TAX BENEFITS FOR PHILANTHROPIC ENDEAVOURS: NAVIGATING SECTION 80G FOR CSR SPENDING AMIDST UNWARRANTED LITIGATIONS

The Report No. 12 of 2022 of the Comptroller and Auditor General of India-Performance Audit on Exemptions to Charitable Trusts and Institutions in its Summary of recommendations in Paragraph 5.5 stated “CBDT needs to consider bringing an amendment or issuing binding clarification as to whether donations to trusts, including in-house/corporate trusts, out of CSR expenditure by specified companies covered by Section 135 of the Companies Act, 2013 is eligible for deduction under section 80G or not. Such an amendment or binding clarification is necessary to ensure that the provisions are interpreted uniformly by the Assessing Officers across all assessment charges and also to minimize the possibility of litigation”

This recommendation clearly reflects the current legal landscape encompassing the issue regarding availability of deduction under Section 80G of the Income Tax Act in respect of CSR Spending as mandated under Section 135 of Companies Act, 2013. A rather straightforward tax deduction has become a landmine of litigation for the assessee which could easily be avoided on Perusal of Acts, Rules, and Notifications; understanding the intention of the Legislature; and use of proper interpretation maxims. Unfortunately, the failure of Assessing Officers to deploy these tools while exercising their judgment has resulted in unwarranted litigations, where Tribunals have consistently ruled in favour of the assessee. ?

In this write-up, we explore the legal validity of deduction under Section 80G with respect to CSR Spending along with legal issues arising out of such tax treatments. ?The write-up has been divided into following sections:

i.???????????????? Legal Framework of CSR under Companies Act, 2013, and Section 80G of the Income Tax Act, 1961.

ii.??????????????? Analysis of the Provisions and Rules in context of the subject matter.

iii.?????????????? Legal Issues encompassing claim of CSR spending under Section 80G.

iv.?????????????? Conclusion and Recommendations

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LEGAL FRAMEWORK OF CSR UNDER COMPANIES ACT, 2013, AND SECTION 80G OF THE INCOME TAX ACT, 1961

The Legal framework of CSR under Companies Act, 2013 has been provided through:

a.????? Section 135 of the Companies Act, 2013 which states provisions regarding CSR

b.????? Schedule VII of the Companies Act, 2013 which indicates activities to be undertaken for CSR

c.????? The Companies (Corporate Social Responsibility Policy) Rules, 2014

For Section 80G which provides for Deduction in respect of donations to certain funds, charitable institutions, etc. under Income Tax Act, 1961, it has been provided under Chapter VIA of the Act.

Relevant Portions of the legal framework (supra) and Section 80G which need to be taken in to consideration to understand the validity of deduction under Section 80G with respect to CSR Spending are reproduced as follows:

Sub-Section 5 of Section 135 read as under:

“The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy”

Sub-Rule 1 of Rule 4 of The Companies (Corporate Social Responsibility Policy) Rules, 2014 (relevant portions) read as under:

“CSR Implementation. –

(1) The Board shall ensure that the CSR activities are undertaken by the company itself or through, –

(a) a company established under section 8 of the Act, or a registered public trust or a registered society, exempted under sub-clauses (iv), (v), (vi) or (via) of clause (23C) of section 10 or registered under section 12A and approved under 80 G of the Income Tax Act, 1961 (43 of 1961), established by the company, either singly or along with any other company; or

(b) ………………………

(c) ………………………

(d) a company established under section 8 of the Act, or a registered public trust or a registered society, exempted under sub-clauses (iv), (v), (vi) or (via) of clause (23C) of section 10 or registered under section 12A and approved under 80 G of the Income Tax Act, 1961, and having an established track record of at least three years in undertaking similar activities.

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The Section 80G of the Income Tax Act, 1961 (relevant portions) read as under:

"(1) In computing the total income of an assessee, there shall be deducted, in accordance with and subject to the provisions of this section, —

(i)? ………………………

(ii)? ………………………

(2) The sums referred to in sub-section (1) shall be the following, namely :—

(a) any sums paid by the assessee in the previous year as donations to—

(i) ………………………

(ii) ………………………

(iii) to (iiihj) ………………………

(iiihk) the Swachh Bharat Kosh, set up by the Central Government, other than the sum spent by the assessee in pursuance of Corporate Social Responsibility under sub-section (5) of section 135 of the Companies Act, 2013 (18 of 2013); or

(iiihl) the Clean Ganga Fund, set up by the Central Government, where such assessee is a resident and such sum is other than the sum spent by the assessee in pursuance of Corporate Social Responsibility

(iv)? any other fund or any institution to which this section applies; or

(v) to (vii) ………………………

(3) to (6) ………………………

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ANALYSIS OF THE PROVISIONS AND RULES IN CONTEXT OF THE SUBJECT MATTER

Sub-Rule 1 of Rule 4 of The Companies (Corporate Social Responsibility Policy) Rules, 2014 clearly states that CSR can be implemented through a company established under section 8 of the Act, or a registered public trust or a registered society, exempted under sub-clauses (iv), (v), (vi) or (via) of clause (23C) of section 10 or registered under section 12A and approved under 80 G of the Income Tax Act, 1961, established by the company, either singly or along with any other company; or a company established under section 8 of the Act, or a registered public trust or a registered society, exempted under sub-clauses (iv), (v), (vi) or (via) of clause (23C) of section 10 or registered under section 12A and approved under 80 G of the Income Tax Act, 1961, and having an established track record of at least three years in undertaking similar activities. Hence contribution to funds mentioned under Section 80G is in line with the CSR Implementation rules.

