In the instant case before us also, the expenses have been incurred on the direction of the relevant Ministry / Government of India. Further, neither the Assessing Officer nor the learned DR has rebutted the contention of the assessee that expenses have been incurred for enhancing brand image of the company which are wholly and exclusively for the purpose of the business of the assessee. Both the lower authorities have disallowed the expenses only on the ground that Explanation -2 is clarificatory and retrospective in nature. Thus, respectfully following the finding of the Tribunal(supra) that said Explanation -2 is prospective in nature, we hold that expenses incurred on corporate social responsibility in the year under consideration i.e. AY 2014-15, cannot be disallowed invoking Explanation-2 to section 37(1) of the Act. The ground No. 2 of the appeal of the assessee is accordingly allowed.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal by the assessee is directed against order dated 26/03/2018 passed by the Ld. Commissioner of Income- tax (Appeals)-28, New Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2014-15, raising following grounds:
1. On the facts and circumstances of the case, the order passed by learned Commissioner of Income Tax (Appeals) [CIT(A)] is bad both in the eye of law and
2. (i) On the facts and circumstances of the case, the Id. CIT(A) has erred, both on facts and in law, in confirming the disallowance made by the Id. AO of Rs.572,32,442/- on account of expenses incurred on Corporate Social Responsibility.
(ii)That the CIT(A) has erred in confirming the disallowance made by Ld. AO, rejecting the contention of the assessee that Explanation 2 to Section 37(1) having been inserted with effect from 01.04.2015 the same is not applicable in the relevant assessment year.
(iii)That the disallowance has been confirmed despite the expenses having been incurred wholly and exclusively for the purpose of business, otherwise allowable under the Income Tax Act.
3. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law, in confirming the action of the AO of charging the interest under sections 234A, 234B, 234C and 234Dof the Act.
4. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law, in confirming the action of the AO of withdrawing the interest u/s 244A.
5. The appellant craves leave to add, amend or alter any of the grounds of appeal.
2. Briefly stated facts of the case are that the assessee is a Government of India undertaking, engaged in execution of civil/electrical projects. The assessee filed return of income for the year under consideration on 25/09/2014, declaring total income of ₹ 293,47,00,300/-, which was revised to ₹ 293,58,51,230/- on 31/03/2016. The return of income filed by the assessee was selected for scrutiny assessment. The scrutiny assessment has been completed 13/12/2016 in terms of section 143(3) of Incometax Act, 1961 (in short ‘the Act’) after making certain disallowances. On further appeal by the assessee, the Ld. CIT(A) allowed partly in favour of the assessee and sustained the disallowance in respect of corporate social responsibility expenses. Aggrieved, the assessee is in appeal before the Tribunal, raising the grounds as reproduced above.]
3. We have heard both the parties, who appeared through Video Conferencing facility and perused the material available on record as well as filed by the parties through email.
3.1 The ground No.1 of the appeal being general in nature, we are not required to adjudicate upon specifically and same is dismissed as infructuous.
3.2 The ground No. 2 of the appeal is regarding disallowance of ₹ 5,72,32,442/- on account of expenses incurred on corporate social responsibility.
3.3 Before the Assessing Officer, the assessee submitted that corporate social responsibility expenses were incurred for the purpose of protecting its business and said expenditure was incurred in accordance with the guidelines of the Ministry of Heavy Industry and Public Enterprises. According to the assessee, the expenses has enhanced the brand image of the company which in turn has got a positive long-term impact on the business of the assessee. In view of The Assessing Officer, the Explanation -2 to section 37(1) has prohibited allowance of corporate social responsibility expenses. According to the Assessing Officer, said explanation being classificatory in nature, it was applicable in the year under consideration also. The Ld. CIT(A) also upheld the finding of the Assessing Officer observing as under:
“6.2 I have considered the facts of the issues, basis of disallowance made by AO and submissions of the appellant. It can be seen from the facts that the appellant has claimed CSR expenses of Rs. 575,32,442/- as expenditure incurred for the purpose of business and profession as per provisions of section 37(1) of the IT Act. However, it was clarified by the Legislature by inserting Explanation-2 in the said section with the initial words ‘for the removal of doubts, it is hereby declared….’ which means that clarification has been issued by this Explanation that the expenses incurred on CSR activities shall not be deemed to be an expenditure incurred for the purpose of business and profession. It has to mention here that the said Explanation is not an amendment to law which would be effective prospectively, rather, it is clarification to provisions of law as it was brought in statute originally and therefore would be effective from the date of enactment of law. In view of this, since the Explanation has been inserted to clarify the position of law in respect of section 37(1) of the IT Act, any expenditure incurred under this head in any of the years shall not be deemed to be an expenditure incurred for the purpose of business and profession. Since the CSR expenses are not allowable u/s 37(1) of the IT Act being not for the purpose of business or profession and there are no other provisions under this statue under which CSR expenses could be claimed as genuine allowable business expenditure, the same are to be disallowed if claimed by any assessee. In view of this, I uphold the conclusion drawn by AO and addition made by him and dismiss the ground taken by the appellant.”
