M/S. SONATA INFORMATION,MUMBAI V. CIT CIRCLE 3(4), MUMBAI

ITA 1402/MUM/2024

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The case revolves around the disallowance of a deduction claimed by M/s. Sonata Information under Section 80G of the Income Tax Act, 1961, for donations made as part of its Corporate Social Responsibility (CSR) activities. The Assessing Officer initially disallowed the deduction, categorizing the donations as mandatory under the Companies Act, 2013, and thus not voluntary, which is a requirement for deductions under Section 80G. The Commissioner of Income Tax Appeals upheld this decision. However, the Tribunal reversed this decision, citing that the absence of a specific provision in Section 80G excluding CSR expenditures and the voluntary nature of the donations entitled the assessee to the deduction.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 471070 (ITAT-MUMBAI)
• Duration Of Justice: 7 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-11-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 30-08-2024
• Assessment Year: 2020-2021
• Appeal Filed On: 26-03-2024
• Other Referred Cases: Agilent Technologies (International) Pvt. Ltd. Vs. ACIT, Societe Generale Securities India P. Ltd. Vs. PCIT, Interglobe Technology Quotient P. Ltd. Vs. ACIT, SBI DFHI Ltd. Vs. ACIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: ASSESSEE
• Keywords: Business expenditure
• Section: 143(3); 12A; 2; 37(1); 80G

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL \"G” BENCH, MUMBAI SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER ITA No. 1402/MUM/2024 (Assessment Year: 2020-21) M/s. Sonata Information 208, T. V. Industrial Estate, 2nd Floor, S.K.Ahire Marg, Worli Colony S.O. Mumbai, Mumbai- 400 030. Maharashtra [PAN:AAECS8734J] …………. Appellant Commissioner of Income Tax Appeals, National Faceless Appeal Centre [Jurisdictional Assessing Officer-Deputy Commissioner of Income Tax – Circle 3(4), Mumbai 4th Floor, Aayakar Bhavan, Mumbai – 400020 Maharashtra. Vs …………. Respondent Appearance For the Appellant/Assessee For the Respondent/Department : : Shri Vijay Mehta Shri P. D. Chougule/Dr.Kishor Dhule Date Conclusion of hearing Pronouncement of order : : 30.08.2024 05.11.2024 O R D E R [ Per Rahul Chaudhary, Judicial Member: 1. By way of the present the Assessee has challenged the order, dated 23/01/2024, passed by the National Faceless Appeal Centre (NFAC), Delhi, [hereinafter referred to as the ‘CIT(A)’] whereby the Ld. CIT(A) had disposed off the appeal preferred by the Assessee against the Assessment Order, dated 29/09/2022, passed under Section 143(3) read with Section 144B of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’] for the Assessment Year 2020- ITA No.1402/Mum/2024 A.Y.2020-2021 2 2021. 2. The Appellant has raised following grounds of appeal : “Ground No.1: On the facts and in the circumstances of the case and in law, the learned CIT(A) erred by not allowing the eligible deduction of donation amounting to INR.67,15,972/- in accordance with section 80G of the Income Tax Act, 1961 (the Act). Ground No.2: The learned CIT(A) has erred in facts and law by holding that the donation paid by the Appellant forms part of the mandatory requirement of the Companies Act, 2013 and consequently not eligible for deduction under section 80G of the Act.” 3. The relevant facts in brief are that during the relevant previous year, the Assessee had incurred Corporate Social Responsibility (CSR) Expenses of INR 1,34,31,944/- which were disallowed in the computation of income in view of the provisions contained in Explanation 2 to Section 37(1) of the Act. However, since the aforesaid CSR Expenses were incurred by way of donation made to charitable organisations deduction under section 80G of the Act amounting to INR.67,15,972/- was claimed by the Assessee in the return of income. While framing assessment under Section 143(3) read with Section 144B of the Act, vide Assessment Order, dated 29/09/2022, the Assessing Officer disallowed the deduction of INR.67,15,972/- claimed by the Assessee under Section 80G of the Act observing as under: “4.4.3. Claim of the assessee is not acceptable. In the case under consideration, the amount has not been paid by the Assessee voluntarily to become eligible for entity specified under Section 80G of the Act. But the same has been paid by the Assessee as a mandatory requirement as per Section 135 of the Companies Act, 2013 to spend certain amount for specified activities as per. The expression \"shall ensure used in Section 135(5) of the Companies Act 2013 clearly implies that there is a mandate to ITA No.1402/Mum/2024 A.Y.2020-2021 3 spend 2% of average net profits of the preceding three years on CSR activity. Thus the required-to- spend amount is perceived by the legislature to be mandatory in nature and not voluntary. The Assessee could also have very well made payment to an entity not covered by Section 80G or it could have directly incurred the expenditure for the specified purpose, but it chose to spend only in those areas where it could claim deduction u/s 80G of the Act. Therefore, the sum paid by the Assessee cannot be considered as a 'donation' for the purpose of Section 80G of the Act as the element of charity is missing in it. The main characteristic of charity is that it is purely voluntary and there is no legal obligation to make that contribution. The amounts spent on CSR activities, even though is contributed to the areas where BOG deduction is available, but the same lacks voluntary character and partakes the nature of an obligation to be fulfilled, a necessary requirement imposed by law in accordance with Section 135 of the Companies Act 2013. The intention of the legislature was never to allow deduction for CSR expenditure, as this would result in subsidizing the CSR expenditure by one-third amount. 