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Income Tax Appellate Tribunal, “RANCHI” BENCH: RANCHI
Before: Shri Rajesh Kumar & Shri Sonjoy Sarma]
ORDER
Per Shri Sonjoy Sarma, JM:
This is an appeal preferred by the assessee against the order of the Ld. Commissioner of Income Tax(Appeals)-Ranchi, Jharkhand [hereinafter referred to as ‘Ld.CIT(A)’] dated 15.06.2017 for the assessment year 2013-14. The assessee has raised the following grounds of appeal:
“i. That on facts as well as on law, Ld. CIT(A) has erred in confirming disallowance of Rs. 3,00,00,000/- on account of expenses on Corporate Social Responsibility merely on the ground that CSR expenses are not incidental to the business & are incurred for non-business purpose, CSR expenses are application of income & are not expenses at all without considering the facts & circumstances of the case. ii. That on facts as well as on law, the ld. CIT(A) has erred in confirming disallowance of Rs. 53,64,000/- on account of expenses on sustainable development merely on the ground that sustainable development expenses are not incidental to the business & are incurred for non-business purpose, sustainable development expenses are application of income & are not expenses at all without considering the facts & circumstances of the case. iii. That your appellant begs your leave to urge any additional ground of appeal or modify and ground of appeal before or at the time of hearing.”
2. At the outset, the ld. Counsel for the assessee submitted that ground no. 1 & 2 in the instant appeal are inter connected, therefore, the sole issue of assessee in this appeal is against the action of ld. CIT(A) in forming the disallowance claimed by the assessee company as CSR & sustainable development expenses u/s 37(1) of the Act (hereinafter referred to as the ‘Act’) to the tune of Rs. 3,00,00,,000/- and Rs. 53,64,000/- respectively.
Brief facts of the case are that on perusal of accounts submitted by the assessee, during the course of assessment proceedings, the AO observed that an amount of Rs. 3,00,00,000/- have been debited under the head ‘Corporate Social Responsibility’ (CSR) and Rs. 53,64,000/- under the head of sustainable expenses. On a specific query raised by AO on these issues, the assessee in its submission dated 29.12.2015 submitted as follows:
Regarding CSR expenses: CSR expense/fund is earmarked wholly and exclusively for carrying out CSR activities/programme undertaken by the company from time to time. This fund is non-lapsable fund and unspent amount is to be carried forwarded in the books of the company. Hence, the company has debited P & L A/c for Rs. 202.04 lakhs towards CSR and SD expenses and created CSR Fund as per direction of the DPE, Govt. of India. The Finance Act, 2014 has inserted Explanation 2 to section 37(1) of the Income Tax Act w.e.f. 01.04.2015. As per Explanation 2, for the purposes of section 37(1) any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of the business or profession from the AY 2015-16 onward. Therefore, this is not applicable for AY 2013-14 under scrutiny assessment. MECON has allocated fund of Rs. 202.04 lakhs during the financial year 2013-14 for CSR activities/programmes etc. in compliance with the guidelines issued by Department of Public Enterprises, Govt. of India on Corporate Social Responsibility for all Central Public Sector Enterprises. This expenses incurred on CSR was allowed by the Assessing Officer in earlier assessments since this is an expense incidental to the business and it is incurred in the course of the business of the assessee as per Govt. guidelines. There was no specific provision in the Act for disallowance of such expenses incurred by the assessee prior to AY 2015-16. The amendment in section 37(1) of the Act is not a retrospective amendment.
However, the AO was of the opinion that the CSR and substantive development expenditure are not allowable as deduction u/s 37(1) of the Act and added back the same to the total income of the assessee.
Aggrieved by the above order, assessee preferred an appeal before the ld. CIT(A) and confirmed the action of the AO and dismiss the appeal of the assessee.
Aggrieved assessee is in appeal before us.
