2018 (1) TMI 1067 - AT - Income Tax

Addition on account of CSR/donation expenses - what is the effect of CSR commitments from tax deductibility perspective? - allowable busniss expenditure - Held that - The general norm has been to allow a deduction for donations, contributions, etc., made for charitable purposes under Section 80G. The corporate houses were expecting relief under section 37 (1). It is a residuary section in the Act to allow business expenditure which is done in the normal course of business and profession. The requirement is that it should have a nexus with business objectives and should not be of a personal nature. In the instant case, the assessee has donated the amounts to the institutions, which are engaged in medical treatment; school for mentally handicapped and education for poor and needy children. These itself prove that the expenditure incurred by the assessee are for charitable purposes. Hence, the deduction under section 37 is to be allowed. - Decided in favour of assessee The CIT(A) has referred to the amendment made in Finance Act (No.2) 2014 w.e.f. 1.4.2015 in Section 37, wherein, it is declared that for the purposes of sub-section(1) any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. The CIT(A) has held that there was no such embargo for the preceding years. Disallowance u/s.14A - as per AO the assessee has incurred certain expenditure towards interest and also these investments were made out of borrowed funds in the group companies - Held that - CIT(A) found that the assessee has made investment in the sister concern out of its non-interest bearing funds, which is not disputed by ld D.R. and also the investments have been made with profit motive. Thus the CIT(A) correctly found that the disallowance is not in order - Decided against revenue.

Summary

Issues:
1. Disallowance of CSR/donation expenses
2. Disallowance u/s.14A of the Income Tax Act, 1961

Analysis:

1. Disallowance of CSR/donation expenses:
The Assessing Officer disallowed a sum of &8377; 77,01,165/- out of total expenses claimed by the assessee, which included donations to various charitable institutions. On appeal, the CIT(A) allowed relief by disallowing &8377; 51,165/- and allowing &8377; 76,50,000/-. The Revenue contended that the expenses claimed were not wholly and exclusively for business purposes, lacking nexus with business objectives. However, the ITAT found that the donations were made to institutions engaged in medical treatment, education for the handicapped, and needy children, aligning with charitable purposes. The ITAT noted that the CIT(A) correctly referenced the decision of the Karnataka High Court and considered the amendment in the Finance Act, concluding that the disallowance was not justified. Therefore, the ITAT dismissed the Revenue's appeal on this ground.

2. Disallowance u/s.14A of the Income Tax Act, 1961:
The Assessing Officer disallowed &8377; 50,77,701/- under section 14A of the Act, pertaining to the investment in shares of a group company. The CIT(A) overturned this disallowance, noting that interest on borrowed funds attributable to the investment was added to the cost of investment, reducing the interest debited to the profit and loss account. The Revenue argued that the interest component related to exempt income should not be allowed. However, the ITAT upheld the CIT(A)'s decision, emphasizing that the investment was made with a profit motive and out of non-interest bearing funds. The ITAT concluded that the disallowance was unwarranted, affirming the CIT(A)'s order and dismissing the Revenue's appeal.

In conclusion, the ITAT upheld the CIT(A)'s decisions on both issues, dismissing the Revenue's appeal in its entirety.