2019 (2) TMI 1346 - AT - Income Tax

Disallowance of claim of CSR and SD expenses - allowable expenses u/s 37(1) - HELD THAT - AO disallowed the above expenditure applying the provision of explanation 2 to section 37(1) of the Act which has been introduced w.e.f. 01.04.2015. The decision cited by the ld AR M/S. HLL LIFECARE LIMITEDC/O. K. VENKATACHALAM AIYER AND CO. CHARTERED ACCOUNTANTS VERSUS THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE 1 (1) , TRIVANDRUM 2018 (6) TMI 552 - ITAT COCHIN clearly covers the issue in favour of the assessee that the explanation 2 introduced w.e.f. 01.04.2015 applies from Assessment Year 2015-16 only. The ld DR could not produced any contrary decision wherein, it has been held that above explanation applies with retrospective effect. Therefore, we hold that for AY 2013- 14 CSR expenditure cannot be disallowed by invoking the explanation 2 to section 37(1) of the Act. In view of this we reverse the order of the lower authorities and direct the ld AO to delete the disallowance of CSR expenses and sustainable development expenses - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of claim of CSR and SD expenses under section 37.
2. Applicability of Explanation 2 to section 37(1) introduced by Finance Act(No.2), 2014.
3. Disallowance upheld by the CIT(A) for CSR and SD expenses.
4. Whether CSR and SD expenses have a direct nexus with business activities.

Analysis:
1. The appeal was filed against the order of the CIT(A) confirming the disallowance of CSR and SD expenses. The assessee argued that these expenses were allowable under section 37(1) of the Income Tax Act, 1961, and the explanation 2 to section 37(1) inserted vide Finance Act(No.2), 2014 was prospective in nature and not applicable to the year under consideration. The appellant, being a government undertaking, incurred these expenses in compliance with mandatory guidelines, making them in accordance with the provisions of section 37(1). The assessee contended that these expenses had a direct nexus with business activities, and there was no legal basis for their disallowance.

2. The brief facts revealed that the assessee, engaged in technical consultancy services and turnkey contracts for hydel power, had filed its return of income for the Assessment Year 2013-14. The Assessing Officer disallowed CSR and sustainable development expenses, leading to an appeal before the CIT(A). The CIT(A) upheld the disallowance, citing explanation 2 to section 37(1) introduced by the Finance Act No. 2 of 2014. The CIT(A) held that even prior to the amendment, CSR expenses were disallowable, and confirmed the disallowance of sustainable development expenses as well, deeming them akin to CSR expenses.

3. The only issue in the appeal pertained to the disallowance of CSR and sustainable development expenses. The appellant argued that the explanation introduced in 2015 was not applicable to the assessment year 2013-14 and cited relevant decisions supporting this contention. The appellant submitted evidence of the nature and expenditure of CSR and sustainable development activities undertaken, along with guidelines issued by the Ministry of Heavy Industries and Public Enterprises. The appellant maintained that these expenses were incurred in line with government guidelines, making them allowable.

4. After considering the contentions and reviewing the orders of the lower authorities, it was noted that the explanation 2 to section 37(1) introduced in 2015 applied from the assessment year 2015-16 only. The decision of the coordinate bench favored the assessee, stating that the explanation did not apply retrospectively. As no contrary decision was presented by the Revenue, the Tribunal held that for the assessment year 2013-14, CSR expenses could not be disallowed under the said explanation. Consequently, the order of the lower authorities was reversed, directing the Assessing Officer to delete the disallowance of CSR and sustainable development expenses. The appeal of the assessee was allowed accordingly.