By TIOL News Service

RAIPUR, JULY 11, 2016: THE issue is: Whether for the expenses incurred by the assessee on discharging CSR under such a statutory obligation, the disallowance under Explanation 2 to Section 37(1) comes into play and under a voluntary assumption of responsibility, the expense incurred can be allowed provided they are wholly and exclusively for the purposes of business”. Yes is the answer.

Facts of the case

The assessee is engaged in the business of generation of thermal power. It had also taken the coal mines on lease from the State Government. The assessee extracts coal from the mines with the process used in the extraction of coal mines in open cast coal lines. During assessment, AO noticed that the assessee had claimed deduction on account of ‘mine development expenses’. It was also noticed that this expense represents expenses on removal of overburden to mine the coal om mines. It was explained by the assessee that “the coal is found under the earth under different seams having soil/stone layer in between” and that “these expenses are revenue in nature because these expenses were made basically to remove the overburden in order to reach the minerals which would be use in the process of generation of power, as a fuel”. The claim of the assessee was that this was a revenue expenditure as no new asset came into existence and the removal of overburden was an ongoing process. It was also explained that while the coal seam was 3-4 meters in depth, the overburden varies from 1 meters to 10 meters, and that, after removal of coal, the excavated area was required to be filled back by removing overburden of new areas. AO, however, rejected these arguments and held the expenses incurred to be capital in nature, and, accordingly, not deductible in computation of business income. On appeal, CIT(A) held that AO disallowed ongoing expenses on overburden removal by treating it as capital in seam present in multiple layers. It was a continuous process even for the same layer. The procedure for extracting coal by removing over burden in open cast mine was similar to what has been adopted by the subsidiaries of Coal India Limited and other coal mines.

Disallowance of Corporate Social Responsibility (CSR) Expenses

During assessment, AO noticed that the assessee claimed a deduction on account of expenses incurred on discharging CSR. In response to the questions of AO, assessee explained that this expenditure mainly related to expenses incurred on construction of school building, devasthan/ temple, drainage, barbed wire fencing, educational schemes and distributions of clothes etc voluntarily. In this background, and without much of a discussion on the factual aspects, AO disallowed the claim of deduction by observing that no material has been placed to substantiate the claim that the entire expenses of Rs.732.98 lakhs was incurred on purposes shown in the written reply. Particular of villages and communities where such development activities were carried out and nature of each and every activity with the quantum of expenditure incurred thereon also has not been furnished. No material whatsoever has been placed in support of existence of such facts. It was mentioned here that the South Eastern Coalfields Limited deals with the mining and extraction of coal only whereas assessee mines the coal as well as produces the power. Similar nature of claims had been made by South Eastern Coalfields Limited, the Government controlled company and disallowed for last several years by the department and confirmed by ITAT Bench, Patna vide their order in the case of Central Coalfields Ltd., Ranchi for the A. Yr. 1983-84 to 1986-87 dated 18/10/2000 had upheld the order of CIT(A), who had upheld the total disallowance made by the AO for those years on similar issue considering the expenses were in the nature of charity and though laudable, they could not be said to have been incurred for the purpose of business. Thus, the AO disallowed the amont incurred for CSR and added back to the income returned. Penalty proceedings u/s. 271(1)(c) were also initiated for furnishing inaccurate particulars as responsibility is voluntary and not mandatory and not for business purposes.

On appeal, CIT(A) observed that the CSR policy of the assessee includes adoption of more than 42 villages for overall up-gradation, 10+2 co-educational O.P. Jindal School, O.P. Jindal Institute of Technology having state-of-the-art infrastructure, spread over 25 acres and AICTE affiliated, O.P. Jindal Institute of Power Technology - CEA affiliated, diploma courses to be started from September 2008. Other initiatives include adoption of various government run ITIs in Chhattisgarh, Multi-specialty O.P. Jindal Hospital & Research Centre. The expenses incurred on water supply for perennial availability of portable water, roads and culverts, toilets and others, water tanks, other community works, temple renovation, school building renovation etc. in the villages for up-gradation are part of implementation of CSR policies of the company. The expenses were made for the welfare of the employees as well. Similar expenses on community development and welfare of employees were allowed as admissible expenses by the ITAT Nagpur Bench, Nagpur in various cases. Similarly, construction of roads and culverts for providing easier access for its workman and movement of goods are admissible expenditure u/s 37. The expenditure under the above heads incurred by assessee as a good corporate citizen and as measure of gaining goodwill of the people living in and around its industries through the aforesaid activities were admissible expenditures as held in CIT Vs. Refineries Ltd. (2004) 266 ITR 170 (Mad.) and other judicial pronouncement.

However, as per CIT(A) the financial assistance claimed to have been given to villagers and various samities amounting to Rs.12,40,809/- include expenses on purchase of lac for cultivation program, financial assistance to O.P. Jindal Samaj Kalyan Samiti, pooja expenses and such expenses were neither substantiated with proper evidences nor have any nexus with the CSR policies of the appellant company. Thus, CIT(A) gave a partial relief on this count.

