2021 (11) TMI 141 - AT - Income Tax

Tribunal allows appeal on CSR & R&R expenses, upholds legal expenses treatment. Impact on interest levy.

Shri B. Rudra Gouda Versus The Assistant Commissioner of Income Tax, Circle 1, Bellary. And The Deputy Commissioner of Income Tax, Circle 1, Bellary. Versus Shri B. Rudra Gouda

The Tribunal allowed the assessee's appeal partly by deleting the disallowances of Corporate Social Responsibility (CSR) and Reclamation & ... Allowability of business expenditure - Disallowance of amount expended towards Corporate Social Responsibility - HELD THAT:- Assessee has incurred the expenditure at the behest of the Deputy Commissioner, Bellary which was necessary to be incurred for the purposes of business, in public interest. Respectfully following the aforesaid view, we direct the Ld.AO to delete the disallowance.Decided against revenue. Disallowance of deduction by Central Empower Committee (CEC) towards Reclamation and Rehabilitation expenses - HELD THAT:- As relying on M/S VEERABHADRAPPA SANGAPPA & CO. [2020 (12) TMI 1145 - ITAT BANGALORE] we direct the Ld.AO to allow the same as business expenditure for year under consideration.Decided against revenue. Disallowance of the legal fees incurred by assessee to protect and defend the claim made against the assessee by third parties - HELD THAT:- As relying on SHRI B. KUMARA GOWDA AND VICE-VERSA [2014 (8) TMI 1112 - ITAT BANGALORE]assessee concerned was resisting a suit for protecting its business and not with a view get a new lease. Hon'ble Apex Court in the case of Sree Meenakshi Mill Ltd., has clearly held that taxability of expenditure must depend on the purpose of the legal proceeding, in relation to the business and cannot be computed by the final outcome of the proceedings. We are therefore, of the opinion that the CIT(A) was justified in holding that legal expenses incurred by assessee for litigation deserves to be deleted. - Decided against revenue. Issues Involved:1. Disallowance of Corporate Social Responsibility (CSR) expenditure.2. Disallowance of Reclamation & Rehabilitation (R&R) expenses.3. Treatment of legal expenses as capital expenditure.4. Levy of interest under Section 234B.Issue-Wise Detailed Analysis:1. Disallowance of Corporate Social Responsibility (CSR) Expenditure:The assessee challenged the disallowance of Rs. 75,00,000 incurred towards the construction of roads, categorized as CSR expenditure. The Ld.AO treated this as capital expenditure. The Tribunal referred to the decision in M/s. Veerabhadrappa Sangappa & Co. Vs. ACIT, where similar CSR expenses were allowed as business expenditure. The Tribunal noted that the expenditure was incurred at the direction of the Deputy Commissioner, Bellary, and was necessary for business purposes and public interest. It was held that such expenditure is allowable as a deduction under Section 37(1) of the IT Act, as it was incurred for the benefit of the business, promoting goodwill and long-term benefits. Consequently, the disallowance was deleted.2. Disallowance of Reclamation & Rehabilitation (R&R) Expenses:The assessee contested the disallowance of Rs. 14,54,31,191 deducted by the Central Empower Committee (CEC) towards R&R expenses. The Tribunal referenced the case of M/s. Veerabhadrappa Sangappa & Co. Vs. ACIT, where similar contributions to the Special Purpose Vehicle (SPV) account were considered. It was concluded that these contributions were necessary for resuming mining operations and were not penal in nature but compensatory. The Tribunal held that such expenses are allowable as business expenditure under Section 37(1) of the IT Act. The disallowance was directed to be deleted.3. Treatment of Legal Expenses as Capital Expenditure:The revenue challenged the Ld.CIT(A)'s decision to treat legal expenses of Rs. 9,41,07,014 incurred by the assessee as revenue expenditure. The Tribunal referred to the case of DCIT Vs. Shri B. Kumara Gowda, where similar legal expenses were allowed as revenue expenditure. It was noted that the expenses were incurred to protect the existing business and did not create a new asset or provide a capital advantage. The Tribunal upheld the Ld.CIT(A)'s decision, treating the legal expenses as revenue in nature and dismissing the revenue's appeal.4. Levy of Interest Under Section 234B:The assessee contested the levy of interest under Section 234B amounting to Rs. 3,44,80,540. The Tribunal's decision on the disallowance of CSR and R&R expenses impacted the computation of interest. Since the disallowances were deleted, the levy of interest under Section 234B was also affected accordingly.Conclusion:The Tribunal allowed the assessee's appeal partly by deleting the disallowances of CSR and R&R expenses and upheld the Ld.CIT(A)'s decision on treating legal expenses as revenue expenditure. The revenue's appeal was dismissed, and the levy of interest under Section 234B was impacted by the deletion of disallowances. The order was pronounced on 27th October 2021.