CHANDAN STEEL LIMITED,MUMBAI vs. PRINCIPAL COMMISSIONER OF INCOME TAX OFFICER, MUMBAI 4, MUMBAI

On the fact and circumstances of the case as well as in Law, the Learned Principal CIT has erred in passing Revision Order u/s.263 of the 2 Income Tax Act, 1961 for the assessment order u/s. 143(3) of the Act, 1961, passed by the Learned Assessing Officer after making adequate enquiries and application of mind, without considering the facts and circumstances of the case.

On the fact and circumstances of the case as well as in Law, the Learned Principal CIT has erred in considering the order passed u/s.143(3) of the Income Tax Act, 1961 by the Learned Assessing officer as erroneous and prejudicial to the interest of the revenue, without appreciating the facts and circumstances of the case.

On the fact and circumstances of the case as well as in Law, the Learned Principal CIT has erred in partly setting aside Assessment order passed by the Learned Assessing Officer and directing him to modify the assessment order, without considering the facts and circumstances of the case.

On the fact and circumstances of the case as well as in Law, the Learned Principal CIT has erred in directing the Learned Assessing Officer to make enquiries about the claim of section 80G deduction out of CSR expenses, without considering the facts and circumstances of the case.

Briefly the facts of the case are that the assessee filed its return of income on 14-02-201 declaring total income of Rs.27,51,52,050/-. The case of the assessee was selected for scrutiny through CASS and one of the reasons for selection was to examine the claim of deduction under Chapter VI-A of the Act. Thereafter, notices were issued and after calling for information/documentation from the assessee, the assessment was completed u/s. 143(3) r.w.s. 144B of the Income Tax Act, 1961 („the Act‟), wherein the returned income of the assessee was accepted. Thereafter, the assessment records were called for and examined by the Ld.PCIT and a show cause dt. 10-02-2025 was issued to the assessee u/s. 263 of the Act. On the perusal of show cause, the Ld.PCIT has stated that the assessee has debited a sum of Rs. 39,93,000/- towards CSR expenses which were added back in the computation of total income and at the same time, the assessee has claimed deduction on the CSR expenditure u/s. 80G of the 3 Act, which is not allowable and it was accordingly held that the assessment order passed by the AO was erroneous and prejudicial to the interest of the Revenue within the meaning of section 263 of the Act. In response to the show cause, the assessee filed its submissions, which were considered but not found acceptable to the Ld. PCIT and it was held by the Ld. PCIT that the assessee is not eligible for deduction u/s. 80G of the Act and since the AO has allowed the same, the order so passed by the AO was held as erroneous and prejudicial to the interest of the Revenue and the AO was directed to enquire into the claim of deduction u/s. 80G in respect of CSR expenses and modify the assessment order as per the findings in the impugned order. Against the said order, the assessee is in appeal before us.

The Ld.AR submitted that during the year under consideration, the assessee-company had made donations to various institutions and as the said expenditure was not allowable expenditure under the provisions of section 37(1) of the Act, the assessee-company while computing the taxable income has added back the said amount and has not claimed any deduction while computing its income. It was further submitted that since the said donations were eligible for the deduction u/s. 80G of the Act, the assessee-company has claimed an amount of Rs. 39,93,000/- u/s. 80G of the Act. It was submitted that the case of the assessee was selected for complete scrutiny and one of the reasons for selection of the case relates to examination of deduction under chapter VI-A of the Act. It was submitted that during the course of assessment proceedings, the AO issued notices calling for the details regarding the claim of deduction u/s. 80G of the Act and in response, the assessee filed the necessary submissions. In this regard, our reference was drawn to the notice u/s. 142(1) of the Act, dt. 07-12-2001, wherein the AO has sought specific information with regard to 4 the claim of deduction u/s. 80G of the Act and in response, the assessee filed its submissions wherein the necessary documentation in terms of donation receipts in support of the claim of deduction u/s. 80G of the Act were submitted. It was submitted that the AO thereafter passed the assessment order wherein he has specifically mentioned that he has examined the claim of deduction u/s. 80G of the Act and the same was thus allowed. It was accordingly submitted that it was only after proper enquiry and verification including the aspect of CSR expenditure vis-à-vis the claim u/s. 80G of the Act, the AO passed the assessment order u/s. 143(3) of the Act.

