2023 (10) TMI 191 - AT - Income Tax

Tribunal Rules on Tax Deductions: Some Allowed, Some Denied Over Compliance Issues and CSR Expenses.

The Tribunal partially allowed the appeal by the assessee, affirming the Principal Commissioner of Income Tax's (PCIT) decision regarding the deduction ... Revision u/s 263 - as per CIT deduction allowed u/s 35(2AB) AO has allowed the claim without obtaining Form No. 3CL - HELD THAT:- On a perusal of Rule 6(7A)(b) would show that the said rule prescribes certain condition, which inter alia, includes quantification of Expenditure eligible for deduction u/s 35(2AB) in Form 3CL. Even though it is not the responsibility of the assessee to furnish above said form, yet it is the requirement prescribed in Rule 6(7A), which should have been examined by the AO before allowing deduction u/s 35(2AB) of the Act. We noticed earlier that the assessing officer had asked the assessee through the notice issued u/s 142(1) of the Act about the break-up details of expenses only and did not mention about Form 3CL. Even though the above said form has to be furnished by the prescribed authority directly to the PCCIT/CCIT, yet it is the responsibility of the AO to verify as to whether the requirement of Rule 6(7A) has been satisfied or not, before allowing the claim u/s 35(2AB) of the Act. Admittedly, the AO has not examined the same. We notice that the provisions of sec. 35(2AB)(3) of the Act was amended with effect from 1.4.2016 by Finance Act, 2015, wherein it is stated that the assessee should fulfil such conditions with regard to maintenance of accounts and audit thereof and furnishing of reports in such manner as may be prescribed. We notice Rule 6(7A) was amended w.e.f 1.7.2016, i.e., after the amendment made in Sec. 35(2AB)(3) of the Act. Further, Form 3CL is one of the forms prescribed in Rule 6(7A)(b) of the Rules for quantifying scientific research expenditure by the prescribed authority. Since the rules prescribe for examination of the above said form, it is the duty of the AO to verify the same before allowing the deduction u/s 35(2AB) - Admittedly, the AO has not examined this aspect, even though it is not a fault upon the assessee. We agree with the view taken by PCIT on this issue that the AO has not carried out due enquiries or verification with regard to this issue. Accordingly, we uphold the order passed by Ld PCIT on this issue. Deduction allowed u/s 35(1)(i) - As is the view of the Ld PCIT that the said deduction was allowed by the AO without obtaining mandatory Form 3CM and Form 3CL issued by DSIR. A.R drew our attention to the provisions of sec. 35 of the Act and submitted that the above said Form 3CM and 3CL are applicable to the deduction claimed u/s 35(2AB) of the Act only, i.e., the above said forms are not required for allowing deduction u/s 35(1)(i) of the Act. On a perusal of the relevant provisions, we find that the above said submissions of Ld A.R to be correct, meaning thereby, the Ld PCIT has misdirected himself on this issue. Accordingly, we set aside the order passed by Ld PCIT on this issue. Deduction allowed u/s 80G the view of CIT is that the said claim has been made by the assessee in respect of the expenses incurred on Corporate Social Responsibility (CSR), which is disallowable u/s 37(1) of the Act and hence deduction under section 80G should not have been allowed. Disallowance of CSR expenses are required to be made u/s 37(1) of the Act, but there is no statutory bar in claiming the deduction u/s 80G of the Act if the said expenses are otherwise allowable as deduction - see ALLEGIS SERVICES (INDIA) PVT. LTD.[2020 (5) TMI 378 - ITAT BANGALORE], M/S JMS MINING PVT. LTD. [2021 (7) TMI 907 - ITAT KOLKATA]. Thus, the view taken by PCIT on this issue is a debatable one, meaning thereby, the action of the AO in allowing deduction u/s 80G results in a possible view. Accordingly, PCIT was not justified in initiating revision proceedings on this issue. Accordingly, we set aside his order on this issue. Appeal of the assessee is partly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Principal Commissioner was justified in invoking revisionary powers under section 263 on the ground that the Assessing Officer allowed deduction under section 35(2AB) without obtaining/verifying Form 3CL as required by Rule 6(7A)(b). 2. Whether the Principal Commissioner was justified in holding the assessment erroneous and prejudicial for allowing deduction under section 35(1)(i) without obtaining Forms 3CM and 3CL issued by the prescribed authority. 3. Whether the Principal Commissioner was justified in invoking section 263 to disturb allowance of deduction under section 80G where the expenditure claimed related to Corporate Social Responsibility (CSR), given the contention that CSR expense is disallowable under section 37(1). