India: CSR Spend May Be Entitle For Deduction Under Section 80G Of The IT Act

Background

Section 135 of the Companies Act 2013 (CA 2013) mandates every company with net worth or turnover above the prescribed limits to spend certain portion of its profit towards Corporate Social Responsibility (CSR) activities. While such companies are required to make this spend, 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). Though there is no specific tax exemption that has been extended to expenditure incurred on CSR, 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.

Recently the Bangalore Tax Tribunal¹ had an occasion to examine the issue, inter-alia, whether the expenses incurred to fulfil the CSR obligation under CA 2013 could be claimed as deduction under section 80G of the IT Act. We, at BDO in India, have summarised the ruling of Bangalore Tribunal as far as it pertains to deductibility of CSR expenditure and provided our comments on the impact of this decision.

Facts of the case

Taxpayer, subsidiary of a foreign company, is engaged in the business of developing computer software and provides Software Development Services to its Associated Enterprises (AEs) and has Information Technology Enabled Services (ITES) to support the business processes of its group companies. For the fiscal year 2014-15, in terms of section 135 of CA 2013, the taxpayer incurred INR 47.2mn towards CSR. Out of this, the taxpayer treated INR 22.52mn as qualified for deduction and thereby claimed INR 11.26 as deduction under section 80G of the 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.

Tribunal ruling

Tribunal observed CSR expenses are required 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. 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:

• 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.

BDO comments

While the Tribunal has remanded the issue to the tax officer for fresh examination, it 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. Further, it is imperative to note that the Bangalore Tax Tribunal in few recent decisions² have held that if 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. The government too is not unfavourable to tax benefits for CSR expenditure. This is supported by the fact that it is specifically clarified that CSR expenditure which is of the nature described in section 30 to 36 of IT Act shall be allowed as deduction subject to fulfilment of conditions, if any, specified therein. Thus, even if the expenditure is 'application of income', it could still qualify as business income deduction (e.g. 35AC, 35(1)(iia), etc.).

Footnotes