2018 (6) TMI 893 - AT - Income Tax

Disallowance made on account of peripheral development expenses - allowable busniss expenses - Held that - The expenditure on peripheral development was incurred by the assessee as a part of corporate social responsibility as per the scheme framed under the Companies Act - such expenditure was incurred by the assessee even in the earlier years and the same was allowed by the A.O. even in the assessment made u/s 143(3) CSR expenditure incurred for construction of schools, electrification of schools etc. it is submitted that the said expenditure cannot be treated as capital in nature as neither the ownership of the school belonged to the assessee nor it had any control over the running of school - expenditure incurred for construction of a block by way of addition to the school building located in a village in the vicinity of mines was incurred for the benefit of its workers and general public - also explanation 2 to Section 37 inserted by the Finance Act, 2014 with effect from 01.04.2015 is not retrospective - hence we are of the view that the action of the A.O. in disallowing the claim of the assessee for peripheral development expenditure as a part of CSR was not well founded and the Ld. CIT(A) was not justified in confirming the said disallowance - thus we delete the same - Decided in favor of assessee.

Summary

Issues: Disallowance of peripheral development expenses

Analysis:
1. Issue of Disallowance: The appeal was against the disallowance of ?36,92,842 made by the AO and confirmed by the Ld. CIT(A) on account of peripheral development expenses.

2. Assessee's Argument: The company argued that the expenses were incurred for the welfare of workers and the public, not capital in nature, and were wholly and exclusively for business purposes, thus allowable under Section 37(1) of the Income Tax Act.

3. AO's Disallowance: The AO contended that the creation of a CSR reserve was appropriation of profits, and the expenses were mainly for capital purposes like school construction. He relied on Explanation 2 to Section 37, stating CSR expenses were not allowable as business expenditure.

4. Appellate Proceedings: The assessee challenged the disallowance before the Ld. CIT(A), citing obligations for welfare expenses and non-retrospective nature of Explanation 2 to Section 37. However, the Ld. CIT(A) upheld the disallowance.

5. Tribunal Decision: The Tribunal observed that the expenses were incurred as part of CSR, not a reserve creation, and had been allowed in previous assessments. It noted the expenses were not capital in nature as the company did not own the school. Relying on a precedent, the Tribunal held the disallowance was unjustified and allowed the appeal, deleting the disallowance.

6. Conclusion: The Tribunal ruled in favor of the assessee, emphasizing that the expenses were for CSR, not capital in nature, and were wholly and exclusively for business purposes, thus allowable under Section 37(1) of the Income Tax Act. The disallowance was deemed unwarranted, and the appeal was allowed.