2025 (7) TMI 878 - AT - Income Tax

Revision u/s 263 - deduction of CSR expenses claimed u/s 80G - as per CIT CSR expenses as statutory obligation fails the test of voluntariness so as to be eligible for deduction u/s. 80G of the Act. Accordingly it was concluded that the deduction u/s. 80G could not be allowed for deduction - HELD THAT - We observed that the assessee had duly disclosed such facts on record during assessment proceedings and the AO taking note of such facts with specific reference to CSR expenditure claimed as deduction preferred to allow the claim of the assessee u/s 80G of the Act. Therefore on facts and the circumstances of the case it can be safely construed that the issue has been taken note of by the AO who accepted the claim of the assessee. Thus the AO has considered the issue and allowed the claim of deduction u/s. 80G in respect of CSR expenses which is a plausible view taken by him. The Hon ble Supreme Court in the case of Malabar Industries Ltd. 2000 (2) TMI 10 - SUPREME COURT has held that twin conditions needs to be satisfied before exercising revisional jurisdiction u/s 263 of the Act by the CIT. We find from the assessment records that the AO has brought on record material facts which go to show that necessary enquiries were indeed made on the impugned issue. Moreover as stated in preceding paras the very basis of selection of the case hinged upon the issue of deduction u/s 80G of the Act and seen in the light of specific queries and replies of the assessee it can be safely concluded that the issue was duly examined and the AO allowed the claim after due application of mind and in accordance with the provisions of the Act. We do not find that the assessment order could be considered as erroneous and prejudicial and liable to application of Explanation 2 to section 263 of the Act. Whether the CSR expenditure is allowable u/s. 80G is also no more res integra by a catena of decisions by various Co-ordinate Benches of the Tribunal. The Mumbai Bench of the Tribunal in the case of Alubond Dacs India (P.) Ltd. 2024 (7) TMI 636 - ITAT MUMBAI considered the provisions of Companies Act and I.T. Act and held that the assessee is entitled to deduction claimed u/s. 80G of the Act towards the CSR expenditure incurred by it. We therefore direct the ld. A.O to allow the claim of the assessee subject to the condition that the assessee has satisfied the other requirements warranted u/s.80G of the Act. Decided in favour of assessee. ESOP which according to the PCIT was not enquired into by the AO - lack of inquiry OR inadequate inquiry - HELD THAT - After going through the assessment order as well as the response of the assessee to the show cause notice issued before invoking provisions of section 263 of the Act we note that no query has been raised by the AO in the matter. No contrary material has been brought on record by the ld.AR. Certainly there is non-application of mind by the AO. There is no material before us which could have suggested that he had conducted enquiry or taken follow-up action after applying his mind on this issue. The contention that the said item duly reflected in the audited account would imply that the AO has examined the issue is devoid of any merit. Even the contention on merits based on judicial decisions is not acceptable in adjudicating on the applicability of revisionary powers of the ld.PCIT on the impugned issue which basically revolves around the applicability of Explanation 2 to section 263 vis- -vis enquiries conducted. We observe the ld.PCIT has drawn support from Explanation 2 below section 263(1) of the Act introduced by Finance Act 2015 w.e.f. 01.06.2015 for his action. The Explanation 2 inter alia provides that the order passed without making inquiries or verification which should have been made will be deemed to be erroneous insofar as it is prejudicial to the interest of the Revenue. Requirement of due enquiry to be conducted by the AO while scrutinising any case in the course of assessment order is concerned it would be relevant to quote certain landmark decisions of Rampyari Devi Saraogi versus CIT 1967 (5) TMI 10 - SUPREME COURT and Tara Devi Aggarwal (Smt) 1972 (11) TMI 2 - SUPREME COURT wherein it has been observed that where the AO had accepted a particular contention or issue without inquiry whatsoever the order was erroneous and prejudicial to the interest of Revenue. These two decisions show that it is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The aforesaid observations have to be understood in the factual background and matrix involved. In the said cases the AO had not conducted any enquiry or examined evidence whatsoever. There was total absence of enquiry or verification. The broad principle that emerges from the decisions relied upon above is that if AO has merely accepted the assessee s explanation on various issues without proper inquiry then the same would come within the ambit of lack of inquiry and not inadequate inquiry . Moreover there cannot be any dispute that in the instant case there is no enquiry at all by the AO. CIT has merely set aside the assessment order for framing it de novo. Therefore the AO would examine the issue involved and needless to say he would also allow the assessee opportunity of hearing following the principles of natural justice. In view of these facts we are of the considered view that the assessee should not prejudiced by the revision order otherwise also. Therefore we do not have any hesitation to conclude and concur with the ld.PCIT that the assessment order is not only erroneous but also prejudicial to the interests of the revenue - Decided against assessee.

