ITAT allows Deduction u/S 80G of Income Tax Act on CSR expenses [Read Order]

The Income Tax Appellate Tribunal ( ITAT ) allowed deduction under Section 80G of the Income Tax Act 1961 on Corporate Social Responsibility ( CSR ) expenses

The assessee, operating in real estate construction and development, filed its income tax return for the relevant year on 14/01/2021, declaring a total income of Rs. 71,49,06,790. The filed return underwent scrutiny, and statutory notices under sections 143(2) and 142(1) of the Income Tax Act 1961, were issued. During the assessment, it was observed that the assessee claimed an interest expense of Rs. 7851 lakh at the rate of 21.3% on debentures.

The Assessing Officer raised a query, questioning the justification for not restricting the interest expense to 10%, aligning with the secured loan rate. In response, the assessee clarified that it had issued 14,00,00,000 unsecured redeemable cumulative non-convertible debentures at Rs. 10 each, totaling Rs. 140,00,00,000 to Kapstone Construction Pvt. Ltd. The interest rate of 21.3% was determined based on factors such as loan amount, risk, credit, security, and market conditions from 2014 to 2020, making comparisons with a secured term loan on 25/02/2020 irrelevant.

The counsel for the assessee Naresh Kumar had contended that during the period of 2014, the interest rate for the secured term loan ranged from 14% to 16.5%, and the assessee itself had borrowed a loan on 19/09/2013 at the rate of 14.10%. However, the Assessing Officer ( AO ), in an order dated 26/09/2022 issued under section 143(3)of the Income Tax Act 1961 read with section 144 B Of the Income Tax Act 1961,, did not accept the assessee’s arguments.

The AO asserted that the rate of interest for a secured loan at the time of debenture issuance was 14.10%, while the assessee had issued debentures at the rate of 21.3%, significantly exceeding the market interest rate. Consequently, the AO limited the claimed interest expenses on debentures to 14.1%, disallowing the excess interest claim of Rs. 26,53,85,916.

The CIT(A) had allowed the ground raised by the assessee on this issue. The CIT(A) held that the interest rate on a secured loan could not be compared with the interest on unsecured non-convertible debentures. According to the CIT(A), determining the interest rate on different instruments involves considering various factors.

The two member bench of the tribunal comprising Om Prakash Kanth ( Account member ) and Sandeep Singh Krahail (Judicial member) observed that the consistently favored the assesse’s position. They maintained that despite the non-allowance of CSR expenses under section 37 of the Income Tax Act 1961, following the insertion of Explanation-2 to section 37 of the Income Tax Act 1961 by the Finance Act, 2014, effective from 01/04/2015, such expenditures were still permissible under section 80G of the Income Tax Act 1961. The CIT(A) similarly adhered to these judicial precedents and rendered a favorable decision for the assessee.

In the result, the appeal by the Revenue was dismissed.

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