The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) held that deduction under Section 80G of the Income Tax Act, 1961 cannot be denied merely because the donation forms part of the assessee’s Corporate Social Responsibility (CSR) expenditure. The Tribunal further ruled that no disallowance under Section 14A can be made where the assessee has not earned any exempt income during the relevant assessment year. A Bench comprising Vice President Prashant Maharishi and Judicial Member Sandeep Singh Karhail partly allowed the appeal filed by Schneider Electric IT Business India Private Limited for AY 2020-21.

The dispute arose after the assessee incurred CSR expenditure of Rs.5.86 crore during the year and voluntarily disallowed the same under Section 37 of the Act. Out of this expenditure, it claimed deduction of Rs.3.75 crore under Section 80G in respect of eligible donations. The Assessing Officer denied the deduction on the ground that CSR spending is incurred pursuant to a statutory obligation under Section 135 of the Companies Act, 2013 and therefore lacks the voluntary character required for a donation under Section 80G. The Dispute Resolution Panel upheld the disallowance.

Before the Tribunal, the assessee contended that while CSR expenditure is not allowable as a business deduction under Section 37, there is no prohibition against claiming deduction under Section 80G where the statutory conditions are satisfied.

“If assessee is denied this benefit, merely because such payment forms part of CSR, it would lead to double disallowance, which is not the intention of Legislature.”

The Tribunal noted that several coordinate benches had already held that Explanation 2 to Section 37(1) only bars deduction of CSR expenditure while computing business income and does not restrict deductions available under Chapter VI-A. It observed that the legislature specifically excluded CSR-related contributions only in respect of donations made to Swachh Bharat Kosh and Clean Ganga Fund under Section 80G(2), while no such restriction exists for other eligible donations.

The Bench held that since the assessee’s donations were not made to the specifically excluded funds, the deduction under Section 80G could not be denied merely because the expenditure formed part of CSR obligations. Accordingly, the claim for deduction under Section 80G was allowed.

On the issue of disallowance under Section 14A read with Rule 8D, the Tribunal found that the assessee had not earned any exempt income during the relevant previous year and had not claimed any exemption under Section 10(34) of the Act.

“Section 14A of the Act will not apply if no exempt income is received or receivable during the relevant previous year.”

Thus, the Tribunal allowed the deduction claimed under Section 80G, deleted the disallowance made under Section 14A read with Rule 8D, and partly allowed the assessee’s appeal.