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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI GEORGE GEORGE K & SHRI LAXMI PRASAD SAHU
Per George George K, Vice President:
This appeal at the instance of the assessee is directed against the Final Assessment Order (FAO) dated 27.06.2024, passed under section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2020-21.
The solitary issue that is raised is whether the authorities below were justified in disallowing the claim of deduction under section 80G of the Act, amounting to Rs.1,12,23,296/-.
Brief facts of the case are as follows:
Assessee is a company providing business process outsourcing (BPO) services to its group companies. For Assessment Year 2020-21, the return of income was filed on 05.02.2021 declaring income of Rs.1,62,67,53,700/-. The return of income was selected for scrutiny and notice under section 143(2) of the Act, was issued on 29.06.2021. The AO issued notice under section 142(1) of the Act, directing the assessee to justify the claim of deduction under section 80G of the Act. The assessee, vide its submissions dated 14.09.2023 and 21.09.2023, explained the eligibility of deduction under section 80G of the Act (copies of the submissions filed by the assessee are placed on record at pages 32 to 46 and 50 to 59 of the Paper Book). The AO rejected the submissions of the assessee and passed Draft Assessment Order (DAO) on 26.09.2023.
Aggrieved by the DAO, assessee filed its objections before the Dispute Resolution Panel (DRP) on 25.10.2023. The DRP rejected the assessee’s objections and confirmed the disallowance under section 80G of the Act, vide its directions dated 04.06.2024. Pursuant to the DRP’s directions, the impugned FAO was passed.
Aggrieved by the FAO, assessee has filed the present appeal before the Tribunal raising the following grounds:
A. General grounds: 1. That on the facts and in circumstances of the case and in law, the•final assessment order under section 143(3) read with section 144C(13) and section 144B of the Income-tax Act, 1961 ('the Act'), dated July 27, 2024 passed by the Assessment Unit, Income-tax Department ('learned Assessing Officer' or 'learned AO'), to the extent prejudicial to the Appellant, is bad in law, contrary to the facts and circumstances of the case and is liable to be quashed. B. Disallowance of deduction under section 8oG of the Act- INR 1,12,23,296 Page 3 of 11 2. That on the facts and in the circumstances of the case and in law, the learned AO erred in disallowing the claim of deduction of INR 1,12,23,296 under section 8oG of the Act by holding that amount paid out of Corporate Social Responsibility ('CSR') expenditure is ineligible for such deduction.
3. That the learned AO erred in stating that the amounts paid to eligible entities specified in section 8oG of the Act as a part of CSR contributions has not been paid by the Appellant on a voluntary basis and hence not eligible to be claimed as deduction under section 8oG of the Act.
4. That the learned AO erred in not appreciating the fact that the provisions of section 135 of Companies Act, 2013 do not impose any restriction for claiming deduction of CSR expenditure under section 80G of the Act.
5. That the learned AO erred in law and on facts by not appreciating the contention of the Appellant that section 8oG of the Act places explicit restriction for claiming deduction of CSR contributions made to Swachh Bharat Kosh and Clean Ganga Fund. However, similar prohibition to claim deduction under section 80G is not provided anywhere in the law, in respect of other donations spent as a part of CSR activity.
6. That on the facts and in the circumstances of the case, the learned AO failed to appreciate the favourable rulings wherein it was held that CSR expenditure should be allowed under section 8oG of the Act. (Tax Effect: INR 28,24,679 C. Incorrect levy of interest 7. On the facts and in the circumstances of the case, the learned AO erred in computing the interest under section 234B of the Act amounting to INR 28,246.
D. Penalty Proceedings 8.On the facts and in the circumstances the Learned AO erred in initiating penalty proceedings under section 274 read with section 270A of the Act.
Assessee has filed two sets of Paper Books, in one set enclosing the case laws relied on and in the other set enclosing the tax audit report in Form 3CA-3CD, the notices issued by the AO and the DRP, party wise details of the donations made to the institutions having 80G registration, the certificate issued by the donees, etc.
The learned AR submitted that the sole reason for denying the benefit of deduction under section 80G of the Act was that the CSR expenditure is a compulsory expenditure incurred as per the Companies Act and not a voluntary donation. It was submitted that on identical facts, the Bangalore Bench of the Tribunal in the case of Allegis Services (India) Pvt. Ltd., Vs. ACIT in (Order dated 29.04.2020) and in the case of FNF India (P) Ltd., Vs. ACIT reported in [2021] 133 taxmann.com 251 (Bangalore – Trib.) had decided the issue in favour of the assessee. The learned AR further submitted that the matter need not be restored to the files of the AO without any allegations of the AO or DRP that assessee has not satisfied any conditions specified under section 80G of the Act. Lastly, it was contended that the donation receipts were verified by the tax auditor and its eligibility has been certified in Form 3CD. In support of her contention, the learned AR relied on the following case laws:
CIT Vs. Kelvinator of India Ltd. reported in [2002] 256 ITR 1 (Delhi) Interglobe Technology Quotient (P) Ltd. Vs. ACIT reported in (2024) 163 taxmann.com 542 (Delhi-Trib)
The learned DR strongly supported the Orders of the AO and DRP.
