2023 (6) TMI 1486 - AT - Income Tax

Revision u/s 263 - deduction u/s 80G in respect of CSR Expenses - HELD THAT - We find that in identical facts and circumstances as in the case of JMS Mining Pvt. Ltd. 2021 (7) TMI 907 - ITAT KOLKATA relied upon by AR quashed the order of revision passed under Section 263 of the Act. Respectfully following the above decision we hold that Assessment Order whereby deduction under Section 80G of the Act was allowed in respect of CSR Expenses was not erroneous. Therefore the PCIT did not have jurisdiction to invoke provisions of Section 263 of the Act as per the judgment of Hon ble Supreme Court in the case of Malabar Industrial Co. Ltd. 2000 (2) TMI 10 - SUPREME COURT Accordingly the order passed by the PCIT u/s 263 of the Act is set aside and the Assessment Order passed u/s 143(3) of the Act is reinstated. Thus Ground No. 1 and 2 raised by the Appellant are allowed.

Summary

The core legal questions considered by the Tribunal in this appeal are:

1. Whether the Assessment Order passed under Section 143(3) read with Sections 143(3A) and 143(3B) of the Income Tax Act, 1961 (the Act), allowing deduction under Section 80G of the Act in respect of 50% of the Corporate Social Responsibility (CSR) expenditure incurred by the appellant, was erroneous and prejudicial to the interest of the Revenue so as to justify revision under Section 263 of the Act by the Principal Commissioner of Income Tax (PCIT).

2. Whether the deduction claimed under Section 80G of the Act for donations made as part of CSR expenses is allowable, given the prohibition on deduction of CSR expenditure as business expenditure under Explanation 2 to Section 37(1) of the Act.

3. Whether the PCIT was justified in invoking the revisional jurisdiction under Section 263 of the Act on the ground that the Assessing Officer (AO) passed the assessment order without making relevant enquiry or verification regarding the deduction claimed under Section 80G.

Issue-wise Detailed Analysis

Issue 1: Legality and correctness of the PCIT's exercise of revisional jurisdiction under Section 263 of the Act

Legal framework and precedents: Section 263 of the Act empowers the PCIT to revise an assessment order if it is found to be erroneous and prejudicial to the interest of the Revenue. The Supreme Court's decision in Malabar Industrial Co. Ltd. v. CIT establishes the twin conditions for invoking Section 263: (i) the order of the AO must be erroneous, and (ii) it must be prejudicial to the interest of the Revenue. The Court further clarified that mere loss of revenue or a difference of opinion between the AO and the PCIT does not suffice to invoke revisional jurisdiction unless the AO's view is unsustainable in law. Erroneousness can arise from incorrect assumptions of fact, incorrect application of law, violation of natural justice, lack of application of mind, or failure to investigate the issue.

Court's interpretation and reasoning: The Tribunal noted that the AO had specifically raised queries regarding the deduction claimed under Section 80G during the assessment proceedings and had examined the relevant documents including donation receipts and 80G certificates before allowing the deduction. Therefore, the AO had discharged his dual role of investigator and adjudicator. The PCIT's finding that the AO had not made any enquiry or verification was factually incorrect and amounted to non-application of mind. The Tribunal held that the PCIT's exercise of revisional jurisdiction was an usurpation of power and bad in law.

Key evidence and findings: The AO's notice under Section 142(1) explicitly queried the claim of deduction under Section 80G, and the appellant's detailed reply with supporting documents was on record. The AO accepted the claim after due consideration. The PCIT's show cause notice and order under Section 263 did not take into account this material.

Application of law to facts: Since the AO's order was based on a plausible view supported by evidence and law, it could not be held erroneous or prejudicial to the Revenue. The PCIT was not empowered to substitute his opinion for that of the AO.

Treatment of competing arguments: The Revenue contended that the AO's order was erroneous because CSR expenses are disallowed under Explanation 2 to Section 37(1) and that the PCIT was justified in revising the order due to lack of enquiry. The Tribunal rejected this, finding that the AO had made relevant enquiries and that the disallowance under Section 37 does not automatically negate deduction under other provisions such as Section 80G.

Conclusion: The PCIT's order under Section 263 was set aside for lack of jurisdiction and non-application of mind.

