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Income Tax Appellate Tribunal, DELHI BENCH, ‘B’: NEW DELHI
Before: SHRI SHAMIM YAHYA & SHRI YOGESH KUMAR US
ORDER PER SHAMIM YAHYA, AM, This appeal by the assessee is directed against the order of the Ld. CIT(A)-4, New Delhi, dated 23.09.2019 pertaining to Assessment Year 2016-17.
The grounds of appeal reads as under:-
1. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in confirming the action of the Learned Assessing Officer (‘Ld. AO’) in increasing book profits by INR 48,00,000, computed as per section 115JB of the Act.
2. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that the Profit and Loss Account of the Appellant is not prepared in accordance with generally accepted accounting principles (‘GAAP’), and thus, holding that the Hon’ble Supreme Court’s decision in the case of Apollo Tyres Ltd. vs. CIT [2002] 255ITR 273 (SC) is not applicable in the present case.
3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that CSR expenditure is a below the line item and an application of income, thereby adding back the CSR expenditure to profits considered for computation of book profits u/s 115JB of the Act, without appreciating the fact that Appellant has actually incurred such amount during the year. 4. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating that Explanation 1 to section 115JB of the Act, does not prescribe any adjustment in respect of CSR expenditure actually incurred and thus, the said addition is without any legal basis. 5. That on the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 271(1)(c) of the Act. 3. Brief facts of the case are that the assessee company is engaged in the business of manufacturing of turbines and generators for thermal and the projects. The Assessing Officer noted that the from the financial statements, it has been noticed that the assessee company has debited an amount of Rs.48,00,000/- towards expenditure on corporate social responsibility. The Assessing Officer asked the assessee that Rs.48 Lakhs has been shown as expenditure but the same has not been added back in your MAT computation. The assessee was asked to explain as to why the same should not be added back to your MAT computation. The assessee responded as under:-
“It is submitted that Explanation 1 to section 115JB of the Act provides the manner for computation of book profits for the purpose of Minimum Alternate Tax (‘MAT’). Copy of the section is enclosed herewith as Annexure-4. The said explanation does not prescribed any adjustment on account of expenditure pertaining to Corporate Social Responsibility (‘CSR’), for the purposed of computing book profits. Further, it is submitted that section 115JB is a deeming provision and the addition or deletions to be made from the profit as appearing in the statement in profit and loss account in order to arrive at the Book Profits are clearly defined in the said section. The deeming provision is to be interpreted strictly and thus an adjustment which is not prescribed by the Explanation 1, cannot be made for computation of book profits. In view of the above, it is submitted that expenditure on CSR is not required to be added back for the purposes of MAT computation.”
The Assessing Officer noted during the year under consideration, the assessee incurred a sum of Rs.48 lakhs towards CSR, and this entire sum was disallowed by the assessee company in computation of its taxable income under the normal provision of the Income Tax Act but the Assessing Officer noted that the same was not deducted from the book profit. He noted that as per the explanation (2) to section 37(1), the CSR expenditure is not allowable under the normal provision of the Act. The Assessing Officer was of the opinion that CSR expenses are not allowable primarily for two reasons (a) it is in the nature of appropriation of profits and (b) it is in the nature of reserve. That the provision of CSR expenses are created on the basis of profits earned. That any liability created out of profits takes the character of appropriations that income tax is not an allowable deduction primarily because it is in the nature of appropriation of profits. That as per accepted norms of accountancy, the appropriation does not take the character of expenditure. The Assessing Officer proceeded to disallow the same and increase the book profit to that extent. He held that as per provisions of section 115JB, item no. b to explanation 1, the amount carried to any reserves, by whatever name called, other than a reserve specified under section 33AC is to be added back to the book profits. That the creation of reserves for CSR is clearly not covered by section 33AC of the Act. Hence, the Assessing Officer added back to the book profit the CSR provision expenditure.
Against the above order, the assessee appealed before the Ld. CIT(A).
