2025 (10) TMI 1347 - AT - Income Tax

Disallowance under Section 14A and deduction under Section 80G: disallowance deleted; CSR donations allowed as 80G deduction.

Disallowance under section 14A/Rule 8D was examined where no exempt income arose from investments; the tribunal applied authority that no disallowance can ... Disallowance u/s 14A r/w Rule 8D(2)(ii) - DR submitted that the assessee had income from investments which did not form part of total income but no disallowance u/s 14A r/w Rule 8D was made by the assessee - if no exempt income was earned by the assessee - AO had made addition being 1% of annual average of investments, towards administrative expense - Scope of amendment inserting an Explanation to Section 14A - HELD THAT:- There is no dispute to the fact that no exempt income was earned by the assessee during the current year. CIT(A) has given a finding that the income earned by the assessee from the investments was offered to tax as capital gains and this fact has not been controverted by the Revenue. As held in the case of PCIT vs. Adani Wilmar Limited [2021 (8) TMI 1390 - SC ORDER] that no disallowance u/s 14A of the Act can be made if the assessee did not earn any exempt income during the year. The provision of Section 14A of the Act was amended and an Explanation was inserted w.e.f. 01.04.2022, as per which the disallowance u/s 14A can be made, even if no exempt income is earned during the year. As in the case of Williamson Financial Services Limited [2024 (9) TMI 1571 - GAUHATI HIGH COURT] has held that the Explanation inserted to Section 14A of the Act vide Finance Act, 2022 w.e.f 01.04.2022 is prospective in nature and cannot be presumed to have retrospective effect and applied to assessment years prior to 01.04.2022. CIT(A) had rightly deleted the addition made u/s 14A - Decided in favour of assessee. Disallowance u/s 80G - amounts expended under CSR activity - assessee had incurred expenditure towards CSR activity which was added u/s 37(1) - HELD THAT:- None of the donations were made to Swachh Bharat Kosh and Clean Ganga Fund. Therefore, there was no bar on the assessee to claim the deduction under Section 80G of the Act. As decided in the case of JMS Mining Pvt. Ltd. [2021 (7) TMI 907 - ITAT KOLKATA] has held that Explanation 2 to section 37(1) of the Act which denies deduction for CSR expenses by way of business expenditure is applicable only to the extent of computing 'Business Income' under Chapter IV-D of the Act. The said Explanation cannot be extended or imported to CSR contributions which is otherwise eligible for deduction under any other provision or Chapter, to say donations made to charitable trusts registered u/s 80G of the Act. Also held in the case of Gabriel India Limited [2025 (5) TMI 863 - ITAT MUMBAI] that the assessee’s claim for deduction u/s 80G in respect of CSR expenses was eligible for deduction. CIT(A) had rightly allowed the relief to the assessee - The ground taken by the Revenue is dismissed. Issues: (i) Whether disallowance under Section 14A read with Rule 8D can be made in the absence of any exempt income for the assessment year in question; (ii) Whether amounts spent under corporate social responsibility (CSR) and donated to funds/charitable trusts eligible under Section 80G are barred from deduction under Section 80G by operation of Explanation 2 to Section 37(1).Issue (i): Whether disallowance under Section 14A read with Rule 8D can be made when no exempt income arose in the assessment year.Analysis: The issue turns on whether the Explanation inserted to Section 14A by the Finance Act, 2022 operates retrospectively or prospectively and whether disallowance under Section 14A is permissible in years where no exempt income was earned. Relevant judicial authority has held that the Explanation is prospective and does not apply to assessment years prior to 01.04.2022. The facts show no exempt income was earned in the year under appeal and income from investments was offered to tax as capital gains.Conclusion: Disallowance under Section 14A read with Rule 8D cannot be made for the year under appeal where no exempt income arose; conclusion is in favour of the assessee.Issue (ii): Whether CSR expenditure donated to trusts eligible under Section 80G is barred from deduction under Section 80G by Explanation 2 to Section 37(1).Analysis: The issue requires distinguishing the separate statutory regimes: Section 37(1) (and its Explanation 2) limits deduction of CSR as business expenditure, whereas Section 80G provides a separate route for deduction of eligible donations. Coordinate Tribunal precedents have held that Explanation 2 to Section 37(1) does not displace or prevent claims under Section 80G where the donations are to funds/charities eligible under Section 80G; specific statutory restrictions apply only to certain named funds.Conclusion: CSR donations to trusts/funds eligible under Section 80G are not barred from deduction under Section 80G by Explanation 2 to Section 37(1); conclusion is in favour of the assessee.Final Conclusion: The Revenue's appeal is dismissed and the appellate authority's order upholding deletion of the Section 14A disallowance and allowance of Section 80G deduction is upheld.Ratio Decidendi: The Explanation to Section 14A inserted w.e.f. 01.04.2022 is prospective and does not authorize disallowance in assessment years prior to that date where no exempt income arose; and Explanation 2 to Section 37(1) does not bar separate statutory deductions under Section 80G for CSR donations to funds/charities that are eligible under Section 80G.