2025 (4) TMI 204 - AT - Income Tax

Denial of deduction claimed u/s 80G - donations made as part of Corporate Social Responsibility (CSR) activities - AO disallowed the deduction claimed on the ground that since these donations form a part of CSR expenditure mandated u/s 135(5) of the Companies Act 2013 the payments cannot be considered voluntary in nature and cannot be considered as donations as element of charity missing. HELD THAT - As in the case of Interglobe Technology Quotient (P) Ltd. 2024 (6) TMI 8 - ITAT DELHI in which held that mandatory nature of CSR expenditure does not justify disallowance of the same u/s 80G if other conditions of section 80G are fulfilled. As decided in Cheil India P. Ltd 2024 (12) TMI 457 - ITAT DELHI section 80G(2) lists down the sums on which deduction shall be allowed to the assessee. Section 80G falls in Chapter VIA which comes into play only after the gross total income has been computed by applying the computation provisions under various heads of income including the Explanation 2 to section 37(1) of the Act. Thus there is no correlation between suo-moto disallowance in section 37(1) and claim of deduction under section 80G of the Act. As with regard to the reasoning that CSR expenditure are not voluntary but mandatory in nature due to penal consequences we are of considered view that voluntary nature of donation is by nature of fan that it is not on the basis of any reciprocal promise of donee. The CSR expenditures are also without any reciprocal commitment from beneficiary being philanthropic in nature. The Act permits deduction of donations as per Section 80G of the Act even though assessee is not gaining any benefit out of any reciprocity from donee. Similar is the case of CSR expenditure. Thus the reasoning of learned Tax Authority the CSR expenditure is mandatory does not justify disallowance of these expenditures u/s 80G if other conditions of section 80G are fulfilled. There is no allegation of Revenue that other conditions of Section 80G are not fulfilled. Decided in favour of assessee.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issue considered in this judgment was whether the deduction claimed by the Assessee under Section 80G of the Income Tax Act, 1961, for donations made as part of Corporate Social Responsibility (CSR) activities, should be allowed. The primary question was whether such donations, which are mandated under Section 135 of the Companies Act, 2013, could be considered voluntary donations eligible for deduction under Section 80G.

ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The legal framework involved Section 80G of the Income Tax Act, which allows deductions for donations to certain funds and charities, and Section 135 of the Companies Act, 2013, which mandates certain companies to spend a percentage of their profits on CSR activities. The Court also considered Explanation 2 to Section 37(1) of the Income Tax Act, which disallows CSR expenditure as a business expense.

Court's Interpretation and Reasoning

The Court interpreted that the provisions of Section 80G and Section 37(1) of the Income Tax Act operate independently. While CSR expenses are not deductible as business expenses under Section 37(1), this does not preclude them from being considered for deductions under Section 80G, provided the donations meet the criteria set out in that section.

Key Evidence and Findings

The Assessee had made donations to eligible institutions registered under Section 80G(5) of the Act. These donations were part of the CSR expenditure mandated by Section 135 of the Companies Act. The Assessee argued that there is no legislative intent to deny Section 80G deductions for CSR-related donations, except for specific funds like the "Swachh Bharat Kosh" and "Clean Ganga Fund," where such deductions are explicitly disallowed.

Application of Law to Facts

The Court applied the law by examining whether the donations made by the Assessee, although part of mandatory CSR activities, could still qualify for deductions under Section 80G. It found that the CSR expenditures, while mandatory, were philanthropic and lacked any reciprocal benefit to the Assessee, thus aligning with the nature of donations envisaged under Section 80G.

Treatment of Competing Arguments

The Revenue argued that the CSR expenditures lacked the voluntary nature required for donations under Section 80G. However, the Court found that the absence of a reciprocal promise from the donee and the philanthropic nature of the CSR activities aligned with the characteristics of donations under Section 80G.

Conclusions

The Court concluded that the mandatory nature of CSR expenditures does not preclude them from being deductible under Section 80G, provided the donations meet the specified conditions. The Court allowed the Assessee's appeal, granting the deduction under Section 80G.

SIGNIFICANT HOLDINGS

The Court held that the deduction under Section 80G is permissible for CSR-related donations if they meet the conditions specified in Section 80G. The judgment emphasized that the legislative intent behind disallowing CSR expenditures as business expenses under Section 37(1) does not extend to deductions under Section 80G.

Core Principles Established

The judgment established that the voluntary nature of a donation, as required by Section 80G, is not negated by the statutory obligation to incur CSR expenditures. The key principle is that the absence of a reciprocal benefit to the donor aligns CSR donations with the characteristics of donations under Section 80G.

Final Determinations on Each Issue

The Court determined that the Assessee was entitled to the deduction under Section 80G for the donations made as part of its CSR activities, as the donations were philanthropic and met the conditions specified in Section 80G. The appeal was allowed, and the disallowance of the deduction by the lower authorities was set aside.