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Allowability of CSR expenditure has been sealed after Explanation 2 to Section 37(1) was inserted in the Income tax Act 1961 w.e.f. 1.4.2015. It reads as –
“Explanation 2- For the removal of doubts, it is hereby declared that for the purposes of sub-section (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 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.”
Explanation-2 to section 37(1) of the Act thus denies deduction for CSR expenses by way of business expenditure and is applicable only to the extent of computing business income under Chapter IV-D and it could not be extended or imported to CSR contribution which was otherwise eligible for deduction under Chapter VI. Various ITAT and High Court decisions are available in this respect. The ITAT Mumbai in the case of SAVITA OIL TECHNOLOGIES LTD Vs ACIT, CENTRAL CIRCLE [2023- VIL-1595-ITAT-MUM] has again held in this regard on the following grounds –
A. The embargo created by this Explanation 2 inserted in Section 37 of the Act by the Finance (No.2) Act, 2014 was to deny deduction for CSR expenses incurred by companies, as and by way of regular business expenditure while computing 'Income under the head Business. So, it can be clearly seen that this Explanation 2 to Section 37(1) of the Act which denies deduction for CSR expenses by way of business expenditure is applicable only to the extent of computing 'Business Income' under Chapter IV-D of the Act.
B. The Court relied on the interpretation maxim “Expressio Unius Esl Exclusio Alterius” which is a Latin phrase that means “express mention ofone thing excludes all others. The phrase indicates that items not on the listare assumed not to be covered by the Statute. When something is mentionedexpressly in a Statute, it leads to the presumption that the things notmentioned are excluded. Even if the assessee has included the expenditureas CSR Expenditure because there is no prohibition or restriction placed by the Parliament on such a donation even if shown as CSR expenditure. Thereason for saying so is that in section 80G of the Act certain restrictions inrespect of deduction in respect of two donations are expressly seen in this Section. So, the Parliament has expressed its intention clearly by bringing in restriction in respect of expenditure classified by an assessee company while claiming deduction u/s. 80G of the Act i.e. CSR expenditure related to Swachh Bharat Kosh and Clean Ganga Fund. So if an assessee makes some donation to these projects and include/classify it as CSR expenditure while claiming deduction u/s. 80G of the Act then it will be allowed only the amount that is other than the sums spent by the assessee in pursuance of CSR u/s. 135 of the Companies Act.
In other words, if an assessee company spends only the mandatory expenditure of 2% of net profit for CSR activity, which includes the amount of donation to Swachh Bharat Kosh & Clean Ganga Fund (iiihk) and (iiihi) of clause (a) of sub-section (2) of section 80G of the Act, then deduction u/s. 80G of the Act is not allowable. However, in a case scenario, wherein the assessee expends the mandatory expenditure and gives donation to these two projects i.e. over and above the mandatory CSR expenditure u/s. 135 of Companies Act, that sum donated to Swachh Bharat Kosh & Clean Ganga Fund will be eligible for 100% deduction u/s. 80G of the Act [refer section 80G (1)(i) and subject to section 80G (4)]. However, such a restriction in respect of expenditure made by an assessee to any other fund or institution as referred to in sub clause (iv) of clause (a) of sub-section 2 of section 80G of the Act had not been placed by the Legislature. If the Parliament desired, it could have been made such kind of restriction or any restriction like in the case of donation to Swachh Bharat Kosh & Clean Ganga Fund.