2022 (11) TMI 1514 - AT - Income Tax

Disallowance claimed as CSR u/s 37(1) - expenditure is not wholly and exclusively for the purpose of the assessee s business - HELD THAT - Since the CSR expenditure are mandatory for companies incorporated as per the Companies Act, 2013 and the expenditure have been incurred by the assessee as envisaged under the Companies Act, 2013. So we are of the opinion that it has to be allowed and we take note that the Tribunal in Jindal Power Ltd. 2016 (7) TMI 203 - ITAT RAIPUR has already held that the introduction of explanation 2 to sec. 37(1) of the Act w.e.f. from 1st August, 2015 cannot be held to be retrospective in operation. Therefore, the expenditure incurred by assessee on account of CSR as envisaged u/s. 135 of the Companies Act, 2013 need to be allowed as deduction. Therefore, the CSR expenditure which the assessee company was obliged to discharge because it was a statutory obligation upon the assessee company so, the deduction should have been allowed as per the law in force for this assessment year and we direct the AO to allow the expenditure. Therefore, the appeal of assessee is allowed.

Summary

Issues:
- Disallowance of expenses on Corporate Social Responsibility and Sustainable Development
- Rectification/refund of Dividend Distribution Tax amount
- Allowability of CSR expenditure under section 37(1) of the Income Tax Act

Analysis:
1. Disallowance of CSR Expenses:
- The assessee appealed against the disallowance of Rs. 2,02,04,000/- on account of expenses on Corporate Social Responsibility (CSR) and Sustainable Development (SD) for the assessment year 2014-15.
- The AO disallowed the CSR expenditure, stating it was not wholly and exclusively for business purposes.
- The assessee argued that the CSR expenses were incurred as per the guidelines of the Department of Public Enterprises, Govt. of India, and were incidental to the business.
- The Tribunal referred to a similar case where CSR expenses were allowed as they contribute to goodwill and societal welfare, aligning with the evolving concept of business responsibility.
- The Tribunal held that since CSR expenditure was mandatory under the Companies Act, 2013, and incurred as per statutory obligations, it should be allowed as a deduction under section 37(1) of the Act.
- The Tribunal emphasized that the introduction of Explanation 2 to section 37(1) from 1st April 2015 was not retrospective, and hence, the CSR expenditure for the assessment year should be allowed.

2. Rectification/Refund of Dividend Distribution Tax:
- The assessee also raised a ground regarding the rectification or refund of Rs. 1,37,12,989/- deducted as Dividend Distribution Tax in the computation of tax liability.
- However, the Tribunal did not address this ground in the appeal as the assessee chose not to press this issue during the proceedings.

3. Conclusion:
- The Tribunal allowed the appeal of the assessee, directing the Assessing Officer to allow the CSR expenditure of Rs. 2,02,04,000/- as a deduction for the assessment year 2014-15.
- The judgment highlighted the importance of CSR expenditure as a statutory obligation under the Companies Act, 2013, and emphasized that such expenses should be considered as incurred wholly and exclusively for business purposes, warranting their allowance as deductions under section 37(1) of the Income Tax Act.
- The decision was based on the non-retrospective nature of the amendment to section 37(1) introduced in 2015, ensuring that the assessee's CSR expenses for the relevant assessment year were eligible for deduction.

This comprehensive analysis of the judgment addresses the key issues involved and the Tribunal's decision regarding the disallowance of CSR expenses and the related legal implications under the Income Tax Act.