Tribunal rules CSR expenses not deductible for business purposes, citing Income Tax Act.

The Tribunal allowed the appeal, ruling that the amendment to Section 37(1) of the Income Tax Act, 1961, regarding the deductibility of Corporate Social Responsibility (CSR) expenditure is prospective and does not apply to the assessment year 2013-14. The revision order disallowing CSR expenses was overturned, emphasizing that such expenses are not deductible as they are not incurred for business purposes but as an application of income. The decision was made on 31-12-2018.

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Issues Involved:
1. Allowability of Corporate Social Responsibility (CSR) expenditure.
2. Retrospective vs. prospective application of Explanation 2 to Section 37(1) of the Income Tax Act, 1961.

Detailed Analysis:

1. Allowability of Corporate Social Responsibility (CSR) Expenditure:
The primary issue in this appeal is the allowability of CSR expenditure as a deductible expense under the Income Tax Act, 1961. The assessee, a public sector undertaking engaged in electricity generation, claimed Rs. 15.70 crores under administrative and other expenses for CSR. The CIT(LTU) revised the assessment order under Section 263, arguing that the CSR expenses should not be allowed as a deduction based on Explanation 2 to Section 37(1) introduced by the Finance (No. 2) Act, 2014, effective from 01.04.2015. This explanation specifies that CSR expenditure as per Section 135 of the Companies Act, 2013, is not deemed to be incurred for business purposes and hence, not deductible.

2. Retrospective vs. Prospective Application of Explanation 2 to Section 37(1):
The assessee contended that the amendment to Section 37(1) is prospective, applicable from the assessment year 2015-16 onwards, and should not affect the assessment year 2013-14. The CIT(LTU), however, did not find any explicit mention that the amendment is not retrospective and directed the AO to disallow the CSR expenditure.

The Tribunal examined the amended provision and noted that the Companies Act, 2013, mandates certain companies to spend a percentage of their profits on CSR activities. Under the existing provisions, only expenses incurred wholly and exclusively for business purposes are deductible. Since CSR expenditure is not incurred for business purposes but rather as an application of income, it is not deductible under Section 37.

The Tribunal referred to the Hon’ble Supreme Court's decision in CIT vs. Vatika Township (P.) Ltd, which established the principle that amendments imposing new obligations or liabilities are presumed to be prospective unless the legislative intent clearly indicates otherwise. The Supreme Court emphasized that retrospective application is generally avoided unless the amendment is clarificatory or declaratory in nature.

The Tribunal concluded that the amendment to Section 37(1) is prospective, effective from 01.04.2015, and does not apply to the assessment year 2013-14. Therefore, the revision proceedings initiated by the CIT(LTU) were deemed without basis, and the appeal of the assessee was allowed.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the amendment to Section 37(1) introduced by the Finance (No. 2) Act, 2014, is prospective and does not apply to the assessment year 2013-14. Consequently, the revision order passed by the CIT(LTU) was quashed. The decision was pronounced in the open court on 31-12-2018.

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