Tax tribunals in Delhi and Mumbai allow deductions for CSR donation
New Delhi, June 11, 2024
Tax authorities had earlier argued that since CSR expenditures were mandated by law, they were not voluntary and therefore, did not qualify as donations for tax deductions
Income Tax Appellate Tribunal (ITAT) benches in Delhi and Mumbai recently ruled in favour of allowing tax deductions under Section 80G of the Income Tax Act for corporate donations made as part of companies’ corporate social responsibility (CSR) expenses, according to a report in the Times of India.
This decision marks a change from previous decisions to not recognise such deductions.
Background on case
According to a report by CSR Journal, the ruling was prompted by a case involving a company in the aluminium composite panel sheet industry. The company sought deductions for CSR-related donations under Section 80G in its tax return, but tax authorities denied these claims.
The authorities argued that CSR expenditures mandated by law were not voluntary and thus did not qualify as donations for tax deductions. The initial appeal to the first appellate authority upheld the tax authorities' stance.
The company went to ITAT, where Judicial Member Kavitha Rajagopal and Accountant Member Om Prakash Kant overturned the previous decision. The tribunal highlighted a 2015 amendment to Section 80G, which explicitly excluded certain CSR donations (such as those to the Swachh Bharat Kosh and Clean Ganga Fund) from deductions. This, the tribunal argued, implied that other CSR-related expenses could still qualify for deductions under Section 80G.
The journal’s report observed that tribunals were beginning to increasingly allow tax deductions under section 80G as there is no embargo under this section to disallow the expenditure. Additionally, recognising CSR-related donations for tax deductions incentivises companies to engage in more initiatives and not treat them as mere legal obligations.
What rules must companies follow under CSR?
The ITAT's ruling has broader implications for corporate entities and their approach to CSR. Under Section 135 of the Companies Act, companies with a net worth of Rs 500 crore or more, a turnover of Rs 1,000 crore or more, or a net profit of Rs 5 crore or more must spend at least 2 per cent their average net profit from the previous three years on CSR activities. The tribunal's decision reinforces the notion that CSR should not merely be seen as a compliance obligation but as an opportunity for corporations to actively contribute to social development.
[The Business Standard]
