BACKGROUND 

In order to promote social welfare and holistic growth of the society, especially those section which were excluded from mainstream of development, Section 135 was introduced in the Companies Act, 2013. As per this section, Companies are mandatorily required to contribute a prescribed portion of their net profit towards Corporate Social Responsibility (CSR) activities. The activities that falls within the ambit of CSR are specified in Schedule VII¹ of the Companies Act, 2013. A Company may either incur the expenditure or donate to an organisation which carries out prescribed activities.

While the Companies Act, 2013 mandated spending of a prescribed portion towards CSR, Section 37(1) of the Income Tax Act, 1961 (IT Act) was amended to provide that any expenditure incurred by the taxpayer on the activities relating to CSR referred to in section 135 of the Companies Act, 2013 shall not be allowed as a business expenditure. In other words, CSR expenditure is not a deductible item while computing income under the head Profit and Gains from Business or Profession.

While it is explicitly provided that CSR expenditure incurred by the Company is not a deductible item under section 37(1) of the IT Act, a question may arise about its deductibility under section 80G² of the IT Act when the money is donated. In this regard, recently, the Delhi Tax Tribunal³ had an occasion to analyse whether donations made as a part of CSR expenditure are eligible for deduction under section 80G of the IT Act.

We, at BDO in India, have summarised this ruling and provided our comments on the impact of this decision hereunder:

FACTS OF THE CASE

• The taxpayer, an Indian company, is engaged in the business of rendering and exporting data processing services.

• During the Fiscal Year (FY) 2019-20, the taxpayer made certain donations worth INR 275 mn which included donations made as part of CSR expenditure - INR 156 mn.

• While filing its tax return for the said FY, the taxpayer suo-moto disallowed the entire donations under section 37(1) of the IT Act and thereafter claimed a deduction of INR 137 mn being donations eligible for deduction under section 80G of IT Act.

• During the course of assessment proceedings, the tax officer opined that donations forming part of CSR expenditure are not eligible for deduction under section 80G of the IT Act. Further, in relation to donations other than CSR, the tax officer opined that since the same was made in May 2020 (i.e. after the end of FY), same is not eligible for deduction under 80G of IT Act.

• Accordingly, the tax officer after disallowing entire deduction claimed under section 80G of IT Act, passed the assessment order under section 143(3) read with section 144B of the IT Act.

• Aggrieved by the order of the tax officer, the taxpayer filed an appeal before the First Appellate Authority, which confirmed the tax officer’s order. Hence, the taxpayer filed an appeal before the Delhi bench of the Income Tax Appellate Tribunal (Delhi Tax Tribunal)

DELHI TAX TRIBUNAL RULING

The Hon’ble Delhi Tax Tribunal while granting deduction under section 80G of the IT Act made the following observations:

Re. deductibility of non-CSR donations which were made after the end of FY

• Provisions of the Taxation and Other Laws (Relaxation and Amendment to Certain Provisions) Act, 2020 (TOLA) were applicable in regard to the donations made beyond 31 March 2020. As per the provisions of TOLA, inter-alia, the due date for making donations for which deduction could be claimed under section 80G of the IT Act, in the income tax return for FY 2019-20 was extended till 30 July 2020.

Re. Allowability of donations made as a part of the CSR mandate

• Disallowance of deduction claimed under section 80G of the IT Act will result in double disallowance, which is not provided for by the Legislature. In this regard, the reliance placed by the taxpayer on the decision of the Bangalore Bench of Tax Tribunal in the case Allegis Services (India) Pvt Ltd⁴ was affirmed.  

• Relied on the ruling of Bangalore Tax Tribunal in the case of Goldman Sachs Services Pvt Ltd⁵ (Goldman Sach) wherein it was held that Section 80G of IT Act clearly provides that contribution towards Clean Ganga Fund and Swachh Bharat Kosh shall be allowed only if it does not falls under CSR.  Accordingly, it can be inferred that the other contributions made under section 135(5) of the Companies Act, 2013 are also eligible for deduction under section 80G of the IT Act subject to the satisfaction of requisite conditions as prescribed for deduction under section 80G of IT Act.

• Relying on Goldman Sach’s decision, this co-ordinate bench in the case of Honda Motorcycle and Scooter India Pvt Ltd⁶ held that there is no restriction in the IT Act that expenditure when disallowed for CSR cannot be considered under section 80G of the IT Act.

• Reliance was placed on the decision of co-ordinate bench in the case of Teradata India Pvt Ltd⁷ wherein it was held that since the donee institutions are eligible for enjoying exemption under section 80G of IT Act, the taxpayer has also rightly claimed deduction under section 80G of the IT Act as provided in the statute itself. Hence, denial of deduction under section 80G of the IT Act to the taxpayer would result in gross injustice.

• Under the provisions of section 135 of the Companies Act, 2023, CSR expenditure could be the expenditure directly undertaken by taxpayers such as setting up and running schools, social business projects, etc. or taxpayers may choose to give donations to institutions that are engaged in undertaking such projects, which is also a recognised way of compliance of CSR obligation.

• As per the Explanatory Memorandum to the Finance (No.2) Bill, 2014, the legislative intent and rationale behind the introduction of Explanation 2 to section 37(1) of the IT Act is that CSR expenditure is application of income and not incurred for the purposes of business. This, in itself, justifies the grant of deduction under section 80G of the IT Act.

• Further, section 80G of the IT Act falls in Chapter VIA, which comes into play only after the gross total income has been computed by applying the computation provisions under various heads of income, including Explanation 2 to section 37(1) of the IT Act. Thus, there is no correlation between suo-moto disallowance in section 37(1) of the IT Act and the claim of deduction under section 80G of the IT Act.

• With regard to the reasoning laid down by tax authorities that CSR expenditure are not voluntary but mandatory in nature due to penal consequences, we are of considered view that voluntary nature of donation is by nature of fact that it is not on the basis of any reciprocal promise of donee.

• Section 80G of the IT Act permits the deduction of donations, even though the taxpayer is not gaining any benefit out of any reciprocity from the donee. Similarly, CSR expenditures are also without any reciprocal commitment from beneficiary being philanthropic in nature. Thus, the reasoning of the tax authorities that CSR expenditure is mandatory does not justify the disallowance of these expenditures under section 80G of the IT Act, provided other conditions are fulfilled.

BDO IN INDIA COMMENTS

Delhi Tax Tribunal has affirmed the judiciary’s view that the deduction under section 80G of the IT Act is available for CSR contributions subject to meeting of prescribed condition under the said section. The Delhi tax Tribunal has brought out the similarity between donation and CSR expenditure (I,e, CSR expenditure, even though mandatory, is without any reciprocal commitment from the beneficiary). It is pertinent to note that Comptroller and Auditor General of India (CAG) in its Press Release dated 8 August 2022 wherein it inform about tabling of it report no. 12 of 2022 before the Parliament. As per this Report, CAG has suggested that the Central Board of Direct Taxes should consider bringing an amendment or binding clarification is necessary to ensure that the provisions are interpreted uniformly by the tax officer across all assessment charges and also to minimise the possibility of litigation.