MILLENNIUM DEVELOPERS PRIVATE LIMITED,MUMBAI vs. PRINCIPLE COMMISSIONER OF INCOME TAX -3, MUMBAI

PER RAJ KUMAR CHAUHAN (J.M.): 1. This appeal is filed by the appellant/assessee against the order dated 21.03.2024 of Learned Principal Commissioner of Income Tax, Mumbai [hereinafter referred to as the “PCIT”], passed under section 253 of the Income Tax Act, 1961 [hereinafter referred to as “the Act”] for the A.Y. 2017-18 wherein Ld. PCIT set aside the order of AO and directed to disallow Millennium Developers Pvt. Ltd. the deduction u/s 80G of the Act in respect of donation claimed out of CSR expenditure. 2. The brief facts of the case are that, the assessee company is engaged in real estate business. The assessee filed its return of income for AY 2017- 18 on 31.10.2017 declaring total income of Rs. 9,66,52,230/- under normal provision and Rs. 10,13,32,715 u/s 115JB of the Act. The case was selected for scrutiny u/s 147 of the Act on the ground that assessee had debited an amount of Rs. 1,39,00,000/- towards Corporate Social Responsibility (CSR) and had claimed deduction of Rs. 50,86,981/-. It was stated that the expenditure has been incurred towards CSR which is not allowable expenditure u/s 37(1) of the Act. Notice u/s 148 of the Income tax Act, 1961 was issued on 30.03.2021. Subsequently notice u/s 142(1) of the Act was issued on 17.06.2021. Further, notice u/s 142(1) was issued on 25.11.2021 along with questionnaire seeking compliance on 02.12.2021. In response to the said notice assessee filed submission on 02.12.2021 wherein they have given details of expenditure incurred on CSR to the tune of Rs. 1,39,00,000/-. Assessee further submitted that he has not claimed deduction for CSR expenditure of Rs. 1,39,00,000/- from its business profit, but he has claimed deduction of Rs. 50,86,981/- u/s 80G of the Act. Millennium Developers Pvt. Ltd. The same was Verified from the income computation given by the assessee and the return filed by the assessee wherein assessee has submitted donation receipt from Gondia Education Society and The Indian Council for Mental Health. The same was cross verified with the bank statement of the assessee. In view of the above examination and submission filed by the assessee, in light of the reason for reopening the case, return Income is accepted. 3. Ld. PCIT has proceeded to examine the matter u/s 263 of the Act and observed that AO has accepted the contention of assessee without examining the allowability of deduction u/s 80G of the Act with reference to CSR expenditure. Ld. PCIT was of the opinion that the FAO has grossly neglected the fact that the assessee has claimed deduction u/s 80G of the Act on the expenses made on CSR activity. It is further observed that the AO has failed to examine the allowability of deduction u/s 80G of the Act on the donations made through CSR expenditure. It was concluded that the order of AO is therefore deemed to be erroneous as it is prejudicial to the interest of revenue. Hence, Ld. PCIT set aside the order of AO. Millennium Developers Pvt. Ltd. 4. Aggrieved with the order of Ld. PCIT assessee preferred the present appeal before us raising the following grounds: 1. The Pr.C.I.T. erred in holding that the order of the FAO passed u/s. 144 read with sec.147 read with sec. 144B of the Act dated 17th January 2022 is erroneous and prejudicial to the interest of the Revenue. 2. The Pr.C.I.T. erred in observing as under: Further the assessee has claimed the said expenditure in the guise of donation and claimed deduction on it. Though it is a disallowable expenditure, the assessee company claimed the same as a deduction u/s. 80G and the FAO in the order section 144 rws 144B r.w.s. 148 has allowed it. Therefore, the order of the FAO, u/s. 144 rws 147 rws 144B dated 17.01.2022 is erroneous in so far as it is prejudicial to the interest of the revenue." 