2019 (2) TMI 1538 - AT - Income Tax

Disallowance of Corporate Social Responsibility (CSR) - allowable business expenditure - HELD THAT - Explanation 2 has been inserted in the section 37 (1) w.e.f. 01/04/15 and is prospective in nature. In our considered opinion amendment by way of Explanation 2 to Sec.37(1) cannot be construed as disadvantage to the assessee in the period prior to the amendment. It is a disabling provision, as set out in Explanation 2 to Sec.37(1), and refers to such Corporate Social Responsibility expenses u/s 135 of Companies Act, 2013 and as such cannot have application for period not covered by this Statutory Provision which itself came into existence in 2013. We draw our support from the decision in case of CIT vs. Vatika Townships Pvt. Ltd. 2014 (9) TMI 576 - SUPREME COURT . Amendment would not affect allowability of such expenses for the year under consideration, being assessment year 2012-13. It is observed that authorities below rejected claim of assessee only on the ground that Explanation 2 to Sec.37(1) is applicable to year under consideration. Allow grounds raised by assessee. As we have already allowed the said expenses under section 37 (1) for the year under consideration, the alternate claim raised by assessee under section 35AC and 80 G of the Act becomes academic in nature. - Decided in favour of assessee.

Summary

Issues:
Disallowance of Corporate Social Responsibility (CSR) expenses, Non-consideration of alternate claim under Sections 35AC and 80G, Influence of Explanations under Companies Act 2013, Tax demanded, Independence of appeal grounds.

Analysis:
1. Disallowance of CSR Expenses:
The case involved the disallowance of Corporate Social Responsibility (CSR) expenses claimed by the assessee. The Assessing Officer (AO) disallowed the expenses as being towards CSR, which he believed could not be allowed. The CIT (A) upheld the AO's decision. The assessee argued that the expenses were incurred under government directions for public projects and fell within the purview of section 2(15) of the Income Tax Act, qualifying for deduction under sections 35AC and 80G. The expenses were detailed to show activities like education, healthcare, and skill development. The Senior DR, however, argued that the expenses should not be debited to the Profit and Loss account based on guidelines and the Finance Act (No. 2) 2014.

2. Non-consideration of Alternate Claim:
The assessee also raised an alternative plea for allowing the expenses under sections 35AC and 80G of the Act. It was argued that the expenses were incurred voluntarily towards various social causes and were eligible for exemption under section 80G and a few under section 35AC. The Senior DR contended that the expenses towards CSR were not deductible against business income based on the 2014 amendment, which was considered clarificatory in nature. The AO and CIT (A) made the addition based on this premise.

3. Influence of Explanations under Companies Act 2013:
The authorities below were influenced by Explanations under section 37 of the Act inserted concerning the Companies Act 2013. The insertion was considered clarificatory by the Senior DR, leading to the disallowance of CSR expenses. However, the Tribunal disagreed, citing the prospective nature of the amendment and the principle that legislation is presumed not to have retrospective operation unless a contrary intention appears.

4. Tax Demanded:
The assessee contended that the tax demanded was incorrect, which was not elaborated upon in the judgment but was part of the grounds of appeal.

5. Independence of Appeal Grounds:
The grounds of appeal were stated to be independent and without prejudice to each other. The appellant sought leave to add, amend, alter, or abandon any of the grounds at the time of the appeal hearing. This ensured flexibility in presenting arguments during the appeal process.

In conclusion, the Tribunal allowed the appeal filed by the assessee, rejecting the arguments of the Senior DR regarding the disallowance of CSR expenses. The Tribunal held that the amendment by way of Explanation 2 to Section 37(1) was prospective in nature and did not affect the allowability of such expenses for the assessment year 2012-13. The alternate claim under sections 35AC and 80G became academic as the expenses were already allowed under section 37(1) for the year under consideration.