2025 (7) TMI 1037 - AT - Income Tax

Revision u/s 263 - twin perquisites of initiating revisionary action - claim of deduction u/s 80G allowed by AO - HELD THAT - On perusal of notices u/s142(1) we find that AO sought explanation on various issues including on the deduction u/s 80G along with supporting documents. The assessee vide its reply furnished various details including the detail of examination claimed u/s 80G. The assessee also furnished receipt of donations and per Annexure-XII of the reply. The assessee explained that they have claimed deduction of 50% of total donation. AO has not made such references in the assessment order. Thus assessing officer impliedly accepted the explanation offered by assessee. We find that in DCIT Vs Gabriel India Ltd. 2025 (5) TMI 863 - ITAT MUMBAI Vistex Asia Pacific Private Limited 2025 (7) TMI 877 - ITAT MUMBAI and Axis Securities Limited 2025 (7) TMI 953 - ITAT MUMBAI consistently allowed deduction under section 80G @ 50% of CSR expenses. As relying on n Dalal and Broacha Stock Broking Pvt. Ltd. 2025 (6) TMI 1712 - ITAT MUMBAI in accepting the claim of donation under section 80G @ 50% of total donation in the assessment order is not erroneous as the action of assessing officer is legally sustainable view. Thus in our considered view the twin conditions prescribed under section 263 of the Income Tax Act is not fulfilled in the present case. As the pre-requisite conditions for exercising jurisdiction under section 263 has not meet out in the present hence we quash/set aside the order of ld. Pr. CIT. Decided in favour of assessee.

Summary

The core legal questions considered by the Tribunal in this appeal revolve around the validity and correctness of the revisionary order passed by the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income Tax Act, 1961. Specifically, the issues are:

1. Whether the PCIT was justified in invoking section 263 to revise the assessment order passed under section 143(3) read with section 144, on grounds that the order was erroneous and prejudicial to the interests of revenue.

2. Whether the assessing officer's allowance of deduction under section 80G of the Act in respect of Corporate Social Responsibility (CSR) expenditure was legally sustainable, or whether such deduction was impermissible because CSR expenditure is a statutory obligation and not voluntary donation.

3. Whether the prerequisites for exercise of jurisdiction under section 263-namely, that the assessment order was erroneous and prejudicial to revenue-were satisfied in the present case.

4. Whether the PCIT's action amounted to impermissible change of opinion without establishing that the assessing officer's order was irrational or unsustainable in law.

Issue-wise Detailed Analysis:

1. Jurisdiction and Validity of Revisionary Order under Section 263

The legal framework under section 263 empowers the PCIT to revise an assessment order if it is found to be erroneous and prejudicial to the interests of the revenue. The twin conditions for exercise of such jurisdiction are well-settled in precedents, including the Supreme Court ruling in Malabar Industrial Co. Ltd. v. Commissioner of Income-tax, which holds that mere change of opinion does not justify revisionary jurisdiction.

The PCIT issued a show cause notice alleging that the assessing officer had passed the assessment order without proper enquiry into the claim of deduction under section 80G in respect of CSR expenditure, thereby rendering the order erroneous and prejudicial to revenue. The PCIT contended that CSR expenditure is mandatory and hence not eligible for deduction under section 80G, and that the assessing officer failed to make necessary enquiries before allowing such deduction.

The assessee argued that the assessing officer had issued a detailed notice under section 142(1) during assessment, sought explanations specifically on the deduction under section 80G, and examined the claim after receiving detailed replies and supporting documents. The assessing officer's decision to allow the deduction was thus a considered and plausible view based on the material on record.

The Tribunal noted that the assessing officer had indeed sought and received detailed information regarding the deduction under section 80G, including receipts evidencing eligibility. The absence of any adverse finding or addition disallowing the deduction in the assessment order implied acceptance of the assessee's claim. The Tribunal further observed that the PCIT's order did not demonstrate that the assessing officer's opinion was irrational or unsustainable in law, and hence the revisionary jurisdiction was not validly invoked.

In applying the law to facts, the Tribunal held that the twin conditions for section 263 jurisdiction were not met, as the assessment order was not erroneous nor prejudicial to revenue. The PCIT's order was thus quashed as beyond jurisdiction.

