Disallowance of CSR expense by treating it as capital is unjustified

Security Printing & Minting Corporation of India Ltd. Vs Addl. CIT (ITAT Delhi)

Held that impugned expenditure cannot be held to be capital and it is not in the nature of personal expenditure or for any violation of law. Disallowance of CSR expenditure unjustified.

Facts- The assessee alleged disallowance of CSR expenses of Rs. 3,96,00,919/-. Further, assessee also alleged denial of deduction u/s. 80G of Rs. 2.50 crore to CM relief fund out of aggregate CSR expenses.

Conclusion- An identical issue has been considered by the Tribunal in its order in ITA Nos. 3685 & 3686/Del/2017 dated 16.09.2021 for AY 2012-13 and 2013-14 wherein the Tribunal recorded the finding that the impugned expenditure cannot be held to be capital and it is not in the nature of personal expenditure or for any violation of law. Held that following the order of the Tribunal and concurring with the same, we delete the impugned disallowance of CSR expenses. As regards donation to CM’s relief fund, the same is, otherwise allowable as deduction under section 80G(2)(a)(iiihf).

FULL TEXT OF THE ORDER OF ITAT DELHI

The appeal by the assessee is directed against the order dated 05.10.2018 of the Ld. Commissioner of Income Tax (Appeals)-43, New Delhi (“CIT(A)”) pertaining to the Assessment Year (“AY”) 2014-15.

2. The assesee has taken following grounds:-

“1. The Ld. CIT (A) has erred in law on facts and under the circumstances of the case in general passing the impugned appellate order bearing appeal no. 280/16-17.

2. (i) The Ld. CIT (A) under the facts and in the circumstances of the case has erred in law by upholding the disallowance of Rs. 1,92,91,622/- made by Ld. AO u/s 14A Rule 6 D(2)(III).

(ii) Without prejudice to 2(i) above the Ld. CIT (A) under the facts of the case has erred in law by upholding the average investment in Joint Venture named Bank Note Paper Mill Pvt. Ltd.. Included by Ld. AO which has yielded nil exempted income during the previous year 2013-14.

3. (i) Under the facts and in circumstances of the case the Ld. CIT(A) has erred in law by sustaining the disallowance of Rs. 3,96,00,919/-debited as CSR expenses, made by Ld. AO.

(ii) Without prejudice to above the Ld. CIT (A) has erred in law by not allowing donation of Rs. 2.50 crore to CM relief fund deductible u/s 80G out of aggregate CSR expenses disallowed.”

3. We have heard the Ld. Representatives of the parties and perused the material available on record.

4. Ground No. 1 is general.

5. Ground No. 2 relates to disallowance of Rs. 1,92,91,622/- under section 14A of the Income Tax Act, 1961 (“Act”) read with Rule 8D(2)(iii) of the Income Tax Rules, 1962 (“Rules”) which has been sustained by the Ld. CIT(A).

5.1 The Ld. AO has discussed this issue in para 4 of his order. The Ld. AO found that the assessee has made substantial investment in mutual funds, dividend on which is exempt. In addition, the assessee has also held shares of a JV Company during the year, such shares being assets which can yield exempt income to the assessee. The assessee was asked to show cause why expenditure relatable to the earnings of exempt income be not disallowed in view of the provision of section 14A read with Rule 8D. Vide submission dated 24.10.2016 the assessee contended inter alia that it did not have to deploy any person or make any special effort or put in any direct or indirect expenditure; that the assessee being a cash rich company did not incur any expenditure on interest to earn dividend income on units of mutual funds.

The explanation/ contentions of the assessee were not acceptable to the Ld. AO. He was of the view that certain expenditure of the nature of administrative and other expenditures are bound to have been incurred by the assessee simply for the reason that the assessee is maintaining such assets, namely units of mutual funds and shares of the JV Company. He, therefore, made the impugned disallowance.

