ITAT quashes PCIT order under Section 263, allows Section 80G deduction on CSR expenditure after proper verification

ITAT Mumbai allowed the assessee's appeal and quashed the PCIT's order under Section 263. The case involved allowability of deduction under Section 80G for CSR expenditure. The assessee had added back CSR expenditure in income computation per Explanation 2 to Section 37 and claimed 50% deduction under Section 80G. The AO conducted detailed enquiries and verification regarding the Section 80G claim on CSR expenditure. ITAT relied on precedents from Synergia Lifesciences Pvt. Ltd. and Alubound Dacs India Pvt. Ltd., which established that CSR expenditure is allowable as deduction under Section 80G. Since the AO had made proper verification and the assessee provided relevant submissions during assessment proceedings, ITAT held the Section 263 order was unsustainable and quashed it.

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ISSUES:

Whether the order passed under section 263 of the Income-tax Act, 1961 is valid and within jurisdiction when it sets aside an assessment completed under sections 143(3), 147 read with 144B of the Act by a Faceless Assessing Officer.Whether the assessing officer erred in allowing deduction under section 80G of the Act on Corporate Social Responsibility (CSR) expenditure.Whether CSR expenditure qualifies for deduction under section 80G despite being disallowed as business expenditure under section 37(1) of the Act.Whether the Principal Commissioner of Income-tax (PCIT) was justified in setting aside the assessment order as erroneous and prejudicial to the interest of revenue for failure to examine the allowability of deduction under section 80G.

RULINGS / HOLDINGS:

The order passed under section 263 of the Act is not sustainable and was rightly quashed because the assessing officer had jurisdiction under the Faceless regime and had duly considered the issue of deduction under section 80G.The assessing officer conducted detailed enquiries and verified submissions regarding the claim of deduction under section 80G on CSR expenditure and accepted the claim without disallowance, which was proper and in accordance with law.CSR expenditure is not allowable as business expenditure under section 37(1) as per Explanation 2, but deduction under section 80G is available for donations made, subject to prescribed conditions; there is no blanket disallowance of section 80G deduction for CSR-related donations.The PCIT erred in holding that the assessment order was erroneous and prejudicial to the interest of revenue on the ground that the assessing officer failed to examine the allowability of deduction under section 80G, as the record showed detailed examination and acceptance of the claim.

RATIONALE:

The Court applied the statutory provisions of the Income-tax Act, 1961, particularly sections 37(1), 80G, 143(3), 147, 144B, and 263.Explanation 2 to section 37(1) excludes CSR expenditure from allowable business expenditure, but section 80G(2)(a) allows deductions for sums paid as donations, except those specifically excluded (e.g., Swachh Bharat Kosh and Clean Ganga Fund), thus permitting deduction for qualifying CSR donations.The Court relied on the principle that the legislative intent, as reflected in the Memorandum to the Finance Bill and clarifications by the Ministry of Corporate Affairs, does not impose a blanket ban on section 80G deductions for CSR expenditure.Precedents from the ITAT, Mumbai, were considered, holding that expenditure towards CSR activities qualifies for deduction under section 80G, reinforcing the legality of the assessing officer's acceptance of the claim.The Court emphasized that the assessing officer had issued specific notices seeking details on the claim and had considered the submissions before passing the assessment order, negating the PCIT's finding of erroneous and prejudicial order under section 263.No doctrinal shift or dissenting opinion was noted; the decision affirmed established interpretations and procedural correctness under the Faceless Assessment regime.

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