2022 (6) TMI 681 - AT - Income Tax

Disallowance of Corporate Social Responsibility (CSR) expenses u/s 37(1) - HELD THAT - As per section 135 of the Companies Act, 2013, every company having net worth of Rs. 500/- crores or more, or turnover of Rs. 1000/- crores or more, or a net profit of Rs. 5 crores or more during the immediately preceding financial year has to spent a certain percentage out of their profit towards CSR activities. Prior to amendment to section 37(1) of the Act by the Finance Act, 2014 by insertion of Explanation 2, CSR expenses were allowed as deduction under section 37(1) of the Act, as, there was no specific bar either u/s 37(1) of the Act or under any other provision for claiming deduction for CSR expenses. There are number of judicial precedents which have expressed the aforesaid view, some of these decisions have been cited before us by learned counsel for the assessee. Thus, prior to insertion of Explanation 2 to section 37(1) of the Act, w.e.f., 01.04.2014, as per settled legal position, it is an allowable expenditure under Section 37(1). A specific bar for allowing such expenditure u/s 37(1) of the Act was brought to the statue by Finance Act, 2014 effective from 01.04.2014. The amendment, no doubt, will apply prospectively. Thus, following the various judicial precedents cited before us, we hold that CSR expenses incurred by the assessee are allowable as deduction under section 37(1). Disallowance made under section 14A read with Rule 8D - assessee suo motu worked out the disallowance under section 14A by applying the methodology provided under Rule 8D(2)(iii) - HELD THAT - Undisputedly, while computing the income in the return of income filed for the impugned assessment year, the assessee has suo motu disallowed an amount of Rs.3.50 crores under section 14A read with Rule 8D. However, in course of assessment proceeding, the assessee filed a revised working of disallowance under rule 8D(2)(iii) by computing the disallowance of Rs.5.33 lakhs. While AO completely ignored the revised computation - Commissioner (Appeals) rejected assessee s claim. Before us, learned counsel for the assessee submitted that the methodology adopted by the assessee in the revised computation of disallowance under section 14A read with Rule 8D was also adopted by the assessee in assessment years 2008-09 and 2009-10 and while giving effect to the direction of the learned Commissioner (Appeals), the AO has adopted such methodology and computed disallowance under Section 14A read with Rule 8D. We direct the Assessing Officer to examine the revised computation of disallowance under section 14A read with Rule 8D of the Act as filed by the assessee and if it is found similar to the methodology adopted by the assessee in assessment years 2008-09 and 2009- 10, which, as submitted, were accepted by the AO while giving effect to the orders of Commissioner (Appeals) in assessment year 2008-09 and 2009-10, assessee claim may be accepted. Appeal is allowed for statistical purposes. We direct the AO to examine the revised computation of disallowance under section 14A read with Rule 8D of the Act as filed by the assessee and if it is found similar to the methodology adopted by the assessee in assessment years 2008-09 and 2009- 10, which, as submitted, were accepted by the AO while giving effect to the orders of Commissioner (Appeals) in assessment year 2008-09 and 2009-10, assessee claim may be accepted. Needless to mention, assessee must be provided due opportunity of being heard before deciding the issue. This ground is allowed for statistical purposes.

Summary

Issues:
1. Disallowance of Corporate Social Responsibility (CSR) expenses.
2. Disallowance made under section 14A read with Rule 8D.

Issue 1: Disallowance of Corporate Social Responsibility (CSR) expenses
The appellant challenged the disallowance of CSR expenses of Rs.5329 lakhs for the assessment year 2013-14. The Assessing Officer disallowed the expenditure, considering it as of capital nature and not incurred wholly and exclusively for business purposes. The Commissioner (Appeals) upheld the disallowance on the grounds that the expenditure did not serve the business purpose entirely. However, the appellant argued that prior to the amendment to section 37 of the Act by the Finance Act, 2014, CSR expenses were allowed as a deduction. The Tribunal examined the legal position and held that CSR expenses were allowable under Section 37(1) of the Act before the amendment. The Tribunal ruled that the amendment would apply prospectively and allowed the appellant's claim for CSR expenses as a deduction under section 37(1) of the Act.

Issue 2: Disallowance made under section 14A read with Rule 8D
The assessee made a disallowance under section 14A by applying Rule 8D(2)(iii) for Rs.3,50,83,000 during the assessment year. The Assessing Officer ignored the revised computation provided by the assessee and upheld the original disallowance. The Commissioner (Appeals) also rejected the revised claim of the assessee. The appellant contended that the methodology adopted in the revised computation was consistent with previous years and should be accepted. The Tribunal directed the Assessing Officer to reexamine the revised computation of disallowance under section 14A read with Rule 8D, following the methodology adopted in previous assessment years. The Tribunal allowed the ground for statistical purposes, emphasizing that the assessee should be given a fair opportunity to present their case. Ultimately, the appeal was allowed for statistical purposes.

In conclusion, the Tribunal allowed the appellant's claim for CSR expenses as a deduction under section 37(1) of the Act and directed a reexamination of the disallowance under section 14A read with Rule 8D, ensuring fairness and consistency in the assessment process.