3. The Pr. CIT, Mumbai-3 has erred in holding that the reassessment order passed by the Assessing Officer dated 17th January 2022 is erroneous and prejudicial to the interest of the revenue, without appreciating the fact that mere adopting of one view out of two possible views based on the specific inquiries conducted by the Assessing Officer in respect of the issue under consideration cannot render the order so passed to be erroneous. 4. The Pr. CIT, Mumbai-3 erred in holding that the deduction of Rs.50,86,981/- claimed u/s. 80G of the Act (being 50% of the total CSR expenditure incurred restricted to 10% of the Total Income) should be disallowed, without appreciating the fact that the same was validly claimed u/s. 80G(2)(iv)(a) of the Act in respect of donations paid to eligible institutions approved u/s. 80G(5) of the Act. Millennium Developers Pvt. Ltd. 5. The Pr. CIT, Mumbai-3 failed to consider the reply of the assessee company dated 3rd May 2019 during the original assessment proceedings wherein while replying to the query of large deduction under chapter VI-A, the assessee had informed that "To meet the requirement of sec. 135 of the Companies Act 2013 it has contributed Rs.1,39,00,000/- towards education projects of the following institutes registered u/s. 80G of the Act: Name of the Party

PAN

Amount
Gondia Education Society

AAATG0564F
1,28,00,000/-
The Indian Council of Mental Health
AAATI1077R
11,00,000/-"
6. The Pr. CIT, Mumbai-3 failed to consider the reply of the assessee company dated 2nd December 2021 during the reopened assessment proceedings u/s.
148 of the Act wherein the assessee had informed that:
"For CSR expenditure of Rs.1,39,00,000/- incurred during the year assessee has not claimed any deduction from its business profits however assessee has claimed deduction u/s. 80G of Rs.50,86,981/- in respect of Rs.1.39 crore paid to above Trusts approved for the purposes of sec. 80G of the Act."
7. The order of the Pr. C.I.T. passed u/s. 263 of the I. T. Act, 1961, is bad in law and without juri iction.
8. Your appellant craves leave to add to, alter, amend or delete any of the foregoing grounds of appeal.
5. To summarize the grounds, the following points for determination arise as:-
Millennium Developers Pvt. Ltd.
i) Whether the assessee is legally entitled to allow a sum of Rs.
50,66,981/- as deduction u/s 80G of the Act out of the amount of Rs.
1,39,00,000/- spend towards CSR?
ii) Whether the order of the Ld. AO is erroneous or prejudicial to the interest of revenue, if so it affects?
6. We have heard Ld. AR. Ld. AR submitted that the reasons given by Ld. PCIT for setting aside the order of AO were incorrect and contrary to the facts on record. Secondly, it is argued that the assessee company in its reply dated 3rd May 2019 has clearly stated that assessee is required to spend 2% of the average pre-tax profits of the preceding 3 years towards its CSR as specified u/s 135 of the Companies Act 2013. CSR amounted to Rs.
1,39,00,000/- has been spent by giving donations to 2 institutions i.e.
Gondia Education Society and The Indian Council of Mental Health and the said expenditure has not been claimed as business expenditure. Thirdly, it is argued that the said 2 institutions expenses has been claimed u/s 80G of the Act. The said reply of the assessee is on record of the AO in the original assessment proceedings. Lastly, it is argued that since the return filed by the assessee has been accepted, hence in view of the above facts, the order
Millennium Developers Pvt. Ltd.
