CSR expenses qualifying under Sections 30-36 allowed as Section 80G deduction except Swachh Bharat and Clean Ganga Fund donations

The ITAT Mumbai upheld the reopening of assessment regarding deduction claimed under Section 80G for corporate social responsibility expenses. The tribunal found the reopening valid as the original AO had not examined whether CSR funds could qualify for Section 80G deduction. Following precedent in Alubound Dacs India Limited, the tribunal ruled that CSR expenditure qualifying under Sections 30-36 is allowable as deduction under Section 80G, except for donations to Swachh Bharat Kosh and Clean Ganga Fund as specified by Finance Act 2015 amendments. The AO was directed to allow the assessee's claim subject to meeting other Section 80G requirements.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the reopening of the assessment under Section 147 of the Income Tax Act, 1961 (the Act) for the Assessment Year 2015-2016 was valid and legally sustainable, particularly given the lapse of more than four years and whether there was any failure on the part of the assessee to fully and truly disclose all material facts necessitating such reopening.

(b) Whether the deduction claimed by the assessee under Section 80G of the Act for amounts spent on Corporate Social Responsibility (CSR) activities mandated under Section 135 of the Companies Act, 2013, is allowable, or whether such expenditure lacks the voluntary nature required to qualify as a donation under Section 80G and is therefore not deductible.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Reopening of Assessment under Section 147

Relevant legal framework and precedents: Section 147 of the Act permits reopening of assessment if the Assessing Officer (AO) has reason to believe that income chargeable to tax has escaped assessment. The proviso to Section 147 restricts reopening beyond four years from the end of the relevant assessment year unless the failure to disclose material facts is established. Section 151 requires prior approval of the Principal Commissioner of Income Tax (PCIT) for reopening beyond four years. The courts have held that reopening cannot be based merely on change of opinion and must be supported by material indicating failure to disclose material facts.

The Tribunal referred to the decision of the Hon'ble Delhi High Court in Techspan India Pvt. Ltd. v. Income Tax Officer, which clarified that reopening is valid if the original assessment order is non-speaking or cryptic and does not disclose an opinion on the issue sought to be reopened. The Court also emphasized that judicial intervention should not abort reopening where material was available but ignored or escaped the AO's attention.

Court's interpretation and reasoning: The Tribunal examined the original assessment order dated 30/10/2017 and found no indication that the AO had examined the issue of deduction claimed under Section 80G on amounts also claimed as CSR expenses. The reopening was based on the discovery that CSR expenses and 80G donations were claimed on the same amounts, which could lead to double benefit, defeating the purpose of the provisions. The PCIT's approval for reopening was found to be given after proper application of mind, not mechanically.

Key evidence and findings: The reopening was triggered by the observation that the assessee claimed deduction under Section 80G on amounts also spent as CSR expenses, which are statutorily mandated. The AO found that this constituted failure to disclose material facts. The PCIT's approval letter dated 25/03/2021 was on record. The original assessment order did not address the issue of overlapping claims.

Application of law to facts: Since the original assessment order did not deal with the issue of Section 80G deduction on CSR expenses, the reopening was not a mere change of opinion but based on material indicating failure to disclose. The procedural safeguards under Sections 147 and 151 were complied with.

Treatment of competing arguments: The assessee argued that reopening was invalid due to absence of failure to disclose, no new material, and mechanical approval by PCIT. The Tribunal rejected these contentions, relying on the non-speaking nature of the original order and proper approval by PCIT.

Conclusion: The reopening of the assessment under Section 147 was valid and legally sustainable.

Issue 2: Deduction under Section 80G for CSR Expenditure

Relevant legal framework and precedents: Section 80G allows deduction for donations made to specified funds and charitable institutions, provided the donation is voluntary. Section 135 of the Companies Act, 2013 mandates certain companies to spend a percentage of profits on CSR activities. Explanation 2 to Section 37(1) of the Act, inserted by Finance (No.2) Act, 2014, disallows CSR expenditure as business expenditure. The Finance Act, 2015 amended Section 80G(2)(a) to exclude donations to certain funds (Swachh Bharat Kosh, Clean Ganga Fund) from deduction. The Supreme Court in Commissioner of Expenditure-Tax v. PVG Raju held that donations must be voluntary and without expectation of return to qualify as donations. The Delhi Tribunal in Agilent Technologies (International) (P.) Ltd. v. ACIT held that CSR contributions do not qualify for deduction under Section 80G as they are statutory obligations lacking voluntariness.

