By TIOL News Service

NEW DELHI, FEB 28, 2019: THE ISSUE IS - Whether CSR expenses incurred prior to April 1, 2015 are allowable as amendment vide Explanation 2 by Finance Act, 2014 are prospective in nature. YES IS THE ANSWER.

Facts of the case

THE assessee-company filed its return for the relevant AY. During the course of assessment proceedings, the AO observed that the assessee incurred expenses of certain amount under head 'Corporate Social Responsibilities' and claimed such expenses in return filed. Accordingly, assessee was called upon to justify the claim of such expenses. However, the AO was not satisfied with assessee's explanation and held that expenses claimed by assessee towards CSR cannot be allowed. Thus, the AO made addition. On appeal, the CIT(A) confirmed AO's addition. Hence, the present appeal.

On appeal, the Tribunal held that,

++ apart from arguing for allowability of expenses, assessee raised alternative plea, that these expenses may be allowed u/s 35 AC and 80G. It was observed that, the assessee is a public sector undertaking which was established to promote and develop skill India through cottage and small industries. Thus, in order to promote skill amongst poor class of the society assessee established technical centres at various places and also carved out purposeful technical training programmes through NGOs which were involved in such activities at various places. All these expenses have been incurred voluntarily. Most of these expenses are in the nature of donations which are eligible for exemption u/s 80G and a few are covered u/s 35AC;

++ the plea of the DR is not acceptable that, expenses discharging CSR are outside the ambit of expenses deductible under section 37 (1), by virtue of Explanation 2 inserted by Finance Act (No. 2) 2014. Thus, Explanation 2 has been inserted in section 37(1) w.e.f. 01/04/15 and is prospective in nature. Accordingly, amendment by way of Explanation 2 to section 37(1) cannot be construed as disadvantage to the assessee in the period prior to the amendment. It is a disabling provision, as set out in Explanation 2 to section 37(1), and refers to such CSR expenses u/s 135 of Companies Act, 2013 and as such cannot have application for period not covered by this Statutory Provision which itself came into existence in 2013. In the decision of Supreme Court in case of CIT vs. Vatika Townships Pvt. Ltd., it has been held that, unless the legislation explicitly says that certain provision has a retrospective effect, it cannot govern the activities of the present. Thus, the amendment would not affect the allowability of CSR expenses for the relevant AY. Hence, assessee's appeal is allowed, and as expenses u/s 37(1) are already allowed, the alternate claim raised by assessee u/s 35AC and 80G becomes academic in nature.

(See 2019-TIOL-537-ITAT-DEL)