5.2 Before the Ld. CIT(A) the assessee reiterated the same contentions and also submitted that the Ld. AO has not recorded the satisfaction as to why there was expenditure relatable to exempt income. The assessee also without prejudice submitted that the average investment was computed after inclusion of strategic investment which is contrary to the provisions laid down for the computation of disallowance under section 14A. The Ld. CIT(A), however endorsed the findings of the Ld. AO and observed that satisfaction is not mandatory where no disallowance or apportionment has been made by the assessee. Since the assessee has made no disallowance, prima facie reason to invoke section 14A exists.

6. Aggrieved, the assessee is before the Tribunal.

7. We noticed that no disallowance under section 14A read with Rule 8D was made in AY 2011-12 by the Ld. AO in original assessment under section 143(3) framed on 28.02.2014. The Ld. Pr.CIT-(8) set aside the said assessment under section 263. Consequent thereto, the Ld. AO made fresh assessment under section 263/143(3) on 19.12.2016 by making addition of Rs. 50,25,537/- being 0.5% of the average investment. When the matter reached the Tribunal, the Tribunal in its order dated 17.01.2022 in ITA No. 475/Del/2018 for AY 2011-12 recorded the finding that the assessee received dividend from UTI Treasury Advantage Fund which was being managed by Investment Advisors, M/s. SPA Merchant Banker Limited as honorary services without any cost to the assessee. It has been advising and also daily managing this fund portfolio for assessee without any cost. The Investment Advisors engaged does not get any fees/ remuneration being so settled between the assessee and the Investment Advisors vide renewed Letter No. SPMCIL/UTI/73/06/6143 dated 30.06.2010. In fact, no indirect expense on account of establishment, audit fees or otherwise are incurred related to operation of this fund as being estimated by the Ld. AO without any reason. The dividend is automatically reinvested in the plan by UTI as per the instruction of the assessee company.

7.1 After analysing the correspondence between the assessee and M/s. SPA Merchant Banker Limited, the Tribunal in ITA No. 475/Del/2018 for AY 2011-12 came to the conclusion that no disallowance under section 14A is called for. The relevant paras 10 & 11 are reproduced below :-

“10. We have gone through the correspondence between the assessee and M/s SPA Merchant Banker Limited.

The engagement is subject to the following conditions:

1. You are requested to start this assignment w.e.f. 02.06.2008.

2. As per you presentation held on 25.04.2008, the services will be provided by your turn on honorary basis.

3. All investment will be made in compliance with the Department of Public Enterprise guidelines and guidelines of SPMCIL.

4. Fund position and cash flow of SPMCIL will be monitored and reviewed on a weekly basis and based on the same, investment advisor will recommend investment strategy and plan for investment in various applicable/admissible instruments.

5. Quarterly review of the portfolio of investments with the SPMCIL authorities.

6. If the performance of your firm will be found to be unsatisfactory, then this appointment may be terminated at a notice of one month without assigning any further reasons.

7. Full confidentiality will be resorted to in all the transactions related to SPMCIL Funds.

11. Since, the funds have been utilized for investment without incurring any expenses and keeping in view the evidences submitted by the assessee that no expenditure has been incurred for investment, no disallowance u/s 14A is called for. The appeal of the assessee on this ground is allowed.”

7.2 Similar disallowance under section 14A came up for consideration before the Tribunal in the case of the assessee relating to the AY 2012-13. Vide consolidated order dated 16.09.2021 in ITA No. 3685 & 3686/Del/2017 for AYs 2012-13 and 2013-14, the Tribunal deleted the disallowance of Rs. 49,82,319/- under section 14A for AY 2012-13. The relevant paras are extracted hereunder :-

“13. Coming to the disallowance u/s 14A of Rs. 49,82,319/-, we find that in assessment year 2013-14, the Ld. CIT(A) has deleted the said addition on merits. In this year, the Ld. AO noted that assessee has made substantial investment in mutual fund dividend on which income is exempt. In response to the show cause notice, it was submitted that the dividend income earned during the year was Rs.4,31,79,170/- from the investment in the units of mutual fund and no specific or any special effort was made nor any direct or indirect expenditure was incurred. Further assessee has not taken any loan for making any investment as same has been made out of surplus fund. Ld. AO without examining the assessee’s explanation having regard to the nature of expenditure debited has simply proceeded to make the disallowance u/s 14A read with Rule 8D of Rs. 49,82,310/- which was worked out under rule 8D by deducting 0.5% of the average investment. Ld. CIT (A) after detailed reasoning and analysis has confirmed the said disallowance.