In respect of deduction under Section 80G for Income Tax Purposes, upon reviewing Section 80G of the Act, it is evident that deductions under this section can be availed subject to adherence to its provisions. Specifically, Section 80G of the Act allows for a deduction equivalent to fifty percent of the total specified sums outlined in sub-section 2. This includes donations to eligible funds or institutions, subject to the satisfaction of the criteria in sub-section (5) of Section 80G.

In the context of CSR (Corporate Social Responsibility) expenditures, it is noteworthy that the Section 80G does not impose any restrictions or prohibitions on donations made under CSR, even if it is classified as CSR Expenditure, except when donation has been paid to funds mentioned under clause (iiihk) and (iiihl). The Parliament has explicitly articulated restrictions related to deductions under Section 80G concerning donations to Swachh Bharat Kosh and Clean Ganga Fund when made pursuant to Corporate Social Responsibility under section 135(5) of the Companies Act, 2013. However, no similar restrictions have been imposed for donations to other funds or institutions covered by Section 80G.

Hence when the Section is interpreted using the interpretation maxim "Expressio Unius Esl Exclusio Alterius" (express mention of one thing excludes all others) reinforces the notion that limitations explicitly outlined in the statute are exclusive. This is one of the rules used in interpretation of Statutes. The phrase indicates that items not on the list are assumed not to be covered by the Statute. When something is mentioned expressly in a Statute, it leads to the presumption that the things not mentioned are excluded.

Accordingly applying this interpretation maxim in the interpretation of Section 80G vis-à-vis legality of claim of deduction when donation is made pursuant to CSR Spending under Section 135(5) of the Companies Act, 2013, it can be clearly inferred that specific restriction on deduction under Section 80G is imposed when donation is made to funds referred under 2 clauses: clause (iiihk) and (iiihl) pursuant to Section 135(5). Hence express mention of these 2 funds automatically excludes funds mentioned in other clauses from this restriction. Consequently, any donation made to funds mentioned in clauses other than (iiihk) and (iiihl) of Section 80G, even if pursuant to CSR Spending, can be legally claimed as deduction under Section 80G subject to the limits mentioned in the section, adherence to the Schedule VII of the Companies Act, 2013 which outlines permissible activities to be undertaken for CSR, and other procedural rules.

LEGAL ISSUES ENCOMPASSING CLAIM OF CSR SPENDING UNDER SECTION 80G

Though on the face of it, the legality of deduction under Section 80G pursuant to CSR Spending looks straight-forward with an explicit disallowance under 2 clauses, but the incorrect interpretation of Assessing Officers has marred this deduction with unnecessary litigations. The assessing officers have constantly extended this restriction to other funds mentioned under the section and bringing into the question the voluntariness of the contribution. Virtually, every matter which has been listed before the Tribunal with respect to this issue has resulted in order in favour of the assessee.

Some examples of the litigations with respect to the subject matter are JMS Mining (P.) Ltd v. Principal Commissioner of Income-tax [2021], Sling Media (P.) Ltd v. Deputy Commissioner of Income-tax [2022], and Power Mech Projects Ltd. v. Deputy Commissioner of Income Tax [2023]. Almost Identical judgements are passed in all these cases with JMS Mining (P.) Ltd v. Principal Commissioner of Income-tax [2021] being the most cited judgement. Importantly, all these judgments uniformly favour the assessee.

Even though all appeals in front of the tribunal, the appeals being numerous, have resulted in judgements in favour of the assessee, the assessing officers in various part of the countries continue to err by incorrectly disallowing the claim. This has resulted in increased legal costs to the assessee not to mention the burden to go through these litigations. A binding clarification is hence imperative to ensure a consistent and correct interpretation of the provisions by Assessing Officers across all assessment charges, thus minimizing the likelihood of litigation.

CONCLUSION AND RECOMMENDATIONS

In conclusion, the recommendation of CAG that CBDT needs to bring an amendment or issuing binding clarification as to whether donations to trusts, including in-house/corporate trusts, out of CSR expenditure by specified companies covered by Section 135 of the Companies Act, 2013 is eligible for deduction under section 80G or not and such an amendment or binding clarification is necessary to ensure that the provisions are interpreted uniformly by the Assessing Officers across all assessment charges and also to minimize the possibility of litigation perfectly sums up the solution to this problem.

Also, the above stated analysis, which is supported by various judgements, a few of which are cited above, unequivocally establishes that contributions made to funds listed under Section 80G (excluding under clause (iiihk) and (iiihl)) as part of Corporate Social Responsibility (CSR) Spending constitute a legitimate deduction under the Income Tax Act. This deduction is not only legally permissible but also entirely allowable under the prevailing tax regulations.