Summary

The core legal questions considered in this judgment are:

1. Whether the Principal Commissioner of Income-tax (PCIT) was justified in invoking revisionary powers under section 263 of the Income-tax Act, 1961 ("the Act") to set aside the assessment order passed under section 143(3) read with section 144B regarding deductions claimed under section 80G for Corporate Social Responsibility (CSR) expenses.

2. Whether the PCIT was justified in directing disallowance of Employee Stock Option Plan (ESOP) expenses claimed as deduction without the Assessing Officer (AO) conducting necessary inquiries.

3. Whether the AO had made sufficient inquiry and applied mind in allowing the deductions claimed under section 80G and ESOP expenses, and if not, whether the order passed by AO was erroneous and prejudicial to the interests of revenue.

4. Whether the revisionary order under section 263 was passed without granting sufficient opportunity of hearing to the assessee.

5. Whether the PCIT erred in passing the revision order merely on the basis of audit objections without proper inquiry.

Issue-wise Detailed Analysis:

1. Deduction of CSR Expenses under Section 80G

Legal Framework and Precedents: Section 80G of the Act allows deduction for donations made to specified funds or charitable institutions. However, CSR expenses are mandatory under section 135 of the Companies Act, 2013 and are excluded from business expenditure under Explanation 2 to section 37 of the Act. The Supreme Court in Commissioner of Expenditure Tax vs PVG Raju held that donations must be voluntary to qualify for deduction under section 80G.

Court's Interpretation and Reasoning: The PCIT held that CSR expenses are statutory obligations and not voluntary donations; hence, the deduction under section 80G was not allowable. The AO had not conducted any inquiry on this issue and allowed the deduction, which PCIT found erroneous and prejudicial to revenue.

Key Evidence and Findings: The AO had recorded the claim and allowed the deduction without specific inquiry but on the basis of the assessee's submissions. The assessee contended that the AO had made necessary inquiries and was satisfied with the claim.

Application of Law to Facts: The Tribunal noted that the AO had considered the claim and allowed it after applying his mind, constituting a plausible view. The PCIT's revision was based on disagreement with AO's opinion rather than an unsustainable legal position.

Treatment of Competing Arguments: The Tribunal relied on the Supreme Court's decision in Malabar Industries Ltd. v. CIT, which requires two conditions for invoking section 263: the order must be erroneous and prejudicial to revenue. The Tribunal emphasized that where two views are possible, the AO's choice of one view cannot be deemed erroneous unless unsustainable in law.

Conclusions: The Tribunal held that the AO's order was neither erroneous nor prejudicial to revenue on this issue. It referred to a coordinate bench decision (Alubond Dacs India Pvt. Ltd.) which upheld the allowability of CSR expenses under section 80G, subject to conditions. Therefore, the revision order disallowing CSR deduction was unsustainable and was set aside.

2. Deduction of ESOP Expenses

Legal Framework and Precedents: ESOP expenses represent share-based payments to employees and are notional expenses without actual cash outflow. The question is whether such expenses are allowable as revenue expenditure under section 37(1) of the Act. The Karnataka High Court in CIT vs Biocon Ltd. held such expenses as not allowable, but the Supreme Court has admitted the Department's Special Leave Petition against this decision, indicating unsettled law.

Court's Interpretation and Reasoning: The PCIT observed that the AO had not made any inquiry into the ESOP expenses, which were debited under employee benefit expenses. The PCIT found the assessment order erroneous and prejudicial to revenue for lack of inquiry and verification, invoking Explanation 2 to section 263.

Key Evidence and Findings: The assessee argued that the ESOP expenses were disclosed in audited accounts and accepted by the AO without query. However, there was no material to show that AO applied mind or conducted any inquiry.

