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2022 (12) TMI 759 - HC - Income TaxCorporate Social Responsibility (CSR) expenditure u/s 37 - HELD THAT - The Tribunal has opined, that Explanation 2 inserted in Section 37(1) was prospective in nature, and therefore was not applicable in the assessment years in issue. It is required to be noticed, that Explanation 2 was inserted in Section 37 via Finance (No.2) Act, 2004 w.e.f. 01.04.2015. Furthermore, what emerged during the course of the hearing was, that the memorandum which was published along with Finance (No.2) Bill 2014 clearly indicated that the amendment would take effect from 01.04.2015 and, accordingly, would apply in relation to assessment year 2015-2016 and the subsequent years. If there was any doubt, the same has been removed both by the memorandum issued along with the Finance Bill, as well as the aforementioned circular issued by the CBDT. It is well established that circulars are binding on the revenue. See Catholic Syrian Bank 2012 (2) TMI 262 - SUPREME COURT Therefore, for the appellant/revenue to contend in the aforementioned appeals, that the Tribunal had erred in law in sustaining the deduction claimed by the respondents/assessees u/s 37(1) of the Act is an argument, which cannot be accepted. Accordingly, the question of law is decided against the appellant/revenue and in favour of the respondents/assessees.
Issues:
1. Interpretation of Section 37 of the Income Tax Act, 1961 regarding deduction of expenses related to Corporate Social Responsibility (CSR) activities. Analysis: 1. The judgment revolves around the interpretation of Section 37 of the Income Tax Act, 1961, specifically concerning the deduction of expenses related to Corporate Social Responsibility (CSR) activities. The primary question raised was whether the Income Tax Appellate Tribunal (Tribunal) erred in allowing the deduction of expenses incurred under CSR endeavors under Section 37 of the Act. 2. The case involved appeals related to RITES Ltd., a company owned by the Government of India, for the assessment years 2013-2014 and 2014-2015. The expenses disallowed by the assessing officer in each assessment year were detailed, focusing on CSR expenditure. 3. The appellant/revenue argued that the expenses claimed for deduction were not incurred wholly and exclusively for the purpose of carrying on business or profession. This argument was based on the contention that CSR expenses involved the application of income, not expenses incurred for business purposes. 4. The Tribunal took a different view, relying on Circular No.1 dated 21.01.2015, which clarified that CSR expenditure should not be deemed as incurred for the purpose of business and hence not allowed as a deduction under Section 37. The Tribunal emphasized that the amendment in Section 37(1) by way of Explanation 2 was prospective and not applicable to the assessment years in question. 5. The Court analyzed Section 37(1) of the Act, emphasizing that for an expense to be deductible, it should be laid out or expended wholly or exclusively for the purposes of business or profession, excluding capital expenditure or personal expenses. The judgment highlighted the conditions that must be met for claiming a deduction under this section. 6. The Court referenced the Finance (No.2) Act, 2004, which inserted Explanation 2 in Section 37(1) effective from 01.04.2015. The memorandum accompanying the Finance Bill clearly stated that the amendment would apply from 01.04.2015, affecting assessment year 2015-2016 and subsequent years. 7. The Court cited a circular by the Central Board of Direct Taxes (CBDT) reinforcing that CSR expenditure should not be allowed as a deduction under Section 37 unless falling under specific sections 30 to 36. The circular emphasized the prospective nature of the amendment and its applicability from 01.04.2015 onwards. 8. The Court concluded that the Tribunal's decision aligns with the legislative intent as clarified by the Finance Bill memorandum and CBDT circular. Circulars are considered binding on the revenue, and therefore, the deduction claimed by the respondents/assessees for CSR expenses under Section 37(1) was upheld. 9. Consequently, the question of law was decided against the appellant/revenue in favor of the respondents/assessees, and the appeals were disposed of accordingly.
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