Further, reference was drawn to the show cause notice issued u/s. 263 of the Act and it was submitted that the show cause has been issued basis the observations by the audit team and it is, therefore, a case of borrowed satisfaction, wherein the Ld.PCIT has not applied his mind while issuing the show cause and the show-cause has been merely issued basis the audit objections. Further, our reference was drawn to the submissions filed before the Ld.PCIT and it was submitted that the same have not been appreciated in proper perspective. It was further submitted that the case of the assessee is fully covered by catena of judgments rendered by the Mumbai Bench of the Tribunal and in this connection, our reference was drawn to the decision in case of Mahansaria Enterprises (P.) Ltd. vs. PCIT [2025] 175 taxmann.com 885 (Mumbai-Trib).

Per contra, the Ld.DR is heard, who has relied on the findings of the Ld. PCIT. It was submitted that in the assessment proceedings, there were no query raised by the AO regarding the CSR expenses eligible for deduction u/s. 80G of the Act and therefore, it is a clear case of no enquiry on the part of the AO. It was further submitted that the CSR expenses are 5 mandated by law, and as such, they lack the essential characteristic of voluntariness, which is a core requirement for claiming deduction u/s. 80G of the Act. However, when these contributions are made as part of the statutory CSR obligations u/s. 135 of the Companies Act, they cease to qualify as voluntary donations. It was submitted that as per explanation to section 37(1), the CSR expenses are mandated by law, and as such, they lack the essential characterstic of voluntariness, which is a core requirement for claiming deduction u/s. 80G of the Act as upheld by the Hon‟ble Supreme Court in the case of PVG Raju, Raja of Vizianagaram [101 ITR 465]. It was submitted that CSR expenses are statutory obligation, will fail the test of voluntariness so as to be eligible for deduction u/s. 80G of the Act. It was submitted that the assessee cannot get benefit of compliance to the provisions of Companies Act on one hand and at the same time, claim those expenses as deduction u/s. 80G of the Act. This amounts to circumventing the provisions of Explanation 2 to section 37(1) of the Act. It was accordingly submitted that there is no infirmity in the findings of the Ld.PCIT where the assessment order was set aside to the file of the AO to enquire the claim of deduction u/s. 80G of the Act in respect of CSR expenses.

We have heard the rival contentions and perused the material available on record. The issue under consideration relates to whether the AO has erred in allowing CSR expenditure incurred by the assessee by way of deduction u/s. 80G of the Act even though the same has been suo moto disallowed by the assessee while computing the income under the head „income from business or profession‟, where admittedly other conditions for claiming deduction u/s. 80G of the Act are satisfied in the instance case and have not been disputed by the Ld.PCIT. The Ld.AR has referred to the decision of the Co-ordinate Bench of the Tribunal in the case of 6 Mahansaria Enterprises (P.) Ltd. vs. PCIT (supra), wherein the relevant findings read as under:

The word "donation" has not been defined under the Act. However the Hon'ble Supreme Court in the context of Expenditure Tax Act in the case of P.V.G. Raju (supra) has described the meaning of the word "donation" in the following words - When a person gives money to another without any material return, he donates that am. An act by which the owner of a thing voluntarily transfers the title and understand the meaning of what many people do every day, viz, giving donations to some fund or other, or to some person or other. Indeed, many rich people out of diverse motives make donations to political parties. The hope of spiritual benefit or political goodwill, the spontaneous affection that benefaction brings, the popularization of a good cause or the prestige that publicized bounty fetches -these and other myriad consequences or feelings may not mar a donation to make it a grant for a quid pro quo. Wholly motiveless donation is rare, but material return alone negates a gift or donation."

