The Kolkata bench of Income Tax Appellate Tribunal ( ITAT ), in Misrilall Pvt.Ltd v. DCIT recently held that peripheral development expenditure as part of CSR is revenue expenditure and the peripheral development and CSR Expenses incurred by the company wholly and exclusively for the purposes of the business cannot be disallowed under Section 37(1) of the Income Tax Act.
The appellant (Assessee) is a company engaged in the business of mining, processing and export of chrome ore and manufacturing and export of ferroalloys. The return of income for the A.Y. 2013-14 was filed by it on 01.03.2014 declaring a total income of Rs. 34,78,59,899/-. The Assessee claimed a deduction of Rs 36,92,842, as expenses incurred on peripheral development.
It was held that the expenses incurred by the Assessee on peripheral development as part of CSR were mainly incurred for construction of schools which was capital in nature.AO also observed that the payments made by the Assessee for construction of toilets and water supply, electrification of some school could not be considered as expenditure wholly or exclusively incurred for the purpose of assessee’s business. He also relied on Explanation 2 to Section 37 inserted by the Finance Act whereby it was declared that any expenditure incurred by an Assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be expenditure incurred by the assessee for the purpose of business or profession. He held that even though the said explanation was inserted in the statutory effect from 01.04.2015, the spirit of the same was to be considered in deciding the issue relating to allowability of CSR expenses. Consequently the expenses of Rs. 36,92,842/- incurred by the Assessee on peripheral development was disallowed.
The disallowance made by the A.O. on account of peripheral development expenses was challenged by the Assessee in the appeal filed before the CIT(A).The CIT(A) dismissed the appeal and confirmed the disallowance made by AO. Aggrieved the Assessee preferred appeal before the ITAT.
The ITAT after hearing the contentions of both sides the observed that the expenditure on peripheral development was incurred by the Assessee as a part of corporate social responsibility as per the scheme framed under the Companies Act. It was also observed that such expenditure on peripheral development as a part of CSR was incurred by the Assessee even in the earlier years and the same was allowed by the A.O.
The ITAT held that the expenditure incurred for construction of schools, electrification of schools etc., cannot be treated as capital in nature as neither the owners of the school belonged to the Assessee nor it had any control over the running of the school. The said expenditure for construction of a block by way of addition to the school building located in a village in the vicinity of mines was incurred for the benefit of its workers and the general public and not for any gain of personal nature.
The ITAT also observed that the Raipur Bench of the Tribunal has held that the explanation inserted by the Finance Act, 2014 with effect from01.04.2015 is not retrospective.
Therefore ITAT allowed the appeal of the Assessee and set aside the disallowance made by the AO.
Subscribe Taxscan Premium to view the Judgment
