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2019 (2) TMI 40 - AT - Income TaxRevision u/s 263 - allowability of Corporate Social Responsibility (CSR) expenditure - Held that - Section 37 has been amended to clarify that for the purposes of sub-section (1) of section 37 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 have been incurred for the purpose of business and hence shall not be allowed as deduction under said section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Act shall be allowed as deduction under those sections subject to fulfillment of conditions, if any, specified therein. But this amendment takes effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years. The relevant assessment year before us is 2013-14 and hence this amendment will not apply to this case of assessee s case. Respectfully following the principle laid down by the Hon ble Supreme Court in the case of Vatika Township (P.) Ltd. 2014 (9) TMI 576 - SUPREME COURT we hold that the ammendment brought out in section 37(1) by inserting explanation 2 by Finance (No. 2) Act, 2014 w.e.f. 01.04.2015 is prospective and assessee s assessment year being 2013-14 will not apply and hence, revision proceedings of CIT is without any basis and quashed. - Appeal of assessee is allowed.
Issues Involved:
1. Allowability of Corporate Social Responsibility (CSR) expenditure. 2. Retrospective vs. prospective application of Explanation 2 to Section 37(1) of the Income Tax Act, 1961. Detailed Analysis: 1. Allowability of Corporate Social Responsibility (CSR) Expenditure: The primary issue in this appeal is the allowability of CSR expenditure as a deductible expense under the Income Tax Act, 1961. The assessee, a public sector undertaking engaged in electricity generation, claimed ?15.70 crores under administrative and other expenses for CSR. The CIT(LTU) revised the assessment order under Section 263, arguing that the CSR expenses should not be allowed as a deduction based on Explanation 2 to Section 37(1) introduced by the Finance (No. 2) Act, 2014, effective from 01.04.2015. This explanation specifies that CSR expenditure as per Section 135 of the Companies Act, 2013, is not deemed to be incurred for business purposes and hence, not deductible. 2. Retrospective vs. Prospective Application of Explanation 2 to Section 37(1): The assessee contended that the amendment to Section 37(1) is prospective, applicable from the assessment year 2015-16 onwards, and should not affect the assessment year 2013-14. The CIT(LTU), however, did not find any explicit mention that the amendment is not retrospective and directed the AO to disallow the CSR expenditure. The Tribunal examined the amended provision and noted that the Companies Act, 2013, mandates certain companies to spend a percentage of their profits on CSR activities. Under the existing provisions, only expenses incurred wholly and exclusively for business purposes are deductible. Since CSR expenditure is not incurred for business purposes but rather as an application of income, it is not deductible under Section 37. The Tribunal referred to the Hon’ble Supreme Court's decision in CIT vs. Vatika Township (P.) Ltd, which established the principle that amendments imposing new obligations or liabilities are presumed to be prospective unless the legislative intent clearly indicates otherwise. The Supreme Court emphasized that retrospective application is generally avoided unless the amendment is clarificatory or declaratory in nature. The Tribunal concluded that the amendment to Section 37(1) is prospective, effective from 01.04.2015, and does not apply to the assessment year 2013-14. Therefore, the revision proceedings initiated by the CIT(LTU) were deemed without basis, and the appeal of the assessee was allowed. Conclusion: The Tribunal allowed the appeal of the assessee, holding that the amendment to Section 37(1) introduced by the Finance (No. 2) Act, 2014, is prospective and does not apply to the assessment year 2013-14. Consequently, the revision order passed by the CIT(LTU) was quashed. The decision was pronounced in the open court on 31-12-2018.
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