Case Law Details
ABIS Export India Pvt Ltd Vs DCIT (ITAT Raipur)
The dispute arose when the Assessing Officer (AO) disallowed ABIS’s deduction under Section 80G, citing that CSR expenditures, although mandatory under the Companies Act 2013, do not qualify as voluntary donations eligible for tax benefits under 80G. The AO’s decision was based on the Finance (No.2) Act, 2014, which explicitly disallows CSR expenses for tax deductions under certain conditions.
ABIS argued that the mandatory nature of CSR does not preclude its eligibility under 80G, supported by legal precedents and the legislative intent analysis. They pointed out that CSR expenses, despite being mandatory, align with the spirit of charitable contributions as defined under 80G, thus warranting deduction.
During the appeal before the CIT(Appeals), the contention remained unresolved, leading ABIS to appeal further to the Income Tax Appellate Tribunal (ITAT) in Raipur. The ITAT reviewed previous judicial decisions and the legislative framework to assess the eligibility of CSR expenses under Section 80G. It acknowledged ABIS’s arguments and directed the CIT(A) to reconsider the case, emphasizing procedural fairness and the need for a comprehensive review of evidence.
FULL TEXT OF THE ORDER OF ITAT RAIPUR
The present appeal filed by the assessee company is directed against the order passed by the Commissioner of Income-Tax (Appeals), National Faceless Appeal Center (NFAC), Delhi, dated 02.02.2024, which in turn arises from the order passed by the A.O under Sec.143(3) r.w.s. 144B of the Income-tax Act, 1961 (in short ‘the Act’) dated 28.09.2022 for the assessment year 2020-21. The assessee company has assailed the impugned order on the following grounds of appeal:
“1. On the fact and in the circumstances of the case, the Ld. Commissioner of Income Tax-Appeals (NFAC) has erred in upholding the assessment order passed by the Assessment Unit-Income Tax Department without considering the detailed submissions made by the appellant with the office of NFAC. The addition upheld by the Ld. CIT(A)/NFAC is unjustified, unwarranted and uncalled for.”
2. The Ld. AO has ignored the detailed submissions made against the show cause notice and has rejected the same giving same reasons as raised in the show cause notice. The Ld. AO failed to appreciate the case laws quoted by the appellant and has also ignored the MCA circular submitted Against the show cause notice. The addition made by the A.O. is unjustified, unwarranted and uncalled for.”
3. On the facts and circumstances of the case and in law, the Ld. AO has erred in not appreciating that the prescribed form for filing of re-computation has not been made available till the date of passing the order. In the absence of the form, the assessee could not apply for total income and the Ld. AO had made additions to the total income along with initiation of penalty proceeding for under reporting of income. The penalty initiated by the A.O. is unjustified, unwarranted and uncalled for.
4. Disallowance of claim of donation paid u/s.80G, by ignoring the submissions, judicial decisions and MCA circular without giving any proper justification. Further Initiation of penalty proceedings for under reporting of income when the form for applying for re-computation was not made available. “The addition made by the A.O. and upheld by the Ld.CIT(A) is unjustified, unwarranted and uncalled for.”
5. The assessee reserves the right to add, amend or alter any grounds of appeal at any time of hearing.”
2. Succinctly stated, the assessee company which is engaged in the business of manufacturing and trading of poultry feeds, cattle feed, pet feed, aqua feed and soya value-added products and poultry equipment, etc., had filed its return of income for A.Y.2020-21 on 05.02.2021, declaring an income of Rs.180,24,05,350/-. Thereafter, the assessee company revised its return of income on 08.02.2021 declaring the same income as was originally returned. Subsequently, the case of the assessee company was selected for scrutiny assessment u/s. 143(2) of the Act.