Therefore to examine if CSR spending of the assessee would be a donation it is essential to examine whether the donations given by the assessee to Mis. Reliance Foundation and M/s Shyam Kothari Foundation without any material return and without any consideration and whether it was a grant for quid pro quo. It is not the case of the revenue that the assessee has made contributions to these institutions with an intention get something in return. The only contention of the revenue is that the contributions are made as part of a mandate and not voluntary. However, the Hon'ble Supreme Court in the above case has laid down the basic principle that a payment made without any material return and without any consideration and not for quid pro quo is a donation. Therefore in our considered view, the payment made whether voluntarily or as part of a mandate does not 7 negate the intention of the contribution made. The reliance placed by the Id DR on the decision of Agilent Technologies (International) Pvt. Ltd (supra) is factually distinguishable. The DRP whose order was upheld in the said case, had placed reliance on the decision of the Hon'ble High Court in the case of DCIT v. Hindustan Darr Oliver Ltd (1994) 45 TTJ Mumbai 552 where the payment made was held as not a donation since it was found that the intention behind making the donation was to get reserved seats in the college run by the institute to whom the payments are made as part of CSR spending. As already mentioned, the revenue is not contending that the assessee in the present case has made payments to get something material in return.

Now coming to the intention of legislature while amending the provisions of section 37 whereby the CSR spend are not allowed to be claimed as a deduction under the said section. Finance (No.2) Act, 2014 brought in the amendment to section 37 by inserting Explanation 2 to the said section w.e.f.01.04.2015. It is relevant to look at the provisions of section 37 of the said Act which read as under "37. (1)Any expenditure (not being expenditure of the nature described in sections 30 to 36 [***] and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.

The "Explanatory Notes to the provisions of Finance (No.2) Act, 2014" issued by the Central Board read as under:

Corporate Social Responsibility (CSR)

1 Corporate Social Responsibility (CSR) Under the Companies Act, 2013 certain companies (which have net worth of Rs.500 crore or more, or turnover of Rs. 1000 crore or more, or a net profit of Rs. 5 crote or more during any financial year) are required to spend certain percentage of their profit on activities relating to Corporate Social Responsibility (CSR). Under the existing provisions of the Act expenditure incurred wholly and exclusively for the purposes of the business is only allowed as a deduction for computing taxable business income.

2 CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business. As the application of income is not allowed as deduction for the purposes of computing taxable income of a company, amount spent on CSR cannot be allowed as deduction for computing the taxable income of the company. Moreover, the objective of CSR is to share burden of the Government in providing social services by companies having net worth turnover profit above a threshold. If such expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure.

4 Applicability:-This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years." (emphasis supplied)

The next issue is whether the impugned payments are otherwise eligible for deduction under section 80G of the Act. We have already established that the payments made by the 9 assessee are donations and therefore if the other conditions for the deduction under section 800 is are fulfilled then there should not be any restriction for the assessee to claim the deduction. Before holding so we will address the contention of the revenue that the payments made towards CSR spend are monitored and controlled by the assessee and are not voluntary. In this regard it is relevant to note that though there is a statutory obligation of CSR expenditure under section 135 of Companies Act 2013, there are many prescribed modes and activities under Schedule VII of the Companies Act for spending the CSR expenditure, (the list is not exhaustive but inclusive). Further neither section 135 of the Companies Act nor Schedule VII to the Companies Act nor the CSR Rules, mandates donations to the institutes/funds prescribed under section 80G of the Act. Therefore, in our considered view there is merit in the submission of the Id AR that though the quantum of CSR spend is mandatory there is no mandate on how amount is to be spent or to whom the contribution is to be made. Accordingly the act of the assessee to choose to M/s Reliance Foundation and M/s Shyam Kothari Foundation which are eligible to accept donations under section 80G of the Act is voluntary and is not mandated under section 135 of the Companies Act 2013. Further from the perusal of CSR applicable in assessee's case, we notice that the monitoring of the CSR spend is to ensure that the same is as per the CSR policy of the company and it does not provide for monitoring the utilization of the funds by the third party donees. In any case the donations made for a specific cause does not result denial of deduction which is otherwise allowable as per the provisions of section 80G of the Act. The Kolkata Bench of the Tribunal in the case of L&T Finance Lad v. DCIT [2024] 167 taxmann.com 503 (Kolkata Trib.), has elaborately discussed the allowability of CSR spend as a deduction under section 80G of the Act and it is relevant to take note of the following observations made regarding monitoring of CSR spend by the donor i.e. assessee -

