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TaxTMI 
TaxTMI 
TaxTMI 
2026 (1) TMI 366
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....uction under section 80G amounting to Rs.7,22,00,000/- in respect of donations forming part of Corporate Social Responsibility ("CSR") expenditure; (v) the revision pertaining to deduction allowed for penalties paid to the stock exchange amounting to Rs.64,64,367/-; and (vi) the revision relating to deduction of interest expenditure amounting to Rs.26,45,160/- under section 36(1)(iii) of the Act. 3. The material facts, as borne out from the record, are that the assessee-company filed its return of income on 13.02.2021 declaring a total income of Rs.777,93,11,090/- for the assessment year under consideration. Subsequently, the assessee revised its return on 29.05.2021, reducing the total income to Rs.568,10,45,800/-. The case was selected for scrutiny, and the assessment was completed by the Assessing Officer under section 143(3) read with section 144B of the Act on 24.09.2022, determining the total income at Rs.777,93,11,090/-. 4. It is apparent from the record that certain audit objections were raised in respect of the assessment so completed. Pursuant thereto, an audit memo along with a proposal from the Assessing Officer was forwarded to the learned Princ....
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....rincipal Commissioner noted that the club facilities were availed by senior executives and that mere production of invoices was insufficient to establish a proximate nexus with business exigencies. The absence of enquiry on this aspect was held to vitiate the assessment. (3) With regard to ESOP expenditure aggregating to Rs.12.65 crores, the learned Principal Commissioner observed that while a portion of the expenditure had been suo motu disallowed by the assessee, the balance amount of Rs.3,89,69,483/- was allowed by the Assessing Officer without examination. It was held that such ESOP expenditure was merely a notional charge representing the difference between the market price and the exercise price of shares and did not result in any real outflow or accrued liability. The failure of the Assessing Officer to examine the factual and legal sustainability of the claim under section 37(1) was treated as a serious lapse. (4) In so far as the deduction under section 80G amounting to Rs.7,22,00,000/- was concerned, the learned Principal Commissioner held that the claim arose out of CSR expenditure incurred in compliance with section 135 of the Companies Act. Such expen....
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....s all issues is that the Assessing Officer failed to make adequate enquiries, thereby rendering the assessment order erroneous and prejudicial to the interests of the Revenue within the meaning of section 263 of the Act. 8. Before us, the learned counsel for the assessee submitted that each of the issues sought to be revised had been specifically examined by the Assessing Officer during the course of assessment proceedings; that detailed replies along with documentary evidence were furnished; and that the Assessing Officer, after due consideration, had taken a plausible and legally sustainable view. It was further submitted that even during the revisionary proceedings, voluminous submissions were filed, copies of which form part of the paper book placed before us. Club Expenses 9. From the tax audit report, it is noted that the assessee had incurred an amount of Rs.40,23,516/- under the head "club expenses", comprising primarily of club membership fees and subscription charges. According to the learned Principal Commissioner, such expenditure could not be regarded as having been incurred wholly and exclusively for the purposes of business and, therefore, was not allowable ....
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....tive pronouncements of the Hon'ble Supreme Court as well as the Hon'ble jurisdictional High Court. In view of these binding precedents, the Assessing Officer's action in allowing the expenditure cannot be regarded as erroneous or unsustainable in law. 14. Therefore, on this issue, the learned Principal Commissioner was not justified in invoking the revisionary jurisdiction under section 263 of the Act. The revision on this count is accordingly set aside. ESOP Expenses of Rs.12,65,00,000/- 15. The next issue pertains to the revision of allowance of Employee Stock Option Plan (ESOP) expenditure. The brief facts, as emanating from the record, are that the assessee had formulated ESOP schemes in accordance with the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999, as well as the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014, as amended from time to time. Under these schemes, options were granted to eligible employees of the assessee, each option being convertible into one fully paid-up equity share of Rs.5 each upon exercise. 16. It is also an admitted fact th....
