CSR donations held voluntary; ITAT restores 80G deduction, quashes s.263 revision relying on s.135, CBDT circular, bar under s.37(1)

ITAT Mumbai allowed the assessee's appeal and quashed the PCIT's order passed u/s 263. It held that although CSR expenditure is mandated u/s 135 of the Companies Act, the assessee retains discretion over the mode and recipient of such spending, and donations made thereunder are voluntary in nature. Relying on CBDT Circular No. 1/2015 and the clarification of the Ministry of Corporate Affairs, the Tribunal held that CSR expenditure otherwise qualifying u/s 80G is eligible for deduction, with the only bar being under s.37(1). Consequently, the assessment order allowing deduction u/s 80G on CSR donations was restored, and revision jurisdiction u/s 263 was held to be wrongly invoked.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether donations classified as Corporate Social Responsibility (CSR) expenditure, disallowed under section 37(1), are eligible for deduction under section 80G of the Income-tax Act, 1961.

1.2 Whether the conditions for invoking revisionary jurisdiction under section 263, namely that the assessment order is "erroneous in so far as it is prejudicial to the interests of the Revenue", were satisfied in respect of the Assessing Officer's allowance of deduction under section 80G on CSR-related donations.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Deduction under section 80G for donations forming part of CSR expenditure

Legal framework (as discussed)

2.1 The Court noted that: (i) CSR expenditure referred to in section 135 of the Companies Act, 2013 is specifically barred as a business deduction under Explanation 2 to section 37(1); (ii) CBDT Circular No. 1/2015 (Explanatory Notes to Finance (No. 2) Act, 2014) clarifies that CSR expenditure is not allowable under section 37(1), but CSR expenditure of the nature described in sections 30 to 36 shall be allowed under those sections, subject to conditions; (iii) section 80G provides deduction from total income in respect of donations, and itself contains specific exclusions only for donations to "Swachh Bharat Kosh" and "Clean Ganga Fund" when made as CSR expenditure; and (iv) the Ministry of Corporate Affairs General Circular No. 01/2016 (FAQ No. 6) clarifies that while CSR is not a business expenditure, several CSR activities (e.g. donations to notified funds, rural development, scientific research) already enjoy tax benefit under various provisions including section 80G.

Interpretation and reasoning

2.2 It was undisputed that the assessee made donations of Rs. 26,00,000/- to entities registered under section 80G, classified the same as CSR in its books, suo motu disallowed the amount under section 37(1) in computation, but separately claimed deduction under section 80G. This claim and its factual particulars were fully disclosed in the computation and tax audit report.

2.3 The Court held that section 135 of the Companies Act merely mandates the quantum of CSR expenditure, but does not mandate the recipient or mode of spending; the assessee retains discretion as to whom to donate. The donations to charitable trusts were made without any reciprocal obligation from the donees, and, in any event, section 80G does not prescribe that the donation must be "voluntary" in the sense argued by the Revenue.

2.4 The restriction in Explanation 2 to section 37(1) operates only for the purposes of computing business income under Chapter IV-D, i.e., disallowing CSR as "business expenditure". It cannot be extended to deny deduction under other provisions such as section 80G, which fall under Chapter VI-A and operate on gross total income after business income is computed.

2.5 The Court observed that Parliament has specifically carved out only two exceptions in section 80G for CSR contributions to "Swachh Bharat Kosh" and "Clean Ganga Fund". If the legislative intent were to deny 80G relief for all CSR-linked donations, a general bar could have been inserted. The express, limited exclusions imply that CSR donations to other qualifying funds/organisations under section 80G remain eligible.

2.6 Reliance was placed on coordinate bench decisions, including Sharda Cropchem Ltd. and other Mumbai Tribunal rulings, holding that: (i) Explanation 2 to section 37(1) is confined to business expenditure and does not govern Chapter VI-A deductions; (ii) CSR-related donations, except to the specifically barred funds, are allowable under section 80G if other statutory conditions are met.

Conclusions

2.7 The Court concluded that donations classified as CSR expenditure, though disallowable under section 37(1), are eligible for deduction under section 80G, provided they satisfy the substantive conditions of section 80G and do not fall within the specific exclusions for certain funds. On the facts, the assessee's CSR donations qualified for deduction under section 80G.

Issue 2: Validity of revision under section 263 in relation to 80G deduction on CSR donations

Legal framework (as discussed)

2.8 The Court applied the settled principle that section 263 can be invoked only where the assessment order is both "erroneous" and "prejudicial to the interests of the Revenue". Where the Assessing Officer has made inquiries and adopted one of two possible legal views, the order cannot be revised merely because the revisional authority prefers another view. Reference was made to the principle affirmed in the decision of the Supreme Court in Max India Ltd. that when two views are possible and the Assessing Officer adopts one, revision is not warranted.

Interpretation and reasoning

2.9 The Principal Commissioner invoked section 263 on the ground that the Assessing Officer did not examine the allowability of deduction under section 80G in respect of CSR expenditure and that the assessment order did not discuss this issue, rendering it erroneous and prejudicial.

2.10 The assessee demonstrated, through the notice issued under section 142(1) with questionnaire and the detailed reply with supporting documents, that the Assessing Officer had specifically called for and examined: the details of donations, the donee's 80G registration, source of payment, bank statements, computation, ITR acknowledgement, and audited financial statements. The Court found that "detailed enquiries with regard to the issue in question were carried out" and duly responded to by the assessee.

2.11 The Court held that the absence of discussion in the body of the assessment order does not imply absence of inquiry, where the record shows that inquiries were made and material was examined. This was therefore not a case of "lack of enquiry" or "perfunctory enquiry". The Assessing Officer had consciously allowed the claim after verification.

2.12 It was also noted that, at the relevant time, there were divergent judicial views on allowability of 80G deduction for CSR donations. Coordinate benches (including JMS Mining (P.) Ltd. and other Mumbai decisions) had allowed such claims, while another Tribunal decision (Agilent Technologies (International) (P.) Ltd.) had taken a contrary view. Even the Principal Commissioner acknowledged the existence of favourable Tribunal decisions and pending departmental appeals before the High Court.

2.13 In light of these divergent but plausible views, the Court held that the Assessing Officer's view allowing 80G deduction on CSR donations was a "possible view" and not unsustainable in law. The Principal Commissioner, by substituting his own legal interpretation, could not treat such an order as "erroneous" for section 263 purposes.

2.14 The Court further relied on a coordinate bench decision in Inter Gold (India) Pvt. Ltd., which held that section 263 cannot be invoked to deny 80G deduction on CSR donations where: (i) the Assessing Officer had examined the claim; (ii) section 37(1) and section 80G operate independently; and (iii) Parliament has expressly restricted 80G deduction for CSR only in respect of specified funds.

Conclusions

2.15 The Court held that: (i) the Assessing Officer had duly inquired into and examined the claim of deduction under section 80G for CSR-related donations; (ii) the allowance of such deduction was based on a plausible and sustainable legal view; and (iii) the assessment order was neither "erroneous" nor "prejudicial to the interests of the Revenue" within the meaning of section 263.

2.16 Consequently, the Principal Commissioner's order under section 263 was held unsustainable in law and was quashed, and the original assessment order was restored. The assessee's appeal was allowed.

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