2. The contribution made by a company toward the discharge of it's CSR to a registered charitable institution, in our view, is akin to corpus donations. Section 11(1)(d) of the Income Tax Act speaks of the specific or corpus, donations, although it has not been defined under Income Tax Act, 1961. Corpus donations are donations wherein, the donor makes the donations to the donee for a specific purpose or object. Prior to the amendment made by amended CSR Rules of 2021, Rule 7 of the erstwhile CSR Rules permitted contributions to charitable institutions cligible CSR expenditure. Further, the Ministry of Corporate Affairs vide Circular No.21/2014 dated 18th June 2014 had also clarified that contribution to Corpus of a Trust society/ section 8 companies etc. will qualify as CSR expenditure, if such a donee institution or the said corpus has been created exclusively for a purpose related to the activities provided under the CSR framework. However, under the old rules, the mechanism to monitor and ensure that such donation has been actually spent on CSR activity was missing. The donor company would get absolved of its liability of CSR by just donating to the eligible trust/society/company, without ensuring that the amount has been actually spent by the donee on such specific object or purpose (CSR activity) for which it was donated. Therefore, Rule 7 of the CSR Rules, which permitted corpus contributions as eligible CSR expenditure, has been substituted and under the amended CSR Rules of 2021, corpus contributions to any entity shall not be admissible as CSR expenditure. The object and purpose of the aforesaid amendment is to ensure that the expenditure made is actually utilised towards CSR activities.

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 10 Explanation 2 to section 37 is for computing the business income under the provision of Section 28-44DB whereas the deduction under 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 therefore when the CSR spend is evaluated independently under the provisions of the Act, in our considered view 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 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 each other. Let us assume a situation 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 company makes donations in excess of 2% even then the payment may get disallowed under section 37 but in that case the revenue would not impose any restriction to evaluate the payment for claiming deduction under section 80G. If the same analogy is applied to the CSR spend in our view the assessee should be able to claim deduction under section 80G if the other conditions are fulfilled. Denying the claim for the reason that there is a specific mention under section 37 for disallowance and that the payments are made in compliance with section 135 of the Companies Act in our view is not legally tenable unless there is an explicit provision for e.g. contributions towards 'Swacha Bharat Kosh' and 'Clean Ganga Fund'. This view of ours is supported by the decision of the coordinate bench of the Tribunal in the case of Blue Dart Express Limited v. PCIT (ITA No.1101/Mum/2024 dated 03.09.2024) where in the context of revision under section 263 of the Act, the bench has considered the issue of allowing deduction under section 80G towards CSR spend and held that-

On merits also, we find that view of Id. AO is correct in law. Claiming a deduction from computation of business income as provided from sections 28 to 44DB is different from claiming a deduction under chapter VIA of the Act which is allowed from Total Income. As per Explanation 2 to Section 37, CSR expenditure is not allowable as deduction while computing the business income under the provision of Section 28-44DB, whereas deduction u/s.80G is allowed while computing the total income under Chapter VIA. There is no precondition that claim for deduction u/s.80G on a donation should be voluntary. It is independent of computation of business income as it is allowed from Gross Total Income. The assessee had disallowed the CSR expenses while computing business income. Further, there is no dispute 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), ie, 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 80G vis-a-vis CSR can be restricted to 11 contributions made to these Funds mentioned in Section 800(2)(a)(iiihk) and (iiihl) only. It is an undisputed fact that the assessee has not claimed any deduction against the aforesaid clauses of 80G (2) (a) of the Act and as such entire donation claimed by the assessee is allowable u/s. 80G. The Ministry of Corporate Affairs ("MCA") has issued "FAQ through General circular no. 01/2016 dated January 12, 2016 (FAO No. 6) and has clarified on the issue as follows: "Question No. 6: What tax benefits can be availed under CSR? Answer: No specific tax exemptions have been extended to CSR expenditure per se. The Finance Act, 2014 also clarifies that expenditure on CSR does not form part of business expenditure. While no specific tax exemptions have been extended to expenditure incurred on CSR, spending on several activities like Prime Minister's Relief Fund, scientific research, rural development projects, skill development projects, agriculture extension projects etc, which fund place in Schedule VII, already enjoys exemptions under different sections of the Income-tax Act, 1961."