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....without independently applying his mind to the detailed submissions and supporting material placed on record. 21. It was further submitted that the allowability of ESOP expenditure under section 37(1) now stands conclusively settled by the judgment of the Hon'ble Karnataka High Court in CIT v. Biocon Ltd. (2021) 430 ITR 151, as well as by the judgments of the Hon'ble Delhi High Court in CIT v. Lemon Tree Hotels Ltd. and CIT v. New Delhi Television Ltd., apart from a series of consistent decisions of various coordinate benches of the Tribunal. 22. On a careful appraisal of the facts and the legal position, it is evident that the assessee had incurred ESOP expenditure in the course of its business, in accordance with statutory regulations and accounting standards, and that such expenditure had a direct nexus with employee compensation and retention. The fact that a portion of the expenditure had already been disallowed by the assessee itself further demonstrates due compliance and application of mind. 23. In view of the settled judicial position recognising ESOP expenditure as an allowable business expenditure, the Assessing Officer's action in allowing the claim cannot be r....
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.... claim did not fall within these excluded categories. 28. At this juncture, it is relevant to note that this precise controversy namely, the allowability of deduction under section 80G in respect of donations made out of CSR expenditure after disallowance under section 37(1) now stands squarely covered by a series of decisions of coordinate benches of the Tribunal. The issue has been examined in detail and discussed threadbare in those decisions. 29. This issue stands covered by the following decision(s) of the Tribunal, wherein the matter has been discussed threadbare. The relevant observations are as under:- "5. After giving thoughtful consideration to the material placed on record and the submissions of the learned Departmental Representative, 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 under section 37. This precise issue has travelled before the Tribunal on several occasions, and the law is now fairly well settled. In particular, the decision in Blue Dart Express Limited has examined the question....
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....e that the assessee has filed complete details of donation and also filed the certificate u/s. 80G which was enclosed before the AO. Section 80G (1) of the Act provides that in computing total income of the assessee, they shall be deducted in accordance with the provision of Section, such sum paid by the assessee in the previous year as a donation. Deduction under Chapter VIA provides deduction from the gross total income which is computed after making necessary allowances / disallowances in accordance with Section 28-44BB of the Act including Explanation to Section 37(1). Thus, Section 37(1) and Section 80G of the Act are independent and the principles governing what is not allowable u/s. 37(1) have been provided in the section itself. Even in section 80G also, what is not allowable has also been provided under the Act. For instance, Section 80G specifically mentions two clauses, viz., section 800(2)(a)(iihk) and (iiihl), i.e., contributions towards „Swacha Bharat Kosh‟ and „Clean Ganga Fund‟, where donation in the nature of CSR Expenditure is not allowable as deduction under section 80G of the Act. Therefore, the disallowances for deduction under section 8....
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....thin the statutory exclusions carved out in clauses (iihk) and (iiihl) of section 80G(2)(a). 7. The matter has also been examined by a coordinate bench in ACIT v. Sikka Ports and Terminals Ltd. [(2025) 173 taxmann.com 366], where the Tribunal, after an exhaustive survey of arguments regarding voluntariness, statutory compulsion, and legislative intent, concluded that CSR contributions to approved institutions under section 80G continue to enjoy deductibility, subject of course to satisfaction of the statutory conditions. The Tribunal eloquently explained: * The assessee during the year disallowed a sum of Rs. 33.85 crores under section 37 towards the CSR Spend in compliance with section 135 of the Companies Act. Since the institutions to which the said amounts are given are registered under section BOG, the assessee claimed 50 per cent ie. Rs. 16.93 crores of the same as deduction. The argument of the revenue is that the payment are made to comply with the mandate under the Companies Act, and therefore it cannot be treated as donations which are "voluntary" payments. The further argument of the revenue is that when the statute has denied the direct claim of the CS....
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....ound one-third of such expenses by the Government by way of tax expenditure. However, it is pertinent to note that though, the expenditure Incurred towards CSRs is not an expenditure incurred for the purpose of business, if the spend is of the nature described in sections 30 college or other institution to be used for scientific research etc., which are approved under section 35 n For example if the contribution is made to a scientific research association, or to a university or to s part of CSR spending then deduction can be allowed subject to the fulfilment of conditions prescribed under section 35. This explanatory note though self-contradictory Le, denying deduction under section 31 but allowing the assessee to claim deduction under sections 30 to 36, also makes it clear that there is no bar regarding the admissibility of CSR expenditure under any other provision of the Act, except under section 37(1). In other words, the intention of the legislature is not to restrict the right of the assessee to claim deduction towards the CSR spend if the payment is otherwise allowable under a specific provision of the Act. Further wherever the intention is to restrict the claim of deduction....
