2025 (7) TMI 1228 - AT - Income Tax

PCIT cannot revise assessment allowing Section 80G deduction for CSR expenditure when AO conducted proper enquiry

The ITAT Mumbai held that the PCIT's order u/s 263 challenging the AO's allowance of deduction u/s 80G for CSR expenditure was invalid. The Tribunal found ... Validity of Order u/s 263 - assertion that the AO erred in law in allowing the assessee’s claim of deduction u/s 80G in respect of expenditure incurred towards corporate social responsibility (CSR), the same being, according to the PCIT, of a non-voluntary nature - HELD THAT:- AO had undertaken the requisite enquiries and verification warranted in the facts and circumstances of the case and it is not necessary to reproduce his discussion wherever he has accepted the view of the AO and the claim of DR of non-application of the mind of the AO was unwarranted. It is well-established that the mere absence of elaborate discussion in the assessment order does not imply lack of enquiry or non-application of mind, where the record reveals that the issue was specifically raised and replied to. The submission of the Department that the order is vitiated by non-application of mind stands negated in the face of documentary evidence to the contrary. As it emerges from the record that divergent views exist on the allowability of deduction u/s 80G in respect of donations which also constitute CSR expenditure. While the Delhi Bench of the Tribunal in Agilent Technologies (International) (P.) Ltd. [2023 (12) TMI 1090 - ITAT DELHI] has taken a view against such deductibility, the Bangalore Benches in Allegis Services (India) Pvt. Ltd. [2020 (5) TMI 378 - ITAT BANGALORE] and First American (India) Pvt. Ltd. [2020 (5) TMI 187 - ITAT BANGALORE] have allowed the claim. The existence of contrary but plausible legal views fortifies the conclusion that the issue is debatable. In CIT v. Max India Ltd. [2007 (11) TMI 12 - SUPREME COURT] Hon’ble Supreme Court held that where two views are reasonably possible and the AO has taken one such view, the Commissioner cannot exercise revisionary powers merely because he prefers a different interpretation. The authority under Section 263 is not intended to confer jurisdiction upon superior officers to substitute their own opinion for that of the AO in matters which admit of a legitimate divergence of views. Thus, assessment order passed by the AO cannot be said to be either erroneous or prejudicial to the interests of the Revenue within the meaning of Section 263. AO has applied his mind to the issue in question and adopted a view which finds support in judicial pronouncements. Accordingly, the impugned order passed by the PCIT is liable to be, and is hereby, set aside. Appeal of the assessee is stands allowed. ISSUES: Whether the revision order under section 263 of the Income Tax Act, 1961 was validly passed on the grounds that the assessment order was erroneous and prejudicial to the interests of the Revenue.Whether the deduction claimed under section 80G of the Income Tax Act for donations forming part of Corporate Social Responsibility (CSR) expenditure is allowable.Whether the Assessing Officer conducted adequate enquiry and applied mind before allowing the deduction under section 80G.Whether CSR expenditure, being a statutory obligation under section 135 of the Companies Act, 2013, qualifies as 'voluntary donation' eligible for deduction under section 80G.Whether Explanation 2 to section 263, which deems an order erroneous due to lack of enquiry or inadequate enquiry, applies in the facts of the case.Whether the Circular No. 1/2016 issued by the Ministry of Corporate Affairs is binding on the taxpayer regarding tax treatment of CSR expenditure. RULINGS / HOLDINGS: The revision order under section 263 was not validly passed as the Assessing Officer had conducted a full-fledged enquiry and taken a plausible view; hence, the twin conditions of the order being 'erroneous' and 'prejudicial to the interests of the Revenue' were not satisfied.Deduction under section 80G is allowable for donations made to entities registered under section 12A of the Income Tax Act, even if such donations form part of CSR expenditure, subject to satisfaction of conditions prescribed under section 80G.The Assessing Officer had applied mind and examined the issue in depth by raising specific queries under section 142(1) and considering detailed submissions and judicial precedents; therefore, invocation of Explanation 2 to section 263 was unwarranted.CSR expenditure, being a statutory obligation under section 135 of the Companies Act, 2013, does not ipso facto disqualify donations from being considered 'voluntary' for the purpose of section 80G deduction, as there is no express bar in the statute other than specific exclusions under section 80G(2)(a)(iiihk) and (iiihl).The Circular No. 1/2016 clarifies that no specific tax exemptions are extended to CSR expenditure per se, but does not preclude deduction under section 80G for donations qualifying under that section; the Circular is not binding on the taxpayer in a manner that overrides statutory provisions. RATIONALE: The Court applied the legal framework under section 263 of the Income Tax Act, which requires that for revisionary jurisdiction to be validly exercised, the assessment order must be both 'erroneous' and 'prejudicial to the interests of the Revenue' as held in precedent decisions.Explanation 2 to section 263 was considered, which deems an order erroneous where the Assessing Officer has failed to make enquiries or verification which ought to have been undertaken; however, the record showed adequate enquiry and application of mind.The Court referred to the legislative intent behind Explanation 2 to section 37(1) introduced by the Finance (No. 2) Act, 2014, clarifying that CSR expenditure is not allowable as business expenditure under section 37(1), but this does not affect the separate deduction regime under section 80G.Judicial precedents from various Benches of the Income Tax Appellate Tribunal were considered, including conflicting views from different jurisdictions, establishing that the issue is debatable and that the Assessing Officer's plausible view cannot be overturned merely on a change of opinion by the PCIT.The Court emphasized the principle that the authority under section 263 is not intended to substitute the Assessing Officer's opinion where two views are reasonably possible, citing Supreme Court authority on the matter.The Court noted that the exclusions under section 80G(2)(a)(iiihk) and (iiihl) specifically exclude certain CSR-related funds from deduction, implying that other CSR-related donations are not barred from deduction under section 80G.The Circular No. 1/2016 issued by the Ministry of Corporate Affairs was interpreted as an administrative clarification that does not override statutory provisions or judicial precedents on the deductibility of CSR-related donations under section 80G.