CSR expenditure and section 14A disallowance: business-linked social spending allowed, and Rule 8D rejected without recorded dissatisfaction.

CSR expenditure incurred on education, infrastructure, training, drinking water, sanitation and environment projects was held allowable as revenue expenditure under section 37(1), as the relevant assessment years predated Explanation 2, and the outlay was business-linked rather than capital or personal in nature; the disallowance was deleted. Disallowance under section 14A read with Rule 8D was also rejected because the Assessing Officer had not recorded the mandatory dissatisfaction with the assessee's claim and had not examined the books of account to identify expenditure attributable to exempt dividend income; mechanical invocation of Rule 8D was therefore unsustainable. The assessee succeeded on both issues and the additions were set aside.

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Issues: (i) Whether Corporate Social Responsibility expenditure was allowable as revenue expenditure under section 37(1); (ii) Whether the disallowance made under section 14A read with Rule 8D was sustainable.

Issue (i): Whether Corporate Social Responsibility expenditure was allowable as revenue expenditure under section 37(1).

Analysis: The expenditure was incurred on activities such as education, infrastructure, training, drinking water, sanitation and environment-related projects. The amendment introducing Explanation 2 to section 37(1) was not applicable to the assessment years involved. The nature of the assessee's business, the board-approved CSR policy, and the absence of any personal expenditure or violation of law supported the claim that the outlay was incurred for business purposes and not as capital expenditure.

Conclusion: The CSR expenditure was allowable as revenue expenditure and the disallowance was deleted.

Issue (ii): Whether the disallowance made under section 14A read with Rule 8D was sustainable.

Analysis: The Assessing Officer did not record satisfaction regarding the correctness of the assessee's claim before invoking Rule 8D, nor was there examination of the books of account to identify expenditure attributable to exempt dividend income. In the absence of the statutory precondition under section 14A(2), the mechanical computation under Rule 8D could not be sustained.

Conclusion: The disallowance under section 14A read with Rule 8D was not sustainable and was deleted.

Final Conclusion: The assessee succeeded on both issues and the additions made on account of CSR expenditure and section 14A disallowance were set aside.

Ratio Decidendi: CSR expenditure incurred for business-linked social obligations may be allowed under section 37(1) where it is not capital or personal in nature and the statutory disallowance provision is inapplicable for the year concerned; disallowance under section 14A cannot be made mechanically without recording the mandatory dissatisfaction on the assessee's claim.

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