JOINT COMMISSIONER OF INCOME TAX OSD IN SITU CIRCLE 131, MUMBAI vs. TATA CAPITAL HOUSING FINANCE LIMITED, MUMBAI

The grounds of appeals of the Revenue are as under: ITA No. 216/MUM/2025(A.Y. 2018-19)

In both the appeals, issues being common relating to deduction u/s 80G w.r.t. Corporate Social Responsibility (henceforth ‘CSR’), the Revenue has claimed that the ld.CIT(A) erred in allowing deduction u/s 80G of the Act without verifying compliance with provisions of the Act and also allowing CSR expenses u/s 80G undermining the legislative intent of Explanation 2 to section 37(1) of the Act which expressly disallows CSR expenses as business deductions.

Brief facts of the case are that the assessee claimed certain deduction u/s 80G of the Act. The details of the donations made during the year under consideration on which deduction u/s.80G has been claimed are tabulated in the assessment orders. The said amount of donation(s) made were eligible for deduction u/s.80G(1)(ii) of the Act and therefore, the assessee had claimed a deduction of 50% of the said amount while computing the total income for the year. During the year under consideration, the assessee had incurred certain expenditure CSR expenditure and the same had been disallowed in terms of Explanation 2 to Section 37(1) of the Act, while computing total income under the Act. During the course of the assessment proceedings, the Assessing Officer, inter-alia asked it to show cause as to why deduction u/s.80G of the Act the amount spent towards CSR should not be disallowed. In response thereto, the assessee stated that the donations made during the year were eligible for deduction u/s.80G of the Act. Copies of receipts of donations made and the approval received by the entities from the Competent Authority and extracts of bank statements were submitted to the Assessing Officer. It was pleaded that the Legislature does not prohibit donations made pursuant to CSR, to be ineligible for claiming deduction u/s.80G of the Act. However, the ld.AO rejected the contention on the ground that the said amount had not been paid by the assessee voluntarily to become eligible for entity specified under Section 80G of the Act. But the same was paid by the assessee as a mandatory requirement as per Section 135 of the Companies Act, 2013 to spend certain amount for specified activities as per. The expression “shall ensure" used in Section 135(5) of the Companies Act 2013 clearly implies that there is a mandate to spend 2% of average net profits of the preceding three years on CSR activity. Thus, the requirement to spend amount is perceived by the legislature to be mandatory in nature and not voluntary. According to the AO, the assessee could also have very well made payment to an entity not covered by Section 80G or it could have directly incurred the expenditure for the specified purpose, but it chose to spend only in those areas where it could claim deduction u/s 80G of the Act. Therefore, the sum paid could not be considered as a ‘donation' for the purpose of Section 80G of the Act as the element of charity was missing in it. The main characteristic of charity is that it is purely voluntary and there is no legal obligation to make that contribution. The amounts spent on CSR activities, even though was contributed to the areas where 80G deduction is available, but the same lacked voluntary character and partakes the nature of an obligation to be fulfilled, a necessary requirement imposed by law in accordance with Section 135 of the Companies Act 2013. The intention of the legislature was never to allow deduction for CSR expenditure, as this would result in subsidizing the CSR expenditure by one-third amount. From the memorandum to budget, it is clear that the expenditure was not allowed as deduction in any form to avoid subsidizing of CSR expenditure by government and therefore claim and the contention of the assessee regarding allow ability of CSR expenditure under section 80G was against the basic nature of such amendment. Therefore, it was held by him that the claim regarding allow ability of CSR expenditure under section 80G of the Act was not correct and therefore, deductions claimed under section 80G for both the assessment years were disallowed and added back to the total income of the assessee.

In the subsequent appeal, theld.CIT(A) after observing that the issue had been examined by the juri ictional ITAT in various decision quoted by the appellant, held that there is no doubt that CSR is not an admissible business deduction u/s 37, however, there is no restriction in the law for not allowing deduction u/s 80G if its satisfies the conditions laid in the section 80G. Thus, he deleted the disallowance in both the years allowing appeals of the assessee.

