Income Tax Appellate Tribunal (“ITAT”), Bangalore in its recent ruling in the case of M/S. Toyota Boshoku Automotive India Pvt. Ltd. v. The Deputy Commissioner of Income Tax has held that Explanation 2 of Section 37 (1) of the IT Act was effective from 1st April 2015 and therefore, won’t have retrospective applicability and accordingly deduction will be allowed in respect of CSR Expenses incurred before said date.
Facts of the Case:
- The Appellant, M/S. Toyota Boshoku Automotive India Pvt. Ltd during AY 2012-2013, paid a huge amount towards provision of toilet facilities in Government Schools where the children of employees of the Appellant were studying. While filing the returns for that year, the Appellant claimed the same amount as Corporate Social Responsibility expenses and submitted that by incurring the expenses, its productivity improves and the loyalty of its employees are also ensured.
- The Assessing Officer took the view that the expenditure had no nexus with the business of the Appellant and the AO accordingly disallowed the claim of the Appellant for deduction for AY 2012-2013.
- The Appellant filed an appeal before CIT(A) against the order of the AO contending that the expenditure was incurred for the purpose of business and should be allowed as a deduction.
- However, the CIT (A) held that the expenses were in the nature of CSR and were therefore not allowable for deduction in view of Explanation 2 to Section 37 (1) of the Income Tax Act, 1962.
- Appeal was filed by the Appellant against the order of CIT(A) before the ITAT.
Ruling of ITAT:
After taking perusal of all the facts and evidences, the Income Tax Appellate Tribunal (“ITAT”), Bangalore held that Explanation 2 of Section 37 (1) of the IT Act was effective from 1st April 2015 and therefore, won’t have retrospective applicability. Hence, allowed the appeal of the Appellant and the deduction of CSR expenses incurred during the AY 2012-13 as sought by the appellant was allowed.
Our Comments:
Explanation 2 of Section 37 (1) of the IT Act was inserted from 1st April, 2015 and were applicable in relation to the assessment year 2015-16 and subsequent years. In this regard the memorandum explaining provisions of Finance Bill is relevant to understand the intention of the legislature, which is given below.
Corporate Social Responsibility (CSR) Under the Companies Act, 2013 certain companies (which have net worth of Rs.500 crore or more, or turnover of Rs.1000 crore or more, or a net profit of Rs.5 crore or more during any financial year) are required to spend certain percentage of their profit on activities relating to Corporate Social Responsibility (CSR). Under the existing provisions of the Act expenditure incurred wholly and exclusively for the purposes of the business is only allowed as a deduction for computing taxable business income.
CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business. As the application of income is not allowed as deduction for the purposes of computing taxable income of a company, amount spent on CSR cannot be allowed as deduction for computing the taxable income of the company. Moreover, the objective of CSR
is to share burden of the Government in providing social services by companies having net worth/turnover/profit above a threshold.
If such expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure.
The existing provisions of section 37(1) of the Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. 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 existing provisions of section 37 of the Income-tax Act.
Therefore, in order to provide certainty on this issue, it is proposed to clarify that for the purposes of section 37(1) 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 have been incurred for the purpose of business and hence shall not be allowed as deduction under section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Act shall be allowed deduction under those sections subject to fulfillment of conditions, if any, specified therein.
***
Follow us for free tax updates : facebook Twitter
Subscribe to our portal and get FREE Tax e-books, quality articles and updates on your e-mail.
Resolve your GST queries from national level experts on GST free of cost.
Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
