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Income Tax Appellate Tribunal, “B’’BENCH: BANGALORE
Before: SHRI GEORGE GEORGE K. & SHRI B.R. BASKARAN
PER B.R. BASKARAN, ACCOUNTANT MEMBER:
The assessee has filed this appeal challenging the assessment order dated 23.10.2019 passed by the A.O. for assessment year 2015-16 in pursuance of directions given by Ld. Dispute Resolution Panel (“DRP”). The grounds of appeal and additional grounds of appeal urged by the assessee give rise to the following issues:- a) Addition on account of transfer pricing adjustment b) Disallowance of part of repairs and maintenance expenses treating it as capital in nature. c) Disallowance of deduction u/s 80G of the Income-tax Act,1961 ['the Act' for short]
IT(TP)A No.2589/Bang/2019 M/s. Infinera India Pvt. Ltd., Bangalore
Page 2 of 10 d) Alternative claim to allow depreciation on amount disallowed from repairs and maintenance expenses. e) Claim for deduction of Education Cess.
The assessee is a subsidiary of Infinera Corp. & Infinera International Corporation, U.S. It is registered with Software Technology Park of India Scheme. It provides software development services, which include embedded network management, technical documentation and system verification test and associated hardware design for products that are conceptualized and developed by Infinera Corporation.
The assessee filed its return of income for the year under consideration declaring total income of Rs.27.67 crores. In the draft assessment order, the A.O. determined the total income of the assessee of Rs.47.11 crores. After direction given by Ld. DRP, the total income was determined at Rs.41.99 crores. Aggrieved, the assessee has filed this appeal before us.
The first issue relates to addition made on account of transfer pricing adjustment. The assessee has filed a letter dated 24.9.2021 wherein the assessee has sought permission from the bench for withdrawing all grounds relating to transfer pricing adjustment in accordance with Rule 10RA of the I.T. Rules. The reason given is that it had entered into bilateral Advance Pricing Agreement (APA) for assessment years 2016-17 to 2020-21 with roll back option for 2 years covering assessment years 2014-15 & 2015-16. Accordingly, it is submitted that the year under consideration is covered in the roll back period and accordingly the transfer pricing adjustment made in this year has since been dissolved under APA proceedings. In view of the above, we allow the assessee to withdraw the grounds relating to Transfer pricing adjustment. Accordingly the said
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Page 3 of 10 grounds relating to transfer pricing adjustments are dismissed as not pressed.
The next issue relates to disallowance of repairs & maintenance expenses to the tune of Rs.75,24,807/- treating it as capital in nature. The facts relating thereto are that the assessee had claimed repairs & maintenance expenses of Rs.3.68 crores. The A.O., in the draft assessment order, asked the assessee to furnish the details of repairs expenses. Since the assessee did not furnish the details, A.O. disallowed 50% of the same amounting to Rs.1.84 crores treating it as capital in nature. Before Ld. DRP, the assessee furnished the details and hence Ld. DRP asked the A.O. to examine the same and furnish a remand report. The A.O., in the remand proceedings, accepted that the expenses debited under the head “Repairs & Maintenance Expenses” to the tune of Rs.2.28 crores are revenue in nature. Accordingly he reported in the remand report that the remaining amount of Rs.1.40 crores are capital in nature.
5.1 The assessee disputed the findings given by the AO in the remand report and hence Ld. DRP further examined the details of capital expenditure reported by the AO. The Ld. DRP noticed that the out of the expenditure of Rs.1.40 crores reported by the A.O. as capital in nature, a sum of Rs.64.26 lakhs are actually revenue in nature. Accordingly, the Ld. DRP confirmed the disallowance to the tune of Rs.75,24,807/- holding it as capital in nature. The assessee is aggrieved by the order passed by the A.O. confirming disallowance of above said amount of Rs.75,24,807/-.
5.2. At the time of hearing, the assessee furnished a statement containing the break-up details of Rs.75,24,807/-. We notice from the details furnished by the assessee that the list contained 55
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Page 4 of 10 entries. Out of the same, the assessee itself has accepted that 23 items are capital in nature and remaining 32 items are revenue in nature. In support of its claim that 32 items of expenditure are revenue in nature, the assessee placed reliance on the decision rendered in the case of City Financial, Amway, APL India & Verizon.
5.3 We heard Ld. D.R. on this issue and perused the record. Since the assessee itself is accepting that 23 items found in the list are capital in nature, the addition of above said items are confirmed. With regard to remaining 32 items, we are of the view that they require verification at the end of the A.O. in the light of decisions relied upon by the assessee. Accordingly, we restore this issue to the file of A.O. for examining the claim of assessee with regard to the 32 items found in the list.
The next issue relates to alternative claim of depreciation on the amount held to be capital in nature, which was disallowed from repairs & maintenance expenditure. Since this claim of the assessee is in accordance with law, we restore this issue to the file of the A.O. with a direction to allow depreciation thereon in accordance with law.
The next issue relates to disallowance of claim for deduction u/s 80G of the Act. The assessee had incurred following expenses on account of corporate social responsibility:-
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Page 5 of 10
7.1 It was submitted that the assessee disallowed the above said payments aggregating to Rs.36,56,801/- while computing income from business. However, it claimed deduction u/s 80G of the Act to the tune of Rs.21,36,801/- as stated in the table above.
7.2 The A.O. took the view that the assessee have made above said payment as “Corporate Social Responsibility” (CSR) expenses in terms of the provisions of Companies Act and such kind of expenses are not eligible for deduction under the Explanation given in sec. 37(1) of the Act. The A.O. took the view that the sums paid by the assessee need to be “donation”, which means the voluntary act on the part of the donor. In the instant case, the assessee has made this payment for fulfilling the corporate social responsibility imposed on it under the Companies Act and hence the element of “charity” is messing in this payment. Accordingly, he held that the assessee is not eligible for deduction u/s 80G of the Act. However, in respect of contribution made to Prime Minister’s Relief Fund amounting to Rs.6,16,801/-, the AO considered it as allowable as deduction. Accordingly, he disallowed the remaining claim made u/s 80G of the Act amounting to Rs.15,20,000/-.
