2025 (4) TMI 586 - AT - Income Tax

Denial of deduction u/s 80G - donations/contributions made towards its corporate social responsibility especially when the assessee company suo-motto disallowed the claim of expenditure U/s 37 of the Act. HELD THAT - The existing approval u/s 80G(5)(vi) of the Act expiring on or after 1st October 2009 shall be deemed to have been extended in perpetuity unless specifically withdrawn. Any new approval obtained u/s 80G(5) of the Act on or after 1.10.2009 would be a one time approval which would be valid till it is withdrawn. Therefore in view of the circular No.7/2010 dated 27.10.2010 we are of the opinion that this ground of the ld. CIT(A)/NFAC is not tenable. Section 37(1) of the Act pertains solely to the computation of income from business or profession and its scope is confined to allowing or disallowing expenditure incurred for business purposes. On the other hand section 80G provides deduction for donation made to specified funds and institutions while computing the taxable income of the assessee. Disallowance of CSR expenditure under explanation 2 to section 37(1) of the Act applies only in the context of determining its income from business and does not preclude an assessee from claiming deduction under Chapter VIA (which includes section 80G) for eligible donation. While CSR expenditure is mandatory u/s 135 of the Companies Act 2013 the assessee retains discretion over the recipients of such contributions. When such contributions are made to approved institutions or fund u/s 80G of the Act they qualify as donation for the purpose of that section even if incurred under a statutory obligation . The term donation u/s 80G of the Act includes both voluntary contributions and mandatory payments made to specified entities. The mandatory nature of CSR expenditure does not dilute its eligibility for deduction u/s 80G of the Act as the deduction depends on the nature of recipient and compliance of the conditions specified u/s 80G of the Act. We hereby set aside the orders of ld. AO and direct him to delete the addition made in both these assessment years. Hence the grounds of appeal of the assessee

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

1. Whether the disallowance of Corporate Social Responsibility (CSR) expenditure under Section 37(1) of the Income Tax Act, 1961 precludes the assessee from claiming a deduction under Section 80G for donations made towards CSR activities.

2. Whether the receipts issued by donee organizations lacking explicit approval under Section 80G affect the deductibility of donations made by the assessee.

3. Whether the statutory interest levied under Sections 234A and 234C should be deleted considering the facts and circumstances of the case.

ISSUE-WISE DETAILED ANALYSIS

1. Deduction under Section 80G for CSR Expenditure

Relevant Legal Framework and Precedents: The Income Tax Act, specifically Section 37(1), disallows CSR expenditure as a business deduction, while Section 80G allows deductions for donations to specified funds and institutions. The Finance (No. 2) Act, 2014, introduced Explanation 2 to Section 37(1), clarifying that CSR expenditure is not deductible as business expenditure.

Court's Interpretation and Reasoning: The Tribunal noted that Section 37(1) pertains to business income computation, whereas Section 80G addresses deductions for donations in computing taxable income. The Tribunal emphasized that the disallowance under Section 37(1) does not preclude claiming deductions under Section 80G, provided the donations are made to approved institutions.

Key Evidence and Findings: The Tribunal considered the assessee's voluntary disallowance of CSR expenditure under Section 37 and its claim for deduction under Section 80G. The Tribunal also examined the CBDT Circular No. 7/2010, which clarifies the perpetual validity of Section 80G approvals post-October 2009 unless withdrawn.

Application of Law to Facts: The Tribunal applied the legal distinction between Sections 37(1) and 80G, concluding that CSR expenditure, though disallowed under Section 37(1), can qualify for deduction under Section 80G if the donations meet the section's requirements.

Treatment of Competing Arguments: The Tribunal rejected the Revenue's argument that allowing deductions under Section 80G for CSR expenditure would defeat legislative intent. It emphasized the independent nature of the provisions and the specific exclusions mentioned in Section 80G.

Conclusions: The Tribunal concluded that the assessee is entitled to deductions under Section 80G for donations made towards CSR activities, provided they comply with the section's conditions.

2. Approval under Section 80G for Donee Organizations

Relevant Legal Framework and Precedents: Section 80G requires donations to be made to approved institutions for deductions. The CBDT Circular No. 7/2010 clarifies the perpetual validity of approvals granted post-October 2009.

Court's Interpretation and Reasoning: The Tribunal interpreted the circular to mean that approvals granted post-October 2009 remain valid indefinitely unless specifically withdrawn.

Key Evidence and Findings: The Tribunal noted that certain donee organizations lacked explicit approval under Section 80G, affecting the deductibility of donations.

Application of Law to Facts: The Tribunal applied the circular's provisions, determining that the approvals should be considered valid unless evidence of withdrawal is provided.

Treatment of Competing Arguments: The Tribunal disagreed with the CIT(A)'s reliance on the absence of explicit approvals, emphasizing the circular's guidance on perpetual validity.

Conclusions: The Tribunal concluded that the lack of explicit approval does not invalidate the deduction claim if the approvals are deemed valid under the circular.

3. Deletion of Statutory Interest under Sections 234A and 234C

Relevant Legal Framework and Precedents: Sections 234A and 234C of the Income Tax Act impose interest for defaults in furnishing returns and deferment of advance tax, respectively.

Court's Interpretation and Reasoning: The Tribunal did not provide a detailed analysis on this issue, focusing primarily on the CSR and Section 80G deductions.

Key Evidence and Findings: The Tribunal did not specifically address evidence or findings related to the statutory interest.

Application of Law to Facts: The Tribunal's decision did not explicitly address the application of Sections 234A and 234C to the case facts.

Treatment of Competing Arguments: The Tribunal did not explicitly address arguments related to statutory interest in its decision.

Conclusions: The Tribunal's decision did not specifically address the deletion of statutory interest.

SIGNIFICANT HOLDINGS

Core Principles Established: The Tribunal established that CSR expenditure disallowed under Section 37(1) does not preclude deductions under Section 80G, provided the donations meet the necessary conditions. The Tribunal reinforced the independent nature of these provisions.

Final Determinations on Each Issue: The Tribunal allowed the assessee's appeal, directing the deletion of additions related to CSR donations under Section 80G for both assessment years. It remanded the issue of verifying Section 80G conditions back to the Assessing Officer.

Verbatim Quotes of Crucial Legal Reasoning: The Tribunal stated, "The mandatory nature of CSR expenditure does not dilute its eligibility for deduction u/s 80G of the Act, as the deduction depends on the nature of recipient and compliance of the conditions specified u/s 80G of the Act."