Application of Law to Facts: The Tribunal emphasized that mere disclosure in accounts does not imply inquiry by AO. Citing Supreme Court precedents (Rampyari Devi Saraogi and Tara Devi Aggarwal), the Tribunal held that acceptance without inquiry renders the order erroneous and prejudicial. The Tribunal also referred to multiple decisions and Explanation 2 to section 263 which deem an order erroneous if passed without necessary inquiries or verification.

Treatment of Competing Arguments: The Tribunal rejected the assessee's contention that AO's acceptance implied application of mind. It relied on judicial precedents and coordinate bench decisions holding that lack of inquiry justifies revision under section 263.

Conclusions: The Tribunal upheld the PCIT's revision order setting aside the assessment on ESOP expenses for lack of inquiry and directed AO to re-examine the issue after due inquiry and opportunity of hearing. The grounds challenging the revision on ESOP expenses were dismissed.

3. Scope and Limits of Revision under Section 263

Legal Framework and Precedents: Section 263 allows the Commissioner to revise an order if it is erroneous and prejudicial to the interests of revenue. The Supreme Court in Malabar Industries Ltd. and subsequent High Court decisions have clarified that mere difference of opinion or dissatisfaction with AO's conclusion does not justify revision unless the order is unsustainable in law or passed without application of mind.

Court's Interpretation and Reasoning: The Tribunal reiterated that the PCIT cannot substitute his opinion for that of AO unless the AO's order is erroneous in law or fact. The Tribunal relied on decisions of the Bombay High Court and coordinate benches emphasizing that revision cannot be used to re-assess facts or re-weigh evidence.

Key Evidence and Findings: The Tribunal found that on the CSR issue, the AO had applied mind and taken a plausible view. On the ESOP issue, there was no inquiry, making the assessment order erroneous and prejudicial.

Application of Law to Facts: The Tribunal applied the twin conditions test and concluded that the revision on CSR was not sustainable, but on ESOP was justified.

Treatment of Competing Arguments: The Tribunal distinguished between lack of inquiry (justifying revision) and inadequate inquiry (not justifying revision) based on the Delhi High Court's decision in CIT vs Sun Beam Auto.

Conclusions: The Tribunal upheld the PCIT's revision on ESOP expenses for lack of inquiry but set aside the revision on CSR expenses as the AO had applied mind and taken a sustainable view.

4. Opportunity of Hearing and Basis of Revision

Legal Framework and Precedents: Principles of natural justice require that the assessee be given adequate opportunity of hearing before passing revisionary orders. Revision cannot be based solely on audit objections without proper inquiry.

Court's Interpretation and Reasoning: The Tribunal noted that the grounds alleging lack of opportunity and reliance solely on audit objections were general and did not require detailed adjudication.

Conclusions: These grounds were not pressed or found substantial and were not separately adjudicated.

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."

"Where two views are possible and the AO 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."

"If the AO has merely accepted the assessee's explanation on various issues without proper inquiry then the same would come within the ambit of 'lack of inquiry' and not 'inadequate inquiry'."

"Explanation 2 to Section 263 of the Act introduced a deeming fiction that an order passed without making inquiries or verification which should have been made shall be deemed erroneous and prejudicial to the interest of Revenue."

"Mere disclosure of an item in audited accounts does not imply that the AO has applied his mind or made inquiry on the issue."

"The AO's order on CSR expenses claiming deduction under section 80G was a plausible view taken after applying mind and cannot be held erroneous merely because PCIT disagreed."

"The revision order setting aside the assessment on ESOP expenses for lack of inquiry is sustainable as the AO failed to make any enquiry or verification on this issue."

"The PCIT's revisionary powers under section 263 cannot be invoked to substitute the AO's judgment where the AO has applied mind and taken a view sustainable in law."

The final determinations are:

- The revision order under section 263 disallowing CSR expenses claimed under section 80G is set aside as the AO had applied mind and taken a plausible view.

- The revision order under section 263 setting aside the assessment order on ESOP expenses is upheld as the AO failed to conduct any inquiry or verification, rendering the order erroneous and prejudicial to revenue.

- The appeal is partly allowed accordingly.