2018 (5) TMI 1720 - AT - Income Tax

Whether Corporate Social Responsibility expenses incurred by the assessee is an allowable expenditure or not? - Held that - these expenditure has to be examined from the basis that whether it have been expended wholly and exclusively for the purposes of its business or not - since explanation (2) to section 37 (1) is introduced by the finance No. 2 of 2014 and thus cannot be applied in present case for AY 2010-11 - hence the issue is set aside to the file of AO to determine the nature of these expenditure - and its allowance u/s 37(1) - thus allowed for statistical purposes.

Summary

Issues:
Whether Corporate Social Responsibility expenses incurred by the assessee is an allowable expenditure or not.

Analysis:
1. The appeal was filed against the order of the Commissioner of Income Tax (Appeals) confirming the disallowance of Corporate Social Responsibility Expenses. The appellant argued that the expenses were in line with guidelines set by the Department of Public Enterprises and were mandatory for Central Public Sector Enterprises.
2. The main issue was whether the disallowance of &8377; 72,28,051/- made by the Assessing Officer on the grounds of CSR expenditure being capital in nature was justified. The appellant contended that the expenses were for the welfare of employees and communities surrounding their units, falling under section 37(1) of the Income Tax Act.
3. The CIT (Appeal) held that the expenses cannot be disallowed under explanation (2) of section 37(1) as it was applicable from 01.04.2015 onwards. However, the disallowance was confirmed due to the lack of evidence showing how the requirements of section 37 were fulfilled.
4. The appellant argued that the expenses were incurred for the welfare of employees and localities near their units, making them allowable under section 37(1). The introduction of explanation (2) was supported by the appellant.
5. The Assessing Officer and the Departmental Representative supported the disallowance, claiming that the amendment to section 37(1) was retrospective and clarificatory in nature.
6. The ITAT considered the contentions of both parties and observed that the appellant, a Central Government Public Sector Undertaking, had incurred the CSR expenses for the welfare of staff and localities near its units. The ITAT found that the expenses needed to be examined to determine if they were laid out exclusively for business purposes.
7. It was noted that neither the Assessing Officer nor the CIT (Appeal) had examined the expenses from the perspective of being wholly and exclusively for business purposes. The introduction of explanation (2) to section 37(1) was effective from A.Y. 2015-16 onwards, making it inapplicable for the current A.Y. 2010-11.
8. The ITAT set aside the issue to the Assessing Officer for re-examination, directing to assess whether the expenses were allowable under section 37(1) and for the appellant to provide necessary explanations.
9. Consequently, the appeal by the assessee was allowed for statistical purposes, and the order was pronounced on 21.03.2018.