2025 (8) TMI 1675 - AT - Income Tax

Assessment set aside under s.263 where AO failed to verify s.80G donation despite s.143(2) notice; relief upheld

B. Arunkumar Capital & Credit Services Pvt. Ltd. Versus Principal Commissioner Of Income Tax 3, Mumbai.

ITAT held the assessment order to be erroneous and prejudicial under s.263 because the AO, despite issuing a s.143(2) scrutiny notice, failed to verify or ... Revision u/s 263 - Allowability of deduction u/s. 80G on donations made out of CSR expenditure - whether the assessment order passed by the AO without verifying the claim of deduction u/s. 80G leads the assessment order to be erroneous in so far as prejudicial to the interest of the revenue? HELD THAT:- In present facts of the case, the return was picked up for complete scrutiny, as per the notice issued under section 143(2). It is thus incumbent on the AO to investigate the facts stated in the return, and circumstances would make prudent that the word 'erroneous' in section 263 includes the failure to make such an inquiry. The order becomes erroneous because no inquiry was made, and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. Whether AO still applied his mind on the issue of deduction claimed by the assessee under section 80G? - Admittedly, the Ld.AO did not issue any specific query regarding the deduction claimed by the assessee. The details filed by the assessee was not verified by the Ld.AO. Further, it cannot be lost out of mind that, the notice issued under section 143(2) of the act was for a complete scrutiny. The Ld.AO was under the mandate to verify every claim made in the return of income. Thus the test under Explanation 2(a) to section 263 of the Act needs to be invoked. We concur with the invoking provisions of section 263by the Ld.PCIT as the assessing officer failed to carry out any inquiry, failed to apply his mind while passing the assessment order in respect of the deduction claimed under section 80G of the Act. Deduction u/s 80G - There is nothing on record to conclude the intention behind the donation was material return or that the donation was a quid pro qo. Thus, in our view, the order passed under section 263 cannot be sustained as the provisions of the Act allow the assessee to claim deduction under section 80G. ISSUES PRESENTED AND CONSIDERED 1. Whether the Principal Commissioner was justified in invoking jurisdiction under Section 263 of the Income-tax Act on the ground that the assessment order was erroneous in so far as prejudicial to the interests of revenue because the Assessing Officer did not examine the allowability of deduction under Section 80G where the claimed donation formed part of Corporate Social Responsibility (CSR) expenditure. 2. Whether donations forming part of CSR expenditure are eligible for deduction under Section 80G of the Income-tax Act (i.e., does statutory obligation/mandate to incur CSR expenditure negate the character of such payments as 'donations' for Section 80G purposes?), and whether denial of Section 80G relief in such cases is mandated by Explanation 2 to Section 37(1) and related legislative materials. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of exercise of power under Section 263 for alleged lack of enquiry into Section 80G claim Legal framework: Section 263 empowers the Commissioner to revise an Assessing Officer's order if it is 'erroneous' and 'prejudicial to the interests of the revenue.' Explanation 2 to Section 263 (inserted w.e.f. 1.4.2015) clarifies that an order is deemed erroneous and prejudicial inter alia if 'the order is passed without making inquiries or verification which should have been made' or if 'the order is passed allowing any relief without inquiring into the claim.' Prior Supreme Court decisions (e.g., Malabar Industrial) and Tribunal precedents frame the twin conditions and the standard of inquiry expected of an AO in scrutiny assessments. Precedent treatment: The Tribunal relied on authorities (including Malabar Industrial and coordinate-bench decisions such as Sir Dorabji Tata Trust) to articulate that (i) both error and prejudice must co-exist; (ii) the Commissioner's opinion under Explanation 2(a) is subject to judicial scrutiny; and (iii) the Assessing Officer must, in a complete scrutiny, carry out reasonable enquiries a prudent, judicious and responsible officer would make. The Tribunal followed these precedents to assess whether the AO applied his mind to the Section 80G claim. Interpretation and reasoning: The Tribunal examined the record and found that the notice under Section 143(2) was for complete scrutiny, yet the AO confined verification largely to unsecured loans and did not specifically query or verify supporting documents relating to the Section 80G claim (bank receipts, 80G certificates, genuineness). Given the selection for complete scrutiny, the AO was under mandate to verify claims made in the return. Applying the tests from cited precedents, the Tribunal concluded that the AO failed to conduct enquiries or verifications which a reasonable and prudent AO should have carried out in the circumstances; thus Explanation 