Bytedance (India) Technology Pvt. Ltd. vs Income Tax Officer, Assessment Unit, Income Tax Department

“6.2

Disallowance of deduction claimed u/s 80G out of CSR expenditure: On perusal of the financial statement of the assessee and computation of total income, it is observed that the assessee has claimed an amount of Rs.69.00,030/- as deduction u/s 80G out of CSR expenditure of Rs. 1,96,00,059/-In this regard, it may be mentioned that the question that has always been litigated is whether expenditure on CSR activity is eligible for tax deduction under the Income-tax Act. After CSR was made mandatory for prescribed corporates, another facet of the litigation has emerged with reference to donations made as part of CSR obligation. Prior to 2013, some of the voluntary CSR activities took the form of contributions for establishing a medical college, installation of traffic signals, public welfare scheme, establishing drinking water facilities etc. Such activities, when found to be having nexus with the business of the taxpayer and were incurred wholly and exclusively for the purpose of the business, were allowed as a tax deductible expenditure. However, having regard to the fact that CSR expenses have a philanthropic nature and were not necessarily a business expense, the Parliament legislated that CSR expenses would not be eligible for deduction under section 37 of the income-tax Act. For this purpose. Explanation 2 to section 37(1) was inserted vide the Finance (No 2) Act, 2014 (applicable from the assessment year 2015-16), which provided that any expenditure incurred by an assessee on the activities relating to CSR referred to in section 135 of Companies Act 2013, shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession and shall not be allowed as deduction under section 37(1) of the Income-tax Act. The intent of Parliament in bringing the said provision is given in the Explanatory Memorandum to the Finance (No.2) Bill, 2014 and is reproduced as under.

"CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business. As the application of income is not allowed as deduction for the purposes of computing taxable income of a company, amount spent on CSR cannot be allowed as deduction for computing the taxable income of the company. Moreover, the objective of CSR is to share burden of the Government in providing social services by companies having net worth/turnover/profit above a threshold. If such expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure.

The existing provisions of section 37(1) of the Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditures cannot be allowed under the existing provisions of section 37 of the Income-tax Act. Therefore, in order to provide certainty on this issue, it is proposed to clarify that for the purposes of section 37(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 shall not be deemed to have been incurred for the purpose of business and hence shall not be allowed as deduction under section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Act shall be allowed as deduction under those sections subject to fulfillment of conditions, if any, specified therein."

6.2.1

Thus, it is a clear that the CSR expenditure referred to in section 135 of the Companies Act, cannot be claimed as a tax deductible expenditure under section 37(1) of the Income-tax Act. However, CSR expenditure, which is of the nature described under sections 30 to 36 of the Income-tax Act, was allowable as a deduction, say CSR expenditure laid out or expended on Scientific Research related to the business is allowable under section 35(1)(i) and 35(1)(iv), etc. Expenditure on CSR could take many forms. There could be expenditure on projects directly undertaken by companies, such as setting up and running schools, social business projects, etc. Such expenditure would include expenditure otherwise falling for consideration under section 37(1) of the Income-tax Act. On the other hand, companies, instead of undertaking or participating directly in a project, may choose to give donations to institutions that are engaged in undertaking such projects. While expenditure falling within the ambit of section 37(1) would undoubtedly not qualify, the issue is whether donations, which indirectly help to meet the CSR obligation. The answer is certainly not, in the above perspective. In the above scenario, deduction claimed u/s 80G of Rs.69,00,030/- was proposed to be disallowed in the show cause notice dated 09.09.2022.

6.2.2

In response to the show cause notice, the assessee has furnished a detailed reply on 15.09.2022 on this issue. The same is pursued but found not tenable in view of the above discussions and also reiterate the fact that CSR is a mandatory expenditure and that which has been disallowed cannot be claimed under another section. The intent of Legislation is lost if CSR expenditure were to be allowed as deduction u/s 80G of the Act. Rule 4 of the Companies (Corporate Social Responsibility Policy) Rules, 2014 has listed out mode of spending of CSR Expenditure/activities. Following mode of CSR expenditure are listed out in Rule 4 of the Companies (Corporate Social Responsibility Policy) Rules, 2014:-

(i)

By the Company itself

(ii)

Through a registered trust or a registered society.

(iii)

With collaboration with other companies.

