2024 (11) TMI 855 - AT - Income Tax

Deduction claimed u/s 80G under Chapter VIA in respect of donations which also qualifies as CSR expenditure and expressly disallowed u/s 37(1) - HELD THAT - Even there is no explanation provided under the Income Tax Act as to why the contributions towards Swachh Bharat Kosh and Clean Ganga Fund set up by the Central Government are not eligible for claiming deduction u/s 80G whereas, there is no such restriction in relation to other type of contributions and to the institutions whose names find mention in Schedule VII of the Companies Act read with CSR Rules of 2014 and CSR Rules of 2021, as well as u/s 80G the even u/s 35 of the Act. Rather, as noted above, in the explanatory notes explaining the amendment to section 37(1), it has been clarified by the CBDT that if the funds meant for CSR are spent and are in the nature of expenditure described u/s 30 to 36 of the Act, that shall be allowed as deduction under those sections, despite the fact that such funds are made towards discharge of CSR obligation. Hence, this clarifies the position that the purpose of introduction of Explanation-2 to section 37(1) is not to disallow the CSR expenditure, if so admissible, under any other provision of the Act, but under section 37 only. Contention of the ld. DR, that u/s 80G(2)(a) the deduction is admissible on the sum paid by the assessee to the approved institutions as donations - The term donations refers to a gift usually one of a charitable nature. That the donation is a voluntary transfer of property by the doner to the donee without any exchange of value on the part of the recipient and that the CSR expenditure u/s 135 of the Companies Act, 2013 is a mandatory/statutory obligation and cannot be termed as donation . Though, on the face of it, there seems to be some force in the aforesaid contention of the ld. DR, however, on deeper analysis of the facts, we find that this contention is not applicable in this case. Though, there is a statutory obligation of CSR expenditure u/s 135 of Companies Act 2013, however there are many prescribed modes and activities under Schedule VII of the Companies Act for spending the CSR expenditure, which list is not exhaustive rather inclusive. There is no provision either u/s 135 of the Companies Act or under Schedule VII to the Companies Act or the CSR Rules, requiring mandatory donations to the institutes/funds prescribed under the relevant provisions of section 80G of the Income Tax Act. Therefore, there was no compulsion upon the assessee to donate the funds to a charitable organisation approved u/s 80G of the Income Tax Act.The assessee has chosen this mode out of its own volition. When a taxing statute imposes a financial burden/tax liability even though the same appears to be harsh and not equitable, the courts have held that the fiscal statues are to be interpreted in strict terms and such liability cannot be set aside on the ground of equity or natural justice. The vice-versa is also true. Since, there is no bar to claim deduction under the relevant provisions of section 80G, except wherein so specifically barred i.e. in respect of donation towards Swachh Bharat Kosh and Clean Ganga Fund, the same cannot be denied to an assessee importing or reading the barring provisions of some other section to the entire provisions of section 80G. In view of the above discussion, the assessee, in our view, is not barred from claiming deduction u/s 80G of the Income Tax Act in respect of donations made to the approved institutions even though the same is made in discharge of CSR obligation u/s 135 of the Companies Act.

Summary

Issues Involved:

1. Whether the amount paid to charitable institutions approved under Section 80G of the Income Tax Act, out of CSR expenditure mandated under Section 135 of the Companies Act, is eligible for deduction under Section 80G.
2. Interpretation of Explanation 2 to Section 37(1) of the Income Tax Act concerning CSR expenditure.
3. The applicability of CSR expenditure under other sections of the Income Tax Act, such as Section 35 and Section 80G.
4. The implications of amendments and rules under the Companies Act and Income Tax Act on CSR expenditure.

Issue-wise Detailed Analysis:

1. Eligibility of CSR Expenditure for Deduction under Section 80G:

The core issue was whether donations made to charitable institutions approved under Section 80G, out of CSR obligations, qualify for deduction under Section 80G. The tribunal held that there is no explicit prohibition under Section 80G, except for donations to Swachh Bharat Kosh and Clean Ganga Fund, which are specifically barred. The tribunal noted that the legislative intent did not extend the bar on deductions to other donations made in compliance with CSR obligations, thus allowing such deductions under Section 80G.

2. Interpretation of Explanation 2 to Section 37(1):

Explanation 2 to Section 37(1) clarifies that CSR expenditure is not deductible as business expenditure. The tribunal observed that this explanation was inserted to prevent companies from claiming CSR expenses as business expenses. However, it was clarified that this bar applies only to Section 37(1) and not to other sections like Section 80G, which allows deductions for donations.

3. Applicability of CSR Expenditure under Other Sections:

The tribunal discussed the applicability of CSR expenditure under other sections like Section 35, which allows deductions for scientific research contributions. It highlighted that while CSR expenses are not deductible under Section 37(1), they can still be eligible under other sections if they meet the specified conditions. The tribunal emphasized that the legislative intent was not to disallow CSR expenditure under all provisions of the Income Tax Act.

4. Implications of Amendments and Rules:

The judgment analyzed various amendments and rules under the Companies Act and Income Tax Act, particularly the CSR Rules of 2014 and 2021. It was noted that the CSR Rules require companies to ensure that CSR funds are utilized for specified projects, and mere donations to charitable institutions do not suffice. The tribunal pointed out anomalies in the legislative framework, such as the lack of rationale for barring deductions for certain funds while allowing others and the potential for unequal treatment of companies based on how they fulfill CSR obligations.

Conclusion:

The tribunal allowed the appeals, concluding that the assessee is entitled to claim deductions under Section 80G for donations made to approved institutions, even if made in discharge of CSR obligations. The tribunal also highlighted the need for legislative clarity to address inconsistencies and potential disputes regarding CSR-related deductions.