2025 (7) TMI 442 - AT - Income Tax

Revision u/s 263 - Allowance of relief u/s 90 in respect of foreign tax credit claimed on income earned by the assessee s branch office in the Philippines - HELD THAT - PCIT does not substantiate how the facts for A.Y. 2020 21 are materially different from those considered in A.Y. 2018 19. No material deviation in the nature of income source of receipts DTAA provisions tax treatment in the Philippines or methodology of computation has been pointed out. PCIT merely refers to the reconciliation submitted by the assessee and raises doubt on the admissibility of certain expenses without conclusively demonstrating how such treatment renders the assessment order erroneous. Importantly the reconciliation was not only submitted during assessment but was considered and accepted by the AO after due inquiry. The fact that the AO has not elaborated the acceptance in the assessment order is not ipso facto evidence of non-application of mind or lack of inquiry particularly when the record contains detailed submissions evidences and calculations in response to statutory notices. The decision of the Coordinate Bench in 2025 (2) TMI 648 - ITAT AHMEDABAD squarely covers the issue. The Co-ordinate Bench in assessee s own case for A.Y. 2018 19 accepted the claim for foreign tax credit after examining the branch s income supporting documentation and compliance with the provisions of section 90 and DTAA without disputing the eligibility of the tax paid in the Philippines for relief under section 90. PCIT s distinction is based merely on a narrow interpretation of reconciliation entries without addressing the central finding that the income is taxed in both countries and eligible for relief under the DTAA. Allowance of deduction u/s 80G for donations forming part of CSR expenditure - We find no error in the AO s approach. The assessee had claimed deduction u/s 80G only in respect of donations made to registered institutions satisfying the conditions of section 80G(5) and not as general business expenditure u/s 37(1). PCIT s reference to Explanation 2 to section 37(1) inserted by Finance Act 2014 to deny CSR expenditure as business expenditure is inapplicable in the context of section 80G. Where donations meet the independent eligibility criteria of section 80G they cannot be denied deduction merely because they also fulfil CSR obligations. This principle has judicial approval in several decisions. Therefore the Assessing Officer having verified the approval of donee institutions under section 80G(5) and the satisfaction of all statutory requirements the claim of deduction was rightly allowed. The revisionary interference by the learned PCIT on this count is thus not legally sustainable. An assessment order passed after due consideration of facts supported by submissions and evidence furnished by the assessee in response to statutory notices reflects application of mind by the AO. Where the AO has applied his discretion and reached a plausible conclusion based on the material on record the revisionary authority cannot invoke section 263 merely because it holds a different opinion or would have come to a different conclusion. Thus we hold that the assessment order passed u/s 143(3) was not erroneous or prejudicial to the interest of Revenue. The revisionary order passed u/s 263 is therefore quashed. Appeal of the assessee is allowed.

Summary

The core legal issues considered by the Appellate Tribunal (AT) under section 263 of the Income-tax Act, 1961, in this appeal relate primarily to the validity of the revisionary order passed by the Principal Commissioner of Income Tax (PCIT). The PCIT had set aside the assessment order passed by the Assessing Officer (AO) for the assessment year 2020-21 on grounds that the assessment was both erroneous and prejudicial to the interest of the revenue. The principal issues examined were:

(i) Whether the AO erred in allowing foreign tax credit (FTC) under section 90 read with Article 24 of the India-Philippines Double Taxation Avoidance Agreement (DTAA) without proper verification of the foreign income and tax paid by the assessee's branch in the Philippines;

(ii) Whether the AO erred in allowing deduction under section 80G for donations which formed part of the Corporate Social Responsibility (CSR) expenditure, given that CSR expenses are disallowed under section 37(1) of the Act;

(iii) Whether the PCIT validly invoked the revisionary jurisdiction under section 263 on the basis that the assessment order was passed without proper enquiry or verification, thereby attracting Explanation 2 to section 263(1).

Regarding the foreign tax credit claim, the relevant legal framework includes section 90 of the Income-tax Act, which provides relief in cases of double taxation under treaties, and Article 24 of the India-Philippines DTAA, which governs the allowance of credit for taxes paid in the source country. The AO had examined the assessee's submissions, which included detailed reconciliation statements comparing the income declared in the Philippine tax return and the income offered to tax in India after adjustments for Indian tax principles. The assessee's branch in the Philippines was registered under the Philippine Economic Zone Authority (PEZA) and enjoyed tax concessions. The AO accepted the foreign income offered to tax in India at Rs. 31.88 crore, after allowing adjustments for non-allowable expenses under Indian law, and granted FTC of Rs. 8.02 crore accordingly, based on Form 67 filed and supporting documents.