4.4.4. The above arguments make it clear that the expenditure on CSR activities cannot be claimed as a deduction under section 80G. On the basis of above discussion, the deduction of Rs. 67,15,972/- claimed under sec 80 G donated as CSR activities would be disallowed and added back to the Total Income of the assessee as per Income Tax Act, 1961. 4.4.5. In view of the above, explanation of the assessee founds not satisfactory. The reply and details uploaded by the assessee were carefully examined. On the basis of material available on record the AO is satisfied that assessee has failed to provide satisfactory answer. Therefore, as discussed in above paras, the same cannot be considered as deduction u/s 80G but has to be disallowed as per the Income Tax Act, 1961. The donation claimed u/ 80G of I.T. Act would be disallowed that amounts to Rs. 67,15,972/- Penalty proceedings u/s 270A of the Income Tax Act, 1961 for under reporting the income in its ITR for the year under consideration is initiated separately. (Addition: Rs. 67,15.972/-)” 4. Being aggrieved, the Assessee carried the issue in appeal before the CIT(A). However, the CIT(A) agreed with the Assessing Officer and declined to grant any relief to the Assessee on this issue. ITA No.1402/Mum/2024 A.Y.2020-2021 4 5. Being aggrieved, the Assessee had preferred the present appeal. Both the grounds raised by the Assessee are directed against the order of CIT(A) confirming the disallowance made by Assessing Officer under Section 80G of the Act. 6. We have heard both the sides, perused the material on record and have taken into consideration the written synopsis filed in support of the oral submissions. 7. The primary contention advance on behalf of the Assessee that apart from the Explanation to 2 to Section 37(1) of the Act which specifically prohibits the deduction of amount spent under CSR Expenditure as business expenditure, there is no other provision which debars the Assessee from claiming deduction under Section 80G of the Act in respect of CSR expenditure in case the applicable conditions are satisfied. In absence of such specific provisions, the exclusion of CSR expenditure for the purpose of computing deduction under Section 80G of the Act cannot be read in to the statute. 8. Per contra, the Learned Departmental Representative strongly supported the order passed by the Assessing Officer and the CIT(A). It was submitted that for claiming deduction under Section 80G of the Act there must be an element of charity. The donation made by the Assessee should be voluntary in nature. In the present case, the sole reason of making donations was to comply with the mandate of Section 135 of the Companies Act, 2013. The Learned Departmental Representative placed reliance upon the decision of the Delhi Bench of the Tribunal in the case of Agilent Technologies (International) Pvt. Ltd. Vs. ACIT [160 taxmann.com 238] and General Circular Number 14 of 2021 issued by Ministry of Corporate Affairs, Government of India on 25/08/2021 [for short ‘the Circular’]. ITA No.1402/Mum/2024 A.Y.2020-2021 5 9. In rejoinder the Learned Authorised Representative for the Assessee submitted that reliance placed by the Ld. Departmental Representative upon the above decision of the Tribunal was misplaced in as much as the said decision neither provided any reasons for the conclusion arrived; and nor did it take into consideration other decision of the co-ordinate bench of the Tribunal which wherein this issue was decided in favour of the Assessee. It was further submitted that the Circular issued by Ministry of Corporate Affairs was irrelevant for the reason that the same was not binding upon the Assessee. It was further contended that while making donations an assessee may be guided by other motives in addition to philanthropic considerations, however, the same would not disentitle such assessee from claiming deduction under Section 80G of the Act. The charitable organizations had received donation which was categorized as CSR Expenditure without any consideration, and for that reason also the donations should be regarded as voluntary/charitable in nature. 