Are CSR contributions eligible for tax deduction?

Whether CSR contributions are eligible for tax deduction u/s 80G of the Income tax Act 1961 is a question often asked by companies as also their CSR implementing partners having 80G certificate. Fortunately, in a fairly recent Order dated 28^th November 2023, Income Tax Appellate Tribunal (ITAT) has upheld the allowance of Section 80G deduction on CSR expenses for Rustomjee Realty Private Limited., (Appeal Number: ITA No.1585/Mum/2023 related to Assessment Year 202021). In the Order ITAT referred to several precedents and upheld the tax deduction u/s 80G, stating that the nature of CSR expenses under the Companies Act did not preclude eligibility for Section 80G.

Case History

The Assessing Officer (Income tax) vide order dated 26/09/2022 had held that the CSR amount was not paid by the assessee voluntarily. It was argued that the CSR contribution was made by the assessee as a mandatory requirement as per section 135 of the Companies Act, 2013 and not as a voluntary charitable donation.

The matter went before Commissioner of Income Tax (Appeals) who allowed the ground raised by the assessee that the company was not claiming deduction u/s 37(1) (i.e., deduction on business expenditure) which is specifically disallowed where CSR expenditure is concerned. The assessee was claiming deduction u/s 80G which is not specifically disallowed.

Aggrieved, by the Order of CIT (A), Revenue went in appeal before ITAT.

ITAT’s verdict

ITAT found that the coordinate benches of the Tribunal have consistently taken the view in favour of the taxpayer and held that CSR expenses even though not allowed under section 37 of the Income tax Act pursuant to insertion of Explanation-2 to Section 37 (vide Finance Act, 2014 with effect from 01/04/2015); the said expenditure is allowable under section 80G of the Act.

ITAT found that the learned CIT(A) had also followed these judicial precedents and decided the issue in favour of the assessee.

ITAT observed that the Assessing Officer had disallowed deduction claimed u/s 80G amounting to Rs 5,50,000 by holding that CSR is a mandatory expenditure specified under the Indian Companies Act 2013 whereas deduction claimed u/s 80G of donation is voluntary in nature.

On perusal of the provision of Section 37(1) as well as Section 80G of the Income Tax Act, 1961, ITAT found that there is no specific restriction for companies spending on CSR claiming deduction u/s 80G of the Income Tax Act, 1961.

The following judgments were applicable to the facts of the case:

• Goldman Sachs Services Pvt. Ltd., Vs JCIT IT(TP)A No 2355/Bang/2019.
• Allegis Services (India) (P.) Ltd., Vs Asstt.CIT [IT Appeal No. 1693 (Bang.) of 2019, dated 29-4-2020]
• FNF India (P.) Ltd., Vs. Asstt. CIT [IT Appeal No. 1565 (Bang.) of 2019, dated 5.1.2021]
• JMS Mining (P.) Ltd., Vs. Principal Commissioner of Income Tax Kolkata 2 (2021) 130 com 118 (Kolkata Tribunal)

The Hon’ble ITAT Bangalore Bench decision in case of Goldman Sachs Services Pvt. Ltd., Vs JCIT IT(TP)A No 2355/Bang/2019 while adjudicating on the issue of CSR contributions which were not paid by the appellant on voluntary basis and hence the same not being eligible for deduction u/s 80G of the Act, adjudicated the issue as follows:-

• The assessing officer has rejected the assesses claim without verifying the nature of contributions and observed that it is not a donation, and was not spent voluntarily for the eligibility of claim u/s 80G of the Act but due to legal obligation prescribed u/s 135 read with Schedule VII of Indian companies Act, 2013. We find that the A.O has allowed deduction u/s 80G of the Act in respect of contribution made to PM Relief Fund which is not disputed. We are of the opinion that the A.O. has not made his observations clear that no CSR expenses are eligible for deduction u/s 80G of the IT.

• We consider it appropriate to refer to the Clauses (iiihk) & (iiihl) of sub-section 2 of Section 80G of the Act which are read as under:

“(iiihk) the Swachh Bharat Kost, set up by the Central Government, other than the sum spent by the assessee in pursuance of corporate social responsibility under sub-section (5) of section 135 of the companies Act, 2013 (18 of 2013); or (iiihl) the Clean Ganga Fund, set up the Central Government, where such assessee is a resident and such sum is other than the sum spent by the assesse in pursuance of corporate social responsibility under sub-section (5) of section 135 of the companies Act, 2013) (18 of 2013).”

• Where these two exceptions are provided in section 80G of the Act, it can be inferred that the other contributions made u/s 135(5) of the companies Act are also eligible for deduction u/s 80G of Income Tax Act subject to the assessee satisfying the requisite conditions prescribed for deduction u/s 80G of the Act.

Conclusion:

1. CSR expenditure cannot be claimed as deduction u/s 37(1) of Income tax Act 1961 as business expenditure.
2. However, the company is eligible to claim tax deduction u/s 80G where allowed;
3. Specifically only CSR contributions to Swachh Bharat Kost and Clean Ganga Fund are not eligible for tax deduction and therefore by inference CSR contribution (to CSR implementing agencies having 80G certificate) for other specified CSR activities (as per schedule VII of the Indian Companies Act 2013) deduction u/s 80G can be claimed by companies.