top of page

ITAT Upholds Eligibility of CSR Donations for Tax Deductions under S. 80G of the Income-tax Act

Introduction

The decision in Interglobe Technology Quotient (P) Ltd. v. ACIT[i], delivered by the Income Tax Appellate Tribunal (‘ITAT’), significantly impacts corporate social responsibility (‘CSR’) and tax deductions under s. 80G of the Income-tax Act, 1961 (‘IT Act’). This judgment clarifies the interplay between CSR expenditures and tax deductions, skimming over certain procedural shortcomings in the National Faceless Appeal Centre (‘NFAC’) and thereby reinforcing principles of natural justice. It provides clarity on the treatment of CSR expenditures and the applicability of tax deductions under s. 80G of the IT Act.

Brief Facts

  • This case involved two sets of facts and issues concerning the same Appellant, a private limited company engaged in data processing services and exports. The Appellant filed its return of income (‘ROI’) for the assessment year (‘AY’) 2020-21, declaring an income of Rs. 24,43,74,310. The assessing officer (‘AO’) completed the assessment under s. 143(3) read with s. 144B of the IT Act, determining the Appellant’s income at Rs. 24,91,76,860 after making two disallowances.

  • The AO disallowed the entire deduction claimed by the Appellant under section 80G on the grounds that the donations, forming part of CSR expenditures, were compulsory under the Companies Act, 2013 (‘CA13’) and, thus, not considered 'voluntary' under section 80G of the IT Act. Consequently, the AO deemed these donations non-deductible under s. 80G of the IT Act. Although the NFAC partly allowed the appeal, the Appellant remained aggrieved, prompting a further appeal to the ITAT.

  • Moving to the second issue in this matter, the Appellant followed an accrual system of accounting where revenue is recognized once services are rendered and bills are raised. Corresponding TDS credit is often reflected in the subsequent financial year when the service recipient makes the payment. For services rendered to TravelPort[ii], revenue of Rs. 38,75,00,274 was declared in the AY 2020-21, yet the corresponding tax deducted at source (‘TDS’) of Rs. 3,87,50,028 was reflected in Form 26AS for the following year.

  • The NFAC dismissed the Appellant’s claim for lack of reconciliation between TDS and corresponding income without providing an opportunity for the Appellant to furnish details. The AO subsequently disallowed the TDS credit without granting any opportunity or assigning any reason. Aggrieved, the Appellant contended before the ITAT that under s. 199 of the IT Act, read with r. 37BA of the Income-tax Rules, 1962 (‘IT Rules’), the credit of taxes deducted should be granted in the same year the income is offered to tax.

Held

  • The ITAT allowed the appeal, noting that the NFAC’s failure to grant a personal hearing violated the principles of natural justice and provisions of s. 250 of the IT Act.

  • Regarding the deduction under s. 80G, the ITAT observed that the Appellant initially disallowed donations made as part of CSR activities under s. 37(1) of the IT Act but were claimed as deductions under s. 80G. The Tribunal accepted the Appellant’s plea that denial of CSR expenditure under s. 37(1) of the IT Act does not bar a claim under s. 80G of the IT Act.

  • The Tribunal clarified that CSR expenditures, while mandated by law, do not involve reciprocal benefits and are philanthropic in nature, hence qualifying as donations under s. 80G. Specifically, CSR-related donations to eligible institutions should be allowed as deductions under s. 80G of the IT Act. The ITAT also noted that the NFAC erred in disallowing deductions for donations made after 31.03.2020, ignoring the extended deadline to 30.07.2020 under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (‘TOLA’).

  • Regarding the TDS credit issue, the ITAT held that the Appellant rightly claimed credit for TDS, and the AO’s action in not allowing the credit was incorrect. The ITAT cited s. 199 of the IT Act and r. 37BA of the IT Rules, determining that TDS credit must align with the year the corresponding income is offered to tax. The Tribunal referred to a case[iii] involving the Appellant’s group company, affirming that TDS credit should be granted in the year the income is recognized, not deferred based on when the deductor reports it.

Our Analysis

The ITAT’s ruling is a landmark interpretation of the interplay between CSR expenditures and tax deductions under s. 80G of the IT Act. It highlights the importance of aligning tax treatment with legislative intent, ensuring that the tax system does not penalise companies fulfilling their statutory CSR obligations. By referring to multiple judicial precedents, the ITAT crystallized the principle that CSR donations, even when mandated by statute, retain their charitable nature and should benefit from tax deductions. Such expenditures are an application of income and form part of the total income of the assessee.

Furthermore, the ruling emphasizes the importance of the accrual system of accounting, where revenue is recognized once the service is rendered, and the bill is raised upon the service recipient. The judgment affirms that in such a system, TDS credit should be allowed in the same year the income is claimed to have accrued or arisen and included to determine taxable income. Finally, the judgment’s emphasis on procedural fairness in faceless assessments is noteworthy, highlighting the necessity for a fair hearing and adherence to the principles of natural justice.







End Notes

[i] [2024] 163 taxmann.com 542 (Delhi – Trib.), dated: 28.05.2024.

[ii] M/s Travelport International Operations Limited.

[iii] InterGlobe Enterprises Ltd. v. ACIT, ITA 6580/Del/2019, dated: 07.06.2022.






Authored by Srishty Jaura, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

Comments


bottom of page