7.3 We heard the parties on this issue and perused the record. The Ld. A.R. placed his reliance on the decision rendered by the coordinate bench in the case of Allegis Services India Pvt. Ltd. Vs. ACIT (ITA No.1693/Bang/2019 dated 29.4.2020) and submitted that the co-ordinate bench has held that payment forming part of CSR are eligible for deduction u/s 80G of the Act.
7.4 We heard Ld D.R on this issue and perused the record. We notice that the co-ordinate bench has held in the above said case that the expenses incurred under Corporate Social Responsibility
IT(TP)A No.2589/Bang/2019 M/s. Infinera India Pvt. Ltd., Bangalore Page 6 of 10 scheme under the provisions of Companies Act are also eligible for deduction u/s 80G of the Act. The relevant discussions made in the above said case are extracted below:- “10. 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) Bill, 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 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."
IT(TP)A No.2589/Bang/2019 M/s. Infinera India Pvt. Ltd., Bangalore Page 7 of 10 13. 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 premiums. • 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 know-how, 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. • 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 assessee as donations against which deduction is available. a) Certain donations, give 100% deduction, without any qualifying limit like Prime Minister's National Relief Fund, National Defence Fund, National Illness Assistance Fund etc., specified under section 80G(1)(i) b) Donations with 50% deduction are also available under Section 80G for all those sums that do not fall under section 80G(1)(i).
IT(TP)A No.2589/Bang/2019 M/s. Infinera India Pvt. Ltd., Bangalore Page 8 of 10 Under Section 80G(2) (iiihk) and (iiihl) there are specific exclusion of certain payments, that are part of CSR responsibility, not eligible for deduction u/s80G. 14. In our view, expenditure incurred under section 30 to 36 are claimed while computing income under the head, ‘Income form Business and Profession”, where as monies spent under section 80G are claimed while computing “Total Taxable income” in the hands of assessee. The point of claim under these provisions are different. 15. Further, intention of legislature is very clear and unambiguous, since expenditure incurred under section 30 to 36 are excluded from Explanation 2 to section 37(1) of the Act, they are specifically excluded in clarification issued. There is no restriction on an expenditure being claimed under above sections to be exempt, as long as it satisfies necessary conditions under section 30 to 36 of the Act, for computing income under the head, “Income from Business and Profession”. 16. For claiming benefit under section 80G, deductions are considered at the stage of computing “Total taxable income”. Even if any payments under section 80G forms part of CSR payments(keeping in mind ineligible deduction expressly provided u/s.80G), the same would already stand excluded while computing, Income under the head, “Income form Business and Profession”. The effect of such disallowance would lead to increase in Business income. Thereafter benefit accruing to assessee under Chapter VIA for computing “Total Taxable Income” cannot be denied to assessee, subject to fulfillment of necessary conditions therein. 17. We therefore do not agree with arguments advanced by Ld.Sr.DR. 18. 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 Profession”. It has been submitted that some payments forming part of CSR 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. 19. On the basis of above discussion, in our view, authorities below have erred in denying claim of assessee under section 80G
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Page 9 of 10 of the Act. We also note that authorities below have not verified nature of payments qualifying exemption under section 80G of the Act and quantum of eligibility as per section 80G(1) of the Act.”
7.5 Following the above said decision, we direct the A.O. to allow deduction u/s 80G of the Act in respect of contributions made under CSR scheme, after examining the claim of the assessee that the said payments are eligible for deduction u/s 80G of the Act.
The last issue urged by the assessee relates to claim for deduction of Education Cess including secondary & higher education Cess on income tax as deduction while computing the total income.
8.1 We notice that the Kolkata Bench of Tribunal in the case of Kanoria Chemicals & Industries Ltd Vs. Addl. CIT (ITA No.2184/Kol/2018dated 26.10.2021) has held that the education cess is an additional surcharge levied on income tax and hence it partakes the character of income tax. Accordingly it held that the education cess is not allowable as deduction. The Tribunal also noted the decision rendered by Hon’ble Bombay High Court in the case of Sesagoa Ltd. 117 Taxmann.com 96 and by Hon’ble Rajasthan High Court in the case of Chambal Fertilisers & Chemicals Ltd. Vs. JCIT (ITA No.52/2018 dated 31.7.2018), wherein it was held that the education cess is allowable as deduction. However, the Tribunal observed that the decision rendered by Hon’ble Supreme Court in the case of CIT Vs. K. Srinivasan (1972) 83 ITR 346 was not brought to the notice of the above said Hon’ble High Courts. Accordingly, the Tribunal has expressed the view that the decision rendered by Hon’ble Supreme Court in the case of K. Srinivasan (supra) shall prevail on this issue and accordingly held that the education cess is not allowable as deduction.
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8.2 Following the above said decision of Kolkata bench of Tribunal in the case of Kanoria Chemicals & Industries Ltd (supra), we hold that payment of education cess including secondary and higher education cess is not allowable as deduction. Accordingly, we reject this ground of the assessee.
In the result, the appeal filed by the assessee is treated as partly allowed for statistical purposes. Order pronounced in the open court on 23rd Feb, 2022
Sd/- Sd/- (George George K.) (B.R. Baskaran) Judicial Member Accountant Member
Bangalore, Dated 23rd Feb, 2022. VG/SPS Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order
Asst. Registrar, ITAT, Bangalore.