The Ld. CIT(A) elaborately noted the submission of the assessee. He noted that in response to the addition made by the Assessing Officer while computing the book profit under section 115JB of the Act, the assessee submitted that all the CSR expense of Rs.48,00,000/- was incurred during the year and no reserve was created. Thus, the addition made by the Assessing Officer on the basis of explanation to section 115JB of the Act that the reserves were created is not correct. Furthermore, the assessee stated that the amount of CSR is an expense debited in Profit and Loss Account and thus, the profit which is considered for computation of book profit is correct. Also, the assessee relied upon the decision of the Hon’ble Supreme Court in the case of Apollo Tyres Ltd. vs CIT [2002] 255 ITR 273 (SC), wherein, it has been held that the Assessing Officer cannot tinker with the book profit and any adjustment that can be done is with respect to explanation provided to section 115JB of the Act.
The Ld. CIT(A) agreed with the Assessing Officer and held as under:-
6.4 I have considered the facts of the case, the finding of the AO, the submission of the appellant and the position of law. In this regard, I have perused the audited profit and loss account of the appellant wherein the CSR expenditure has been considered as an expenditure and then the net profit has been computed. Such net profit forms the base of computation of book profit under Section 115JB of the Act on which the adjustments stated in Explanation to Section 115JB are made. Now in this backdrop, it is imperative to see, whether in law the auditor and the company was correct in claiming the CSR as an expenditure and as an above the line item or they should have considered the same as an application of income and thus, the same should be deducted and shown as below the line item in the profit and loss account. If the CSR would be below the line item and would be seen as deduction from the profit and loss account, then the base figure of Profit as per Section 115JB of the Act would change, as the same would not entail any effect of deduction of CSR amount paid. 6.5 In this regard, reference is drawn to the Circular Number 1/2015 issued by CBDT On 21/01/2015, wherein, CBDT clearly stated that the amount spend on CSR activities is an application of income and not a deduction of expenditure. Furthermore, also on reading of the provisions of CSR provided under Section 135 of the Companies Act, 2013, it is noted that the same is computed as a percentage of net profit and thus should be a below the line item. CSR was introduced for the corporates to discharge their responsibility towards society by spending part of their income for welfare of the society. In such a scenario, CSR would be like Dividend which is part of profit and instead of payment being made to shareholders, the amount is spent on welfare of the society. 6.6 In this backdrop, it is noted that since the CSR amount of Rs. 48,00,000/- is shown as deduction of expense in the profit and loss account of the assessee, the same has reduced the profit amount to be considered for Book Profit purposes under Section 115JB of the Act. Since the said amount of CSR is below the line item, the amount of Rs. 48,00,000/- which is claimed as deduction should be added back to the profit considered for the purpose of book profit, which the AO has rightly done so. 6.7 The reference of the appellant on the decision of the Hon'bie Supreme Court in the case of Appollo Tyres ltd. would have been correct, if the audited profit and loss account is prepared in accordance with the generally accepted accounting principles and standards. Since CSR amount is shown as expenditure {an above the line item), the audited profit and loss account is not as per the GAAP and hence the same can be considered by the AO to compute the book profit as per the GAAP and clear provisions of Companies Act. The assessee cannot escape by drawing a wrong profit and loss account on one hand and then taking the benefit of Hon'ble Supreme Court's decision. To my mind, the aforesaid decision would be applicable where the P & L account is drawn as per the provisions of GAAP, Companies Act, 2013 and relevant accounting standard. 6.8. Thus, in view of the above, the addition made by the Assessing Officer is correct as the CSR should be a below the line item as application to income and not charged as an expense in the profit and loss account. Therefore, this appeal of the assessee is dismissed.”
Against the above order, the assessee is in appeal before the Tribunal.