3. The A.O. during the course of the assessment proceedings observed that the assessee company had claimed deduction of “Corporate Social Responsibility” (CSR) expenses and donation u/s. 80G of the Act. On being queried, it was the claim of the assessee company that as a contribution need not be voluntarily to be eligible for deduction u/s.80G of the Act, therefore, its claim of deduction of CSR expenses under the aforesaid statutory provision was in order. However, the aforesaid claim of the assessee did not find favor with the A.O. The A.O was of the view that as the “Explanation-2” to Section 37(1) of the Act was inserted vide the Finance (No.2) Act, 2014 to disallow any CSR expenditure referred to in Section 135 of the Companies Act, 2013 while computing the income under the head “Profits and gains of business or profession”, therefore, in case CSR was allowed as a tax deduction, it would result into subsidizing the CSR contribution by around one-third due to reduced tax expenses. Also, the A.O. was of the view that as CSR was an application of income, therefore, the same could not be said to have been incurred wholly and exclusively for the purpose of carrying on business as envisaged in Sec. 37 of the Act. For the sake of clarity, the observations of the A.O are culled out as under:
“3.2.2.2. Explanation 2 to Section 37(1) of the ITA was inserted vide the Finance (No.2) Act, 2014 to disallow any CSR expenditure referred to in Section 135 of the CA, 2013 while computing the income under the head ‘Profits and gains of business or profession’. The intent of the Parliament in bringing this amendment is given in the Explanatory Memorandum to the Finance (No.2) Bill, 2014. The essence of the justification given was that:
1. CSR expenditure was an application of income, and could not be said to be incurred wholly and exclusively for the purposes of carrying on business as envisaged in Section 37 of the ITA.
2. If CSR expenditure is allowed as a tax deduction, it would result in subsidizing the CSR contribution by around one-third due to reduced tax expense.
Hence, claiming the CSR expenses under section 80G is clearly against the intent of the legislature as it results in subsiding the CSR as well.
3.2.2.3 The question about CSR expenditure and its allowability under the income tax act 1961 has its origins in the companies act 2013. The said act mandated that a company satisfying any of the following criteria during the immediately preceding financial year has to comply with CSR provisions specified under section 135 of the Companies Act, 2013 read with the CSR Rules made thereunder 1. net worth of rupees five hundred crore or more, or 2. turnover of rupees one thousand crore or more or 3. a net profit (as calculated under Section 198 with other adjustments as referred in Rule 2(h) of CSR Rules.) of rupees five crore or more.
The Central Government may give directions to a company or class of companies as it considers necessary to ensure compliance of provisions of this section and such company or class of companies shall be required to comply with such direction.
In the Companies (CSR Policy) Rules, 2014, the term CSR has been defined by way of enlisting of activities which shall not be considered as CSR. According to Rule 2(1)(d) “Corporate Social Responsibility (CSR)” means the activities undertaken by a Company in pursuance of its statutory obligation laid down in section 135 of the Act in accordance with the provisions contained in these rules, but shall not include the following, namely:-
1. activities undertaken in pursuance of normal course of business of the company: Provided that any company engaged in research and development activity of new vaccine, drugs and medical devices in their normal course of business may undertake research and development activity of new vaccine, drugs and medical devices related to COVID-19 for financial years 2020-21, 2021-22, 2022-23 subject to the conditions that such research and development activities shall be carried out in collaboration with any of the institutes or organizations mentioned in item (ix) of Schedule VII to the Act; b) details of such activity shall be disclosed separately in the Annual report on CSR included in the Board’s Report;
2. any activity undertaken by the company outside India except for training of Indian sports personnel representing any State or Union territory at national level or India at international level;
3. contribution of any amount directly or indirectly to any political party under section 182 of the Act;
4. activities benefitting employees of the company as defined in clause (k) of section 2 of the Code on Wages, 2019 (29 of 2019);
5. activities supported by the companies on sponsorship basis for deriving marketing benefits for its products or services;
6. activities carried out for fulfillment of any other statutory obligations under any law in force in India
The important thing to note here is that CSR has been defined in terms of statutory obligation under section 135 of the companies act 2013. This by its very nature distinguishes it from the donation under section 80G of the act which by its very nature is voluntary. This distinction is further borne out by the disclosure as well as accounting requirements for CSR funds. Sub-section (5) of section 135 of the Act has been amended by Companies (Amendment) Act, 2019 whereby, any amount remaining unspent under sub-section (5), pursuant to an activity other than any ongoing project as per section 135(6) has to transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year. As per the said amendment, the company would have an obligation to transfer the unspent amount of “other than relating to an ongoing project” to a specified fund. As per guidance note issued by ICAI, a provision for liability for the amount representing the extent to which the amount is to be transferred, needs to be recognized in the financial statements. The creation of provision by itself brings out its fixed liability status which distinguishes it from the voluntary donation under section 80G. That by itself makes it distinguishable from the 80G donation which is pure voluntary. As there is an obligation to transfer the unspent amount to a separate bank account within 30 days of the end of Financial year and eventually any unspent amount out of that to a Fund specified in Schedule VII, a provision for liability for the amount representing the extent to which the amount is to be transferred within 30 days of the end of the financial year needs to be recognized in the financial statements. This creation of liability further distinguishes CSR expenditure from 80G expenditure.
