Income Tax Appellate Tribunal - Delhi
Dcit, New Delhi vs M/S. National Seeds Corporation Ltd., ... on 4 April, 2018
INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "E": NEW DELHI
BEFORE SHRI G.D. AGRAWAL, HON'BLE PRESIDEN
AND
SHRI KUL BHARAT, JUDICIAL MEMBER
ITA No.:-6794/Del/2014
Assessment Year: 2011-12
National Seeds Corporation Ltd. Addl. CIT,
Beej Bhawan, CTO Building, Range-13,
Pusa Complex, Vs. New Delhi.
New Delhi - 110 012
PAN AABCN8973F
(Appellant) (Respondent)
ITA No. 6970/DEL/2014
Assessment Year : 2011-12
DCIT Vs. National Seeds Corporation Ltd.
Circle-17(2) Beej Bhawan, CTO Building,
New Delhi. Pusa Complex,
New Delhi - 110 012.
PAN AABCN8973F
Assessee by: Shri Vidur Puri, CA
Department by : Shri S.R. Senapati, Sr. DR
Date of Hearing 02/04/2018
Date of
pronouncement
ORDER
PER BENCH These two cross appeals by the assessee and revenue are directed against the order of Ld. CIT(A) XVI New Delhi dated 22nd September, 2014 pertaining to the assessment year 2011-12. Both these appeals are being disposed of together by this common order for the sake of convenience. First we take up assessee's appeal in ITA No. 6794/Del/2014 assessee has raised following grounds :-
1.(a) The learned CIT(A) erred in law and on facts in upholding the disallowance of business expenses of Rs.
59,21,197 as Corporate Social Responsibility (CSR) expenses.
(b)The learned CIT(A) erred in law in his finding that explanation 2 inserted in section 37 by the Finance Act 2014(2) is clarificatory in nature.
2. The learned CIT(A) erred in law and on facts in not disposing off ground No. 1,2 on learned assessing officer's erroneous observations that -
a) The objective behind these guidelines issued by Department of Public Enterprises can be met by the company by spending certain amount out of its surplus profit after tax and it need not to claim these expenses in the books of account as expenditure before determining taxable profit.
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b) The CSR expenditure was meant to be a below the line expenditure."
The Appellant craves to leave, add, amend, modify, delete and / or change all or any of the grounds on/or before the date of hearing."
2. The only effective ground in assessee's appeal is against confirming the disallowance of expenses of Rs. 59,21,197/- as Corporate Social Responsibility expenses. Briefly stated the facts are that case of the assessee was picked up for assessment u/s 143(3) of the Income Tax Act 1961 ( hereinafter refer to as the Act) which was framed vide order dated 31st January, 2014. While framing the assessment the AO disallowed the claim of expenses of Rs. 59,21,197/- incurred in respect of expenses toward corporate social responsibility. Further the AO while invoking the provision of section 14A made disallowance of Rs. 45,41,046/- and also made disallowances of other expenditure related to disallowance on account of default, on account of short deduction of tax, depreciation on UPS and other computer peripherals.
3. Aggrieved against this order the assessee preferred an appeal before the Ld. CIT(A) who after considering the submissions affirmed the disallowance of expenditure claimed under CSR. However in respect of the expenditure disallowed by invoking the provision of 3 section 14A Ld. CIT(A) affirmed the entire addition in respect of the administrative expenses. However, Ld. CIT(A) deleted the addition in respect of the disallowance of interest expenditure and however sustained the addition in respect of disallowance on account of administrative expenses. Against this both the assessee and revenue are in appeal.
4. Ld. Counsel for the assessee submitted that under the identical facts the Tribunal had deleted the addition by holding that the expenses to section 37 (1) was inserted w.e.f. 1st April, 2015 and cannot be construed as to disadvantage to the assessee in the period prior to this amendment.
