2025 (9) TMI 362 - AT - Income Tax

Donations from CSR funds eligible for Section 80G deduction; Section 263 revision quashed for lack of jurisdiction

Hemani Industries Limited Versus The Pr. Commissioner of Income Tax-6, Mumbai

Hemani Industries Limited Versus The Pr. Commissioner of Income Tax-6, Mumbai - TMI 1. ISSUES PRESENTED AND CONSIDERED - Whether the Pr. CIT validly exercised revisionary jurisdiction under section 263 by setting aside an assessment for alleged error in allowing deduction under section 80G in respect of donations made from funds earmarked for Corporate Social Responsibility (CSR). - Whether donations made pursuant to statutory CSR obligations under section 135 of the Companies Act, 2013 lack the requisite voluntariness to qualify as 'donations' for deduction under section 80G. - The legal interplay between Explanation 2 to section 37(1) (disallowance of CSR expenditure as business expenditure) and the independent deductibility regime under Chapter VIA (notably section 80G): whether a disallowance under section 37 precludes a claim under section 80G. - Whether the Assessing Officer erred in law or on facts by not making further enquiries before allowing section 80G deduction, thus rendering the assessment order erroneous and prejudicial to revenue under section 263. 2. ISSUE-WISE DETAILED ANALYSIS Issue A: Validity of invoking section 263 to set aside assessment allowing section 80G deductions for CSR-funded donations - Legal framework: Section 263 permits the Pr. CIT to revise an assessment if the assessment is 'erroneous in so far as it is prejudicial to the interests of the revenue.' Revisionary power is constrained by existing judicial pronouncements and must not be exercised on mere change of opinion when the issue is covered by binding or coordinate bench precedent. - Precedent treatment: The Tribunal relied on multiple coordinate-bench decisions of the Appellate Tribunal which held that if conditions of section 80G are satisfied, donations from CSR funds can qualify for deduction; those decisions treated section 37(1) Explanation 2 and section 80G as independent. The Pr. CIT's exercise of jurisdiction was contrasted with those coordinate-bench findings and thus treated as inconsistent with jurisdictional Tribunal precedent. - Interpretation and reasoning: The Tribunal held that the Pr. CIT invoked section 263 on a premise already decided in favour of the assessee by coordinate benches; hence the revisionary proceedings lacked mandate. The Court stressed that invoking section 263 contrary to settled Tribunal precedent (in absence of binding High Court/Supreme Court contrary ruling) amounts to wrongful assumption of jurisdiction. Further, the Tribunal found no material on record showing malafide or absence of enquiry justifying exercise of section 263. - Ratio vs. Obiter: Ratio - A Pr. CIT cannot validly exercise section 263 to overturn an assessment when the issue is squarely covered by coordinate-bench Tribunal decisions and there is no showing of factual or legal infirmity amounting to an assessment being erroneous and prejudicial. Obiter - Observations on how extensive enquiries should be in every case where 80G is claimed. - Conclusion: The invocation of section 263 was quashed as bereft of substance and premised on an incorrect legal view; the assessment order was not held to be erroneous and prejudicial in circumstances where Tribunal precedent favoured the assessee. Issue B: Whether CSR-mandated contributions lack voluntariness required for section 80G - Legal framework: Section 80G permits deduction for donations as specified; the term 'donation' is not defined in the Income-tax Act. Judicial test of 'donation' (as adopted from earlier Supreme Court exposition) focuses on absence of material return or consideration, not strictly on the donor's statutory obligation. - Precedent treatment: The Pr. CIT relied on Supreme Court authority under Expenditure Tax Act context (P.V.G. Raju) and recent Tribunal/High Court decisions that disallowed CSR contributions. However, coordinate benches of the Tribunal have interpreted the Supreme Court test to enquire into material return/quid pro quo rather than the mere existence of statutory obligation, and allowed section 80G where no material return was shown and statutory prescription did not mandate the donee. - Interpretation and reasoning: The Tribunal followed coordinate-bench reasoning: voluntariness, for the purpose of qualifying as a 'donation', hinges on absence of material return rather than whether the donor is statutorily required to spend a specified quantum. The Tribunal