Can CSR Expenditure be claimed as deduction u/s 80G?
We continue to receive a lot of queries from companies and CSR Implementing NGOs whether contributions made under CSR are eligible for deduction u/s 80G of Income tax 1961 or not? In this Blog Post we shall attempt to answer this question in light of the Income Tax Act, the intent of legislature and a relatively recent order of ITAT Bangalore.
The question whether contributions made under CSR are eligible for deduction u/s 80G of Income tax 1961 or not, is compounded further by The Ministry of Corporate Affairs (MCA) General Circular No. 14 /2021, Dated: 25th August 2021. In this circular MCA has answered various Frequently Asked Questions (FAQ).
FAQ 3.11: What tax benefits can be availed under CSR?
MCA’s Answer: No specific tax exemptions have been extended to CSR expenditure. The Finance Act, 2014 also clarifies that expenditure on CSR does not form part of business expenditure.
Position under Income Tax
Finance Act 2014 (2014-15 was fiscal year from which CSR was made mandatory u/s 135 of the Indian Companies Act 2013) had made it clear that “CSR Expenditure” shall not be allowed as “Business Expenditure” under section 37 of Income Tax Act, 1961. However, CSR expenditure which is allowed as deduction under other sections shall be permissible.
The ‘Memorandum to Finance Bill 2014’ had also clarified that this initiative (mandating CSR) is primarily to ensure that companies share the burden of providing social services and granting deduction for CSR expenditure would amount to the Government effectively bearing one third of that expenditure.
This same Memorandum also added that if CSR expenditure is of the nature which is covered by specific deductions contained in Sections 30 to 36, the expenditure by virtue of being governed by a specific provision (of Income tax) shall be granted a deduction if the conditions prescribed are satisfied.
Section 37 and its explanation
Section 37(1) of Income tax Act 1961 states: “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”.
Explanation 2 to Section 37 clarifies: “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.
Recent ITAT Order
Income Tax Appellate Tribunal (ITAT) Bangalore in its Order dated 30th November 2021, in the matter of Sling Media Private Ltd. Vs DCIT (ITAT Bangalore), Appeal Number: ITA. No. 197/Bang/2020 has held that: “assessee cannot be denied the benefit of claim under Chapter VI A, which is considered for computing ‘Total Taxable Income”. If assessee is denied this benefit, merely because such payment forms part of CSR, would lead to double disallowance, which is not the intention of Legislature“.
It is pertinent to note that in this case the assessee had suo moto disallowed the expenditure towards the CSR responsibilities u/s. 37(1) of the Act and claimed deduction u/s. 80G to the extent of donations paid to eligible charitable institutions.
ITAT (Bangalore was of the view that: “expenditure incurred under section 30 to 36 are claimed while computing income under the head, ‘Income form Business and Profession”, whereas monies spent under section 80G are claimed while computing “Total Taxable income” in the hands of assessee. The point of claim under these provisions are different.”
ITAT further added: “intention of legislature is very clear and unambiguous, since expenditure incurred under section 30 to 36 are excluded from Explanation 2 to section 37(1) of the Act, they are specifically excluded in clarification issued. There is no restriction on an expenditure being claimed under above sections to be exempt, as long as it satisfies necessary conditions under section 30 to 36 of the Act, for computing income under the head, “Income from Business and Profession”.
“For claiming benefit under section 80G, deductions are considered at the stage of computing “Total taxable income”. Even if any payments under section 80G forms part of CSR payments, keeping in mind ineligible deduction expressly provided, the same would already stand excluded while computing, Income under the head, “Income form Business and Profession”. The effect of such disallowance would lead to increase in Business income. Thereafter benefit accruing to assessee under Chapter VIA for computing “Total Taxable Income” cannot be denied to assessee, subject to fulfilment of necessary conditions therein.”
In light of the above ITAT (Bangalore) took the view that: “assessee cannot be denied the benefit of claim under Chapter VI A, which is considered for computing ‘Total Taxable Income”. If assessee is denied this benefit, merely because such payment forms part of CSR, would lead to double disallowance, which is not the intention of Legislature.”
Therefore ITAT (Bangalore held: “On the basis of above discussion, in our view, authorities below have erred in denying claim of assessee under section 80G of the Act.”
Noshir H. Dadrawala