2022 (3) TMI 835 - AT - Income Tax

Reopening of assessment u/s 147 - allowance of Corporate Social Responsibility expenses - contention of the ld. AR is that this issue was already considered by the AO in the original assessment and the AO cannot reopen the assessment on the same issues on change of opinion - HELD THAT - We are of the opinion that in the present case, the AO wanted to review his own earlier order in the garb of reopening the assessment u/s. 147, which is nothing but change of opinion on the issue which was concluded by him by taking a decision in favour of the assessee in the original assessment. Accordingly, we are of the opinion that reopening of assessment in this case is bad in law. Accordingly, we quash the reassessment.. Nature of expenditure - Penalty expenses in illegal mining areas - HELD THAT - In our opinion, the issue is squarely covered by the order of the Tribunal in the case of M/s. Veerabhadrappa Sangappa 2020 (12) TMI 1145 - ITAT BANGALORE wherein held that payment is compensatory in nature only as these funds are meant to be used for public purposes and the assessee could not have commenced its operations without paying the same, the same is allowable as revenue expenditure. We are therefore of the view that payment made as compensation is not hit by Explanation 1 to Section 37(1) and is an allowable expenditure Disallowance of CSR expenditure - HELD THAT - Hon ble High Court of Karnataka in the case of CIT v. Infosys Technologies Ltd. 2013 (7) TMI 451 - KARNATAKA HIGH COURT held that, where assessee incurred expenditure on installation of traffic signals at various parts of city in order to secure free movement of its employees so that they reached office in time, amount so spent being a part of its corporate responsibility, was to be allowed as business expenditure as under section 37(1). Assessee appeal allowed.

Issues Involved:
1. Reopening of the assessment.
2. Disallowance of penalty expenses in illegal mining areas.
3. Disallowance of Corporate Social Responsibility (CSR) expenditure.

Issue-wise Detailed Analysis:

1. Reopening of the Assessment:
The first issue pertains to the reopening of the assessment for AY 2013-14. The original assessment was completed under section 143(3) on 29.2.2016, and later reopened by issuing a notice under section 148 on 22.3.2017, leading to an assessment order under section 143(3) r.w.s. 147 with an addition on account of disallowance of CSR expenditure of ?3,20,79,967. The appellant argued that this issue was already addressed in the original assessment, where the AO had raised queries and received responses regarding CSR expenditure. The appellant contended that reopening the assessment on the same issue constitutes a change of opinion, which is impermissible. The respondent argued that the AO exercised jurisdiction under section 147 due to oversight or mistake, and reassessment can be based on information obtained from proper investigation or enquiry.

The tribunal, after reviewing the material on record, concluded that the AO had considered the CSR expenditure during the original assessment and did not make any addition. The reopening was deemed a change of opinion, which is not permissible as per the Supreme Court's ruling in CIT v. Kelvinator of India Ltd. The tribunal quashed the reassessment, holding it as bad in law.

2. Disallowance of Penalty Expenses in Illegal Mining Areas:
For AY 2014-15, the appellant challenged the disallowance of penalty expenses amounting to ?6,92,00,000 incurred due to illegal mining activities. The CIT(A) upheld the AO's disallowance, referencing the Supreme Court's order which categorized these payments as penalties for illegal and reckless mining. The tribunal, however, referred to its decision in M/s. Veerabhadrappa Sangappa & Co. v. ACIT, where it was held that such payments, although termed penalties, were compensatory in nature as they were meant for environmental restoration and not for any specific statutory violation. The tribunal allowed the appellant's claim, treating the expenditure as compensatory and allowable under section 37(1).

3. Disallowance of Corporate Social Responsibility (CSR) Expenditure:
The third issue involved the disallowance of CSR expenditure of ?3,20,79,967 for AY 2013-14 and ?8,40,23,625 for AY 2014-15. The AO disallowed these expenditures, stating that CSR expenses are not incurred wholly and exclusively for business purposes and are considered an application of income. The CIT(A) confirmed the AO's decision. The appellant argued that CSR expenses should be allowed under section 37(1) as they are incurred for business purposes and the amendment to section 37(1) is applicable only from AY 2015-16 onwards.

The tribunal cited its decision in Shri B. Rudragouda v. ACIT, where it was held that the amendment to section 37(1) is prospective and not applicable to the assessment years under consideration. The tribunal also noted that CSR expenses, even if voluntary, could be considered business expenses if they are incurred wholly and exclusively for business purposes. The tribunal allowed the appellant's claim, following judicial precedents that supported the allowance of CSR expenses as business expenditure.

Conclusion:
The tribunal quashed the reassessment for AY 2013-14, allowed the deduction of penalty expenses for illegal mining for AY 2014-15, and permitted the deduction of CSR expenses for both AY 2013-14 and AY 2014-15, thereby ruling in favor of the appellant on all issues.

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