Applicability of S.68 to CSR Funds: ITAT Rules Addition Unjustified as Identity and Genuineness Proven [Read Order]

The Ahmedabad Bench of Income Tax Appellate Tribunal (ITAT) ruled that Section 68 of Income Tax Act,1961 did not apply to Corporate Social Responsibility (CSR) funds received by the assessee and found that the foundation had proven the identity of the donor, the genuineness of the transaction, and obtained the necessary CSR approval, making the addition unjustified.

Madhu Silica Foundation,appellant-assessee, filed its income tax return for the Assessment Year 2022-23, declaring "Nil" income. During assessment, the Assessing Officer (AO) found that the appellant received Rs. 9.6 crore in March 2022 from Madhu Silica Pvt. Ltd., reportedly for CSR activities.

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The AO observed that the assessee had not audited its books of account or submitted the required Audit Report and Form 10B for earlier years. It also lacked registration under Section 12AA and failed to provide details of donations and expenditures or evidence of CSR fund utilization.

Due to the absence of supporting documents, the AO treated the amount as unexplained cash credits under Section 68 and taxed it at 60% under Section 115BBE of the Act.

The assessee appealed to the Commissioner of Income Tax(Appeals)[CIT(A)], who noted that it was incorporated in October 2021 and received Rs. 9.6 crore from Madhu Silica Pvt. Ltd. (MSPL) for CSR activities in March 2022. The AO had highlighted the lack of registration under Section 12AA and rejection of Section 80G approval, questioning the assessee's eligibility to handle CSR funds.

The assessee claimed it acted as MSPL's implementing agency and did not require such registrations. However, it failed to provide evidence of CSR expenditures or MSPL's tax return. Instead, the funds were invested in fixed deposits, with no CSR activities conducted during FY 2021-22.

The CIT(A) upheld the AO's decision to treat the Rs. 9.6 crore as unexplained cash credits under Section 68, as the assessee failed to prove the funds' proper use. The appeal was dismissed.

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The tribunal reviewed the case and considered the rival arguments. It noted that to apply Section 68 of the Act, the recipient must fail to prove the identity, creditworthiness of the giver, or the genuineness of the transaction. It observed that the assessee had established the identity of the company that gave the funds, and its creditworthiness was not in question.

The next issue was whether the non-utilization of funds for CSR activities could lead to an addition under Section 68. The assessee had obtained the necessary approval for CSR activities after receiving the funds, as shown by Form No. 10AB dated 16-01-2024.It found that although the approval came after the funds were received, it was valid for the relevant year.

The two member bench comprising Siddhartha Nautiyal(Judicial Member) and Annapurna Gupta(Accountant Member) concluded that Section 68 did not apply because the assessee had proven the identity and purpose of the funds, had obtained the necessary approvals, and there was no claim of the funds being returned to the lender. The assessee also argued that if the funds were not used for CSR, they would be considered a loan, not income.

The tribunal ruled that the CIT(A) had wrongly applied Section 68 and allowed the appeal.

To Read the full text of the Order CLICK HERE

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