CSR expenses in P&L must be included in book profits for section 115JB except express statutory adjustments

ITAT AMRITSAR held that CSR expenditure debited in the profit and loss account, prepared in accordance with the Companies Act 2013 and GAAP, must be taken for computing book profits under section 115JB except for express adjustments listed in that section. The CBDT circular relied upon by the AO does not govern computation of book profits under section 115JB, and the AO lacks power to recompute book profits contrary to the statutory accounts. Decision against revenue.

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The core legal question considered by the Tribunal was whether the amount debited as Corporate Social Responsibility (CSR) expenditure in the profit and loss account, made as a provision under the Companies Act, 2013, constitutes an "ascertained liability" or an "unascertained liability" for the purpose of computing "book profits" under clause (c) of Explanation [1] to section 115JB of the Income Tax Act, 1961, thereby affecting the computation of Minimum Alternate Tax (MAT).

The issue arose from appeals filed by the revenue challenging the deletion by the Commissioner of Income Tax (Appeals) of the addition of CSR provisions to the book profits for MAT computation for assessment years 2016-17, 2017-18, and 2018-19.

Detailed analysis of the issue:

Relevant legal framework and precedents: The primary statutory provision under consideration was section 115JB of the Income Tax Act, 1961, which governs the computation of book profits for MAT purposes. Explanation [1] to section 115JB, clause (c), mandates that any amount set aside as a provision for meeting liabilities other than ascertained liabilities must be added back to the book profits.

Key precedents relied upon included:

• The Supreme Court's decision in CIT vs HCL Comnet Systems and Services Ltd, which held that the Assessing Officer (AO) has no power to recompute book profits and must rely on the statement of accounts prepared under the Companies Act.
• The Supreme Court's decision in Apollo Tyres Ltd vs CIT, which similarly emphasized that book profits are to be determined based on accounts maintained according to generally accepted accounting principles and applicable law, and that the AO cannot tinker with the book profits except as expressly provided under section 115JB.
• The Delhi High Court's decision in Pr. Commissioner of Income Tax vs Sony India Pvt. Ltd, which held that CSR expenditure need not be excluded from book profits and that no substantial question of law arises regarding its adjustment under section 115JB.
• The ITAT Delhi Bench decision in Pawan Hans Ltd vs DCIT, which analyzed whether CSR provisions could be considered as ascertained liabilities, concluding that mere earmarking of amounts without specification or certainty of end use amounts to unascertained liability.

Court's interpretation and reasoning: The Tribunal examined the nature of the CSR provision debited by the assessee company. The AO had treated the CSR provision as an unascertained liability, relying on CBDT Circular No. 1/2015, and added back the amount for MAT computation. The AO's rationale was that the provision was merely an estimate without any certainty regarding the timing or nature of the expenditure, thus falling within clause (c) of Explanation [1] to section 115JB.

The CIT (A) deleted the addition, relying primarily on the Supreme Court's ruling in HCL Comnet Systems, which restricts the AO's power to recompute book profits beyond the accounts prepared under the Companies Act. The CIT (A) held that the CSR provision was debited in the profit and loss account as per the Companies Act, 2013, and therefore, the AO could not add it back to the book profits.

The Tribunal carefully considered the submissions of both parties. The revenue argued that since the CSR provision was made on an estimated basis without any definite plan or documentary evidence specifying the end use, it was an unascertained liability and thus should be added back.

The assessee contended that the accounts, including the CSR provision, were prepared in accordance with the Companies Act and accepted accounting standards, and that the AO had no authority to alter the book profits beyond the adjustments explicitly provided under section 115JB.

The Tribunal noted that the CBDT Circular cited by the AO pertained to the disallowance of CSR expenditure for computing taxable income under normal provisions and did not address book profits for MAT purposes. The Tribunal emphasized that there was no evidence that the accounts were prepared contrary to accounting standards or the Companies Act.

Further, the Tribunal relied on the Delhi High Court's decision in Sony India Pvt. Ltd, which held that CSR expenditure should not be excluded from book profits and that the AO's adjustment lacked legal basis. The Tribunal also observed that the Supreme Court's decisions in Apollo Tyres and HCL Comnet Systems clearly restrict the AO's power to recompute book profits beyond the accounts prepared under the Companies Act.

Application of law to facts: The Tribunal applied the legal principles to the facts that the CSR provision was made in the profit and loss account as per the Companies Act, without any challenge to the accounting treatment. The absence of documentary evidence regarding the specific use or timing of the CSR expenditure did not alter the nature of the provision as reflected in the statutory accounts. Therefore, the provision could not be treated as an unascertained liability warranting addition to book profits under clause (c) of Explanation [1] to section 115JB.

Treatment of competing arguments: The Tribunal rejected the revenue's contention that the provision was unascertained simply because the end use was not specified. It distinguished the Pawan Hans Ltd decision cited by the revenue on the basis that in that case, the nature and mode of expenditure were not determined, whereas here the accounts were prepared under the Companies Act and the CSR provision was recognized therein. The Tribunal gave primacy to the binding Supreme Court precedents that prohibit the AO from tinkering with book profits beyond the prescribed adjustments.

Conclusions: The Tribunal concluded that the AO had no jurisdiction to add back the CSR provision to the book profits for MAT computation. The CSR amount debited in the profit and loss account as per the Companies Act 2013 could not be treated as an unascertained liability under clause (c) of Explanation [1] to section 115JB. Accordingly, the Tribunal upheld the order of the CIT (A) deleting the addition and dismissed the revenue's appeals for all three assessment years as devoid of merit.

Significant holdings and legal principles established:

• "Except for adjustments as expressly set out under Section 115JB of the Act, book profits are required to be determined on the basis of accounts maintained in accordance with generally accepted accounting principles and in accordance with the provisions of the Companies Act."
• "The AO has no power to recompute book profits and has to rely on the statement of accounts of the company compiled under the Companies Act."
• "There is no provision under Section 115JB of the Act which requires the expenditure on CSR to be adjusted for arriving at book profits."
• "The CBDT Circular No. 1/2015 relates to the non-allowability of CSR expenditure for computing taxable income under normal provisions and does not apply to computation of book profits under section 115JB."
• "A provision for CSR expenditure debited in the profit and loss account prepared as per the Companies Act, without evidence of non-compliance with accounting standards, cannot be treated as an unascertained liability for the purpose of book profits computation."

Final determinations:

• The CSR amount debited in the profit and loss account as per the Companies Act 2013 is not an unascertained liability requiring addition to book profits under clause (c) of Explanation [1] to section 115JB.
• The AO's addition of the CSR provision to book profits for MAT computation was not sustainable.
• Revenue's appeals for assessment years 2016-17, 2017-18, and 2018-19 were dismissed.

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