2022 (12) TMI 67 - AT - Income Tax

Appeal granted for deductible CSR expenses as incurred for business purposes. Community development expenditure also justified.

The Tribunal allowed the appeal, holding that the disallowed Corporate Social Responsibility (CSR) expenses were deductible under Section 37(1) as they ... Rectification u/s 154 - Addition of community development expenditure by observing that this expenditure is not related to the business activity of the assessee and is not admissible expenditure under the provision of sec. 37(1) - assessee submitted that these expenses were incurred before the amendments in sec. 37(1) and “CSR” (Corporate Social Responsibility) is allowable as business expenditure incurred by the company, which is in the nature of the business expenditure of the company - HELD THAT:- Disallowance under Explanation 2 to section 37(1) comes into play, but, as for latter, there is no such disabling provision as long as the expenses, even in discharge of corporate social responsibility on voluntary basis, can be said to be 'wholly and exclusively for the purposes of business'. There is no dispute that the expenses in question are not incurred under the aforesaid statutory obligation. For this reason also, as also for the basic reason that the Explanation 2 to section 37(1) comes into play with effect from 1st April 2015, we hold that the disabling provision of Explanation 2 to section 37(1) does not apply on the facts of this case.” In assessee’s case has incurred expenditure to promote the interest of underprivileged and impaired section of society and to gain goodwill of the people living in the area of operation of the assessee. Therefore respectfully following the decision of Gujarat Narmada Valley Fertilizers & Chemicals Ltd. [2019 (8) TMI 1288 - GUJARAT HIGH COURT] we hold that Explanation 2 to section 37(1) is not applicable to the assessee’s case and therefore the expenses incurred voluntarily by the assessee towards CSR expenditure is allowable u/s 37(1). We also allow the appeal of the assessee. Issues Involved:1. Jurisdiction under Section 154 of the Income Tax Act.2. Power of the Assessing Officer (AO) to review the assessment order under Section 154.3. Nature of the disallowed expenditure under Section 37(1) of the Income Tax Act.4. Applicability of Corporate Social Responsibility (CSR) expenses as business expenditure.Detailed Analysis:1. Jurisdiction under Section 154 of the Income Tax Act:The appellant contended that the Commissioner of Income Tax (Appeals) erred in not accepting their arguments regarding the jurisdiction exercised by the AO under Section 154. The appellant argued that the AO raised issues in the Section 154 proceedings that were not disputed during the original assessment, making the matter highly debatable and inappropriate for rectification under Section 154.2. Power of the Assessing Officer (AO) to Review the Assessment Order under Section 154:The appellant claimed that the AO does not have the authority to review the entire assessment order and make additions under Section 154, as the original assessment was completed after examining the books of accounts. The appellant asserted that the AO's action contradicted the spirit of Section 154, which is meant for rectifying patent and obvious mistakes of law and facts, not for re-evaluating the scope of relevant provisions.3. Nature of the Disallowed Expenditure under Section 37(1) of the Income Tax Act:The AO disallowed Rs. 11,01,192/- as community development expenditure, stating it was not related to the business activity of the assessee and thus not admissible under Section 37(1). The appellant argued that these expenses were incurred for providing facilities to government schools, which indirectly benefitted their business operations, and should be considered under Section 37(1).4. Applicability of Corporate Social Responsibility (CSR) Expenses as Business Expenditure:The appellant contended that the CSR expenses were incurred before the amendments to Section 37(1) and should be considered as business expenditure. They relied on the judgment of the Hon'ble Apex Court in TS Balaram ITO Vs. Volkart Brothers and the decision of the coordinate bench in Bosch Ltd., which allowed CSR expenses as deductible business expenditure.Findings:Jurisdiction and Power of AO under Section 154:The Tribunal noted that the original assessment under Section 143(3) was completed without disputing the community development expenditure. The AO's subsequent action under Section 154 to disallow the expenditure was deemed unjustifiable, as it involved a debatable issue not suitable for rectification under Section 154. The Tribunal cited the decision in Bosch Ltd., emphasizing that CSR expenses incurred voluntarily and for business promotion are allowable under Section 37(1).Nature of Disallowed Expenditure:The Tribunal observed that the expenditure on providing benches and desks to schools was aimed at gaining goodwill and indirectly facilitating business operations. The Tribunal referred to the Gujarat High Court's decision in PCIT v. Gujarat Narmada Valley Fertilizers & Chemicals Ltd., which held that voluntary expenses incurred for business promotion are deductible under Section 37(1).Applicability of CSR Expenses:The Tribunal concluded that the CSR expenses incurred before the amendment to Section 37(1) are allowable as business expenditure. The Tribunal emphasized that the amendment was prospective and did not apply to expenses incurred voluntarily for business promotion before its enactment.Conclusion:The Tribunal allowed the appeal, holding that the disallowed CSR expenses were incurred wholly and exclusively for business purposes and should be deductible under Section 37(1). The Tribunal's decision was based on the principle that voluntary expenses for business promotion are allowable, as established in previous judgments.Order Pronounced:The appeal of the assessee was allowed, and the disallowed expenditure was deemed deductible under Section 37(1). The order was pronounced in court on the 28th day of November, 2022.