CSR donations to registered entities qualify for section 80G deduction despite mandatory nature under Companies Act 2013

ITAT Mumbai allowed the assessee's appeal against PCIT's revision u/s 263 denying section 80G deduction for CSR donations. The tribunal held that CSR donations to registered entities under section 80G are eligible for deduction as section 80G doesn't require donations to be voluntary. Though Companies Act 2013 mandates CSR spending quantum, it doesn't specify recipients, allowing discretionary choice. CBDT Circular 1/2015 permits deductions for CSR expenditure eligible under other sections. PCIT wrongly invoked section 263 provisions for denying section 80G deduction on CSR donations.

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Two core legal issues were presented and considered by the Tribunal in this appeal: (1) Whether the conditions for invoking the revisional jurisdiction under Section 263 of the Income-tax Act, 1961 ("the Act") were satisfied in the facts of the case, specifically regarding the alleged erroneous and prejudicial nature of the assessment order; and (2) Whether donations classified as Corporate Social Responsibility ("CSR") expenditure under Section 135 of the Companies Act, 2013 are eligible for deduction under Section 80G of the Income-tax Act.

Regarding the first issue, the Tribunal examined the legal framework governing the exercise of revisional powers under Section 263 of the Act. The jurisdiction under Section 263 can be invoked only if the assessment order is found to be erroneous and prejudicial to the interests of the Revenue. The Tribunal referred to the authoritative precedent that not every loss of revenue or difference in opinion with the Assessing Officer's (AO) order qualifies for revision under Section 263. The Supreme Court's ruling in Malabar Industrial Co. Ltd. v. CIT was cited, emphasizing that the AO's order must be demonstrably erroneous and prejudicial for Section 263 to be validly invoked.

The Tribunal noted that during the assessment proceedings, the AO had raised specific queries regarding the donations and their eligibility under Section 80G, to which the assessee responded by furnishing requisite details, including 80G certificates and receipts. The AO examined these submissions and allowed the deduction under Section 80G in the assessment order dated 24th September 2022. The Tribunal observed that the Principal Commissioner of Income-tax (PCIT) had invoked Section 263 on the ground that the assessment order did not explicitly discuss the issue of CSR and Section 80G, and that the deduction was erroneously allowed since CSR expenditure is mandatory and thus not voluntary, disqualifying it from Section 80G deduction.

However, the Tribunal rejected this reasoning, holding that the absence of explicit mention in the assessment order does not render it erroneous if the AO had made enquiries and examined the issue. Reliance was placed on the Bombay High Court decision in CIT v. Reliance Communication Ltd., which held that an assessment order is not erroneous merely because it does not expressly refer to every issue examined. The Tribunal concluded that the AO had conducted a plausible and lawful enquiry and adopted a sustainable view; therefore, the conditions for invoking Section 263 were not met. Consequently, the revisionary order was held to be without jurisdiction and liable to be quashed.

The second issue concerned the eligibility of CSR expenditure for deduction under Section 80G. The PCIT had disallowed the deduction on the ground that CSR expenditure is mandatory under the Companies Act and hence not a voluntary donation, which is a prerequisite for Section 80G deduction. The Tribunal analyzed the relevant statutory provisions and authoritative clarifications.

Section 135 of the Companies Act mandates the quantum of CSR expenditure but does not prescribe the mode or recipient of such expenditure, leaving discretion to the company. The Tribunal observed that the donations were made to entities registered under Section 80G and that there was no reciprocal commitment from the donees, indicating voluntariness in the donations despite their classification as CSR expenses in the books.

The Tribunal extensively relied on the CBDT Circular No. 1/2015 dated 21st January 2015, which clarified that CSR expenditure is not allowable as business expenditure under Section 37(1) of the Income-tax Act but may be allowable under other provisions, including Section 80G, subject to fulfillment of conditions. The Circular explicitly states that the restriction on CSR expenditure deduction applies only to Section 37(1) and not to other sections.

Further, the Ministry of Corporate Affairs' General Circular No. 01/2016 (FAQ No. 6) was cited, clarifying that no specific tax exemptions are extended to CSR expenditure per se, but spending on certain activities covered under Schedule VII of the Companies Act enjoys exemptions under various provisions of the Income-tax Act, including Section 80G.

The Tribunal also relied on consistent decisions of the Mumbai ITAT, notably ACIT v. Sharda Cropchem Limited and Inter Gold (India) Pvt. Ltd. v. Pr. CIT, which held that CSR expenditure is not deductible under Section 37(1) but donations classified as CSR are eligible for deduction under Section 80G, provided the donees are registered and other statutory conditions are met. These decisions emphasized the independence of Section 80G deductions from the business income computations under Sections 28 to 44DB and the Explanation 2 to Section 37(1). The Tribunal noted that Section 80G itself specifies certain exceptions (e.g., donations to Swachh Bharat Kosh and Clean Ganga Fund) where CSR donations are not deductible, but the present case did not involve such exceptions.

The Tribunal addressed the PCIT's contention that CSR donations are not voluntary and hence not deductible under Section 80G by observing that the Act does not impose a voluntariness condition for Section 80G deductions. The absence of reciprocal obligations and the discretion exercised by the assessee in choosing the donees supported the characterization of the donations as eligible under Section 80G.

On the interplay between Sections 37(1) and 80G, the Tribunal clarified that disallowance under Section 37(1) for CSR expenditure as business expenditure does not preclude deduction under Section 80G, which is allowed from gross total income. The Tribunal underscored that these provisions operate independently and that the legislative intent is clear from the specific exceptions enumerated in Section 80G(2)(a).

Applying the legal principles to the facts, the Tribunal found that the AO had duly examined the claim, the assessee had complied with disclosure and documentation requirements, and the donations were made to eligible donees. Therefore, the deduction under Section 80G was rightly allowed by the AO and the PCIT's revisionary order disallowing the same was unsustainable.

Regarding the invocation of Section 263 to deny the Section 80G deduction, the Tribunal held that since the AO had conducted a proper enquiry and adopted a reasonable view, the PCIT could not interfere merely due to a difference in opinion. The Tribunal emphasized that taking a contrary opinion does not render the assessment order erroneous or prejudicial to the Revenue's interest. Hence, the revisionary order was quashed, and the assessment order restored.

In conclusion, the Tribunal held:

"The twin conditions for invoking the provisions of section 263 of the Act have not been fulfilled and therefore the invocation of section 263 of the Act by Principal Commissioner of Income-tax - 4, Mumbai is invalid and consequential order dated 20th March 2025 is bad in law and deserves to be quashed."

Further,

"We hold that the assessee is entitled to deduction claimed u/s. 80G of the Act towards the CSR expenditure incurred by it. We, therefore, direct the ld. A.O. to allow the claim of the assessee subject to the condition that the assessee has satisfied the other requirements warranted u/s. 80G of the Act."

And,

"Allowing the claim of deduction u/s. 80G by the ld. AO cannot be held to be unsustainable in law or amounts to erroneous and prejudicial to the interest of the Revenue. Thus order of the Ld. PCIT is reversed on this point."

Accordingly, the appeal filed by the assessee was allowed, the revisionary order under Section 263 was quashed, and the assessment order was restored.

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