2(a) to Section 263 was engaged. Ratio vs. Obiter: Ratio - Where a return is selected for complete scrutiny, an AO must carry out reasonable enquiries into material claims; failure to do so may render the order 'erroneous and prejudicial' under Explanation 2(a) of Section 263. Obiter - Observations elaborating the conceptual limits of AO's investigatory role (watch-dog vs. bloodhound) reiterate established guidance but do not alter the core legal test. Conclusion: The Tribunal upheld invocation of Section 263 to the extent that the AO had not applied his mind or made requisite enquiries regarding the Section 80G deduction claimed out of CSR expenditure. Ground 1 was partly dismissed (i.e., PCIT rightly invoked Section 263 to set aside assessment for fresh verification on Section 80G claim). Issue 2: Allowability of Section 80G deduction where donation forms part of CSR expenditure Legal framework: Section 80G provides deductions for specified donations; Section 37(1) allows business expenditure if 'wholly and exclusively for business,' with Explanation 2 to Section 37(1) (Finance Act 2014, effective AY 2015-16) clarifying that CSR expenditure under Section 135 Companies Act is not to be deemed expenditure for business purposes. The Explanatory Notes and Memorandum to the Finance Bill and Finance (No.2) Bill discuss policy rationale that CSR spend is an 'application of income.' Section 80G contains specific exclusions for certain payments, including some identified CSR-related payments. Precedent treatment: Conflicting Tribunal decisions exist. Some coordinate bench decisions (First American, Sikka Ports and Terminals, ACIT vs. Sikka Port & Terminal Ltd.) have held that CSR payments may still qualify for Section 80G deduction where the statutory conditions of Section 80G are satisfied and where there is no material return/quid pro quo; these decisions emphasize that disallowance under Section 37(1) (Explanation 2) addresses business-head computation and does not ipso facto bar Chapter VIA relief. Other decisions (e.g., Agilent Technology) have taken a contrary view emphasizing voluntariness and mandatory nature of CSR as negativing donation character. The Tribunal in the present judgment followed and relied upon the line of coordinate-bench decisions allowing Section 80G relief subject to conditions and distinctions drawn in earlier cases (and distinguished Agilent on facts). Interpretation and reasoning: The Tribunal reasoned that (a) the term 'donation' is not defined in the Act; the test (per Supreme Court precedent in related context) is absence of material return/consideration - payments without material return constitute donations; (b) Explanation 2 to Section 37(1) excludes CSR expenditure from being treated as business expenditure for computing profits but does not create a blanket bar on Chapter VIA deductions such as Section 80G; (c) specific exclusions under Section 80G are limited and do not comprehensively disqualify all CSR-related payments; (d) denying Section 80G merely because payments are classified as CSR would create double disallowance (disallow under Section 37 and then deny Chapter VIA benefit), which was not the legislative intent per the explanatory memorandum; and (e) where the record does not show quid pro quo or material return and where conditions of Section 80G are otherwise satisfied, deduction under Section 80G can be allowed even if the payment forms part of CSR outflow. Ratio vs. Obiter: Ratio - CSR expenditure excluded from business-head deduction under Explanation 2 to Section 37(1) does not automatically preclude claim of deduction under Section 80G; if a payment forming part of CSR is otherwise a 'donation' (no material return) and meets Section 80G conditions, Section 80G deduction is claimable. Obiter - Broader policy observations about legislative intent and risk of 'subsidizing' CSR expenditures by allowing overlap of benefits are explanatory but do not constitute a new legal test beyond the statutory text and precedent. Conclusions: On merits the Tribunal held that the Section 80G deduction claimed in respect of amounts forming part of CSR expenditure could not be denied merely because they were made pursuant to CSR obligations, absent evidence of material return or statutory exclusion under Section 80G. Applying that view to the record before it (lack of evidence of quid pro quo and presence of certificates/bank evidence), the Tribunal allowed the ground challenging disallowance and directed that the AO, while acting pursuant to the Section 263 remit, should verify facts afresh but cannot mechanically deny Section 80G solely on account of CSR classification. Cross-reference and operative outcome The Tribunal sustained invocation of Section 263 (Issue 1) because the AO had not made enquiries that a prudent AO would have done in a complete scrutiny; however, on the substantive question (Issue 2) the Tribunal concluded that Section 80G relief is not per se barred for payments forming part of CSR and allowed the assessee's claim on merits, directing fresh verification consistent with the legal tests articulated above.