Viewing the Income Tax Act, 1961 through an Environmental Lens

By Ramakash G Suriaprakash

Climate change is the most pressing concern of our time. From increasing annual mean temperature to rising pollution and from shifting weather patterns to loss of biodiversity, it is necessary that urgent steps be taken to atleast contain its effects. One of the ways through which such steps can be taken is through changes in the legal system governing the interaction with the environment. This piece evaluates the extent of environment friendliness embedded in the Income Tax Act, 1961. It would specifically focus on tax deductions available for activities towards environment protection and whether changes could be incorporated so that real impetus is provided for the same. On the corollary, it does not focus on non-direct tax based initiatives for environment protection.

But why specifically the Income Tax Act? Are there no other legislations that contribute more towards mitigating climate change? There are two reasons for my insistence on analysing the Income Tax Act. Firstly, I believe that, given the environmental emergency, it is important to analyse every legislation through an environment lens, interpret them in a manner that is environment friendly and highlight the deficiencies of such Acts. Secondly, tax savings are a priority for any assessee, and hence it can be used as a leverage to promote the Government’s long term vision for the environment. 

In the Union Budget 2020, there were no specific income-tax based deductions or exemptions provided for environment friendly initiatives. However, in the Union Budget 2019, the Finance Minister had proposed to provide an additional deduction of upto Rs. 1.5 lakh on the interest paid on loans taken to purchase electric vehicles.(1) This benefit is available for those who had availed loan to purchase electric vehicles between April 1, 2019 and March 31, 2023. This means that, if I were to buy an electric vehicle through a loan, I can deduct the amount paid as interest towards the loan from my total income, to the extent of Rs. 1.5 lakh. The government has introduced this benefit keeping in mind the updated FAME II (Faster Adoption and Manufacturing of Hybrid and Electric Vehicles) policy which has allocated Rs. 10,000 crores over three years from April 2019 to encourage “faster adoption of electric and hybrid vehicles” by establishing necessary infrastructure to that effect.

Similarly,  section 80IA provides for 100% deduction of the profits and gains from an undertaking set up in India till 31.03.2017 for the generation/ generation and distribution of power (energy) for a period of 10 consecutive assessment years out of 15 years beginning from the year in which the undertaking has started the generation or generation and distribution of power. It is submitted that the phrase “generation of power” includes power that is derived from renewable energy sources and thus provides a profit linked incentive for generation/ generation and distribution of power through renewable energy sources. However, it must be noted that this provision is not specific to the renewable energy sector.

“There have also been cases where the incentives provided specifically for environmental friendly initiatives had been removed.”

Section 35AD provides that “an assessee shall be allowed a deduction in respect of the whole of any expenditure of capital nature incurred, wholly and exclusively, for the purposes of any specified business carried on by him during the previous year in which such expenditure is incurred”. In this regard, the term “specified business” also includes “developing or maintaining and operating or developing, maintaining and operating a new infrastructural facility”. The term “infrastructural facility” (2) has also been defined, which, inter alia means, “a highway project including housing or other activities being an integral part of the highway project”. (3) However, the phrase “integral part of the highway project” has not been defined. Nevertheless, in August 2017, the NHAI had invited private participation for developing amenities along national highways. These amenities include rest and refreshment for highway commuters, along with fuel station, repair shops etc. It also provides that “these wayside amenities will henceforth form an integral part of highways”. Thus, it is clear that section 35AD contemplates the setting up of electric charging stations in the highways which mean that the assessee is allowed a deduction in respect of the whole of the capital expenditure incurred.

However, it needs to be made clear that the provisions mentioned above do not explicitly encourage environment-friendly technologies or infrastructure. It is also pertinent to note that there have also been cases where the incentives provided specifically for environmental friendly initiatives had been removed. For e.g., the old Appendix I provided under Rule 5 of the Income Tax Rules, 1962, applicable for the assessment years 1988-89 to 2002-03 provided for depreciation allowance of 100% of Written Down Value (WDV) in case of air pollution control equipments such as electrostatic precipitation systems, dust collector systems, ash handling systems etc., water pollution control equipments such as mechanical screens, aerated lagoon systems etc. and solid waste control equipments. However, the New Appendix – I effective from assessment year 2006-07 provides for a depreciation allowance of only 40% of Written Down Value (WDV) in case of such equipments. (4)

A simple analysis shows that the Income Tax Act does not incentivize much in promoting environment protection activities. It may be entirely possible that the government thought such benefits towards environment protection may not be necessary.

Also consider the case of Corporate Social Responsibility (CSR) spendings under section 135(1) of the Companies Act, 2013. CSR spendings mean that companies, whose net worth is Rs. 500 crore or more, or a turnover of Rs. 1000 crore or more or a net profit of Rs. 5 crore or more during a financial year, must spend atleast 2% of their average net profit of the immediately preceding three financial years on CSR activities which are enumerated under Schedule VII of the Companies Act, 2013. It is to be noted that one of the CSR activities enumerated thereunder is “ensure environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining of quality of soil, air and water including contribution to Clean Ganga Fund set up by the Central Government for rejuvenation of river Ganga”. But, to what extent is a company incentivised to spend on environmental concerns out of all the other provisions mentioned in Schedule VII of the Act?

