CSR expenses incurred by the PSU as per government mandates are deductible under Section 37-ITAT

Income Tax Appellate Tribunal (ITAT) order on a Public Sector Undertaking's (PSU) claim for deduction of Corporate Social Responsibility (CSR) expenses as business expenditure.

Facts:

• A Public Sector Undertaking (PSU) operating in remote areas provided facilities like medical care, welfare, recreation, and education to employees and their families.
• The PSU claimed these expenditures as Corporate Social Responsibility (CSR) expenses.
• The tax authorities disallowed these expenses, arguing they weren't incurred wholly and exclusively for business purposes.

Arguments:

• The PSU contended that the facilities were essential for employee welfare, leading to increased efficiency and improved business performance.
• CSR activities are aimed at social development and environmental sustainability, contributing to overall business growth and community well-being.
• The expenditures met the criteria of Section 37(1) of the Income Tax Act as they were not capital or personal expenses and were incurred for business purposes.
• The PSU was obligated to incur CSR expenses under government guidelines.

Question:

Whether the CSR expenses incurred by the PSU were eligible for deduction under Section 37(1) of the Income Tax Act as business expenditures.

Key Points:

• The PSU incurred CSR expenses as mandated by Department of Public Enterprises (DPE) guidelines.
• The Income Tax Officer (ITO) disallowed the CSR expenses, stating they weren't wholly and exclusively for business purposes.
• The ITAT allowed the deduction for the following reasons:
  • The CSR activities aligned with the government's social development goals.
  • The expenses were incurred before the amendment disallowing CSR expense deduction (applicable from 2015-16).
  • DPE guidelines mandated CSR expenditure for PSUs.
  • CSR activities can enhance employee efficiency and generate goodwill, benefiting the business.

Court References:

• The ITAT relied on its own past decisions in similar cases for PSUs.
• The Delhi High Court's decision in PEC Ltd. vs. PCIT was also referenced, highlighting the non-retrospective application of the CSR expense disallowance amendment.

Conclusion:

The ITAT order emphasizes that CSR expenses incurred by PSUs before the 2015-16 amendment can be deductible business expenditures if demonstrably linked to the company's overall business objectives and social responsibility.

Income tax case law Mecon Ltd. versus Assistant Commissioner of Income-tax

Citation-2024 TAXONATION 253 (ITAT RANCHI)

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