2025 (9) TMI 637 - AT - Income Tax

Revision under Section 263 upheld; AO directed to reassess after proper inquiry into Section 80G deduction under Explanation 2(a)

Nirmal Bang Securities P. Ltd. Versus PCIT, Mumbai

ITAT MUMBAI upheld revision under s.263, finding the AO did not make necessary enquiries into allowability of deduction under s.80G. Applying Explanation ... Revision u/s 263 - deduction for CSR expenses under section 80G - HELD THAT:- No enquiries were caused into the allowability of deduction under section 80G of the Act by the Ld. AO coupled with this fact, after taking into consideration the Explanation 2(a) of section 263 of the I.T. Act, the Revision order passed by Ld. PCIT is held as correct. The Ld. AO is directed to pass the assessment order after giving effective opportunity to the appellant. Appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Principal Commissioner's exercise of revisionary jurisdiction under section 263 was valid where the Assessing Officer had allowed deduction under section 80G without any recorded inquiry or application of mind into the claim arising out of Companies' CSR expenditures. 2. Whether donations/payments made as Companies' Social Responsibility (CSR) under the Companies Act constitute 'voluntary' donations eligible for deduction under section 80G, or are ineligible because they are mandatory under section 135 of the Companies Act-and if that legal question, being contested in various decisions, could be treated as a debatable issue precluding revision under section 263. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of invoking section 263 where AO allowed section 80G claim without enquiry Legal framework: Section 263 empowers the Principal Commissioner to revise an assessment if the assessment order is 'erroneous insofar as it is prejudicial to the interests of the Revenue.' Explanation 2(a) to section 263 (w.e.f. 1.6.2015) deems an order erroneous and prejudicial where it is passed without making enquiries or verification which ought to have been made. Precedent treatment: The Court relied on and followed the principles in Malabar Industrial Co. Ltd. and Amitabh Bachchan (Supreme Court authorities) establishing that an order passed without proper enquiry or without application of mind can be revised under section 263 if it is prejudicial to revenue. Decisions of High Court and Tribunal (e.g., Grasim Industries, Max India, and Tribunal decisions upholding revision where AO failed to make enquiries) were applied to the facts. The Tribunal decision invoked by the appellant where a substantive view was taken by the AO (and later reversed) was distinguished on the ground that in the present case the AO had not applied his mind at all. Interpretation and reasoning: The Tribunal examined the assessment order and found no discussion, verification or reasons by the AO on the key issue-allowability under section 80G of amounts claimed out of CSR expenditure. The absence of any recorded inquiry on a material issue meant the AO did not apply his mind; therefore the assessment could be deemed erroneous and prejudicial to revenue. Explanation 2(a) to section 263 was held directly applicable to such a factual matrix, authorising the Principal Commissioner to assume revisionary jurisdiction for limited verification. Ratio vs. Obiter: Ratio - Where the AO allows a deduction on a material and contested legal/factual issue without any enquiry or application of mind, the order can be treated as erroneous and prejudicial and is amenable to revision under section 263; Explanation 2(a) endorses this principle. Distinguishing principle - Prior Tribunal decisions in which the AO considered and took a view are distinguishable and do not preclude revision where no inquiry was carried out. Conclusion: The Principal Commissioner validly exercised power under section 263 to set aside the assessment for limited verification of the section 80G claim because the AO did not make the enquiries or apply his mind, rendering the order erroneous and prejudicial to the revenue. The assessment was remitted to the AO for fresh consideration after giving the assessee an opportunity. Issue 2: Whether CSR expenditures (mandatory under Companies Act) are eligible for deduction under section 80G, and whether that legal question is a debatable issue precluding revision under section 263 Legal framework: Section 80G allows deduction for voluntary donations to specified funds/institutions subject to statutory conditions. Section 135 of the Companies Act imposes CSR obligations on certain companies. The interplay raises the question whether mandated CSR outflows can be treated as 'donations' in the sense required by section 80G. Precedent treatment: The Court noted and referenced divergent tribunal and judicial authorities. The Supreme Court's principle in PVG Raju (and subsequent interpretations) that voluntariness is a key condition for 80G was cited by the Principal Commissioner and Revenue. Recent Tribunal authority (Agilent Technologies) denying 80G for CSR on the basis of mandatoriness was relied on by Revenue; conversely, other Tribunal decisions allowing 80G in similar contexts were cited by the assessee. The appellate bench distinguished cases where the AO had actually considered and pronounced a view (and such views were later reversed) from the present case where no consideration occurred. Interpretation and reasoning: The Tribunal did not finally decide the substantive question of whether CSR payments are categorically ineligible for section 80G; rather, it observed conflicting authorities on the point and noted that voluntariness is materially relevant. However, because the AO here made no enquiry or recorded reasoning on the question, the matter was remitted for verification and fresh finding. The Court emphasized that where two reasonable legal views exist, revision under section 263 is not warranted if the AO had applied his mind; but where the AO failed to apply his mind, absence of enquiry transforms the situation into one amenable to revision regardless of whether the issue is debatable. Ratio vs. Obiter: Obiter - Observations on the substantive ineligibility of CSR expenditures for section 80G (based on voluntariness principle and certain authorities) were noted but were not necessary to decide the appeal because the remand was ordered for factual/verification purposes. Ratio - The existence of conflicting judicial views does not prevent revision under section 263 where the AO has not conducted any enquiry or given reasons; that factual defect triggers Explanation 2(a) and permits limited revision. Conclusion: The Tribunal did not settle the legal debate on whether CSR payments are per se ineligible for section 80G; instead, it held that because the AO did not examine the claim, the assessment was erroneously passed and prejudicial to revenue. The matter is remitted to the Assessing Officer for due enquiry and fresh adjudication on the merits (including the voluntariness/CSR question) after affording effective opportunity to the assessee.