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Facts
The assessee, Bounteous Digital Private Limited, had its assessment for AY 2017-18 selected for scrutiny. The Assessing Officer disallowed CSR expenses amounting to ₹.13,18,000/- and this was confirmed by the CIT(A). The assessee also incurred expenses towards salaries for CSR staff and made donations.
Held
The Tribunal held that the disallowance of CSR salary expenses was justified as the assessee failed to prove that such expenses were incurred wholly and exclusively for business purposes. However, the disallowance of donation expenses was allowed as the assessee had already disallowed it in its return and claimed deduction under Section 80G.
Key Issues
Whether CSR salary expenses are deductible as business expenditure and if donation expenses claimed as deduction under Section 80G are valid.
Sections Cited
143(2), 142(1), 37(1), 37, 80G, 14A, 154, 8D(2)(ii), 8D(2)(iii)
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Before: Shri S.S. Viswanethra Ravi & Shri S.R. Raghunatha
O R D E R
PER S.S. VISWANETHRA RAVI, JUDICIAL MEMBER:
This appeal filed by the assessee is directed against the order dated 11.02.2025 passed by the Addl/JCIT(A) – 10, Mumbai for the assessment year 2017-18. 2. The first issue raised by the assessee emanates for our consideration as to whether the ld. CIT(A) is justified in confirming the disallowance of CSR expenses in the facts and circumstances of the case.
Brief facts relating to the case are that the assessee M/s. Bounteous Digital Private Limited, earlier known as M/s. Lister Technologies Private Limited filed its return of income for the AY 2017-18 admitting an income of ₹.18,98,20,570/-. The case of the assessee was selected for scrutiny through CASS and notices under section 143(2) and 142(1) of the Income Tax Act, 1961 [“Act” in short] were issued and served on the assessee and in response to the notices, the assessee furnished the details as called for from time to time. From the financials of the assessee company, the Assessing Officer noted that an amount of ₹.13,18,000/- has been spent towards CSR activities, disallowed as per Explanation (2) to section 37(1) of the Act and added to the total income of the assessee. On appeal, the ld. CIT(A) confirmed the disallowance made by the Assessing Officer. On being aggrieved, the assessee is in appeal before the Tribunal.
The ld. AR Shri A.R. Raghunathan, CA submits that the assessee paid salaries to an employee, employed for the purpose of handling Corporate Social Responsibility (CSR) of the company to the tune of ₹.9,78,000/- and paid donations to the tune of ₹.3,40,000/-. The salaries paid to the tune of ₹.9,78,000/- has been claimed under the head “salaries and wages”. He further submits that the assessee disallowed the donation of ₹.3,40,000/- in its return of income under section 37 of the Act and claimed it as deduction under section 80G of the Act. The ld. AR, by reiterating the submissions as made before the authorities below, vehemently argued that the salary paid to CSR staff was incurred wholly and exclusively for the purpose of business.
With regard to the disallowance of donation, the ld. AR submits that donation amount was already disallowed by the assessee in its ITR and claimed as deduction under section 80G of the Act [to the extent of 50%). He submits that further addition by the Assessing Officer amounts to double disallowance which is erroneous in law.
The ld. DR Shri C. Sivakumar, Addl. CIT submits that the CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business. He submits that as the application of income is not allowed as deduction for the purposes of computing taxable income of a company, the amount spent on CSR cannot be allowed as deduction for computing the taxable income of the company. He drew our attention to the provisions of section 37(1) of the Act and submits that the 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 purpose of carrying on business or profession. He strongly supported the order passed by the ld. CIT(A) and pleaded for dismissing the ground raised by the assessee.
With regard to the disallowance of donation, the ld. DR fairly conceded the same is allowable deduction under section 80G of the Act.
