Income Tax Appellate Tribunal - Ranchi
M/S Mecon Limited, Doranda, Ranchi, ... vs Assistant Commissioner Of Income Tax, ... on 3 July, 2024
IN THE INCOME TAX APPELLATE TRIBUNAL,
RANCHI BENCH, RANCHI
BEFORE SHRI PARTHA SARATHI CHOUDHURY, JUDICIAL MEMBER
AND SHRI PRABHASH SHANKAR, ACCOUNTANT MEMBER
ITA Nos.77 & 78/RAN/202 22
Assessment Years:2011-12
12 & 2012-13
2012
M/s. Mecon Limited, Doranda, Vs. Asst. Commissioner of Income
Ranchi Tax, Circle-2,
2, Ranchi
PAN/GIR No.AACCM
No 2119 B
(Appellant
(Appellant) .. ( Respondent)
Respondent
Assessee by : Shrii Devesh Poddar,
Poddar Adv
Revenue by :Shri Kanhaiya Lal Kanak, CIT DR
Date of Hearing : 02/077/2024
Date of Pronouncement :03/07
7/2024
ORDER
Per Bench These ese two appeals filed by the assessee are directed against separate orders order of the ld CIT(A), NFAC, Delhi both dated 29.7.2022 for the Assessment Year ears 2011-12 & 2012-13, respectively.
2. Since identical issues are involved in both the appeals, same were heard together and are being disposed of by this common order for the sake of convenience.
P a g e 1 | 15 ITA Nos.77 & 78/RAN/2022 Assessment Years: 2011-12 & 2012-13
3. The issue involved in both the appeals is with regard to disallowance of Corporate Social Responsibility (CSR) expenses and Sustainable Development expenses amounting to Rs.2,47,87,000/- and Rs.2,81,05,000/- respectively upheld by the ld CIT(A).
4. Grounds of appeal are identical to both the appeals, therefore, for the sake of convenience, grounds raised in Assessment year 2011-12 read as under and the decision would apply mutatis-mutandis to assessment year 2012-13.
" 1. For that ld AO was not justified in initiating proceedings u/s.148 beyond 4 years specially when original assessment has been completed u/s.143(3). Proceeding initiated u/s.148 is bad in law and assessment framed thereby is fit to be quashed.
2. For that ld AO has neither in order of assessment or in the reasons recorded mentioned the issue that assessee failed to fully and truly disclose the facts. As such proceeding u/s.148 initiated beyond 4 years without recording of above finding is bad in law.
3. For that ld CIT(A) was not justified in confirming the addition of Rs.2,47,87,000/- being CSR expenses claimed by the assessee. Assessee is a PSU under the Ministry of Steel and governed by their norms and DPE guidelines. Complete details of CSR and sustainable development expenses has been provided to AO and ld CIT(A) . As such addition made by AO and confirmed by CIT(A) is fit to be deleted.
4. For that the assessee being a PSU are governed by strict norms and its books ae subject to CAG audit. Any expenses made is only done after approval at various level of the management and as such, there can be no room for claiming any bogus expenses. As such the claim of Rs.2,47,87,000/- as CSR & sustainable development expenses should be allowed.
5. For that the ld AO was not justified in charging interest on the assessed income. Interest u/s.234A and 234B can only be charged P a g e 2 | 15 ITA Nos.77 & 78/RAN/2022 Assessment Years: 2011-12 & 2012-13 on returned income following the decision of Hon'ble Jharakhand High Court.
5. Ground Nos.1 and 2 pertain to proceedings u/s.148 of the Income tax Act are not pressed by ld counsel for the assessee, therefore, same are dismissed as not pressed.