Issue 2: Allowability of deduction under Section 80G of the Act in respect of CSR expenses

Legal framework and precedents: Explanation 2 to Section 37(1) of the Act, inserted by the Finance Act (No. 2), 2014, excludes CSR expenditure incurred under Section 135 of the Companies Act, 2013, from being allowed as business expenditure. However, Section 80G provides for deduction of donations made to certain eligible institutions. The Bangalore Bench of the Tribunal in FNF India Pvt. Ltd. held that deduction under Section 80G is allowable even if the same expenditure is disallowed under Section 37(1). The Kolkata Bench in JMS Mining Pvt. Ltd. also quashed a revision order under Section 263 where CSR expenses were allowed as deduction under Section 80G.

Court's interpretation and reasoning: The Tribunal observed that Explanation 2 to Section 37(1) applies only to business expenditure and does not extend to donations eligible for deduction under Chapter VI-A, including Section 80G. The legislative intent was to restrict deduction of CSR expenses as business expenditure, not to deny deduction under other provisions where conditions are met. The Tribunal also noted that Parliament expressly restricted deduction for certain funds (Swachh Bharat Kosh and Clean Ganga Fund) but did not prohibit deduction for other eligible donations under Section 80G.

Key evidence and findings: The appellant made donations to SBI Foundation and other trusts holding valid 80G(5)(vi) certificates. The AO examined the eligibility of the donees and accepted the deduction. The Tribunal relied on documentary evidence such as donation receipts and 80G certificates.

Application of law to facts: Since the donations were made to eligible institutions approved under Section 80G(5), and the appellant satisfied all conditions, the deduction under Section 80G was correctly allowed by the AO. The disallowance under Section 37(1) does not negate this deduction.

Treatment of competing arguments: The Revenue argued that allowing deduction under Section 80G for CSR expenses would indirectly permit deduction of CSR expenditure prohibited under Section 37(1). The Tribunal rejected this, distinguishing the two provisions and emphasizing the separate legislative schemes and purposes.

Conclusion: The deduction claimed under Section 80G in respect of CSR donations was allowable and the AO's order was a plausible and sustainable view.

Issue 3: Whether the AO made relevant enquiry and verification before allowing deduction under Section 80G

Legal framework and precedents: Explanation 2 to Section 263(1)(a) of the Act permits revision if the AO passed the order without making enquiry or verification. The AO must discharge the dual role of investigator and adjudicator.

Court's interpretation and reasoning: The Tribunal found that the AO had raised specific queries under Section 142(1) regarding the deduction claimed, and the appellant had furnished detailed replies with documentary evidence. The AO examined the donation receipts, 80G certificates, and other relevant documents before allowing the deduction. Therefore, the AO had made relevant enquiry and verification.

Key evidence and findings: The AO's notice dated 01/08/2018 specifically questioned the deduction under Chapter VIA, and the appellant's replies and documents were on record. The AO's assessment order reflects consideration of these materials.

Application of law to facts: The AO's order cannot be said to have been passed without enquiry or verification. The PCIT's assertion to the contrary was factually incorrect and legally unsustainable.

Treatment of competing arguments: The Revenue contended that mere placing of documents on record does not constitute enquiry. The Tribunal held that the AO's active consideration and acceptance of the claim after scrutiny amounted to sufficient enquiry.

Conclusion: The AO conducted adequate enquiry and verification, and the PCIT's reliance on Explanation 2 to Section 263(1)(a) was misplaced.

Significant Holdings

"The twin conditions needs to be satisfied before exercising revisional jurisdiction u/s 263 of the Act by the CIT. The twin conditions are that the order of the Assessing Officer must be erroneous and so far as prejudicial to the interest of the Revenue."

"When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law."

"Explanation 2 to section 37(1) of the Act which denies deduction for CSR expenses by way of business expenditure is applicable only to the extent of computing 'Business Income' under Chapter IV-D of the Act. The said Explanation cannot be extended or imported to CSR contributions which is otherwise eligible for deduction under any other provision or Chapter, to say donations made to charitable trusts registered u/s 80G of the Act."

"The Assessing Officer has discharged his dual role of an investigator as well as an adjudicator by raising specific queries, obtaining replies and examining documents before allowing the deduction."

"The jurisdictional fact as well as law is absent for invoking revisional jurisdiction under Section 263 of the Act in the present case, and therefore, the usurpation of jurisdiction by the PCIT is bad in law."

"The Assessment Order dated 22/01/2021, whereby deduction under Section 80G of the Act was allowed in respect of CSR Expenses, was not erroneous. Therefore, the PCIT did not have jurisdiction to invoke provisions of Section 263 of the Act."