The PCIT challenged this, contending that the AO failed to verify whether the gross income of Rs. 46.54 crore (as per Philippine return) was fully offered to tax in India and whether the foreign taxes were actually paid. The PCIT held that the entire gross income should have been taxed in India and the FTC claim was therefore erroneous and prejudicial.

The Tribunal, however, noted that the AO had conducted detailed scrutiny, including examination of reconciliation charts, tax returns, and statutory forms, and had accepted the net income computed in accordance with Indian tax principles. The Tribunal found that the PCIT's attempt to distinguish the prior Coordinate Bench decision for A.Y. 2018-19, which upheld a similar FTC claim, lacked a demonstrable basis. The PCIT did not show any material difference in facts or law for the year under consideration. The Tribunal emphasized that income cannot be taxed on a gross basis and that the AO's acceptance of net income after adjustments was consistent with the law. The Tribunal held that the AO had applied his discretion after due inquiry and the PCIT's allegations of non-verification were unsubstantiated.

On the issue of deduction under section 80G for donations forming part of CSR expenditure, the legal framework includes section 37(1), which disallows CSR expenditure as business expenditure, and section 80G, which provides deduction for donations made to specified institutions. The Finance Act, 2014, introduced Explanation 2 to section 37(1) to clarify that CSR expenses are not allowable as business expenditure. The PCIT held that since CSR expenses are not allowable under section 37(1), the corresponding deduction under section 80G should also be denied.

The Tribunal rejected this interpretation, noting that the statutory bar on CSR expenses under section 37(1) applies only to business expenditure and does not automatically preclude deductions under section 80G, which has its own independent criteria. The assessee had disallowed the CSR expenditure in income computation but claimed deduction under section 80G only for donations made to eligible institutions supported by receipts and satisfying statutory conditions. The AO had verified these claims and allowed the deduction. The Tribunal referred to judicial precedents affirming that donations qualifying under section 80G cannot be denied deduction merely because they also constitute CSR expenditure. The PCIT's revisionary interference on this ground was held to be legally unsustainable.

Regarding the invocation of section 263 itself, the Tribunal underscored the twin conditions for exercise of revisionary power: the assessment order must be both erroneous in law or fact and prejudicial to the interest of the Revenue. Both conditions are cumulative. A mere difference of opinion or disagreement with the AO's conclusion does not justify revision unless there is demonstrable error or failure in inquiry causing tangible prejudice. The Tribunal found that the AO had conducted proper inquiry, examined detailed submissions, and applied mind before passing the assessment order. There was no evidence of non-application of mind, non-verification, or misdirection in law. The PCIT's reliance on Explanation 2 to section 263(1) was misplaced as the AO's order was not passed without proper enquiry or verification.

The Tribunal concluded that the assessment order was neither erroneous nor prejudicial to the Revenue. The revisionary order setting aside the assessment was therefore quashed, and the appeal was allowed.

Significant holdings include the following verbatim reasoning:

"The statutory power of revision under section 263 can be exercised by the PCIT only where the assessment order satisfies the twin conditions of being both erroneous in law or in fact, and prejudicial to the interest of the Revenue. These two limbs are cumulative and not alternative. A mere disagreement with the conclusion drawn by the Assessing Officer, in the absence of any demonstrable error or lack of inquiry, cannot render the order erroneous in law."

"Where the Assessing Officer has applied his discretion and reached a plausible conclusion based on the material on record, the revisionary authority cannot invoke section 263 merely because it holds a different opinion or would have come to a different conclusion."

"The restriction under section 37(1) introduced by the Finance Act, 2014, is specific to business expenditure, and does not apply to voluntary donations made to eligible institutions under section 80G."

"Income cannot be taxed on gross basis, and only net income computed under Indian law can be brought to tax in India."

In sum, the Tribunal established the principle that revision under section 263 requires clear demonstration of error and prejudice, not mere difference of opinion; that foreign tax credit claims must be evaluated on net income after Indian tax adjustments; and that CSR expenditure disallowance under section 37(1) does not preclude deduction under section 80G for eligible donations. The final determination was in favour of the assessee, quashing the revisionary order and upholding the original assessment order.