TREAT CSR EXPENDITURE MADE AS DONATIONS TO BE QUALIFIED FOR DEDUCTION SA...

TREAT
CSR EXPENDITURE MADE AS DONATIONS TO BE QUALIFIED FOR DEDUCTION UNDER SECTION
80G OF THE IT ACT- SAYS BANGALORE TAX TRIBUNAL

CSR
COMMITTEE

Section 135 (1) Every
company having net worth of rupees Rs 500 crore or more, or turnover of rupees 1000
crore or more or a net profit of Rs 5 or more during immediately preceding
financial year shall constitute a Corporate Social Responsibility Committee of
the Board consisting of three or more directors, out of which at least one
director shall be an independent director. Proviso to Section 135 (1) .

MANDATORY
CSR SPENDING

Section 135 (5)  of Companies Act 2013 The Board of every company referred to
in sub-section (1), shall ensure that the company spends, in every financial
year, at least two per

cent of the average net
profits of the company made during the three immediately preceding financial years,
in pursuance of its Corporate Social Responsibility Policy:

While such companies are
required to make this CSR spending compulsorily, the Finance (No.2) Act 2014
restricted its deduction for tax purpose by amending section 37(1) of the
Income-tax Act, 1961 (IT Act).

NO SPECIFIC  NO SPECIFIC TAX EXEMPTION

 There is no specific
tax exemption that has been extended to expenditure incurred on CSR.

However spending on several
activities which are governed by section other than section 37(1) of the IT Act
could be claimed as deduction. One of this section is 80G of the IT Act.
However, the claim under section 80G of the IT Act is not free from litigation.

Goldman Sachs Services Pvt
Ltd vs JCIT

 In Goldman Sachs Services Pvt Ltd vs JCIT, Bangalore , an
interesting question was raised  whether
the expenses incurred to fulfil the CSR obligation under CA 2013 could be
claimed as deduction under section 80G of the IT Act

Goldman Sachs in the year
2014-15, spent Rs 2.25 Crores towards CSR and claimed Rs 1.12 Crores as
deduction under section 80 G of IT Act. However, the Tax officer denied
taxpayer's claim under section 80G of the IT Act except for contribution made
to PM National Relief Fund. Dispute Resolution Panel (DRP) confirmed the tax
officer's action. DRP observed that the claims are in the nature of CSR policy
expenditure and hence does
not qualify for deduction under section 80G of the IT Act.

Explanation
2 to section 37(1) of the IT Act

IT Tribunal , Bangalore held
that  CSR expenses are mandatorily  to be incurred by companies in terms of
section 135 of the CA 2013 and the deduction under section 37(1) of the IT Act is not available in light of Explanation 2 to section 37(1) of the IT Act

Explanation 2 narrates that
for the removal of doubts, it is hereby declared that for the purposes of
sub-section (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 (18 of 2013) shall not be deemed to be an expenditure incurred by the
assessee for the purposes of the business or profession.

CSR SPENDING IS NOT A
VOLUNTARY DONATION

In the present case, the tax
officer has rejected the taxpayer's claim under section 80G of the IT Act
without verifying the nature of contributions and observed that it is not a donation, and was
not spent voluntarily for the eligibility of claim under section 80G of the IT
Act but due to legal obligation prescribed under section 135 of the CA 2013.
Further, after examining section 80G of the IT Act, the Tribunal observed that
in respect of following donations, it is specifically provided that if they are
incurred in pursuance of CSR, deduction under section 80G of the IT Act will
not be available to the following:

·     Swachh
Bharat Kosh

·     Clean
Ganga Fund

Tribunal observed that while
these two exceptions are provided in Section 80G of the IT Act, it can be
inferred that the other contributions made under section 135(5) of the CA 2013
are also eligible for deduction section 80G of the IT Act subject to taxpayer
satisfying the requisite conditions prescribed for deduction under section 80G
of the IT Act.

As the tax officer did not
deal with these aspects and merely considered the contributions as not
voluntary but a legal obligation under CSR policy, the Tribunal remanded back
to the tax officer for a fresh examination and verification of facts, subject
to taxpayer satisfying requirements of section 80G of the IT Act.

Findings

Tribunal has made an
important observation that CSR spend, even though made under a legal obligation
under section 135 of CA 2013, can be claimed as deduction under section 80G of
the IT Act (except for Swachh Bharat Kosh and Clean Ganga Fund) subject to
fulfilment of conditions prescribed for section 80G of the IT Act. This Ruling
will give respite to many taxpayers who have incurred CSR spend in accordance
with CA 2013 and are covered by section 80G of the IT Act.

In First American (India)
Pvt Ltd vs ACIT, Bangalore Tribunal held that f the taxpayers are denied the
benefit of deduction under section 80G of the IT Act, merely because such
payments form the part of CSR spend, it would lead to double disallowance,
which is not the intention of Legislature.

While the judiciary is still
evolving on tax deductibility of CSR spends, in light of the recent rulings, it
could be fairly said that the amendment made to Section 80G of IT Act vide
Finance Act, 2015 should be interpreted in a literal manner and contribution
made to any fund / institution (other than Swachh Bharat Kosh and Clean Ganga
Fund) which qualify as CSR spend under section 135 of CA 2013, would be
eligible for deduction under section 80G of the Act.