Tax tribunal rulings open doors to more firms claiming CSR deductions

Orders expected to settle matter but chances of the authorities questioning such deductions not ruled out, say tax experts

Recent rulings by tax dispute tribunals may help more companies to claim deductions for corporate social responsibility (CSR) spending.

Income Tax Appellate Tribunals in Mumbai and Delhi allowed companies to claim a deduction under section 80G for their CSR activities. The section allows deductions for contributions made to charitable institutions. Such claims were questioned in the past over the fact that CSR spends are not voluntary but done to fulfil a statutory obligation. Tribunal rulings, including one in Mumbai, on May 27 allowed claims.

“The amendment brought about by Finance Act, 2015 to section 80G of the Act which had inserted the sub clauses (iiihk) and (iiihl) to be the exception for qualifying a donation for claiming u/s. 80G of the Act could also be an evidencing factor to substantiate that CSR expenditures which fall under the nature specified in section 30 to 36 of the Act are an allowable deduction u/s. 80G of the Act,” said the tribunal in Mumbai.  

Tribunal rulings give clarity to CSR deductions, according to Deloitte India partner Pankaj Bagri.

“...this issue is now expected to be settled. Having said which, the chances of tax authorities questioning such deduction and litigation in this regard, may not be ruled out completely. Further, it would be pertinent and interesting to watch out if the tax department decides to file an appeal with the Supreme Court on this issue,” he said.

“However, with the favourable rulings in place, the companies which may not have claimed deduction of CSR expenditure under section 80G of the IT Act, may look to evaluate this claim for earlier and subsequent years.”

Companies that claimed a concessional tax rate (CTR), which was made available from FY20, would be left out of such deductions, said Sameer Gupta, national tax leader at EY India.

“...companies availing the CTR benefit cannot claim Section 80G deduction. The judgments allowing Section 80G deduction for CSR expenditure pertain to periods prior to the availability of the CTR benefit. Hence, currently, claiming Section 80G deduction for CSR expenditure is possible only if the company has not availed the CTR benefit,” he said.

Domestic companies could claim a concessional tax rate of around 25.17 per cent under the new regime. New domestic manufacturing companies were allowed to have an effective tax rate of 17.16 per cent. They had, however, to forego other exemptions including section 80 G.

Corporate social responsibility requires companies to allocate two per cent share of their profits to developmental activities. Total CSR spending is increasing. A sample of companies listed on the National Stock Exchange spent over Rs 15,000 crore in FY23, the latest year for which data was collated by tracker primeinfobase.com. It was the highest on record.