2021 (3) TMI 257 - AT - Income Tax

Disallowance of CSR SD expenses u/s 37 - Expenses not been incurred for the purpose of business of the appellant - as per assessee appellant being a government of India undertaking and CSR and SD expenses having been incurred as per mandatory guidelines issued by Department of Public Enterprises, Ministry of heavy industry, the expenses are exclusively for the purpose of business and in accordance with provisions of section 37 - HELD THAT - A similar issue was considered by the Tribunal in A.Ys 2013-14 and 2014-15 2021 (1) TMI 530 - ITAT DELHI Just because the expenditure was voluntary in nature and was not forced on the assessee by a statutory obligation, it could not cease to be a business expenditure. Therefore, the authorities below indeed erred in law in declining deduction of the expenditure incurred which was, beyond dispute or controversy, at the instance of the Government, and was to discharge the assessee s obligations towards society as a responsible corporate citizen - no illegality or perversity in the findings returned by the ld. CIT (A) in deleting the addition made by the AO on account of disallowance of CSR expenditure. Revenue recognition - Interest on mobilisation advance - interest on the mobilization amount claimed by the assessee - hybrid method of accounting adopted over the years, the interest amount had to be treated as income HELD THAT - An identical issue was considered by the Hon'ble Delhi High Court in assessee s own case 2016 (12) TMI 1842 - DELHI HIGH COURT the entire matter is contentious in the sense that the third party - RPCL - which was awarded the contract claimed that it had performed it in accordance with the agreement with the parties. The assessee, however, felt otherwise and terminated the contract. There could be several likely outcomes in these proceedings many of them possibility impinging upon the rights of the assessee to receive advance amount itself along with interest either in whole or in part. In these circumstances, the ITAT s conclusions that there was no crystallized right to receive any particular amount or amounts, cannot be faulted. No question of law arises. Disallowance made u/s 14A - Non recording of satisfaction - HELD THAT - As decided in own case 2021 (1) TMI 530 - ITAT DELHI according to the provisions of section 14A(2), the Ld. assessing officer before invoking the applicability of Rule 8D should have explained as to why the voluntary disallowances or no disallowances made by the assessee was unreasonable and unsatisfactory. We failed to find any such satisfaction recorded by the Ld. assessing officer. The satisfaction is mandatory therefore we direct the Ld. assessing officer to delete the disallowance under section 14A of the income tax act applying the provisions of Rule 8D. Assessee appeal allowed.

Summary

Issues Involved:
1. Disallowance of CSR & SD expenses under Section 37.
2. Addition of deemed income on mobilization advance.
3. Disallowance under Section 14A read with Rule 8D.

Issue-wise Detailed Analysis:

1. Disallowance of CSR & SD Expenses under Section 37:
The first issue pertains to the disallowance of CSR and SD expenses amounting to ?4,52,21,943/- under Section 37 of the Income Tax Act. The assessee, a government undertaking, argued that these expenses were incurred as per mandatory guidelines issued by the Department of Public Enterprises, Ministry of Heavy Industry, and were exclusively for business purposes. The Tribunal noted that similar issues had been decided in favor of the assessee in previous assessment years (2013-14 and 2014-15). The Tribunal observed that the Assessing Officer (AO) had mechanically disallowed the expenses without analyzing their nature and purpose. It was emphasized that CSR expenses were incurred as per government guidelines and were necessary for the business. The Tribunal cited previous judgments, including those from the Kerala High Court and ITAT Mumbai, which supported the allowance of CSR expenses for government undertakings. Consequently, the Tribunal allowed the ground in favor of the assessee, stating that the AO had misinterpreted Section 37(1) and ignored the rule of consistency.

2. Addition of Deemed Income on Mobilization Advance:
The second issue involved the addition of ?201.66 crores as deemed income on mobilization advance. The assessee contended that no such income had accrued or been received, and the claim was contingent. The Tribunal referred to a similar issue decided by the Hon'ble Delhi High Court in the assessee's own case for A.Y. 2008-09. The High Court had held that the entitlement to the amount had not crystallized due to the contentious nature of the matter, and thus, it could not be treated as income. The Tribunal noted that the AO and CIT(A) had rejected the assessee's contention, but the ITAT had previously ruled that the amount could not be treated as income as it had not crystallized. Following the High Court's decision, the Tribunal allowed this ground in favor of the assessee.

3. Disallowance under Section 14A read with Rule 8D:
The third issue was the disallowance of ?57,52,225/- under Section 14A read with Rule 8D. The assessee argued that the disallowance was made without recording any satisfaction as required under sub-sections 2 and 3 of Section 14A. The Tribunal referred to its previous decisions in the assessee's own cases for A.Y. 2009-10, 2010-11, and 2013-14, where it had been held that the AO must record satisfaction before invoking Rule 8D. The Tribunal found that the AO had not recorded any such satisfaction, making the disallowance unsustainable. The Tribunal directed the AO to delete the disallowance, following the judicial precedents of the jurisdictional High Court. Consequently, this ground was also allowed in favor of the assessee.

Conclusion:
The appeal filed by the assessee was allowed, with all grounds decided in favor of the assessee. The Tribunal's order was pronounced in the open court on 02.03.2021.