All Corporates are ready to file their Income Tax Return for the AY 22-23 on or before 30th September 2022 and claiming various deduction under Chapter VI A of the Income Tax Act 1961.
in the recent past one of the most litigated issue raised by the learned Assessing officers is “Donations given towards CSR Expenses and its allowablity as deduction U/s 80G of Income Tax Act 1961”
In this Article, we have highlighted the recent controversy that has ignited for allowability of deduction under section 80G of the IT Act for the CSR qualifying donation.
Corporate Social Responsibility under the Companies Act 2013.
CSR provisions are presently applicable to companies with an annual turnover of Rs. 1,000 crore and more, or a net worth of Rs. 500 crore and more, or a net profit of Rs. 5 crore and more. Accordingly, qualifying company is mandated to spend 2% of the average profits of the last three years on CSR activities.
Deduction U/s 80G of IT Act 1961
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 expenditures 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 as deduction under those sections subject to fulfillment of conditions, if any, specified therein.”
Based on the above, Taxpayers were claiming CSR expenditure as business expenditure. However, the Finance (No 2) Act, 2014 introduced Explanation 2 to Section 37(1) (Applicable form AY 15-16) to disallow any expenditure incurred by the taxpayer on the activities relating to CSR referred to in Section 135 of the Companies Act.
After the amendment, some tax authorities not only disallowed the expenditure under Section 37(1) but have also disputed the claim of deduction under Section 80G for eligible donations, qualifying for CSR. The tax authorities contended that the intention of the legislature was never to allow deduction for CSR expenditure, else it would result in subsidising the CSR expenditure by one-third amount. Furthermore, CSR expenditure is not ‘voluntary’, but ‘mandatory’ in Nature.
The question that has always been litigated is whether expenditure on CSR activity is eligible for tax deduction under the Income Tax Act, 1961. After CSR was made mandatory for prescribed corporates, another facet of the litigation has emerged with reference to donations made as part of CSR obligation.
The intent of Parliament in bringing the said provision is given in the Explanatory Memorandum to the Finance (No.2) Bill, 2014 and is reproduced as under:
“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.
Thus, it is a clear that the CSR expenditure referred to in section 135 cannot be claimed as a tax deductible expenditure under section 37(1) of the IT Act. However, CSR expenditure, which is of the nature described under sections 30 to 36 of the IT, was allowable as a deduction, say CSR expenditure laid out or expended on Scientific Research related to the business is allowable under section 35(1)(i) and 35(1)(iv), etc.
On the other hand, it may be mentioned that there have been conflicting views whether the Explanation to section 37(1) is retrospective or prospective in its operation.
Expenditure on CSR could take many forms. There could be expenditure on projects directly undertaken by companies, such as setting up and running schools, orphanage and old age homes, social projects, etc. Such expenditure would include expenditure otherwise falling for consideration under section 37(1) of the IT Act. On the other hand, companies, instead of undertaking or participating directly in a project, may choose to give donations to institutions that are engaged in undertaking such projects. While expenditure falling within the ambit of section 37(1) would undoubtedly not qualify, the issue is whether donations, which indirectly help to meet the CSR obligation, would qualify for deduction under section 80G, if the donation otherwise satisfies the conditions laid down in that section.
“Tax Litigation” – Deduction under section 80G is allowable for CSR contribution?
After the amendment, some tax authorities have disputed the claim of deduction under section 80G for eligible donations, qualifying for CSR under the Companies Act 2013. The tax authorities contend that the intention of the legislature was never to allow deduction for CSR expenditure,
The taxpayer can make the following arguments to support their claim for deduction under section 80G:
a) Section 80G(1) provides that in computing the total income of the assessee, there shall be deducted, in accordance with the provisions of this section, such sum paid by the assessee in the previous year as a donation. Further, section 80G(2) list down the sums on which deduction shall be allowed to the assessee. Section 80G falls in Chapter VIA, which comes into play only after the gross total income has been computed by applying the computation provisions under various heads of income, including the Explanation 2 to section 37(1).
Thus, there is no correlation between section 37(1) and section 80G. Principles governing what is not allowable under section 37(1) have been explained in the section itself (i.e. what is allowable, the conditions subject to which it is allowable, the extent to which it is allowable) and also what is not allowable under section 80G.
b) Section 80G specifically mentions two instances (viz, section 80G(2)(a)(iiihk) and (iiihl), i.e., contributions towards Swacha Bharat Kosh and Clean Ganga Fund), where CSR expenditure is not allowable as deduction under section 80G.
c) Section 80G(2)(a) allows deduction for ‘any sums paid by the assessee in the previous year as donations‘. Thus, the deduction allowable is for sums paid as donation. Donations paid to the said Kosh and Fund are not allowable under section 80G(2)(a)(iiihk) and (iiihl). What is not allowable is however amounts spent by the assessee in pursuance of CSR in pursuance of section 135 of the CA 2013. Contributions to the said Kosh and Fund are CSR activities included in Schedule VII to the Companies Act 2013. The disallowance for deduction under section 80G vis-à-vis CSR can be restricted only to contributions to these Funds under CSR. It is a well-established rule of interpretation that one has to look merely at what is stated in the statute; there is no scope for intendment in law. So only contributions to these two funds will not qualify for deduction under section 80G(2)(a). There is no blanket ban of deduction under section 80G for donations, which also qualifying under CSR.
Recent Judicial Pronouncement of ITAT :-
The ITAT Bangalore in cases of First American (India) Pvt. Ltd v. ACIT (ITA No.1762/Bang/2019) and Allegis services (India) Pvt. Ltd v. ACIT (ITA No.1693/Bang/2019 allowed the deduction under Section 80G and held that taxpayer cannot be denied the benefit of claim under Chapter VI-A, which is considered for computing total taxable income. If taxpayer is denied this benefit, merely because such payment forms part of CSR, it would lead to double disallowance, which is not the intention of Legislature.
In the following ITAT Rulings CSR Expenses is allowed deductions U/s 80G of Income Tax Act :-
It was held that from a plain reading of the Explanation 2 to Section 37(1), expenditure incurred towards CSR activities shall not be allowed as ‘business expenditure’ and shall be deemed to have not been incurred for business. The confusion embargo created by this Explanation 2 inserted in Section 37 by the Finance (No. 2) Act, 2014 was to deny the deduction for CSR expenses incurred by companies, as and by way of regular business expenditure while computing’ income under the head of business and profession.
It can be seen that this Explanation 2 to Section 37(1), which denies a deduction for CSR expenses by way of business expenditure, applies only to the extent of computing business income under Chapter IV-D. The said Explanation cannot be extended or imported to CSR contributions which are otherwise eligible for deduction under any other provision or Chapter, to say donations made by a charitable trust registered under Section 80G. Therefore, it is high time for India to reconsider its taxation policy surrounding CSR and utilize the deduction as an incentive, not an additional tax liability.
Hence 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.”
However it will take time to take a final view before the Hon’ble Apex Court or clarification from Govt. of India. Till such time this is a Pandora Box.