2. Deductibility of CSR Expenditure under Section 80G

The legal issue was whether CSR expenditure, which is a statutory obligation under the Companies Act, can qualify for deduction under section 80G of the Income Tax Act. Section 80G allows deduction for donations made to specified funds or charitable institutions registered under the section.

The PCIT's position was that CSR expenditure is mandatory and not voluntary donation, and hence no deduction under section 80G is permissible. The PCIT relied on the principle that CSR expenses are disallowed as business expenditure under section 37(1) by virtue of Explanation 2 to that section, and extended this reasoning to deny deduction under section 80G.

The assessee contended that there is no amendment or provision in section 80G disallowing CSR expenditure as deduction. The only requirement for claiming deduction under section 80G is that the donee institution must be registered under section 80G. The assessee relied on multiple decisions of coordinate benches of the Tribunal and High Courts which held that deduction under section 80G is allowable if the donee institution is registered, irrespective of the CSR nature of the donation.

The Tribunal examined the precedents cited, including decisions in cases such as Castrol India Ltd., ACIT vs Sharda Cropechem Ltd., and DCIT vs Gabriel India Ltd., which consistently held that CSR donations to eligible institutions registered under section 80G qualify for deduction at prescribed rates (often 50%). The Tribunal distinguished decisions denying deduction under section 37(1) from those under section 80G, noting that the legal provisions and legislative intent differ.

The Tribunal also referred to a detailed coordinate bench ruling which emphasized that while CSR expenses are disallowed under section 37(1), there is no bar on claiming deduction under section 80G if the donee institutions satisfy the registration and other conditions. The Tribunal held that the assessing officer's allowance of deduction under section 80G was a plausible and legally sustainable view.

The Tribunal directed the assessing officer to verify the eligibility of the donee institutions under section 80G and other conditions, and if satisfied, to allow the deduction accordingly.

3. Treatment of Competing Arguments and Evidence

The Tribunal carefully considered the submissions from both sides. The PCIT's reliance on the mandatory nature of CSR expenditure and its ineligibility for deduction was countered by the assessee's demonstration of registration of donee institutions under section 80G and supporting receipts. The Tribunal found that the assessing officer had made detailed enquiries and had sufficient material before allowing the deduction.

The Tribunal also found that the PCIT's order under section 263 was based on a mere change of opinion without demonstrating any illegality or irrationality in the assessing officer's order, which is impermissible under settled law. The Tribunal thus rejected the PCIT's contention and upheld the assessing officer's order.

4. Conclusions

The Tribunal concluded that the assessing officer's order allowing deduction under section 80G in respect of CSR expenditure was not erroneous or prejudicial to revenue. The prerequisites for exercise of revisionary jurisdiction under section 263 were not fulfilled. The PCIT's order was therefore quashed and set aside.

The assessee's grounds of appeal were allowed, confirming the validity of the assessment order and the allowance of deduction under section 80G, subject to verification of donee institutions' registration and compliance with conditions under section 80G.

Significant Holdings and Core Principles Established:

"The twin conditions prescribed under section 263 of the Income Tax Act are that the order sought to be revised must be erroneous and prejudicial to the interests of the revenue. Mere change of opinion by the Principal Commissioner of Income Tax does not justify exercise of revisionary jurisdiction."

"CSR expenditure, being a statutory obligation under the Companies Act, is not allowable as business expenditure under section 37(1) of the Income Tax Act. However, there is no corresponding bar under section 80G of the Act. Therefore, donations made as part of CSR to institutions registered under section 80G are eligible for deduction under that section, subject to fulfillment of other conditions."

"Where the assessing officer has made detailed enquiries, sought explanations and supporting documents, and has passed an order allowing deduction under section 80G, such order cannot be held to be erroneous merely because the Principal Commissioner of Income Tax disagrees with the view."

"In the absence of any new material or evidence, and without demonstrating that the assessing officer's order is irrational or unsustainable in law, the revisionary jurisdiction under section 263 cannot be invoked."

"The assessing officer's allowance of deduction under section 80G in respect of CSR expenditure at 50% of the donation amount, supported by receipts evidencing eligibility, is a legally sustainable and plausible view."