13. After hearing both the parties, we find that while invoking the disallowance u/s 14A read with Rule 8D, nowhere the AO has recorded his satisfaction as to why the assessee’s explanation is not tenable. The relevant observation of the Ld. AO reads as under :-

“The assessee’s contention is not acceptable, section 14A is very clear that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income, which does not form part of total income under this ‘Act’, Dividend income arising out of these investments is exempt u/s 10 and does not form part of total income Considering the facts of the assessee’s case as common expenditure incurred and debited in the P&L a/c for both the activities i.e. for investment as well as business, I hold that disallowance of expenditure u/s 14A r. w. Rule 8D is warranted in this case, which is worked out at Rs. 49,82,310/- (being 0.5% of the average investment of Rs. 99,64,63,755/-) as under and added to the total income of the assessee:-

Opening Investment       :        Rs. 99,18,92,595/-

Closing Investment                 Rs. 1,00,10,34,915/-

Average Investment                Rs. 99,64,63,755/-

0.5% of average            :         Rs.      49,82,319/-

(Addition of Rs. 49,82,319/-)”

14. From the bare reading of the aforesaid observation, it is seen that nowhere AO has noticed the nature of expenditure debited nor he has examined the books of accounts as to what are the expenditure which can be said to be attributable for opening of the dividend income. The conditions laid down in u/s 14A (2) is not being satisfied and accordingly in view of the decision of Hon’ble Supreme Court in the case of Godrej & Boyce Manufacturing vs. DCIT 328 ITR 81 disallowance made u/s 14A is allowed.”

7.3 Since the facts and circumstances remain the same during the AY 2014-15 presently under consideration, respectfully following the orders (supra) of the preceding years of the Tribunal, we delete the disallowance of Rs. 1,92,91,622/- made under section 14A of the Act.

8. Ground No. 3 relates to disallowance of CSR expenses of Rs. 3,96,00,919/- and without prejudice, denial of deduction under section 80G of Rs. 2.50 crore to CM relief fund out of aggregate CSR expenses is not justified. The Ld. AO made the impugned disallowance treating the CSR expenses as being capital in nature disregarding the contention of the assessee that no enduring benefit has either accrued or arisen to the assessee company and following the order of the Ld. CIT(A) in earlier years.

8.1 On appeal, the Ld. CIT(A) following the appellate order for the AY 2013-14 sustained the impugned disallowance. This has brought the assessee before us.

9. Identical issue has been considered by the Tribunal in its order in ITA Nos. 3685 & 3686/Del/2017 dated 16.09.2021 for AY 2012-13 and 2013-14 wherein the Tribunal recorded the finding that the impugned expenditure cannot be held to be capital and it is not in the nature of personal expenditure or for any violation of law. The relevant paras are reproduced herein below :-

“4. Brief facts and background of the case are that assessee is a Central Public Sector Undertaking under the ages of Ministry of Finance, Government of India is engaged in the manufacture/ production of Currency and Bank Notes, Security Paper, Non-Judicial Stamp Papers, Postal Stamps & Stationary, Travel Documents viz. Passport and Visa, Security certificates, Cheques, Bonds, Warrant, Special Certificates with security features, Security Inks, Circulation & Commemorative Coins, Medallions, Refining of Gold & Silver, and Assay of Precious Metals.

