Facts of the Case

  • The appeals were filed by the Revenue against orders of the Income Tax Appellate Tribunal.
  • The respondents (PEC Ltd. and RITES Ltd.) claimed deduction of CSR expenditure for AY 2013–14 and AY 2014–15.
  • The Assessing Officer disallowed such expenditure on the ground that CSR expenses are not incurred wholly and exclusively for business purposes.
  • The Tribunal allowed the deduction, holding that Explanation 2 to Section 37(1) is prospective in nature.

Issues Involved

  1. Whether CSR expenditure qualifies as deductible business expenditure under Section 37(1).
  2. Whether Explanation 2 to Section 37(1) is retrospective or prospective in application.
  3. Whether CSR expenses constitute application of income rather than expenditure incurred for business purposes.

Petitioner’s Arguments (Revenue)

  • CSR expenditure is not incurred wholly and exclusively for business purposes.
  • Such expenditure is an application of income and hence not allowable under Section 37(1).
  • Explanation 2 to Section 37(1) is clarificatory and should apply retrospectively.

Respondent’s Arguments (Assessee)

  • CSR expenses were incurred in the course of business and in line with government guidelines.
  • Explanation 2 to Section 37(1) is prospective and cannot apply to earlier assessment years.
  • The disallowance by the Assessing Officer was mechanical and ignored the nature of expenditure and rule of consistency.

Court’s Findings / Order

  • The Delhi High Court upheld the Tribunal’s decision in favour of the assessee.
  • It held that Explanation 2 to Section 37(1) is prospective and applies only from AY 2015–16 onwards.
  • For earlier years, CSR expenditure cannot be disallowed solely based on the said explanation.
  • The Court emphasized that CBDT circulars are binding on the Revenue.
  • Accordingly, the question of law was decided against the Revenue and in favour of the assessee, and the appeals were dismissed.

Important Clarification

  • CSR expenditure prior to 01.04.2015 may be allowable under Section 37(1), subject to conditions.
  • Post 01.04.2015, CSR expenses are expressly disallowed under Explanation 2.
  • However, if CSR expenditure falls under Sections 30–36, deduction may still be available under those provisions.

Sections Involved

  • Section 37(1) of the Income Tax Act, 1961
  • Explanation 2 to Section 37(1)
  • Section 135 of the Companies Act, 2013

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/RAS29112022ITA2682022_211737.pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.