5. Ld. DR opposed these submissions.
6. We have heard the rival submissions and perused the material on record. There is no dispute with regard to the fact that both the parties have disallowed the expenditure treating the same as incurred under the CSR scheme and applied the Explanation 2 to Section 37(1). Ld. CIT(A) had decided this issue by holding as under :-
"4.1 I have carefully considered the submissions of the A/R of the appellant company, the facts of the case as well as the findings of the AO. In ground Nos. 1.1 & 1.2 of appeal the plea of the appellant is that AO has erred disallowing the Corporate Social Responsibility (CSR for short) expenses 4 of Rs. 59,21,197/-. The assessee company is a Government of India undertaking in cooperative sector and is engaged in the business of production, certification, quality control, processing, handling, packaging, sales training and consultancy of seeds and is assigned to plan and promote programmes of cooperative development in agricultural and allied activities through cooperative societies. The appellant has claimed expenditures of Rs. 59,21,197/- on Corporate Social Responsibility (CSR) Expenses. The appellant submitted that the assessee company's 100% shareholding is held by Central Government of India. The Department of Public Enterprises had issued the guidelines on Corporate Social Responsibility for Central public Sector Enterprises and the assessee has incurred expenses which fall under ambit of Corporate Social Responsibility guidelines. It was submitted that the expenses were incurred to carry out the following CSR activity-
a. Facilitating soil testing for NSC's growers b. Organization of free veterinary health checkups particularly in the seed villages c. Distribution of Metallic Bins for safe storage of seeds saved by farmers 5 d. Undertaking water management /conservation / harvesting measures in the seed villages e. Organizing de-addition programmes, organizing blood donation caps, health/AIDS/HIV awareness campaign etc. f. Participation in prison reform programmes through supply of free seeds and planting material including technical advice and guidance to jail authorities g. Organizing tree plantation so as to contribute to 'Cleaner Environment'.
h. Organizing training programmes for farmers/seed growers on crop production/seed production in particular i. Distribution of solar lamps/hand/foot sprayer and J. Distribution of tarpaulins/silpaulines to farmers/seed growers in rural areas It is seen that the above expenditures are incurred as per guidelines issued by Department of Public Enterprises. Therefore, the expenditures are not mandatory in nature. Further, no commercial expediency has been established by 6 the assessee in connection with the expenditures incurred on account of the Corporate Social Responsibility. Under the provisions of sec 37(1) only the expenditures which are laid out or expended wholly or exclusively for the purpose of the business of the assessee are allowable. The above requirement u/s 37(1) is not fulfilled in respect of the above expenditures incurred on the basis of guidelines issued by Department of Public Enterprises (DPE). All the decisions relied upon by the AR of the appellant deals with instances where expenditure have been incurred specifically based on the' principle of commercial expediency. In respect of expenditures of the nature of Corporate Social Responsibility there are existing provisions under the IT Act such as section 35AC and section 80G which provides for allowbility of such expenditures subject to fulfillment of conditions therein. Therefore, if the assessee incurs certain expenditures under the head Corporate Social Responsibility the same can be claimed as per the provisions enshrined in sec 35AC or section 80G. Further Explanation 2 inserted by the amendment in the Finance Act 2014 (2) in section 37 of the income Tax Act says:
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"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. ".
Although the above explanation was inserted by the Finance Act, 2014 the above explanation being clarificatory in nature, therefore, it is clear that intention of Legislature was never to treat these CSR expenditure as expenditure incurred by the assessee for the purposes of the business or profession. In view of the above, the disallowance made by the AO is fully justified. As such the same is sustained. The appeal fails in this ground. "
7. Further the coordinate bench of this Tribunal in the case of ACIT vs. Jindal Power Ltd. (2016) 70 taxmann.com 389 (Raipur Tribunal) has held as under :-
"18. We have also take note of the fact that in view of insertion of Explanation 2 to Section 37(1), with effect from 1st April 2015, which provides that "for the removal of doubts, it is hereby 8 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 of2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession", the expenses incurred in discharging corporate social responsibility are not deductible in computation of business income. Learned Departmental Representative submits that this amendment should be treated as clarificatory in nature, as it is stated to be in so many words, and we should, therefore, hold that the expenses in discharging corporate social responsibility were outside the ambit of expenses deductible under section 37(1).
19. We are unable to see legally sustainable merits in this plea either. 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 9 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 v. Vatika Townships Pvt. Ltd (2014) 367 ITR 466/227 Taxman 121/49 taxmann.com 249 (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 bedrock that every human being is entitled to arrange his affairs by relying 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. As was observed in Phillips v. Eyre [, a retrospective legislation is contrary to the general principle that legislation by which the conduct of mankind is to be regulated when introduced for the first time to deal with future acts ought not to change the 10 character of past transactions carried on upon the faith of the then existing 'taw." 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, it would be 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 11 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. The revenue has not brought to our notice any other binding precedents by jurisdictional High Court or any other Hon'ble High Courts. Therefore taking a consistent view we hereby direct the AO to delete the disallowance. Ground raised in this appeal is allowed.
