CAPRI GLOBAL ADVISORY SERVICES PVT. LTD. (NOW AMALGAMATED WITH CAPRI GLOBAL HOLDINGS PVT. LTD.),MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 1(1)(1), MUMBAI

3.3. The submission of the assessee has been perused and duly considered. However, the contention of the assessee is found to be not acceptable. It is noted that assessee has made investments in shares. Making investments is an informed decision making process involving study and research. It requires manpower, man-hours and funds to make the investments at a time which the assessee considers it most prudent for making investments. Even after making the investments, the assessee would still have to take decision as to the time span for which it should continue to hold its investments and finally take decision as to the best time to exit from such investments. All this activities require manpower and funds and such man hours and funds will entail a cost to the assessee. This cost, is in the form of both direct costs and indirect costs and is debited in the P & L A/c under various heads such as personnel cost, administration cost, interest costs on the funds invested etc. Therefore, the contention of the assessee that no direct or indirect cost has been incurred in relation to the earning of tax free dividend income cannot be accepted. 3.4 Assessee's contention that assessee has made strategic investments in subsidiaries companies from which no dividend income was received during the year Further such investments were not made with the motive of earning tax free income. As no dividend income was received during the year from such investments, they need to be excluded while working the disallowance under Rule 8D 5. The Assessing Officer further noted: and others Capri Global Advisory Services Pvt. Ltd., “Assessee’s contention that assessee has made strategic investments in subsidiaries companies from which no dividend income was received during the year. Further such investments were not made with the motive of earning tax free income. As no dividend income was received during the year from such investments, they need to be excluded while working the disallowance under Rule 8D.”

The Assessing Officer, invoking the provisions of Rule 8D, proceeded to compute the disallowance by applying 1% to the average value of investments, which resulted in a disallowance of Rs.84,59,676. This figure was not only substantially higher than the exempt income earned during the year but also made without any reference to the specific nature of investments or expenses incurred. In addition to this, the Assessing Officer made a corresponding adjustment by adding the disallowance under section 14A while computing the book profits under section 115JB of the Act. Both these disallowances under the regular provisions as well as under the MAT provisions were upheld by the Commissioner of Income Tax (Appeals).

At the very outset, it was submitted by the learned counsel for the assessee that this issue is no longer res integra, as it stands squarely covered in favour of the assessee by the orders of the Tribunal rendered in the assessee’s own cases for assessment years 2009–10 to 2011– 12. In those years, the Tribunal had considered similar facts and identical reasoning adopted by the Assessing Officer, and and others Capri Global Advisory Services Pvt. Ltd., had unequivocally held that no disallowance under section 14A was warranted in the absence of requisite satisfaction and nexus. The disallowances were accordingly deleted.

In response, the ld. DR relied on the detailed observations made by the Assessing Officer and supported the disallowance on the basis that the investments inherently entail administrative and managerial costs, irrespective of their purpose or the quantum of income actually earned.

We have heard the rival submissions and carefully perused the material available on record. Upon a comparative analysis spanning the three assessment years, the particulars pertaining to exempt income earned by the assessee, the suomoto disallowance offered, and the disallowance computed by the Assessing Officer under section 14A read with Rule 8D are tabulated below: Sr. Particulars A.Y.2017-18 A.Y.2018- A.Y.2020- No. (Amt) 19(Amt) 21(Amt) 1] Exempt Income earned 12,13,02,344 18,18,51,296 97,14,869 by the Assesses II] Suomoto Disallowance 2,06,263 7,78,768 4,38,366 u/s 14A made by the Assessee III] Disallowance u/s 14A 86,65,939 2,27,63,198 97,14,869 r.w.r 8D computed by the AO IV] Disallowance u/s 14A 84,59,676 2,19,84,430 92,76,503 r.w.r 8D made by the AO after reducing Suo moto disallowance and others Capri Global Advisory Services Pvt. Ltd., 10. It is evident that the Assessing Officer invoked Rule 8D in a mechanical manner, without recording the mandatory satisfaction envisaged under section 14A(2) of the Act, with reference to the accounts maintained by the assessee. The investments in question were made in prior years and were in the nature of strategic holdings in group subsidiaries. There was neither any fresh investment during the year nor any instance of active portfolio management. Notably, the assessee had reported a total revenue of Rs.38.64 crores, while the total expenditure debited to the Profit and Loss account amounted to merely Rs.4.44 crores, of which employee cost constituted only Rs.64.30 lakhs. It is not the Revenue’s case that borrowed funds were utilised for making the investments. Hence, the question of disallowing interest expenditure does not arise.