Before us, the ld.DR relied on the assessment order reiterating that in absence of voluntary nature of the donations, deduction u/s 80G could not be allowed. Per contra, the ld.Authorised Representative of the assessee has vehemently argued that the deduction u/s 80G was correctly claimed by the assessee and there is nothing in the Act to provide for its disallowance. He has placed reliance on several decisions of various courts of law including those of the coordinate Bench of ITAT, Mumbai whereby similar claims are being consistently being allowed in favour of taxpayers.

We have carefully considered all the relevant facts of the case, the provisions of the Act, rival submissions and the legal position emerging from various judicial decisions in this regard. We find that this issue has been deliberated at length in a catena of cases by various Benches of ITAT including those of the coordinate bench which have consistently taken the position that there is no bar in claiming deduction u/s 80G in respect of CSR expenses. It would be worth relying on the recent decision of the coordinate Bench in the case of Jamnagar Utilities And Power Private October, 2024 in ITA No.4452/Mum/2024 dated 09.10.2024.Relevant extracts are reproduced for the sake of clarity and brevity as below:

We have heard rival submission of the parties and perused the relevant material on record. In the case, the assessee debited Rs.8,60,00,000/- on account of CSR while computing total income. However, the assessee claimed 50% deduction i.e. Rs.4,30,00,000/- u/s 80G of the Act. According to the Officer CSR is statutory liability on the part of the assessee, which is to be incurred out of profit in compliance to the Companies Act whereas section 80G of the Act deal with donation in the nature of the voluntary out of once own violation. voluntary rather it was legal and the Assessing Officer held the CSR expenditure out of purview the section 80G of the Act and accordingly he disallowed the claim of deduction of the assessee of Rs.4,30,00,000/ the Ld. CIT(A) allowed the claim of the assessee observing as under: "I have carefully considered the assessment order and submission made by the appellant. The appellant has relied upon the following judicial decisions including the decisions of juri ictional ITAT Mumbai where it has been held that payments towards donations made on account of corporate social responsibility, disallowed under section 37(1), are allowable as deductions under section 80G of the Act: DCIT Reliance Industries Ltd. [2023] I.Τ.Α. No. 2587•& FNF India (P.)• M/s. Naik Seafoods Pvt. Ltd. Vs. Pr. CIT-2 (ITA No 490/MUM/2021)(Mumbai ITAT) •2588/Mum/2022 (Mumbai ITAT) Ltd. Vs. ACIT Sling Media (P.)•(2021) (133 taxmann.com 251) (Bangalore ITAT) Ltd. Vs. DCIT Infinera India (P.)•(2022) (194 ITD 1) (Bangalore ITAT) Ltd. Vs. JCIT (2022) (194 ITD 463) (Bangalore ITAT) DCIT Vs. M/s. The Peerless General Finance Jamnagar Utilities and Power Pvt. Ltd & Investment &Co.Ltd (ITA No. 1469 & 1470/Kol/2019) (Kolkata ITAT) Further, it is also observed from the contents of above decision of Hon'ble ITAT that the explanatory memorandum to Finance Act No. 2, 2014, introducing Explanation 2 to Section 37 (1) which prohibited the allowability of CSR expenditure as business expenditure. The memorandum clearly states that CSR expenditure described in sections 30 to 36 of the Income-tax Act, 1961 shall be allowed. Legislators never intended to deny deductions for CSR expenditure outright; it is only not allowable under section 37(1). As the amendment in section 37(1) does not apply to sections 30 to 36 of the Act, the same would not apply to section 80G of the Act. Thus, appellant shall be allowed to claim a deduction under section 80G of the Income Tax Act, 1961 to the extent of eligibility. It is further viewed that juri ictional Hon'ble Mumbai ITAT in the case of M/s. Reliance Industries Ltd. V.DCIT[2023](ITA NO.2587 & 2588/MUM/2022) has followed the decision rendered by Mumbai ITAT in the case of Naik Sea foods P Ltd V.Pr.CIT-2(ITA NO.490/MUM/2021). In the case of Naik Sea foods P Ltd (supra), the co- ordinate bench has followed the decision rendered by Bangalore bench of Tribunal in the case of M/s FNF India P Ltd (ITA No. 1565/Bang/2019 dated 05-01- 2021), which in turn followed the decision rendered in the ease of Allegis Services (India) Pvt. Ltd. υ. ACIT (ITA No. 1693/Bang/2019) and held that the assessee is eligible for deduction u/s 80G of the Act in respect of certain payments included in CSR Expenses. The relevant discussions made by the Tribunal are extracted below:- "

