The ITAT Mumbai in a recent decision[1] clearly enunciated the tax treatment to CSR expenses under the IT Act, 1961. The ITAT held that while Explanation 2 to Section 37 disallows CSR expenses by way of business expenditure, but the import of the provision cannot be imported to CSR contributions which are otherwise eligible for deduction. Section 37 disallows mandatory CSR expenses referred to in Section 135, Companies Act, 2013 and not voluntary CSR expenses. The impugned case dealt with the former.
Facts
Principal Commissioner of Income Tax passed an order under Section 263 stating that the Assessing Officer’s assessment order was prejudicial to the interest of the revenue on the ground that assessee’s claim for deduction under Section 80G in respect of CSR expenses was allowed. The Principal Commissioner was of the view that any CSR expenditure incurred by an assessee shall not be deemed to be expenditure incurred for the purpose of business or profession and thus cannot be claimed as an expense even if part of the expense was spent on a trust/society which was otherwise eligible for deduction under Section 80G. The Principal Commissioner restored the matter to the Assessing Officer stating that the assessee’s claim under Section 80G be disallowed on CSR expenses.
Against the said order, the assessee filed an appeal before the ITAT.
ITAT’s Decision
The ITAT’s decision in the impugned case is a good example of harmonious and strict interpretation of the tax statute. The Revenue’s argument was that if the sum satisfies the requirement of a CSR expense under Section 135, Companies Act, 2013 the sum gets exhausted and is no longer available for claiming the benefit under Section 80G of the IT Act, 1961. The ITAT noted that there is no provision in the IT Act, 1961 which satisfies the Revenue’s contention. The ITAT noted Section 80G barred claiming of CSR expenses if they were allocated to two funds i.e., Swach Bharat Fund and Clean Ganga Fund. While a similar restriction was not prescribed towards any other fund listed under Section 80G. This implied that if CSR expenses were allocated to any other fund listed under Section 80G, other than the two aforementioned funds there was no express prohibition of claiming deductions for donations made to other funds. ITAT noted:
Out of so many entries under section 80G(2) of the Act, only donations in respect of two entries are restricted if such payments were towards the discharge of the CSR. The Legislature could have put a similar embargo in respect of the other entries also, but such a restriction is conspicuously absent for other entries. The irresistible conclusion that would flow from it is that it is not the legislative intention to bar the payments covered by section 80G(2) of the Act which were made pursuant to the CSR, and other than covered by section 80G(2)(iiihk) and (iiihl) of the Act. (para 6)
More pertinently, the ITAT noted that Explanation 2 to Section 37 disallowed deductions of CSR expenses only for the purpose of computing business under Chapter IV-D of IT Act, 1961 and it could not be extended or imported to CSR contributions which were otherwise eligible for deduction under Chapter VI-A of the IT Act, 1961. ITAT elaborated that the legislature intended to deny assessee the benefit under Chapter IVD pertaining to ‘Income under the head Business and Profession’. However, if the assessee is denied the benefit under Chapter VIA while computing ‘Total Taxable Income’, it would result in double disallowance to the assessee contrary to legislative intention.
Conclusion The ITAT’s observations were founded on two pillars: first, that CSR expenses under Section 80G are only barred for two specific funds and thus donations to other funds can be claimed as expenses; second, the restriction under Explanation 2 to Section 37 was only for computing income under the head of income from business or profession and could not be used as a tool while computing total income under a separate Chapter of the IT Act, 1961. The latter observation relies on treating the two Chapters of IT Act, 1961, i.e., Chapter IVD and Chapter VI-A as independent and self-contained codes. This view is not unimpeachable, though in the impugned case the ITAT adopted a strict interpretation of the provisions and apart from the express disallowance for CSR expenses under Section 80G, it correctly held that assessee was allowed to claim expenses for other donations.
[1] Societe Generale Securities India Pvt Ltd v PCIT TS-770-ITAT-2023.