10. We have given thoughtful consideration to do the rival submissions. The issue of consideration is whether the expenses incurred on CSR activity by way of donation made to charitable organizations would be eligible for deduction under Section 80G of the Act. In our view, in order to address the aforesaid issue it would be pertinent to understand the broad framework of the CSR Expenses as explained by the Circular which contains Frequently Asked Questions (FAQs) on CSR Expenditure. As per Section 135 of the Companies Act, 2013, a company satisfying a specific criteria during the immediately preceding financial year is required to comply with CSR provisions specified in Section 135 of the Act and spend, in every financial year, at least 2% of the average net profit of the company made during the three immediately preceding financial years. Such company can incur CSR Expenditure by way of ‘Activities Route’ ITA No.1402/Mum/2024 A.Y.2020-2021 6 wherein the company undertakes CSR projects or programmes as per Schedule VII of the Companies Act 2013 by itself or by engaging ‘Implementing Agencies’. As per Rule 4(1) of the Companies (CSR Policy) Rules 2014, eligible entities which can act as ‘Implementing Agency’ for undertaking CSR activities include a company established under Section 8 of the Companies Act, registered public trust, or society having registration under Section 12A and 80G of the Act. Thus, the scheme for incurring of CSR Expenses includes implementation of CSR projects through ‘Implementing Agencies’ registered under Section 12A & 80G of the Act. Answer to FAQ at Sl.No. 3.10 of the Circular clearly provides that amount spent towards CSR Expenses cannot be claimed as ‘business expenditure’. Further, Answer to FAQ at Sl. No. 3.11 of the Circular specifically provides that no specific tax exemptions have been extended to CSR expenditure. However, in our view, the answers to the aforesaid FAQs do not indicate any intention on the part of the legislature to bar an assessee from claiming deduction Section 80G of the Act in case the same is otherwise available in respect of CSR Expenses. We find merit in the contention advance on behalf of the Assessee that while there exists a specific provision [i.e. Explanation 2 to Section 37 of the Act] prohibiting deduction of CSR Expenses as business expenditure, no corresponding provisions have been inserted in Section 80G of the Act to exclude CSR Expenses from the ambit of Section 80G of the Act. We note that Section 135 of the Act prescribed the monetary limits and the broad purpose for which CSR expenditure should be incurred. However, the choice to incur the CSR Expenditure and the manner in which the same can be incurred is with the company itself. Answer to FAQ at Sl. No. 2.4 and 2.5 of the Circular state that CSR is a ‘Board-driven process’ with Board of Directors of the company being empowered to plan, decide, execute and monitor CSR activities of the company on the recommendation of the CSR Committee. It clarifies that the Government does not ITA No.1402/Mum/2024 A.Y.2020-2021 7 have a direct role in approval or implementation of CSR programmes/projects. Thus, the choice to make contribution to a particular charity continues to be with the assessee and to this extent the contribution is voluntary in nature. It is not the case of the Revenue that the charity receiving the contribution provides any quid pro quo to the Assessee. Thus, in our view, subject to fulfillment of the applicable conditions, Assessee would be entitled to claim deduction under Section 80G of the Act for CSR Expenditure. This issue can also be looked at from another perspective. In our view, the donations made by the Assessee to charitable organization which were eligible for deduction under Section 80G of the Act would not cease to be eligible for such deduction merely on account of the fact that the Assessee chooses to include the same in the category of CSR Expenditure unless there is a specific provision in the Act which so provides. Identical view has been taken by the Co-ordinate benches of the Tribunal in a number of cases cited on behalf of the Assessee including the following- (a) Societe Generale Securities India P. Ltd. Vs. PCIT [204 ITD 796] (b) Interglobe Technology Quotient P. Ltd. Vs. ACIT [163 taxmann.com 542] (c) SBI DFHI Ltd. Vs. ACIT for A.Y.2018-19 in ITA No.1431/Mum/2023 dated 27/06/2023. 11. Thus, adopting the view taken by the Co-ordinate Bench of the Tribunal in favour of the assessee, we hold that the Assessee is entitled to claim deduction of INR 67,15,972/- under Section 80G of the Act in respect of CSR Expenditure of INR 1,34,31,944/- incurred during the relevant previous year. Accordingly, disallowance of INR made by the Assessing Officer is deleted and Ground No.1 & 2 raised by the Assessee are allowed. 12. Before parting we would like to observe that in case the contention of the Revenue is accepted and the donations to the charitable ITA No.1402/Mum/2024 A.Y.2020-2021 8 organizations are ‘not’ treated as voluntary in nature, the same may lead to anomalous consequences in the case of such charitable organizations as the donations so received may become taxable in their respective hands with no mechanism available with such charitable organizations to track such donations. Therefore, in absence in absence of legislative mandate, the contentions of the Revenue, leading to the aforesaid unintended consequences, cannot be accepted. 13. In result, the present appeal preferred by the Assessee is allowed. Order pronounced on 05.11.2024. Sd/- Sd/- (Prashant Maharishi) Accountant Member (Rahul Chaudhary) Judicial Member मुंबई Mumbai; िदनांक Dated : 05.11.2024 Milan,LDC ITA No.1402/Mum/2024 A.Y.2020-2021 9 आदेश की Ůितिलिप अŤेिषत/Copy of the Order forwarded to : 1. अपीलाथŎ / The Appellant 2. ŮȑथŎ / The Respondent. 3. आयकर आयुƅ/ The CIT 4. Ůधान आयकर आयुƅ / Pr.CIT 5. िवभागीय Ůितिनिध ,आयकर अपीलीय अिधकरण ,मुंबई / DR, ITAT, Mumbai 6. गाडŊ फाईल / Guard file. आदेशानुसार/ BY ORDER, सȑािपत Ůित //True Copy// उप/सहायक पंजीकार /(Dy./Asstt. Registrar) आयकर अपीलीय अिधकरण, मुंबई / ITAT, Mumbai "