CSR expenses under Section 37(1) denied as company failed proving business connection for classroom construction and infrastructure projects

The Jharkhand HC quashed the ITAT order regarding CSR expenses claimed under Section 37(1) for FY 2012-13. The assessee-company failed to prove that expenses for building classrooms, toilets, LED lights installation, and tree planting were incidental to its engineering/architectural consultancy business. The HC held that ITAT incorrectly applied Section 135 of Companies Act 2013 (CSR provisions) without considering its applicability to FY 2012-13, which ended March 31, 2013. The matter was remitted to ITAT for fresh adjudication after proper hearing.

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Issues Involved:
1. Applicability of Section 135 of the Companies Act, 2013.
2. Retrospective vs. Prospective application of legislation.
3. Validity of the Tribunal's reliance on a previous judgment.

Issue-wise Detailed Analysis:

1. Applicability of Section 135 of the Companies Act, 2013:

The primary issue was whether Section 135 of the Companies Act, 2013, which deals with Corporate Social Responsibility (CSR), could be applied to the financial year 2012-13. The Tribunal reversed the Assessing Officer and the Appellate Authority's decisions by relying on a previous judgment (ACIT Vs. Jindal Power Limited). The Tribunal concluded that the factual aspects of the present case aligned with the previous case. However, the Tribunal's application of Section 135 was contested by the Revenue, arguing that the section came into effect on 29th August 2013, and thus could not impact the financial year ending on 31st March 2013.

2. Retrospective vs. Prospective Application of Legislation:

The court emphasized that legislation is typically prospective unless explicitly stated otherwise. The court cited several Supreme Court judgments to support this principle, including State of Uttar Pradesh vs. Singhara Singh, Babu Verghese vs. Bar Council of Kerala, and P. Mahendran vs. State of Karnataka. These cases establish that a statute must be followed as written without deviation, and retrospective application requires explicit statutory language. Since Section 135 did not contain any provision for retrospective application, it could only be applied prospectively.

3. Validity of the Tribunal's Reliance on a Previous Judgment:

The Tribunal relied on the judgment in ACIT Vs. Jindal Power Limited without adequately assessing the applicability of Section 135 based on the financial year in question. The court noted that the Tribunal failed to consider the financial year ending on 31st March 2013, which predates the enactment of Section 135. The Tribunal's reliance on the previous judgment was deemed inappropriate because it did not account for the specific timeline of the financial year under review.

Conclusion:

The court concluded that Section 135 of the Companies Act, 2013, could not be applied retrospectively to the financial year 2012-13. The Tribunal's order, which did not consider the prospective nature of the legislation, was found to be erroneous. Consequently, the court quashed the Tribunal's order dated 22.02.2023 and remitted the matter back to the Tribunal for a fresh order after giving the parties an opportunity to be heard. The appeal was disposed of with these observations and directions.

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