2025 (4) TMI 42 - AT - Income Tax

Revision u/s 263 - Assessee has disallowed CSR expenditure but claimed 50% of CSR expenditure on account of donation u/s 80G and accordingly the claim of deduction u/s 80G is not allowable deduction as per the provision of explanation 2 u/s 37(1) and no details of generation of scrap has been provided and stated that the AO has not made any enquiry regarding source of generation scrap item-wise quantity and price etc HELD THAT - Deduction u/s 80G of the Act is a debatable issue and the Ld. PCIT was not authorized to take another view in exercising revisionary jurisdiction u/s 263 of the Act PCIT has not taken any enquiry as required by law or cite any plausible or cogent reason to reach the conclusion that the impugned assessment order was erroneously and prejudiced to the interest of revenue and instead of enquiry himself the PCIT set aside the order with the direction to pass order after revision of assessment. In our humble opinion that the explanation 2 to section 263 of the Act doesn t give unfettered power to the Ld. PCIT to revise each and every order to examine the issue which is already been properly examined and taken are possible view by the AO. On the basis of foregoing fact situations the impugned order passed by the PCIT void ab initio and beyond jurisdiction and liable to be set aside and quashed. Appeal of assessee is allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment revolved around the exercise of jurisdiction under Section 263 of the Income Tax Act, 1961 by the Principal Commissioner of Income Tax (PCIT). Specifically, the issues were:

• Whether the PCIT erred in assuming jurisdiction under Section 263 for the assessment year 2018-19, claiming the assessment order was erroneous and prejudicial to the interest of revenue.
• Whether the PCIT's action to withdraw the deduction allowed under Section 80G for CSR expenses was justified.
• Whether the PCIT rightly questioned the lack of inquiry into the generation of scrap and its impact on the assessment order.
• Whether the principles of natural justice were violated concerning the third notice issued under Section 263.

ISSUE-WISE DETAILED ANALYSIS

1. Assumption of Jurisdiction under Section 263

The relevant legal framework involves Section 263 of the Income Tax Act, which allows the PCIT to revise an assessment order if it is erroneous and prejudicial to the interests of the revenue. The Court examined whether the conditions for invoking Section 263 were met.

The Court noted that for Section 263 to be applicable, the assessment order must be both erroneous and prejudicial to the interests of the revenue. The PCIT's notices raised concerns about the deduction under Section 80G for CSR expenses and the lack of inquiry into the generation of scrap.

The Court found that the PCIT did not provide sufficient evidence or reasoning to establish that the assessment order was erroneous or prejudicial. The Court emphasized that the mere inadequacy of inquiry does not justify revision under Section 263 unless there is a lack of inquiry altogether.

2. Deduction under Section 80G for CSR Expenses

The PCIT challenged the deduction claimed under Section 80G for CSR expenses, arguing that CSR expenses are statutory and not eligible for deduction as donations. The Court examined the interplay between Section 37(1) and Section 80G, noting that the Finance Act 2015 excluded certain CSR payments from deductions, but not all.

The Court referenced ITAT decisions that supported the view that CSR expenses could qualify for deductions under Section 80G if they were donations to eligible funds. The Court concluded that the issue was debatable and that the PCIT could not invoke Section 263 simply because a different view was possible.

3. Inquiry into Generation of Scrap

The PCIT raised concerns about the lack of inquiry into the generation of scrap. The Court noted that the audit report and balance sheet contained details of scrap, and the issue was examined during assessment proceedings.

The Court found that the PCIT did not demonstrate how the lack of detailed inquiry into scrap generation prejudiced the revenue. The Court reiterated that Section 263 requires both error and prejudice, which were not established in this case.

4. Principles of Natural Justice

The assessee argued that the principles of natural justice were violated concerning the third notice under Section 263. The Court did not find sufficient evidence of such a violation, focusing instead on the broader issues of jurisdiction and inquiry adequacy.

SIGNIFICANT HOLDINGS

The Court held that the PCIT's invocation of Section 263 was not justified as the conditions of error and prejudice were not cumulatively satisfied. Key legal reasoning included:

"The CSR expenses are statutory expenses to be carried out from the profit of assessee. Hence no deduction of the amount is allowable u/s 30 to 37 of the Act for these expenses. Converting the same to donation and claiming 50% of the amount u/s 80G of the Act defeats the purpose."

The Court emphasized that inadequacy of inquiry does not automatically confer revisionary power under Section 263 unless there is a complete lack of inquiry. The Court concluded that the PCIT's order was void ab initio and beyond jurisdiction, leading to the quashing of the impugned order.

The appeal was allowed, reaffirming that the deduction under Section 80G for CSR expenses is a debatable issue and that the assessment order was not erroneous or prejudicial to the interests of the revenue.