This clarification being issued by the Ministry of Corporate Affairs, Government of India clarifies that donation covered under CSR Expenses which not are eligible for the deduction under section 80G of the Income-tax Act, 1961, but are allowed under different sections. Ergo, there is nothing that if any expenditure is disallowable u/s 37 the same cannot be allowed under other provisions of Act, if the conditions of allowability are satisfied. Thus, allowing the claim of deduction u/s.80G by the ld. AO cannot be held to be unsustainable in law or amounts to erroneous and prejudicial to the interest of the Revenue. Thus order of the Ld. PCIT is reversed on this point.

Thus, we hold that Id. PCIT is not correct in law in cancelling the assessment order by the Id. AO on this issue. Accordingly, the order of the Id. PCIT is quashed. Consequently, the appeal of the assessee is allowed.

In view these discussions and considering the judicial precedence in this regard, we are of the view that there is no infirmity in the order of the CIT(A) in allowing the deduction under section 80G to the assessee towards donations made to M/s. Reliance Foundation and M/s. Shyam Kothari Foundation by placing reliance on the decision of the coordinate bench in the case of M/s. Naik Seafoods Pvt Ltd v. Pr. CIT (ITA No.490/MUM/2021). Accordingly the grounds raised by the revenue are dismissed."

We find that contention advanced by the ld PCIT wherein he has referred to the explanation 2 to Section 37(1) of the Act, the explanatory notes to the Finance Bill 2014 and Section 135 of the Companies Act to hold that CSR expenditure is not to be allowed as deduction in any form and the same goes against the basic intent of the provisions and what cannot be allowed in view of the specific provisions cannot be allowed indirectly under specifically provided in the Act and secondly, where he has held that the payments made by the assessee towards CSR payments are mandated by law and therefore, cannot be construed as voluntary donations eligible for deduction u/s 80G of the Act have been adequately addressed by the Coordinate Bench in the aforesaid decision. In the instant case, we find that ld PCIT has also fairly admitted that though there are decisions of the Coordinate Benches in favour of the assessee, since the department has filed appeal and the matter is sub-judice before the Hon'ble Bombay High Court, he is setting aside the assessment order. We therefore find that where the view adopted by the AO is 12 supported by various decisions of the Coordinate Benches including the Juri ictional Benches, how such a view can be held as erroneous in nature is beyond our comprehension.”

We, therefore, find that the matter is squarely covered by the aforesaid decision of the Co-ordinate Bench and it is a consistent stand across the various Benches of the Tribunal wherein it has been held that where conditions for claiming deduction u/s.80G are satisfied, there is no bar under law for claiming CSR expenditure as eligible deduction u/s 80G of the Act. There is nothing on record which suggest that the donations so made by the assessee involved any quid pro quo and the donations so made thus satisfies the test of voluntary character. The matter has been duly examined by the AO during the course of assessment proceedings and it is therefore not a case where the AO has not enquired into the matter and there is thus due application of mind on part of the AO in allowing deduction u/s.80G and the order so passed therefore cannot be held as erroneous in so far as prejudicial to the interest of the Revenue.

In light of the same, we are of the considered opinion that the Ld.PCIT has erred in exercise of his juri iction u/s 263 and the order so passed u/s 263 of the Act by the Ld.PCIT is not sustainable and is hereby set- aside and that of the AO is sustained.

In the result, the appeal of the assessee is allowed.