9. Now we take up the revenue's appeal. Revenue has raised following grounds of appeal :-
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"(i) Whether on the facts & in the circumstances of the case & in law, the Ld. CIT(A) is justified in restricting the disallowance of expenses u/s 14A of Rs. 45,41,046/- to Rs. 4,43,533/-.
(ii) That the order of the CIT(Appeals) is erroneous and is not tenable in law and on facts.
(iii) The appellant craves leave to add, alter, amend or forego any ground(s) of the appeal raised above at the time of the hearing."
10. Only effective ground in revenue's appeal is in restricting the disallowance of expenses u/s 14A from Rs. 45,41,046/- to Rs. 4,43,533/-. Ld. DR vehemently argued that the Ld. CIT(A) was not justified in deleing the disallowance. He submitted that the issue with regard to the disallowance u/s 14A has been decided by the Hon'ble Apex Court in favour of the revenue in the cases where the amount of expenditure cannot be divided. The disallowance u/s 14A is justified. On the contrary Ld. AR submitted that the judgment of the Hon'ble Apex Court is not applicable on the facts of the present case and he submitted that the facts are distinguishable.
11. We have heard the rival submissions and perused the material on record. Ld. CIT(A) has decided these issues by giving finding on facts as under :-
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"4.2.1 Ground nos. 2.1 to 2.3 of appeal are directed against disallowance of Rs. 45,41,046/- made by the AO U/S 14A. The assessee has invested in shares of State Seeds Corporation (SSC) of Rs. 8,87,06,500/- during the year 1970 to 2003 and earned dividend income of Rs. 58,44,900/- during the previous year relevant to A.Y. 2011-12. The above dividend income was claimed exempt. Appellant submitted that the year wise detail of share capital received from Government of India and investment made in the shares of SSC are as under:-
Year Shares issued to GOI in Rs. Investment in SSC in Rs.
1970 32,00,000 10,00,000 1971 0 500 1976 1,20,00,000 200 1977 40,00,000 20,00,200 1978 84,18,000 48,10,600 1979 1,19,78,000 96,95,500 1980 37,53,600 42,25,500 1981 34,00,000 81,24,000 1982 1,45,00,000 18,75,000 1983 2,25,00,000 1,70,14,000 1984 2,94,99,400 70,80,000 1985 36,00,000 66,99,000 1986 1,05,50,000 11,54,000 14 1987 1,21,14,000 1,57,82,000 1992 4,46,87,000 15,94,000 1993 0 52,80,000 1997 61,93,000 (12,50,000)* 2003 0 36,22,000 Total 19,03,93,000 8,87,06,500 • Redemption of preference shares by UPSTDC
Further, no deduction was made by the appellant U/S 14A in respect of the expenditure incurred in relation to exempt income. The appellant submitted that during the year no investment was made in the shares by the assessee. The investments in shares of SSC were made in the earlier years and the funds were provided by the Government of India by way of further investment in share capital in Assessee Company. The assessee has not incurred any interest for investment in shares. The last investment in shares was made in the year 2003 and there cannot be nexus between the investment made in shares in the years 1970 to 2003 and the interest paid on loans outstanding during the year ended 31st March, 2011. The A. O. was not satisfied with the correctness of the claim of the assessee that no expenditure has been incurred in relation to the exempt income. Therefore, following Rule 8D, the A.D. has disallowed Rs.45,41,046/- u/s 14A of the Act. 15 4.2.2 Section 14A provides that all the expenditure incurred in relation to the exempt income shall be disallowed. Rule 8D clearly provides for disallowance of direct expenditure incurred in relation to the exempt income under clause (i) of sub-rule (2) and indirect expenditure by way of interest of relevant previous year, under clause (ii) of sub rule (2). Further other indirect expenditure of the relevant previous year are to be disallowed as per clause (iii) of sub-rule (2), which is to be determined on the basis of average value of investment from which the exempt income is earned. 4.2.3 Hon 'ble High Court of Bombay in Godrej & Boyce Mfg. Co.