• The Appellant has following units in different states as under:

> Currency Note Press (CNP) at Nashik, Maharashtra

> Bank Note Press (BNP) at Dewas, Madhya Pradesh

> India Government Mints (IGM) at Mumbai (Maharashtra),

Hyderabad (Telangana), Kolkata (West Bengal) and Noida (Uttar Pradesh)

> Security Printing Press (SPP), Hyderabad, Telangana

> India Security Press (ISP), Nashik, Maharashtra

> Security Paper Mill (SPM), Hoshangabad, Madhya Pradesh

> The Ink Factory, Dewas, Madhya Pradesh

5. Ld. AO noted that the assessee has shown expenses on account of corporate social responsibility of Rs. 4.36 crore which otherwise is incorrect figure because the actual amount of CSR expenditure debited to the profit and loss account is Rs. 3.55 crore whereas it was in the assessment year 2012-­13, the assessee has debited sum of Rs. 4.36 crore. Thus, it appears to be a typographical mistake. The details of CSR expenditure as given by the assessee before the authorities below are as under :-

The AO had made the disallowance on the ground that same is for enduring for long term benefits for communities, cultures and societies in which the assesse company operates. The relevant observations and findings of the Assessing Officer read as under :-

“4.1 I have gone through the submissions of the assessee and find the same untenable. Corporate Social Responsibilities expenditure is made for enduring long term benefits for communities, cultures and societies in which the assessee company operates. These include establishments of medical facilities, sanitation, building of schools and houses, building vocational training centre etc. The expenditure has to come out of the permanent corpus of the assessee company and cannot be debited as revenue expenditure at par with other expenses like commission, hospitality, entertainment, advertisement etc. For these reasons, the expenditure on account of social responsibilities is being treated as capital expenditure and added back to the total income of the assessee. It is noted here that in the earlier years similar disallowance have been confirmed by the Appellate Authorities.”

7. Ld. CIT(A) has confirmed the disallowance after observing and holding as under :-

“5.6 During the course of hearing the appellant dwelt on the said expenditure as under the Corporate Social Responsibility as per the guidelines laid down by DFE, MCA GOI. While at the assessment stage it had given details of the CSR expenditure which were held to be capital expenditure, on the decision of ITAT Raipur relied upon by the appellant for its expenditure on CSR, it is important to note that the facts of the case there is different In that case, the expenditure was voluntary while in the present case, it is not so. Secondly, the Tribunal observed that disabling provisions of Explanation 2 are not triggered as long as the discharge of CSR on voluntary basis can be said to be wholly and exclusively for the purpose of business. Thirdly, the principle behind the CSR expenditure in India is application of profits  and not only incurring social scientific expenditure which is otherwise deductible under various other provisions of the Act. Hence, the intention of legislature to put in place a transparent process where ‘on the ground demonstration of ‘CSR expenditure’ has now been clarified. It is not prejudicial to the taxpayer, in my opinion, as the broad basis has travelled down from philanthropy to corporate sustainability. Secondly, under the income tax Act, the expenditure has to be covered within the ambit of the provisions of Section 37(1) thereof. Accordingly, as the expenditure is claimed to be under CSR and yet there is a claim of deduction thereof in the P & L account as any other expenditure incurred to be wholly and exclusively for the purpose of business (except capital and personal expenses), I am inclined to uphold the disallowance made on this issue in the impugned order.”

8. Before us it has been submitted that from the details of the nature of expenditure it can be seen that primarily expenses were incurred on providing educational facilities, development of infrastructure such as road, rain water harvesting, training to MSMF workers, etc.

