2025 (10) TMI 253 - AT - Income Tax

CSR donations disallowed under Sec 37(1) can still qualify for deduction under Sec 80G; Sec 263 revision held impermissible

ITAT MUMBAI - AT allowed the appeal, holding that donations made from CSR funds, though disallowed under section 37(1), may independently qualify for ... Revision u/s 263 - allowability of deduction u/s 80G in respect of donations made out of CSR funds, which the assessee had already disallowed while computing income u/s 37 - HELD THAT:- It is evident that the sole controversy centres upon the allowability of deduction under section 80G in respect of donations made out of CSR funds, which the assessee had already disallowed while computing income u/s 37. This precise issue has travelled before the Tribunal on several occasions, and the law is now fairly well settled. Once the assessee has disallowed CSR expenditure u/s 37(1), any donation to an institution registered under section 80G stands on an independent footing. The deduction flows not from the head of business income, but from the gross total income under Chapter VIA, which operates in a distinct statutory compartment. AO having examined the claim and allowed it on this basis, adopted a view that is not only plausible but squarely supported by judicial precedent. Therefore, the order passed by the AO cannot be said to be erroneous or prejudicial to the interests of the Revenue. PCIT has merely substituted his own opinion in place of that taken by the AO, which is not permissible under section 263. Appeal of the assessee stands allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether donations made out of Corporate Social Responsibility (CSR) funds, in respect of which CSR expenditure has been disallowed under Explanation 2 to section 37(1), are nonetheless eligible for deduction under section 80G when the donees are institutions notified under section 80G and statutory exclusions under section 80G(2)(a) do not apply. 2. Whether the Principal Commissioner of Income Tax, in exercise of revisionary jurisdiction under section 263, can quash an assessment order in which the Assessing Officer had examined and allowed deduction under section 80G, absent a legal error or materially erroneous finding - i.e., whether substitution of the PCIT's view for a possible view taken by the AO is permissible. 3. Whether the voluntariness of a donation (i.e., payments made pursuant to a statutory CSR mandate) is a condition precedent for claiming deduction under section 80G, and whether statutory compulsion under the Companies Act, 2013 negates the character of a payment as a 'donation' for the purposes of section 80G. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Allowability under section 80G of donations made from CSR funds despite disallowance under Explanation 2 to section 37(1) Legal framework: Section 37(1) and its Explanation 2 disallow CSR expenditure while computing business income (sections 28-44DB). Section 80G provides deductions from gross total income (Chapter VIA) for donations made to institutions notified under section 80G, subject to specific exclusions (notably clauses in section 80G(2)(a) e.g., Swachh Bharat Kosh and Clean Ganga Fund). Precedent Treatment: The Tribunal's prior decisions (including the discussed Blue Dart Express Limited decision and ACIT v. Sikka Ports and Terminals Ltd.) have held that section 37(1) and section 80G operate in different statutory compartments; disallowance under section 37(1) does not ipso facto preclude deduction under section 80G if statutory conditions for section 80G are satisfied. The decisions treat section 80G deductions as independent and permissible unless explicitly excluded by section 80G(2)(a). Interpretation and reasoning: The Court reasons that Explanation 2 to section 37(1) restricts deduction for CSR expenditure only in the computation of business income, whereas Chapter VIA deductions (including section 80G) are applied to gross total income after such computation; there is no textual requirement in section 80G that a contribution must be 'voluntary.' The legislative scheme explicitly identifies only certain funds (as in section 80G(2)(a)(iihk)/(iiihl)) as excluded from 80G relief, demonstrating that Parliament knew how to carve out CSR-linked exclusions when intended. Ministry of Corporate Affairs FAQs and explanatory notes confirm that CSR per se was not granted special tax exemptions and that expenditures meeting other specific provisions (e.g., section 35) remain claimable under those provisions. Ratio vs. Obiter: Ratio - Where a donation to a section 80G notified institution satisfies statutory conditions of section 80G and does not fall within statutory exclusions, such donation is deductible under section 80G notwithstanding disallowance of CSR expenditure under Explanation 2 to section 37(1). Obiter - Observations about policy concerns (e.g., subsidisation argument) are treated as not overriding the statutory text and established precedents. Conclusion: Deduction under section 80G is allowable for donations made from CSR funds provided the donees