Ltd. v. DCIT [20 I 0] 194Taxrnan 203 (Born) held that as a result of the enactment of section 14A, no expenditure can be allowed as a deduction in relation to income which does not form part of the total income under the Act. Only that part of the expenditure, which is incurred in relation to income which forms part of the total income, can be allowed. The expenditure incurred in relation to income which does not form part of the total income has to be disallowed. The expression 'expenditure incurred' in section 14A refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for. Hon'ble High court further held that sub-sections (2) and (3) of section 14A are intended to enforce and implement the provisions of sub-section 16 (1). The object of sub-section (2) is to provide uniformity of method where the Assessing Officer is, on the basis of the accounts of the assessee, not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the Act. Sub- section (2) of section 14A does not enable the Assessing Officer to apply the method prescribed by rule 8D without determining in the first instance the correctness of the claim of the assessee, having regard to the accounts of the assessee.
4.2.4 Hon'ble High Court of Delhi in Maxopp Investment Ltd. v. CIT [2011] 15 Taxmann.com 390 (Delhi) held that while rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same.
4.2.5 The AO held that the amount of direct expenditure in relation to exempt income is nil under Rule 8D(2)(i). The AO computed the indirect interest expenditure under rule 8D(2)(ii) at Rs. 40,97,513/- . However while computing indirect interest expenditure for disallowance u/s 14A, the AO has not indicated any cogent reason as to how the interest expenditure are indirectly incurred in connection with investment from which the exempt income is 17 earned. From the particulars furnished it is seen that the above investments were made in the period 1970 to 2003 and no investments were made during the relevant period under consideration. The investments were made in earlier years and the funds were provided by the Government of India by way of further investment in share capital in Assessee Company. In view of the above and the appellant's submission that no interest expenditures are incurred for investment in shares, therefore, AO is required to indicate cogent reason on the basis of the accounts that the claim of the appellant is not correct. In the absence of any finding on the basis of accounts that interest expenditures are incurred in relation to exempt income no disallowance of indirect interest expenditure can be made under Rule 8D(2)(ii). In view of the above the indirect interest expenditure of Rs. 40.97 lacs computed by the AO under Rule 8D(2)(ii) for disallowance u/s 14A is not justified.
4.2.6 However, considering the investment in shares of Rs. 8.87 crores and tax exempt income of Rs. 58.44 lacs earned during the year, it is inevitable that some managerial and administrative expenditures are incurred in relation to the exempt income because no income can be earned without incurring some expenditures. When administrative and managerial expenditures 18 are incurred during the year it is inevitable that such administrative and managerial expenses are also incurred to earn exempt income, although such expenditures are not segregated in the accounts and remain clubbed with the overall expenditures. Considering the exempt income, quantum of investment, all such administrative and management expenses attributable to the exempt income are required to be considered for disallowance on the basis of the formula given in cl (iii) of Rule 8D (2) to be applied on the average value of investment from which the exempt income is earned. It is seen that AO has disallowed Rs. 4,43,533/- as per formula given in Rule 8D(2)(iii) being 112% of average value of tax exempt investment. Therefore, no interference is called for in this account. As such, the disallowance made by the AO u/s 14A is reduced from Rs. 45.411acs to Rs. 4,43,533/-. Accordingly, the ground of appeal is partly allowed. "
12. We do not see any reason to disturb the above findings on fact as Ld. CIT(A) has examined the issue in right perspective. The judgment rendered in the case of Maxopp Investments vs. CIT (2011) 15 Taxmann.com 390 (Delhi) is on different set of facts. Here the Ld. CIT(A) has given a clear finding that investments were made in earlier years out of the funds provided by the Govt. Of India. The Revenue 19 has not furnished any material suggesting that the investment was out of borrowed funds. This ground of Revenue's appeal is dismissed.
13. In the result the appeal filed by the assessee is allowed whereas appeal filed by the revenue is dismissed.
This decision was pronounced in the Open Court on 4th April, 2018.
sd/- sd/-
(G.D. AGRAWAL) (KUL BHARAT)
HON'BLE PRESIDENT JUDICIAL MEMBER
Dated: 4th April, 2018
Veena
Copy forwarded to
1. Applicant
2. Respondent
3. CIT
4. CIT (A)
5. DR:ITAT
ASSISTANT REGISTRAR
ITAT, New Delhi
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