6. Ground Nos.3 & 4 relate to disallowance of CSR and Sustainable Development expenses as stated earlier.
7. The brief facts of the case are that the assessee is a Public Sector Undertaking/Enterprise under the Ministry of Steel, Government of India. It filed the return of income for the assessment year 2011-12 declaring total income of Rs.1,34,67,73,284/- on 27.09.2011, which was subsequently revised on 20.9.2012 declaring total income of Rs.134,67,73,284/-. The assessment order was passed u/s.143(3) of the Act. Later on, the Assessing Officer issued notice u/s.148 of the Act n 5.12.2017 and went on to complete the assessment order u/s.143(3) r.w.s 147 of the Act, whereby CSR expense of Rs.2,47,87,000/- was disallowed and added back to the income of the assessee.
8. Before the ld CIT(A), it was submitted by the assessee that CSR expenses were incurred as per the guidelines issued by the Department of Public Enterprises, Government of India, which are incidental to the business of the assessee. The assessee debited the expenses to the profit and loss account of the assessee as per generally accepted accounting P a g e 3 | 15 ITA Nos.77 & 78/RAN/2022 Assessment Years: 2011-12 & 2012-13 principles. Moreover, the expenses were shown as separate line item/head of expenses alongwith necessary disclosure in the notes forming part of profit and loss account. Similar claim was allowed by the Assessing Officer in earlier assessment year. It was also submitted by the assessee that the Explanation -2 to Section 37 of the Act, which was inserted by the Finance Act, 2014 would apply prospectively and, therefore, not applicable to the impugned assessment year. Prior to the above amendment, such expenses were allowable deduction u/s.37 of the Act.
9. Ld CIT(A) has, in para 6.3 page 7 admitted that CSR activities had been mandated by the DPE, a department of Government of India and the assessee being a wholly owned Central Public Sector Enterprise, was bound by the government's directives. However, the ld CIT(A) analysed the claim in the light of the provisions contained in section 37(1) of the Act, which reads as under:
"37(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession."
10. It was observed by ld CIT(A) that above section allows deductionof only those expenses , which are incurred wholly and exclusively for the purpose of business or profession. He agreed with the findings of the AO that the expenses were not related to assessee's business and could in no P a g e 4 | 15 ITA Nos.77 & 78/RAN/2022 Assessment Years: 2011-12 & 2012-13 way influence its business dealing with its clients. He proceeded to conclude that the assessee's case was squarely covered by the provisions of section 37(1) inasmuch as such expenses are out of the purview of section 37(1) of the Act. Ld CIT(A) also did not agree with the contention of the assessee with regard to certain decisions of higher courts and concluded that these were not applicable to the facts of the case.
11. Ld AR of the assessee made a detailed oral and written submissions alongwith various enclosures in support of the claim. It has been argued that the assessee being a public sector undertaking, is governed by the norms of Ministry of Steel. The Ministry issues as and when needed guidelines through the Department of Public Enterprises, (DPE guidelines) by the Ministry of Heavy Industries and Public Enterprises. In support of the contention, copy of the office memorandum dated 9th April, 2010 issued by the Ministry has also been enclosed. It is further stated that the funding/budget for CSR expenses depends upon the profit disclosed in the previous year. The assessee falls in the 2nd category i.e. profit of Rs.100 crores to Rs.500 crores for which the CSR expenses range between 2 to 3%. Accordingly, for assessment year 2011-12, actual CSR expenses amounted to Rs.2.47 crores, which was about 2% (1.999%) of the profit of the previous year being Rs.1,24,15,78,000/-. Likewise, for the assessment year 2012-13, actual expenses under this head was Rs.2.81 crores, which was also about 2% (1.999%) of the profit of the previous year being P a g e 5 | 15 ITA Nos.77 & 78/RAN/2022 Assessment Years: 2011-12 & 2012-13 Rs.1,41,08,79,000/-. Ld AR further stated that the assessee PSU operates in various remote areas and villages of Jharkhand and is bound to ensure certain facilities, such as medical, staff welfare and recreation, school etc for the employees and their family members residing at various work sites. These facilities increased the efficiency of employees resulting into better business performance. Further, it is claimed that the genuineness of the expenses has not been doubted by the authorities below. Moreover, the assessee being a PSU, was bound to follow the directives and guidelines issued by Central Government and its books of account are always subjected to audit by CAG. All the expenses were duly verified and proved. These expenses were incurred for social cause which are duly mentioned by the Ministry in the DPE guidelines.
