The Division Bench of Delhi High Court comprising of Justice Rajiv Shakdher and Justice Tara Vitasta Ganju, in a recent ruling, held that the expenditure incurred for Corporate Social Responsibility (CSR) is allowed for deduction under Section 37 of the Income Tax Act, 1961. Thus, the bench dismissed the appeals of the revenue department and upheld the decision of the Income Tax Appellate Tribunal (ITAT).
The bench admitted the 3 appeals together as to consider the question of law that whether the ITAT erred in allowing deduction of expenses undertaken under the Corporate Social Responsibility (CSR) endeavour under Section 37 of the Income Tax Act.
The instant appeal was filed by the department against the decision of ITAT by allowing the deduction of CSR as expenses. The expenses incurred by the respondents/assessees in Assessment Years were disallowed by the Assessing Officer (AO).
The fact is that the respondent/assessee has sought to seek deduction of amounts spent to progress its CSR obligation, and sought deduction against the income chargeable under the head “profits and gains of business or profession.” The deduction claimed was disallowed by the AO.
Puneet Rai, the counsel appeared on behalf of the revenue claimed that the funds utilized by the assessee to effectuate its CSR obligation involved application of income and not an expense which had been incurred wholly and exclusively for the purposes of carrying on business.
The respondent representative relied on the amendment brought about in Section 37(1) of the Income Tax Act by way of insertion of Explanation 2. However, the ITAT took an opposite view which is against the revenue.
The tribunal relied on Circular No.1 dated 21.01.2015 to reach a conclusion that the amendment brought about in Section 37(1) of the Income Tax Act by way of Explanation 2 would not operate vis-à-àvis the assessment years in issue. According to the tribunal, the AO disallowed the claim without interpreting it correctly.
According to the Central Board of Direct Taxes (CBDT) circular, which the Tribunal cited, section 37(1) of the Income Tax Act stipulates that any expense that is not specifically mentioned in sections 30 to 36 of the Income Tax Act may be deducted if it is incurred wholly and exclusively for the purposes of carrying on a business or practising a profession.
Further the circular included, as the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditures cannot be allowed under the provisions of section 37 of the Income-tax Act.
Additionally in the circular, the issue was made clear in sub-section (1) of section 37, which states that any expenses incurred by an assessee on the CSR-related activities mentioned in Section 135 of Companies Act, 2013, shall not be considered to have been incurred for business purposes and, as a result, shall not be eligible for a deduction under said section 37 of the Income Tax Act.
However, in the same circular it was mentioned that, under those sections of the Income-tax Act, CSR expenses of the kind described in sections 30 to 36 shall be permitted as a deduction, provided that the conditions, if any, set forth therein are satisfied.
The Bench highlighted the case of Catholic Syrian Bank Vs. CIT in which it was well established about the binding nature of the circular on revenue.
The HC observed that claim of the revenue on the tribunal had erred in law in sustaining the deduction claimed by the respondents/assessees under Section 37(1) of the Act shall not be accepted.
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