We have heard both the parties and perused the records. The Ld. Counsel for the assessee reiterated the submissions that since in the income tax out such expenditure is not allowed, the assessee has disallowed the same while computing income under the normal provisions of Income Tax Act. However, the assessee did not make any adjustment under MAT computation as section 115JB provides that the net profit as appearing in the financial statements be considered for computing tax liability that only adjustments are allowed to be given in Explanation-1 to the section. Since, amount incurred towards CSR activity was not one of the adjustment, the amount was not added while computing book profit under MAT provisions. The Ld. Counsel for the assessee submitted that disallowance of expenditure u/s 37 would not automatically mean that the same has to be taken out of book profit u/s 115JB of the Act. It was further submitted that there is applicability of section 145 of the Act while preparing the financial under the Companies Act, 2013. The ld. Counsel for the assessee reiterated that adjustment of book profit can be done only specified in the Act and the section 115JB is a self contained code. In this regard, the ld. Counsel for the assessee further referred to the decision of the Hon’ble Supreme Court in the case of Apollo Tyers Ltd. vs CIT. The Ld. Counsel for the assessee submitted that the assessee has prepared the account in accordance with the Standard Accounting issued by the ICAI. The Ld. Counsel for the assessee referred to the guidelines issued by the ICAI, wherein on the question whether CSR expenditure is an operating expenditure or an appropriation of profits. Answer was given that CSR expenditure is not an operating expenditure but is to be disclosed as other expense in Statement of Profit and Loss. Disclosure is not to be made in surplus account under reserve and surplus in balance sheet. The Ld. Counsel for the assessee further referred to the following case laws:-
“In the case of M/s. HTC Global Services (India) P Ltd vs. ACIT (I.T.A. Nos. 58 & 1280/Mds/2014, & 2021/Mds/2014) the Ld. AO had disallowed the amount paid towards donation under section 115JB of the Act by observing that the same was a below the line item and should not be considered as expenditure. The Ld. CIT(A) granted the relief to the Assessee holding that even though such amount may not be an allowable deduction under the Act, it nevertheless forms a part of miscellaneous expenditure while computing book profits under the Act. Thus, cannot be disallowed while computing book profits under section 115JB of the Act. The Hon’ble Chennai bench confirmed the order of the Ld. CIT(A) and held that donation paid is an allowable expenditure while computing the book profit for the purpose of section 115JB of the Act. (Refer para 6.2 at page 39 of CLC) Similar observation was made by the Hon’ble ITAT, Kolkata Bench in the case of I.T.O Ward 4(1), Kolkata vs. M/s. R.B Properties Pvt. Ltd (I.T.A No. 1723/Kol/2011)”
Per contra, the Ld. DR relied upon the orders of the authorities below.
Upon careful consideration, we note section 115JB of the Act provides following adjustment to book profit:-
“115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012, is less than eighteen and one-half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one-half per cent: Provided that for the previous year relevant to the assessment year commencing on or after the 1st day of April, 2020, the provisions of this sub-section shall have effect as if for the words "eighteen and one-half per cent" occurring at both the places, the words "fifteen per cent" had been substituted. (2) Every assessee,— (a) being a company, other than a company referred to in clause (b), shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of Schedule III to the Companies Act, 2013 (18 of 2013); or (b) being a company, to which the second proviso to sub-section (1) of section 129 of the Companies Act, 2013 (18 of 2013) is applicable, shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of the Act governing such company: Provided that while preparing the annual accounts including statement of profit and loss,— (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including statement of profit and loss; (iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including statement of profit and loss and laid before the company at its annual general meeting in accordance with the provisions of section 129 of the Companies Act, 2013 (18 of 2013) : Provided further that where the company has adopted or adopts the financial year under the Companies Act, 2013 (18 of 2013), which is different from the previous year under this Act,— (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including statement of profit and loss; (iii) the method and rates adopted for calculating the depreciation, shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including statement of profit and loss for such financial year or part of such financial year falling within the relevant previous year. Explanation 1.—For the purposes of this section, "book profit" means the profit as shown in the statement of profit and loss for the relevant previous year prepared under sub-section (2), as increased by— (a) the amount of income-tax paid or payable, and the provision therefor; or (b) the amounts carried to any reserves, by whatever name called, other than a reserve specified under section 33AC; or (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) the amount by way of provision for losses of subsidiary companies; or (e) the amount or amounts of dividends paid or proposed ; or (f) the amount or amounts of expenditure relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply; or (fa) the amount or amounts of expenditure relatable to income, being share of the assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86; or (fb) the amount or amounts of expenditure relatable to income accruing or arising to an assessee, being a foreign company, from,—