12. Besides, ld AR has pointed out that in the subsequent assessment years i.e. 2013-13 and 2014-15, identical disallowances were made which have been deleted by the Co-ordinate Bench of this Tribunal vide order dated 22.2.2023 and 23.11.2022, respectively. Ld AR has also strongly relied upon the decision of Hon'ble Calcutta High Court in the case of PCIT vs Ramesh Prasad Sao, 155 taxmann.com 256,in which it was held that CSR expenses incurred prior to assessment year 2014-15 were allowable as business expenses as the same were incurred wholly and exclusively for the purposes of business. Reliance was placed on the decision of Hon'ble Delhi High Court in the case of PCIT vs. PEC Ltd., 146 P a g e 6 | 15 ITA Nos.77 & 78/RAN/2022 Assessment Years: 2011-12 & 2012-13 taxmann.com 407(Del),wherein, it has been, inter alia, that Explanation 2 to Section 37(1) of the Act is prospective in nature being effectivefrom 1.4.2015 and applicable to the expenses incurred with reference to Section 135 of the Companies Act, 2013 that too after 1.4.2015, so, Explanation 2 to Section 37(1) was not applicable to the facts of the case.
13. In reply, ld CIT DR vehemently supported the conclusions drawn by the lower authorities. He has reiterated that the above expenses were incurred wholly and exclusively for the purposes of business of the assessee company. It has been claimed that the assessee has not been able to make out a case for commercial expediency for the relevant assessment years. It has been further stated that even the DPE guidelines are not inconsonance with the claim of the assessee, which is merely clubbing the expenditures under the head "CSR and SD expenses".
14. We have heard the rival submissions. However, before proceeding with the matter, it would be useful to extract the relevant parts of section 37(1) of the Act in order to decide the issue at hand, as under:
""37(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession."
Xxx xxx xxx
Explanation 1 : xxx xxx xxx
P a g e 7 | 15
ITA Nos.77 & 78/RAN/2022
Assessment Years: 2011-12 & 2012-13
Explanation 2.--For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession."
A plain reading of the aforesaid extract of section 37 would show, that in order to claim deduction under section 37 of the Act, the expenditure incurred should be one that :
(i) Does not fall in any of the provisions referred to therein i.e. sections 30 to 36
(ii) Should not be in the nature of a capital expenditure or personal expenses of the assessee.
(iii) And lastly, the expenditure should have been laid out or expended wholly or exclusively for the purposes of business or profession.
If these conditions are met, then the expenses incurred can be deducted while computing the income chargeable under the head "profits and gains of business or professions."
15. It is also worthwhile to examine the claim of the assessee in view of CSR responsibility. The understanding of CSR basically encompasses the range of activities that demonstrate responsibility and advocate for holistic approach to social development and environmental sustainability. It is viewed as business committing to contribute the sustainable economic development by collaborating with employees, their families, local communities and the society at large. An ethically responsible business should embrace economic, legal, ethical and philanthropic responsibilities. CSR is being actively promoted as a developmental model that provides an alternative to state intervention. The corporate responsibility has P a g e 8 | 15 ITA Nos.77 & 78/RAN/2022 Assessment Years: 2011-12 & 2012-13 constitutional responsibility as well as it is connected with the constitutional provisions, philosophy and values.
16. The Parliament of India, in 1976 had inserted the term "socialist' in the preamble of the country's constitution thereby committing itself to ensure a development process which would be guided and spearheaded by the State. This incorporation casts more responsibility on the State when one goes through the Articles under the Chapter 'Directive Principles of State Policy', which is basically a guidance for governance and also for promotion and enhancement of the welfare of the State.