3.4 But, we find that Tribunal in the case of Addl. CIT Vs Rites Limited (ITAT Delhi) in ITA NO.6447/Del/2017 and ITA NO. 6448/Del/2017 for AY 2013-14) has held that said explanation is prospective in nature and applicable from assessment year 2015-16. The relevant finding of the tribunal (supra) is reproduced as under:
“17. AO has disallowed claim of the assessee company qua CSR expenditure by misinterpreting the provisions contained under section 37(1) of the Act by observing that since CSR expenditure is not incurred for the purpose of carrying on the business, such expenditure cannot be allowed under the existing provisions of section 37 of the Act. Even Explanation 2 to section 37(1) of the Act is prospective in nature to be effective from 01.04.2015 and is applicable to the expenses incurred with reference to section 135 of the Companies Act, 2013 that too after 01.04.2015, so Explanation (2) to section 37(1) of the Act is not applicable to the present case also. Moreover, expenses claimed by the assessee company have been incurred as per guidelines of the Ministry concerned with approval of the Board to the best business interest of the assessee company. So AO, without examining the nature of the expenses, disallowed the claim mechanically even by ignoring the rule of consistency.
18. Moreover, CSR expenses have been incurred by the assessee on the direction of the Government of India and identical issue has been decided by the coordinate Bench of the Tribunal in case of M/s. HLL Lifecare Ltd. vs. ACIT in ITA No.123/Coch/2017 for AY 2012-13 order dated 11.06.2018 by returning following findings :-
“9.5 The CSR expenses has been incurred as per the directions of Government of India. The Hon’ble Kerala High Court in the case of Travancore Titanium Products Ltd. (supra) had held that a Government Undertaking is duty bound to comply with Governmental orders. The relevant findings of the Hon’ble jurisdictional High Court reads as follows :-
“Being a company under the control of the Government, it is bound to comply with all the Government orders and the Board of Directors itself is constituted with the Government secretaries and other nominees as members. Therefore, the claim of deduction has to be considered with reference to the peculiar circumstances of the company which has no discretion in regard to the payment of the service charges to the government as it is bound to comply with the government orders. So much so, we are of the view that the parameters applicable in the case of a private company that too with respect to the claim for business expenditure, are exactly not applicable in the case of Public Sector Company whether it is under the control of the State Government or Central Government. In fact, many public sector companies are not formed just to make profit alone but are supposed to achieve larger objectives for the society and the State.
By making payment of service charge, the respondent company has discharged only the obligation under Government orders. It cannot carryon business by violating Government orders and remain as a defaulter to the Government.
9.6 The ITAT Mumbai bench in the case of Hindustan Petroleum Corporation Ltd. (96 ITD 186) had held CSR expenditure incurred by Government Undertaking is an allowable deduction. The relevant finding of the ITAT Mumbai Benches reads as follows:-
“Expenditure incurred by assessee, a company owned by the Government of India and working under its control and directions, towards implementation of 20 pointprogramme as per specific directions of the Government though voluntary in nature and not forced by any statutory obligation, is allowable as business expenditure.
Merely because an expenditure is in the nature of donation, it does not cease to be an expenditure deductible under s. 37(1).”