Another point of difference between the two is that CSR expenditure can be made in kind while 80G expenditure cannot be lade in kind. This reinforces the watertight distinctions between 80G donations and spending under section 135 for csr activities.
Further CSR funds can no longer be contributed to the corpus funds. The provision relating to contribution to corpus as admissible CSR expenditure has been amended and the contribution to corpus of any entity is not an admissible CSR expenditure w.e.f. 22nd January, 2021. This brings out clarity on legislative intent on what constitutes CSR expenditure and makes it different from 80G donations which are made to corpus funds of the charitable trusts.
Non-compliance of CSR provisions has been notified as a civil wrong w.e.f. 22nd January, 2021. The said non-compliance is a civil wrong and shall attract the following penalties:
1. Company: Twice the unspent amount required to be transferred to any fund included in Schedule VII of the Act or Unspent CSR Account, as the case may be, or one crore rupees, whichever is less.
2. Every Officer in Default: 1/10th of the unspent amount required to be transferred to any fund included in Schedule VII of the Act or Unspent CSR Account, or two lakh rupees, whichever is less.
This is an important feature which distinguishes it from 80G donation which is a pure voluntary donation. Surely the intent of the legislature was not to bring about a parity between a civil wrong which is punishable by law with a pure voluntary activity like donation.
Another distinguishing feature is that CSR activities can be part of ongoing projects and the same is not applicable to donations in 80G which represent standalone donations.
To sum up, both the expenditure represent different streams and are not interchangeable in terms of their treatment. The accounting treatment of both is different, the nature of both is different. One represents a statutory obligation which is required to be provided for in books of accounts. The other represents a voluntary donation which comes into picture only when profits have been arrived at. CSR expenditure represents a charge on profit, while 80G donations merely represent an application of profit.
3.2.2.4 Further, almost all the case laws quoted by the assessee in support of their claim were either the judgments by CIT(A) or the Tribunal. The department is in appeal in higher appellate authorities and hence the matter has not attained its legal finality.”
Accordingly, the A.O. vide his order u/s 143(3) r.w.s 144B of the Act, dated 28/09/2022 after, inter alia, declining the assessee’s claim for deduction u/s 80G of Rs. 1,15,50,000/- (50 percent of Rs. 2,31,00,000/-), determined its income at Rs. 183,13,97,086/-.
4. Aggrieved, the assessee carried the matter in appeal before the CIT(Appeals). Ostensibly, the CIT(Appeals) finding no infirmity in the view taken by the A.O., upheld the disallowance of the assessee’s claim for deduction of CSR expenses u/s. 80G of the Act. For the sake of clarity, the observations of the CIT(Appeals) are culled out as under:
“6.4.2 Addition of Rs.1,15,50,000/- on account of disallowance of deduction claimed u/s. 80G
I carefully reviewed the assessment order and the ground of appeal presented. The key issue revolves around the disallowance of Rs. 1,15,50,000 pertaining to the 80G deduction claimed on CSR expenses. The assessing officer (AO) based this disallowance on the grounds that the nature of CSR expenses, being a statutory obligation under Section 135 of the Companies Act 2013, differs significantly from voluntary donations eligible for 80G deduction.
