CSR expenses incurred by making donations are eligible for deduction under Section 80G

JMS Mining (P.) Ltd. v. PCIT
[2021] 130 taxmann.com 118 (Kolkata - Trib.)

HELD THAT

CSR expenses incurred by making donations are eligible for deduction under Section 80G.

BRIEF FACTS

1. The appellant JMS Mining (P.) Ltd has claimed deduction on Income Tax Assessment u/s 80G of the IT Act which provides for claiming of deduction to certain funds, charitable institutions etc.

2. The Appellant donated a certain sum of amount to Shree Charity Trust and a Music Academy Trust as a contribution towards Corporate Social Responsibility ("CSR") activities. The same was allowed by the AO.

3. However the order was challenged by the Principal Commissioner of Income-tax ("Respondent") by invoking revision jurisdiction under Section 263 ibid on the ground that the action of AO to allow deduction of CSR expenses was erroneous as it could not be allowed as per express prohibition under

Explanation 2 to Section 37(1) of the IT Act. Said Explanation provides that expenditure of the activities relating to CSR shall not be deemed to the expenditure of business or profession.

EXPLANATION 2: [SECTION 37(2)] provides that any expenditure incurred by an assessee in compliance with Corporate Social Responsibility according to the provisions of Section 135 of the Companies Act, 2013 shall not be considered as an expenditure for the purpose of business and same shall not be allowed as deduction under provision of Section 37 of the Income Tax Act, 1961.

4. The appellant has challenged the invocation of jurisdiction by the Ld. PCIT u/s 263 of the Act without satisfying the essential condition precedent as prescribed in Section 263 of the Act i.e. the AO’s order has to be found by the Ld. PCIT to be erroneous as well as prejudicial to the revenue.

OBSERVATIONS AND RULINGS OF ITAT

5. ITAT noted the case of Malabar Industries Ltd. v. CIT [2000] 243 ITR 83(SC) wherein the Hon’ble Supreme Court held that in order to invoke revisional jurisdiction under Section 263 of the IT Act, the phrase "prejudicial to the interest of the revenue" has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence to an order of AO cannot be treated as prejudicial to the interest of the revenue.

6. The Ld. PCIT’s findings/allegation that the A.O has not made any enquiry/verification on this issue is factually incorrect. And therefore, his assertion that clause (a) of Explanation 2 to Section 263 is attracted is clearly erroneous.

SECTION 263 OF THE IT ACT,1961 empowers the Principal Commissioner of Income-tax (‘PCIT’) to revise assessment orders which are "erroneous" in so far as they are prejudicial to the interests of the Revenue.

To expand the term "erroneous" in Section 263 of the IT Act, 1961.

Explanation 2 was inserted by way of the Finance Act, 2015 with effect from June 01, 2015. The rationale for inserting this Explanation, as stated, wasto bring clarity to the meaning of the expression "erroneous", given that Courts had, so far, interpreted the expression in a narrow manner , With the insertion of this Explanation, specifically clause (a), an assessment order passed without making inquiries or verification, which should have been made/conducted by the Assessing Officer, would also be amenable to exercise of jurisdiction under Section 263 of the IT Act.

The intention of this insertion seems to be to overcome the judgements of Courts which distinguished between no enquiry and inadequate enquiry during the course of the assessment.

7. ITAT observed that from a plain reading of the above provision 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 this Explanation 2 inserted in Section 37 of the Act by the Finance (No.2) Act, 2014 was to deny deduction for CSR expenses incurred by companies, as and by way of regular business expenditure while computing "Income under the head Business".

8. ITAT noted 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 according to us 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

9. ITAT concurred with the contention of the assessee that since Parliament intended certain restrictions to only CSR expenditure in respect of two donations included by an assessee as CSR expenditure i.e. [Swachh Bharat Kosh and Clean Ganga Fund] has impliedly not made any prohibition/restriction in ITA No.146/Kol/2021 M/s JMS Mining Pvt. Ltd. A.Y. 2016-17 respect of claim of CSR expenses in other cases if it is otherwise eligible under Section 80G of the Act.

10. The assessee satisfies the condition u/s. 80G of the Act of the donees, the assessee’s claim for deduction of CSR expenses/contribution u/s 80G of the Act was allowed after enquiry by the AO.

11. In view of the above deliberations, the ITAT was of the opinion that the action of the AO allowing the claim u/s. 80G of the Act is a plausible view and is in line with the ratio of the decision of Tribunal cited (supra).

12. Thus it was held that the Ld. PCIT has not been able to make out a case that on this issue raised by him, the AO’s order is erroneous as well as prejudicial to the revenue. So the jurisdictional fact, as well as law, is absent for invoking revisional jurisdiction.

13. Therefore, the usurpation of jurisdiction by Ld. PCIT u/s 263 of the Act is bad in law and therefore needs to be quashed.

CONCLUSION

It was held that from a plain reading of the Explanation 2 to Section 37(1), expenditure incurred towards CSR activities shall not be allowed as 'business expenditure' and shall be deemed to have not been incurred for business. The embargo created by this Explanation 2 inserted in Section 37 by the Finance (No. 2) Act, 2014 was to deny the deduction for CSR expenses incurred by companies, as and by way of regular business expenditure while computing’ income under the head of business and profession.

It can be seen that this Explanation 2 to Section 37(1), which denies a deduction for CSR expenses by way of business expenditure, applies 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, to say donations made by a charitable trust registered under Section 80G.
In this context, it was found that the assessee had donated by RTGS through the bank, which was received by Shree Charity Trust, which was approved under Section 80G(5)(vi). Further, the assessee had made payment to Pt. Jashraj Music Academy Trust, which was also approved under Section 80G(5)(vi). Therefore, the assessee’s claim for deduction of CSR expenses/contribution under Section 80G was to be allowed.

DISCLAIMER: The article presented here is only for sharing information and knowledge with the readers. The views are personal. In case of necessity do consult with tax professionals for more clarity and understanding on subject matter.