17. Article 38(1) encapsulates the constitutional concern for human rights and it requires the State to promote the welfare of the people. It lays stress on social and economic justice. It obliges the State to endeavour to minimize inequalities in income and eliminate inequities in facilities and opportunities among the citizens. Similar is the object of Article 39 which, inter alia, enjoins the State to frame its policy in such a manner that it results in ensuring that there is no concentration of wealth and means and that the ownership and control of material resources are so distributed as to best subserve the common good.
18. From the facts emanated from the assessment order as also appellate order alongwith contentions of ld AR, it is evident that the Department has not contested the genuineness of the expenses. Moreover, P a g e 9 | 15 ITA Nos.77 & 78/RAN/2022 Assessment Years: 2011-12 & 2012-13 none of the exception clauses as laid down in section 37(1) appear to be applicable. The only arguments of the department revolve around the claim that the expenses were not wholly and exclusively for the business of the assessee. However, this contention is not applicable to the facts of the case and also in the light of the basic philosophy behind the CSR activates which, in turn, are in line with the directive's principles. India is a welfare country and it is not only the responsibility of the Government to look after the welfare of the people, equal responsibility lies with the corporate in the matter. From the facts of the case, the expenses being claimed by the assessee have been incurred consistently for the last several years in various fields, like education and health etc, which are basically for the welfare of the society and apparently in tune with the CSR objectives.
19. Before introduction of Explanation 2 in section 37(1), there was absolutely no restriction in claiming such expenses as business expenses. It is only after the amendment from assessment year 2015-16, no deduction is allowable in view of Explanation -2. Since none of the exception clauses of Section 37(1) are applicable to the facts of the case, the claim of the assessee is wholly justified and allowable as deduction u/s.37(1) of the Act.
20. It is worth noting that detailed guidelines on CSR for PSUs of March 2010, encompasses all aspects relating to CSR activities including concept, planning, implementation, funding, monitoring etc. In view of such detailed guidelines, it was incumbent on the assessee to incur expenditure in CSR P a g e 10 | 15 ITA Nos.77 & 78/RAN/2022 Assessment Years: 2011-12 & 2012-13 which the assessee has duly obeyed. Apparently, these expenses are incurred for commercial expediency. Assessee was duty bound to comply with these guidelines.
21. In this regard, it may also be mentioned here that this Bench itself vide Virtual hearing at Kolkata in assessee's own case in ITA No.232/RAN/2017 for A.Y. 2013-14 and ITA No.267/RAN/2017 for A.Y. 2014-15 order dated 22.2.2023 and 23.11.2022, respectively has allowed similar claim of the assessee. Relevant concluding portion of the order in A.Y. 2014-15 is reproduced as below:
"7. We have heard the rival submission and gone through the facts and circumstances of the case. we note that the AO after taking note that the assessee had debited under the head CSR an amount of Rs. 2,02,04,000/- and ask the assessee as to why the amount should not be disallowed because according to him this expenditure is not wholly and exclusively for the purpose of the assessee's business. Pursuant to this query of the AO, the assessee explained that payments under the of CSR were made like building classrooms or toilets installing LED lights or planting trees in MECON Colony and the expenditure was part of the CSR expenditure as envisaged u/s 135 of the Companies Act. However, the AO did not agree to the claim of the expenditure and disallowed the same. On appeal, the ld. CIT(A) also concurred with the AO, we note that genuineness of the expenditure made by the assessee on account of CSR which is mandatory as per section 135 of the Companies Act, 2013 was not doubted by the AO as well as ld. CIT(A). However, the claim was disallowed only on the ground that the expenditure is not wholly and exclusively incurred for the purpose of the business expenditure. The ld. AR drew our attention to the coordinate bench decision in ACIT vs Jindal Power Ltd. (ITAT Raipur) in ITA No. 99/BLPR/2012 for A.Y. 2008-09 dated 23.06.2016 wherein on similar facts and law, the Tribunal while allowing the expenditure under CSR held as under:
"ii) The concept of business is not static. It has evolved over a period of time to include within its fold the concrete P a g e 11 | 15 ITA Nos.77 & 78/RAN/2022 Assessment Years: 2011-12 & 2012-13 expression of care and concern for the society at large and the locality in which business is located in particular. Being a good corporate citizen brings goodwill of the local community as also with the regulatory agencies and society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill (CIT v.
