CSR expenditure by loss-making company for commercial expediency is allowable u/s 37(1)

While holding that there was no application of mind while issuing the notice and disposing of the objections, the Gujarat High Court allowed the petition of Adani Power Rajasthan Ltd. (Assessee) against reassessment proceedings.

While rejecting the AO’s argument for sustaining reassessment proceedings that the Corporate Social Responsibility (CSR) expenditure incurred by the Assessee was wrongly allowed, at the same time, the High Court observed that the Assessee, being a loss-making company, was not obliged to spend on CSR under Section 135 of Companies Act. 

The Division Bench comprising of Justice Ashutosh Shastri and Justice J.C. Doshi observed that the expenditure incurred by the Assessee was for commercial expediency and not the one which attracts disallowance under Section 37(1) Explanation 2 of the Income Tax Act.

The Bench further held that notice under Section 148 is liable to be quashed as the re-opening of assessment was based on audit objections and change of opinion, which is impermissible in law.

Advocate B.S. Soparkar appeared for the Assessee while Revenue was represented by Advocate Maithili D. Mehta.

Briefly, the Assessee-Company, filed its return of income for AY 2017-18 declaring loss of Rs.326.01 Cr under the normal provisions and book loss of Rs.6.50 Cr., which was accepted by the AO in scrutiny assessment. Thereafter, the Assessee was served with the reassessment notice under Section 148 on the ground that the Assessee’s claim of CSR expenses of Rs.9.86 Cr was not allowable under Section 37(1).

After considering the submission, the High Court noted that the expenses in question were incurred voluntarily, wholly, and exclusively for the business purpose only, and thus no claim was wrongfully allowed or no income has escaped assessment.

The Bench further observed that Section 37(1) Explanation 2 provides that any expenditure incurred on the activities relating to CSR under Section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred for the purpose of business whereas Section 135 of the Companies Act provides that at least two per cent of the average net profits made during the three preceding FYs shall be spent towards CSR.

The Bench highlighted that the Assessee incurred average net loss of Rs.187.67 Cr during three immediately preceding FYs, and thus, falls out of the ambit of Section 135.

On validity of re-opening of assessment, the Bench opined that there is no application of mind while issuing the notice under Section 148 and disposing of objections and states that the Revenue is trying to take a different view in absence of any tangible material.

Cause Title: Adani Power Rajasthan Limited vs Assistant Commissioner of Income Tax, Circle 1(1)(1), Ahmedabad [ R/SPECIAL CIVIL APPLICATION NO. 18826 of 2021 / 2023-Enterslice-10-HC-Gujarat-IT]

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