Delhi High Court Allows Deduction Of Expenses Undertaken Under the CSR Endeavour u/s 37 Of The Income Tax Act

The Delhi High Court has allowed the deduction of expenses undertaken under the Corporate Social Responsibility (CSR) endeavor under Section 37 of the Income Tax Act, 1961.

The division bench of Justice Rajeev Shakdher and Justice Tara Vitasta Ganju has observed that the memorandum, which was published along with Finance (No. 2) Bill 2014, clearly indicated that the amendment would take effect from 01.04.2015 and, accordingly, would apply in relation to assessment year 2015-2016 and the subsequent years.

The department has assailed the ITAT's order allowing the deduction of expenses undertaken under the Corporate Social Responsibility (CSR) endeavor under Section 37 of the Income Tax Act, 1961.

The department contended that the expenditure for which the deduction is claimed was not incurred wholly and exclusively for the purposes of carrying on business or a profession. The funds utilized by the respondent/assessee to effectuate its CSR obligation involved the application of income and not an expense that had been incurred wholly and exclusively for the purposes of carrying on a business.

The department relied on the amendment brought about in Section 37(1) by way of the insertion of Explanation 2. Explanation 2 appended to sub-section (1) of Section 37 is clarificatory in nature, and therefore would be applicable qua the assessment years in issue, concerning each of the respondents or assessees.

As per Section 37 of the Income Tax Act, in order to claim a deduction under Section 37, the expenditure incurred should be one that does not fall under any of the provisions referred to in Sections 30 to 36. The expenditure should not be in the nature of capital expenditure or the assessee's personal expenses. The expenditure should have been laid out or expended wholly or exclusively for the purposes of business or profession.

If the conditions are met, then the expense incurred can be deducted while computing the income chargeable under the heading "profits and gains of business or profession."

The court, while upholding the order of the ITAT, held that explanation 2 inserted in Section 37(1) was prospective in nature and therefore not applicable in the assessment years in issue.

Case Title: PCIT Versus PEC Ltd.

Citation: 2022 LiveLaw (Del) 1186

Date: 29.11.2022

Counsel For Appellant: Sr. Standing Counsel Puneet Rai, Jr. Standing Counsel Adeeba Mujahid, with Adv. Nikhil Jain

Counsel For Respondent: None

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