ITAT allows deduction of Expenses on Corporate Social Responsibility

The Income Tax Appellate Tribunal (ITAT) has allowed the deduction of Expenses on Corporate Social Responsibility (CSR).

In the present case, the assessee debited an amount of Rs.70,53,990 under the head ‘CSR account’ and called for the assessee to explain the allowability of the same. The assessee explained that the amount was spent towards expenses for the being part of expenses incurred towards education expenses of children of the villages Kunikere and Hirebaginal village where the Factory of the assessee is situated. The assessee company incurred expenses towards providing books, uniforms, and construction of drinking water facilities, etc. to the schools/villages surrounding the factory. All these expenses are allowable u/s 37 of the Act being business expenses incurred wholly and exclusively for the purposes of the business and are allowable, according to the assessee.

The AO noted that merely incurring expenditure for the people in the area and earning goodwill cannot be treated as business expenditure as it is not related to the assessee’s nature of business and has not effected the carrying out of the business of the assessee and does not fall u/s. 37(1) of the Act. For an expenditure to be eligible as an allowance under the residuary provisions, the following conditions should be satisfied:-

(i) The expenditure must not be governed by the provisions of sections 30 to 36.

(ii) The expenditure must be have been laid out wholly and exclusively for the purpose of the business of the assessee.

(iii) The expenditure must not be personal in nature.

(iv) The expenditure must not be capital in nature.

According to the AO, since the assessee failed to substantiate its claim that expenditure was exclusively for the purpose of business or any sort of commercial expediency, he disallowed the amount of Rs.70,52,990. and brought it to tax.

On appeal, the CIT(Appeals) held that in the absence of nexus of the expenditure with business exigency, the expenditure cannot be allowed u/s. 37(1) of the Act and rejected the contentions of the assessee.

ITAT bench of N V Vasudevan and Padmavathy S opined that in the present case, the assessee has spent the amount towards expenditure for the benefit of the public towards education expenses by way of providing books, uniforms, and constriction of drinking water facilities, etc., to the schools/villages surrounding the factory of children of the villages where the factory of the assessee is situated to earn the goodwill and the long term benefit that may yield in future to earn profits.

Following the coordinated Bench decision in the case of M/s. The Sandur Manganese & Iron Ores Ltd. (supra) in identical facts and circumstances, the bench concluded that the expenditure incurred is wholly and exclusively for the purpose of business and the same is to be allowed as a deduction u/s. 37 of the Act.