2025 (7) TMI 373 - AT - Income Tax

Revision u/s 263 - as per CIT deduction u/s 80G was erroneously allowed since donation was in nature of CSR expenditure which is not voluntary in nature and thus not eligible for deduction - also the issue of section 80G/CSR was not discussed in the assessment order and hence assessment order is erroneous in so far as it is prejudicial to the interest of the Revenue - HELD THAT - CBDT Circular clearly states that the restriction on claiming deduction of CSR expense is only with respect to Section 37(1) of the Act wherein it will not be deemed to be a business expenditure for the purpose computing income under the head Profits and Gains from Business or Profession . The Circular itself clarifies that CSR expenditure will be allowable under other sections under the same head of income. In view of CBDT Circular it is clear that there is no express bar in claiming deduction in respect of CSR expenditure other than under Section 37(1) of the Act. The Ministry of Corporate Affairs ( MCA ) has issued Frequently Asked Questions ( FAQ ) through General Circular No. 01/2016 dated January 12 2016 (FAQ No. 6) and clarification being issued by the Ministry of Corporate Affairs Government of India also confirms that donation covered under CSR Expenses are eligible for the deduction under section 80G of the Income-tax Act 1961. Moreover reliance is placed on the decision of Sharda Cropchem Limited 2024 (8) TMI 1585 - ITAT MUMBAI wherein it was held that donations which are classified as CSR expenditure are eligible for deduction under Section 80G of the Act. Thus we are also of the view that the assessee is entitled for deduction claimed under section 80G of the Act towards CSR expenditure incurred by it. Whether PCIT could have invoked section 263 for denial of deduction claimed u/s 80G in respect of donation classified as CSR? - Tribunal in the case of Inter Gold (India) Pvt. Ltd. 2024 (8) TMI 1585 - ITAT MUMBAI as held that the provisions of Section 263 of the Act cannot be invoked for denial of deduction claimed under Section 80G in respect of donations classified as CSR. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the deduction claimed under section 80G of the Income-tax Act is allowable in respect of donations classified as Corporate Social Responsibility (CSR) expenditure under section 135 of the Companies Act, 2013;

(b) Whether the conditions for invoking revision jurisdiction under section 263 of the Income-tax Act were satisfied in the case of denial of deduction claimed under section 80G with respect to CSR donations;

(c) The interplay and distinction between disallowance of CSR expenditure under section 37(1) of the Income-tax Act and allowance of deduction under section 80G;

(d) The correctness and legality of the Principal Commissioner of Income Tax's (PCIT) order under section 263, which held that the assessment order was erroneous and prejudicial to the interests of Revenue for allowing deduction under section 80G on CSR donations.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Allowability of deduction under section 80G for CSR donations

Relevant legal framework and precedents: Section 80G of the Income-tax Act provides deduction for donations made to specified funds and charitable institutions. Section 135 of the Companies Act, 2013 mandates certain companies to spend a minimum amount on CSR activities but does not prescribe the mode or donees for such expenditure. Explanation 2 to section 37(1) of the Income-tax Act disallows CSR expenditure as business expenditure. CBDT Circular No. 1/2015 clarifies that CSR expenditure is not allowable under section 37(1) but may be allowable under other provisions. The Ministry of Corporate Affairs' FAQ No. 6 (General Circular No. 01/2016) confirms CSR expenditure does not enjoy specific tax exemptions but donations to entities listed under section 80G may qualify for deduction.

Coordinate Bench decisions such as ACIT v. Sharda Cropchem Limited and Alubound Dacs India Private Limited v. Dy. CIT have held that CSR expenditure can qualify for deduction under section 80G, provided the other conditions of the section are met.

Court's interpretation and reasoning: The Tribunal noted that although CSR expenditure is mandatory under the Companies Act, the assessee has discretion regarding the mode and donee of such expenditure. The donations were made to entities registered under section 80G, and the assessee was otherwise eligible to claim deduction under section 80G. The Tribunal emphasized that section 80G does not require donations to be voluntary for claiming deduction. The CBDT Circular and MCA FAQ clarified that CSR expenditure is disallowed only under section 37(1) but may be allowed under other provisions like section 80G.

Key evidence and findings: The assessee's donation of Rs. 24,20,000 to Axis Foundation was disclosed in the computation and tax audit report, and allowed by the Assessing Officer (AO) under section 143(3). The donation was classified as CSR expense in the books and disallowed under section 37(1) as per Explanation 2 but claimed as deduction under section 80G in the return.

Application of law to facts: The Tribunal applied the legal position that CSR expenditure is not allowable as business expenditure under section 37(1) but may be allowed as deduction under section 80G if the donee is registered and other conditions are met. The Tribunal relied on CBDT Circular and MCA FAQ to support this view.

Treatment of competing arguments: The PCIT argued that CSR expenditure is mandatory and not voluntary, hence not eligible for deduction under section 80G. The Tribunal rejected this, holding that the mandatory nature of CSR does not preclude deduction under section 80G, which does not require donations to be voluntary. The Tribunal also distinguished the disallowance under section 37(1) from the allowance under section 80G.

Conclusions: The Tribunal concluded that the assessee is entitled to claim deduction under section 80G for donations classified as CSR expenditure, subject to fulfillment of other conditions under section 80G.