Considered the rival submissions and material placed on record, we observe from the record that Ld. Pr.CIT while examining the records of the assessment observed that the Assessing Officer has not Verified the expenses claimed by the assessee and allowed by the Assessing Officer, without making the proper verification and purchases which is 95% of the sale declared by the assessee and again Assessing Officer allowed the same without making proper verification. After considering the submissions of both the parties we observe from the record that with regard to section 80G deduction we observed that the Coordinate Bench of ITAT Bangalore Bench decided the issue of deduction u/s.80G relating to donations which is part of Corporate Social Responsibility in the case of M/s FNF India Pvt. Ltd., v. ACIT (ITA. No. 1565/Bang/2019 dated 05.01.2021). The relevant findings of the Bangalore Bench are reproduced below: - "

After hearing both the parties, we find that similar issue came up for consideration before this Tribunal in ITA No. 1693/Bang/2019 in the case of Allegis Services (India) Pvt. Ltd. v. ACIT. The Tribunal by its order dated 29.4.2020 held as under.- "

Section 135 of Companies Act, 2013 requires companies with CSR obligations, with effect from 01/04/2014. Finance (No.2) Act, 2014 inserted new Explanation 2 to sub-section (1) of section 37, so as to clarify that for purposes of sub-section (1) of section 37, 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 purposes of the business or profession.

This amendment will take effect from 1/04/2015 and will, accordingly, apply to assessment year 2015-16 and subsequent years.

Thus, CSR expenditure is to be disallowed by new Explanation 2 to section 37(1), while computing Income under, the Head Income form Business and Profession. Further, clarification regarding impact of Explanation 2 to section 37(1) of the Income Tax Act in Explanatory Memorandum to The Finance (No.2) Bul, 2014 is as under: "The existing provisions of section 37(1) of the Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Act, shall be allowed if the same is Jamnagar Utilities and Power Pvt. Ltd incurred wholly and exclusively for the purposes of, carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditure cannot be allowed under the existing provisions of section 37 of the Income-tax Act. Therefore, in order to provide certainty on this issue, it is proposed to clarify that 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 have been incurred for the purpose of business and, hence, shall not be allowed as deduction under section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Act shall be allowed deduction under those sections subject to fulfilment of conditions, if any, specified therein."

From the above it is clear that under Income tax Act, certain provisions explicitly state that deductions for expenditure would be allowed while computing income under the head, Income from Business and Profession to those, who pursue corporate social responsibility projects under following sections. • Section 30 provides deduction on repairs, municipal tax and insurance premium Section 31, provides deduction on repairs and insurance of plant, machinery and furniture Section 32 provides for depreciation on tangible assets like building, machinery, plant, furniture and also on intangible assets like knowhow, patents, trademarks, licenses. Section 33 allows development rebate on machinery, plants and ships. • Section 34 states conditions for depreciation and development rebate. • Section 35 grants deduction on expenditure for scientific research and knowledge extension in natural and applied sciences under agriculture, animal husbandry and fisheries. Payment to approved universities/research institutions or company also qualifies for deduction. In-house R&D is eligible for deduction, under this section. Jamnagar Utilities and Power Pvt. Ltd Section 35CCD •provides deduction for skill development projects, which constitute the flagship mission of the present Government. Section 36 provides deduction regarding insurance premium on stock, health of employees, loans or commission for employees, interest on borrowed capital, employer contribution to provident fund, gratuity and payment of security transaction tax. Income Tax Act, under section 80G, forming part of Chapter VIA, provides for deductions for computing taxable income as under: •Section 80G(2) provides for sums expended by an assessen as donations against which deduction is available.