(A) the capital gains arising on transactions in securities; or (B) the interest, 52[dividend,] royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII, if the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, is at a rate less than the rate specified in sub-section (1); or (fc) the amount representing notional loss on transfer of a capital asset, being share of a special purpose vehicle, to a business trust in exchange of units allotted by the trust referred to in clause (xvii) of section 47 or the amount representing notional loss resulting from any change in carrying amount of said units or the amount of loss on transfer of units referred to in clause (xvii) of section 47; or (fd) the amount or amounts of expenditure relatable to income by way of royalty in respect of patent chargeable to tax under section 115BBF; or (g) the amount of depreciation, (h) the amount of deferred tax and the provision therefor, (i) the amount or amounts set aside as provision for diminution in the value of any asset, (j) the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset, (k) the amount of gain on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through statement of profit and loss, as the case may be; if any amount referred to in clauses (a) to (i) is debited to the statement of profit and loss or if any amount referred to in clause (j) is not credited to the statement of profit and loss, and as reduced by,— (i) the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997 otherwise than by way of a debit to the statement of profit and loss), if any such amount is credited to the statement of profit and loss: Provided that where this section is applicable to an assessee in any previous year, the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation or Explanation below the second proviso to section 115JA, as the case may be; or (ii) the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply, if any such amount is credited to the statement of profit and loss; or (iia) the amount of depreciation debited to the statement of profit and loss (excluding the depreciation on account of revaluation of assets); or (iib) the amount withdrawn from revaluation reserve and credited to the statement of profit and loss, to the extent it does not exceed the amount of depreciation on account of revaluation of assets referred to in clause (iia); or (iic) the amount of income, being the share of the assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86, if any, such amount is credited to the statement of profit and loss; or (iid) the amount of income accruing or arising to an assessee, being a foreign company, from,— (A) the capital gains arising on transactions in securities; or (B) the interest, 53[dividend,] royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII, if such income is credited to the statement of profit and loss and the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, is at a rate less than the rate specified in sub-section (1); or (iie) the amount representing,— (A) notional gain on transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust referred to in clause (xvii) of section 47; or (B) notional gain resulting from any change in carrying amount of said units; or (C) gain on transfer of units referred to in clause (xvii) of section 47, if any, credited to the statement of profit and loss; or (iif) the amount of loss on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through statement of profit and loss, as the case may be; or (iig) the amount of income by way of royalty in respect of patent chargeable to tax under section 115BBF; or (iih) the aggregate amount of unabsorbed depreciation and loss brought forward in case of a— (A) company, and its subsidiary and the subsidiary of such subsidiary, where, the Tribunal, on an application moved by the Central Government under section 241 of the Companies Act, 2013 (18 of 2013) has suspended the Board of Directors of such company and has appointed new directors who are nominated by the Central Government under section 242 of the said Act; (B) company against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under section 7 or section 9 or section 10 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016). Explanation.—For the purposes of this clause,— (i) "Adjudicating Authority" shall have the meaning assigned to it in clause (1) of section 5 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016); (ii) "Tribunal" shall have the meaning assigned to it in clause (90) of section 2 of the Companies Act, 2013 (18 of 2013); (iii) a company shall be a subsidiary of another company, if such other company holds more than half in the nominal value of equity share capital of the company; (iv) "loss" shall not include depreciation; or (iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account in case of a company other than the company referred to in clause (iih). Explanation.—For the purposes of this clause,— (a) the loss shall not include depreciation; (b) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is nil; or (iv) to (vi) [***] (vii) the amount of profits of sick industrial company for the assessment year commencing on and from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses.
Explanation.—For the purposes of this clause, "net worth" shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); or (viii) the amount of deferred tax, if any such amount is credited to the statement of profit and loss.” 11. In our considered opinion, none of the clauses above provides that CSR expenses have to be added to book profit. Except for the wild imagination of the Assessing Officer by no stretch of imagination, it can be said expenditure on CSR expenses is a transfer to/from reserve.
Hon’ble Apex Court in Apollo Tyers (supra) have clearly laid down that the Assessing Officer or assessee, none can tinker with book profit disclosed in audited account. It is not the case that the accounts have not been prepared as per accepted accounting principle. Once the accounts have been prepared in accordance with standards in this regard, this tinkering by the Assessing Officer has no sanction of law. We have no hesitation in setting aside the addition to book profit in this regard.
In the result, the appeal of the assessee stands allowed.
Order pronounced in the open court on 10/08/2022.