It is also provided in the said rule of 2014, that if such trust or society or company is not established by the company or its holding or subsidiary or associate company, it shall have an established track record of three years in undertaking similar programs or projects.

6.2.3

For the purpose of ready reference, Rule 4 of the Companies (Corporate Social Responsibility Policy) Rules, 2014 is reproduced below:

"4. CSR Activities-

(1)

The CSR activities shall be undertaken by the company, as per its stated CSR Policy, as projects or programs or activities (either new or ongoing), excluding activities undertaken in pursuance of its normal course of business. (2) The Board of a company may decide to undertake its CSR activities approved by the CSR Committee, through

(a)

a company established under Section 8 of the Act or a registered trust or a registered society, established by the company, either singly or alongwith any other company, or

(b)

a company established under Section 8 of the Act or a registered trust or a registered society, established by the Central Government or State Government or any entity established under on Act of Parliament or State legislature:

Provided that if, the Board of a company decides to undertake its CSR activities through a company established under Section 8 of the Act or a registered trust or a registered society, other than those specified in this sub-rule, such company or trust or society shall have an established track record of three years in undertaking similar programs or projects: and the company has specified the projects or programs to be undertaken, the modalities of utilization of funds of such projects and programs and the monitoring and reporting mechanism.

(3)

A company may also collaborate with other companies for undertaking projects or programs or CSR activities in such a manner that the CSR committees of respective companies are in a position to report separately on such projects or programs in accordance with these rules

(4)

Subject to provisions of sub-section (5) of section 135 of the Act, the CSR projects or programs or activities undertaken in India only shall amount to CSR expenditure.

(5)

The CSR projects or programs or activities that benefit only the employees of the company and their families shall not be considered as CSR activities in accordance with section 135 of the Act.

(6)

Companies may build CSR capacities of their own personnel as well as those of their Implementing agencies through Institutions with established track records of at least three financial years but such expenditure shall not exceed five percent of total CSR expenditure of the company in one financial year (7) Contribution of any amount directly or indirectly to any political party under section 182 of the Act. shall not be considered as CSR activity

6.2.4

Further, on January 22, 2021, the Government of India brought into effect the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 ("Rules"). The Rules amended the exiting Companies (Corporate Social Responsibility Policy) Rules, 2014 ("Existing Rules"). The amended Rule 4 states that a Company can undertake CSR activities by itself or through

(a)

a company established under section 8 of the Act, or a registered public trust or a registered society. registered under section 12A and 80 G of the Income Tax Act, 1961 (43 of 1961), established by the company, either singly or along with any other company, or

(b)

a company established under section 8 of the Act or a registered trust or a registered society, established by the Central Government or State Government, or

(c)

any entity established under an Act of Parliament or a State legislature; or

(d)

a company established under section 8 of the Act, or a registered public trust or a registered society, registered under section 12A and 80G of the Income Tax Act, 1961, and having an established track record of at least three years in undertaking similar activities.

Every entity that needs to undertake any CSR activity will have to register itself with the Central Government. These entities would be required to fill the CSR-1 Form electronically with the Registrar of Companies from April 1, 2021.

The amended Rule 4 ensures that it is the responsibility of the board of the company to monitor the implementation of CSR projects in accordance with project timelines and to ensure that the funds are utilized for the approved purpose. The board has been granted the power to make alterations to the projects if deemed necessary, to ensure better implementation with the prescribed time period. The amended Rule 4 places an additional obligation on the Chief Financial Officer of the company. Any funds disbursed for a CSR Project is required to be utilized to the satisfaction of the board in the manner approved by it and shall be certified by the Chief Financial Officer (CFO) or the 'person' in charge of financial management. Engagement of external organizations, international or national for design, evaluation, capacity building and monitoring of CSR projects as well as collaboration with other companies to undertake CSR projects so long as the reporting mechanism remains individualistic, has also been permitted under the said rule.

6.2.5

From the above, it is amply clear that the company may conduct CSR activities through a registered trust or a society or through other options as cited above subject to the conditions laid down in the said Rule 4. Therefore, intent of the Legislation is not that the CSR activities conducted through a registered trust or a registered society, the quantum of expenditure incurred in this regard will be eligible for deduction u/s 80G of the Act. Further, donation is voluntary while the CSR activities may be opted through a registered trust or society, but is mandatory and also subject to monitoring by the assessee company in terms of utilization of fund.