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....ovisions of section 80G. * One more point that needs to be considered while deciding the deduction under section 80G for CSR spend is that the restriction on the allowability of the said spend as provided in Explanation 2 to section 37 is for computing the business income under the provision of section 28-44DB whereas the deduction fer section 80G is claimed under Chapter VIA ie. after computing the Gross Total Income. The provisions of section 80G does not impose any condition that the contribution should be voluntary and provefore when the CSR spend is evaluated independently under the provisions of the Act, it is viewed that there is no restriction for the assessee to claim deduction under section 80G provided the CSR spend meets the conditions specified therein. In other words, the provisions of section 37 is computation provision whereas section 80G is a beneficial provision which allows deduction towards payments made by the assessee for charitable purposes and therefore these two sections are independent of each other. For example, when a company which is not required to comply with the provisions of section 135 of the Companies Act 2013 makes a donation or a compan....
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....lowed the deduction, had taken a plausible and legally sustainable view. 31. In such circumstances, the learned Principal Commissioner could not have invoked section 263 merely because he held a different opinion on the matter. Substitution of one plausible view by another is impermissible in revisionary proceedings. Accordingly, on this issue also, the assumption of jurisdiction under section 263 is held to be unsustainable. Penalties paid to Stock Exchange amounting to Rs.64,64,367/- 32. The next issue pertains to the allowability of expenditure incurred by the assessee towards penalties paid to the stock exchange amounting to Rs.64,64,367/-. The learned Principal Commissioner observed that the Assessing Officer had allowed the said expenditure without examining whether it was hit by Explanation 1 to section 37(1) of the Act, which disallows expenditure incurred for any purpose which is an offence or which is prohibited by law. 33. It was noted by the learned Principal Commissioner that the tax auditor had reported the said amount under the head "expenditure by way of any other penalty or fine" in Form 3CD, and that the Assessing Officer had failed to enquire into the....
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....diture has consistently been held to be allowable. 40. In this context, reliance placed by the assessee on judicial precedents, including the decision of the Hon'ble Karnataka High Court in J.K. Panthaki & Co. v. ITO (2012) 344 ITR 329, clearly brings out the scope and ambit of Explanation 1 to section 37(1) and supports the assessee's case. 41. It is also an undisputed fact that in the assessee's own case for an earlier assessment year, the Tribunal has held that penalties levied by the stock exchange on account of similar operational lapses are allowable as business expenditure. The Assessing Officer, by allowing the claim, had thus followed a consistent view. 42. In view of the above factual and legal position, it cannot be said that the Assessing Officer committed any error in allowing the expenditure, much less an error prejudicial to the interests of the Revenue. The learned Principal Commissioner was, therefore, not justified in invoking revisionary jurisdiction on this issue. Disallowance of Interest Expenditure of Rs.26,45,160/- under section 36(1)(iii) 43. The last issue which arises for consideration pertains to the disallowance of interest expenditure amo....
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....s such as trade funding for clients, placement of fixed deposits as margin with the stock exchange, and meeting working capital requirements. It was categorically stated, and substantiated through sample offer letters of commercial papers, that none of the borrowings were raised for acquisition of fixed assets or for funding CWIP. 50. It is also material to note that the commercial papers issued by the assessee were of a short-term nature, with maturities ranging between 7 to 365 days. Such short-term borrowings, by their very nature, are inconsistent with financing acquisition of capital assets or long-term projects. Apart from commercial papers, the assessee did not have any other borrowings during the year. 51. The assessee also explained that the financial year 2019-20 was the first year in which it adopted Indian Accounting Standard (Ind AS) 116 relating to leases. Pursuant thereto, the assessee recognised right-of-use (ROU) assets and corresponding lease liabilities in its books of account. The interest component arising from such lease liabilities was disclosed as finance cost in the audited financial statements. 52. However, while computing the total income, the as....