CSR expenditure under Companies Act 2013 allowed as business deduction under section 37(1) as mandatory statutory obligation

ITAT Ranchi held that CSR expenditure incurred under Companies Act, 2013 should be allowed as deduction under section 37(1). The tribunal ruled that since CSR expenditure is mandatory for companies and constitutes a statutory obligation, it must be permitted as business deduction. Following precedent from Jindal Power Ltd., the tribunal found that explanation 2 to section 37(1) effective from August 1, 2015 cannot operate retrospectively. The AO was directed to allow the CSR expenditure as deduction, and the assessee's appeal was allowed.

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Issues:
- Disallowance of expenses on Corporate Social Responsibility and Sustainable Development
- Rectification/refund of Dividend Distribution Tax amount
- Allowability of CSR expenditure under section 37(1) of the Income Tax Act

Analysis:
1. Disallowance of CSR Expenses:
- The assessee appealed against the disallowance of Rs. 2,02,04,000/- on account of expenses on Corporate Social Responsibility (CSR) and Sustainable Development (SD) for the assessment year 2014-15.
- The AO disallowed the CSR expenditure, stating it was not wholly and exclusively for business purposes.
- The assessee argued that the CSR expenses were incurred as per the guidelines of the Department of Public Enterprises, Govt. of India, and were incidental to the business.
- The Tribunal referred to a similar case where CSR expenses were allowed as they contribute to goodwill and societal welfare, aligning with the evolving concept of business responsibility.
- The Tribunal held that since CSR expenditure was mandatory under the Companies Act, 2013, and incurred as per statutory obligations, it should be allowed as a deduction under section 37(1) of the Act.
- The Tribunal emphasized that the introduction of Explanation 2 to section 37(1) from 1st April 2015 was not retrospective, and hence, the CSR expenditure for the assessment year should be allowed.

2. Rectification/Refund of Dividend Distribution Tax:
- The assessee also raised a ground regarding the rectification or refund of Rs. 1,37,12,989/- deducted as Dividend Distribution Tax in the computation of tax liability.
- However, the Tribunal did not address this ground in the appeal as the assessee chose not to press this issue during the proceedings.

3. Conclusion:
- The Tribunal allowed the appeal of the assessee, directing the Assessing Officer to allow the CSR expenditure of Rs. 2,02,04,000/- as a deduction for the assessment year 2014-15.
- The judgment highlighted the importance of CSR expenditure as a statutory obligation under the Companies Act, 2013, and emphasized that such expenses should be considered as incurred wholly and exclusively for business purposes, warranting their allowance as deductions under section 37(1) of the Income Tax Act.
- The decision was based on the non-retrospective nature of the amendment to section 37(1) introduced in 2015, ensuring that the assessee's CSR expenses for the relevant assessment year were eligible for deduction.

This comprehensive analysis of the judgment addresses the key issues involved and the Tribunal's decision regarding the disallowance of CSR expenses and the related legal implications under the Income Tax Act.

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