Having heard the matter, the Tribunal held that,

Expense incurred on overburden removal

++ in the case of Northern Coalfield Ltd Vs ACIT [(2015) 69 SOT 637 (Jab)]. The issue before us is squarely covered, in favour of the assessee, by this judicial precedent as well, even though DR dutifully relied upon the stand of AO. There are, of course, certain dissimilarities in the case before us vis-à-vis the facts of the above case, inasmuch as overburden in the present case is stated to be much less, at 1- 10 meters, as against 30-120 meters in the case of illustration reproduced above, but then the coal seam being much closer to the earth surface does not at all improve the case of AO. The fact that, under lease agreement with the Government of Chattisgarh, the assessee has to return the land in a habitable stage, shows that removal of overburden is a part of the process in as much as what is removed is to be filled back and then plantations are to be done. The overburden removal is a continuous process even as the coal extraction is on and there is removal of overburden from between the coal seams as well. It is not a onetime process that the removal of overburden takes the assessee to a stage where the coal can be extracted without any further activities to be carried out so far as overburden removal is concerned. The mechanism of open cast mining, on the first principles, is such that removal of overburden is a continuous process. For these reasons also, removal of overburden cannot seen in an isolated manner as a capital expenditure. Ironically, even as the case involves substantial tax revenue, the manner in which the authorities below have dealt with the matter, as would be evident from extracts reproduced earlier, is somewhat superficial and leaves a lot to be desired. The authorities below have not even set out, or dealt with, break up or the exact nature of expenses or the complete details of nature of work carried out under, what is termed as, mine development. Be that as it may, under the scheme of the Act, it is not for this Tribunal to supplement the work of AO or to go the areas which he has left untouched. Given this legal position, the views of the coordinate bench are equally applicable on the facts before us as well. We, therefore, see no reasons to take any other view of the matter than the view taken by the coordinate bench in the case of Northern Coalfield Ltd. Similar are the conclusions arrived at by another coordinate bench in the case of Western Coalfield Limited. Revenue’s grievance that the CIT(A) ought not to have followed the decision of the coordinate bench as the said decision was under challenge before HC is devoid of any merits as a mere challenge to binding judicial precedent does not affect its binding nature unless, of course, the challenge is successful and the judicial precedent is overturned or reversed. That’s not the case before us. In view of the above discussions, in our considered view, CIT(A) was quite correct in following the binding judicial precedents by way of decisions of this Tribunal, and thus deleting the impugned disallowance. We approve and confirm his action, and decline to interfere in the matter;

Disallowance of Corporate Social Responsibility (CSR) Expenses

++ we have noted that fundamental objection of AO is that the expenses is voluntary, not mandatory and not for business purposes. As for the contention that the expenses being in the nature of voluntary expenses, which are not mandatory, and which the assessee was not statutorily required to incur, are not admissible deduction in computation of business income, we are of the considered view that as long as 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. In other words, it is not necessary that every expense that could be allowed as a deduction should be such as a hardnosed, and perhaps devoid of senses of compassion, businessman alone would incur in furtherance of his business pursuits. We find guidance from a passage from the judgment of House of Lords in the case of Atherton vs. British Insulated & Helsbey Cables Ltd. (1925) 10 Tax Cases 155 (HL), referred to with approval by the SC in the case of CIT vs. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC), which reads as follows: "It was made clear in the above cited cases of Usher’s Wilshire Brewery vs. Bruce (supra) and Smith vs. Incorporated Council of Law Reporting (1914) 6 Tax Cases 477 that a sum of money expended not with a necessity and with a view to direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order to indirectly facilitate, carrying on of business may yet be expended wholly and exclusively for the purpose of the trade; and it appears to me that the findings of the CIT in the present case, bring the payment in question within that description. They found that payment was made for the sound commercial purpose of enabling the company to retain the existing and future members of staff and for increasing the efficiency of the staff; and after referring to the contention of the Crown that the sum of Sterling Pound 31,784 was not money wholly and exclusively laid out for the purpose of the trade under the rule above referred to, they found deduction was admissible-thus in effect, though not in terms, negativing the Crowns contentions. I think that there was ample material to support the findings of the CIT, and accordingly hold that this prohibition does not apply." It will, therefore, be clear that even if an expense is incurred voluntarily, it may still be construed as 'wholly and exclusively’;

++ 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 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”, the expenses incurred in discharging corporate social responsibility are not deductible in computation of business income. DR 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 u/s 37(1). 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 into existence in 2013. Explanation 2 to Section 37(1) is, therefore, inherently incapable of retrospective application any further;

++ as held by SC's five judge constitutional bench's landmark judgment, in the case of CIT Vs Vatika Townships Pvt Ltd 2014-TIOL-78-SC-IT-CB, 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 bed rock 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. 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 between the expenses incurred by the assessee on discharging CSR 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 CSR 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. In the result, the appeal is dismissed.

(See 2016-TIOL-1231-ITAT-RAIPUR)