2025 (6) TMI 2046 - AT - Income Tax

CSR expenses not deductible under Section 80G as they are mandatory, not voluntary donations; AO's order upheld by ITAT

The ITAT Mumbai held that expenditure on CSR obligations is not eligible for deduction under section 80G, as CSR payments are mandated by law and cannot ... Revision u/s 263 - Eligibility for deduction u/s. 80G - expenditure on Corporate Social Responsibility (CSR) -Whether the AO has erred in allowing expenditure incurred by the assessee by way of its CSR obligation by way of deduction u/s 80G even though the same has been suo-moto disallowed by the assessee while computing the income under the head ‘income from business or profession” where admittedly, other conditions for claiming deduction u/s 80G are satisfied in the instant case. HELD THAT:- As per explanation 2 to Section 37(1) of the Act, the explanatory notes to the Finance Bill 2014 and Section 135 of the Companies Act to hold that CSR expenditure is not to be allowed as deduction in any form and the same goes against the basic intent of the provisions and what cannot be allowed in view of the specific provisions cannot be allowed indirectly under specifically provided in the Act and secondly, where he has held that the payments made by the assessee towards CSR payments are mandated by law and therefore, cannot be construed as voluntary donations eligible for deduction u/s 80G of the Act have been adequately addressed by the Coordinate Bench in the aforesaid decision. In the instant case, we find that PCIT has also fairly admitted that though there are decisions of the Coordinate Benches in favour of the assessee, since the department has filed appeal and the matter is sub-judice before the Hon’ble Bombay High Court, he is setting aside the assessment order. We therefore find that where the view adopted by the AO is supported by various decisions of the Coordinate Benches including the Jurisdictional Benches, how such a view can be held as erroneous in nature is beyond our comprehension. AO has made detailed enquiries and verification in respect of claim of deduction u/s 80G on the CSR expenditure incurred by the assessee during the year under consideration and only after such enquiry and verification, claim of deduction has been allowed by him. We are of the considered view that the PCIT has erred in exercise of his jurisdiction u/s 263 and the order so passed u/s 263 PCIT is not sustainable and the same is hereby quashed and that of the AO is sustained. Appeal of the assessee is allowed. ISSUES: Whether expenditure incurred towards Corporate Social Responsibility (CSR) can be allowed as a deduction under section 80G of the Income Tax Act, 1961 ('the Act').Whether the Principal Commissioner of Income Tax (PCIT) was justified in revising the assessment order under section 263 of the Act on the ground that the assessment order was erroneous and prejudicial to the interest of revenue for allowing deduction under section 80G in respect of CSR expenditure.Whether mandatory CSR contributions can be treated as voluntary donations eligible for deduction under section 80G.Whether the AO's allowance of deduction under section 80G after due inquiry constitutes a 'change of opinion' that cannot be interfered with under section 263.Whether the PCIT was justified in directing initiation of penalty proceedings under the Act in the revision order under section 263.Whether the provisions of sections 37(1) (including Explanation 2) and section 80G of the Act are to be read harmoniously, and if CSR expenditure disallowed under section 37(1) can be allowed as deduction under section 80G. RULINGS / HOLDINGS: The Tribunal held that deduction under section 80G of the Act cannot be disallowed merely because the expenditure is incurred towards CSR, as section 80G does not impose a condition that donations must be voluntary; thus, CSR expenditure eligible under section 80G can be claimed despite disallowance under section 37(1) Explanation 2.The revision under section 263 was held to be not sustainable where the AO had made detailed enquiry and adopted one possible legal view supported by various coordinate Bench decisions; hence, the PCIT erred in setting aside the assessment order as 'erroneous and prejudicial to the interest of revenue.'The mandatory nature of CSR contributions under the Companies Act, 2013 does not negate their character as donations for the purpose of section 80G, since the essential element is absence of quid pro quo or material return, not voluntariness of payment.The Tribunal reaffirmed that 'what cannot be allowed in view of specific provisions cannot be allowed indirectly unless specifically provided in the Act' but held that section 80G and section 37(1) are independent provisions and Explanation 2 to section 37(1) does not bar deduction under section 80G.The PCIT's direction to initiate penalty proceedings under section 263 was found to be beyond the scope of revisionary jurisdiction and therefore not justified.The Tribunal relied on the principle of harmonious construction to hold that allowing deduction under section 80G for CSR expenditure does not render Explanation 2 to section 37(1) nugatory, as the two sections operate independently-section 37(1) governs business income computation, whereas section 80G provides a deduction from gross total income. RATIONALE: The legal framework applied includes section 37(1) of the Act (including Explanation 2 introduced by Finance (No.2) Act, 2014), section 80G of the Act, section 135 of the Companies Act, 2013, and relevant judicial precedents including the Supreme Court decision in PVG Raju (1976) and various coordinate Bench decisions of the Tribunal.The Tribunal applied the principle that the term 'donation' requires absence of quid pro quo or material return, not necessarily voluntariness in the sense of non-mandatory payment, thereby distinguishing mandatory CSR contributions from non-donations only on the basis of statutory obligation is not warranted.The Tribunal emphasized that the legislative intent behind Explanation 2 to section 37(1) was to disallow CSR expenditure as business expense to avoid subsidizing CSR through business deductions, but did not explicitly restrict claiming deduction under other provisions such as section 80G, unless expressly stated (e.g., specific exclusions under section 80G(2)(a)(iiihk) and (iiihl)).The Tribunal noted the Ministry of Corporate Affairs Circular No. 01/2016 clarifying no specific tax exemptions for CSR expenditure but recognizing that CSR expenditure may qualify for deduction under other provisions if conditions are met.The Tribunal relied on the principle of harmonious construction to interpret the Act so as to give effect to both section 37(1) Explanation 2 and section 80G without rendering either provision redundant.The Tribunal rejected the PCIT's reliance on the pendency of departmental appeals before the Bombay High Court as insufficient to override binding coordinate Bench decisions supporting the AO's view.The Tribunal held that exercise of revisionary jurisdiction under section 263 requires the original order to be 'erroneous' and 'prejudicial to the interest of revenue' and that mere difference of opinion or adoption of one possible view after due inquiry does not warrant interference.The Tribunal clarified that initiation of penalty proceedings under section 263 is beyond the scope of revisionary powers and thus not justified.