are notified under section 80G and the donations do not fall under the explicit statutory exclusions in section 80G(2)(a). Disallowance under section 37(1) does not by itself negate a valid claim under section 80G. Issue 2 - Scope of revisionary jurisdiction under section 263: substitution of view vs. demonstration of error Legal framework: Section 263 empowers the Commissioner to revise an assessment when it is erroneous and prejudicial to the interests of the Revenue. Explanation 2 to section 263(1) was invoked by the PCIT in the impugned order. Precedent Treatment: Tribunal precedent cited establishes that where the Assessing Officer has made enquiries, examined evidence, and taken a possible view supported by law and facts, the Commissioner cannot substitute his own view in revisionary jurisdiction unless the AO's order is shown to be erroneous or prejudicial in law. Interpretation and reasoning: The Court finds that the AO conducted scrutiny, examined the donation certificates and section 80G certificates, and allowed deduction after verification. Absent any demonstration that the AO's conclusion was legally incorrect, the PCIT's cancellation of the assessment amounted to impermissible substitution of opinion. The Tribunal emphasises that Explanation 2 to section 263(1) cannot be invoked merely because the Commissioner would have reached a different conclusion; there must be a material or legal infirmity in the AO's order. Ratio vs. Obiter: Ratio - Revision under section 263 cannot be used to substitute the Commissioner's view for a possible view legitimately taken by the AO where there is no demonstration that the AO's order is erroneous in law or prejudicial to Revenue. Obiter - Remarks on adequacy of AO's verification are contextual to the facts. Conclusion: The PCIT erred in quashing the assessment order; the AO's allowance of deduction under section 80G stands because it was a permissible view taken after verification and not shown to be legally unsustainable. Issue 3 - Voluntariness and statutory compulsion: does CSR mandate negate donation character for section 80G? Legal framework: Section 80G does not define 'donation' nor expressly require voluntariness; Companies Act, 2013 (section 135) imposes CSR spending obligations for certain companies. Precedent Treatment: Tribunal decisions (as cited) and authoritative exposition of the term 'donation' from higher court contexts establish that payments made without material return, without consideration, and not for quid pro quo constitute donations. Judicial treatment holds that statutory mandate regarding quantum of CSR spend does not dictate the identity of donees or the mode of spending in a way that converts all CSR payments into non-donative transactions. Interpretation and reasoning: The Tribunal reasons that voluntariness in the abstract is not a statutory precondition for section 80G; what matters is the absence of material return/consideration and fulfillment of section 80G conditions. Section 135 does not mandate payments specifically to institutions notified under section 80G, nor does it prescribe the method of deployment of funds to the extent that choosing notified donees cannot be an exercise of discretion; therefore, donations routed through CSR mechanisms can retain the character of donations for section 80G purposes. Ratio vs. Obiter: Ratio - A payment made pursuant to a statutory CSR obligation can still be a 'donation' for section 80G if it is without material return and satisfies section 80G conditions; voluntariness is not an express statutory requirement for section 80G. Obiter - Observations on legislative intent (e.g., avoiding subsidisation) inform reasoning but do not override statutory text. Conclusion: The statutory CSR mandate does not per se negate the donative character of payments; therefore, CSR-sourced contributions to section 80G notified institutions may qualify for deduction under section 80G provided statutory conditions are met and no specific statutory exclusion applies. Inter-issue cross-reference Issues 1-3 are interrelated: (a) The statutory independence of section 37(1) and section 80G (Issue 1) underpins the conclusion that AO's allowance was permissible; (b) that permissibility defeats the PCIT's exercise of section 263 absent legal error (Issue 2); and (c) the voluntariness question (Issue 3) is resolved in favour of allowability because section 80G does not impose a voluntariness precondition and statutory CSR obligations do not necessarily convert every CSR payment into a non-donation for tax purposes. Final Conclusions 1. Donations to institutions notified under section 80G, made from CSR funds and duly supported by section 80G certificates, are deductible under section 80G unless expressly excluded by section 80G(2)(a); disallowance under Explanation 2 to section 37(1) does not preclude such deduction. 2. The revisionary power under section 263 cannot be used to substitute the PCIT's view for a possible, verified view legitimately taken by the Assessing Officer; absent demonstration of error or prejudice, the AO's order stands.