I concur with the AO’s stance that the insertion of Explanation 2 to Section 37(1) of the Income Tax Act (ITA) in 2014 explicitly disallows CSR expenditures while computing income under the head “Profits and gains of business or profession.” The legislative intent, as explained in the Explanatory Memorandum to the Finance (No.2) Bill, 2014, emphasizes that CSR expenditure is an application of income and should not be considered incurred wholly and exclusively for the purpose of carrying on business, as required by Section 37 of the ITA.
The distinction between CSR expenses, which are obligatory and represent a charge on profit, and 80G donations, which are voluntary and only come into play after profits are determined, is crucial. In light of these considerations, I find merit in the AO’s decision to disallow the 50% of 80G deduction of Rs.2,31,00,000/- i.e. Rs.1,15,50,000. The nature of CSR expenses, being a statutory obligation with specific accounting and compliance requirements, distinguishes it from the realm of 80G donations. Therefore, the addition on this issue made by the AO is upheld.
On perusal of assessment order, ground of appeal submitted by appellant and available documents, it is stated that appellant has not submitted any supporting documentary evidence and explanation even in appellate proceedings. The claim of the appellant without any documentary evidence cannot be entertained. Further, appellant remained non-responsive in appellate proceedings as well. In this scenario, I do not find any infirmity in the decision of AO in respect of Rs.2,89,91,736/- on above both mentioned issues and I upheld the addition made by AO in its assessment order u/s.143(3) of IT Act, 1961.
6.5 Hence, on merits also, the appellant has no case. The appellant, has the challenged the additions made, without submitting any documentary evidences or counter arguments in support of its claims. Mere claiming that the AO erred in making the additions does not give an edge to the appellant. Keeping in view all the stated facts and discussions, I find no reason in altering the additions made by the AO. In view of the above facts, merit of the case, non-responsive nature of the assessee and failure to carry out its responsibility as an appellant, Thus, I firmly uphold the AO’s additions to the appellant’s income and dismiss their appeal with unwavering resolve.
07. For statistical purposes, the appeal is summarily and unceremoniously dismissed, reflecting the appellant’s complete lack of accountability and sincerity in the face of due process.”
5. The assessee being aggrieved with the order of the CIT(Appeals) has carried the matter in appeal before us.
6. We have heard the Ld. Authorized Representatives of both the parties, perused the orders of the lower authorities and material available on record, as well as considered the judicial pronouncements that have been pressed into service by the Ld. AR to drive home her contentions.
7. Mrs. Dimple Warlyani, Ld. Authorized Representative (for short ‘AR’) for the assessee company at the threshold submitted that as per instructions she is confining her contentions only qua the “ground of appeal No.4”. We, thus, in the backdrop of the concession of the Ld. AR dismiss the Grounds of appeal Nos. 1 to 3 as not pressed.
8. The Ld. AR for the assessee submitted that the order passed by the CIT(Appeals) suffered from a perversity. Elaborating on her contention, the Ld. AR submitted that the CIT(Appeals) had wrongly observed that the assessee company had adopted a negligent and evasive attitude and in the course of proceedings before him failed to provide a single piece of evidence in support of its claim. Carrying her contention further, the Ld. AR submitted that the assessee company pursuant to the notice of the CIT(Appeals), dated 18.01.2024 (fixing the response due date till 25.01.2024) had uploaded its reply dated 19.01.2024 on the e-portal of the CIT(Appeals), Page 1 to 9 of APB. The Ld. AR submitted that the assessee was, thereafter, in receipt of a letter/notice dated 22.01.2024 from the CIT(Appeals), NFAC, Delhi (fixing the response due date till 29.01.2024) wherein, it was brought to its notice that the attachments, i.e rar/zip pdfs that were earlier uploaded along with its reply were damaged and, thus, was called upon to attach simple PDF format files for further necessary action, Page 13-14 of APB. The Ld. A.R submitted that the assessee company in compliance with the aforesaid letter/notice dated 22.01.2024, had once again uploaded its earlier reply on 28.01.2024, Page 15 of APB. The Ld. AR submitted that the CIT(Appeals) while disposing of the appeal had failed to take cognizance of the aforesaid reply of the assessee which was filed before him on 28.01.2024, i.e. well within the response due date window that was open till 29.01.2024. It was, thus, submitted by the Ld. AR that as the CIT(Appeals) had failed to consider the reply filed by the assessee company, therefore, his order suffered from a serious infirmity.