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Requirement to examine Form 3CL before allowing deduction under section 35(2AB) Legal framework: Section 35(2AB) (read with the amended proviso in section 35(2AB)(3) effective 1.4.2016) permits deduction for scientific research expenditure subject to conditions and furnishing of reports as prescribed. Rule 6(7A)(b) prescribes quantification of expenditure eligible for deduction and contemplates Form 3CL issued by the prescribed authority for quantification. Precedent treatment: Authorities have held that section 263 cannot be invoked where the Assessing Officer has conducted enquiries and taken a possible view; revision requires an order to be 'erroneous' and 'prejudicial to the interests of the Revenue.' Earlier decisions addressing non-supply of Form 3CL pre-amendment were distinguished. Interpretation and reasoning: The Tribunal reviewed the record showing that the AO issued notice under section 142(1) seeking break-up details of expenses but did not specifically verify Form 3CL compliance under Rule 6(7A). Although Form 3CL is provided by a prescribed authority directly to the Chief Commissioner/Principal Chief Commissioner and not by the assessee, Rule 6(7A) places a verification obligation on the AO to ensure conditions for section 35(2AB) are met before allowing the deduction. The amendment to Rule 6(7A)(b) post-dates earlier High Court decisions relied upon by the assessee, rendering those decisions inapplicable for the year under consideration. The Tribunal held that absence of AO's verification of Rule 6(7A) compliance constitutes lack of due enquiry/application of mind. Ratio vs. Obiter: Ratio - Where rules prescribing preconditions (Form 3CL) for quantification of eligible R&D expenditure exist, the Assessing Officer must verify compliance; failure to do so can render the assessment order erroneous and prejudicial if no enquiry on that required material was made. Distinguishing prior authority on temporal grounds is part of the binding reasoning. Conclusion: The Tribunal upheld the revision under section 263 on this issue - the AO had not carried out requisite enquiries/verification regarding Form 3CL and Rule 6(7A), and the PCIT was justified in setting aside the assessment for de novo adjudication in respect of the section 35(2AB) claim. Issue 2 - Applicability of Forms 3CM and 3CL to deduction under section 35(1)(i) Legal framework: Section 35(1)(i) allows deduction for certain payments to scientific research associations/approved institutions subject to statutory conditions. Rule 6(7A) and associated forms (such as Forms 3CM/3CL) were considered in relation to section 35(2AB). Precedent treatment: The Tribunal referred to statutory text and the scope of forms prescribed by rules; earlier judicial pronouncements differentiating applicability of forms to different sub-sections of section 35 were noted. Interpretation and reasoning: On textual reading, Forms 3CM and 3CL apply to the regime under section 35(2AB) for quantification of eligible expenditure and related prescribed conditions. The forms are not mandatory preconditions for allowing deduction under section 35(1)(i). The Principal Commissioner's premise that these forms were required for section 35(1)(i) was therefore a misdirection. Ratio vs. Obiter: Ratio - The requirement of Forms 3CM/3CL is not applicable to claims under section 35(1)(i); relying on their absence to characterize an assessment as erroneous is unsustainable. This forms a binding conclusion on the issue. Conclusion: The Tribunal set aside the revision order so far as it related to denial of the section 35(1)(i) deduction on the ground of non-production of Forms 3CM/3CL; the Principal Commissioner was not justified in invoking section 263 on this basis. Issue 3 - Allowance under section 80G for payments characterized as CSR expenditures Legal framework: Section 80G allows deduction for certain charitable donations in accordance with criteria in the statute and rules. Section 37(1) disallows business expenditure of a capital or personal nature and contains the statutory bar on CSR expenditure as business deduction by amendment/case-law. Interaction arises where an outflow characterized as CSR may also be claimed under a specific deduction head like section 80G. Precedent treatment: The Tribunal noted decisions where courts/tribunals have held that while CSR expenditure is not allowable under section 37(1), there is no statutory bar on claiming deduction under section 80G if the expense otherwise meets the requirements of section 80G; such questions are often debatable and admit two views. Interpretation and reasoning: The Tribunal found that allowance of deduction under section 80G for amounts alleged to be CSR-related represents a debatable issue on the facts and law - the Assessing Officer's allowance falls within a possible view. Section 263 is not available to merely substitute the Commissioner's view for a possible but sustainable view taken by the AO. Given that authorities support the proposition that section 80G claims may survive notwithstanding CSR disallowance under section 37(1), the Principal Commissioner's initiation of revision on this ground lacked justification. Ratio vs. Obiter: Ratio - Where an issue is debatable and the Assessing Officer has taken a possible view supported by material/authority, revision under section 263 is not warranted. Obiter - The specific treatment of CSR vis-à-vis section 80G claims may depend on factual matrix and merits adjudication on re-assessment. Conclusion: The Tribunal set aside the revision order insofar as it challenged the section 80G allowance; the PCIT was not justified in invoking section 263 because the AO's view was a possible view and the matter is debatable. Cross-reference and final disposition Cross-reference: The Tribunal applied the settled legal principles governing section 263 - revision requires an order to be both erroneous and prejudicial to the interests of Revenue, not merely an alternative view. Where the AO failed to verify a statutory/regulatory precondition (Issue 1), revision was sustained; where the Commissioner misdirected on statutory applicability (Issue 2) or confronted a debatable question of law/fact (Issue 3), revision was not sustained. Final disposition: The appeal was allowed in part - the revision order was upheld only with respect to the section 35(2AB) verification lapse; it was set aside in respect of the section 35(1)(i) and section 80G issues.