We therefore do not agree with arguments advanced by Ld. Sr. DR

In present facts of case, Ld.AR submitted that all payments forming part of CSR does not form part of profit and loss account for computing Income under the head, "Income from Business and Professionit has been submitted that some payments forming part of GSR were claimed as deduction under section 80G of the Act, for computing "Total taxable income", which has been disallowed by authorities below. In our view, assessee cannot be denied the benefit of claim under Chapter VI A, which is considered for computing Total Taxable Income". If assessee is denied this benefit, merely because such payment forms part of CSR, would lead to double disallowance, which is not the intention of Legislature.

1 We find that the Ld. CIT(A) has followed the decision of the Co-ordinate Bench on the issue in dispute. Further, we find that the assessee has fulfilled all the conditions for deduction u/s 80G of the Act in respect of deduction claimed. We also note there is no specific bar in section 80G of the Act for claiming deduction in respect of CSR expenditure if an assessee otherwise fulfill all the requirement of section 80G of the Act. In view of the above,

The ground raised by the assessee being in support of order of the Ld. CIT(A) and since we have already upheld the finding of the Ld. CIT(A) and dismissed the appeal of the Revenue, the ground raised by the assessee is rendered academic. Accordingly, we are not required to adjudicate upon the same.

The facts for the year under consideration are identical and therefore,

Since we have upheld the order of the CIT(A) and dismissed the grounds of the Revenue, the C.O. of the assessee contending the legality of reopening has become academic not warranting any adjudication. Hence, the same is dismissed accordingly.

In the result, the appeal of the Revenue and the C.O. of the assessee are dismissed.

1 In view of the decisions quoted above, it is evident that CSR expenses which are required to be mandatorily incurred by the assessee company as per section 135 of the Companies Act are not entitled to deduction under section 37(1) for assessment year 2015-16 by virtue of the fetters placed by Explanation 2 to section 37(1), which was inserted by the Finance (No. 2) Act, 2014. A plain reading of Explanation 2 to section 37(1) shows that any expenditure incurred towards CSR activities as referred to in section 135 of the Companies Act, 2013 shall not be allowed as 'business expenditure' and shall be deemed to have not been incurred for purpose of business. The embargo created by Explanation 2 inserted in section 37 by Finance (No. 2) Act, 2014 was to deny deduction for CSR expenses incurred by companies, as and by way of regular business expenditure while computing ‘income under the head business'.

2 So, it can be clearly seen that this Explanation 2 to section 37(1) which denies deduction for CSR expenses by way of business expenditure is applicable only to the extent of computing 'business income' under Chapter IV-D. The said Explanation cannot be extended or imported to CSR contributions which are otherwise eligible for deduction under any other provision or Chapter, so as to say donations made by charitable trust registered under section 80G.Parliament has expressed its intention clearly by bringing in restriction in respect of expenditure classified by an assessee company while claiming deduction under section 80G i.e. CSR expenditure related to Swachh Bharat Kosh and Clean Ganga Fund. And if the Parliament desired, it could have been made such kind of restriction or any restriction like in the case of donation to Swachh Bharat Kosh & Clean Ganga Fund. So the assertion of the Assessing Officer is erroneous and therefore cannot be accepted. It can be safely inferred that when the Legislature in particular has provided for only the above referred two specific exceptions in section 80G, then it is the implied intent of the Legislature to permit deduction under section 80G in respect of CSR contributions made to funds/organizations referred to in all other sub-clauses of section 80G [other than (iiihk) and (iiihl)] of the Act.

3 The facts for the year under consideration are identical and therefore, respectfully following the Co-ordinate and other Benches of ITAT in plethora of cases cited above, we uphold the order of the CIT(A). The grounds raised by the Revenue in this regard are dismissed.

In the result, both the appeals of the Revenue are dismissed. Order pronounced in the open court on 18/03/2025. NARENDER KUMAR CHOUDHRY (न्यायिक सदस्य /JUDICIAL MEMBER) Place: मुंबई/Mumbai दिनांक / Date 18.03.2025 Lubhna Shaikh / Steno PRABHASH SHANKAR (लेखाकार सदस्य/ACCOUNTANT MEMBER) आदेश की प्रतिलिपि अग्रेषित/