• • The brief details of CSR is also reported in audited annual accounts at page 21 OF CONSOLIDATED ANNUAL A/CS.
  • The nature & objectives of expenses are the same as were in earlier years i.e. AY 2010-11 & AY 2011-12. The management of the Corporation considered it BUSINESS necessisty to incur theses expenses. The Corporation has a well framed CSR policy which is controlled and monitored by a CSR committee formed by corp. to frame & advise on these exp. THESE, EXPS. ARE INCURRED VOLUNTARILY BY APPELLANT .
  • These expenses were incurred as a business necessity and have been incurred wholly and exclusively for business purposes during the previous year.
  • In fact, in FY 2016-17 Annual Report, the Chairman underlying the importance of such expenses has commented that corporate social responsibility has been the cornerstone of success for your company right from its inception.
  • In AY 2010-11 which is the base year for CSR expense, on the identical facts, the co-ordinate Bench of this tribunal vide order dated 21.03.2018 has remanded the matter vide order no ita 5102/del/2017 to the Ld. AO with a specific direction to examine the nature of expenses and to decide whether the same are allowable u/s 37(1) of the Income-tax Act. 1961 [Refer Paper Book Page No. xx].
  • The Ld. AO vide remand assessment order dated 30-12-2019, has allowed expenses of Rs. 53,29,551/- u/s 37(1) against total CSR expenses of Rs. 72,28,051/-. The appellant has filed appeal before CIT (A) with respect to CSR expenses of Rs. I8,9,500 disallowed by the ld. AO |Refer Paper Book Page No. xx]

9. Thus, he submitted that issue is squarely covered by the order of the Tribunal in assessee’s own case for the earlier assessment years 2010-11 & 2011-12.

10. On the other hand, Ld. DR relied upon the order of the AO and Ld. CIT (A).

11. After considering the aforesaid submissions and on perusal of the impugned order as well as the order of the Tribunal, we find that this Tribunal vide order dated 21.3.2018 for the assessment year 2010-11 had remanded the case to the AO with specific direction to examine the nature of expenses to decide whether the same is allowable u/s 37(1) of the Income Tax Act 1961. The relevant observation and the finding of the Tribunal is as under :-

“According to us these expenditure are required to be examined firstly from the fact that whether these expenditure have been laid out or expended by the assessee wholly and exclusively for purposes of its business or not. Neither Ld. Assessing Officer nor Ld. CIT(Appeals) has examined the expenses from this angle. Furthermore, Explanation (2) of section 37(1) of the Act introduced by the Finance No. 2 of 2014 is stated to be effective from 01.04.2015 i.e. from A.Y. 2015-16 only. Therefore for present A.Y. 2010-11 no disallowance this explanation to section 37(1) can be made. In view of the above facts the whole issue is set aside to the file of Ld. Assessing Officer with direction to examine the nature of these expenditure and decide whether same are allowable u/s 37(1) of the Act or not.”

11. It has been informed by the Ld. Counsel that the matter got resolved in the remand proceedings in the favour the assessee. First of all, we find that there is no dispute that these CSR expenses which have been incurred for the purpose of business has not been disputed by the AO and Ld. CIT(A) except for that was treated it as capital expenditure. The amendment which has been brought in the Explanation 2 of section 37(1) is also not applicable either in the assessment year 2012-13 or 2013-14 as it has come with effect from assessment year 2015-16. The allowability of expenditure section 37 (1) are otherwise fully applicable, once the Explanation 2 is not applicable for the impugned assessment year. Viewing from the nature of business activities of the assessee which is dealing in highly sensitive commodity i.e., currency, coins, security stationery, etc. Expenditure incurred is voluntarily as per board approval. Accordingly, such expenditure cannot be held to be capital as accepted by the authorities in the earlier years and it is not in the nature of personal expenditure or for any violation of law.

ASSESSMENT YEAR 2012-13

12. In so far as appeal for the assessment year 2012-13 is concerned, first ground relates to disallowance of a sum of Rs. 4,36,40,497/-. Since in this year also, similar findings are there in the appellate order, therefore, our aforesaid decision will apply mutatis mutandis. This expenditure of Rs. 4,36,40,497/- is allowed.”

10. Respectfully following the order (supra) of the Tribunal and concurring with the same, we delete the impugned disallowance of CSR expenses. As regards donation to CM’s relief fund, the same is, otherwise allowable as deduction under section 80G(2)(a)(iiihf).

11. In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 30^th June, 2022.