Issue (b): Validity of invoking section 263 for revising the assessment order

Relevant legal framework and precedents: Section 263 authorizes the PCIT to revise an assessment order if it is erroneous and prejudicial to the interests of Revenue. The principles require that the order under revision must be erroneous in law or fact and cause prejudice to Revenue. The Hon'ble Mumbai Tribunal in Inter Gold (India) Pvt. Ltd. v. Pr. CIT held that section 263 cannot be invoked merely because the PCIT holds a contrary opinion if the AO has considered the issue and allowed deduction in accordance with law.

Court's interpretation and reasoning: The Tribunal found that the AO had duly examined and allowed the deduction under section 80G after verifying the details and certificate of donation. The PCIT's order under section 263 was based on the premise that CSR expenditure is mandatory and hence not eligible for deduction under section 80G, which the Tribunal found to be an incorrect legal position. The Tribunal emphasized that section 37(1) and section 80G operate independently and the disallowance of CSR expenditure under section 37(1) does not preclude deduction under section 80G.

Key evidence and findings: The AO's order was detailed and based on the assessee's disclosure and evidence. No defect or illegality was found in the AO's order that would justify invoking section 263. The PCIT failed to identify any error in the AO's order or how it was prejudicial to Revenue.

Application of law to facts: The Tribunal applied the established legal principle that section 263 cannot be invoked to substitute the AO's judgment with that of the PCIT unless the AO's order is erroneous and prejudicial. Since the AO's order was sustainable in law and fact, the revision order was invalid.

Treatment of competing arguments: The PCIT's contention that CSR expenses are mandatory and hence not eligible for deduction under section 80G was rejected. The Tribunal held that the PCIT's opinion did not amount to an error of law or fact justifying revision under section 263.

Conclusions: The Tribunal held that the PCIT's invocation of section 263 was not justified and quashed the revision order, restoring the AO's assessment order.

Issue (c): Distinction between disallowance under section 37(1) and deduction under section 80G

Relevant legal framework and precedents: Explanation 2 to section 37(1) disallows CSR expenditure as business expenditure. Section 80G allows deduction for donations to certain funds and charitable institutions. CBDT Circular No. 1/2015 and MCA FAQ clarify that CSR expenditure is not allowable under section 37(1) but may be allowable under other provisions.

Court's interpretation and reasoning: The Tribunal highlighted that section 37(1) and section 80G serve different purposes and operate independently. Disallowance of CSR expenditure under section 37(1) for computing business income does not affect the eligibility for deduction under section 80G, which is allowed from gross total income.

Key evidence and findings: The assessee had disallowed CSR expenses under section 37(1) but claimed deduction under section 80G, supported by donation certificates and disclosures.

Application of law to facts: The Tribunal applied the legal distinction to hold that the assessee's approach was correct and consistent with law and administrative clarifications.

Treatment of competing arguments: The PCIT's conflation of the two provisions and assertion that CSR expenditure cannot qualify for deduction under section 80G was rejected.

Conclusions: The Tribunal confirmed the independent operation of section 37(1) and section 80G, allowing deduction under section 80G notwithstanding disallowance under section 37(1).

3. SIGNIFICANT HOLDINGS

"Section 80G of the Income-tax Act does not put any condition for the donation to be voluntary in nature for the purpose of claiming deduction."

"The provisions of section 37(1) of the Income-tax Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Income-tax Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditures cannot be allowed under the provisions of section 37 of the Income-tax Act."

"The restriction on claiming deduction of CSR expense is only with respect to Section 37(1) of the Act wherein it will not be deemed to be a business expenditure for the purpose computing income under the head 'Profits and Gains from Business or Profession'. The Circular itself clarifies that CSR expenditure will be allowable under other sections under the same head of income."

"The disallowances for deduction under section 80G vis-`a-vis CSR can be restricted to contributions made to these Funds mentioned in Section 80G(2)(a)(iiihk) and (iiihl) only. It is an undisputed fact that the assessee has not claimed any deduction against the aforesaid clauses of 80G(2)(a) of the Act and as such entire donation claimed by the assessee is allowable u/s 80G."

"Section 37(1) and Section 80G of the Act are independent and the principles governing what is not allowable u/s. 37(1) have been provided in the section itself. Even in section 80G also, what is not allowable has also been provided under the Act."

"Allowing the claim of deduction u/s. 80G by the Id. AO cannot be held to be unsustainable in law or amounts to erroneous and prejudicial to the interest of the Revenue. Thus order of the Ld. PCIT is reversed on this point."

"The provisions of Section 263 of the Act cannot be invoked for denial of deduction claimed under Section 80G in respect of donations classified as CSR. Without finding any defect in such order or how the claim allowed by the Id. AO u/s. 80G is unsustainable in law, he cannot cancel the assessment order."

"The mandatory nature of CSR expenditure does not preclude deduction under section 80G, which is allowed from Gross Total Income and is independent of business expenditure computation."

"The assessee is entitled to deduction claimed under section 80G of the Act towards the CSR expenditure incurred by it."

"The order passed by the Ld. PCIT under section 263 is quashed and the assessment order passed by the Ld. AO is restored."