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TMI Blog2022 (12) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... ling provision of Explanation 2 to section 37(1) does not apply on the facts of this case. In assessee s case has incurred expenditure to promote the interest of underprivileged and impaired section of society and to gain goodwill of the people living in the area of operation of the assessee. Therefore respectfully following the decision of Gujarat Narmada Valley Fertilizers Chemicals Ltd. [ 2019 (8) TMI 1288 - GUJARAT HIGH COURT] we hold that Explanation 2 to section 37(1) is not applicable to the assessee s case and therefore the expenses incurred voluntarily by the assessee towards CSR expenditure is allowable u/s 37(1). We also allow the appeal of the assessee. - ITA No.789/Bang/2022 - - - Dated:- 28-11-2022 - Shri George George K. Judicial Member And Shri Laxmi Prasad Sahu, Accountant Member For the Assessee : Shri M.G Vinay Simha, C.A For the Revenue : Shri K.R Narayana, Addl. CIT (DR) ORDER PER LAXMI PRASAD SAHU, ACCOUNTANT MEMBER : This appeal filed by the assessee against the order of National e-Assessment Center (NFAC) dated 13/07/2022 with the following grounds of appeal:- 1. The learned Commissioner of Income Tax (Appeals) is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- being CSP. Activities expenses without considering the nature of business carried out by the appellant. 8.The learned Commissioner of Income Tax (Appeals) has failed to understand the provisions of Section 37(1). white applying section 37(1). The expenditure claimed therein need not be necessarily spent by the assessee. It might be incurred voluntarily and without any necessity , but it must for promoting the business. In other words, if the expenditure has been incurred by the assessee voluntarily, even without necessity, but if it is for promoting the business, the deduction would be permissible under section 37(1) of the Act. 9. The learned Commissioner of Income Tax (Appeals)has failed to understand the fact that Section 37(1), barring the exceptions mentioned therein, the money paid out or away must be paid out wholly and exclusively for the purpose of the business . The assessee can claim the whole of it for deduction in computing the income chargeable under the head Profits and gains of business or profession . 10. The learned Commissioner of Income Tax (Appeals) has sustained the addition on the ground that such expenses are not for the purposes of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss expenditure under income tax. AO in the order u/s 154 has held that the supply of benches and desks to schools cannot be construed to be relating to its business. It is noted that the company's pipelines runs to 363KM. How can one school students help it business activity. There is no data to prove that they are miscreants or they have offered their services to safe guard the pipelines of the company. Thus, the explanation furnished by the appellant is not justifiable or reasonable. Under Section 37(1), the allowable business expenses should be wholly and exclusively for the purpose of the business. This is not proved by the appellant. Hence, the action of the AO u/s 154 is held to be justifiable. Grounds of appeal 1to 10 are dismissed. 4. Aggrieved from the above order, the assessee filled appeal before the ITAT. 5. The ld.AR reiterated the submission made before the lower authorizes and submitted that these expenses were incurred before the amendments in sec. 37(1) of the Income-tax Act and CSR (Corporate Social Responsibility) is allowable as business expenditure incurred by the company, which is in the nature of the business expenditure of the company and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has incurred expenditure to promote the interest of under-privileged and impaired sections of the society through social work carried through monetary contributions for social work carried out by charitable institutions. The AO rejected the submissions of the assessee and disallowed the expenditure u/s. 37 by stating that the same is not incurred wholly and exclusively for business purposes. 48. The CIT(Appeals) confirmed the disallowance. 49. Before us, the ld. AR reiterated the submissions made before the lower authorities. Further, he submitted that the amendment brought to section 37(1) by Finance Act 2014, inserting Explanation 2 was brought prospectively from 1.4.2015 and prior to 1.4.2015 the expenditure incurred towards CSR is allowable u/s. 37(1) of the Act. The ld. AR in this regard relied on the decision of the Gujarat High Court in the case of PCIT v. Gujarat Narmada Vallely Fertilizers Chemicals Ltd. [2020] 121 taxmann.com 82 (Guj). Further, the ld. AR submitted that the nature of expenditure is not in dispute and considering that the expenditure is incurred prior to the insertion of Explanation 2 to section 37(1), the CSR expenditure is allowable. 