Are CSR Contributions Eligible for Tax Deduction?

Author: CS Pradeep Kumar Parakh 

Executive Summary

The question of whether Corporate Social Responsibility (CSR) contributions qualify for tax deductions under Section 80G of the Income Tax Act, 1961, has been a point of considerable debate among corporations and their CSR implementing partners. Specifically, many ask whether companies that undertake CSR activities as mandated by the Companies Act, 2013, can claim deductions under Section 80G if those contributions are made to institutions or projects with 80G certification.

This issue was addressed recently in a significant ruling by the Income Tax Appellate Tribunal (ITAT) in its order dated November 28, 2023. In the case of Rustomjee Realty Private Limited (Appeal Number: ITA No.1585/Mum/2023, Assessment Year 2020-21), the ITAT upheld the company's right to claim a deduction under Section 80G for its CSR expenses. The ruling clarified that CSR expenditures, while mandatory under the Companies Act, are not excluded from eligibility for Section 80G deductions unless they fall under specific exclusions, such as contributions to the Swachh Bharat Kosh or Clean Ganga Fund.

Understanding CSR Obligations Under Indian Law

To understand the broader implications of this ruling, it is crucial to grasp the legal framework surrounding CSR in India. Under Section 135 of the Companies Act, 2013, companies meeting specific financial thresholds are obligated to spend at least 2% of their average net profits over the last three years on CSR activities. Schedule VII of the Act lists the activities that qualify as CSR, including areas like education, healthcare, and environmental sustainability.

However, while CSR is mandatory for certain companies, its treatment under income tax law has been less clear. According to Explanation 2 to Section 37(1), introduced via the Finance Act, 2014, CSR expenditures cannot be claimed as deductions under Section 37 of the Income Tax Act, which deals with general business expenses. This was intended to prevent companies from reducing their taxable income by categorizing CSR spending as a business expense.

But this restriction applies only to Section 37(1). CSR contributions may still be eligible for deductions under other sections of the Income Tax Act, including Section 80G, which deals with charitable donations.

The Legal Contention

In the case of Rustomjee Realty, the Assessing Officer initially denied the company’s claim for a deduction under Section 80G, asserting that CSR contributions were not voluntary donations but were instead made to fulfill a statutory obligation under Section 135 of the Companies Act. According to the officer, only voluntary donations qualified for deductions under Section 80G.

However, the company argued that the provisions of Section 80G do not explicitly exclude CSR expenses from being eligible for deductions, except for specific exclusions mentioned in sub-sections related to the Swachh Bharat Kosh and Clean Ganga Fund. The company further pointed out that it was not seeking a deduction under Section 37(1), which explicitly disallows CSR-related deductions, but under Section 80G, which is not subject to the same restrictions.

When the case was brought before the **Commissioner of Income Tax (Appeals)** [CIT(A)], the CIT(A) ruled in favour of the company, affirming that the deduction under Section 80G was valid. Dissatisfied with this decision, the Revenue appealed to the ITAT.

ITAT's Verdict

The ITAT upheld the CIT(A)’s ruling, finding that the CSR expenses in question were eligible for a deduction under Section 80G. The Tribunal pointed to several earlier decisions that supported this conclusion, including:

1. Goldman Sachs Services Pvt. Ltd. vs JCIT (IT(TP)A No. 2355/Bang/2019)

2. Allegis Services (India) Pvt. Ltd. vs Asstt. CIT (IT Appeal No. 1693 (Bang.) of 2019)

3. FNF India Pvt. Ltd. vs Asstt. CIT (IT Appeal No. 1565 (Bang.) of 2019)

4. JMS Mining Pvt. Ltd. vs Principal CIT Kolkata (2021)

In the Goldman Sachs case, for instance, the Assessing Officer had denied the deduction under Section 80G, arguing that CSR contributions were mandatory under Section 135 and thus did not qualify as voluntary donations. The ITAT disagreed, clarifying that while CSR is mandatory, that alone does not disqualify the contribution from being eligible for an 80G deduction, provided it meets the conditions outlined in the section.

Similarly, in Allegis Services (India) Pvt. Ltd. vs Asstt. CIT, the ITAT had ruled that CSR contributions could still qualify as donations under Section 80G, and the statutory nature of the CSR obligation under the Companies Act did not automatically render these expenditures ineligible.

Section 80G of the Income Tax Act

Section 80G of the Income Tax Act allows for deductions on donations made to certain funds, charitable institutions, and other approved entities. These donations are generally voluntary in nature, but the section does not explicitly state that mandatory contributions, such as CSR, are ineligible for deduction—except for specific exceptions like the Swachh Bharat Kosh and the Clean Ganga Fund, as outlined in Clauses (iiihk) and (iiihl) of sub-section (2) of Section 80G.

These clauses stipulate that donations to the Swachh Bharat Kosh and Clean Ganga Fund are not eligible for deductions under Section 80G if they are made to fulfill CSR obligations. By inference, this means that other CSR-related contributions are eligible for deductions under Section 80G, provided the donations meet the requirements of the section and are made to qualifying entities.

Application of Judicial Precedents

In the Rustomjee Realty case, the ITAT referred to its earlier rulings, which had consistently favored the taxpayer in such matters. For example, in the FNF India Pvt. Ltd. vs Asstt. CIT case, the ITAT held that while CSR contributions cannot be claimed as business expenditures under Section 37(1), they are eligible for deductions under Section 80G. The same conclusion was reached in JMS Mining Pvt. Ltd. vs Principal CIT Kolkata, where the ITAT ruled that the statutory obligation under Section 135 did not preclude companies from claiming 80G deductions.

The ITAT in the Rustomjee case further noted that the Assessing Officer had allowed deductions for contributions to the Prime Minister's Relief Fund, which are eligible under Section 80G. This indicated an inconsistency in the officer's approach to disallowing the CSR deductions.

Conclusion

The ruling in the Rustomjee Realty case reaffirms the principle that CSR expenditures, while not deductible under Section 37(1), can still qualify for tax deductions under Section 80G, provided they meet the requisite conditions. The only exceptions are contributions to the Swachh Bharat Kosh and Clean Ganga Fund, which are expressly excluded from 80G eligibility when made as part of CSR obligations.

This ruling provides clarity for companies engaging in CSR activities and highlights that, beyond these specific exclusions, CSR contributions can be eligible for tax deductions under Section 80G. This is a significant development for companies looking to maximize the tax benefits associated with their mandatory CSR expenditures.

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