Madras Refineries Ltd. [2004]266 ITR 170, Sri Venkata Satyanarayna Rice Mill Contractors Co. v. CIT [1997] 223 ITR 101, Hindustan Petroleum Corporation Ltd Vs DCIT [(2005) 96 ITO 186 (Bom)]
(iv) The amendment in the scheme of Section 37(1), which has been introduced with effect from 1st April 2015, cannot be construed as to disadvantage to the assessee in the period prior to this amendment. This disabling provision, as set out in Explanation 2 to Section 37(1), refers only to such corporate social responsibility expenses as under Section 135 of the Companies Act, 2013, and, as such, it cannot have any application for the period not covered by this 'statutory provision which itself came into existence in 2013. Explanation 2 to Section 37(1) is, therefore, inherently incapable of retrospective application any further. In any event, as held by Hon'ble Supreme Court's five judge constitutional bench's landmark judgment, in the case of CIT Vs Vatika Townships Pvt Ltd [(2014) 367 ITR 466 (SC)], the legal position in this regard has been very succinctly summed up by observing that "Of the various rules guiding how legislation has to be interpreted, one established rule is that unless a contrary intention appears, legislation is presumed not to be intended to have a retrospective operation. The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of today and in force and not tomorrow's backward adjustment of it. Our belief in the nature of the law is founded on the bed rock that every human being is entitled to arrange his affairs by rely on the existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit: law looks forward not backward .
(iv) It may appear to be some kind of a dichotomy in the tax legislation but the well settled legal position is that when a legislation confers a benefit on the taxpayer by relaxing the rigour of pre-amendment law, and when such a benefit appears to have been the objective pursued by the legislature, P a g e 12 | 15 ITA Nos.77 & 78/RAN/2022 Assessment Years: 2011-12 & 2012-13 it would a purposive interpretation giving it a retrospective effect but when a tax legislation imposes a liability or a burden, the effect of such a legislative provision can only be prospective. We have also noted that the amendment in the scheme of Section 37(1) is not specifically stated to be retrospective and the said Explanation is inserted only with effect from 1st April 2015. In this view of the matter also, there is no reason to hold this provision to be retrospective in application. As a matter of fact, the amendment in law, which was accompanied by the statutory requirement with regard to discharging the corporate social responsibility, is a disabling provision which puts an additional tax burden on the assessee in the sense that the expenses that the assessee is required to incur, under a statutory obligation, in the course of his business are not allowed deduction in the computation of income. This disallowance is restricted to the expenses incurred by the assessee under a statutory obligation under section 135 of Companies Act 2013, and there is thus now a line of demarcation between the expenses incurred by the assessee on discharging corporate social responsibility under such a statutory obligation, and under a voluntary assumption of responsibility. As for the former, the disallowance under Explanation 2 to Section 37(1) comes into play, but, as for latter, there is no such disabling provision as long as the expenses, even in discharge of corporate social responsibility on voluntary basis, can be said to be "wholly and exclusively for the purposes of business". There is no dispute that the expenses in question are not incurred under the aforesaid statutory obligation. For this reason also, as also for the basic reason that the Explanation 2 to Section 37(1) comes into play with effect from 1st April 2015, we hold that the disabling provision of Explanation 2 to Section 37(1) does not apply on the facts of this case."
