2021 (9) TMI 1405 - AT - Income Tax

Corporate Social Responsibilities - nature of expenses - whether the same is allowable u/s 37(1)? - HELD THAT - 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. Disallowance u/s 14A - Mandation of recording satisfaction - HELD THAT - As 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 - 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 in the case of Godrej Boyce Manufacturing 2010 (8) TMI 77 - BOMBAY HIGH COURT disallowance made u/s 14A is allowed. Assessee appeal allowed.

Summary

Issues Involved:
1. Disallowance of Corporate Social Responsibility (CSR) expenses.
2. Disallowance under Section 14A of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Disallowance of Corporate Social Responsibility (CSR) expenses:

The primary issue in both assessment years 2012-13 and 2013-14 pertains to the disallowance of CSR expenses. The assessee, a Central Public Sector Undertaking, argued that these expenses were incurred as per the mandatory guidelines of the Department of Public Enterprises (DPE) and were necessary for its business operations. The CSR expenses included projects such as the construction of schools, road beautification, providing mobile health services, and environmental protection initiatives.

The Assessing Officer (AO) disallowed these expenses, treating them as capital expenditure, arguing that they provided long-term benefits to communities and were not directly related to the business operations. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, emphasizing that the CSR expenses were not incurred wholly and exclusively for the business purposes as per Section 37(1) of the Income Tax Act.

However, the Tribunal noted that in earlier assessment years (2010-11 and 2011-12), similar CSR expenses were allowed after remand proceedings. The Tribunal emphasized that the CSR expenses were voluntary and incurred as a business necessity. Since the amendment to Explanation 2 of Section 37(1) was effective from the assessment year 2015-16, it did not apply to the assessment years in question (2012-13 and 2013-14). Therefore, the Tribunal allowed the CSR expenses, overturning the disallowance made by the AO and CIT(A).

2. Disallowance under Section 14A of the Income Tax Act:

For the assessment year 2012-13, the AO disallowed Rs. 49,82,319 under Section 14A, read with Rule 8D, arguing that the assessee had made substantial investments in mutual funds, earning exempt dividend income. The AO applied Rule 8D, calculating 0.5% of the average investment as the disallowable amount.

The Tribunal found that the AO did not record any satisfaction regarding the assessee's explanation or examine the nature of the expenditure debited. The AO failed to demonstrate that the common expenditure was incurred for both investment and business purposes. The Tribunal referred to the Supreme Court's decision in Godrej & Boyce Manufacturing vs. DCIT, which mandates recording satisfaction before making disallowances under Section 14A. Consequently, the Tribunal allowed the appeal, overturning the disallowance made by the AO.

Conclusion:

The Tribunal allowed both appeals of the assessee for the assessment years 2012-13 and 2013-14. The CSR expenses were deemed allowable under Section 37(1) as they were incurred voluntarily and were necessary for business purposes. The disallowance under Section 14A was also overturned due to the AO's failure to record satisfaction regarding the nature of the expenditure.