2023 (1) TMI 779 - HC - Income Tax

Deduction under Section 37(1) - expenditure incurred by the respondent/assessee towards Corporate Social Responsibility - HELD THAT - The conditions for allowing deduction under Section 37 of the Act are broadly the following (a) That the expenditure is not in the nature of capital expenditure. (b) That the expenditure is laid out or expended wholly and exclusively for the purposes of the business or profession. (c) That the deduction qua the expenditure incurred is not of the nature as specified under Sections 30 to 36 of the Act. Insofar as the third criterion is concerned, there is no dispute, that the expenditure claimed does not fall under any of the sections referred to in 37(1) of the Act i.e., Sections 30 to 36. As far as the other aspects are concerned, as noted by the Tribunal, in the past, CSR expenses had been allowed as deductible expenditure under Section 37(1) of the Act. Therefore, the only aspect, which appears to have been agitated before the Tribunal, was that Explanation 2 appended to Section 37(1) of the Act was retrospective in nature. This Explanation was inserted, as noted above, by Finance Act, 2014 with effect from 01.04.2015. That the Explanation appended to Section 37(1) of the Act is prospective has been held by this Court in order dated 29.11.2022 passed in a bunch of appeals, the lead matter 2022 (12) TMI 759 - DELHI HIGH COURT - No substantial question of law arises for consideration.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Allowability of deduction for Corporate Social Responsibility (CSR) expenses under Section 37(1) of the Income Tax Act, 1961.

Detailed Analysis:

1. Condonation of Delay:
The appellant sought condonation of a 146-day delay in filing the appeal, attributing it to administrative reasons beyond their control, without providing a detailed explanation. The counsel mentioned that the delay was due to the impact of the Covid-19 pandemic on the pendency of matters. Despite the discrepancy between the reasons stated in the application and by the counsel, the court decided to condone the delay, ultimately disposing of the application accordingly.

2. Allowability of CSR Expenses:
The appeal challenged the Tribunal's order disallowing the deduction claimed by the respondent for CSR expenses under Section 37(1) of the Act. The appellant argued that the expenditure was not capital in nature and was wholly and exclusively incurred for business purposes. The AO had treated the CSR expenditure as capital expenditure without specifying how it was related to capital assets, leading to an erroneous conclusion. The CIT(A) focused on the business purpose criterion but failed to address the capital nature of the expenses. The Tribunal, considering previous decisions, allowed the CSR expenses as deductible under Section 37(1) of the Act.

The Tribunal's decision was supported by the fact that CSR expenses historically fell under allowable deductions and that the insertion of Explanation 2 to Section 37(1) by the Finance Act, 2014 was prospective, not retrospective. A previous judgment confirmed the prospective nature of this Explanation. Consequently, the court declined to interfere with the Tribunal's order, finding no substantial question of law for consideration. The appeal was closed accordingly.