50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be construed as wholly and exclusively . Explaining this principle, the Hon'ble Supreme Court has, in the case of Sassoon J. David Co. (P.) Ltd. (supra) inter alia observed that : 'It has to be observed here that the expression wholly and exclusively used in s. 10(2)(xv) of the Act does not mean necessarily . Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under s. 10(2) (xv) of the Act even though there was no compelling necessity to incur such expenditure. It is I.T.A. No. 99/BLPR/2012 Assessment year: 2008-09 relevant to refer at this stage to the legislative history of s. 37 of the IT Act, 1961, which corresponds to s. 10(2)(xv) of the Act. An attempt was made in the IT Bill of 1961 to lay down the necessity of the expenditure as a condition for claiming deduction under s. 37. Sec. 37(1) in the Bill read any expenditure.. laid out or expended wholly, necessarily and exclusively for the purposes of the business or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Malayalam Plantations has been freely drawn upon by courts for laying down that the provisions of s. 37(1) and similar provisions of s. 10(2)(xv) of the 1922 Act in which the expression for the purposes of the business is used, have wider implication than the provisions of s. 10(2) of the 1922 Act which used the words for the purpose of earning such.... profits and the provisions of s. 57(iii) in which the expression for the purpose of making or earning such income is used. (See for example, Smt. Padmavati Jaykrishna v. CIT [1975] 101 ITR 153 (Guj.). That this view is justified is amply borne out by the different approaches adopted in two decisions of the Supreme Court in relation to a claim for deduction in respect of the same item of expenditure. In T.S. Krishna v. CIT [1973] 87 ITR 429 (SC), a claim for deduction in respect of wealth-tax paid on shares held by the assessee was held to be not a permissible deduction under s. 57(iii) even apart from or irrespective of the provisions of s. 58(1A). As against this, we have the decision in Indian Aluminium Co. Ltd. v. CIT [1972] 84 ITR 735 (SC), wherein wealth-tax paid by the assessee, which was a trading company, on assets h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the activity which is the source of the income. [See Smt. Virmati Ramkrishna v. CIT [1981] 131 ITR 659 (Guj.)]. 8.7 We may refer to a decision of the Karnataka High Court in the case of Mysore Kirloskar Ltd. (supra). The Court observed : While 'the basic requirements for invoking sections 37(1) and 80G are quite different', 'but nonetheless the two sections are not mutually exclusive'. Thus, there are overlapping areas between the donations given by the assessee and the business expenditure incurred by the assessee. In other words, there can be certain amounts, though in the nature of donations, and nonetheless, these amounts may be deductible under section 37(1) as well. Therefore, merely because an expenditure is in the nature of donation, or, to use the words of the CIT(A), 'promoted by altruistic motives', it does not cease to be an expenditure deductible under section 37(1). 8.8 In Mysore Kirloskar Ltd.'s case (supra), the Hon'ble Court proceeded to observe : Even if the contributions by the assessee is in the forms of donations, but if it could be termed as expenditure of the category falling in section 37(1), then the right of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osphere in which the business can succeed in a greater measure with the aid of such goodwill .... 8.10 We have also noted that the amendment in the scheme of section 37(1) is not specifically stated to be retrospective and the said Explanation is inserted only with effect from 1st April 2015. In this view of the matter also, there is no reason to hold this provision to be retrospective in application. As a matter of fact, the amendment in law, which was accompanied by the statutory requirement with regard to discharging the corporate social responsibility, is a disabling provision which puts an additional tax burden on the assessee in the sense that the expenses that the assessee is required to incur, under a statutory obligation, in the course of his business are not allowed deduction in the computation of income. This disallowance is restricted to the expenses incurred by the assessee under a statutory obligation under section 135 of Companies Act 2013, and there is thus now a line of demarcation between the expenses incurred by the assessee on discharging corporate social responsibility under such a statutory obligation and under a voluntary assumption of responsibility. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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