to clarify that for the purposes of section 37(1) any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and, hence, shall not be allowed as deduction under section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Act shall be allowed deduction under those sections subject to fulfilment of conditions, if any, specified therein.”

13. From the above it is clear that under Income tax Act, certain provisions explicitly state that deductions for expenditure would be allowed while computing income under the head, ‘Income from Business and Profession” to those, who pursue corporate social responsibility projects under following sections.

• Section 30 provides deduction on repairs, municipal tax and insurance premiums.

• Section 31, provides deduction on repairs and insurance of plant, machinery and furniture

• Section 32 provides for depreciation on tangible assets like building, machinery, plant, furniture and also on intangible assets like know-how, patents, trademarks, licenses.

• Section 33 allows development rebate on machinery, plants and ships.

• Section 34 states conditions for depreciation and development rebate.

• Section 35 grants deduction on expenditure for scientific research and knowledge extension in natural and applied sciences under agriculture, animal husbandry and fisheries. Payment to approved universities/research institutions or company also qualifies for deduction. In-house R&D is eligible for deduction, under this section.

• Section 35CCD provides deduction for skill development projects, which constitute the flagship mission of the present Government.

• Section 36 provides deduction regarding insurance premium on stock, health of employees, loans or commission for employees, interest on borrowed capital, employer contribution to provident fund, gratuity and payment of security transaction tax.

Income Tax Act, under section 80G, forming part of Chapter VIA, provides for deductions for computing taxable income as under:

• Section 80G(2) provides for sums expended by an assessee as donations against which deduction is available.

a) Certain donations, give 100% deduction, without any qualifying limit like Prime Minister’s National Relief Fund, National Defence Fund, National Illness Assistance Fund etc., specified under section 80G(1)(i)

b) Donations with 50% deduction are also available under Section 80G for all those sums that do not fall under section 80G(1)(i).

Under Section 80G(2) (iiihk) and (iiihl) there are specific exclusion of certain payments, that are part of CSR responsibility, not eligible for deduction u/s80G.

14. In our view, expenditure incurred under section 30 to 36 are claimed while computing income under the head, ‘Income form Business and Profession”, where as monies spent under section 80G are claimed while computing “Total Taxable income” in the hands of assessee. The point of claim under these provisions are different.

15. Further, intention of legislature is very clear and unambiguous, since expenditure incurred under section 30 to 36 are excluded from Explanation 2 to section 37(1) of the Act, they are specifically excluded in clarification issued. There is no restriction on an expenditure being claimed under above sections to be exempt, as long as it satisfies necessary conditions under section 30 to 36 of the Act, for computing income under the head, “Income from Business and Profession”.

16. For claiming benefit under section 80G, deductions are considered at the stage of computing “Total taxable income”. Even if any payments under section 80G forms part of CSR payments(keeping in mind ineligible deduction expressly provided u/s.80G), the same would already stand excluded while computing, Income under the head, “Income form Business and Profession”. The effect of such disallowance would lead to increase in Business income. Thereafter benefit accruing to assessee under Chapter VIA for computing “Total Taxable Income” cannot be denied to assessee, subject to fulfillment of necessary conditions therein.

17. We therefore do not agree with arguments advanced by Ld.Sr.DR.

18. In present facts of case, Ld.AR submitted that all payments forming part of CSR does not form part of profit and loss account for computing Income under the head, “Income from Business and Profession”. It has been submitted that some payments forming part of CSR were claimed as deduction under section 80G of the Act, for computing “Total taxable income”, which has been disallowed by authorities below. In our view, assessee cannot be denied the benefit of claim under Chapter VI A, which is considered for computing ‘Total Taxable Income”. If assessee is denied this benefit, merely because such payment forms part of CSR, would lead to double disallowance, which is not the intention of Legislature.

19. On the basis of above discussion, in our view, authorities below have erred in denying claim of assessee under section 80G of the Act. We also note that authorities below have not verified nature of payments qualifying exemption under section 80G of the Act and quantum of eligibility as per section 80G(1) of the Act.”

7.5 Following the above said decision, we direct the A.O. to allow deduction u/s 80G of the Act in respect of contribu tions made under CSR scheme, after examining the claim of the assessee that the said payments are eligible for deduction u/s 80G of the Act.

8. The last issue urged by the assessee relates to claim for deduction of Education Cess including secondary & h igher education Cess on income tax as deduction while com puting the total income.

8.1 We notice that the Kolkata Bench of Tribunal in the case of Kanoria Chemicals & Industries Ltd Vs. Addl. CIT (I TA No.2184/Kol/2018dated 26.10.2021) has held that the education cess is an additional surcharge levied on income tax and hence it partakes the character of income tax. Accordingly it held that the education cess is not allowable as deduction. The Tribunal also noted the decision rendered by Hon9ble Bombay High Court in the case of Sesagoa Ltd. 117 Taxmann.com 96 and by Hon9 ble Rajasthan High Court in the case of Chambal Fertili sers & Chemicals Ltd. Vs. JCIT (ITA No.52/2018 dated 31.7. 2018), wherein it was held that the education cess is allo wable as deduction. However, the Tribunal observed that the decision rendered by Hon9ble Supreme Court in the case of CI T Vs. K. Srinivasan (1972) 83 ITR 346 was not brought to the notice of the above said Hon9ble High Courts. Accordingly, the T ribunal has expressed the view that the decision rendered by Hon9ble Supreme Court in the case of K. Srinivasan (supra) shall prevail on this issue and accordingly held that the education cess is not allowable as deduction. httpsj33taxgurucin3

8.2 Following the above said decision of Kolkata bench of Tribunal in the case of Kanoria Chemicals & Industries Ltd (supra), we hold that payment of education cess including secondary and higher education cess is not allowable as deduction. Accordingly, we reject this ground of the assessee.

9. In the result, the appeal filed by the assessee is treated as partly allowed for statistical purposes. Order pronounced in the open court on 23rd Feb, 2022