2025 (1) TMI 1579 - AT - Income Tax

Product registration expenses deemed revenue expenditure; CSR expenses allowed as section 80G deductions despite section 37(1) restrictions

ACIT, Circle-13 (2) (2), Mumbai Versus Sharda Cropchem Limited

ACIT, Circle-13 (2) (2), Mumbai Versus Sharda Cropchem Limited - TMI The core legal questions considered in this judgment are:1. Whether the expenditure incurred on product registration can be treated as revenue expenditure or capital expenditure for the purposes of the Income-tax Act, 1961.2. Whether depreciation claimed on product registration expenditure, when treated as capital expenditure, is allowable.3. Whether the deduction claimed under section 80G of the Income-tax Act for Corporate Social Responsibility (CSR) expenses mandated under section 135 of the Companies Act, 2013 is allowable, given the proviso in Explanation 2 to section 37(1) excluding CSR expenses from business expenditure deductions.Issue 1 & 2: Treatment of Product Registration ExpenditureLegal framework and precedents: The Income-tax Act distinguishes between capital and revenue expenditure, with revenue expenditure being deductible in the year incurred, while capital expenditure is generally not deductible but may qualify for depreciation if it creates an asset. The product registration process, taking 1-4 years and providing an enduring advantage enabling the assessee to sell products, was scrutinized under this framework. Prior decisions of the Mumbai ITAT in the assessee's own case for AYs 2011-12 through 2014-15 had held product registration expenses to be revenue in nature.Court's interpretation and reasoning: The Assessing Officer (AO) treated the product registration expenditure as capital expenditure, reasoning that the registration confers a long-term benefit and forms the basis of the business structure. Accordingly, the AO disallowed the expenditure as revenue expense but allowed depreciation as an intangible asset. The Commissioner of Income-tax (Appeals) [CIT(A)] overturned this, relying on earlier ITAT decisions in the assessee's own case, which treated such expenses as revenue expenditure on identical facts. The CIT(A) found no distinguishing features in the current year's claim to warrant a different treatment.Key evidence and findings: The product registration process's duration and its role in enabling the business were central. The AO's reliance on the capital nature was based on the enduring benefit principle. However, the CIT(A) and the Tribunal found the earlier ITAT rulings persuasive and applicable.Application of law to facts and competing arguments: The AO's argument emphasized the long-term benefit and capital nature, while the assessee argued consistency with prior rulings and the revenue nature of the expenditure. The Tribunal upheld the CIT(A)'s order, emphasizing the principle of consistency and the absence of any distinguishing facts.Conclusions: The Tribunal upheld the CIT(A)'s decision allowing the product registration expenditure as revenue expenditure and dismissed the Revenue's appeal. The consequential deletion of depreciation claimed on the disallowed capital expenditure was upheld.Issue 3: Deduction under Section 80G for CSR Expenditure Mandated by Companies Act, 2013Legal framework and precedents: Section 80G of the Income-tax Act provides deduction for donations to specified funds or institutions. Section 135 of the Companies Act, 2013 mandates certain companies to spend a minimum of 2% of average net profits on CSR activities. Explanation 2 to section 37(1) of the Income-tax Act, inserted by the Finance (No. 2) Act, 2014, excludes CSR expenditure from business expenditure deductions. The key legal question is whether mandatory CSR expenditure qualifies for deduction under section 80G, which traditionally requires donations to be voluntary.Court's interpretation and reasoning: The AO disallowed the section 80G deduction on the ground that CSR expenditure is mandatory under the Companies Act and thus not a voluntary donation as required for section 80G. It was argued that allowing deduction would effectively subsidize CSR expenses by the government, contrary to legislative intent. The CIT(A) initially upheld the AO's view.However, the Tribunal referred to a recent co-ordinate Bench decision in Alubound Dacs India Pvt Ltd, which held that the Explanation 2 to section 37(1) only excludes CSR expenses from business expenditure deductions but does not bar deduction under section 80G. The Tribunal noted that Parliament expressly excluded only donations to Swachh Bharat Kosh and Clean Ganga Fund from section 80G deductions, implying other CSR donations remain eligible. The Tribunal further distinguished the requirement of voluntariness for section 80G deduction, noting that the Act does not explicitly require voluntariness for such deduction, and the legislative intent was to encourage CSR participation without double disallowance.Key evidence and findings: The Tribunal relied on statutory provisions, explanatory notes to the Finance Act, 2015, and authoritative decisions including the Alubound Dacs case and the Bangalore ITAT decision in Allegis Services (India) Pvt. Ltd. The legislative history and specific exclusions under section 80G were pivotal.Application of law to facts and competing arguments: The Revenue emphasized the mandatory nature of CSR spending and the Apex Court's decision requiring voluntariness for donations. The assessee relied on the legislative framework allowing deduction under section 80G except for specified exceptions and the co-ordinate Bench rulings. The Tribunal favored the latter, reasoning that the Explanation 2 to section 37(1) does not extend to denial of section 80G deductions and that denying section 80G benefits would lead to double disallowance.Conclusions: The Tribunal held that CSR expenditure mandated under the Companies Act is eligible for deduction under section 80G, subject to fulfillment of other statutory conditions. The Revenue's appeal on this ground was dismissed.Significant holdings and principles established:On product registration expenditure:'The decision rendered by the above squarely applies to the year under consideration, as well. Accordingly, we find no infirmity in the order of the ld. CIT(A) and uphold the same.'This affirms that product registration expenses, despite their long-term benefit, can be treated as revenue expenditure if consistent with prior rulings and facts.On CSR expenditure deduction under section 80G:'A plain reading of Explanation 2 to section 37(1) shows that any expenditure incurred towards CSR activities as referred to in section 135 of the Companies Act, 2013 shall not be allowed as 'business expenditure' and shall be deemed to have not been incurred for purpose of business. The embargo created by Explanation 2 ... is applicable only to the extent of computing 'business income' under Chapter IV-D. The said Explanation cannot be extended or imported to CSR contributions which are otherwise eligible for deduction under any other provision or Chapter, so as to say donations made by charitable trust registered under section 80G.''When the Legislature in particular has provided for only the above referred two specific exceptions in section 80G, then it is the implied intent of the Legislature to permit deduction under section 80G in respect of CSR contributions made to funds/organizations referred to in all other sub-clauses of section 80G.''We hold that the assessee is entitled to deduction claimed u/s. 80G of the Act towards the CSR expenditure incurred by it.'These holdings clarify that mandatory CSR expenses, while excluded from business expenditure deductions, are not barred from deduction under section 80G unless specifically excluded, and that the requirement of voluntariness for donations under section 80G is not absolute in this context.The final determinations are:- The product registration expenditure is allowable as revenue expenditure, and the corresponding depreciation claim on capitalized registration expenses is disallowed.- The deduction claimed under section 80G for CSR expenses mandated by the Companies Act is allowable, subject to compliance with other statutory conditions under section 80G.- Both appeals filed by the Revenue for Assessment Years 2016-17 and 2018-19 are dismissed.