11. The Assessing Officer, rather than undertaking an objective evaluation of the nature and character of the expenditures debited to the accounts, presumed that certain indirect expenses must have been incurred in relation to the earning of exempt income. Such presumptive reasoning without examining the nature of books of account and nature of expenses debited cannot be sustained. The invocation of Rule 8D cannot be automatic or mechanical; it must be preceded by a cogent and objective satisfaction based on a review of the assessee’s books of account. In the absence of such satisfaction, and in the absence of any demonstrable nexus between the expenses and the exempt income, the disallowance made by the Assessing Officer, beyond the

We now proceed to examine the disallowance of deduction claimed under section 80G for the assessment year 2020–21. During the relevant previous year, the assessee had incurred an expenditure of Rs.97.30 lakhs towards Corporate Social Responsibility (CSR) activities, in compliance with section 135 of the Companies Act, 2013. This amount was duly added back while computing the business income, in accordance with the provisions of section 37(1) of the Income Tax Act, which expressly disallow such CSR-related expenses as deductions under the head of business expenditure.

However, out of the total CSR spend, the assessee had contributed Rs.48.65 lakhs by way of donations to institutions registered and approved under section 80G of the Act. Accordingly, it claimed deduction for the said amount

The Assessing Officer, however, disallowed the claim, taking the view that since the donations were made in fulfilment of a statutory CSR obligation, they lacked the element of voluntariness that is implicit in the concept of donation. On this reasoning, he concluded that such payments could not be construed as donations eligible for deduction under section 80G, and accordingly, disallowed the entire claim.

We find that this issue now stands covered by several decisions of the Tribunal, notably ACIT vs. Blue Dart Express Ltd. (ITA No. 1101/Mum/2024), where the Tribunal observed “9. We have heard both the parties and also perused the relevant material referred to before us. First of all from the perusal of the re-assessment order which is the subject matter of revision u/s.263 by the ld. PCIT, we find that this was one of the ground for reopening and ld. AO has raised specific query as noted above on exactly same issue. The assessee has given its detailed reply and after examining those replies, the ld. AO has allowed the deduction u/s.80G holding that assessee has already disallowed CSR expenses u/s.37(1), and there is no bar for claiming deduction u/s.80G unless the same is not in accordance with the provision of the Section 80G and there is no issue of mutual exclusiveness of the claim found in this regard. Ld. PCIT has not brought on record any law or judicial precedence that such an observation and finding of the ld. AO is incorrect in law. Once the ld. AO has taken a possible view and there is no contrary law, then to take a different view in a revisionary jurisdiction u/s.263, cannot be held that the and others Capri Global Advisory Services Pvt. Ltd., order of the ld. AO is erroneous and prejudicial to the interest of the Revenue. There is no case of invoking Explanation 2 to Section 263 which ld. PCIT has done, because ld. AO has made his enquiry and verification on the same issue. Ld. PCIT cannot cancel the assessment order to re-examine the same issue without finding any defect in such order that how the claim made u/s.80G is unsustainable in law.

On merits also, we find that view of ld. 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 pre-condition 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), 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 80G vis-à-vis CSR can be restricted to contributions made to these Funds mentioned in Section 800(2)(a)(iiihk) and (iiihl) only. It is an and others Capri Global Advisory Services Pvt. Ltd., 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 "FAQs" through General circular no. 01/2016 dated January 12, 2016 (FAQ 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 ld. PCIT is not correct in law in cancelling the assessment order by the ld. AO on this issue. Accordingly, the order of the ld. PCIT is quashed. Consequently, the appeal of the assessee is allowed.

ACIT vs. Sikka Ports and Terminals Ltd. (ITA No. 3755/Mum/2023), wherein it was held as under:-

In view of the foregoing judicial precedents and the well- settled legal position, we are of the considered opinion that and others Capri Global Advisory Services Pvt. Ltd., the disallowance made by the Assessing Officer under section 80G cannot be sustained. Both the Tribunal in the case of ACIT vs. Blue Dart Express Ltd. as well as in ACIT vs. Sikka Ports and Terminals Ltd. have categorically held that while CSR expenditure is not allowable as a deduction under section 37(1), there is no embargo in claiming such expenditure as a deduction under Chapter VI-A, including section 80G, provided the conditions stipulated therein are satisfied. These judicial pronouncements have drawn a clear distinction between business expenditure governed by sections 28 to 44DB and deductions allowed from gross total income under Chapter VI-A.

The contention of the Assessing Officer that such donations lack voluntariness solely because they form part of the CSR obligation is misconceived in law. The statutory mandate to incur CSR expenditure does not ipso facto denude the voluntary character of the assessee’s decision as to the choice of the recipient institution. As long as the donations are made to institutions approved under section 80G and all requisite documentary compliances are in place as is the undisputed fact in the present case, the deduction cannot be denied merely because the payment also satisfies the CSR requirement under the Companies Act.

Accordingly, we uphold the assessee’s claim for deduction under section 80G to the extent of Rs.48,65,000. The disallowance made by the Assessing Officer on this count is directed to be deleted.

In the result all the appeals of the assessee are allowed.