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Facts
The Kerala Minerals and Metals Ltd., a Kerala Government undertaking, filed its return for AY 2012-13. The AO completed the assessment, but the Pr. CIT initiated Section 263 proceedings, deeming the assessment erroneous due to unexamined social responsibility expenses, specifically concerning Explanation 2 to Section 37(1). Subsequently, the AO disallowed Rs. 79,12,974/- incurred as CSR expenditure, which was confirmed by the CIT(A).
Held
The Tribunal held that the expenditure was not mandatory CSR under the Companies Act, 2013, nor was Explanation 2 to Section 37(1) applicable for AY 2012-13. It was incurred for business expediency to earn goodwill in the community, hence allowable as a business deduction under Section 37(1) of the Income Tax Act, based on Supreme Court precedents on commercial expediency.
Key Issues
Whether expenditure incurred for community development to earn goodwill is an allowable business expense under Section 37(1) of the Income Tax Act for AY 2012-13, considering the non-applicability of Explanation 2 to Section 37(1) and mandatory CSR provisions of the Companies Act, 2013 for that year.
Sections Cited
143(3), 263, 37(1)
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Income Tax Appellate Tribunal, COCHIN BENCH
Before: SHRI GEORGE GEORGE K., VP & SHRI INTURI RAMA RAO, AM
O R D E R Per: Inturi Rama Rao, AM This appeal filed by the assessee is directed against the orders of the National Faceless Appeal Centre, Delhi [CIT(A)], dated 1192.09.2024 for Assessment Year (AY) 2012-13.
Brief facts of the case are that the appellant is a company incorporated under the provisions of Companies Act, 1956. It is a Kerala Government undertaking engaged in the business of production of Titanium Dioxide. The return of income for AY 2012- 13 was filed on 29.09.2012 declaring income of Rs. 111,08,84,540/-.
The Kerala Minerals and Metals Ltd. Against the said return of income, the assessment was completed by the ACIT, Circle -1, Kollam (hereinafter called "the AO") vide order dated 31.03.2015 passed u/s. 143(3) of the Income Tax Act, 1961 (the Act) at a total income of Rs. 126,94,95,680/-. Subsequently, on review of the assessment order the ld. Pr. CIT, Thiruvananthapuram formed an opinion that the assessment order passed on 31.03.2015 is erroneous and prejudicial to the interests of Revenue for the failure of the AO to examine the allowability or otherwise of social responsibility expenses in view of Explanation 2 to section 37(1) of the Act. Accordingly, issued a show cause notice u/s. 263 of the Act on 19.02.201619.02.2016 calling upon the appellant to explain as to why the assessment order should not be set aside. In response to the show cause notice the appellant had filed a detailed explanation stating that the exercise of power u/s. 263 of the Act is illegal as there was no error in the assessment order passed u/s. 143(3) of the Act. It is submitted that Explanation 2 to section 37(1) has no application as it is effective from AY 2015-16 and moreover the expenditure is not incurred mandatorily u/s. 135 of the Companies Act, 2013 but the expenditure is incurred wholly and exclusively for acquiring goodwill of the community. The ld. Pr. CIT considered the above explanation and held that non-examination of the issue renderd the assessment erroneous and prejudicial to the interests of Revenue. Accordingly, the ld. Pr. CIT set aside the assessment for fresh disposal in accordance with law after affording reasonable The Kerala Minerals and Metals Ltd. opportunity of hearing to the appellant. Thus, the Pr. CIT passed an order of remand to the AO. Pursuant to the order u/s. 263, the AO passed assessment order dated 14.12.2017 u/s. 143(3) r.w.s. 263 of the Act disallowing the CSR expenditure of Rs. 79,12,974/- after hearing the appellant.
Being aggrieved, an appeal was filed before the CIT(A). who vide the impugned order confirmed the action of the AO.
Being aggrieved, the appellant is in appeal before us in the present appeal.