Heard both the parties and perused the material available on record. In the assessment order, we note that the Assessing officer disallowed the claim of deduction of salary to the CSR staff as CSR expenditure. On perusal of the impugned order, we note that the assessee was asked the details in respect of salary paid towards CSR expenses, which is clear from para 5.1.3 of the impugned order. We find the assessee filed details in respect of the question raised by the ld. CIT(A) which are reproduced in para 5.1.4 of the impugned order. On perusal of the same, we note that the assessee incurred ₹.3,40,000/- on account of donation towards health care and ₹.68,600/- on account of donation towards education and others. Further, we find the assessee contended that the GL extract for the salary expenses incurred cannot be provided as it included as a part of the payroll entry and no separate ledger is maintained and further we note that it was said that no board approval or resolution required in respect of salary paid for CSR staff. Further we note that the ld. CIT(A) asked the assessee to explain how the 5 salary paid to Shri Jenaan Lilani was wholly and exclusively for the purpose of business and we find no explanation given by the assessee. Therefore, in view of the above discussion and with reference to material on record, we note that the ld. CIT(A) has rightly held that the onus is on the assessee to explain the subjected salary expenses incurred towards CSR activities was wholly and exclusively for the purpose of business available under section 37 of the Act. Thus, we find no infirmity in the order of the ld. CIT(A) and accordingly, it is justified. Thus, the ground raised by the assessee is dismissed.
With regard to the claim of deduction of donation, we note that the assessee has already disallowed the same in the return of income and claimed as deduction under section 80G of the Act. We note that as per clause (ii) to section sub-section (1) of section 80G of the Act, an amount equal to fifty per cent of the aggregate of the sums specified in sub- section (2) of section 80G of the Act, i.e., any sums paid by the assessee in the previous year as donation is an allowable deduction. Thus, the ground raised by the assessee is allowed.
The next ground raised
in Ground No. 2 relates to confirmation of disallowance made under section 14A of the Act. The assessee has earned dividend income during the year and claimed it as exempt. The 6. Assessing Officer noted that substantial investments have been made in equity shares and mutual funds, etc. Accordingly, the Assessing Officer asked the assessee to provide the annual average of monthly averages of the opening and closing balances of the values of investment, income from which does not or shall not form part of the total income vide notice under section 142(1) of the Act dated 03.12.2019. In response to the above notice, the assessee furnished the details and the same is reproduced at page 3 of the assessment order. The Assessing Officer noted that the total monthly average balance of investment from April to March is determined at ₹.30,04,18,737/- and determined the annual average of investment at ₹.2,50,34,895/-. Accordingly, the Assessing Officer disallowed 1% on the annual average of ₹.2,50,34,895/-, which comes to ₹.2,50,349/- and section 14A of the Act and added to the total income of the assessee. On appeal, the ld. CIT(A) confirmed the addition made by the Assessing Officer and also rejected the rectification petition filed under section 154 of the Act dated 21.03.2025 towards confirmation of disallowance under section 14A of the Act.
Having heard both the parties, we note that the Assessing Officer invoked the provisions of Rule 8D(2)(ii) of Income Tax Rules and made disallowance of ₹.2,50,349/- under section 14A of the Act being 1% on the annual average of ₹.2,50,34,895/-. We note that the new Rule 8D(2)(ii) has been amended vide IT (Fourteenth Amdt.) Rules, 2016 to sub-Rule (2) to Rule 8D w.e.f. 02.06.2016, which came into effect from 02.06.2016 for making the addition under section 14A of the Act. We note that the disallowance of expenses of 0.5% as per existing Rule [Rule 8D(2)(iii)] has been revised to 1% as per amended Rule 8D(2)(ii) of Income Tax Rules. We note that the year under consideration is AY 2017- 18 and the substitution to sub-Rule (2) to Rule 8D came into effect from 02.06.2016 and attracts the AY under consideration. Since the assessee has not disallowed any expenditure under section 14A of the Act and in view of the new substitution came into force from 02.06.2016, we find no infirmity in the order of the ld. CIT(A) in confirming the addition made by the Assessing Officer under section 14A of the Act and thus, the ground raised by the assessee is dismissed.