Court's interpretation and reasoning: The Tribunal examined the legislative intent behind Explanation 2 to Section 37(1) and the Finance Act amendments. It observed that CSR expenditure is disallowed as business expenditure because it is an application of income, not incurred wholly and exclusively for business purposes. However, Section 80G deductions apply after computation of total income and allow deductions for donations made to specified funds, irrespective of business expenditure disallowance.

The Tribunal held that the voluntariness criterion under Section 80G is related to absence of reciprocal benefit, not absence of statutory obligation. CSR expenditure, though mandated, is philanthropic and does not entail reciprocal benefit. The Tribunal relied on recent decisions of coordinate benches, including Interglobe Technology Quotient Pvt. Ltd. and M/s. Alubound Dacs India Ltd., which allowed deduction under Section 80G for CSR expenditure subject to fulfillment of other conditions.

Key evidence and findings: The assessee claimed deduction under Section 80G for CSR expenses amounting to Rs. 2,21,70,074/-. The AO disallowed the claim on the ground that CSR expenses are statutory and not voluntary donations. The Tribunal reviewed the Finance Ministry's explanatory memorandum and circulars, judicial precedents, and legislative amendments.

Application of law to facts: The Tribunal distinguished the Supreme Court decision in PVG Raju as dealing with donations to political parties involving reciprocal benefit, which is not the case here. It found that CSR donations are philanthropic and voluntary in the sense of lacking quid pro quo, and thus eligible for Section 80G deduction if other conditions are met. The disallowance under Section 37(1) does not preclude deduction under Section 80G.

Treatment of competing arguments: The revenue argued that allowing Section 80G deduction would render Explanation 2 to Section 37(1) nugatory and defeat legislative intent. The assessee contended that the statutory bar under Section 37(1) does not affect Section 80G claims and that the Finance Act amendments specifically exclude only certain funds from Section 80G deduction, not CSR expenses generally. The Tribunal sided with the assessee, relying on recent authoritative decisions.

Conclusion: The deduction under Section 80G for CSR expenditure is allowable subject to compliance with other conditions of Section 80G. The disallowance by AO and CIT(A) is set aside on this issue.

3. SIGNIFICANT HOLDINGS

"The reopening of the assessment, in our opinion, is neither bad in law nor void... The issue whether the amount claimed under as contribution towards social responsibility (CSR) expenses can also be claimed by deduction under Section 80G of the Act was not brought to the notice of the ld. AO in the original assessment order."

"CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business... If such expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure."

"Section 80G falls in Chapter VIA, which comes into play only after the gross total income has been computed... Thus, there is no correlation between suo-moto disallowance in section 37(1) and claim of deduction under section 80G of the Act."

"Voluntary nature of donation is by nature of fact that it is not on the basis of any reciprocal promise of donee. The CSR expenditures are also without any reciprocal commitment from beneficiary being philanthropic in nature... Thus the reasoning of learned Tax Authority, the CSR expenditure is mandatory, does not justify disallowance of these expenditures u/s 80G, if other conditions of section 80G are fulfilled."

"The amendment brought about by Finance Act, 2015 to section 80G(2)(a) of the Act which had inserted the sub clauses (iiihk) and (iiihl) to be the only exception for qualifying a donation for claiming u/s. 80G of the Act pertaining to Swatch Bharat Kosh and Clean Ganga Fund... This fact substantiate that CSR expenditure which falls under the nature specified in Section 30 to 36 of the Act are an allowable deduction u/s. 80G of the Act."

"The assessee is entitled to claim deduction u/s. 80G of the Act towards the CSR expenditure incurred by it, subject to satisfaction of other requirements under Section 80G."

The appeal was partly allowed: reopening of assessment was upheld, but the disallowance of deduction under Section 80G for CSR expenditure was set aside with directions to allow the claim subject to compliance with Section 80G conditions.

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