The learned counsel for the assessee submits that the appellant is in the business of chemical industry which causes air and water pollution and also sand mining by dislocating the people who were inhabitating there for generation has been susceptible to public agitation always. Therefore, in order to earn goodwill of the people of that locality the appellant had incurred an expenditure of Rs. 85,74,874/- out of which donations of Rs. 6,61,900/- has been disallowed by the appellant itself and the balance of Rs. 79,12,974/- was incurred on the following items: -
Payment to Confederation of Indian Industry 5,00,000 for Conducting Job Fest in Chavara Payment to KSEDC Ltd for Electronic Toilet 17,00,000 for Government/Aided Schools in Chavara Payment to Gender Rest – 2012 10,00,000 Expense incurred for flood relief and 13,84,550 dewatering of surrounding area The Kerala Minerals and Metals Ltd. Construction of female ward in Community 12,00,000 Health Centre (CHC) Hospital and other miscellaneous expenses to 1,91,763 meet Alleged Toxic Gas Leak Contributions to Various Programmes of 3,66,100 Panmana Grama Panchayat Expenses Towards Drinking water for Public 3,44,652 Contribution to Govt/Public Institution 2,73,712 Honorarium to Staff of CHC and Cost of 2,73,712 Medicines Constuction to Thevalakkara Panchayath for 2,71,500 Consturcting Kanjiravila Pallikadavu Road Contribution to Club/Sports Charitable and 1,30,629 Other Institutions Expenses for Renovation of Panmana Village 1,11,218 Office Contribution to Educational Institutions 63,750 Contribution to Various Programmes of 34,600 Chavara Block Panchayath Contribution to Kudumasree Units 15,000 Contribution to Chavara Grama Panchayath 13,000 Contribution to Thevalakkara Grama 10,000 Panchayath Treatment Assistance to Local Public 2,500 Total 79,12,974
It is submitted that Explanation 2 to section 37(1) of the Act has not application for the year under consideration. It is further submitted that these expenditures were not incurred mandatorily under the Companies Act, 2013 but the expenditures were incurred in order to earn goodwill of the people of that locality where the plant of the company was situated. In support of this proposition he relied on the following judgements: - The Kerala Minerals and Metals Ltd. i) CIT v. Tata Engineering and Locomotive Co. Ltd [2024] 165 taxmann.com 227 (Bom) ii) PCIT v. Sandur Manganese & Iron Ore Ltd. [2024] 158 taxmann.com 409 (Kar) iii) Hindustan Coca Cola Beverages (P) Ltd. v. ACIT [2025] 170 taxmann.com 633 (Delhi Trib) iv) Kanhaiyalal Dudheria v. JCIT [2019] 418 ITR 410 (Kar) v) Mecon Ltd. v. ACIT [2024] 165 taxmann.com 149 (Ranchi Trib) 7. On the other hand, the learned Sr. DR submits that the expenditure incurred on Corporate Social Responsibility (CSR) cannot be allowed u/s. 37(1) of the act as it amounts to application of income.
We have heard the rival contentions and perused the material available on record. The issue that arises for our consideration is whether the CIT(A) was justified in confirming the disallowance of Rs. 79,12,974/- incurred towards community development on the ground that it was not an expenditure allowable u/s. 37(1) of the Act. It is the contention of the appellant that this expenditure was incurred towards community of the locality where the plant of the company was located in order to earn goodwill of the society. There is no dispute about the fact that the expenditure was incurred by the assessee for a public cause in the locality of the business operations of the appellant company. The genuineness of the expenditure is not under challenge before us. The purpose of the expenditure was on the ground of commercial expediency. The ratio of the decision of The Kerala Minerals and Metals Ltd. the Hon'ble Supreme Court in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co. vs. CIT [1997] 223 ITR 101 (SC) is squarely applicable to the facts of the case, wherein it is held as follows: - “The principles for determining whether the payment of the kind made by assessee could be regarded as a business expense are well-settled. What is to be seen is not whether it was compulsory for the assessee to make the payment or not but the correct test is that of commercial expediency. As long as the payment which is made is for the purposes of the business, and the payment made is not by way of penalty for infraction of any Law the same would be allowable as a deduction."
It appears that the lower authorities merely carried away by the nomenclature given to the expenditure incurred. It is not incurred mandatorily on CSR activity under the Companies Act, 2013. So this expenditure is proved to be incurred out of business expediency from the point of businessman and the same is required to be allowed u/s. 37(1) of the Act.
In the result, the appeal filed by the assessee stands allowed.
Order pronounced in the open court on 16th May, 2025.