2020 (3) TMI 1459 - AT - Income Tax

CSR Expenses Before 2015-16 Allowed as Business Expenditure Under Section 37(1), Tribunal Affirms CIT(A) Decision

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete the addition of Rs. 4,22,38,097 related to periphery development ... Allowability of Periphery Development Expenses - CSR expenditure incurred by assessee voluntarily prior to asst. year 2015-16 - whether allowable business expenses - HELD THAT:- We note that the Periphery Development Expenses was nothing but a Corporate Social Responsibility (CSR) of the company which was carrying out the business of mining in Joda, Odisha. As Counsel submitted that it was mandatory for the mining industry to look after the development of the area in which the mines were operating and to create employment opportunities, providing educational facilities to the children etc. The expenses incurred by the assessee were on welfare schemes only which are for malaria eradication, distribution of mosquito nets, construction of mandaps etc. Therefore, these expenses were wholly and exclusively for the business purpose. We are of the view that the CSR expenditure incurred prior to asst. Year 2015- 16 are allowable business expenditure as the same are wholly and exclusively incurred for the purpose of business. The explanation to section 37 of the Act restricting the allowance of CSR expenditure is prospective in nature and has no application prior to asst. Year 2015-16. For that we rely on the judgment of the co-ordinate Bench of ITAT Raipur in the case of ACIT, Circle 1(1), Bilaspur v. Jindal Power Ltd. [2016 (7) TMI 203 - ITAT RAIPUR] held Periphery Development Expenses, if incurred have to be taken as a business expenditure. The maximum that was to be explained as per the ld. Assessing Officer was 5%. He has sort of accused the assessee for spending more that 5%. This stand of the ld. Assessing Officer cannot be accepted inasmuch as how much the assessee spends legitimately is the decision of the assessee. The Revenue cannot question this expenditure as per the decision of the Apex Court in [2006 (12) TMI 82 - SUPREME COURT]. Decided against revenue. Issues Involved:1. Allowability of periphery development expenses as business expenditure.2. Interpretation of Section 37(1) of the Income Tax Act, 1961 regarding CSR expenditure.Issue 1: Allowability of Periphery Development Expenses as Business ExpenditureThe appeal filed by the Revenue challenged the deletion of an addition of Rs. 4,22,38,097 made by the Assessing Officer on account of periphery development expenses exceeding 5% of the net profit. The Assessing Officer contended that these expenses were not related to business activity as per mining provisions. The company, engaged in mining, had debited the expenses under 'periphery development expenses'. The Commissioner of Income Tax (Appeals) (CIT(A)) deleted the addition, stating that the expenses were for corporate social responsibility (CSR) and were wholly and exclusively for business purposes. The CIT(A) noted that the expenses were for welfare schemes like malaria eradication, distribution of mosquito nets, and construction of mandaps, which were mandatory for the mining industry to undertake. The Tribunal agreed with the CIT(A) that the expenses were allowable business expenditure as they were incurred for the development of the area where the mines operated and were in line with CSR obligations.Issue 2: Interpretation of Section 37(1) of the Income Tax Act, 1961 Regarding CSR ExpenditureThe Tribunal analyzed whether the CSR expenditure incurred voluntarily by the assessee prior to the assessment year 2015-16 could be considered allowable business expenditure. Section 135 of the Companies Act, 2013 mandated certain companies to spend a percentage of their net profit on CSR activities. However, an explanation to Section 37(1) of the Income Tax Act, added from the assessment year 2015-16, disallowed CSR expenditure as a deduction for computing income under the head Business or Profession. The Tribunal held that the explanation to Section 37 was prospective in nature and did not apply to CSR expenditure incurred before the assessment year 2015-16. Citing a judgment of a co-ordinate Bench of ITAT Raipur, the Tribunal concluded that CSR expenditure prior to the specified assessment year was allowable as business expenditure. The Tribunal upheld the CIT(A)'s decision to delete the addition related to CSR expenditure, emphasizing that such expenses were legitimate business expenditures.In conclusion, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order to delete the addition of periphery development expenses. The Tribunal found that the expenses were incurred for CSR purposes and were wholly and exclusively for business, making them allowable as business expenditure. The Tribunal also clarified the interpretation of Section 37(1) regarding the treatment of CSR expenditure, highlighting that pre-2015-16 CSR expenses were permissible deductions for business income.