Case Law Details
Mysore Minerals Ltd. Vs DCIT (ITAT Bangalore)
AO noted that assessee has incurred above expenses towards corporate social responsibility as per Companies CSR Rules 2014. He was of the view that under the existing provisions of the Income-tax Act, expenditure incurred wholly and exclusively for the purposes of the business is only allowed as a deduction for computing taxable business income. CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business. As the application of income is not allowed as deduction for the purposes of computing taxable income of a company, amount spent on CSR cannot be allowed as deduction for computing the taxable income of the company. Moreover, the objective of CSR is to share burden of the Government in providing social services by companies having net worth/turnover/profit above a threshold. If such expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure.
According to the AO, the provisions of section 37(1) of the Income-tax Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Income-tax 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 provisions of section 37 of the Income-tax Act. Therefore in order to provide certainty on this issue, said section 37 has been amended to clarify that for the 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 have been incurred for the purpose of business and hence shall not be allowed as deduction under said section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Income-tax Act shall be allowed as deduction under those sections subject to fulfilment of conditions, if any, specified therein. Hence the AO held that CSR expenditure is not an allowable expense.
The ld. AR submitted that CSR expenditure is incurred wholly and exclusively for the purpose of business and is to be allowed as an expenditure u/s. 37(1) of the Act on principle of commercial expediency. Explanation 2 to section 37(1) is effective from 1.4.2015 and from AY 2015-16 onwards. Being so, the present appeals under consideration being prior to that, accordingly it cannot be applied.
The amendment introduced w.e.f. 1.4.2015 cannot be construed as disadvantageous to the assessee and it cannot cover the impugned expenditure incurred by the assessee in these two assessment years. We have gone through the amended provisions including Note on Clauses and explanatory notes and note that as per the Companies Act, 2013, certain companies (which have net worth of Rs.500 crores or more, or turnover of 1000 crore or more or net profit of 5 crores or more during any financial year) are required to spend certain percentage of their profit on activities relating to Corporate Social Responsibility (CSR). Under the existing provisions of the Act, expenditure incurred wholly and exclusively for the purpose of business is only allowed as deduction for computing taxable business income. CSR expenditure being an application of income is not incurred wholly and exclusively for the purpose of carrying on business. As application of income is not allowed as deduction for the purpose of taxable income of a company, the amount spent on CSR cannot be allowed as a deduction for computing taxable income of the company. The object of the CSR expenditure is to share the burden of the Govt. in providing social service by companies having import/turnover/profit above a threshold. If such expenses are allowed as deduction, it will result in subsidizing the amount of one-third of such expenses by Govt. by way of tax expenditure. The provisions of section 37(1) provide that deduction for any expenditure which is not mentioned specifically in section 30 to 36 of the Act, shall be allowed if the same is incurred wholly and exclusively for the purpose of carrying on business or profession. As CSR expenditure being application of income is not incurred for the purpose of carrying on of business, such expenditure cannot be allowed under the provisions of section 37 of the Act. Therefore, in order to provide certainty on this issue, the said section 37 has been amended to clarify that for the purpose of sub-section (1) of section 37 any expenditure by an assessee on the activities relating to CSR referred to in section 135 of the Companies At, 2013 should not be allowed as deduction under sub-section 37. However, CSR expenditure which is of nature described sections 30 to 36 of the Act, shall be allowed as deduction under this section, subject to fulfillment of conditions, if any, specified therein. But this amendment takes effect from 1.4.2015 and will be applicable in relation to AY 2015-16 and subsequent years.
Please become a Premium member. If you are already a Premium member, login here to access the full content.