9.7 The Commissioner of Income tax had mentioned in his order that “the Apex Court (313 ITR 334 SC) CIT Vs Madras Refineries Ltd., while hearing the allowability of CSR expenses observed that neither the High Court nor the Tribunal concerned had given specific finding to the effect that the said CSR expenditure is allowable as business expenditure “. In the above mentioned case, the Apex court has not given any decision on merits of the case. It had only given an observation and remitted the issue back to the Tribunal to give specific finding to the effect that the said CSR expenditure is allowable as business expenditure.
9.8 Since, the assessee had incurred CSR expenses to comply with the directions of Govt. of India, following the above observations made by High Court of Kerala and ITAT, Mumbai Bench, the expenditure incurred is incidental to the assessee’s business and ought to be allowed as deduction u/s 37 of the I.T.Act.”
19. Identical issue has also been decided by the coordinate Bench of the Tribunal in Hindustan Petroleum Corporation Ltd. vs. DCIT (2005) 96 ITD 186 (Mum.) by returning following findings:-
“It had been held by the Karnataka High Court in the case of Mysore Kirloskar Ltd. v. CIT [1987J 166 ITR 836/ 30 Taxman 467. that while ‘the basic requirements for invoking sections 37(/) and 80G are quite different’, but nonetheless the two sections are not mutually exclusive. Thus, there are overlapping areas between the donations given by the assessee and the business expenditure incurred by the assessee. In other words, there can be certain amounts. though in the nature of donations, and nonetheless, these amounts may be deductible under section 37(1) as well. Therefore, merely because the expenditure in question was in the nature of donation, or, as per the words of the Commissioner (Appeals), ‘prompted by altruistic motives’, it did not cease to be an expenditure deductible under section 37(1). In the case of Mysore Kirloskar Ltd. (supra), the High Court had observed that even if the contribution by the assessee is in the form of donations, but if it could be termed as expenditure of the category falling in section 37(/), then the right of the assessee to claim the whole of it as a deduction under section 37(1) cannot be declined. What is material in this context is whether the expenditure in question was necessitated by business considerations or not. Once it is found that the expenditure was dictated by commercial expediencies, the deduction under section 37(1) cannot be declined. [Para 7]
In the instant case, the expenditure on 20-Point Programme was incurred in view of specific directions of the Government of India. It could not but be in the business interest of the assessee to abide by the directions of the Government of India which also owned the assessee.
Further, the expenditure incurred for the implementation of 20- Point Programme was solely for the welfare of the oppressed classes of society, for which even the Constitution of India sanctions positive discrimination and for contribution to all around development of villages, which has always been the central theme of Government’s development initiatives. An expenditure of such a nature cannot but be, ‘a concrete expression of care and concern for the society at large and an expenditure to discharge the responsibilities of a ‘good corporate citizen which brings goodwill of with the regulatory agencies and society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill’. [Para 9]
Just because the expenditure was voluntary in nature and was not forced on the assessee by a statutory obligation, it could not cease to be a business expenditure. Therefore, the authorities below indeed erred in law in declining deduction of the expenditure incurred on 20-Point Programme which was, beyond dispute or controversy, at the instance of the Government, and was to discharge the assessee s obligations towards society as a responsible corporate citizen. [Para 10]”
20. So, we find no illegality or perversity in the findings returned by the ld. CIT (A) in deleting the addition made by the AO on account of disallowance of CSR expenditure for AYs 2013-14 & 2014-15. Ground No.2 of both the appeals filed by the Revenue are determined against the Revenue.”
3.5 In the instant case before us also, the expenses have been incurred on the direction of the relevant Ministry / Government of India. Further, neither the Assessing Officer nor the learned DR has rebutted the contention of the assessee that expenses have been incurred for enhancing brand image of the company which are wholly and exclusively for the purpose of the business of the assessee. Both the lower authorities have disallowed the expenses only on the ground that Explanation -2 is clarificatory and retrospective in nature. Thus, respectfully following the finding of the Tribunal(supra) that said Explanation -2 is prospective in nature, we hold that expenses incurred on corporate social responsibility in the year under consideration i.e. AY 2014-15, cannot be disallowed invoking Explanation-2 to section 37(1) of the Act. The ground No. 2 of the appeal of the assessee is accordingly allowed.
4. The grounds No. 3 & 4 of the appeal, being consequential in nature, are dismissed as infructuous .
5. The ground No. 5, being general in nature, same is dismissed as infructuous.
6. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 11th August, 2021