8. Respectfully following the ratio laid by the Coordinate bench of this Tribunal, we note that since the 'CSR' expenditure are mandatory for companies incorporated as per the Companies Act, 2013 and the expenditure have been incurred by the assessee as envisaged under the Companies Act, 2013. So we are of the opinion that it has to be allowed and we take note that the Tribunal in Jindal Power Ltd., (supra), has already held that the introduction of explanation 2 to sec. 37(1) of the Act w.e.f. from 1 st August, 2015 cannot be held to be retrospective in operation. Therefore, the expenditure incurred by assessee on account of 'CSR' as envisaged u/s. 135 of the Companies P a g e 13 | 15 ITA Nos.77 & 78/RAN/2022 Assessment Years: 2011-12 & 2012-13 Act, 2013 need to be allowed as deduction. Therefore, the 'CSR' expenditure which the assessee company was obliged to discharge because it was a statutory obligation upon the assessee company so, the deduction should have been allowed as per the law in force for this assessment year and we direct the AO to allow the expenditure. Therefore, the appeal of assessee is allowed. 9. In the result, the appeal of the assessee is allowed."
22. We also find that the Hon'ble Delhi High Court in the case of PEC Ltd (supra) while deciding the similar issue has held as under:
"S. 37(1) : Business expenditure-Corporate social responsibility expenditure-Expenditure for earlier years allowable as a deduction-CBDT Circular binding on the department.
Dismissing the appeals of the Revenue the Court held that circulars issued by the Central Board of Direct Taxes were binding on the Department. Therefore, the Tribunal had not erred in allowing the deduction claimed by the assessees under section 37 of the expenses incurred for their corporate social responsibility. Explanation 2 was inserted in section 37 of the Income-tax Act, 1961 by the Finance (No. 2) Act, 2014 with effect from April 1, 2015. The Memorandum which was published along with the Finance (No. 2) Bill, 2014 clearly indicated that the amendment would take effect from April 1, 2015 and, accordingly, would apply in relation to the assessment year 2015-16 and subsequent years. This position is also exemplified in the circular dated January 21, 2015 ([2015] 371 ITR (St.)
22) issued by the Central Board of Direct Taxes. (AY.2013-14, 2014-15)."
23. In consonance with the views taken in assessee's own case referred (supra) and also respectfully following the decision of the Hon'ble Delhi High Court in the case of PEC Ltd (supra), we are of the view that the assessee company was obliged to incur CSR and SD expenses in view of specific guidelines of Govt. of India. It is, therefore, held that the expenditure have been incurred during the relevant assessment years 2011-12 and 2012-13, P a g e 14 | 15 ITA Nos.77 & 78/RAN/2022 Assessment Years: 2011-12 & 2012-13 by the assessee wholly and exclusively for the purposes of business of the assessee. Thus, the deduction claimed by the assessee for both the assessment years is allowable. The Assessing Officer is directed to allow the expenditure. Consequently, ground Nos.3 and 4 are allowed.
24. Ground No.5 on the issue of charging of interest u/s.234A and 234B are not pressed.
25. In the result, appeals of the assessee are partly allowed.
Order dictated and pronounced in the open court on 3/07/2024.
Sd/- Sd/- (Partha Sarathi Choudhury) (Prabhash Shankar) JUDICIAL MEMBER ACCOUNTANT MEMBER Ranchi; Dated 03/07/2024 B.K.Parida, SPS (OS) Copy of the Order forwarded to :
1. The Appellant :M/s. Mecon Limited, Doranda, Ranchi
2. The respondent: Asst. Commissioner of Income Tax, Circle-2, Ranchi
3. The CIT(A)- NFAC, Delhi
4. Pr.CIT, Ranchi
5. DR, ITAT,
6. Guard file.
//True Copy// By order Sr.Pvt.secretary ITAT, Ranchi P a g e 15 | 15