9. On merits, the Ld. AR submitted that the core issue involved in the present appeal, i.e. allowability of deduction u/s. 80G of the Act of CSR expenses is squarely covered by the orders of the Co-ordinate Benches of the Tribunal, as under:
(i) Power Mech Projects Ltd. Vs. DCIT, Central Circle-1(3), ITA No.155/Hyd/2023 dated 31.08.2023
(ii) Synergia Lifesciences Pvt. Ltd. Vs. DCIT, ITA No.938/Mum/2023 dated 20.06.2023
(iii) Honda Motorcycle and Scooter India Pvt. Ltd. Vs. ACIT, ITA No. 1523/Del/2022 dated 22.08.2023
The Ld. AR had specifically drawn our attention to the order of the ITAT, Hyderabad in the case of Power Mech Projects Ltd. Vs. DCIT, Central Circle-1(3), ITA No.155/Hyd/2023, dated 31.08.2023. Elaborating further, it was submitted by the Ld. AR that all the aforementioned judicial pronouncements were pressed into service by the assessee company in its reply dated 19.01.2024 (supra) that was uploaded on the e-portal of the CIT(Appeals) on 19.01.2024 and 28.01.2024.
10. Per contra, the Ld. Departmental Representative (‘for short ‘DR’) relied on the orders of the lower authorities.
11. As is discernible from the record, the assessee company had uploaded its reply/submissions dated 19.01.2024 on the e-portal of the CIT(Appeals) pursuant to the notice of hearing that was issued by the latter on 18.01.2024. As the rar/zip pdfs that were uploaded by the assessee company were damaged, therefore, the CIT(Appeals) vide his letter dated 22.01.2024 directed the assessee company to upload simple PDF format files so that further necessary action could be taken, Page 14 of APB. In compliance, the assessee company had on 28.01.2024 (response due date till 29.01.2014) once again uploaded the PDF file of its earlier reply dated 19.01.2024 (supra), Page 15 of APB. On a perusal of the record, we find that the assessee company had in its response dated 28.01.2024, stated as under:
“Dear sir, you have mentioned in your notice that the pfs files uploaded are damaged. We are hereby submitting the same again for your kind perusal. We have checked the same and the files are ok as of now. If still you are unable to open the same, pls. let us know how to submit the same with you.”
On a perusal of the reply dated 19.01.2024 (supra) filed by the assessee company, it transpires that it had relied upon certain judicial pronouncements wherein it was held that the CSR expenses are eligible for deduction u/s. 80G of the Act.
12. As the CIT(Appeals) had failed to consider both the aforesaid reply dated 19.01.2024 uploaded by the assessee company and also the judicial pronouncements that were pressed into service in support of its aforesaid claim, therefore, in our considered view, the matter in all fairness requires to be restored to the file of the CIT(Appeals) for fresh adjudication. The CIT(Appeals) is directed to re-decide the appeal after considering the reply of the assessee company dated 19.01.2024 (supra) along with the judicial pronouncements that it had pressed into service in support of its aforesaid claim, i.e. CSR expenses are eligible for deduction u/s. 80G of the Act. Needless to say, the CIT(Appeals) shall in the course of the set-aside proceedings afford a reasonable opportunity of being heard to the assessee company which shall remain at liberty to substantiate its claim based on fresh documentary evidence, if any.
13. In the result, the appeal of the assessee company is allowed for statistical purposes in terms of our aforesaid observations.
Order pronounced in open court on 29th day of May, 2024
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