ITAT Mumbai has allowed deduction Expenses u/s 80G of Income Tax incurred on CSR.
Reetu | Nov 29, 2023 |
ITAT allows deduction Expenses u/s 80G of Income Tax incurred on CSR
The Income Tax Appellate Tribunal (ITAT Mumbai) in the matter of Asstt. Commissioner of Income Tax vs. M/s. Rustomjee Realty Private Limited has allowed deduction Expenses u/s 80G of Income Tax incurred on CSR.
The present appeal has been filed by the Revenue challenging the impugned order dated 10/03/2023, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2020-21.
In its appeal, the Revenue has raised the following grounds:–
“1. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of expenses of Rs.26,53,85,916 when the rate of interest for secured loan at the time of issuance of debentures was 14.1% which was also reflected in the sanction order submitted by the assessee while the assessee had issued debentures at the rate of 21.3% which was much more than the market.
2. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting disallowance of interest of Rs.26,53,85,916/- paid on Non-Convertible Debentures (NCDs) by merely relying on the submissions of the assessee. The Ld.CIT(A) ought to have examined the terms contained in Debentures Subscription Agreement and the purpose for which such high interest bearing funds have been utilised particularly when huge interest of Rs.46.46 crores has been debited to Profit and Loss Account.
3. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in disallowance of 80G deduction in respect of donations made towards CSR activities without appreciating the fact that these are not voluntary donations, rather they were paid to comply with statutory requirement of CSR and the amount spent towards CSR activities was nothing but appropriation of profits.
4. The Appellant craves leave to add, amend and/or vary the grounds of Appeal/ before or during the course of hearing.”
The issue arising in grounds no. 1 and 2, raised in Revenue’s appeal, pertains to the deletion of disallowance of interest paid on non-convertible debentures.
The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is engaged in the business of construction and development of real estate. For the year under consideration, the assessee filed its return of income on 14/01/2021 declaring a total income of Rs. 71,49,06,790. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) as well as section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, from the details of the borrowing cost claimed by the assessee, it was noted that the assessee has claimed interest expense @21.3% on debentures, i.e. Rs. 7851 lakh. Accordingly, the assessee was asked to show cause as to why the interest expense be not restricted to 10% on the money borrowed by issuing debentures as per the secured loan rate of interest. In response thereto, the assessee submitted that it had issued 14,00,00,000 unsecured redeemable cumulative non-convertible debentures of Rs. 10 each for a period of 6 years amounting to Rs. 140,00,00,000 to Kapstone Construction Pvt. Ltd. It was further submitted that the debentures were issued at the interest rate of 21.3% after considering various factors such as quantum of loan, risk factor, credit, security, pledge, etc. during the period of 2014 to 2020. It was further submitted that the market situation differs from time to time and therefore there is no comparison of the interest rate of secured term loan taken on 25/02/2020 and unsecured redeemable cumulative non-convertible debentures issued on 08/03/2014.
The assessee submitted that during a period of 2014, the interest rate against the secured term loan was in the range of 14%-16.5% and the assessee has itself borrowed a loan on 19/09/2013 at the rate of 14.10%. The Assessing Officer (“AO”) vide order dated 26/09/2022 passed under section 143(3) read with section 144B of the Act did not agree with the submissions of the assessee and held that the rate of interest for a secured loan at the time of issuance of debentures was 14.10%, however, the assessee has issued debentures at the rate of 21.3% which is much more than the market rate of interest. Accordingly, the AO restricted the interest expenses claimed on debentures to 14.1% instead of 21.3% and disallowed the excess interest claim of Rs. 26,53,85,916.
The learned CIT(A), vide impugned order, allowed the ground raised by the assessee on this issue and held that the interest rate on a secured loan cannot be compared with interest on unsecured non-convertible debentures, as for determining the interest rate on different instruments, various factors comes into consideration.
We have considered the submissions of both sides and perused the material available on record. We find that the coordinate benches of the Tribunal have consistently taken the view in favour of the taxpayer and held that the CSR expenses even though not allowed under section 37 of the Act pursuant to insertion of Explanation-2 to section 37 vide Finance Act, 2014 with effect from 01/04/2015. However, the said expenditure is allowable under section 80G of the Act. We find that the learned CIT(A) has also followed these judicial precedents and decided the issue in favour of the assessee, by observing as under:-
“Ground No.1
In this Ground of appeal, the Appellant has agitated the disallowance of deduction U/s 80G of the Income Tax Act, 1961, of Rs.5,50,000 which as per the appellant has been expended in compliance with the provisions of Companies Act, 2013 under head CSR expenditure. On perusal of the submission of appellant, it has been found that the A.O has disallowed the deduction claimed u/s 80G amounting to Rs 5,50,000 by holding that the CSR is a mandatory expenditure specified in Companies Act whereas deduction claimed u/s 80G of donation is voluntary in nature.