Till the enactment of the Finance Act, 2014, CSR spendings was allowed as business expenses under section 37(1) of the Income Tax Act, 1961. It provides that,

“Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”  

For e.g., in CIT v.  Madras Refineries Ltd., (5) the Madras High Court upheld the order of the  Income Tax Appellate Tribunal allowing the expense of Rs. 15,32,000 towards establishing drinking water facility near its refinery as a deduction, stating that “monies spent for bringing drinking water… in which the business is situated cannot be regarded as being wholly outside the ambit of the business concerns of the assessee, especially where the undertaking owned by the assessee is one which is to some extent a polluting industry”. (6)

However, an explanation added to section 37(1) by the Finance Act, 2014 clarified that “any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession” (7) reasoning (8) that CSR expenditure is not incurred wholly and exclusively for the purposes of carrying on business; it is an application of income, and, hence, is not allowed as deduction while computing the taxable income of the company. Nevertheless, sections 30-36 and section 80G provide for tax exemptions under CSR expenses. It is these sections that one needs to analyse to understand the extent of incentive provided for environment protection.

Earlier, section 35AC provided for claiming for deduction when the “assessee incurs any expenditure by way of payment of any sum to a public sector company or a local authority or to an association or institution approved by the National Committee for any eligible project or scheme”. Such projects also included pollution control, conservation of natural resources or of afforestation, establishment and running of renewable sources of energy systems etc. (9) However, section 35(7) provides that no deduction shall be allowed under this section in respect of any assessment year from 2018. Thus, deductions cannot be availed of by investing in eligible environment friendly projects. Similarly, section 35CCB had provided for deduction on expenditure incurred for carrying out programmes of conservation of natural resources, but it is limited to those incurred on or before the 31st day of March, 2002. 

money, money tree, make money

Considering the dire need to shift to a low carbon economy and mitigating the effects of climate change, providing tax deductions and exemptions might just incentivize the taxpayers to help the transition.

In contrast, section 35CCC allows for a deduction of a sum equal to one and one-half times of such expenditure on agricultural extension projects notified by the Board; however, such deduction is restricted to a sum equal to the expenditure from A.Y.2021-2022. Similar restriction is extended to expenditure on any skill development project notified by the Board under section 35CCD. Further, section 80G provides for 100 percent deduction without any qualifying limit to National Defence Fund, PM’s National Relief Fund, Funds set up by State governments for medical relief of the poor, National Sports Fund, National Cultural Fund etc. It is, however to be noted that, these funds do not expressly relate to environment protection.

Given that in some cases 100% deductions are available, even in case of spending under CSR, it is natural to expect that such companies would use such provisions to satisfy the mandate under section 135 of the Companies Act, 2013 as well as obtain benefit in the form of deductions. It is not encouraging to observe that environment protection is not given due consideration as other areas.

This is not to argue that companies will always involve in activities which have higher deductions. There are a lot of companies who undertake activities with social interest in mind rather than tax benefits. But, what I have tried to show is that, if the Income Tax Act per se is taken for consideration, it does not explicitly provide for benefits concerning activities towards environment protection. Further, the reasons for removal of benefits that were provided earlier is always a prerogative of the government, and every such benefit usually has a time-frame after which it is taken back. A simple analysis shows that the Income Tax Act does not incentivize much in promoting environment protection activities. It may be entirely possible that the government thought such benefits towards environment protection may not be necessary. However, considering the dire need to shift to a low carbon economy and mitigating the effects of climate change, providing tax deductions and exemptions might just incentivize the taxpayers to help the transition.

(1) Section 80EEB of the Income Tax Act, 1961, inserted vide section 25 of the Finance (No.2) Act, 2019. 
(2) Section 35AD(8)(C)(xiv) of the Income Tax Act, 1961.
(3) Section 35AD(8)(ba)(ii) of the Income Tax Act, 1961.
(4) See Part A(III)(3)(viii) and (ix).
(5) [2004] 138 Taxman 261 (Mad).
(6) Ibid., para 5.
(7) Section 13 of the Finance (No.2) Act, 2014.
(8) See paras 10-12 of the hyperlink.
(9) Priya Subramanian, ‘CSR Obligations: Charity Ushers in Good Wishes and Tax Benefits’ (2014) 52 12, para 5.


G Suriaprakash

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Ramakash is an amazingly interesting person pursuing B.A.LLB (Hons.) at TNNLU.  He doesn’t take pride, rather he doesn’t really realize how interesting he here is the bio written by his bestie! Ram is an ardent reader, has an exceptional passion for research and writing and never misses a chance for an extempore dance. He can always be found glued to his laptop (of course, reading) that we eventually had to  declare it his “girlfriend”! He is rational and takes a logical approach to everything. Once he promises, there isn’t any going back. He just adheres to it. He is an amazing friend who stands by in the worst, helping you make sense out of the mess. His circle is small, but he keeps it close forever. One can always trust him with their emotions and problems.

His brain doesn’t rest much and he keeps thinking. He loves experimenting, developing theories and discussing philosophies. He sets his own standards and always works to keep it up.  Once entrusted with a job, he does it with utmost care and perfection. Mind you, he isn’t boring and is nothing short of a fun person to be with! He is very calm, grounded and has a strong sense of justice. He stays busy.. but never says no for a walk and talk with may be..a tea-kadai “Boost”!

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