2022 (9) TMI 815 - AT - Income Tax

Tribunal rejects CSR expenditure adjustment in book profits, rules AO's action unjustified.

The Tribunal concluded that the addition of CSR expenditure to book profits was not justified. It held that the AO's action of increasing the book profits ... MAT computation u/s 115JB - amount incurred towards CSR activity - addition made on the basis of explanation to section 115JB of the Act that the reserves were created - HELD THAT:- None of the clauses provides that CSR expenses have to be added to book profit. Except for the wild imagination of the Assessing Officer by no stretch of imagination, it can be said expenditure on CSR expenses is a transfer to/from reserve. Hon’ble Apex Court in Apollo Tyers [2002 (5) TMI 5 - SUPREME COURT] have clearly laid down that the Assessing Officer or assessee, none can tinker with book profit disclosed in audited account. It is not the case that the accounts have not been prepared as per accepted accounting principle. Once the accounts have been prepared in accordance with standards in this regard, this tinkering by the Assessing Officer has no sanction of law. We have no hesitation in setting aside the addition to book profit in this regard. - Appeal of assessee allowed. Issues Involved:1. Increase in book profits by INR 48,00,000 as per Section 115JB of the Income Tax Act.2. Preparation of Profit and Loss Account in accordance with Generally Accepted Accounting Principles (GAAP).3. Treatment of Corporate Social Responsibility (CSR) expenditure in the computation of book profits under Section 115JB.4. Applicability of Explanation 1 to Section 115JB concerning CSR expenditure.5. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.Issue-wise Detailed Analysis:1. Increase in Book Profits by INR 48,00,000 as per Section 115JB:The Assessing Officer (AO) increased the book profits by INR 48,00,000, which was the amount debited towards CSR expenditure. The AO argued that CSR expenditure should be added back to the book profits because it is in the nature of appropriation of profits and not allowable under the normal provisions of the Income Tax Act. The assessee contended that Section 115JB does not prescribe any adjustment for CSR expenditure in the computation of book profits.2. Preparation of Profit and Loss Account in Accordance with GAAP:The Ld. CIT(A) held that the Profit and Loss Account was not prepared in accordance with GAAP, thereby making the Supreme Court's decision in Apollo Tyres Ltd. vs. CIT inapplicable. The assessee argued that the accounts were prepared according to the standards issued by the ICAI and that CSR expenditure is to be disclosed as other expenses in the Statement of Profit and Loss, not as an appropriation of profits.3. Treatment of CSR Expenditure in the Computation of Book Profits under Section 115JB:The AO and Ld. CIT(A) treated CSR expenditure as a below-the-line item, arguing that it should be added back to the book profits. The Ld. CIT(A) referenced Circular Number 1/2015 issued by CBDT, which states that CSR expenditure is an application of income, not a deduction of expenditure. The assessee argued that CSR expenditure should be considered an expense and not an appropriation of profits, citing the Supreme Court decision in Apollo Tyres Ltd. vs. CIT.4. Applicability of Explanation 1 to Section 115JB Concerning CSR Expenditure:The assessee argued that Explanation 1 to Section 115JB does not prescribe any adjustment for CSR expenditure. The Tribunal noted that none of the clauses in Section 115JB provides for adding CSR expenses to book profits. The Tribunal emphasized that the AO cannot tinker with the book profits disclosed in audited accounts prepared according to accepted accounting principles, as established by the Supreme Court in Apollo Tyres Ltd. vs. CIT.5. Initiation of Penalty Proceedings under Section 271(1)(c):The AO initiated penalty proceedings under Section 271(1)(c) of the Income Tax Act. However, this issue was not elaborated upon in the judgment, as the primary focus was on the treatment of CSR expenditure in the computation of book profits.Conclusion:The Tribunal concluded that the addition of CSR expenditure to book profits was not justified. It held that the AO's action of increasing the book profits by INR 48,00,000 had no sanction of law, as none of the clauses in Section 115JB provided for such an adjustment. The Tribunal set aside the addition to book profits and allowed the appeal of the assessee.Order Pronounced:The appeal of the assessee was allowed, and the order was pronounced in the open court on 10/08/2022.