CSR expenses allowed as deduction under Section 37(1) as statutory obligation under Companies Act 2013

ITAT Ranchi allowed the assessee's appeal regarding disallowance of CSR expenses. The tribunal held that CSR expenditure mandated under Companies Act, 2013 should be allowed as deduction, noting that Explanation 2 to Section 37(1) cannot operate retrospectively from August 1, 2015. Since CSR expenses were statutory obligations under Section 135 of Companies Act, 2013, the AO was directed to allow the expenditure as deduction for the relevant assessment year.

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Issues:
Disallowance of expenses on Corporate Social Responsibility (CSR) and sustainable development under section 37(1) of the Income Tax Act for the assessment year 2013-14.

Analysis:
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) confirming the disallowance of Rs. 3,00,00,000/- for CSR expenses and Rs. 53,64,000/- for sustainable development expenses. The main issue was whether these expenses were allowable deductions under section 37(1) of the Income Tax Act.

During assessment proceedings, the Assessing Officer (AO) observed the expenses debited under CSR and sustainable development heads and questioned the purpose of these expenses. The assessee explained that the CSR fund was earmarked for CSR activities as per government guidelines, and the expenses were incurred in compliance with the guidelines issued by the Department of Public Enterprises, Government of India.

However, the AO disallowed the expenses, stating they were not wholly and exclusively for the business purpose. The Commissioner of Income Tax (Appeals) upheld the AO's decision, leading to the appeal before the Appellate Tribunal.

The Tribunal noted that the genuineness of the expenses was not doubted, but the disallowance was based on the premise that the expenses were not solely for the business purpose. The Tribunal referred to a previous decision where similar expenses were allowed, emphasizing that being a good corporate citizen can benefit the business by creating goodwill in the community.

The Tribunal held that since CSR expenses were mandatory under the Companies Act, 2013, and incurred as per statutory obligations, they should be allowed as deductions. The introduction of Explanation 2 to section 37(1) of the Act was deemed not retrospective in operation, and thus, the expenses were allowed as deductions for the assessment year in question.

Consequently, the Tribunal allowed the appeal of the assessee, directing the AO to allow the CSR and sustainable development expenses as deductions, considering them as statutory obligations and not discretionary expenses.

In conclusion, the Tribunal's decision favored the assessee, allowing the expenses on CSR and sustainable development as deductions for the assessment year 2013-14.

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