2025 (10) TMI 691 - AT - Income Tax

s.45IC transfers are appropriations not deductible for income or book profit u/s115JB; 80G CSR allowed; s.36(1)(viii) reserve excluded until withdrawal.

ITAT held that amounts transferred to the special reserve under RBI Act s.45IC are appropriations and not deductible for computing normal income or book ... Apportionments of profit versus Allowable Expenditure - Amount transferred to Special Reserve u/s 45IC of RBI Act, 1934 - computing the total income under the normal provision of the Act, as well as in computing the book profit u/s 115JB - HELD THAT:- Transferring of amount to special reserve pursuant to provision of section 45IC of the RBI Act 1934 is appropriation of profit and therefore, not admissible as deduction while computing the books profit as well as normal profits under the Act. Donation u/s 80G while computing the income of the assessee - The assessee is entitled to the deduction u/s 80G of the Act even if the amount is donated under CSR expenses. It is specifically mentioned in section 80G that no deduction is allowable in two instances namely; contribution towards the Swachh Bharat Kosh (Clean India Fund) and the Clean Ganga Fund respectively, where CSR expenditure is not allowable u/s 80G(2)(a)(iiihk) and (Iiihl) of the Act. Therefore, provisions are not applicable to other CSR expenditure. The case of the assessee is clearly covered by the decision of M/s The Peerless General Finance & Investment & co. Ltd. [2019 (12) TMI 1281 - ITAT KOLKATA] wherein it has been held that the assessee is entitled to deduction of donation under section 80G of the Act where the assessee has donated the amount to eligible institutions even the amount is paid under CSR activities. Exclusion of amount transferred to income tax special reserve in computing the book profit u/s 115JB - We find that the provisions of section 36(1)(viii) of the Act provided for creation of special reserve and deduction of the same. Section 36(1)(viii) of the Act provides for taxability of the amount withdrawn from the special reserve u/s 36(1)(viii) of the Act under the head, profit and gains from the business and profession. Therefore, the amount transferred to special reserve as per section 36(1)(viii) of the Act is taxable in the year in which the amount is withdrawn from such reserve. Therefore, in our opinion, the said amount transferred to reserve under section 36(1)(viii) shall not be included in the book profit under section 115JB of the Act. If we allow the grant of reserve to be added to the book profit, it will create several practical difficulties. Therefore, we are inclined to set aside the order of ld. CIT (A) and direct the AO to allow the said provisions while computing the book profit under section 36(1)(viii) of the Act. Employee’s contribution to ESI deposited within due date of filing rate of return - The assessee has made payment of the above amount on 16-10- 2017 when the due date was 15-10-2017 which happens to be a public holiday i.e. Sunday and therefore, there is a delay in depositing the ESI for the month of September 2017 - AO disallowed the same and added the income to the assessee which was confirmed by CIT (A). We find that the issue is squarely covered by the decision of the Coordinated Bench in assessee’s own case [2024 (2) TMI 1598 - ITAT KOLKATA], wherein a similar issue has been decided in favour of the assessee by the co-ordinate Bench while deciding the appeal filed by the assessee against the order of ld. CIT (A) wherein the order passed u/s 143(1) was upheld. We direct the ld. AO to allow the deduction in respect of ESI paid by the assessee. The ground is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a transfer to Special Reserve pursuant to section 45IC of the RBI Act, 1934 constitutes an appropriation of profit and hence is not deductible/excludable for computing total income and book profit under the Income-tax Act. 2. Whether donation paid as Corporate Social Responsibility (CSR) expenditure to an eligible institution is eligible for deduction under section 80G of the Income-tax Act despite CSR being mandated by the Companies Act. 3. Whether amount transferred to 'income tax special reserve' under section 36(1)(viii) is to be excluded from book profit for computation of tax under section 115JB. 4. Whether one-day delay in depositing employees' ESI contribution (where due date falls on Sunday/holiday and payment made next working day) warrants disallowance or should be condoned and deduction allowed. 5. Miscellaneous: General/ground No.1 (general in nature) requiring no specific adjudication. ISSUE-WISE DETAILED ANALYSIS Issue 1: Transfer to Special Reserve under section 45IC (RBI Act) - appropriation vs allowable deduction/exclusion Legal framework: Section 45IC of the RBI Act permits creation of a special reserve by specified entities; the Income-tax Act requires determination whether such transfers are treatable as appropriation of profit (non-deductible/excludable) or deductible/excludable when computing taxable income and book profits. Precedent treatment: The Tribunal applied prior coordinate-bench rulings in the assessee's own case for earlier assessment years holding transfers under section 45IC as appropriation of profit and not allowable for computing book profit or taxable income. Interpretation and reasoning: The court accepted the coordinate-bench holding that transfers to the special reserve under section 45IC are appropriations of profit (i.e., an application of profit, not an outflow qua expense) and therefore do not qualify for deduction or exclusion when computing taxable income or book profit. The assessing officer's conclusion that funds were available to the books and the transfer was an appropriation was endorsed on the basis of binding coordinate-bench precedent. Ratio vs. Obiter: Ratio - transfer under section 45IC is appropriation of profit and not deductible/excludable for income and book-profit computation. The Tribunal's reliance on coordinate-bench precedent is