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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
O R D E R Per: Beena Pillai, JM The present appeal is filed by the assessee against the order dated 12.10.2021 passed by the Pr. CIT (Central), Kochi under Section 263 of the Income Tax Act, 1961 (the Act) for AY 2017- 18 on the following grounds of appeal: - “1. The learnt Pr, Commissioner of Income-Tax went wrong in setting aside the assessment by holding that the order passed under section 143(3) on 30/12/2019 by the ACIT Circle-1 Aluva is erroneous for the reason of the failure on the part of the assessing officer to examine the admissibility of deduction of Rs 24,15,860 claimed in respect of the amount paid to local authority for the welfare of the local society. He ought to have appreciated that - (i) such payment is a pre-requisite to conduct the business of quarry in the State of Kerala; (ii) had the payment not made it would not have been possible to derive an income to the tune of Rs 4.13 crores and to pay tax of Rs 1.46 crores during the year; (iii) as such, the expenditure is incurred wholly and exclusively for the purposes of the business carried on; (iv) the amount of annual payment of Rs 30 lakhs mentioned in the SEIAA-Environmental Clearance was agreed to be paid after the close of the previous year relevant to the assessment year 2017-18 and, as such payment of a lesser amount in A.Y 2017-18 cannot be considered as a reason for holding that it was not expended wholly and exclusively for the purposes of the business carried on; and (v) that the expenditure incurred was not in respect of activities relating to Corporate Social Responsibility referred to in section 135 of the Companies Act, 2013 and, therefore, the Explanation - 2 below section 37(1) has no application in this case and, as such is allowable under section 37(1) of the I. T Act, 1961.”
2. The brief facts of the case are that the assessee is an individual and filed his original return of income on 25.01.2018 declaring total income of Rs.4,12,82,340/- and a net agricultural income of Rs.9,24,880/-. The case was selected for scrutiny for the following reasons: - (i) Large agricultural income shown in the ITR and large cash deposits during the demonetisation period; (ii) Mismatch in expenditure of personal nature reported in the audit report; (iii) Opening written down value of fixed assets as per ITR of the current year is greater than the closing written down value of fixed assets as per ITR of the preceding year.
3. The learned A.R. submitted that the assessee filed various details in respect of the issues on which 143(2) notices were issued.
3.1 The learned AO then passed the assessment order after making addition to the total income which amounted to Rs.4,63,68,773/-. The AO also reduced the net agricultural income to Rs.3,00,000/- vide order dated 30.12.2019. 3.2 The learned PCIT thereafter issued notice under Section 263 of the Act for the reason that the deduction claimed by the assessee for society welfare expenses amounting to Rs. 24,15,860/- under Section 37 of the Act was not an allowable expenditure. The assessee, in response to the same, filed reply on 19.03.2021 and 05.10.2021. He submitted that the AO has called for details and on verification had made disallowance under Section 37 of the Act amounting to Rs.41,41,053/- in the original assessment proceedings. He submitted that initiation of proceedings under Section 263 of the Act is uncalled for as all the necessary details were furnished by the assessee to the AO based on which the assessment order has been passed. He placed reliance on the decision of the Hon'ble Bombay Court in the case of PCT vs. Sumatichand Tolamal Gouti reported in (2019) 111 taxmann.com 287 (Bom) 4. On the contrary, the learned D.R. submitted that though notice under Section 143(2) has been issued to the assessee there is lack of enquiry by the AO and therefore initiation of proceedings under Section 263 of the Act was rightly done.
We have heard the rival contentions and perused the material on record. Admittedly, in the present facts of the case the scrutiny assessment under Section 143(3) of the Act was taken up on the limited issue that has been recorded hereinabove. The mismatch in expenditure of personal nature, that include the expenditure claim by assessee of CSR activity has admittedly not been verified by the AO. From para 7 of the assessment order it is categorically clear that the AO restricted his verification only to the issues considered therein. For the sake of convenience we reproduce para 7 of the assessment order which reads as under: - “7. As per the Balance sheet as on 31/3/2017, assessee has given loan/advance amounting Rs.7,38,47,572/- including Land advance of Rs.1,91,10,000/-. Out of these loans/advances, except Rs.44,22,512/- (Royalty Advance, L&T Finance Ltd. (TDS), Reliance – TDS, Petromee Engineers, input tax credit, Standard electricals), others amounting Rs.6,94,25,060/- cannot be treated as made wholly and exclusively for the purpose of business. The loan liability as per Balance sheet is Rs.27,26,70,775/-. The interest debited to the P&L account is Rs.1,62,64,216/-. Proportionate interest is disallowed on account of diversion of loan amount for purposes other than business which works out (16264216/272670775 * 69425060) to Rs,41,41,053/- is disallowed and added to the returned income u/s 37.” The argument made by the learned A.R. that since there is no disallowance made by the AO it has to be considered that the AO was satisfied with the claim of CSR expenses under Section 37 of the Act as an allowable expenditure. This submission cannot hold good for AY 2017-18 for the simple reason that the Act itself does not allow the claim of CSR expenditure to be an allowable expenditure under Section 37 of the Act. We note that the assessee had claimed Rs.24,15,860/- in Schedule 14 to the Statement of Account towards CSE expenditure which the AO ought to have examine considering the prevalent provisions that were applicable to such expenditure under the Act. We are, therefore, of the opinion that Section 263 of the Act has been rightly initiated in the present facts of the case. However, we direct the AO to consider the claim in accordance with law by granting opportunity to the assessee to file necessary documents in support of the claim. In the event such expenditure has been incurred as an obligation cast upon the assessee by the local authorities the same should be treated as an allowable expenditure having nexus to the business activity carried out by the assessee. For this proposition we rely on the decision of the coordinate bench of the ITAT Bangalore benches in the case of Veerabhadrappa Sangappa & Co. vs. ACIT in ITA No.1054/Bang/2019. With the above modification of the impugned order we dismiss the present appeal of the assessee.
In the result, the appeal filed by the assessee is dismissed. Dictated and pronounced in the open Court on 30th March, 2023.