According a recent ruling of the Income Tax Appellate Tribunal (ITAT) in Mumbai, the companies are entitled to claim tax deductions for expenses incurred related to Corporate Social Responsibility (CSR) initiatives, under Section 80G of the Income Tax Act. This reverses the earlier claims of the tax authorities that did not accept tax deductions for CSR spending.
Background and Ruling
The case that triggered the ruling by ITAT involved a company in the aluminum composite panel sheet industry, that had included CSR-related donations in its tax return, seeking deductions under Section 80G. However, the tax authorities declined half of these claims presenting an argument that CSR expenditure is mandated by law, and since it is not voluntary, it does not qualify as donations for tax deductions. In order to challenge this claim, the company appealed to the first appellate authority who stood with the tax authorities on the matter. The company then appealed further which brought the case to the ITAT.
The ITAT with Judicial Member Kavitha Rajagopal and Accountant Member Om Prakash Kant on the bench, reversed the previous order of the appellate authority, ruling in favour of the company. The order issued by the bench has noted that an amendment in 2015 to Section 80G, which added specific exclusions for certain CSR donations (such as those to the Swachh Bharat Kosh and Clean Ganga Fund), indicates that other CSR-related expenses can still qualify for deductions under Section 80G. This interpretation comes as a relief to companies as it allows them to claim deductions for a broader range of CSR activities.
Implications
The ruling has broader implications, when it comes to undertaking CSR beyond law. The aim of mandating CSR was not to stronghold companies into handing out more money to the government who is originally in charge of the social development. It is to encourage participation of the corporates in the development, while reminding them of their responsibility towards the society. The underlining aim is to get corporates to view CSR as opportunity to collaborate with various entities for development of the society at large, rather than focusing solely on profits while paying away an amount as tax for operating within a community and utilising its resources.
To get corporates to develop this attitude is challenging if they are taxed for the CSR expenditures they make. This ruling helps address this road-block, and it further incentivises companies to conduct more CSR initiatives rather than making donations without further monitoring. Additionally, by allowing deductions for CSR related donations or expenses, the ruling reinforces the purpose of Section 80G, which aims to encourage philanthropy and support charitable organisations. This can lead to increase in funding for social, cultural, economic development and environment conservation initiatives.
The ITAT’s decision has confirmed that expenses made under CSR of a company, can still be considered donations for tax purposes, even if they are legally required, provided they meet specific criteria. By allowing deductions for CSR-related donations under Section 80G, the ruling not only supports and encourages corporate philanthropy but also provides much-needed clarity for businesses to continue investing in social and environmental initiatives beyond what is required by the law.
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