observed that section 135/CSR rules prescribe quantum/objects but do not mandate the specific donee in many instances; election by the donor to give to an 80G-eligible donee can be voluntary in substance. The Tribunal also noted that the Supreme Court's description of donation emphasizes lack of material return; a statutory requirement to expend does not per se negate charity-character where no quid pro quo exists. - Ratio vs. Obiter: Ratio - CSR-mandated contributions may still qualify as 'donations' for section 80G deduction if there is no material return or quid pro quo; statutory compulsion as to quantum does not automatically extinguish the philanthropic character required under section 80G. Obiter - Comments on policy consequences and revenue loss arguments advanced by revenue. - Conclusion: CSR-funded donations are not per se excluded from section 80G; voluntariness is assessed by presence/absence of material return, and where conditions of section 80G are otherwise satisfied the deduction can be allowed. Issue C: Interaction between Explanation 2 to section 37(1) and section 80G - whether disallowance under section 37 precludes section 80G claim - Legal framework: Explanation 2 to section 37(1) declares CSR expenditure not to be business expenditure for section 37 purposes. Section 80G is a Chapter VIA deduction from gross total income after computation under sections 28-44DB; specific exclusions under section 80G are set out in the statute. - Precedent treatment: Coordinate benches and explanatory notes (CBDT/Circulars) were examined; certain Tribunal benches held section 37 disallowance is independent and does not operate as a universal bar to claiming benefits under other provisions (e.g., sections 30-36 or section 80G) where those provisions' conditions are met. Revenue's argument that allowing section 80G would subvert legislative intent behind Explanation 2 was considered and rejected where statute expressly restricts only specified funds (e.g., Swachh Bharat Kosh, Clean Ganga Fund) for CSR-linked disallowance under section 80G. - Interpretation and reasoning: The Tribunal reasoned that section 37 and section 80G operate in different parts of the charge/computation mechanism; Explanation 2 removes CSR expenditure from being a business deduction but does not, by itself, negate a separately stipulated deduction under Chapter VIA unless the statute explicitly so provides for the specific donation. Explanatory notes and circulars indicate that some CSR-related activities may qualify under other specific heads (sections 30-36, 35 etc.) if conditions are met; analogously, section 80G remains available where statutory conditions for 80G are fulfilled and no express exclusion applies. - Ratio vs. Obiter: Ratio - Disallowance under Explanation 2 to section 37(1) does not automatically preclude claiming deduction under section 80G; each provision is to be applied independently and restrictions must be explicit. Obiter - Policy observations concerning legislative intent to avoid subsidizing CSR were noted but held insufficient to override statutory design of chapter-wise deductions. - Conclusion: Section 37(1) Explanation 2 and section 80G are independent; absent an express statutory bar to section 80G, eligible donations out of CSR funds can be allowed deduction under section 80G if statutory conditions of that section are satisfied. Issue D: Whether AO failed to make necessary enquiries such that the assessment was erroneous and prejudicial - Legal framework: For section 263 to be invoked on grounds of inadequate inquiry, there must be demonstrable failure to makequiries on material facts which makes assessment legally unsustainable. - Precedent treatment and reasoning: The Tribunal examined record and prior coordinate-bench decisions which found that where no material exists showing quid pro quo or material return, and where complete documentation (80G certificates etc.) was placed before the AO, mere absence of further inquiry does not render the assessment per se erroneous. The Tribunal found no conclusive material indicating intention for material return or improper claim. - Ratio vs. Obiter: Ratio - Absence of further inquiry by AO does not automatically make an assessment erroneous and prejudicial when the claim is supported by requisite documents and no adverse material exists; section 263 cannot be invoked on that basis alone. Obiter - Guidance that if material suggesting quid pro quo exists, AO must investigate. - Conclusion: AO's conduct did not amount to an erroneous and prejudicial assessment justifying section 263; thus revision was unsustainable.