substantive ratio and dispositive for the issue. Conclusion: Grounds complaining of disallowance of the section 45IC transfer (grounds 2 & 3) are dismissed; the transfer is held to be appropriation of profit and not allowable. Issue 2: Deduction under section 80G for donations made as CSR (mandatory under Companies Act) Legal framework: Section 80G permits deduction for donations to specified funds/institutions subject to statutory exclusions; Companies Act section 135 mandates CSR expenditure for certain companies. The interplay concerns whether mandated CSR outlays are 'voluntary' donations eligible under section 80G and whether any express exclusions in section 80G bar CSR deductions generally. Precedent treatment: The Tribunal relied on coordinate-bench decisions (including a decision applying similar principles to CSR donations) which held that except for expressly specified exclusions (Swachh Bharat Kosh and Clean Ganga Fund in certain circumstances), contributions made pursuant to section 135(5) of the Companies Act are not per se barred from section 80G deductions; eligibility depends on satisfaction of conditions under section 80G. Interpretation and reasoning: The Tribunal distinguished mandatory nature of CSR from the statutory text of section 80G. Noting specific exceptions in section 80G(2) for two funds and the absence of a blanket prohibition against CSR expenditures, the Tribunal held that CSR donations to eligible donees may qualify for section 80G deduction if the statutory conditions for 80G are met. The Tribunal observed that AO/CIT(A) failed to examine/verifiy eligibility particulars (donee status, receipts, PAN etc.) and wrongly treated CSR contributions as automatically ineligible because mandated by Companies Act. Ratio vs. Obiter: Ratio - CSR donations are not automatically ineligible for section 80G deduction; eligibility is determined by whether the donee satisfies section 80G conditions, subject only to express statutory exclusions. Portions criticizing AO's failure to verify particulars and remanding for verification are consequential but ancillary (procedural direction). Conclusion: Deduction under section 80G in respect of the claimed CSR portion is allowed subject to satisfaction of section 80G conditions; the CIT(A)'s rejection is set aside and AO directed to allow the deduction of Rs. 1.50 crore (as claimed) after requisite verification. Issue 3: Treatment of transfer to income-tax special reserve under section 36(1)(viii) for computation of book profit under section 115JB Legal framework: Section 36(1)(viii) allows deduction for creation of certain special reserves and provides that withdrawals from such reserves are assessable as business income when made; section 115JB (minimum alternate tax / book profit tax) prescribes book profit computation with certain inclusions/exclusions defined in Explanation 1 to section 115JB. Precedent treatment: The Tribunal reasoned from statutory text and practical implications rather than distinguishing case law, relying on the express taxability rule for withdrawals under section 36(1)(viii) to infer exclusion from book profit at time of transfer. Interpretation and reasoning: Because section 36(1)(viii) contemplates deduction for creation of the special reserve and prescribes taxability upon withdrawal, the Tribunal held that the transfer is not a provision for uncertain liabilities nor a mere credit to a reserve that must be added back under the clauses of Explanation 1 to section 115JB. Allowing addition now would conflict with the statutory scheme and create practical anomalies (double taxation or mismatch). Therefore, the transfer under section 36(1)(viii) should be excluded from book profit for section 115JB computation and taxability triggered only upon withdrawal as per the provision. Ratio vs. Obiter: Ratio - amounts transferred to income-tax special reserve under section 36(1)(viii) shall not be included in book profit under section 115JB and are taxable only when withdrawn; this is a substantive statutory interpretation holding. Conclusion: The CIT(A)'s confirmation of addition is set aside; AO directed to exclude the transfer to income-tax special reserve from book profit under section 115JB in accordance with section 36(1)(viii). Issue 4: Delay of one day in depositing employees' ESI contribution where due date fell on Sunday/holiday Legal framework: Statutory payment deadlines and principles of condonation for delay where due date falls on Sunday/holiday; authorities have considered bona fides and proximate payment when assessing disallowance for late deposit of statutory employee contributions. Precedent treatment: The Tribunal relied on a coordinate-bench decision in the assessee's own case and other co-ordinate bench authority holding that when the due date falls on a Sunday/public holiday and payment is made on the next working day, a one-day delay is to be condoned, especially where payment was otherwise timely and bona fide. Interpretation and reasoning: The Tribunal examined dates and amounts, noting that for one item the payment was made on the next day (no delay) and for other items a one-day delay occurred owing to the holiday. Applying the principle that delays caused by Sunday/holidays are excusable and considering bona fide prompt payment, the Tribunal concluded that the AO erred in disallowing the employee contribution; the case is squarely covered by earlier coordinate-bench authority condoning such delays. Ratio vs. Obiter: Ratio - a one-day delay in depositing statutory employee contributions occasioned by the due date falling on Sunday/holiday, where payment is made on the next working day and bona-fide is shown, merits condonation and deduction should not be disallowed. Conclusion: The addition for late deposit of ESI is set aside and the AO is directed to allow the ESI deduction; ground relating to this addition is allowed. Miscellaneous / General Ground Ground No.1 being general in nature required no specific adjudication and was not considered substantively.