Section 37, Explanation 2 to section 37 – Voluntary expenses incurred, prior to 1.4.2015, on corporate social responsibility are deductible. Explanation 2 to section 37(1) inserted with effect from 1.4.2015 providing that expenditure incurred on corporate social responsibility referred to in Companies Act, 2013 shall not be deemed to be an expenditure incurred for purpose of business or profession does not have retrospective effect.
FACTS
The assessee had in its return of income claimed a sum of Rs. 24,45,435 on account of expenses incurred on discharging corporate social responsibility. This expenditure mainly related to expenses incurred on construction of school building, devasthan / temple, drainage, barbed wire fencing, educational schemes and distribution of clothes, etc voluntarily. The Assessing Officer (AO) disallowed this expenditure on the ground that it was incurred voluntarily, and was not for business purpose.
Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the appeal filed by the assessee.
Aggrieved, the revenue preferred an appeal to the Tribunal.
HELD
As regards the contention of the AO that the expenditure is voluntary and not mandatory, the Tribunal held that as long as the expenses are incurred wholly and exclusively for the purposes of earning the income from business or profession, merely because some of these expenses are incurred voluntarily, i.e. without there being any legal or contractual obligation to incur the same, those expenses do not cease to be deductible in nature.
As regards the contention on behalf of the revenue that the provisions of Explanation 2 to Section 37(1) be regarded as clarificatary in nature, the Tribunal held that the Explanation refers only to such corporate social responsibility expenses which fall 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) was held to be inherently incapable of retrospective application any further. The Tribunal 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 1.4.2015 and in this view of the matter also, there is no reason to hold this provision to be retrospective in application.
The Tribunal observed that 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 as deduction in computation of income. This disallowance is restricted to the expenses incurred by the assessee under a statutory obligation under section 135 of the 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”. The Tribunal observed that there is no dispute that the expenses in question are not incurred under the aforesaid statutory obligation. For this reason also, as also the basic reason that the Explanation 2 to section 37(1) comes into play with effect from 1st April, 2015, the Tribunal held that the disabling provision of Explanation 2 to section 37(1) does not apply to the facts of the case.
This ground of appeal of the revenue was dismissed.
