2018 (4) TMI 335 - AT - Income Tax

Tribunal decisions on CSR expenses and Section 14A disallowance upheld and reduced.

The Tribunal allowed the assessee's appeal regarding Corporate Social Responsibility (CSR) expenses, directing the Assessing Officer to delete the ... Disallowance of business expenses as Corporate Social Responsibility (CSR) expenses - scope of amendment - Held that:- The expenses to section 37 (1) was inserted w.e.f. 1st April, 2015 and cannot be construed as to disadvantage to the assessee in the period prior to this amendment. - Decided in favour of assessee Addition u/s 14A - Held that:- CIT(A) has given a clear finding that investments were made in earlier years out of the funds provided by the Govt. Of India. The Revenue has not furnished any material suggesting that the investment was out of borrowed funds. This ground of Revenue’s appeal is dismissed. Issues Involved:1. Disallowance of Corporate Social Responsibility (CSR) expenses.2. Disallowance of expenses under Section 14A of the Income Tax Act.Issue-wise Detailed Analysis:1. Disallowance of Corporate Social Responsibility (CSR) expenses:The primary issue in the assessee’s appeal was the disallowance of Rs. 59,21,197/- as CSR expenses. The Assessing Officer (AO) disallowed these expenses by framing the assessment under Section 143(3) of the Income Tax Act, 1961. The AO treated the expenses as incurred under the CSR scheme and applied Explanation 2 to Section 37(1), which was inserted by the Finance Act, 2014. The Ld. CIT(A) upheld this disallowance, stating that the expenses were not mandatory and did not fulfill the requirement under Section 37(1) of being incurred wholly and exclusively for business purposes. The CIT(A) noted that the expenses were in line with guidelines issued by the Department of Public Enterprises (DPE) and suggested that such expenses could be claimed under Sections 35AC or 80G, which provide for the allowability of such expenditures subject to specific conditions.The Tribunal, however, referred to a precedent set by the Raipur Tribunal in the case of ACIT vs. Jindal Power Ltd., which held that Explanation 2 to Section 37(1) is not retrospective and applies only from 1st April 2015. The Tribunal noted that the expenses in question were not incurred under a statutory obligation but were voluntary and thus could be considered as business expenses. Consequently, the Tribunal directed the AO to delete the disallowance, allowing the ground raised by the assessee.2. Disallowance of expenses under Section 14A:The revenue’s appeal contested the restriction of disallowance under Section 14A from Rs. 45,41,046/- to Rs. 4,43,533/-. The AO had disallowed Rs. 45,41,046/- following Rule 8D, which includes direct and indirect expenditure related to exempt income. The Ld. CIT(A) reduced this disallowance, noting that the investments were made in earlier years with funds provided by the Government of India, and no interest expenses were incurred for these investments. The CIT(A) found no cogent reason from the AO to justify the indirect interest expenditure disallowance under Rule 8D(2)(ii) but upheld the administrative and managerial expenses disallowance under Rule 8D(2)(iii).The Tribunal upheld the CIT(A)’s findings, emphasizing that the investments were made out of funds provided by the Government of India and not from borrowed funds. The Tribunal found no reason to disturb the CIT(A)’s factual findings and dismissed the revenue’s appeal, thereby confirming the reduced disallowance of Rs. 4,43,533/-.Conclusion:The Tribunal allowed the assessee's appeal regarding CSR expenses, directing the AO to delete the disallowance. Conversely, the Tribunal dismissed the revenue's appeal concerning the disallowance under Section 14A, upholding the CIT(A)’s decision to restrict the disallowance to Rs. 4,43,533/-. The decision was pronounced in the Open Court on 4th April 2018.