We have heard the rival submissions and perused the material on record. Assessee for the relevant Assessment Year had incurred CSR expenditure amounting to Rs.2,24,64,592/-. Assessee disallowed CSR expenditure in its return of income and claimed deduction of 50% of the same to the tune of Rs.1,12,23,296/- under section 80G of the Act. The AO disallowed the claim of deduction under section 80G of the Act. The solitary reason for denying the benefit of deduction under section 80G of the Act was that it was not a voluntary contribution but CSR expenses are statutory obligation under the Companies Law. The relevant observation of the AO in this regard reads as follows:
“In the COI, the assessee has added back CSR expenses of Rs 22.446.592/-, however it has claimed deduction u/s 80 G for 50% of these expenses amounting to Rs. 11,223,296/-. CSR expenses are statutory obligations under the Company Law. These expenses lack the element of voluntary donation whereas for the deduction u/s 80G, the element of charity and voluntary nature of donation is a pre requisite. The voluntary nature is thus implicit in the donations made to charitable organizations for the purpose of 80G.Therefore, the expenses towards CSR cannot again be utilized for claiming deduction u/s 80G. In effect it would be using the same expenditure for two purposes at the same time. Further, the CSR expenditure has the underlining intention to supplement the Government efforts and resources towards certain specific domains concerning social and developmental interests of the society. If the CSR expenses are again claimed for deduction u/s 80G, it would be mean that considerable part of the expenditure towards CSR are funded by the Government by foregoing the tax and hence to some extent it will nullify the basic intent behind inserting the CSR provisions. The donation under 80G on the other hand has the underlying intent of charity behind it. Further, the contention of the assessee that CSR expenses towards only two schemes are specifically barred from being used for the purpose of 80G and so it implies that there is no prohibition for other CSR expenses to be used for 80G, is also misplaced. It is to be underlined that the two schemes mentioned above are specifically barred, but, it does not automatically imply that other CSR expenses are allowed to be used for 80G. The issue has to be seen in the context of the basic intent and purpose of the CSR expenses and the donations u/s 80G. As discussed above, one is a mandatory expense whereas the other is a voluntary donation with the basic intent of charity. Therefore, assessee's contention in this regard was found to be untenable and thus the deduction u/s 80 G amounting to Rs 11,223,296/- was proposed to be disallowed. Penalty proceedings u/s 270A were also proposed to be initiated on this issue for under reporting of income which is in consequence of misreporting thereof.”
Disallowance under section 37 of the Act operates under Chapter IV-D of the Act while computing income under head “Profits and Gains from Business / Profession”. Expenses prescribed under sections 32 to 36 of the Act are not allowed for deduction under section 37 of the Act if it is not incurred for the purpose of business. Finance Bill, 2014, introduced explanation to section 37 of the Act deeming CSR expenditure to be an expenditure as not being incurred for the purpose of the business. The disallowance under section 37 of the Act is independent of, and it does not govern any other exemptions / deductions under the provisions of the Act. On the other hand, deduction under section 80G of the Act is within the realms of Chapter VI-A of the Act and is relevant for computing the “Total Income” of a taxpayer. In order to claim deduction under section 80G of the Act, assessee has to fulfill the conditions prescribed therein. Out of all the conditions prescribed, one such condition is that the CSR expenditure incurred should not be towards “Swachh Bharat Kosh” nor towards “Clean Ganga Fund”. The assessee fulfills all the conditions prescribed under section 80G of the Act. Also, the CSR expenditure incurred by the company is not towards “Swachh Bharat Kosh” nor towards “Clean Ganga Fund”, the same is clear from the perusal of party wise details of donation made to institutions having 80G registration and certificates issued for claiming deduction under section 80G of the Act (placed at pages 60 to 66 of the Paper Book).
Deduction under section 37 of the Act and deduction under section 80G of the Act operates in different spheres. For the proposition that the CSR expenditure (subsequent to Amendment in 2014) though cannot be an allowable deduction under section 37 of the Act, can be allowed as a deduction under section 80G of the Act (if conditions precedent to the said section are satisfied), we rely on the Orders of the Bangalore Bench of the Tribunal in the case of Allegis Services (India) Pvt. Ltd., and FNF India (P) Ltd., Vs. ACIT (supra). The relevant finding of the Bangalore Bench of Tribunal in the case Allegis Services (India) Pvt. Ltd., (supra) reads as follows:
“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.
11. This amendment will take effect from 1/04/2015 and will, accordingly, apply to assessment year 2015-16 and subsequent years.
12. 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."
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 A. Y : 2016 - 17 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). 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 A. Y : 2016 - 17 hands of assessee. The point of claim under these provisions are different.
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".
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.
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 Profession". It has been submitted that some payments forming part of CSR were claimed as deduction under section A. Y : 2016 - 17 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.
On the basis of above discussion, in our view, authorities below have erred in denying claim of assessee under section 80G 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.
Under such circumstances, we are remitting the issue back to Ld.AO for verifying conditions necessary to claim deduction under section 80G of the Act. Assessee is directed to file all requisite details in order to substantiate its calim before Ld.AO. Ld.AO is then directed to grant deduction to the extent of eligibility.”
We find that assessee had submitted the donation receipts before AO and DRP. On perusal of the same which is placed on record, we find that the total donations made is to the tune of Rs.2,24,64,592/-. The party wise details and the approval granted to each of the donees are also placed on record and same is evident from the certificate issued from the donees. The details of the donations given by the assessee to the various entities, their PAN, date of donation and the approval granted to the donees is annexed to this order as Annexure A.
Further, we find donation receipts were verified by the tax auditor and its eligibility has been certified in Form 3CD. Without any allegation of lower authorities on other conditions of section 80G of the Act not being satisfied, it can safely be concluded that lower authorities accepted that the other conditions have been fulfilled by the assessee. Therefore, on perusal of the material on record, we direct the AO to grant deduction claimed under section 80G of the Act, amounting to Rs.1,12,23,296/-. It is ordered accordingly.
In the result, appeal filed by the assessee is allowed.