2022 (11) TMI 982 - HC - Income Tax

Corporate Social Responsibility (CSR) expenses - Allowable business expenses u/s 37 - allowability of only such expenditure laid out wholly and exclusively for the purpose of business or profession and not otherwise - HELD THAT - Government of India has framed guidelines on Corporate Social Responsibility for Central Public Sector Enterprises and every public sector enterprise is bound to formulate a policy in terms of the said guidelines issued by the Government of India which has been down by the respondent/assessee by framing its policy, copy of which has been placed before us for consideration. Thus, it is clearly seen that there is an obligation on the respondent/assessee to fulfil such responsibility which is not only to take care of his employees but also to rehabilitate the entire area where operations are being carried on by the respective public sector undertaking. The decision rendered in the case of Commissioner of Income Tax vs. Tamil Nadu Tourism Development Corporation Ltd 2016 (8) TMI 229 - MADRAS HIGH COURT will aid the assessee s case, wherein the expenses incurred by the said assessee for maintenance of Thiruvalluvar statue at Kanyakumari was held to be allowable deduction under Section 37(1) of the Act. It would be immensely beneficial to refer to the decisions of the hon ble Supreme in the case of S.A. Builders Ltd. vs. Commissioner of Income Tax 2006 (12) TMI 82 - SUPREME COURT wherein it was held that an expenditure made may not have been incurred under any legal obligation, yet it is allowable as business expenditure if it is incurred on the ground of commercial expediency. The facts of the case on hand is much better as there was a legal obligation on the part of the respondent/assessee to incur such expenses. Thus, we find that the learned Tribunal rightly allowed the assessee s appeal and granted relief.

Summary

Issues:
1. Whether expenses incurred on CSR activities are deemed as expenditure u/s 37 of the Income Tax Act?
2. Whether the claim of CSR expenses as part of 'Employees Welfare' is valid under the Income Tax Act?
3. Whether CSR expenses should be disallowed as Capital Expenditure?

Analysis:
1. The appeal addressed the issue of whether expenses related to Corporate Social Responsibility (CSR) should be considered as allowable expenditure under Section 37 of the Income Tax Act. The assessing officer disallowed part of the expenses due to lack of verification. The Tribunal noted the contractual obligation of the assessee under the National Coal Wage Agreement and similar relief granted to another public sector undertaking. The High Court agreed with the Tribunal, emphasizing the availability of material during assessment, the policy framework for CSR, and legal obligations to fulfill social responsibilities.

2. The second issue involved the validity of treating CSR expenses as part of 'Employees Welfare' under the Income Tax Act. The assessee argued that such expenses were justified under the National Coal Wage Agreement. The CIT(A) and Tribunal considered the lack of verified details but ultimately allowed the appeal based on the contractual obligation and policy compliance. The High Court supported this decision by citing precedents where similar expenses were allowed as deductions under Section 37(1) of the Act, emphasizing the evolving concept of business to include social responsibilities.

3. The final issue questioned whether CSR expenses should be disallowed as Capital Expenditure, especially when they contribute to creating new assets like hospitals and schools. The High Court referenced the legal obligation of the assessee to incur such expenses, aligning with the Tribunal's decision to grant relief and allow the appeal. The judgment highlighted the commercial expediency test and the allowance of business expenditure even if not incurred under a legal obligation, further supporting the decision to consider CSR expenses as allowable deductions.

In conclusion, the High Court dismissed the revenue's appeal, affirming the Tribunal's decision to allow the assessee's appeal regarding CSR expenses. The judgment underscored the legal obligations, policy compliance, and evolving business concepts related to social responsibilities, ultimately supporting the allowance of such expenses as deductions under the Income Tax Act.