PCIT Vs PEC Ltd. (Delhi High Court)
Delhi High Court held that Explanation 2 was inserted in Section 37 via Finance (No.2) Act, 2004 and is effective from 01.04.2015 [from Assessment Year 2015-2016 onwards]. Accordingly, expenditure incurred towards Corporate Social Responsibility is allowable as deduction u/s 37 of the Income Tax Act.
Facts- The present writ is filed by the department alleging that ITAT has erred in allowing deduction of expenses undertaken under the Corporate Social Responsibility (CSR) endeavor u/s. 37 of the Income Tax Act.
Department alleges that deduction u/s 37 can be claimed only if all the conditions prescribed in the said provisions are satisfied. It is accordingly stated that the funds utilized by the respondent/assessee to effectuate its CSR obligation involved application of income and not an expense which had been incurred wholly and exclusively for the purposes of carrying on business.
It was further alleged that explanation 2 appended to sub-section (1) of section 37 is clarificatory in nature and hence would be applicable qua the assessment years in issue.
Conclusion- It is required to be noticed, that Explanation 2 was inserted in Section 37 via Finance (No.2) Act, 2004 w.e.f. 01.04.2015. Furthermore, what emerged during the course of the hearing was, that the memorandum which was published along with Finance (No.2) Bill 2014 clearly indicated that the amendment would take effect from 01.04.2015 and, accordingly, would apply in relation to assessment year 2015-2016 and the subsequent years.
This position is also exemplified in the circular dated 21.01.2015 issued by the Central Board of Direct Taxes (CBDT). It is well established that circulars are binding on the revenue. Accordingly, the question of law is decided against the appellant/revenue and in favour of the respondents/assessees.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. A common question of law arises for consideration in the aforementioned appeals.
1.1 Although the matters are at the notice stage, we are inclined to consider the question of law proposed on behalf of the appellant/revenue. Therefore, these appeals are admitted, and the following question of law is framed for consideration:
“Whether in the facts and circumstances of the case, the Income Tax Appellate Tribunal [hereafter referred to as “Tribunal”] erred in allowing deduction of expenses undertaken under the Corporate Social Responsibility (CSR) endeavour under Section 37 of the Income Tax Act, 1961 [in short “Act”]?”
2. As would be evident from the cause title of the appeals before us, two orders in the aforementioned appeals i.e., ITA No.269/2022 and ITA No.270/2022 pertain to a company i.e., RITES Ltd. RITES Ltd is owned by the Government of India. The assessment years, which are under consideration in the aforementioned appeals, are the following:
