LIVLONG INSURANCE BROKERS LIMITED ,MUMBAI vs. PCIT -4 , MUMBAI

On the facts and circumstances of the case as well as in law, the Learned CIT has erred in passing order u/s 263, setting aside assessment order passed u/s 143(3) r.w.s 144B on account of deductions u/s.80G amounting to Rs. 18,06,528/-.

On the facts and circumstances of the case as well as in law, the Learned CIT has erred in passing order u/s 263, directing the assessing officer to modify the assessment order passed u/s 143(3) r.w.s 144B by dis-allowing deductions u/s 80G amounting to Rs.18,06,528/-.

On the facts and circumstances of the case as well as in law, the Learned CIT has erred in passing order u/s 263, setting aside assessment order passed u/s 143(3) r.w.s 144B on account of deduction of ESOP expenses amounting to Rs.1,98,715/-.

On the facts and circumstances of the case as well as in law, the Learned CIT has erred in passing order u/s 263, directing the assessing officer to modify the assessment order passed u/s 143(3) r.w.s 144B by dis-allowing ESOP expenses amounting to Rs.1,98,715/-.

On the facts and circumstances of the case as well as in law, the Learned CIT has erred in passing order u/s 263 without granting sufficient opportunity of being heard to the appellant.

The Learned CIT has erred in passing order u/s 263, merely on the basis of issue raised in audit objection.

Ground no. 1 and 2 pertain to the deduction of CSR expenses claimed u/s 80G of the Act. In this case,assessment order u/s 143(3) was passed determining total income of Rs 20,48,42,090/-.The ld.PCIT noted that subsequent to passing of the order, it was observed that section 80G deduction to the tune of Rs.18,06,528/- was not allowable in view of the fact that the assessee had claimed Corporate Social Responsibility(‘CSR') expenses of Rs.37,21,056/- and out of which Rs.18,06,528/-was claimed as deduction u/s 80G of the Act. In the order, the AO had not mentioned about any enquiry conducted on the issue of claim of CSR expenses as well as deduction u/s.80G of the Act. It is stated by him that the CSR expenses are mandatory in nature incurred by virtue of compliance to Section 135 of Companies Act 2013 read with Schedule VII of this Companies Rules, 2014. Further, Explanation 2 to Section 37 of the Act mandates that CSR expenses shall not be allowed as business expenditure. It is also an undisputed fact that the donations u/s 80G have to be voluntary and this has been upheld by Hon'ble Apex Court in 1 SCR 1017G(1967) in the case of Commissioner eligible for deduction u/s.80G of the Act. Accordingly, it was concluded that the deduction u/s.80G could not be allowed for deduction.

1 In response to show cause issued in this regard, the assessee made a submission dated which is also reproduced in the revision order stating that specific query was raised by the AO in the matter and in response to which it was submitted to him that no deduction of CSR expenses u/s 37 was claimed being personal in nature.However,it was claimed that the assessee made claim u/s 80G of the 50% of such expenses and the AO being satisfied did not make any further query nor made any disallowance. Therefore, it was claimed that necessary enquiry was indeed was made and no action u/s 263 of the Act was deemed necessary. However, the ld.PCIT concluded that as noted from the assessment order, the AO had not carried out any enquiry on the issue and to this extent the assessment order was prima facie, erroneous and prejudicial to the interest of revenue in terms of section 263 of the Act.

We have carefully considered all relevant facts of the case,rival submissions and also the contents of the revisions order. In so far as the issue of deduction of CSR expenses claimed u/s 80G is concerned, it was open for adjudication before the AO. We observed that the assessee had duly disclosed such facts on record during assessment proceedings and the AO taking note of such facts with specific reference to CSR expenditure claimed as deduction, preferred to allow the claim of the assessee u/s 80G of the Act. Therefore, on facts and the circumstances of the case, it can be safely construed that the issue has been taken note of by the AO who accepted the claim of the assessee. Thus, the AO has considered the issue and allowed the claim of deduction u/s.80G in respect of CSR expenses which is a plausible view taken by him.

The Hon'ble Supreme Court in the case of Malabar Industries Ltd. v. CIT 243 ITR 83has held that twin conditions needs to be satisfied before exercising revisional juri iction u/s 263 of the Act by the CIT. The twin conditions are that the order of the Assessing Officer must be erroneous and so far as prejudicial to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous order, that is (i) if the Assessing Officer's order was passed on incorrect assumption of fact; or (ii) incorrect application of law, or (iii) Assessing Officer's order is in violation of the principle of natural justice, or (iv) if the order is passed by the AO without application of mind. (v) if the AO has not investigated the issue before him; because AO has to discharge dual role of an investigator as well as that of an adjudicator then in aforesaid any event the order passed by the AO can be termed as erroneous order. Coming next to the second limb, which is required to be examined as to whether the actions of the AO can be termed as prejudicial to the interest of Revenue. When this aspect is examined one has to understand what is prejudicial to the interest of the revenue. Their Lordship held when the AO adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the AO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue "unless the view taken by the Assessing Officer is unsustainable in law". Thus, in our considered view of juri iction by the PCIT in the para below:

From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualize a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decisions is held to be erroneous. Cases may be visualized where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo-motu revision because the first requirement, viz., that the order is erroneous, is absent." (Emphasis supplied) 5.1Apart from the above principles, we deem it appropriate to make reference to the decision of the Hon'ble Delhi High Court in the case of CIT vs. Sun Beam Auto 227 CTR 113 wherein the Hon'ble High Court has pointed out a distinction between lack of inquiry and inadequate inquiry. The following observations of the Hon'ble Delhi High Court are worth noting:

We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income-tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry", that such a course of action would be open".

We find from the assessment records that the AO has brought on record material facts which go to show that necessary enquiries were indeed made on the impugned issue. Moreover, as stated in preceding paras, the very basis of selection of the case hinged upon the issue of deduction u/s 80G of the Act, and seen in the light of specific queries and replies of the assessee, it can be safely concluded that the issue was duly examined and the AO allowed the claim after due application of mind and in accordance with the provisions of the Act. We do not find that the assessment order could be considered as erroneous and prejudicial and liable to application of Explanation 2 to section 263 of the Act.

1 On merits of the case, the issue whether the CSR expenditure is allowable u/s.80G of the Act is also no more res integra by a catena of decisions by various Co-ordinate Benches of the Tribunal.The Mumbai Bench of the Tribunal in the case of Alubond Dacs India (P.) Ltd. in (2024) 163 taxmann.com 536 (Mum)considered the provisions of Companies Act and I.T. Act and held as follows:

We have heard the rival submissions and perused the materials available on record. The only morn question to be decided here is whether the expenditure towards CSR activities are an allowable deduction us 80G of the Act. The CSR expenses are governed by section 135 of the Companies Act, 2013, Schedule VII of the Act and Companies (CSR) Policy Rules, 2014 where companies having net worth of Rs 500 crores of more or turnover of Rs.1000 crores or more or net profit of Rs 5 crores of more have to mandatorily comply with the CSR provisions specified us.135(1) of the Companies Act, 2011. The above mentioned companies are liable to spend atleast 25% of its average net profit for the immediately preceding three financial years on CSR activities. In the present case, the assessee has contributed Rs 30 lacs to various educational and charitable trust for which the assessee has claimed 50% of the total donation paid as deduction u/s.800 of the Act. Prior to the Finance (No.2) Act, 2014, the said expenditure was claimed as ‘business expenditure' u/s.37(1) of the Act where after the insertion of Explanation 2 to section 37(1) of the Act, the CSR expenses referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession. It is observed that the said expenses pertaining to CSR has been claimed as deduction u/s. 80G of the Act which claim was perennially rejected by the Revenue for the reason that only donations which are voluntary in nature will come under the purview of section 80G of the Act and donation towards CSR was merely a statutory obligation on companies as per section 135 of the Companies Act, 2013. It is pertinent to point out that the intention of the legislature was clear when the same was clarified by the Finance (No.2) Act, 2014 that CSR expenses will not fall under the business expenditure and also there has been an express bar specified in sub clause (iiihk) and (iiihl) of section 80G(2)(a) of the Act that any sum paid by the assessee as donation to Swatch Bharat Kosh and Clean Ganga Fund will not come under the purview of deduction u's 80G of the Act subject to certain conditions. This justifies the fact that the other donations specified us 80G of the Act would be entitled to deduction provided the conditions stipulated u/s.80G of the Act are satisfied. In the present case in hand, the contributions made by the assessee would not fall under the two exceptions specified above which clearly mandates that the assessee is entitled to claim deduction for the donations contributed during the year under consideration u/s 80G of the Act. The decision relied upon by the ld. A.O in the case of PVG Raju (supra) is distinguishable on the facts of the present case where there is no requirement of proving the voluntariness of the donation contributed by the assessee for claiming deduction u/s.80G of the Act. The amendment brought about by Finance Act, 2015 to section 80G of the Act which had inserted the sub clauses (iiihk) and (iiihl) to be the exception for qualifying a donation for claiming us.80G of the Act could also be an evidencing factor to substantiate that CSR expenditures which falls under the nature specified in section 30 to 36 of the Act are an allowable deduction u/s 80G of the Act.

On the above observation, we deem it fit to hold that the assessee is entitled to deduction claimed u/s.80G of the Act towards the CSR expenditure incurred by it. We, therefore, direct the ld. A.O, to allow the claim of the assessee subject to the condition that the assessee has satisfied the other requirements warranted u/s.80G of the Act. Hence, ground no. 2 raised by the assessee is allowed.

In the case under consideration, the proposed revision is sought to be done merely on change of opinion disagreeing with the opinion of the AO that the expenditure is not deductible under sec 80G of the Act. Further, it is a settled position of law that where there are two views possible and the AO has adopted one of the two possible views, then the order cannot be held to be erroneous/ prejudicial to the interest of the revenue and thereby proceedings under section 263 of the Act could not be sustained. Moreover, as discussed in the preceding paras, the deduction of CSR expenses under section 80G of the Act is held allowable consistently by the courts. Hence, both on legal ground as also on merits, appeal of the assessee has sufficient force. Therefore,

Ground no. 3 and 4 pertain to the issue of ESOP which according to the ld.PCIT was not enquired into by the AO. The ld.PCIT further observed that as per audit memo and on perusal of assessment records thatas per the Profit and Loss account that under the head 'Employee Benefit Expenses', the assessee had debited an amount of Rs.1,98,715/- towards Employee Stock Compensation Expenses [ESOP). As per Audit Memo, ESOP expenses are incurred in relation to issue of shares to employees and were not relatable to profits and gains arising or accruing from a business trade. ESOP is issued by the company for its employees to encourage employee ownership in the company. The shares are issued at a discounted price to its employees. Thus, ESOP is a scheme where a company proposes to increase its subscribed share capital by issuing further shares to its employees at a predetermined rate. This indirectly benefits the company in employees retention and loyalty. Thus, it was noted that ESOP is nothing more than expenditure related to issue of shares and was not allowable as deduction u/s 37(1) of the Act. He concluded that there were two aspects to the claim of the Employee Stock Compensation expenses, first being whether there was any expenses incurred at all and second, being whether such expense was disallowable u/s.37(1) of the Act while completing the assessment. As noted from the assessment order, the AO had not carried out any enquiry on the issue of ESOP expenses debited in the P&L account and SLP against the said decision of Hon'ble Karnataka High Court in the case of Biocon(supra) which has been admitted by the Hon'ble Apex Court.

During hearing, the ld.DR argued that on facts of the case and in the light of the provisions of the Act and also lack of any enquiry into the impugned issue by the AO, the ld.PCIT was fully justified in invoking the provisions of section 263 of the Act as the assessment order was erroneous and prejudicial to the interest of the Revenue on both the counts.

Before us, the ld.AR has submitted that in the course of assessment proceedings u/s 143(3), the assessee has submitted detailed Profit and Loss Account for the relevant year. Vide Note 28 to the Profit and Loss Account under the head of "Employee of Benefit Expenses", it could be observed that the assessee had debited an amount of Rs.1,98,715/- being share based payment which was on account of ESOP.As such, the AO was fully aware of the facts regarding ESOP expenses and he passed assessment order on the basis of his satisfaction. The assessee has correctly made the claim of the ESOP expenses debited in its books of accounts as a Revenue Expenditure and the same were incurred in the normal course of activities of the assessee. In view of the latest decisions of various courts allowing the deduction of ESOP expenses, it is submitted that the said ESOP expenses are allowable as deduction in the hands of the assessee. It cannot be said that the assessment order passed was without making enquiry or verification on this ground. Further, it cannot be said that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the revenue on this ground as he has passed the assessment order after being satisfied regarding the allowability of deduction of ESOP expenses.

We have heard rival submissions. On perusal of the facts and materials on record, we are of the view that the initiation of proceeding u/s.263 is valid on the issue of ESOP as the assessment order is not only erroneous but also prejudicial to the interest of revenue as the AO has failed to enquire into the issue at all. After going through the assessment order as well as the response of the assessee to the show cause notice issued before invoking provisions of section 263 of the Act, we note that no query has been raised by the AO in the matter. No contrary material has been brought on record by the ld.AR. Certainly there is non-application of mind by the AO. There is no material before us which could have suggested that he had conducted enquiry or taken follow-up action after applying his mind on this issue. The contention that the said item duly reflected in the audited account would imply that the AO has examined the issue is devoid of any merit. Moreover, even the contention on merits based on judicial decisions is not acceptable in adjudicating on the applicability of revisionary powers of the ld.PCIT on the impugned issue which basically revolves around the applicability of Explanation 2 to section 263 vis-à-vis enquiries conducted. We observe the ld.PCIT has drawn support from Explanation 2 below section 263(1) of the Act introduced by Finance Act, 2015 w.e.f. 01.06.2015 for his action. The Explanation 2 inter alia provides that the order passed without making inquiries or verification 'which should have been made' will be deemed to be erroneous insofar as it is prejudicial to the interest of the Revenue.

In so far as the requirement of due enquiry to be conducted by the AO while scrutinising any case in the course of assessment order is concerned, it would be relevant to quote certain landmark decisions of hon'ble Supreme Court in Rampyari Devi Saraogi versus CIT, (1968) 67 ITR 84 (SC) and Tara Devi Aggarwal (Smt) versus CIT, (1973) 88 ITR 323 (SC) wherein it has been observed that where the AO had accepted a particular contention or issue without inquiry whatsoever, the order was erroneous and prejudicial to the interest of Revenue. These two decisions show that it is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The aforesaid observations have to be understood in the factual background and matrix involved. In the said cases, the Assessing Officer had not conducted any enquiry or examined evidence whatsoever. There was total absence of enquiry or verification.

1 In the case of PVS Multiplex India Ltd V CIT in ITA No. 2370/Del/2013 on identical facts it was held that, “wherein the Assessing Officer conducted the assessment proceeding and passed impugned assessment order accepting the return of income of the assessee, we clearly observe that the Assessing Officer has not made inquiry on the issue of interest free advances and proportionate disallowance of interest thereon, on the issue of verification on TDS and on the claim and calculation of the assessee for the purpose of deduction u/s 80IB(7A) of the Act specially on the issue of exclusion of income/receipt on sale of shop and FDR interest. In this situation, we have no hesitation to hold that the order of the AO which is apparently very precise and cryptic, was not passed after due examination and verification of certain issues and therefore, there was an error on the part of AO which leads to a correct conclusion of the CIT that the order of the AO is not only erroneous but also prejudicial to the interest of Revenue. We may further point out that the assessment order suffers from lack of necessary enquiry on certain important issues which have been raised by the CIT in the notice issued to the assessee and impugned order u/s 263 of the Act. Therefore, we reach to a conclusion that the assessment order is not sustainable and in accordance with the provisions of the Act which is not only erroneous but also prejudicial to the interest of the Revenue. Hence, we are inclined to hold that the issuance of notice u/s 263 of the Act and impugned order passed by the CIT u/s 263 of the Act is validly assumed juri iction of revisional powers u/s 263 of the Act which cannot be alleged as invalid assumption of juri iction or bad in law and we confirm the same."

2 The co-ordinate bench of ITAT, Patna in ITA Nos.356 to 360/PAT/2024 in the case of Gandhipati Construction Private Limited observed as below: "Having said that, we may also add that while in a situation in which the necessary inquiries are not conducted or necessary verifications are not done, Commissioner may indeed have the powers to invoke his powers under section 263 but that it does not necessarily follow that in all such cases the matters can be remitted back to the assessment stage f or such inquiries and verifications. There can be three mutually exclusive situations with regard to exercise of power s under section 263, read with Explanation 2(a) thereto, with respect to lack of proper inquiries and verifications. The first situation could be this. Even if necessary inquiries and verifications are not made, the Commissioner can, based on the material before him, in certain cases straight away come to a conclusion that an addition to income, or disallowance from expenditure or some other adverse inference, is warranted. In such a situation, there will be no point in sending the matter back to the Assessing Officer for fresh inquiries or verification because an adverse inference against the assessee can be legitimately drawn, based on material on record, by the Commissioner. In exercise of his powers under section 263, the Commissioner may as well direct the Assessing Officer that related addition to income or disallowance from expenditure be made, or remedial measures are taken. The second category of cases could be when the Commissioner finds that necessary inquiries are not made or verifications not done, but, based on material on record and in his considered view, even if the necessary inquiries were made or necessary verifications were done, no addition to income or disallowance of expenditure or any other adverse action would have been warranted. Clearly, in such cases, no prejudice is caused to the legitimate interests of the revenue. No interference will be, as such, justified in such a situation. That leaves us with the third possibility, and that is when the Commissioner is satisfied that the necessary inquiries are not made and necessary verifications are not done, and that, in the absence of this exercise by the Assessing Officer, a conclusive finding is not possible one way or the other. That is perhaps the situation in which, in our humble understanding, the Commissioner, in exercise of his powers under section 263, can set aside an order, for lack of proper inquiry or verification, and the Assessing Officer to conduct such inquiries or verifications afresh."

3 The co-ordinate Mumbai Bench of the ITAT w.r.t Explanation 2 thorough an elaborate order in the case of Madhurima International (P.) Ltd. v. Pr.CIT [ITA No.421/ Mumbai] held that, “. In the instant case, the AO has not enquired the fair value adopted by the assessee in proper perspective and in the manner indicated under law as detailed above. Moreover, explanation 2 to Section 263 of the 1961 Act is inserted by Finance Act, 2015, which deems an order to be erroneous in so far as prejudicial to the interest of Revenue if the order is passed without making inquiries or verification which should have been made. Thus, in the instant case, we have already held that proper enquiries were not made by the AO before passing assessment order dated 23-03- 2016 u/s 143(3) of the 1961 Act, as are mandated u/s 263 of the 1961 Act. In our considered view, the ld. Pr. CIT has rightly invoked the provisions of section 263 of the Act, which we uphold/sustain.."

4 The Hon'ble Delhi Court in the case of Pr. Commissioner of Income Tax, Delhi-7 vs M/S Paramount Propbuild Pvt. Ltd. in ITA 247/2023(Del-HC)on 19 March, 2024 held as below: "Unfortunately, the assessment order nowhere reflects any element of inquiry or verification. The discussion about the loan transactions in question is altogether missing. Furthermore, the assessment record would also reflect that the AO has not taken any concrete steps to ascertain the genuineness and creditworthiness of the transactions, which merits consideration in the light of the findings that emerged from the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing & Finance Pvt. Ltd. It emerges that the present is a case where the AO failed not only to spell out any finding about the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing & Finance Pvt. Ltd. but also to scrutinize the highlighted aspects in the said report qua the genuineness and creditworthiness of aforenoted loan transactions. Therefore, this is the minimum inquiry which atleast was expected to have been made by the AO.

At this juncture, it is apposite to point out that clause (a) of Explanation 2 of Section 263 of the Act introduces a deeming fiction to the effect that the order passed by the AO shall be considered erroneous and prejudicial to the interests of the Revenue, if the order is passed without making inquiries or verification, which should have been made. Henceforth, since neither there is any facet of discussion about the aforenoted aspects in the assessment order nor the assessment record duly reflects that the AO has done inquiry in the light of the findings of the investigation report. We find that the present is a fit case to invoke the revisional powers under Section 263 of the Act."

5 The co-ordinate bench of ITAT, Mumbai in the case of Nos.2709 & 2716/Mum/2024 held as below:

From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualize a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decisions is held to be erroneous. Cases may be visualized where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo-motu revision because the first requirement, viz., that the order is erroneous, is absent." (Emphasis supplied) 5.1Apart from the above principles, we deem it appropriate to make reference to the decision of the Hon'ble Delhi High Court in the case of CIT vs. Sun Beam Auto 227 CTR 113 wherein the Hon'ble High Court has pointed out a distinction between lack of inquiry and inadequate inquiry. The following observations of the Hon'ble Delhi High Court are worth noting:

We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income-tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry", that such a course of action would be open".

We find from the assessment records that the AO has brought on record material facts which go to show that necessary enquiries were indeed made on the impugned issue. Moreover, as stated in preceding paras, the very basis of selection of the case hinged upon the issue of deduction u/s 80G of the Act, and seen in the light of specific queries and replies of the assessee, it can be safely concluded that the issue was duly examined and the AO allowed the claim after due application of mind and in accordance with the provisions of the Act. We do not find that the assessment order could be considered as erroneous and prejudicial and liable to application of Explanation 2 to section 263 of the Act.

1 On merits of the case, the issue whether the CSR expenditure is allowable u/s.80G of the Act is also no more res integra by a catena of decisions by various Co-ordinate Benches of the Tribunal.The Mumbai Bench of the Tribunal in the case of Alubond Dacs India (P.) Ltd. in (2024) 163 taxmann.com 536 (Mum)considered the provisions of Companies Act and I.T. Act and held as follows:

We have heard the rival submissions and perused the materials available on record. The only morn question to be decided here is whether the expenditure towards CSR activities are an allowable deduction us 80G of the Act. The CSR expenses are governed by section 135 of the Companies Act, 2013, Schedule VII of the Act and Companies (CSR) Policy Rules, 2014 where companies having net worth of Rs 500 crores of more or turnover of Rs.1000 crores or more or net profit of Rs 5 crores of more have to mandatorily comply with the CSR provisions specified us.135(1) of the Companies Act, 2011. The above mentioned companies are liable to spend atleast 25% of its average net profit for the immediately preceding three financial years on CSR activities. In the present case, the assessee has contributed Rs 30 lacs to various educational and charitable trust for which the assessee has claimed 50% of the total donation paid as deduction u/s.800 of the Act. Prior to the Finance (No.2) Act, 2014, the said expenditure was claimed as ‘business expenditure' u/s.37(1) of the Act where after the insertion of Explanation 2 to section 37(1) of the Act, the CSR expenses referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession. It is observed that the said expenses pertaining to CSR has been claimed as deduction u/s. 80G of the Act which claim was perennially rejected by the Revenue for the reason that only donations which are voluntary in nature will come under the purview of section 80G of the Act and donation towards CSR was merely a statutory obligation on companies as per section 135 of the Companies Act, 2013. It is pertinent to point out that the intention of the legislature was clear when the same was clarified by the Finance (No.2) Act, 2014 that CSR expenses will not fall under the business expenditure and also there has been an express bar specified in sub clause (iiihk) and (iiihl) of section 80G(2)(a) of the Act that any sum paid by the assessee as donation to Swatch Bharat Kosh and Clean Ganga Fund will not come under the purview of deduction u's 80G of the Act subject to certain conditions. This justifies the fact that the other donations specified us 80G of the Act would be entitled to deduction provided the conditions stipulated u/s.80G of the Act are satisfied. In the present case in hand, the contributions made by the assessee would not fall under the two exceptions specified above which clearly mandates that the assessee is entitled to claim deduction for the donations contributed during the year under consideration u/s 80G of the Act. The decision relied upon by the ld. A.O in the case of PVG Raju (supra) is distinguishable on the facts of the present case where there is no requirement of proving the voluntariness of the donation contributed by the assessee for claiming deduction u/s.80G of the Act. The amendment brought about by Finance Act, 2015 to section 80G of the Act which had inserted the sub clauses (iiihk) and (iiihl) to be the exception for qualifying a donation for claiming us.80G of the Act could also be an evidencing factor to substantiate that CSR expenditures which falls under the nature specified in section 30 to 36 of the Act are an allowable deduction u/s 80G of the Act.

On the above observation, we deem it fit to hold that the assessee is entitled to deduction claimed u/s.80G of the Act towards the CSR expenditure incurred by it. We, therefore, direct the ld. A.O, to allow the claim of the assessee subject to the condition that the assessee has satisfied the other requirements warranted u/s.80G of the Act. Hence, ground no. 2 raised by the assessee is allowed.

In the case under consideration, the proposed revision is sought to be done merely on change of opinion disagreeing with the opinion of the AO that the expenditure is not deductible under sec 80G of the Act. Further, it is a settled position of law that where there are two views possible and the AO has adopted one of the two possible views, then the order cannot be held to be erroneous/ prejudicial to the interest of the revenue and thereby proceedings under section 263 of the Act could not be sustained. Moreover, as discussed in the preceding paras, the deduction of CSR expenses under section 80G of the Act is held allowable consistently by the courts. Hence, both on legal ground as also on merits, appeal of the assessee has sufficient force. Therefore,

Ground no. 3 and 4 pertain to the issue of ESOP which according to the ld.PCIT was not enquired into by the AO. The ld.PCIT further observed that as per audit memo and on perusal of assessment records thatas per the Profit and Loss account that under the head 'Employee Benefit Expenses', the assessee had debited an amount of Rs.1,98,715/- towards Employee Stock Compensation Expenses [ESOP). As per Audit Memo, ESOP expenses are incurred in relation to issue of shares to employees and were not relatable to profits and gains arising or accruing from a business trade. ESOP is issued by the company for its employees to encourage employee ownership in the company. The shares are issued at a discounted price to its employees. Thus, ESOP is a scheme where a company proposes to increase its subscribed share capital by issuing further shares to its employees at a predetermined rate. This indirectly benefits the company in employees retention and loyalty. Thus, it was noted that ESOP is nothing more than expenditure related to issue of shares and was not allowable as deduction u/s 37(1) of the Act. He concluded that there were two aspects to the claim of the Employee Stock Compensation expenses, first being whether there was any expenses incurred at all and second, being whether such expense was disallowable u/s.37(1) of the Act while completing the assessment. As noted from the assessment order, the AO had not carried out any enquiry on the issue of ESOP expenses debited in the P&L account and SLP against the said decision of Hon'ble Karnataka High Court in the case of Biocon(supra) which has been admitted by the Hon'ble Apex Court.

During hearing, the ld.DR argued that on facts of the case and in the light of the provisions of the Act and also lack of any enquiry into the impugned issue by the AO, the ld.PCIT was fully justified in invoking the provisions of section 263 of the Act as the assessment order was erroneous and prejudicial to the interest of the Revenue on both the counts.

Before us, the ld.AR has submitted that in the course of assessment proceedings u/s 143(3), the assessee has submitted detailed Profit and Loss Account for the relevant year. Vide Note 28 to the Profit and Loss Account under the head of "Employee of Benefit Expenses", it could be observed that the assessee had debited an amount of Rs.1,98,715/- being share based payment which was on account of ESOP.As such, the AO was fully aware of the facts regarding ESOP expenses and he passed assessment order on the basis of his satisfaction. The assessee has correctly made the claim of the ESOP expenses debited in its books of accounts as a Revenue Expenditure and the same were incurred in the normal course of activities of the assessee. In view of the latest decisions of various courts allowing the deduction of ESOP expenses, it is submitted that the said ESOP expenses are allowable as deduction in the hands of the assessee. It cannot be said that the assessment order passed was without making enquiry or verification on this ground. Further, it cannot be said that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the revenue on this ground as he has passed the assessment order after being satisfied regarding the allowability of deduction of ESOP expenses.

We have heard rival submissions. On perusal of the facts and materials on record, we are of the view that the initiation of proceeding u/s.263 is valid on the issue of ESOP as the assessment order is not only erroneous but also prejudicial to the interest of revenue as the AO has failed to enquire into the issue at all. After going through the assessment order as well as the response of the assessee to the show cause notice issued before invoking provisions of section 263 of the Act, we note that no query has been raised by the AO in the matter. No contrary material has been brought on record by the ld.AR. Certainly there is non-application of mind by the AO. There is no material before us which could have suggested that he had conducted enquiry or taken follow-up action after applying his mind on this issue. The contention that the said item duly reflected in the audited account would imply that the AO has examined the issue is devoid of any merit. Moreover, even the contention on merits based on judicial decisions is not acceptable in adjudicating on the applicability of revisionary powers of the ld.PCIT on the impugned issue which basically revolves around the applicability of Explanation 2 to section 263 vis-à-vis enquiries conducted. We observe the ld.PCIT has drawn support from Explanation 2 below section 263(1) of the Act introduced by Finance Act, 2015 w.e.f. 01.06.2015 for his action. The Explanation 2 inter alia provides that the order passed without making inquiries or verification 'which should have been made' will be deemed to be erroneous insofar as it is prejudicial to the interest of the Revenue.

In so far as the requirement of due enquiry to be conducted by the AO while scrutinising any case in the course of assessment order is concerned, it would be relevant to quote certain landmark decisions of hon'ble Supreme Court in Rampyari Devi Saraogi versus CIT, (1968) 67 ITR 84 (SC) and Tara Devi Aggarwal (Smt) versus CIT, (1973) 88 ITR 323 (SC) wherein it has been observed that where the AO had accepted a particular contention or issue without inquiry whatsoever, the order was erroneous and prejudicial to the interest of Revenue. These two decisions show that it is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The aforesaid observations have to be understood in the factual background and matrix involved. In the said cases, the Assessing Officer had not conducted any enquiry or examined evidence whatsoever. There was total absence of enquiry or verification.

1 In the case of PVS Multiplex India Ltd V CIT in ITA No. 2370/Del/2013 on identical facts it was held that, “wherein the Assessing Officer conducted the assessment proceeding and passed impugned assessment order accepting the return of income of the assessee, we clearly observe that the Assessing Officer has not made inquiry on the issue of interest free advances and proportionate disallowance of interest thereon, on the issue of verification on TDS and on the claim and calculation of the assessee for the purpose of deduction u/s 80IB(7A) of the Act specially on the issue of exclusion of income/receipt on sale of shop and FDR interest. In this situation, we have no hesitation to hold that the order of the AO which is apparently very precise and cryptic, was not passed after due examination and verification of certain issues and therefore, there was an error on the part of AO which leads to a correct conclusion of the CIT that the order of the AO is not only erroneous but also prejudicial to the interest of Revenue. We may further point out that the assessment order suffers from lack of necessary enquiry on certain important issues which have been raised by the CIT in the notice issued to the assessee and impugned order u/s 263 of the Act. Therefore, we reach to a conclusion that the assessment order is not sustainable and in accordance with the provisions of the Act which is not only erroneous but also prejudicial to the interest of the Revenue. Hence, we are inclined to hold that the issuance of notice u/s 263 of the Act and impugned order passed by the CIT u/s 263 of the Act is validly assumed juri iction of revisional powers u/s 263 of the Act which cannot be alleged as invalid assumption of juri iction or bad in law and we confirm the same."

2 The co-ordinate bench of ITAT, Patna in ITA Nos.356 to 360/PAT/2024 in the case of Gandhipati Construction Private Limited observed as below: "Having said that, we may also add that while in a situation in which the necessary inquiries are not conducted or necessary verifications are not done, Commissioner may indeed have the powers to invoke his powers under section 263 but that it does not necessarily follow that in all such cases the matters can be remitted back to the assessment stage f or such inquiries and verifications. There can be three mutually exclusive situations with regard to exercise of power s under section 263, read with Explanation 2(a) thereto, with respect to lack of proper inquiries and verifications. The first situation could be this. Even if necessary inquiries and verifications are not made, the Commissioner can, based on the material before him, in certain cases straight away come to a conclusion that an addition to income, or disallowance from expenditure or some other adverse inference, is warranted. In such a situation, there will be no point in sending the matter back to the Assessing Officer for fresh inquiries or verification because an adverse inference against the assessee can be legitimately drawn, based on material on record, by the Commissioner. In exercise of his powers under section 263, the Commissioner may as well direct the Assessing Officer that related addition to income or disallowance from expenditure be made, or remedial measures are taken. The second category of cases could be when the Commissioner finds that necessary inquiries are not made or verifications not done, but, based on material on record and in his considered view, even if the necessary inquiries were made or necessary verifications were done, no addition to income or disallowance of expenditure or any other adverse action would have been warranted. Clearly, in such cases, no prejudice is caused to the legitimate interests of the revenue. No interference will be, as such, justified in such a situation. That leaves us with the third possibility, and that is when the Commissioner is satisfied that the necessary inquiries are not made and necessary verifications are not done, and that, in the absence of this exercise by the Assessing Officer, a conclusive finding is not possible one way or the other. That is perhaps the situation in which, in our humble understanding, the Commissioner, in exercise of his powers under section 263, can set aside an order, for lack of proper inquiry or verification, and the Assessing Officer to conduct such inquiries or verifications afresh."

3 The co-ordinate Mumbai Bench of the ITAT w.r.t Explanation 2 thorough an elaborate order in the case of Madhurima International (P.) Ltd. v. Pr.CIT [ITA No.421/ Mumbai] held that, “. In the instant case, the AO has not enquired the fair value adopted by the assessee in proper perspective and in the manner indicated under law as detailed above. Moreover, explanation 2 to Section 263 of the 1961 Act is inserted by Finance Act, 2015, which deems an order to be erroneous in so far as prejudicial to the interest of Revenue if the order is passed without making inquiries or verification which should have been made. Thus, in the instant case, we have already held that proper enquiries were not made by the AO before passing assessment order dated 23-03- 2016 u/s 143(3) of the 1961 Act, as are mandated u/s 263 of the 1961 Act. In our considered view, the ld. Pr. CIT has rightly invoked the provisions of section 263 of the Act, which we uphold/sustain.."

4 The Hon'ble Delhi Court in the case of Pr. Commissioner of Income Tax, Delhi-7 vs M/S Paramount Propbuild Pvt. Ltd. in ITA 247/2023(Del-HC)on 19 March, 2024 held as below: "Unfortunately, the assessment order nowhere reflects any element of inquiry or verification. The discussion about the loan transactions in question is altogether missing. Furthermore, the assessment record would also reflect that the AO has not taken any concrete steps to ascertain the genuineness and creditworthiness of the transactions, which merits consideration in the light of the findings that emerged from the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing & Finance Pvt. Ltd. It emerges that the present is a case where the AO failed not only to spell out any finding about the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing & Finance Pvt. Ltd. but also to scrutinize the highlighted aspects in the said report qua the genuineness and creditworthiness of aforenoted loan transactions. Therefore, this is the minimum inquiry which atleast was expected to have been made by the AO.

At this juncture, it is apposite to point out that clause (a) of Explanation 2 of Section 263 of the Act introduces a deeming fiction to the effect that the order passed by the AO shall be considered erroneous and prejudicial to the interests of the Revenue, if the order is passed without making inquiries or verification, which should have been made. Henceforth, since neither there is any facet of discussion about the aforenoted aspects in the assessment order nor the assessment record duly reflects that the AO has done inquiry in the light of the findings of the investigation report. We find that the present is a fit case to invoke the revisional powers under Section 263 of the Act."

5 The co-ordinate bench of ITAT, Mumbai in the case of Nos.2709 & 2716/Mum/2024 held as below:

From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualize a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decisions is held to be erroneous. Cases may be visualized where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo-motu revision because the first requirement, viz., that the order is erroneous, is absent." (Emphasis supplied) 5.1Apart from the above principles, we deem it appropriate to make reference to the decision of the Hon'ble Delhi High Court in the case of CIT vs. Sun Beam Auto 227 CTR 113 wherein the Hon'ble High Court has pointed out a distinction between lack of inquiry and inadequate inquiry. The following observations of the Hon'ble Delhi High Court are worth noting:

We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income-tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry", that such a course of action would be open".

We find from the assessment records that the AO has brought on record material facts which go to show that necessary enquiries were indeed made on the impugned issue. Moreover, as stated in preceding paras, the very basis of selection of the case hinged upon the issue of deduction u/s 80G of the Act, and seen in the light of specific queries and replies of the assessee, it can be safely concluded that the issue was duly examined and the AO allowed the claim after due application of mind and in accordance with the provisions of the Act. We do not find that the assessment order could be considered as erroneous and prejudicial and liable to application of Explanation 2 to section 263 of the Act.

1 On merits of the case, the issue whether the CSR expenditure is allowable u/s.80G of the Act is also no more res integra by a catena of decisions by various Co-ordinate Benches of the Tribunal.The Mumbai Bench of the Tribunal in the case of Alubond Dacs India (P.) Ltd. in (2024) 163 taxmann.com 536 (Mum)considered the provisions of Companies Act and I.T. Act and held as follows:

We have heard the rival submissions and perused the materials available on record. The only morn question to be decided here is whether the expenditure towards CSR activities are an allowable deduction us 80G of the Act. The CSR expenses are governed by section 135 of the Companies Act, 2013, Schedule VII of the Act and Companies (CSR) Policy Rules, 2014 where companies having net worth of Rs 500 crores of more or turnover of Rs.1000 crores or more or net profit of Rs 5 crores of more have to mandatorily comply with the CSR provisions specified us.135(1) of the Companies Act, 2011. The above mentioned companies are liable to spend atleast 25% of its average net profit for the immediately preceding three financial years on CSR activities. In the present case, the assessee has contributed Rs 30 lacs to various educational and charitable trust for which the assessee has claimed 50% of the total donation paid as deduction u/s.800 of the Act. Prior to the Finance (No.2) Act, 2014, the said expenditure was claimed as ‘business expenditure' u/s.37(1) of the Act where after the insertion of Explanation 2 to section 37(1) of the Act, the CSR expenses referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession. It is observed that the said expenses pertaining to CSR has been claimed as deduction u/s. 80G of the Act which claim was perennially rejected by the Revenue for the reason that only donations which are voluntary in nature will come under the purview of section 80G of the Act and donation towards CSR was merely a statutory obligation on companies as per section 135 of the Companies Act, 2013. It is pertinent to point out that the intention of the legislature was clear when the same was clarified by the Finance (No.2) Act, 2014 that CSR expenses will not fall under the business expenditure and also there has been an express bar specified in sub clause (iiihk) and (iiihl) of section 80G(2)(a) of the Act that any sum paid by the assessee as donation to Swatch Bharat Kosh and Clean Ganga Fund will not come under the purview of deduction u's 80G of the Act subject to certain conditions. This justifies the fact that the other donations specified us 80G of the Act would be entitled to deduction provided the conditions stipulated u/s.80G of the Act are satisfied. In the present case in hand, the contributions made by the assessee would not fall under the two exceptions specified above which clearly mandates that the assessee is entitled to claim deduction for the donations contributed during the year under consideration u/s 80G of the Act. The decision relied upon by the ld. A.O in the case of PVG Raju (supra) is distinguishable on the facts of the present case where there is no requirement of proving the voluntariness of the donation contributed by the assessee for claiming deduction u/s.80G of the Act. The amendment brought about by Finance Act, 2015 to section 80G of the Act which had inserted the sub clauses (iiihk) and (iiihl) to be the exception for qualifying a donation for claiming us.80G of the Act could also be an evidencing factor to substantiate that CSR expenditures which falls under the nature specified in section 30 to 36 of the Act are an allowable deduction u/s 80G of the Act.

On the above observation, we deem it fit to hold that the assessee is entitled to deduction claimed u/s.80G of the Act towards the CSR expenditure incurred by it. We, therefore, direct the ld. A.O, to allow the claim of the assessee subject to the condition that the assessee has satisfied the other requirements warranted u/s.80G of the Act. Hence, ground no. 2 raised by the assessee is allowed.

In the case under consideration, the proposed revision is sought to be done merely on change of opinion disagreeing with the opinion of the AO that the expenditure is not deductible under sec 80G of the Act. Further, it is a settled position of law that where there are two views possible and the AO has adopted one of the two possible views, then the order cannot be held to be erroneous/ prejudicial to the interest of the revenue and thereby proceedings under section 263 of the Act could not be sustained. Moreover, as discussed in the preceding paras, the deduction of CSR expenses under section 80G of the Act is held allowable consistently by the courts. Hence, both on legal ground as also on merits, appeal of the assessee has sufficient force. Therefore,

Ground no. 3 and 4 pertain to the issue of ESOP which according to the ld.PCIT was not enquired into by the AO. The ld.PCIT further observed that as per audit memo and on perusal of assessment records thatas per the Profit and Loss account that under the head 'Employee Benefit Expenses', the assessee had debited an amount of Rs.1,98,715/- towards Employee Stock Compensation Expenses [ESOP). As per Audit Memo, ESOP expenses are incurred in relation to issue of shares to employees and were not relatable to profits and gains arising or accruing from a business trade. ESOP is issued by the company for its employees to encourage employee ownership in the company. The shares are issued at a discounted price to its employees. Thus, ESOP is a scheme where a company proposes to increase its subscribed share capital by issuing further shares to its employees at a predetermined rate. This indirectly benefits the company in employees retention and loyalty. Thus, it was noted that ESOP is nothing more than expenditure related to issue of shares and was not allowable as deduction u/s 37(1) of the Act. He concluded that there were two aspects to the claim of the Employee Stock Compensation expenses, first being whether there was any expenses incurred at all and second, being whether such expense was disallowable u/s.37(1) of the Act while completing the assessment. As noted from the assessment order, the AO had not carried out any enquiry on the issue of ESOP expenses debited in the P&L account and SLP against the said decision of Hon'ble Karnataka High Court in the case of Biocon(supra) which has been admitted by the Hon'ble Apex Court.

During hearing, the ld.DR argued that on facts of the case and in the light of the provisions of the Act and also lack of any enquiry into the impugned issue by the AO, the ld.PCIT was fully justified in invoking the provisions of section 263 of the Act as the assessment order was erroneous and prejudicial to the interest of the Revenue on both the counts.

Before us, the ld.AR has submitted that in the course of assessment proceedings u/s 143(3), the assessee has submitted detailed Profit and Loss Account for the relevant year. Vide Note 28 to the Profit and Loss Account under the head of "Employee of Benefit Expenses", it could be observed that the assessee had debited an amount of Rs.1,98,715/- being share based payment which was on account of ESOP.As such, the AO was fully aware of the facts regarding ESOP expenses and he passed assessment order on the basis of his satisfaction. The assessee has correctly made the claim of the ESOP expenses debited in its books of accounts as a Revenue Expenditure and the same were incurred in the normal course of activities of the assessee. In view of the latest decisions of various courts allowing the deduction of ESOP expenses, it is submitted that the said ESOP expenses are allowable as deduction in the hands of the assessee. It cannot be said that the assessment order passed was without making enquiry or verification on this ground. Further, it cannot be said that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the revenue on this ground as he has passed the assessment order after being satisfied regarding the allowability of deduction of ESOP expenses.

We have heard rival submissions. On perusal of the facts and materials on record, we are of the view that the initiation of proceeding u/s.263 is valid on the issue of ESOP as the assessment order is not only erroneous but also prejudicial to the interest of revenue as the AO has failed to enquire into the issue at all. After going through the assessment order as well as the response of the assessee to the show cause notice issued before invoking provisions of section 263 of the Act, we note that no query has been raised by the AO in the matter. No contrary material has been brought on record by the ld.AR. Certainly there is non-application of mind by the AO. There is no material before us which could have suggested that he had conducted enquiry or taken follow-up action after applying his mind on this issue. The contention that the said item duly reflected in the audited account would imply that the AO has examined the issue is devoid of any merit. Moreover, even the contention on merits based on judicial decisions is not acceptable in adjudicating on the applicability of revisionary powers of the ld.PCIT on the impugned issue which basically revolves around the applicability of Explanation 2 to section 263 vis-à-vis enquiries conducted. We observe the ld.PCIT has drawn support from Explanation 2 below section 263(1) of the Act introduced by Finance Act, 2015 w.e.f. 01.06.2015 for his action. The Explanation 2 inter alia provides that the order passed without making inquiries or verification 'which should have been made' will be deemed to be erroneous insofar as it is prejudicial to the interest of the Revenue.

In so far as the requirement of due enquiry to be conducted by the AO while scrutinising any case in the course of assessment order is concerned, it would be relevant to quote certain landmark decisions of hon'ble Supreme Court in Rampyari Devi Saraogi versus CIT, (1968) 67 ITR 84 (SC) and Tara Devi Aggarwal (Smt) versus CIT, (1973) 88 ITR 323 (SC) wherein it has been observed that where the AO had accepted a particular contention or issue without inquiry whatsoever, the order was erroneous and prejudicial to the interest of Revenue. These two decisions show that it is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The aforesaid observations have to be understood in the factual background and matrix involved. In the said cases, the Assessing Officer had not conducted any enquiry or examined evidence whatsoever. There was total absence of enquiry or verification.

1 In the case of PVS Multiplex India Ltd V CIT in ITA No. 2370/Del/2013 on identical facts it was held that, “wherein the Assessing Officer conducted the assessment proceeding and passed impugned assessment order accepting the return of income of the assessee, we clearly observe that the Assessing Officer has not made inquiry on the issue of interest free advances and proportionate disallowance of interest thereon, on the issue of verification on TDS and on the claim and calculation of the assessee for the purpose of deduction u/s 80IB(7A) of the Act specially on the issue of exclusion of income/receipt on sale of shop and FDR interest. In this situation, we have no hesitation to hold that the order of the AO which is apparently very precise and cryptic, was not passed after due examination and verification of certain issues and therefore, there was an error on the part of AO which leads to a correct conclusion of the CIT that the order of the AO is not only erroneous but also prejudicial to the interest of Revenue. We may further point out that the assessment order suffers from lack of necessary enquiry on certain important issues which have been raised by the CIT in the notice issued to the assessee and impugned order u/s 263 of the Act. Therefore, we reach to a conclusion that the assessment order is not sustainable and in accordance with the provisions of the Act which is not only erroneous but also prejudicial to the interest of the Revenue. Hence, we are inclined to hold that the issuance of notice u/s 263 of the Act and impugned order passed by the CIT u/s 263 of the Act is validly assumed juri iction of revisional powers u/s 263 of the Act which cannot be alleged as invalid assumption of juri iction or bad in law and we confirm the same."

2 The co-ordinate bench of ITAT, Patna in ITA Nos.356 to 360/PAT/2024 in the case of Gandhipati Construction Private Limited observed as below: "Having said that, we may also add that while in a situation in which the necessary inquiries are not conducted or necessary verifications are not done, Commissioner may indeed have the powers to invoke his powers under section 263 but that it does not necessarily follow that in all such cases the matters can be remitted back to the assessment stage f or such inquiries and verifications. There can be three mutually exclusive situations with regard to exercise of power s under section 263, read with Explanation 2(a) thereto, with respect to lack of proper inquiries and verifications. The first situation could be this. Even if necessary inquiries and verifications are not made, the Commissioner can, based on the material before him, in certain cases straight away come to a conclusion that an addition to income, or disallowance from expenditure or some other adverse inference, is warranted. In such a situation, there will be no point in sending the matter back to the Assessing Officer for fresh inquiries or verification because an adverse inference against the assessee can be legitimately drawn, based on material on record, by the Commissioner. In exercise of his powers under section 263, the Commissioner may as well direct the Assessing Officer that related addition to income or disallowance from expenditure be made, or remedial measures are taken. The second category of cases could be when the Commissioner finds that necessary inquiries are not made or verifications not done, but, based on material on record and in his considered view, even if the necessary inquiries were made or necessary verifications were done, no addition to income or disallowance of expenditure or any other adverse action would have been warranted. Clearly, in such cases, no prejudice is caused to the legitimate interests of the revenue. No interference will be, as such, justified in such a situation. That leaves us with the third possibility, and that is when the Commissioner is satisfied that the necessary inquiries are not made and necessary verifications are not done, and that, in the absence of this exercise by the Assessing Officer, a conclusive finding is not possible one way or the other. That is perhaps the situation in which, in our humble understanding, the Commissioner, in exercise of his powers under section 263, can set aside an order, for lack of proper inquiry or verification, and the Assessing Officer to conduct such inquiries or verifications afresh."

3 The co-ordinate Mumbai Bench of the ITAT w.r.t Explanation 2 thorough an elaborate order in the case of Madhurima International (P.) Ltd. v. Pr.CIT [ITA No.421/ Mumbai] held that, “. In the instant case, the AO has not enquired the fair value adopted by the assessee in proper perspective and in the manner indicated under law as detailed above. Moreover, explanation 2 to Section 263 of the 1961 Act is inserted by Finance Act, 2015, which deems an order to be erroneous in so far as prejudicial to the interest of Revenue if the order is passed without making inquiries or verification which should have been made. Thus, in the instant case, we have already held that proper enquiries were not made by the AO before passing assessment order dated 23-03- 2016 u/s 143(3) of the 1961 Act, as are mandated u/s 263 of the 1961 Act. In our considered view, the ld. Pr. CIT has rightly invoked the provisions of section 263 of the Act, which we uphold/sustain.."

4 The Hon'ble Delhi Court in the case of Pr. Commissioner of Income Tax, Delhi-7 vs M/S Paramount Propbuild Pvt. Ltd. in ITA 247/2023(Del-HC)on 19 March, 2024 held as below: "Unfortunately, the assessment order nowhere reflects any element of inquiry or verification. The discussion about the loan transactions in question is altogether missing. Furthermore, the assessment record would also reflect that the AO has not taken any concrete steps to ascertain the genuineness and creditworthiness of the transactions, which merits consideration in the light of the findings that emerged from the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing & Finance Pvt. Ltd. It emerges that the present is a case where the AO failed not only to spell out any finding about the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing & Finance Pvt. Ltd. but also to scrutinize the highlighted aspects in the said report qua the genuineness and creditworthiness of aforenoted loan transactions. Therefore, this is the minimum inquiry which atleast was expected to have been made by the AO.

At this juncture, it is apposite to point out that clause (a) of Explanation 2 of Section 263 of the Act introduces a deeming fiction to the effect that the order passed by the AO shall be considered erroneous and prejudicial to the interests of the Revenue, if the order is passed without making inquiries or verification, which should have been made. Henceforth, since neither there is any facet of discussion about the aforenoted aspects in the assessment order nor the assessment record duly reflects that the AO has done inquiry in the light of the findings of the investigation report. We find that the present is a fit case to invoke the revisional powers under Section 263 of the Act."

5 The co-ordinate bench of ITAT, Mumbai in the case of Nos.2709 & 2716/Mum/2024 held as below:

From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualize a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decisions is held to be erroneous. Cases may be visualized where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo-motu revision because the first requirement, viz., that the order is erroneous, is absent." (Emphasis supplied) 5.1Apart from the above principles, we deem it appropriate to make reference to the decision of the Hon'ble Delhi High Court in the case of CIT vs. Sun Beam Auto 227 CTR 113 wherein the Hon'ble High Court has pointed out a distinction between lack of inquiry and inadequate inquiry. The following observations of the Hon'ble Delhi High Court are worth noting:

We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income-tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry", that such a course of action would be open".

We find from the assessment records that the AO has brought on record material facts which go to show that necessary enquiries were indeed made on the impugned issue. Moreover, as stated in preceding paras, the very basis of selection of the case hinged upon the issue of deduction u/s 80G of the Act, and seen in the light of specific queries and replies of the assessee, it can be safely concluded that the issue was duly examined and the AO allowed the claim after due application of mind and in accordance with the provisions of the Act. We do not find that the assessment order could be considered as erroneous and prejudicial and liable to application of Explanation 2 to section 263 of the Act.

1 On merits of the case, the issue whether the CSR expenditure is allowable u/s.80G of the Act is also no more res integra by a catena of decisions by various Co-ordinate Benches of the Tribunal.The Mumbai Bench of the Tribunal in the case of Alubond Dacs India (P.) Ltd. in (2024) 163 taxmann.com 536 (Mum)considered the provisions of Companies Act and I.T. Act and held as follows:

We have heard the rival submissions and perused the materials available on record. The only morn question to be decided here is whether the expenditure towards CSR activities are an allowable deduction us 80G of the Act. The CSR expenses are governed by section 135 of the Companies Act, 2013, Schedule VII of the Act and Companies (CSR) Policy Rules, 2014 where companies having net worth of Rs 500 crores of more or turnover of Rs.1000 crores or more or net profit of Rs 5 crores of more have to mandatorily comply with the CSR provisions specified us.135(1) of the Companies Act, 2011. The above mentioned companies are liable to spend atleast 25% of its average net profit for the immediately preceding three financial years on CSR activities. In the present case, the assessee has contributed Rs 30 lacs to various educational and charitable trust for which the assessee has claimed 50% of the total donation paid as deduction u/s.800 of the Act. Prior to the Finance (No.2) Act, 2014, the said expenditure was claimed as ‘business expenditure' u/s.37(1) of the Act where after the insertion of Explanation 2 to section 37(1) of the Act, the CSR expenses referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession. It is observed that the said expenses pertaining to CSR has been claimed as deduction u/s. 80G of the Act which claim was perennially rejected by the Revenue for the reason that only donations which are voluntary in nature will come under the purview of section 80G of the Act and donation towards CSR was merely a statutory obligation on companies as per section 135 of the Companies Act, 2013. It is pertinent to point out that the intention of the legislature was clear when the same was clarified by the Finance (No.2) Act, 2014 that CSR expenses will not fall under the business expenditure and also there has been an express bar specified in sub clause (iiihk) and (iiihl) of section 80G(2)(a) of the Act that any sum paid by the assessee as donation to Swatch Bharat Kosh and Clean Ganga Fund will not come under the purview of deduction u's 80G of the Act subject to certain conditions. This justifies the fact that the other donations specified us 80G of the Act would be entitled to deduction provided the conditions stipulated u/s.80G of the Act are satisfied. In the present case in hand, the contributions made by the assessee would not fall under the two exceptions specified above which clearly mandates that the assessee is entitled to claim deduction for the donations contributed during the year under consideration u/s 80G of the Act. The decision relied upon by the ld. A.O in the case of PVG Raju (supra) is distinguishable on the facts of the present case where there is no requirement of proving the voluntariness of the donation contributed by the assessee for claiming deduction u/s.80G of the Act. The amendment brought about by Finance Act, 2015 to section 80G of the Act which had inserted the sub clauses (iiihk) and (iiihl) to be the exception for qualifying a donation for claiming us.80G of the Act could also be an evidencing factor to substantiate that CSR expenditures which falls under the nature specified in section 30 to 36 of the Act are an allowable deduction u/s 80G of the Act.

On the above observation, we deem it fit to hold that the assessee is entitled to deduction claimed u/s.80G of the Act towards the CSR expenditure incurred by it. We, therefore, direct the ld. A.O, to allow the claim of the assessee subject to the condition that the assessee has satisfied the other requirements warranted u/s.80G of the Act. Hence, ground no. 2 raised by the assessee is allowed.

In the case under consideration, the proposed revision is sought to be done merely on change of opinion disagreeing with the opinion of the AO that the expenditure is not deductible under sec 80G of the Act. Further, it is a settled position of law that where there are two views possible and the AO has adopted one of the two possible views, then the order cannot be held to be erroneous/ prejudicial to the interest of the revenue and thereby proceedings under section 263 of the Act could not be sustained. Moreover, as discussed in the preceding paras, the deduction of CSR expenses under section 80G of the Act is held allowable consistently by the courts. Hence, both on legal ground as also on merits, appeal of the assessee has sufficient force. Therefore,

Ground no. 3 and 4 pertain to the issue of ESOP which according to the ld.PCIT was not enquired into by the AO. The ld.PCIT further observed that as per audit memo and on perusal of assessment records thatas per the Profit and Loss account that under the head 'Employee Benefit Expenses', the assessee had debited an amount of Rs.1,98,715/- towards Employee Stock Compensation Expenses [ESOP). As per Audit Memo, ESOP expenses are incurred in relation to issue of shares to employees and were not relatable to profits and gains arising or accruing from a business trade. ESOP is issued by the company for its employees to encourage employee ownership in the company. The shares are issued at a discounted price to its employees. Thus, ESOP is a scheme where a company proposes to increase its subscribed share capital by issuing further shares to its employees at a predetermined rate. This indirectly benefits the company in employees retention and loyalty. Thus, it was noted that ESOP is nothing more than expenditure related to issue of shares and was not allowable as deduction u/s 37(1) of the Act. He concluded that there were two aspects to the claim of the Employee Stock Compensation expenses, first being whether there was any expenses incurred at all and second, being whether such expense was disallowable u/s.37(1) of the Act while completing the assessment. As noted from the assessment order, the AO had not carried out any enquiry on the issue of ESOP expenses debited in the P&L account and SLP against the said decision of Hon'ble Karnataka High Court in the case of Biocon(supra) which has been admitted by the Hon'ble Apex Court.

During hearing, the ld.DR argued that on facts of the case and in the light of the provisions of the Act and also lack of any enquiry into the impugned issue by the AO, the ld.PCIT was fully justified in invoking the provisions of section 263 of the Act as the assessment order was erroneous and prejudicial to the interest of the Revenue on both the counts.

Before us, the ld.AR has submitted that in the course of assessment proceedings u/s 143(3), the assessee has submitted detailed Profit and Loss Account for the relevant year. Vide Note 28 to the Profit and Loss Account under the head of "Employee of Benefit Expenses", it could be observed that the assessee had debited an amount of Rs.1,98,715/- being share based payment which was on account of ESOP.As such, the AO was fully aware of the facts regarding ESOP expenses and he passed assessment order on the basis of his satisfaction. The assessee has correctly made the claim of the ESOP expenses debited in its books of accounts as a Revenue Expenditure and the same were incurred in the normal course of activities of the assessee. In view of the latest decisions of various courts allowing the deduction of ESOP expenses, it is submitted that the said ESOP expenses are allowable as deduction in the hands of the assessee. It cannot be said that the assessment order passed was without making enquiry or verification on this ground. Further, it cannot be said that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the revenue on this ground as he has passed the assessment order after being satisfied regarding the allowability of deduction of ESOP expenses.

We have heard rival submissions. On perusal of the facts and materials on record, we are of the view that the initiation of proceeding u/s.263 is valid on the issue of ESOP as the assessment order is not only erroneous but also prejudicial to the interest of revenue as the AO has failed to enquire into the issue at all. After going through the assessment order as well as the response of the assessee to the show cause notice issued before invoking provisions of section 263 of the Act, we note that no query has been raised by the AO in the matter. No contrary material has been brought on record by the ld.AR. Certainly there is non-application of mind by the AO. There is no material before us which could have suggested that he had conducted enquiry or taken follow-up action after applying his mind on this issue. The contention that the said item duly reflected in the audited account would imply that the AO has examined the issue is devoid of any merit. Moreover, even the contention on merits based on judicial decisions is not acceptable in adjudicating on the applicability of revisionary powers of the ld.PCIT on the impugned issue which basically revolves around the applicability of Explanation 2 to section 263 vis-à-vis enquiries conducted. We observe the ld.PCIT has drawn support from Explanation 2 below section 263(1) of the Act introduced by Finance Act, 2015 w.e.f. 01.06.2015 for his action. The Explanation 2 inter alia provides that the order passed without making inquiries or verification 'which should have been made' will be deemed to be erroneous insofar as it is prejudicial to the interest of the Revenue.

In so far as the requirement of due enquiry to be conducted by the AO while scrutinising any case in the course of assessment order is concerned, it would be relevant to quote certain landmark decisions of hon'ble Supreme Court in Rampyari Devi Saraogi versus CIT, (1968) 67 ITR 84 (SC) and Tara Devi Aggarwal (Smt) versus CIT, (1973) 88 ITR 323 (SC) wherein it has been observed that where the AO had accepted a particular contention or issue without inquiry whatsoever, the order was erroneous and prejudicial to the interest of Revenue. These two decisions show that it is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The aforesaid observations have to be understood in the factual background and matrix involved. In the said cases, the Assessing Officer had not conducted any enquiry or examined evidence whatsoever. There was total absence of enquiry or verification.

1 In the case of PVS Multiplex India Ltd V CIT in ITA No. 2370/Del/2013 on identical facts it was held that, “wherein the Assessing Officer conducted the assessment proceeding and passed impugned assessment order accepting the return of income of the assessee, we clearly observe that the Assessing Officer has not made inquiry on the issue of interest free advances and proportionate disallowance of interest thereon, on the issue of verification on TDS and on the claim and calculation of the assessee for the purpose of deduction u/s 80IB(7A) of the Act specially on the issue of exclusion of income/receipt on sale of shop and FDR interest. In this situation, we have no hesitation to hold that the order of the AO which is apparently very precise and cryptic, was not passed after due examination and verification of certain issues and therefore, there was an error on the part of AO which leads to a correct conclusion of the CIT that the order of the AO is not only erroneous but also prejudicial to the interest of Revenue. We may further point out that the assessment order suffers from lack of necessary enquiry on certain important issues which have been raised by the CIT in the notice issued to the assessee and impugned order u/s 263 of the Act. Therefore, we reach to a conclusion that the assessment order is not sustainable and in accordance with the provisions of the Act which is not only erroneous but also prejudicial to the interest of the Revenue. Hence, we are inclined to hold that the issuance of notice u/s 263 of the Act and impugned order passed by the CIT u/s 263 of the Act is validly assumed juri iction of revisional powers u/s 263 of the Act which cannot be alleged as invalid assumption of juri iction or bad in law and we confirm the same."

2 The co-ordinate bench of ITAT, Patna in ITA Nos.356 to 360/PAT/2024 in the case of Gandhipati Construction Private Limited observed as below: "Having said that, we may also add that while in a situation in which the necessary inquiries are not conducted or necessary verifications are not done, Commissioner may indeed have the powers to invoke his powers under section 263 but that it does not necessarily follow that in all such cases the matters can be remitted back to the assessment stage f or such inquiries and verifications. There can be three mutually exclusive situations with regard to exercise of power s under section 263, read with Explanation 2(a) thereto, with respect to lack of proper inquiries and verifications. The first situation could be this. Even if necessary inquiries and verifications are not made, the Commissioner can, based on the material before him, in certain cases straight away come to a conclusion that an addition to income, or disallowance from expenditure or some other adverse inference, is warranted. In such a situation, there will be no point in sending the matter back to the Assessing Officer for fresh inquiries or verification because an adverse inference against the assessee can be legitimately drawn, based on material on record, by the Commissioner. In exercise of his powers under section 263, the Commissioner may as well direct the Assessing Officer that related addition to income or disallowance from expenditure be made, or remedial measures are taken. The second category of cases could be when the Commissioner finds that necessary inquiries are not made or verifications not done, but, based on material on record and in his considered view, even if the necessary inquiries were made or necessary verifications were done, no addition to income or disallowance of expenditure or any other adverse action would have been warranted. Clearly, in such cases, no prejudice is caused to the legitimate interests of the revenue. No interference will be, as such, justified in such a situation. That leaves us with the third possibility, and that is when the Commissioner is satisfied that the necessary inquiries are not made and necessary verifications are not done, and that, in the absence of this exercise by the Assessing Officer, a conclusive finding is not possible one way or the other. That is perhaps the situation in which, in our humble understanding, the Commissioner, in exercise of his powers under section 263, can set side an order, for lack of proper inquiry or verification, and the Assessing Officer to conduct such inquiries or verifications afresh."

3 The co-ordinate Mumbai Bench of the ITAT w.r.t Explanation 2 thorough an elaborate order in the case of Madhurima International (P.) Ltd. v. Pr.CIT [ITA No.421/ Mumbai] held that, “. In the instant case, the AO has not enquired the fair value adopted by the assessee in proper perspective and in the manner indicated under law as detailed above. Moreover, explanation 2 to Section 263 of the 1961 Act is inserted by Finance Act, 2015, which deems an order to be erroneous in so far as prejudicial to the interest of Revenue if the order is passed without making inquiries or verification which should have been made. Thus, in the instant case, we have already held that proper enquiries were not made by the AO before passing assessment order dated 23-03- 2016 u/s 143(3) of the 1961 Act, as are mandated u/s 263 of the 1961 Act. In our considered view, the ld. Pr. CIT has rightly invoked the provisions of section 263 of the Act, which we uphold/sustain.."

4 The Hon'ble Delhi Court in the case of Pr. Commissioner of Income Tax, Delhi-7 vs M/S Paramount Propbuild Pvt. Ltd. in ITA 247/2023(Del-HC)on 19 March, 2024 held as below: "Unfortunately, the assessment order nowhere reflects any element of inquiry or verification. The discussion about the loan transactions in question is altogether missing. Furthermore, the assessment record would also reflect that the AO has not taken any concrete steps to ascertain the genuineness and creditworthiness of the transactions, which merits consideration in the light of the findings that emerged from the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing & Finance Pvt. Ltd. It emerges that the present is a case where the AO failed not only to spell out any finding about the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing & Finance Pvt. Ltd. but also to scrutinize the highlighted aspects in the said report qua the genuineness and creditworthiness of aforenoted loan transactions. Therefore, this is the minimum inquiry which atleast was expected to have been made by the AO.

At this juncture, it is apposite to point out that clause (a) of Explanation 2 of Section 263 of the Act introduces a deeming fiction to the effect that the order passed by the AO shall be considered erroneous and prejudicial to the interests of the Revenue, if the order is passed without making inquiries or verification, which should have been made. Henceforth, since neither there is any facet of discussion about the aforenoted aspects in the assessment order nor the assessment record duly reflects that the AO has done inquiry in the light of the findings of the investigation report. We find that the present is a fit case to invoke the revisional powers under Section 263 of the Act."

5 The co-ordinate bench of ITAT, Mumbai in the case of Nos.2709 & 2716/Mum/2024 held as below:

From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualize a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decisions is held to be erroneous. Cases may be visualized where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo-motu revision because the first requirement, viz., that the order is erroneous, is absent." (Emphasis supplied) 5.1Apart from the above principles, we deem it appropriate to make reference to the decision of the Hon'ble Delhi High Court in the case of CIT vs. Sun Beam Auto 227 CTR 113 wherein the Hon'ble High Court has pointed out a distinction between lack of inquiry and inadequate inquiry. The following observations of the Hon'ble Delhi High Court are worth noting:

We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income-tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry", that such a course of action would be open".

We find from the assessment records that the AO has brought on record material facts which go to show that necessary enquiries were indeed made on the impugned issue. Moreover, as stated in preceding paras, the very basis of selection of the case hinged upon the issue of deduction u/s 80G of the Act, and seen in the light of specific queries and replies of the assessee, it can be safely concluded that the issue was duly examined and the AO allowed the claim after due application of mind and in accordance with the provisions of the Act. We do not find that the assessment order could be considered as erroneous and prejudicial and liable to application of Explanation 2 to section 263 of the Act.

1 On merits of the case, the issue whether the CSR expenditure is allowable u/s.80G of the Act is also no more res integra by a catena of decisions by various Co-ordinate Benches of the Tribunal.The Mumbai Bench of the Tribunal in the case of Alubond Dacs India (P.) Ltd. in (2024) 163 taxmann.com 536 (Mum)considered the provisions of Companies Act and I.T. Act and held as follows:

We have heard the rival submissions and perused the materials available on record. The only morn question to be decided here is whether the expenditure towards CSR activities are an allowable deduction us 80G of the Act. The CSR expenses are governed by section 135 of the Companies Act, 2013, Schedule VII of the Act and Companies (CSR) Policy Rules, 2014 where companies having net worth of Rs 500 crores of more or turnover of Rs.1000 crores or more or net profit of Rs 5 crores of more have to mandatorily comply with the CSR provisions specified us.135(1) of the Companies Act, 2011. The above mentioned companies are liable to spend atleast 25% of its average net profit for the immediately preceding three financial years on CSR activities. In the present case, the assessee has contributed Rs 30 lacs to various educational and charitable trust for which the assessee has claimed 50% of the total donation paid as deduction u/s.800 of the Act. Prior to the Finance (No.2) Act, 2014, the said expenditure was claimed as ‘business expenditure' u/s.37(1) of the Act where after the insertion of Explanation 2 to section 37(1) of the Act, the CSR expenses referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession. It is observed that the said expenses pertaining to CSR has been claimed as deduction u/s. 80G of the Act which claim was perennially rejected by the Revenue for the reason that only donations which are voluntary in nature will come under the purview of section 80G of the Act and donation towards CSR was merely a statutory obligation on companies as per section 135 of the Companies Act, 2013. It is pertinent to point out that the intention of the legislature was clear when the same was clarified by the Finance (No.2) Act, 2014 that CSR expenses will not fall under the business expenditure and also there has been an express bar specified in sub clause (iiihk) and (iiihl) of section 80G(2)(a) of the Act that any sum paid by the assessee as donation to Swatch Bharat Kosh and Clean Ganga Fund will not come under the purview of deduction u's 80G of the Act subject to certain conditions. This justifies the fact that the other donations specified us 80G of the Act would be entitled to deduction provided the conditions stipulated u/s.80G of the Act are satisfied. In the present case in hand, the contributions made by the assessee would not fall under the two exceptions specified above which clearly mandates that the assessee is entitled to claim deduction for the donations contributed during the year under consideration u/s 80G of the Act. The decision relied upon by the ld. A.O in the case of PVG Raju (supra) is distinguishable on the facts of the present case where there is no requirement of proving the voluntariness of the donation contributed by the assessee for claiming deduction u/s.80G of the Act. The amendment brought about by Finance Act, 2015 to section 80G of the Act which had inserted the sub clauses (iiihk) and (iiihl) to be the exception for qualifying a donation for claiming us.80G of the Act could also be an evidencing factor to substantiate that CSR expenditures which falls under the nature specified in section 30 to 36 of the Act are an allowable deduction u/s 80G of the Act.

On the above observation, we deem it fit to hold that the assessee is entitled to deduction claimed u/s.80G of the Act towards the CSR expenditure incurred by it. We, therefore, direct the ld. A.O, to allow the claim of the assessee subject to the condition that the assessee has satisfied the other requirements warranted u/s.80G of the Act. Hence, ground no. 2 raised by the assessee is allowed.

In the case under consideration, the proposed revision is sought to be done merely on change of opinion disagreeing with the opinion of the AO that the expenditure is not deductible under sec 80G of the Act. Further, it is a settled position of law that where there are two views possible and the AO has adopted one of the two possible views, then the order cannot be held to be erroneous/ prejudicial to the interest of the revenue and thereby proceedings under section 263 of the Act could not be sustained. Moreover, as discussed in the preceding paras, the deduction of CSR expenses under section 80G of the Act is held allowable consistently by the courts. Hence, both on legal ground as also on merits, appeal of the assessee has sufficient force. Therefore,

Ground no. 3 and 4 pertain to the issue of ESOP which according to the ld.PCIT was not enquired into by the AO. The ld.PCIT further observed that as per audit memo and on perusal of assessment records thatas per the Profit and Loss account that under the head 'Employee Benefit Expenses', the assessee had debited an amount of Rs.1,98,715/- towards Employee Stock Compensation Expenses [ESOP). As per Audit Memo, ESOP expenses are incurred in relation to issue of shares to employees and were not relatable to profits and gains arising or accruing from a business trade. ESOP is issued by the company for its employees to encourage employee ownership in the company. The shares are issued at a discounted price to its employees. Thus, ESOP is a scheme where a company proposes to increase its subscribed share capital by issuing further shares to its employees at a predetermined rate. This indirectly benefits the company in employees retention and loyalty. Thus, it was noted that ESOP is nothing more than expenditure related to issue of shares and was not allowable as deduction u/s 37(1) of the Act. He concluded that there were two aspects to the claim of the Employee Stock Compensation expenses, first being whether there was any expenses incurred at all and second, being whether such expense was disallowable u/s.37(1) of the Act while completing the assessment. As noted from the assessment order, the AO had not carried out any enquiry on the issue of ESOP expenses debited in the P&L account and SLP against the said decision of Hon'ble Karnataka High Court in the case of Biocon(supra) which has been admitted by the Hon'ble Apex Court.

During hearing, the ld.DR argued that on facts of the case and in the light of the provisions of the Act and also lack of any enquiry into the impugned issue by the AO, the ld.PCIT was fully justified in invoking the provisions of section 263 of the Act as the assessment order was erroneous and prejudicial to the interest of the Revenue on both the counts.

Before us, the ld.AR has submitted that in the course of assessment proceedings u/s 143(3), the assessee has submitted detailed Profit and Loss Account for the relevant year. Vide Note 28 to the Profit and Loss Account under the head of "Employee of Benefit Expenses", it could be observed that the assessee had debited an amount of Rs.1,98,715/- being share based payment which was on account of ESOP.As such, the AO was fully aware of the facts regarding ESOP expenses and he passed assessment order on the basis of his satisfaction. The assessee has correctly made the claim of the ESOP expenses debited in its books of accounts as a Revenue Expenditure and the same were incurred in the normal course of activities of the assessee. In view of the latest decisions of various courts allowing the deduction of ESOP expenses, it is submitted that the said ESOP expenses are allowable as deduction in the hands of the assessee. It cannot be said that the assessment order passed was without making enquiry or verification on this ground. Further, it cannot be said that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the revenue on this ground as he has passed the assessment order after being satisfied regarding the allowability of deduction of ESOP expenses.

We have heard rival submissions. On perusal of the facts and materials on record, we are of the view that the initiation of proceeding u/s.263 is valid on the issue of ESOP as the assessment order is not only erroneous but also prejudicial to the interest of revenue as the AO has failed to enquire into the issue at all. After going through the assessment order as well as the response of the assessee to the show cause notice issued before invoking provisions of section 263 of the Act, we note that no query has been raised by the AO in the matter. No contrary material has been brought on record by the ld.AR. Certainly there is non-application of mind by the AO. There is no material before us which could have suggested that he had conducted enquiry or taken follow-up action after applying his mind on this issue. The contention that the said item duly reflected in the audited account would imply that the AO has examined the issue is devoid of any merit. Moreover, even the contention on merits based on judicial decisions is not acceptable in adjudicating on the applicability of revisionary powers of the ld.PCIT on the impugned issue which basically revolves around the applicability of Explanation 2 to section 263 vis-à-vis enquiries conducted. We observe the ld.PCIT has drawn support from Explanation 2 below section 263(1) of the Act introduced by Finance Act, 2015 w.e.f. 01.06.2015 for his action. The Explanation 2 inter alia provides that the order passed without making inquiries or verification 'which should have been made' will be deemed to be erroneous insofar as it is prejudicial to the interest of the Revenue.

In so far as the requirement of due enquiry to be conducted by the AO while scrutinising any case in the course of assessment order is concerned, it would be relevant to quote certain landmark decisions of hon'ble Supreme Court in Rampyari Devi Saraogi versus CIT, (1968) 67 ITR 84 (SC) and Tara Devi Aggarwal (Smt) versus CIT, (1973) 88 ITR 323 (SC) wherein it has been observed that where the AO had accepted a particular contention or issue without inquiry whatsoever, the order was erroneous and prejudicial to the interest of Revenue. These two decisions show that it is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The aforesaid observations have to be understood in the factual background and matrix involved. In the said cases, the Assessing Officer had not conducted any enquiry or examined evidence whatsoever. There was total absence of enquiry or verification.

1 In the case of PVS Multiplex India Ltd V CIT in ITA No. 2370/Del/2013 on identical facts it was held that, “wherein the Assessing Officer conducted the assessment proceeding and passed impugned assessment order accepting the return of income of the assessee, we clearly observe that the Assessing Officer has not made inquiry on the issue of interest free advances and proportionate disallowance of interest thereon, on the issue of verification on TDS and on the claim and calculation of the assessee for the purpose of deduction u/s 80IB(7A) of the Act specially on the issue of exclusion of income/receipt on sale of shop and FDR interest. In this situation, we have no hesitation to hold that the order of the AO which is apparently very precise and cryptic, was not passed after due examination and verification of certain issues and therefore, there was an error on the part of AO which leads to a correct conclusion of the CIT that the order of the AO is not only erroneous but also prejudicial to the interest of Revenue. We may further point out that the assessment order suffers from lack of necessary enquiry on certain important issues which have been raised by the CIT in the notice issued to the assessee and impugned order u/s 263 of the Act. Therefore, we reach to a conclusion that the assessment order is not sustainable and in accordance with the provisions of the Act which is not only erroneous but also prejudicial to the interest of the Revenue. Hence, we are inclined to hold that the issuance of notice u/s 263 of the Act and impugned order passed by the CIT u/s 263 of the Act is validly assumed juri iction of revisional powers u/s 263 of the Act which cannot be alleged as invalid assumption of juri iction or bad in law and we confirm the same."

2 The co-ordinate bench of ITAT, Patna in ITA Nos.356 to 360/PAT/2024 in the case of Gandhipati Construction Private Limited observed as below: "Having said that, we may also add that while in a situation in which the necessary inquiries are not conducted or necessary verifications are not done, Commissioner may indeed have the powers to invoke his powers under section 263 but that it does not necessarily follow that in all such cases the matters can be remitted back to the assessment stage f or such inquiries and verifications. There can be three mutually exclusive situations with regard to exercise of power s under section 263, read with Explanation 2(a) thereto, with respect to lack of proper inquiries and verifications. The first situation could be this. Even if necessary inquiries and verifications are not made, the Commissioner can, based on the material before him, in certain cases straight away come to a conclusion that an addition to income, or disallowance from expenditure or some other adverse inference, is warranted. In such a situation, there will be no point in sending the matter back to the Assessing Officer for fresh inquiries or verification because an adverse inference against the assessee can be legitimately drawn, based on material on record, by the Commissioner. In exercise of his powers under section 263, the Commissioner may as well direct the Assessing Officer that related addition to income or disallowance from expenditure be made, or remedial measures are taken. The second category of cases could be when the Commissioner finds that necessary inquiries are not made or verifications not done, but, based on material on record and in his considered view, even if the necessary inquiries were made or necessary verifications were done, no addition to income or disallowance of expenditure or any other adverse action would have been warranted. Clearly, in such cases, no prejudice is caused to the legitimate interests of the revenue. No interference will be, as such, justified in such a situation. That leaves us with the third possibility, and that is when the Commissioner is satisfied that the necessary inquiries are not made and necessary verifications are not done, and that, in the absence of this exercise by the Assessing Officer, a conclusive finding is not possible one way or the other. That is perhaps the situation in which, in our humble understanding, the Commissioner, in exercise of his powers under section 263, can set side an order, for lack of proper inquiry or verification, and the Assessing Officer to conduct such inquiries or verifications afresh."

3 The co-ordinate Mumbai Bench of the ITAT w.r.t Explanation 2 thorough an elaborate order in the case of Madhurima International (P.) Ltd. v. Pr.CIT [ITA No.421/ Mumbai] held that, “. In the instant case, the AO has not enquired the fair value adopted by the assessee in proper perspective and in the manner indicated under law as detailed above. Moreover, explanation 2 to Section 263 of the 1961 Act is inserted by Finance Act, 2015, which deems an order to be erroneous in so far as prejudicial to the interest of Revenue if the order is passed without making inquiries or verification which should have been made. Thus, in the instant case, we have already held that proper enquiries were not made by the AO before passing assessment order dated 23-03- 2016 u/s 143(3) of the 1961 Act, as are mandated u/s 263 of the 1961 Act. In our considered view, the ld. Pr. CIT has rightly invoked the provisions of section 263 of the Act, which we uphold/sustain.."

4 The Hon'ble Delhi Court in the case of Pr. Commissioner of Income Tax, Delhi-7 vs M/S Paramount Propbuild Pvt. Ltd. in ITA 247/2023(Del-HC)on 19 March, 2024 held as below: "Unfortunately, the assessment order nowhere reflects any element of inquiry or verification. The discussion about the loan transactions in question is altogether missing. Furthermore, the assessment record would also reflect that the AO has not taken any concrete steps to ascertain the genuineness and creditworthiness of the transactions, which merits consideration in the light of the findings that emerged from the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing & Finance Pvt. Ltd. It emerges that the present is a case where the AO failed not only to spell out any finding about the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing & Finance Pvt. Ltd. but also to scrutinize the highlighted aspects in the said report qua the genuineness and creditworthiness of aforenoted loan transactions. Therefore, this is the minimum inquiry which atleast was expected to have been made by the AO.

At this juncture, it is apposite to point out that clause (a) of Explanation 2 of Section 263 of the Act introduces a deeming fiction to the effect that the order passed by the AO shall be considered erroneous and prejudicial to the interests of the Revenue, if the order is passed without making inquiries or verification, which should have been made. Henceforth, since neither there is any facet of discussion about the aforenoted aspects in the assessment order nor the assessment record duly reflects that the AO has done inquiry in the light of the findings of the investigation report. We find that the present is a fit case to invoke the revisional powers under Section 263 of the Act."

5 The co-ordinate bench of ITAT, Mumbai in the case of Nos.2709 & 2716/Mum/2024 held as below:

From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualize a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decisions is held to be erroneous. Cases may be visualized where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo-motu revision because the first requirement, viz., that the order is erroneous, is absent." (Emphasis supplied) 5.1Apart from the above principles, we deem it appropriate to make reference to the decision of the Hon'ble Delhi High Court in the case of CIT vs. Sun Beam Auto 227 CTR 113 wherein the Hon'ble High Court has pointed out a distinction between lack of inquiry and inadequate inquiry. The following observations of the Hon'ble Delhi High Court are worth noting:

We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income-tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry", that such a course of action would be open".

We find from the assessment records that the AO has brought on record material facts which go to show that necessary enquiries were indeed made on the impugned issue. Moreover, as stated in preceding paras, the very basis of selection of the case hinged upon the issue of deduction u/s 80G of the Act, and seen in the light of specific queries and replies of the assessee, it can be safely concluded that the issue was duly examined and the AO allowed the claim after due application of mind and in accordance with the provisions of the Act. We do not find that the assessment order could be considered as erroneous and prejudicial and liable to application of Explanation 2 to section 263 of the Act.

1 On merits of the case, the issue whether the CSR expenditure is allowable u/s.80G of the Act is also no more res integra by a catena of decisions by various Co-ordinate Benches of the Tribunal.The Mumbai Bench of the Tribunal in the case of Alubond Dacs India (P.) Ltd. in (2024) 163 taxmann.com 536 (Mum)considered the provisions of Companies Act and I.T. Act and held as follows:

We have heard the rival submissions and perused the materials available on record. The only morn question to be decided here is whether the expenditure towards CSR activities are an allowable deduction us 80G of the Act. The CSR expenses are governed by section 135 of the Companies Act, 2013, Schedule VII of the Act and Companies (CSR) Policy Rules, 2014 where companies having net worth of Rs 500 crores of more or turnover of Rs.1000 crores or more or net profit of Rs 5 crores of more have to mandatorily comply with the CSR provisions specified us.135(1) of the Companies Act, 2011. The above mentioned companies are liable to spend atleast 25% of its average net profit for the immediately preceding three financial years on CSR activities. In the present case, the assessee has contributed Rs 30 lacs to various educational and charitable trust for which the assessee has claimed 50% of the total donation paid as deduction u/s.800 of the Act. Prior to the Finance (No.2) Act, 2014, the said expenditure was claimed as ‘business expenditure' u/s.37(1) of the Act where after the insertion of Explanation 2 to section 37(1) of the Act, the CSR expenses referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession. It is observed that the said expenses pertaining to CSR has been claimed as deduction u/s. 80G of the Act which claim was perennially rejected by the Revenue for the reason that only donations which are voluntary in nature will come under the purview of section 80G of the Act and donation towards CSR was merely a statutory obligation on companies as per section 135 of the Companies Act, 2013. It is pertinent to point out that the intention of the legislature was clear when the same was clarified by the Finance (No.2) Act, 2014 that CSR expenses will not fall under the business expenditure and also there has been an express bar specified in sub clause (iiihk) and (iiihl) of section 80G(2)(a) of the Act that any sum paid by the assessee as donation to Swatch Bharat Kosh and Clean Ganga Fund will not come under the purview of deduction u's 80G of the Act subject to certain conditions. This justifies the fact that the other donations specified us 80G of the Act would be entitled to deduction provided the conditions stipulated u/s.80G of the Act are satisfied. In the present case in hand, the contributions made by the assessee would not fall under the two exceptions specified above which clearly mandates that the assessee is entitled to claim deduction for the donations contributed during the year under consideration u/s 80G of the Act. The decision relied upon by the ld. A.O in the case of PVG Raju (supra) is distinguishable on the facts of the present case where there is no requirement of proving the voluntariness of the donation contributed by the assessee for claiming deduction u/s.80G of the Act. The amendment brought about by Finance Act, 2015 to section 80G of the Act which had inserted the sub clauses (iiihk) and (iiihl) to be the exception for qualifying a donation for claiming us.80G of the Act could also be an evidencing factor to substantiate that CSR expenditures which falls under the nature specified in section 30 to 36 of the Act are an allowable deduction u/s 80G of the Act.

On the above observation, we deem it fit to hold that the assessee is entitled to deduction claimed u/s.80G of the Act towards the CSR expenditure incurred by it. We, therefore, direct the ld. A.O, to allow the claim of the assessee subject to the condition that the assessee has satisfied the other requirements warranted u/s.80G of the Act. Hence, ground no. 2 raised by the assessee is allowed.

In the case under consideration, the proposed revision is sought to be done merely on change of opinion disagreeing with the opinion of the AO that the expenditure is not deductible under sec 80G of the Act. Further, it is a settled position of law that where there are two views possible and the AO has adopted one of the two possible views, then the order cannot be held to be erroneous/ prejudicial to the interest of the revenue and thereby proceedings under section 263 of the Act could not be sustained. Moreover, as discussed in the preceding paras, the deduction of CSR expenses under section 80G of the Act is held allowable consistently by the courts. Hence, both on legal ground as also on merits, appeal of the assessee has sufficient force. Therefore,

Ground no. 3 and 4 pertain to the issue of ESOP which according to the ld.PCIT was not enquired into by the AO. The ld.PCIT further observed that as per audit memo and on perusal of assessment records thatas per the Profit and Loss account that under the head 'Employee Benefit Expenses', the assessee had debited an amount of Rs.1,98,715/- towards Employee Stock Compensation Expenses [ESOP). As per Audit Memo, ESOP expenses are incurred in relation to issue of shares to employees and were not relatable to profits and gains arising or accruing from a business trade. ESOP is issued by the company for its employees to encourage employee ownership in the company. The shares are issued at a discounted price to its employees. Thus, ESOP is a scheme where a company proposes to increase its subscribed share capital by issuing further shares to its employees at a predetermined rate. This indirectly benefits the company in employees retention and loyalty. Thus, it was noted that ESOP is nothing more than expenditure related to issue of shares and was not allowable as deduction u/s 37(1) of the Act. He concluded that there were two aspects to the claim of the Employee Stock Compensation expenses, first being whether there was any expenses incurred at all and second, being whether such expense was disallowable u/s.37(1) of the Act while completing the assessment. As noted from the assessment order, the AO had not carried out any enquiry on the issue of ESOP expenses debited in the P&L account and SLP against the said decision of Hon'ble Karnataka High Court in the case of Biocon(supra) which has been admitted by the Hon'ble Apex Court.

During hearing, the ld.DR argued that on facts of the case and in the light of the provisions of the Act and also lack of any enquiry into the impugned issue by the AO, the ld.PCIT was fully justified in invoking the provisions of section 263 of the Act as the assessment order was erroneous and prejudicial to the interest of the Revenue on both the counts.

Before us, the ld.AR has submitted that in the course of assessment proceedings u/s 143(3), the assessee has submitted detailed Profit and Loss Account for the relevant year. Vide Note 28 to the Profit and Loss Account under the head of "Employee of Benefit Expenses", it could be observed that the assessee had debited an amount of Rs.1,98,715/- being share based payment which was on account of ESOP.As such, the AO was fully aware of the facts regarding ESOP expenses and he passed assessment order on the basis of his satisfaction. The assessee has correctly made the claim of the ESOP expenses debited in its books of accounts as a Revenue Expenditure and the same were incurred in the normal course of activities of the assessee. In view of the latest decisions of various courts allowing the deduction of ESOP expenses, it is submitted that the said ESOP expenses are allowable as deduction in the hands of the assessee. It cannot be said that the assessment order passed was without making enquiry or verification on this ground. Further, it cannot be said that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the revenue on this ground as he has passed the assessment order after being satisfied regarding the allowability of deduction of ESOP expenses.

We have heard rival submissions. On perusal of the facts and materials on record, we are of the view that the initiation of proceeding u/s.263 is valid on the issue of ESOP as the assessment order is not only erroneous but also prejudicial to the interest of revenue as the AO has failed to enquire into the issue at all. After going through the assessment order as well as the response of the assessee to the show cause notice issued before invoking provisions of section 263 of the Act, we note that no query has been raised by the AO in the matter. No contrary material has been brought on record by the ld.AR. Certainly there is non-application of mind by the AO. There is no material before us which could have suggested that he had conducted enquiry or taken follow-up action after applying his mind on this issue. The contention that the said item duly reflected in the audited account would imply that the AO has examined the issue is devoid of any merit. Moreover, even the contention on merits based on judicial decisions is not acceptable in adjudicating on the applicability of revisionary powers of the ld.PCIT on the impugned issue which basically revolves around the applicability of Explanation 2 to section 263 vis-à-vis enquiries conducted. We observe the ld.PCIT has drawn support from Explanation 2 below section 263(1) of the Act introduced by Finance Act, 2015 w.e.f. 01.06.2015 for his action. The Explanation 2 inter alia provides that the order passed without making inquiries or verification 'which should have been made' will be deemed to be erroneous insofar as it is prejudicial to the interest of the Revenue.

In so far as the requirement of due enquiry to be conducted by the AO while scrutinising any case in the course of assessment order is concerned, it would be relevant to quote certain landmark decisions of hon'ble Supreme Court in Rampyari Devi Saraogi versus CIT, (1968) 67 ITR 84 (SC) and Tara Devi Aggarwal (Smt) versus CIT, (1973) 88 ITR 323 (SC) wherein it has been observed that where the AO had accepted a particular contention or issue without inquiry whatsoever, the order was erroneous and prejudicial to the interest of Revenue. These two decisions show that it is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The aforesaid observations have to be understood in the factual background and matrix involved. In the said cases, the Assessing Officer had not conducted any enquiry or examined evidence whatsoever. There was total absence of enquiry or verification.

1 In the case of PVS Multiplex India Ltd V CIT in ITA No. 2370/Del/2013 on identical facts it was held that, “wherein the Assessing Officer conducted the assessment proceeding and passed impugned assessment order accepting the return of income of the assessee, we clearly observe that the Assessing Officer has not made inquiry on the issue of interest free advances and proportionate disallowance of interest thereon, on the issue of verification on TDS and on the claim and calculation of the assessee for the purpose of deduction u/s 80IB(7A) of the Act specially on the issue of exclusion of income/receipt on sale of shop and FDR interest. In this situation, we have no hesitation to hold that the order of the AO which is apparently very precise and cryptic, was not passed after due examination and verification of certain issues and therefore, there was an error on the part of AO which leads to a correct conclusion of the CIT that the order of the AO is not only erroneous but also prejudicial to the interest of Revenue. We may further point out that the assessment order suffers from lack of necessary enquiry on certain important issues which have been raised by the CIT in the notice issued to the assessee and impugned order u/s 263 of the Act. Therefore, we reach to a conclusion that the assessment order is not sustainable and in accordance with the provisions of the Act which is not only erroneous but also prejudicial to the interest of the Revenue. Hence, we are inclined to hold that the issuance of notice u/s 263 of the Act and impugned order passed by the CIT u/s 263 of the Act is validly assumed juri iction of revisional powers u/s 263 of the Act which cannot be alleged as invalid assumption of juri iction or bad in law and we confirm the same."

2 The co-ordinate bench of ITAT, Patna in ITA Nos.356 to 360/PAT/2024 in the case of Gandhipati Construction Private Limited observed as below: "Having said that, we may also add that while in a situation in which the necessary inquiries are not conducted or necessary verifications are not done, Commissioner may indeed have the powers to invoke his powers under section 263 but that it does not necessarily follow that in all such cases the matters can be remitted back to the assessment stage f or such inquiries and verifications. There can be three mutually exclusive situations with regard to exercise of power s under section 263, read with Explanation 2(a) thereto, with respect to lack of proper inquiries and verifications. The first situation could be this. Even if necessary inquiries and verifications are not made, the Commissioner can, based on the material before him, in certain cases straight away come to a conclusion that an addition to income, or disallowance from expenditure or some other adverse inference, is warranted. In such a situation, there will be no point in sending the matter back to the Assessing Officer for fresh inquiries or verification because an adverse inference against the assessee can be legitimately drawn, based on material on record, by the Commissioner. In exercise of his powers under section 263, the Commissioner may as well direct the Assessing Officer that related addition to income or disallowance from expenditure be made, or remedial measures are taken. The second category of cases could be when the Commissioner finds that necessary inquiries are not made or verifications not done, but, based on material on record and in his considered view, even if the necessary inquiries were made or necessary verifications were done, no addition to income or disallowance of expenditure or any other adverse action would have been warranted. Clearly, in such cases, no prejudice is caused to the legitimate interests of the revenue. No interference will be, as such, justified in such a situation. That leaves us with the third possibility, and that is when the Commissioner is satisfied that the necessary inquiries are not made and necessary verifications are not done, and that, in the absence of this exercise by the Assessing Officer, a conclusive finding is not possible one way or the other. That is perhaps the situation in which, in our humble understanding, the Commissioner, in exercise of his powers under section 263, can set side an order, for lack of proper inquiry or verification, and the Assessing Officer to conduct such inquiries or verifications afresh."

3 The co-ordinate Mumbai Bench of the ITAT w.r.t Explanation 2 thorough an elaborate order in the case of Madhurima International (P.) Ltd. v. Pr.CIT [ITA No.421/ Mumbai] held that, “. In the instant case, the AO has not enquired the fair value adopted by the assessee in proper perspective and in the manner indicated under law as detailed above. Moreover, explanation 2 to Section 263 of the 1961 Act is inserted by Finance Act, 2015, which deems an order to be erroneous in so far as prejudicial to the interest of Revenue if the order is passed without making inquiries or verification which should have been made. Thus, in the instant case, we have already held that proper enquiries were not made by the AO before passing assessment order dated 23-03- 2016 u/s 143(3) of the 1961 Act, as are mandated u/s 263 of the 1961 Act. In our considered view, the ld. Pr. CIT has rightly invoked the provisions of section 263 of the Act, which we uphold/sustain.."

4 The Hon'ble Delhi Court in the case of Pr. Commissioner of Income Tax, Delhi-7 vs M/S Paramount Propbuild Pvt. Ltd. in ITA 247/2023(Del-HC)on 19 March, 2024 held as below: "Unfortunately, the assessment order nowhere reflects any element of inquiry or verification. The discussion about the loan transactions in question is altogether missing. Furthermore, the assessment record would also reflect that the AO has not taken any concrete steps to ascertain the genuineness and creditworthiness of the transactions, which merits consideration in the light of the findings that emerged from the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing & Finance Pvt. Ltd. It emerges that the present is a case where the AO failed not only to spell out any finding about the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing & Finance Pvt. Ltd. but also to scrutinize the highlighted aspects in the said report qua the genuineness and creditworthiness of aforenoted loan transactions. Therefore, this is the minimum inquiry which atleast was expected to have been made by the AO.

At this juncture, it is apposite to point out that clause (a) of Explanation 2 of Section 263 of the Act introduces a deeming fiction to the effect that the order passed by the AO shall be considered erroneous and prejudicial to the interests of the Revenue, if the order is passed without making inquiries or verification, which should have been made. Henceforth, since neither there is any facet of discussion about the aforenoted aspects in the assessment order nor the assessment record duly reflects that the AO has done inquiry in the light of the findings of the investigation report. We find that the present is a fit case to invoke the revisional powers under Section 263 of the Act."

5 The co-ordinate bench of ITAT, Mumbai in the case of Nos.2709 & 2716/Mum/2024 held as below:

From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualize a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decisions is held to be erroneous. Cases may be visualized where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo-motu revision because the first requirement, viz., that the order is erroneous, is absent." (Emphasis supplied) 5.1Apart from the above principles, we deem it appropriate to make reference to the decision of the Hon'ble Delhi High Court in the case of CIT vs. Sun Beam Auto 227 CTR 113 wherein the Hon'ble High Court has pointed out a distinction between lack of inquiry and inadequate inquiry. The following observations of the Hon'ble Delhi High Court are worth noting:

We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income-tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry", that such a course of action would be open".

We find from the assessment records that the AO has brought on record material facts which go to show that necessary enquiries were indeed made on the impugned issue. Moreover, as stated in preceding paras, the very basis of selection of the case hinged upon the issue of deduction u/s 80G of the Act, and seen in the light of specific queries and replies of the assessee, it can be safely concluded that the issue was duly examined and the AO allowed the claim after due application of mind and in accordance with the provisions of the Act. We do not find that the assessment order could be considered as erroneous and prejudicial and liable to application of Explanation 2 to section 263 of the Act.

1 On merits of the case, the issue whether the CSR expenditure is allowable u/s.80G of the Act is also no more res integra by a catena of decisions by various Co-ordinate Benches of the Tribunal.The Mumbai Bench of the Tribunal in the case of Alubond Dacs India (P.) Ltd. in (2024) 163 taxmann.com 536 (Mum)considered the provisions of Companies Act and I.T. Act and held as follows:

We have heard the rival submissions and perused the materials available on record. The only morn question to be decided here is whether the expenditure towards CSR activities are an allowable deduction us 80G of the Act. The CSR expenses are governed by section 135 of the Companies Act, 2013, Schedule VII of the Act and Companies (CSR) Policy Rules, 2014 where companies having net worth of Rs 500 crores of more or turnover of Rs.1000 crores or more or net profit of Rs 5 crores of more have to mandatorily comply with the CSR provisions specified us.135(1) of the Companies Act, 2011. The above mentioned companies are liable to spend atleast 25% of its average net profit for the immediately preceding three financial years on CSR activities. In the present case, the assessee has contributed Rs 30 lacs to various educational and charitable trust for which the assessee has claimed 50% of the total donation paid as deduction u/s.800 of the Act. Prior to the Finance (No.2) Act, 2014, the said expenditure was claimed as ‘business expenditure' u/s.37(1) of the Act where after the insertion of Explanation 2 to section 37(1) of the Act, the CSR expenses referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession. It is observed that the said expenses pertaining to CSR has been claimed as deduction u/s. 80G of the Act which claim was perennially rejected by the Revenue for the reason that only donations which are voluntary in nature will come under the purview of section 80G of the Act and donation towards CSR was merely a statutory obligation on companies as per section 135 of the Companies Act, 2013. It is pertinent to point out that the intention of the legislature was clear when the same was clarified by the Finance (No.2) Act, 2014 that CSR expenses will not fall under the business expenditure and also there has been an express bar specified in sub clause (iiihk) and (iiihl) of section 80G(2)(a) of the Act that any sum paid by the assessee as donation to Swatch Bharat Kosh and Clean Ganga Fund will not come under the purview of deduction u's 80G of the Act subject to certain conditions. This justifies the fact that the other donations specified us 80G of the Act would be entitled to deduction provided the conditions stipulated u/s.80G of the Act are satisfied. In the present case in hand, the contributions made by the assessee would not fall under the two exceptions specified above which clearly mandates that the assessee is entitled to claim deduction for the donations contributed during the year under consideration u/s 80G of the Act. The decision relied upon by the ld. A.O in the case of PVG Raju (supra) is distinguishable on the facts of the present case where there is no requirement of proving the voluntariness of the donation contributed by the assessee for claiming deduction u/s.80G of the Act. The amendment brought about by Finance Act, 2015 to section 80G of the Act which had inserted the sub clauses (iiihk) and (iiihl) to be the exception for qualifying a donation for claiming us.80G of the Act could also be an evidencing factor to substantiate that CSR expenditures which falls under the nature specified in section 30 to 36 of the Act are an allowable deduction u/s 80G of the Act.

On the above observation, we deem it fit to hold that the assessee is entitled to deduction claimed u/s.80G of the Act towards the CSR expenditure incurred by it. We, therefore, direct the ld. A.O, to allow the claim of the assessee subject to the condition that the assessee has satisfied the other requirements warranted u/s.80G of the Act. Hence, ground no. 2 raised by the assessee is allowed.

In the case under consideration, the proposed revision is sought to be done merely on change of opinion disagreeing with the opinion of the AO that the expenditure is not deductible under sec 80G of the Act. Further, it is a settled position of law that where there are two views possible and the AO has adopted one of the two possible views, then the order cannot be held to be erroneous/ prejudicial to the interest of the revenue and thereby proceedings under section 263 of the Act could not be sustained. Moreover, as discussed in the preceding paras, the deduction of CSR expenses under section 80G of the Act is held allowable consistently by the courts. Hence, both on legal ground as also on merits, appeal of the assessee has sufficient force. Therefore,

Ground no. 3 and 4 pertain to the issue of ESOP which according to the ld.PCIT was not enquired into by the AO. The ld.PCIT further observed that as per audit memo and on perusal of assessment records thatas per the Profit and Loss account that under the head 'Employee Benefit Expenses', the assessee had debited an amount of Rs.1,98,715/- towards Employee Stock Compensation Expenses [ESOP). As per Audit Memo, ESOP expenses are incurred in relation to issue of shares to employees and were not relatable to profits and gains arising or accruing from a business trade. ESOP is issued by the company for its employees to encourage employee ownership in the company. The shares are issued at a discounted price to its employees. Thus, ESOP is a scheme where a company proposes to increase its subscribed share capital by issuing further shares to its employees at a predetermined rate. This indirectly benefits the company in employees retention and loyalty. Thus, it was noted that ESOP is nothing more than expenditure related to issue of shares and was not allowable as deduction u/s 37(1) of the Act. He concluded that there were two aspects to the claim of the Employee Stock Compensation expenses, first being whether there was any expenses incurred at all and second, being whether such expense was disallowable u/s.37(1) of the Act while completing the assessment. As noted from the assessment order, the AO had not carried out any enquiry on the issue of ESOP expenses debited in the P&L account and SLP against the said decision of Hon'ble Karnataka High Court in the case of Biocon(supra) which has been admitted by the Hon'ble Apex Court.

During hearing, the ld.DR argued that on facts of the case and in the light of the provisions of the Act and also lack of any enquiry into the impugned issue by the AO, the ld.PCIT was fully justified in invoking the provisions of section 263 of the Act as the assessment order was erroneous and prejudicial to the interest of the Revenue on both the counts.

Before us, the ld.AR has submitted that in the course of assessment proceedings u/s 143(3), the assessee has submitted detailed Profit and Loss Account for the relevant year. Vide Note 28 to the Profit and Loss Account under the head of "Employee of Benefit Expenses", it could be observed that the assessee had debited an amount of Rs.1,98,715/- being share based payment which was on account of ESOP.As such, the AO was fully aware of the facts regarding ESOP expenses and he passed assessment order on the basis of his satisfaction. The assessee has correctly made the claim of the ESOP expenses debited in its books of accounts as a Revenue Expenditure and the same were incurred in the normal course of activities of the assessee. In view of the latest decisions of various courts allowing the deduction of ESOP expenses, it is submitted that the said ESOP expenses are allowable as deduction in the hands of the assessee. It cannot be said that the assessment order passed was without making enquiry or verification on this ground. Further, it cannot be said that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the revenue on this ground as he has passed the assessment order after being satisfied regarding the allowability of deduction of ESOP expenses.

We have heard rival submissions. On perusal of the facts and materials on record, we are of the view that the initiation of proceeding u/s.263 is valid on the issue of ESOP as the assessment order is not only erroneous but also prejudicial to the interest of revenue as the AO has failed to enquire into the issue at all. After going through the assessment order as well as the response of the assessee to the show cause notice issued before invoking provisions of section 263 of the Act, we note that no query has been raised by the AO in the matter. No contrary material has been brought on record by the ld.AR. Certainly there is non-application of mind by the AO. There is no material before us which could have suggested that he had conducted enquiry or taken follow-up action after applying his mind on this issue. The contention that the said item duly reflected in the audited account would imply that the AO has examined the issue is devoid of any merit. Moreover, even the contention on merits based on judicial decisions is not acceptable in adjudicating on the applicability of revisionary powers of the ld.PCIT on the impugned issue which basically revolves around the applicability of Explanation 2 to section 263 vis-à-vis enquiries conducted. We observe the ld.PCIT has drawn support from Explanation 2 below section 263(1) of the Act introduced by Finance Act, 2015 w.e.f. 01.06.2015 for his action. The Explanation 2 inter alia provides that the order passed without making inquiries or verification 'which should have been made' will be deemed to be erroneous insofar as it is prejudicial to the interest of the Revenue.

In so far as the requirement of due enquiry to be conducted by the AO while scrutinising any case in the course of assessment order is concerned, it would be relevant to quote certain landmark decisions of hon'ble Supreme Court in Rampyari Devi Saraogi versus CIT, (1968) 67 ITR 84 (SC) and Tara Devi Aggarwal (Smt) versus CIT, (1973) 88 ITR 323 (SC) wherein it has been observed that where the AO had accepted a particular contention or issue without inquiry whatsoever, the order was erroneous and prejudicial to the interest of Revenue. These two decisions show that it is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The aforesaid observations have to be understood in the factual background and matrix involved. In the said cases, the Assessing Officer had not conducted any enquiry or examined evidence whatsoever. There was total absence of enquiry or verification.

1 In the case of PVS Multiplex India Ltd V CIT in ITA No. 2370/Del/2013 on identical facts it was held that, “wherein the Assessing Officer conducted the assessment proceeding and passed impugned assessment order accepting the return of income of the assessee, we clearly observe that the Assessing Officer has not made inquiry on the issue of interest free advances and proportionate disallowance of interest thereon, on the issue of verification on TDS and on the claim and calculation of the assessee for the purpose of deduction u/s 80IB(7A) of the Act specially on the issue of exclusion of income/receipt on sale of shop and FDR interest. In this situation, we have no hesitation to hold that the order of the AO which is apparently very precise and cryptic, was not passed after due examination and verification of certain issues and therefore, there was an error on the part of AO which leads to a correct conclusion of the CIT that the order of the AO is not only erroneous but also prejudicial to the interest of Revenue. We may further point out that the assessment order suffers from lack of necessary enquiry on certain important issues which have been raised by the CIT in the notice issued to the assessee and impugned order u/s 263 of the Act. Therefore, we reach to a conclusion that the assessment order is not sustainable and in accordance with the provisions of the Act which is not only erroneous but also prejudicial to the interest of the Revenue. Hence, we are inclined to hold that the issuance of notice u/s 263 of the Act and impugned order passed by the CIT u/s 263 of the Act is validly assumed juri iction of revisional powers u/s 263 of the Act which cannot be alleged as invalid assumption of juri iction or bad in law and we confirm the same."

2 The co-ordinate bench of ITAT, Patna in ITA Nos.356 to 360/PAT/2024 in the case of Gandhipati Construction Private Limited observed as below: "Having said that, we may also add that while in a situation in which the necessary inquiries are not conducted or necessary verifications are not done, Commissioner may indeed have the powers to invoke his powers under section 263 but that it does not necessarily follow that in all such cases the matters can be remitted back to the assessment stage f or such inquiries and verifications. There can be three mutually exclusive situations with regard to exercise of power s under section 263, read with Explanation 2(a) thereto, with respect to lack of proper inquiries and verifications. The first situation could be this. Even if necessary inquiries and verifications are not made, the Commissioner can, based on the material before him, in certain cases straight away come to a conclusion that an addition to income, or disallowance from expenditure or some other adverse inference, is warranted. In such a situation, there will be no point in sending the matter back to the Assessing Officer for fresh inquiries or verification because an adverse inference against the assessee can be legitimately drawn, based on material on record, by the Commissioner. In exercise of his powers under section 263, the Commissioner may as well direct the Assessing Officer that related addition to income or disallowance from expenditure be made, or remedial measures are taken. The second category of cases could be when the Commissioner finds that necessary inquiries are not made or verifications not done, but, based on material on record and in his considered view, even if the necessary inquiries were made or necessary verifications were done, no addition to income or disallowance of expenditure or any other adverse action would have been warranted. Clearly, in such cases, no prejudice is caused to the legitimate interests of the revenue. No interference will be, as such, justified in such a situation. That leaves us with the third possibility, and that is when the Commissioner is satisfied that the necessary inquiries are not made and necessary verifications are not done, and that, in the absence of this exercise by the Assessing Officer, a conclusive finding is not possible one way or the other. That is perhaps the situation in which, in our humble understanding, the Commissioner, in exercise of his powers under section 263, can set side an order, for lack of proper inquiry or verification, and the Assessing Officer to conduct such inquiries or verifications afresh."

3 The co-ordinate Mumbai Bench of the ITAT w.r.t Explanation 2 thorough an elaborate order in the case of Madhurima International (P.) Ltd. v. Pr.CIT [ITA No.421/ Mumbai] held that, “. In the instant case, the AO has not enquired the fair value adopted by the assessee in proper perspective and in the manner indicated under law as detailed above. Moreover, explanation 2 to Section 263 of the 1961 Act is inserted by Finance Act, 2015, which deems an order to be erroneous in so far as prejudicial to the interest of Revenue if the order is passed without making inquiries or verification which should have been made. Thus, in the instant case, we have already held that proper enquiries were not made by the AO before passing assessment order dated 23-03- 2016 u/s 143(3) of the 1961 Act, as are mandated u/s 263 of the 1961 Act. In our considered view, the ld. Pr. CIT has rightly invoked the provisions of section 263 of the Act, which we uphold/sustain.."

4 The Hon'ble Delhi Court in the case of Pr. Commissioner of Income Tax, Delhi-7 vs M/S Paramount Propbuild Pvt. Ltd. in ITA 247/2023(Del-HC)on 19 March, 2024 held as below: "Unfortunately, the assessment order nowhere reflects any element of inquiry or verification. The discussion about the loan transactions in question is altogether missing. Furthermore, the assessment record would also reflect that the AO has not taken any concrete steps to ascertain the genuineness and creditworthiness of the transactions, which merits consideration in the light of the findings that emerged from the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing & Finance Pvt. Ltd. It emerges that the present is a case where the AO failed not only to spell out any finding about the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing & Finance Pvt. Ltd. but also to scrutinize the highlighted aspects in the said report qua the genuineness and creditworthiness of aforenoted loan transactions. Therefore, this is the minimum inquiry which atleast was expected to have been made by the AO.

At this juncture, it is apposite to point out that clause (a) of Explanation 2 of Section 263 of the Act introduces a deeming fiction to the effect that the order passed by the AO shall be considered erroneous and prejudicial to the interests of the Revenue, if the order is passed without making inquiries or verification, which should have been made. Henceforth, since neither there is any facet of discussion about the aforenoted aspects in the assessment order nor the assessment record duly reflects that the AO has done inquiry in the light of the findings of the investigation report. We find that the present is a fit case to invoke the revisional powers under Section 263 of the Act."

5 The co-ordinate bench of ITAT, Mumbai in the case of Nos.2709 & 2716/Mum/2024 held as below:

From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualize a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decisions is held to be erroneous. Cases may be visualized where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo-motu revision because the first requirement, viz., that the order is erroneous, is absent." (Emphasis supplied) 5.1Apart from the above principles, we deem it appropriate to make reference to the decision of the Hon'ble Delhi High Court in the case of CIT vs. Sun Beam Auto 227 CTR 113 wherein the Hon'ble High Court has pointed out a distinction between lack of inquiry and inadequate inquiry. The following observations of the Hon'ble Delhi High Court are worth noting:

We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income-tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry", that such a course of action would be open".

We find from the assessment records that the AO has brought on record material facts which go to show that necessary enquiries were indeed made on the impugned issue. Moreover, as stated in preceding paras, the very basis of selection of the case hinged upon the issue of deduction u/s 80G of the Act, and seen in the light of specific queries and replies of the assessee, it can be safely concluded that the issue was duly examined and the AO allowed the claim after due application of mind and in accordance with the provisions of the Act. We do not find that the assessment order could be considered as erroneous and prejudicial and liable to application of Explanation 2 to section 263 of the Act.

1 On merits of the case, the issue whether the CSR expenditure is allowable u/s.80G of the Act is also no more res integra by a catena of decisions by various Co-ordinate Benches of the Tribunal.The Mumbai Bench of the Tribunal in the case of Alubond Dacs India (P.) Ltd. in (2024) 163 taxmann.com 536 (Mum)considered the provisions of Companies Act and I.T. Act and held as follows:

We have heard the rival submissions and perused the materials available on record. The only morn question to be decided here is whether the expenditure towards CSR activities are an allowable deduction us 80G of the Act. The CSR expenses are governed by section 135 of the Companies Act, 2013, Schedule VII of the Act and Companies (CSR) Policy Rules, 2014 where companies having net worth of Rs 500 crores of more or turnover of Rs.1000 crores or more or net profit of Rs 5 crores of more have to mandatorily comply with the CSR provisions specified us.135(1) of the Companies Act, 2011. The above mentioned companies are liable to spend atleast 25% of its average net profit for the immediately preceding three financial years on CSR activities. In the present case, the assessee has contributed Rs 30 lacs to various educational and charitable trust for which the assessee has claimed 50% of the total donation paid as deduction u/s.800 of the Act. Prior to the Finance (No.2) Act, 2014, the said expenditure was claimed as ‘business expenditure' u/s.37(1) of the Act where after the insertion of Explanation 2 to section 37(1) of the Act, the CSR expenses referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession. It is observed that the said expenses pertaining to CSR has been claimed as deduction u/s. 80G of the Act which claim was perennially rejected by the Revenue for the reason that only donations which are voluntary in nature will come under the purview of section 80G of the Act and donation towards CSR was merely a statutory obligation on companies as per section 135 of the Companies Act, 2013. It is pertinent to point out that the intention of the legislature was clear when the same was clarified by the Finance (No.2) Act, 2014 that CSR expenses will not fall under the business expenditure and also there has been an express bar specified in sub clause (iiihk) and (iiihl) of section 80G(2)(a) of the Act that any sum paid by the assessee as donation to Swatch Bharat Kosh and Clean Ganga Fund will not come under the purview of deduction u's 80G of the Act subject to certain conditions. This justifies the fact that the other donations specified us 80G of the Act would be entitled to deduction provided the conditions stipulated u/s.80G of the Act are satisfied. In the present case in hand, the contributions made by the assessee would not fall under the two exceptions specified above which clearly mandates that the assessee is entitled to claim deduction for the donations contributed during the year under consideration u/s 80G of the Act. The decision relied upon by the ld. A.O in the case of PVG Raju (supra) is distinguishable on the facts of the present case where there is no requirement of proving the voluntariness of the donation contributed by the assessee for claiming deduction u/s.80G of the Act. The amendment brought about by Finance Act, 2015 to section 80G of the Act which had inserted the sub clauses (iiihk) and (iiihl) to be the exception for qualifying a donation for claiming us.80G of the Act could also be an evidencing factor to substantiate that CSR expenditures which falls under the nature specified in section 30 to 36 of the Act are an allowable deduction u/s 80G of the Act.

On the above observation, we deem it fit to hold that the assessee is entitled to deduction claimed u/s.80G of the Act towards the CSR expenditure incurred by it. We, therefore, direct the ld. A.O, to allow the claim of the assessee subject to the condition that the assessee has satisfied the other requirements warranted u/s.80G of the Act. Hence, ground no. 2 raised by the assessee is allowed.

In the case under consideration, the proposed revision is sought to be done merely on change of opinion disagreeing with the opinion of the AO that the expenditure is not deductible under sec 80G of the Act. Further, it is a settled position of law that where there are two views possible and the AO has adopted one of the two possible views, then the order cannot be held to be erroneous/ prejudicial to the interest of the revenue and thereby proceedings under section 263 of the Act could not be sustained. Moreover, as discussed in the preceding paras, the deduction of CSR expenses under section 80G of the Act is held allowable consistently by the courts. Hence, both on legal ground as also on merits, appeal of the assessee has sufficient force. Therefore,

Ground no. 3 and 4 pertain to the issue of ESOP which according to the ld.PCIT was not enquired into by the AO. The ld.PCIT further observed that as per audit memo and on perusal of assessment records thatas per the Profit and Loss account that under the head 'Employee Benefit Expenses', the assessee had debited an amount of Rs.1,98,715/- towards Employee Stock Compensation Expenses [ESOP). As per Audit Memo, ESOP expenses are incurred in relation to issue of shares to employees and were not relatable to profits and gains arising or accruing from a business trade. ESOP is issued by the company for its employees to encourage employee ownership in the company. The shares are issued at a discounted price to its employees. Thus, ESOP is a scheme where a company proposes to increase its subscribed share capital by issuing further shares to its employees at a predetermined rate. This indirectly benefits the company in employees retention and loyalty. Thus, it was noted that ESOP is nothing more than expenditure related to issue of shares and was not allowable as deduction u/s 37(1) of the Act. He concluded that there were two aspects to the claim of the Employee Stock Compensation expenses, first being whether there was any expenses incurred at all and second, being whether such expense was disallowable u/s.37(1) of the Act while completing the assessment. As noted from the assessment order, the AO had not carried out any enquiry on the issue of ESOP expenses debited in the P&L account and SLP against the said decision of Hon'ble Karnataka High Court in the case of Biocon(supra) which has been admitted by the Hon'ble Apex Court.

During hearing, the ld.DR argued that on facts of the case and in the light of the provisions of the Act and also lack of any enquiry into the impugned issue by the AO, the ld.PCIT was fully justified in invoking the provisions of section 263 of the Act as the assessment order was erroneous and prejudicial to the interest of the Revenue on both the counts.

Before us, the ld.AR has submitted that in the course of assessment proceedings u/s 143(3), the assessee has submitted detailed Profit and Loss Account for the relevant year. Vide Note 28 to the Profit and Loss Account under the head of "Employee of Benefit Expenses", it could be observed that the assessee had debited an amount of Rs.1,98,715/- being share based payment which was on account of ESOP.As such, the AO was fully aware of the facts regarding ESOP expenses and he passed assessment order on the basis of his satisfaction. The assessee has correctly made the claim of the ESOP expenses debited in its books of accounts as a Revenue Expenditure and the same were incurred in the normal course of activities of the assessee. In view of the latest decisions of various courts allowing the deduction of ESOP expenses, it is submitted that the said ESOP expenses are allowable as deduction in the hands of the assessee. It cannot be said that the assessment order passed was without making enquiry or verification on this ground. Further, it cannot be said that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the revenue on this ground as he has passed the assessment order after being satisfied regarding the allowability of deduction of ESOP expenses.

We have heard rival submissions. On perusal of the facts and materials on record, we are of the view that the initiation of proceeding u/s.263 is valid on the issue of ESOP as the assessment order is not only erroneous but also prejudicial to the interest of revenue as the AO has failed to enquire into the issue at all. After going through the assessment order as well as the response of the assessee to the show cause notice issued before invoking provisions of section 263 of the Act, we note that no query has been raised by the AO in the matter. No contrary material has been brought on record by the ld.AR. Certainly there is non-application of mind by the AO. There is no material before us which could have suggested that he had conducted enquiry or taken follow-up action after applying his mind on this issue. The contention that the said item duly reflected in the audited account would imply that the AO has examined the issue is devoid of any merit. Moreover, even the contention on merits based on judicial decisions is not acceptable in adjudicating on the applicability of revisionary powers of the ld.PCIT on the impugned issue which basically revolves around the applicability of Explanation 2 to section 263 vis-à-vis enquiries conducted. We observe the ld.PCIT has drawn support from Explanation 2 below section 263(1) of the Act introduced by Finance Act, 2015 w.e.f. 01.06.2015 for his action. The Explanation 2 inter alia provides that the order passed without making inquiries or verification 'which should have been made' will be deemed to be erroneous insofar as it is prejudicial to the interest of the Revenue.

In so far as the requirement of due enquiry to be conducted by the AO while scrutinising any case in the course of assessment order is concerned, it would be relevant to quote certain landmark decisions of hon'ble Supreme Court in Rampyari Devi Saraogi versus CIT, (1968) 67 ITR 84 (SC) and Tara Devi Aggarwal (Smt) versus CIT, (1973) 88 ITR 323 (SC) wherein it has been observed that where the AO had accepted a particular contention or issue without inquiry whatsoever, the order was erroneous and prejudicial to the interest of Revenue. These two decisions show that it is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The aforesaid observations have to be understood in the factual background and matrix involved. In the said cases, the Assessing Officer had not conducted any enquiry or examined evidence whatsoever. There was total absence of enquiry or verification.

1 In the case of PVS Multiplex India Ltd V CIT in ITA No. 2370/Del/2013 on identical facts it was held that, “wherein the Assessing Officer conducted the assessment proceeding and passed impugned assessment order accepting the return of income of the assessee, we clearly observe that the Assessing Officer has not made inquiry on the issue of interest free advances and proportionate disallowance of interest thereon, on the issue of verification on TDS and on the claim and calculation of the assessee for the purpose of deduction u/s 80IB(7A) of the Act specially on the issue of exclusion of income/receipt on sale of shop and FDR interest. In this situation, we have no hesitation to hold that the order of the AO which is apparently very precise and cryptic, was not passed after due examination and verification of certain issues and therefore, there was an error on the part of AO which leads to a correct conclusion of the CIT that the order of the AO is not only erroneous but also prejudicial to the interest of Revenue. We may further point out that the assessment order suffers from lack of necessary enquiry on certain important issues which have been raised by the CIT in the notice issued to the assessee and impugned order u/s 263 of the Act. Therefore, we reach to a conclusion that the assessment order is not sustainable and in accordance with the provisions of the Act which is not only erroneous but also prejudicial to the interest of the Revenue. Hence, we are inclined to hold that the issuance of notice u/s 263 of the Act and impugned order passed by the CIT u/s 263 of the Act is validly assumed juri iction of revisional powers u/s 263 of the Act which cannot be alleged as invalid assumption of juri iction or bad in law and we confirm the same."

2 The co-ordinate bench of ITAT, Patna in ITA Nos.356 to 360/PAT/2024 in the case of Gandhipati Construction Private Limited observed as below: "Having said that, we may also add that while in a situation in which the necessary inquiries are not conducted or necessary verifications are not done, Commissioner may indeed have the powers to invoke his powers under section 263 but that it does not necessarily follow that in all such cases the matters can be remitted back to the assessment stage f or such inquiries and verifications. There can be three mutually exclusive situations with regard to exercise of power s under section 263, read with Explanation 2(a) thereto, with respect to lack of proper inquiries and verifications. The first situation could be this. Even if necessary inquiries and verifications are not made, the Commissioner can, based on the material before him, in certain cases straight away come to a conclusion that an addition to income, or disallowance from expenditure or some other adverse inference, is warranted. In such a situation, there will be no point in sending the matter back to the Assessing Officer for fresh inquiries or verification because an adverse inference against the assessee can be legitimately drawn, based on material on record, by the Commissioner. In exercise of his powers under section 263, the Commissioner may as well direct the Assessing Officer that related addition to income or disallowance from expenditure be made, or remedial measures are taken. The second category of cases could be when the Commissioner finds that necessary inquiries are not made or verifications not done, but, based on material on record and in his considered view, even if the necessary inquiries were made or necessary verifications were done, no addition to income or disallowance of expenditure or any other adverse action would have been warranted. Clearly, in such cases, no prejudice is caused to the legitimate interests of the revenue. No interference will be, as such, justified in such a situation. That leaves us with the third possibility, and that is when the Commissioner is satisfied that the necessary inquiries are not made and necessary verifications are not done, and that, in the absence of this exercise by the Assessing Officer, a conclusive finding is not possible one way or the other. That is perhaps the situation in which, in our humble understanding, the Commissioner, in exercise of his powers under section 263, can set side an order, for lack of proper inquiry or verification, and the Assessing Officer to conduct such inquiries or verifications afresh."

3 The co-ordinate Mumbai Bench of the ITAT w.r.t Explanation 2 thorough an elaborate order in the case of Madhurima International (P.) Ltd. v. Pr.CIT [ITA No.421/ Mumbai] held that, “. In the instant case, the AO has not enquired the fair value adopted by the assessee in proper perspective and in the manner indicated under law as detailed above. Moreover, explanation 2 to Section 263 of the 1961 Act is inserted by Finance Act, 2015, which deems an order to be erroneous in so far as prejudicial to the interest of Revenue if the order is passed without making inquiries or verification which should have been made. Thus, in the instant case, we have already held that proper enquiries were not made by the AO before passing assessment order dated 23-03- 2016 u/s 143(3) of the 1961 Act, as are mandated u/s 263 of the 1961 Act. In our considered view, the ld. Pr. CIT has rightly invoked the provisions of section 263 of the Act, which we uphold/sustain.."

4 The Hon'ble Delhi Court in the case of Pr. Commissioner of Income Tax, Delhi-7 vs M/S Paramount Propbuild Pvt. Ltd. in ITA 247/2023(Del-HC)on 19 March, 2024 held as below: "Unfortunately, the assessment order nowhere reflects any element of inquiry or verification. The discussion about the loan transactions in question is altogether missing. Furthermore, the assessment record would also reflect that the AO has not taken any concrete steps to ascertain the genuineness and creditworthiness of the transactions, which merits consideration in the light of the findings that emerged from the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing & Finance Pvt. Ltd. It emerges that the present is a case where the AO failed not only to spell out any finding about the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing & Finance Pvt. Ltd. but also to scrutinize the highlighted aspects in the said report qua the genuineness and creditworthiness of aforenoted loan transactions. Therefore, this is the minimum inquiry which atleast was expected to have been made by the AO.

At this juncture, it is apposite to point out that clause (a) of Explanation 2 of Section 263 of the Act introduces a deeming fiction to the effect that the order passed by the AO shall be considered erroneous and prejudicial to the interests of the Revenue, if the order is passed without making inquiries or verification, which should have been made. Henceforth, since neither there is any facet of discussion about the aforenoted aspects in the assessment order nor the assessment record duly reflects that the AO has done inquiry in the light of the findings of the investigation report. We find that the present is a fit case to invoke the revisional powers under Section 263 of the Act."

5 The co-ordinate bench of ITAT, Mumbai in the case of Nos.2709 & 2716/Mum/2024 held as below:

From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualize a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decisions is held to be erroneous. Cases may be visualized where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo-motu revision because the first requirement, viz., that the order is erroneous, is absent." (Emphasis supplied) 5.1Apart from the above principles, we deem it appropriate to make reference to the decision of the Hon'ble Delhi High Court in the case of CIT vs. Sun Beam Auto 227 CTR 113 wherein the Hon'ble High Court has pointed out a distinction between lack of inquiry and inadequate inquiry. The following observations of the Hon'ble Delhi High Court are worth noting:

We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income-tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry", that such a course of action would be open".

We find from the assessment records that the AO has brought on record material facts which go to show that necessary enquiries were indeed made on the impugned issue. Moreover, as stated in preceding paras, the very basis of selection of the case hinged upon the issue of deduction u/s 80G of the Act, and seen in the light of specific queries and replies of the assessee, it can be safely concluded that the issue was duly examined and the AO allowed the claim after due application of mind and in accordance with the provisions of the Act. We do not find that the assessment order could be considered as erroneous and prejudicial and liable to application of Explanation 2 to section 263 of the Act.

1 On merits of the case, the issue whether the CSR expenditure is allowable u/s.80G of the Act is also no more res integra by a catena of decisions by various Co-ordinate Benches of the Tribunal.The Mumbai Bench of the Tribunal in the case of Alubond Dacs India (P.) Ltd. in (2024) 163 taxmann.com 536 (Mum)considered the provisions of Companies Act and I.T. Act and held as follows:

We have heard the rival submissions and perused the materials available on record. The only morn question to be decided here is whether the expenditure towards CSR activities are an allowable deduction us 80G of the Act. The CSR expenses are governed by section 135 of the Companies Act, 2013, Schedule VII of the Act and Companies (CSR) Policy Rules, 2014 where companies having net worth of Rs 500 crores of more or turnover of Rs.1000 crores or more or net profit of Rs 5 crores of more have to mandatorily comply with the CSR provisions specified us.135(1) of the Companies Act, 2011. The above mentioned companies are liable to spend atleast 25% of its average net profit for the immediately preceding three financial years on CSR activities. In the present case, the assessee has contributed Rs 30 lacs to various educational and charitable trust for which the assessee has claimed 50% of the total donation paid as deduction u/s.800 of the Act. Prior to the Finance (No.2) Act, 2014, the said expenditure was claimed as ‘business expenditure' u/s.37(1) of the Act where after the insertion of Explanation 2 to section 37(1) of the Act, the CSR expenses referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession. It is observed that the said expenses pertaining to CSR has been claimed as deduction u/s. 80G of the Act which claim was perennially rejected by the Revenue for the reason that only donations which are voluntary in nature will come under the purview of section 80G of the Act and donation towards CSR was merely a statutory obligation on companies as per section 135 of the Companies Act, 2013. It is pertinent to point out that the intention of the legislature was clear when the same was clarified by the Finance (No.2) Act, 2014 that CSR expenses will not fall under the business expenditure and also there has been an express bar specified in sub clause (iiihk) and (iiihl) of section 80G(2)(a) of the Act that any sum paid by the assessee as donation to Swatch Bharat Kosh and Clean Ganga Fund will not come under the purview of deduction u's 80G of the Act subject to certain conditions. This justifies the fact that the other donations specified us 80G of the Act would be entitled to deduction provided the conditions stipulated u/s.80G of the Act are satisfied. In the present case in hand, the contributions made by the assessee would not fall under the two exceptions specified above which clearly mandates that the assessee is entitled to claim deduction for the donations contributed during the year under consideration u/s 80G of the Act. The decision relied upon by the ld. A.O in the case of PVG Raju (supra) is distinguishable on the facts of the present case where there is no requirement of proving the voluntariness of the donation contributed by the assessee for claiming deduction u/s.80G of the Act. The amendment brought about by Finance Act, 2015 to section 80G of the Act which had inserted the sub clauses (iiihk) and (iiihl) to be the exception for qualifying a donation for claiming us.80G of the Act could also be an evidencing factor to substantiate that CSR expenditures which falls under the nature specified in section 30 to 36 of the Act are an allowable deduction u/s 80G of the Act.

On the above observation, we deem it fit to hold that the assessee is entitled to deduction claimed u/s.80G of the Act towards the CSR expenditure incurred by it. We, therefore, direct the ld. A.O, to allow the claim of the assessee subject to the condition that the assessee has satisfied the other requirements warranted u/s.80G of the Act. Hence, ground no. 2 raised by the assessee is allowed.

In the case under consideration, the proposed revision is sought to be done merely on change of opinion disagreeing with the opinion of the AO that the expenditure is not deductible under sec 80G of the Act. Further, it is a settled position of law that where there are two views possible and the AO has adopted one of the two possible views, then the order cannot be held to be erroneous/ prejudicial to the interest of the revenue and thereby proceedings under section 263 of the Act could not be sustained. Moreover, as discussed in the preceding paras, the deduction of CSR expenses under section 80G of the Act is held allowable consistently by the courts. Hence, both on legal ground as also on merits, appeal of the assessee has sufficient force. Therefore,

Ground no. 3 and 4 pertain to the issue of ESOP which according to the ld.PCIT was not enquired into by the AO. The ld.PCIT further observed that as per audit memo and on perusal of assessment records thatas per the Profit and Loss account that under the head 'Employee Benefit Expenses', the assessee had debited an amount of Rs.1,98,715/- towards Employee Stock Compensation Expenses [ESOP). As per Audit Memo, ESOP expenses are incurred in relation to issue of shares to employees and were not relatable to profits and gains arising or accruing from a business trade. ESOP is issued by the company for its employees to encourage employee ownership in the company. The shares are issued at a discounted price to its employees. Thus, ESOP is a scheme where a company proposes to increase its subscribed share capital by issuing further shares to its employees at a predetermined rate. This indirectly benefits the company in employees retention and loyalty. Thus, it was noted that ESOP is nothing more than expenditure related to issue of shares and was not allowable as deduction u/s 37(1) of the Act. He concluded that there were two aspects to the claim of the Employee Stock Compensation expenses, first being whether there was any expenses incurred at all and second, being whether such expense was disallowable u/s.37(1) of the Act while completing the assessment. As noted from the assessment order, the AO had not carried out any enquiry on the issue of ESOP expenses debited in the P&L account and SLP against the said decision of Hon'ble Karnataka High Court in the case of Biocon(supra) which has been admitted by the Hon'ble Apex Court.

During hearing, the ld.DR argued that on facts of the case and in the light of the provisions of the Act and also lack of any enquiry into the impugned issue by the AO, the ld.PCIT was fully justified in invoking the provisions of section 263 of the Act as the assessment order was erroneous and prejudicial to the interest of the Revenue on both the counts.

Before us, the ld.AR has submitted that in the course of assessment proceedings u/s 143(3), the assessee has submitted detailed Profit and Loss Account for the relevant year. Vide Note 28 to the Profit and Loss Account under the head of "Employee of Benefit Expenses", it could be observed that the assessee had debited an amount of Rs.1,98,715/- being share based payment which was on account of ESOP.As such, the AO was fully aware of the facts regarding ESOP expenses and he passed assessment order on the basis of his satisfaction. The assessee has correctly made the claim of the ESOP expenses debited in its books of accounts as a Revenue Expenditure and the same were incurred in the normal course of activities of the assessee. In view of the latest decisions of various courts allowing the deduction of ESOP expenses, it is submitted that the said ESOP expenses are allowable as deduction in the hands of the assessee. It cannot be said that the assessment order passed was without making enquiry or verification on this ground. Further, it cannot be said that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the revenue on this ground as he has passed the assessment order after being satisfied regarding the allowability of deduction of ESOP expenses.

We have heard rival submissions. On perusal of the facts and materials on record, we are of the view that the initiation of proceeding u/s.263 is valid on the issue of ESOP as the assessment order is not only erroneous but also prejudicial to the interest of revenue as the AO has failed to enquire into the issue at all. After going through the assessment order as well as the response of the assessee to the show cause notice issued before invoking provisions of section 263 of the Act, we note that no query has been raised by the AO in the matter. No contrary material has been brought on record by the ld.AR. Certainly there is non-application of mind by the AO. There is no material before us which could have suggested that he had conducted enquiry or taken follow-up action after applying his mind on this issue. The contention that the said item duly reflected in the audited account would imply that the AO has examined the issue is devoid of any merit. Moreover, even the contention on merits based on judicial decisions is not acceptable in adjudicating on the applicability of revisionary powers of the ld.PCIT on the impugned issue which basically revolves around the applicability of Explanation 2 to section 263 vis-à-vis enquiries conducted. We observe the ld.PCIT has drawn support from Explanation 2 below section 263(1) of the Act introduced by Finance Act, 2015 w.e.f. 01.06.2015 for his action. The Explanation 2 inter alia provides that the order passed without making inquiries or verification 'which should have been made' will be deemed to be erroneous insofar as it is prejudicial to the interest of the Revenue.

In so far as the requirement of due enquiry to be conducted by the AO while scrutinising any case in the course of assessment order is concerned, it would be relevant to quote certain landmark decisions of hon'ble Supreme Court in Rampyari Devi Saraogi versus CIT, (1968) 67 ITR 84 (SC) and Tara Devi Aggarwal (Smt) versus CIT, (1973) 88 ITR 323 (SC) wherein it has been observed that where the AO had accepted a particular contention or issue without inquiry whatsoever, the order was erroneous and prejudicial to the interest of Revenue. These two decisions show that it is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The aforesaid observations have to be understood in the factual background and matrix involved. In the said cases, the Assessing Officer had not conducted any enquiry or examined evidence whatsoever. There was total absence of enquiry or verification.

1 In the case of PVS Multiplex India Ltd V CIT in ITA No. 2370/Del/2013 on identical facts it was held that, “wherein the Assessing Officer conducted the assessment proceeding and passed impugned assessment order accepting the return of income of the assessee, we clearly observe that the Assessing Officer has not made inquiry on the issue of interest free advances and proportionate disallowance of interest thereon, on the issue of verification on TDS and on the claim and calculation of the assessee for the purpose of deduction u/s 80IB(7A) of the Act specially on the issue of exclusion of income/receipt on sale of shop and FDR interest. In this situation, we have no hesitation to hold that the order of the AO which is apparently very precise and cryptic, was not passed after due examination and verification of certain issues and therefore, there was an error on the part of AO which leads to a correct conclusion of the CIT that the order of the AO is not only erroneous but also prejudicial to the interest of Revenue. We may further point out that the assessment order suffers from lack of necessary enquiry on certain important issues which have been raised by the CIT in the notice issued to the assessee and impugned order u/s 263 of the Act. Therefore, we reach to a conclusion that the assessment order is not sustainable and in accordance with the provisions of the Act which is not only erroneous but also prejudicial to the interest of the Revenue. Hence, we are inclined to hold that the issuance of notice u/s 263 of the Act and impugned order passed by the CIT u/s 263 of the Act is validly assumed juri iction of revisional powers u/s 263 of the Act which cannot be alleged as invalid assumption of juri iction or bad in law and we confirm the same."

2 The co-ordinate bench of ITAT, Patna in ITA Nos.356 to 360/PAT/2024 in the case of Gandhipati Construction Private Limited observed as below: "Having said that, we may also add that while in a situation in which the necessary inquiries are not conducted or necessary verifications are not done, Commissioner may indeed have the powers to invoke his powers under section 263 but that it does not necessarily follow that in all such cases the matters can be remitted back to the assessment stage f or such inquiries and verifications. There can be three mutually exclusive situations with regard to exercise of power s under section 263, read with Explanation 2(a) thereto, with respect to lack of proper inquiries and verifications. The first situation could be this. Even if necessary inquiries and verifications are not made, the Commissioner can, based on the material before him, in certain cases straight away come to a conclusion that an addition to income, or disallowance from expenditure or some other adverse inference, is warranted. In such a situation, there will be no point in sending the matter back to the Assessing Officer for fresh inquiries or verification because an adverse inference against the assessee can be legitimately drawn, based on material on record, by the Commissioner. In exercise of his powers under section 263, the Commissioner may as well direct the Assessing Officer that related addition to income or disallowance from expenditure be made, or remedial measures are taken. The second category of cases could be when the Commissioner finds that necessary inquiries are not made or verifications not done, but, based on material on record and in his considered view, even if the necessary inquiries were made or necessary verifications were done, no addition to income or disallowance of expenditure or any other adverse action would have been warranted. Clearly, in such cases, no prejudice is caused to the legitimate interests of the revenue. No interference will be, as such, justified in such a situation. That leaves us with the third possibility, and that is when the Commissioner is satisfied that the necessary inquiries are not made and necessary verifications are not done, and that, in the absence of this exercise by the Assessing Officer, a conclusive finding is not possible one way or the other. That is perhaps the situation in which, in our humble understanding, the Commissioner, in exercise of his powers under section 263, can set side an order, for lack of proper inquiry or verification, and the Assessing Officer to conduct such inquiries or verifications afresh."

3 The co-ordinate Mumbai Bench of the ITAT w.r.t Explanation 2 thorough an elaborate order in the case of Madhurima International (P.) Ltd. v. Pr.CIT [ITA No.421/ Mumbai] held that, “. In the instant case, the AO has not enquired the fair value adopted by the assessee in proper perspective and in the manner indicated under law as detailed above. Moreover, explanation 2 to Section 263 of the 1961 Act is inserted by Finance Act, 2015, which deems an order to be erroneous in so far as prejudicial to the interest of Revenue if the order is passed without making inquiries or verification which should have been made. Thus, in the instant case, we have already held that proper enquiries were not made by the AO before passing assessment order dated 23-03- 2016 u/s 143(3) of the 1961 Act, as are mandated u/s 263 of the 1961 Act. In our considered view, the ld. Pr. CIT has rightly invoked the provisions of section 263 of the Act, which we uphold/sustain.."

4 The Hon'ble Delhi Court in the case of Pr. Commissioner of Income Tax, Delhi-7 vs M/S Paramount Propbuild Pvt. Ltd. in ITA 247/2023(Del-HC)on 19 March, 2024 held as below: "Unfortunately, the assessment order nowhere reflects any element of inquiry or verification. The discussion about the loan transactions in question is altogether missing. Furthermore, the assessment record would also reflect that the AO has not taken any concrete steps to ascertain the genuineness and creditworthiness of the transactions, which merits consideration in the light of the findings that emerged from the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing & Finance Pvt. Ltd. It emerges that the present is a case where the AO failed not only to spell out any finding about the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing & Finance Pvt. Ltd. but also to scrutinize the highlighted aspects in the said report qua the genuineness and creditworthiness of aforenoted loan transactions. Therefore, this is the minimum inquiry which atleast was expected to have been made by the AO.

At this juncture, it is apposite to point out that clause (a) of Explanation 2 of Section 263 of the Act introduces a deeming fiction to the effect that the order passed by the AO shall be considered erroneous and prejudicial to the interests of the Revenue, if the order is passed without making inquiries or verification, which should have been made. Henceforth, since neither there is any facet of discussion about the aforenoted aspects in the assessment order nor the assessment record duly reflects that the AO has done inquiry in the light of the findings of the investigation report. We find that the present is a fit case to invoke the revisional powers under Section 263 of the Act."

5 The co-ordinate bench of ITAT, Mumbai in the case of Nos.2709 & 2716/Mum/2024 held as below:

From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualize a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decisions is held to be erroneous. Cases may be visualized where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo-motu revision because the first requirement, viz., that the order is erroneous, is absent." (Emphasis supplied) 5.1Apart from the above principles, we deem it appropriate to make reference to the decision of the Hon'ble Delhi High Court in the case of CIT vs. Sun Beam Auto 227 CTR 113 wherein the Hon'ble High Court has pointed out a distinction between lack of inquiry and inadequate inquiry. The following observations of the Hon'ble Delhi High Court are worth noting:

We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income-tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry", that such a course of action would be open".

We find from the assessment records that the AO has brought on record material facts which go to show that necessary enquiries were indeed made on the impugned issue. Moreover, as stated in preceding paras, the very basis of selection of the case hinged upon the issue of deduction u/s 80G of the Act, and seen in the light of specific queries and replies of the assessee, it can be safely concluded that the issue was duly examined and the AO allowed the claim after due application of mind and in accordance with the provisions of the Act. We do not find that the assessment order could be considered as erroneous and prejudicial and liable to application of Explanation 2 to section 263 of the Act.

1 On merits of the case, the issue whether the CSR expenditure is allowable u/s.80G of the Act is also no more res integra by a catena of decisions by various Co-ordinate Benches of the Tribunal.The Mumbai Bench of the Tribunal in the case of Alubond Dacs India (P.) Ltd. in (2024) 163 taxmann.com 536 (Mum)considered the provisions of Companies Act and I.T. Act and held as follows:

We have heard the rival submissions and perused the materials available on record. The only morn question to be decided here is whether the expenditure towards CSR activities are an allowable deduction us 80G of the Act. The CSR expenses are governed by section 135 of the Companies Act, 2013, Schedule VII of the Act and Companies (CSR) Policy Rules, 2014 where companies having net worth of Rs 500 crores of more or turnover of Rs.1000 crores or more or net profit of Rs 5 crores of more have to mandatorily comply with the CSR provisions specified us.135(1) of the Companies Act, 2011. The above mentioned companies are liable to spend atleast 25% of its average net profit for the immediately preceding three financial years on CSR activities.