Facts of the Case

  • The respondents/assessees (PEC Ltd. and RITES Ltd.) incurred CSR expenditure during Assessment Years 2013-14 and 2014-15.
  • The Assessing Officer disallowed the CSR expenses claimed as deduction under Section 37(1).
  • The Income Tax Appellate Tribunal allowed the deduction, holding that Explanation 2 to Section 37(1) is prospective.
  • The Revenue challenged the Tribunal’s decision before the Delhi High Court.

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 nature?
  3. Whether CSR expenditure constitutes application of income or business expenditure?

Petitioner’s Arguments (Revenue)

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

Respondent’s Arguments (Assessee)

  • CSR expenses were incurred in accordance with government guidelines and in the business interest of the company.
  • Explanation 2 to Section 37(1) is prospective and applicable only from AY 2015-16 onwards.
  • For earlier years, CSR expenditure qualifies as allowable deduction under Section 37(1).

Court Findings / Order

  • The High Court upheld the Tribunal’s decision in favour of the assessee.
  • It held that Explanation 2 to Section 37(1) is prospective and applicable only from 01.04.2015 (AY 2015-16 onwards).
  • CSR expenditure incurred prior to this date can be claimed as deduction if conditions of Section 37(1) are satisfied.
  • CBDT Circular dated 21.01.2015 and Finance Bill memorandum clearly establish prospective applicability.
  • The Court rejected the Revenue’s contention and decided the issue in favour of the assessee.

Important Clarification

  • CSR expenditure prior to AY 2015-16 is allowable under Section 37(1), subject to fulfillment of conditions.
  • Post amendment (w.e.f. 01.04.2015), CSR expenditure is not allowable under Section 37(1), except where covered under Sections 30 to 36.
  • CBDT Circulars are binding on the Revenue authorities.

Section 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 

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