We have heard the rival submission and gone through the facts and circumstances of the case, we note that the AO after taking note that the assessee had debited under the head CSR an amount of Rs. 3,00,00.000/- and substantive development expenses of Rs. 53,64,000/- and ask the assessee as to why the amount should not be disallowed because according to him these expenses are not wholly and exclusively for the purpose of the assessee’s business. Pursuant to this query of the AO, the assessee explained that payments under CSR and substantive development expenses were made like building classrooms or toilets installing LED lights or planting trees in MECON Colony and the expenditure was part of the CSR expenditure as envisaged u/s 135 of the Companies Act. However, the AO did not agree to the claim of the expenditure and disallowed the same. On appeal, the ld. CIT(A) also concurred with the AO, we note that genuineness of the expenditure made by the assessee on account of CSR which is mandatory as per section 135 of the Companies Act, 2013 was not doubted by the AO as well as ld. CIT(A). However, the claim was disallowed only on the ground that the expenditure is not wholly and exclusively incurred for the purpose of the business expenditure. The ld. AR drew our attention to the coordinate bench decision in ACIT vs Jindal Power Ltd. (ITAT Raipur) in for A.Y. 2008-09 dated 23.06.2016 wherein on similar facts and law, the Tribunal while allowing the expenditure under CSR held as under:
ii) The concept of business is not static. It has evolved over a period of time to include within its fold the concrete expression of care and concern for the society at large and the locality in which business is located in particular. Being a good corporate citizen brings goodwill of the local community as also with the regulatory agencies and society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill (CIT v. Madras Refineries Ltd. [2004]266 ITR 170, Sri Venkata Satyanarayna Rice Mill Contractors Co. v. CIT [1997] 223 ITR 101, Hindustan Petroleum Corporation Ltd Vs DCIT [(2005) 96 ITO 186 (Bom)] (iii) The amendment in the scheme of Section 37(1), which has been introduced with effect from 1st April 2015, cannot be construed as to disadvantage to the assessee in the period prior to this amendment. This disabling provision, as set out in Explanation 2 to Section 37(1), refers only to such corporate social responsibility expenses as under Section 135 of the Companies Act, 2013, and, as such, it cannot have any application for the period not covered by this 'statutory provision which itself came into existence in 2013. Explanation 2 to Section 37(1) is, therefore, inherently incapable of retrospective application any further. In any event, as held by Hon'ble Supreme Court's five judge constitutional bench's landmark judgment, in the case of CIT Vs Vatika Townships Pvt Ltd [(2014) 367 ITR 466 (SC)], the legal position in this regard has been very succinctly summed up by observing that Of the various rules guiding how legislation has to be interpreted, one established rule is that unless a contrary intention appears, legislation is presumed not to be intended to have a retrospective operation. The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of today and in force and not tomorrow's backward adjustment of it. Our belief in the nature of the law is founded on the bed rock that every human being is entitled to arrange his affairs by rely on the existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit: law looks forward not backward (iv) It may appear to be some kind of a dichotomy in the tax legislation but the well settled legal position is that when a legislation confers a benefit on the taxpayer by relaxing the rigour of pre-amendment law, and when such a benefit appears to have been the objective pursued by the legislature, it would a purposive interpretation giving it a retrospective effect but when a tax legislation imposes a liability or a burden, the effect of such a legislative provision can only be prospective. 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. As for the former, the disallowance under Explanation 2 to Section 37(1) comes into play, but, as for latter, there is no such disabling provision as long as the expenses, even in discharge of corporate social responsibility on voluntary basis, can be said to be "wholly and exclusively for the purposes of business". There is no dispute that the expenses in question are not incurred under the aforesaid statutory obligation. For this reason also, as also for the basic reason that the Explanation 2 to Section 37(1) comes into play with effect from 1st April 2015, we hold that the disabling provision of Explanation 2 to Section 37(1) does not apply on the facts of this case.”
Respectfully following the ratio laid by the Coordinate bench of this Tribunal, we note that since the ‘CSR’ expenditure are mandatory for companies incorporated as per the Companies Act, 2013 and the expenditure have been incurred by the assessee as envisaged under the Companies Act, 2013. So we are of the opinion that it has to be allowed and we take note that the Tribunal in Jindal Power Ltd., (supra), has already held that the introduction of explanation 2 to sec. 37(1) of the Act w.e.f. from 1st August, 2015 cannot be held to be retrospective in operation. Therefore, the expenditure incurred by assessee on account of ‘CSR’ and substantive development expenses as envisaged u/s. 135 of the Companies Act, 2013 need to be allowed as deduction. Therefore, the ‘CSR’ and substantive development expenses which the assessee company was obliged to discharge because it was a statutory obligation upon the assessee company so, the deduction should have been allowed as per the law in force for this assessment year and we direct the AO to allow the expenditure. Therefore, the appeal of assessee is allowed.
In the result, the appeal of the assessee is allowed.
Order is pronounced in the open court on 22.02.2023