Thus, the above perspective clearly distinguish the normal donation eligible for deduction w/s 80G and CSR activities through a registered trust or registered society.

In view of the above discussions, the assessee's submissions on the issue are found not tenable and hence, the claim of deduction u/s 80G out of CSR expenditure is disallowed.”

“7.3 Ground 3: Disallowance of claim made u/s 80G:

7.3.1

The appellant has submitted that it is covered by sec 135of the companies Act i.e. it is not mandatory for it to incur CSR expenditure and therefore what it has paid as donation to certain entities are eligible for deduction u/s 80G.

7.3.2

However on careful perusal of the assessment order, it is noted that the AO has denied the deduction not merely for the same being incurred for cor compliance of CSR requirement under Companies Act and claimed under sec 80G, but AO has given a clear finding that the entities to which donation are made are having same PAN which indicates that the same are not genuine. Thus the appellant did not bring in any evidence to prove the genuineness of such donation payment and it claim u/s 80G. Therefore, the same is not allowed. Accordingly, this ground of appeal 3 is dismissed.”

“General ground

1.

That Commissioner of Income tax (Appeals) ('CIT(A)') has erred in confirming an addition of INR 69,00,030 made in the assessment order passed under section 143(3) read with section 1448 of the Act by Income Tax Officer, Assessment Unit, Income Tax Department ('AO') which was based on surmises, conjectures, allegations not supported by corroborative evidence and based on assumptions.

Grounds in relation to disallowance of deduction claimed under section 80G amounting to INR 69.00.030

2.

That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in disallowing deduction of INR 69,00,030 claimed by the Appellant on account of donations made under section 80G on the ground that the genuineness of these donation payments has not been proved without appreciating that the same was not the primary ground on which the AO disallowed the donations in the first instance.

3.

That, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) and the Ld. AO erred in not affording the Appellant a fair and proper opportunity of being heard to substantiate and demonstrate the genuineness of the donations. The impugned order is, therefore, vitiated for violation of the principles of natural justice.

4.

That the Appellant's claim of deduction of INR 69,00,030 under section 80G is liable to be allowed as Appellant has fulfilled all the conditions specified in section 80G.

5.

That the Ld. AO has erred in disallowing the claim of deduction under section 80G on the ground that the donations were granted as part of Corporate Social Responsibility (CSR) expenditure without appreciating that the section 135 of Companies Act, 2013 providing for CSR compliances was not even applicable to the Appellant for the subject AY.

6.

Without prejudice to the above, it is submitted that expenditure incurred as CSR is allowable under section 80G if the conditions specified in section 80G are satisfied.

Initiation of penalty proceedings under section 270A of the Act

7.

That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty under section 270A of the Act.”

“7.4

The aforesaid explanatory memorandum categorically expresses the legislative intent and the rationale of disallowance of CSR expenditure referred to in section 135 of the Companies Act, that such expenditure is application of income and not incurred for the purposes of business. We are of considered view that this in itself justifies the grant of deduction u/s 80G. As CSR expenditure is application of income of the assessee under the Income Tax Act, that means it continues to form part of the Total income of the assessee. Section 80G(1) of the Act provides that in computing the total income of an assessee, there shall be deducted, in accordance with the provisions of this section, such sum paid by the assessee in the previous year as a donation. Further, section 80G(2) lists down the sums on which deduction shall be allowed to the assessee. Section 80G falls in Chapter VIA, which comes into play only after the gross total income has been computed by applying the computation provisions under various heads of income, including the Explanation 2 to section 37(1) of the Act. Thus, there is no correlation between suo-moto disallowance in section 37(1) and claim of deduction under section 80G of the Act.

7.5

As with regard to the reasoning that CSR expenditure are not voluntary but mandatory in nature due to penal consequences, we are of considered view that voluntary nature of donation is by nature of fact that it is not on the basis of any reciprocal promise of donee. The CSR expenditures are also without any reciprocal commitment from beneficiary being philanthropic in nature. The Act permits deduction of donations as per Section 80G of the Act, even though, assessee is not gaining any benefit out of any reciprocity from donee. Similar is the case of CSR expenditure. Thus the reasoning of learned Tax Authority, the CSR expenditure is mandatory, does not justify disallowance of these expenditures u/s 80G, if other conditions of section 80G are fulfilled. There is no allegation of Revenue that other conditions of Section 80G are not fulfilled. We, thus sustain the ground.”