The AO’s contention is that the nature and character of CSR expenditure mandated u/s 135 of the Companies Act read with provision of Section 37 of the Income Tax Act, 1961 and donation prescribed in Section 80G are totally different, distinct and independent from each other. On the other hand, it has been found that the Appellant has disallowed the CSR expenses amounting to Rs 11,00,000 u/s 37(1) of the Income Tax Act, 1961 and claimed the deduction u/s 80G of Rs 5,50,000 for the year under consideration. On perusal of the provision of Section 37(1) as well as Section 80G of the Income Tax Act, 1961, the contention of the appellant is found to be correct as there is no specific restriction for claiming the deduction u/s 80G of the Income Tax Act, 1961 and therefore, no disallowance of deduction claimed u/s 80G is warranted in this case. Appellant has relied upon the following judgements applicable to the facts of the case:
The Hon’ble ITAT Bangalore Bench decision in case of Goldman Sachs Services Pvt Ltd V JCIT IT(TP)A No 2355/Bang/2019 while adjudicating on the issue of CSR contributions which have not been paid by the appellant on voluntary basis and hence the same being not eligible for deduction u/s 80G of the Act, adjudicated the issue as follows:-
“…….. But the assessing officer has rejected the assesses claim without verifying the nature of contributions and observed that it is not a donation, and was not spent voluntarily for the eligibility of claim u/s 80G of the Act but due to legal obligation prescribed u/s 135 r.w. Schedule VII of companies Act, 2013. We find that the A.O has allowed deduction u/s 80G of the Act in respect of contribution made to PM Relief Fund which is not disputed. We are of the opinion that he A.O. has not made his observations clear that no CSR expenses are eligible for deduction u/s 80G of the IT(TP) A No.2355/Bang/2019 Act. We consider it appropriate to refer to the Clauses (iiihk) & (iiihl) of sub-section 2 of Section 80G of the Act which are read as under:
*(iiihk) the Swachh Bharat Kost, set up by the Central Government, other than the sum spent by the assessee in pursuance of corporate social responsibility under sub-section (5) of section 135 of the companies Act, 2013 (18 of 2013); or (iiihl) the clean ganga fund, set up the Central Government, where such assessee is a resident and such sum is other than the sum spent by the assesse in pursuance of corporate social responsibility under sub-section (5) of section 135 of the companies Act, 2013) (18 of 2013).”
Where these two exceptions are provided in section 80G of the Act, it can be inferred that the other contributions made u/s 135(5) of the companies Act are also eligible for deduction u/s 80G of Income Tax Act subject to assessee satisfying the requisite conditions prescribed for deduction u/s 80G of the Act. In the present case the AO has not dealt on these aspects, prima facie, considered the contributions as not voluntary but a legal obligation and has accepted the genuineness of the contributions.
Hence, on the facts of the case it is to be examined that the conditions are satisfying the requirements of claim u/s 80G of the Act. The appellant has also disallowed the CSR expenses amounting to Rs. 11,00,000 u/s 37(1) of the Income Tax Act, 1961.
Accordingly, the disallowance made by the A.O of Rs.5,50,000 is deleted. Accordingly, this Ground of Appeal is allowed.”
Therefore, in view of the above, we find no infirmity in the impugned order passed by the learned CIT(A) in allowing the claim of deduction under section 80G of the Act on CSR expenses incurred by the assessee. Accordingly, ground no. 3 raised in Revenue’s appeal is dismissed.
In the result, the appeal by the Revenue is partly allowed for statistical purposes.
For Official Judgment Download PDF Given Below:
In case of any Doubt regarding Membership you can mail us at [email protected]
Join Studycafe's WhatsApp Group or Telegram Channel for Latest Updates on Government Job, Sarkari Naukri, Private Jobs, Income Tax, GST, Companies Act, Judgements and CA, CS, ICWA, and MUCH MORE!"