of AO is neither erroneous nor prejudicial to the interest of revenue. In support of its submissions, Ld. AR relied on the following judgments:- i) CIT vs. Gabriel India Ltd. (1993) 203 ITR 108 (Bombay) ii) Aroni Commercial Ltd. Vs. DCIT (2014) 362 ITR 403 (Bombay)
7. On the other hand, Ld. DR relied on the decision of Ld. PCIT.
8. We have considered the rival submissions and examined the material placed on record as well as judgments relied upon by the parties. The Hon'ble High Court of Bombay in Commissioner to Income Tax Vs. Gabriel
India Ltd. [1993] 71 Taxman 585 (Bombay) dated 15.04.1993had the occasion to interpret Section 263(1) and elaborated the meaning of word erroneous and prejudicial to the interest of revenue. Para 13 of the said case is relevant and reproduced as under:-
13. We, therefore, hold that in order to exercise power under sub-section (1) of section 263 there must be material before the Commissioner to consider that the order passed by the ITO was erroneous insofar as it is prejudicial to the interests of the revenue. We have already held what is erroneous. It must be an order which is not in accordance with the law or which has been passed by the ITO without making any enquiry in undue haste. We have also held as to what is prejudicial to the interests of the Millennium Developers Pvt. Ltd.
revenue. An order can be said to be prejudicial to the interests of the revenue if it is not in accordance with the law in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised. There must be material available on the record called for by the Commissioner to satisfy him prima facie that the aforesaid two requisites are present. If not, he has no authority to initiate proceedings for revision. Exercise of power of suomotu revision under such circumstances will amount to arbitrary exercise of power. It is well-settled that when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on record to satisfy it in that regard. If the action of the authority is challenged before the Court, it would be open to the Courts to examine whether the relevant objective factors were available from the records called for and examined by such authority. Our aforesaid conclusion gets full support from a decision of Sabyasachi Mukharji, J.
(as his Lordship then was) in Russell Properties (P.) Ltd. v. A.
Chowdhury, Addl. CIT [1977] 109 ITR 229 (Cal.). In our opinion, any other view in the matter will amount to giving unbridled and arbitrary power to the revising authority to initiate proceedings for revision in every case and start re-examination and fresh enquiries in matters which have already been concluded under the law. As already stated, it is a quasi-judicial power hedged in with limitation and has to be exercised subject to the same and within its scope and ambit. So far as calling for the records and examining the same is concerned, undoubtedly, it is an administrative act, but on examination 'to consider' or in other words, to form an opinion that the particular order is erroneous insofar as it is prejudicial to the interests of the revenue, is a quasi-judicial act because on this consideration or opinion the whole machinery of re-examination
Millennium Developers Pvt. Ltd.
and reconsideration of an order of assessment, which has already been concluded and controversy which has been set at rest, is set again in motion. It is an important decision and the same cannot be based on the whims or caprice of the revising authority. There must be materials available from the records called for by the Commissioner.”
9. Para 10-13 of the Ld. PCIT’s order concludes as to how the Ld. AO’s order was erroneous and prejudicial to the interest of revenue and the said para reads as under:-
10. In the submissions, the ground that in assessee contested already examined
Its case the Ad of the assessee and allowed the deduction u/s 80G. I do not agree with these, arguments. It is true that the assessing officer obtained the details of deduction claimed u/s 80G but the assessment record does not speak of the assessing officer having considered the matter as to whether this deduction claimed against donations made as part of CSR expenditure is allowable or not.
In none of the asseessee's submission before the assessing officer also, the assessee made any reference to this issue and argued that the donations being part of CSR expenditure are still eligible for deduction u/s 80G. So, it cannot be inferred that the assessing officer has applied his mind on this aspect. In any case, the assessing officer's failure to consider this issue despite it being in contravention of the provisions of the Act in view of the Explanation 2 to section 37(1) read with Explanatory notes to the Finance Bill 2014, caused erroneous allowance of deduction u/s 80G and made the order prejudicial to the interests of revenue.
11. I find no merit in the submissions for the reasons discussed below:-
Millennium Developers Pvt. Ltd.
11.1 Firstly, it is important to note that CSR expenditure has to be mandatorily incurred by certain specified companies as per provisions of Section 135 of the Companies Act. It is a statutory obligation cast upon certain companies to share certain portion of profits to the activities towards social responsibilities. In other words, it is part of profit appropriation to the society at large which, in the new scenario of CSR regime, is one of the strategic stake holders of the company. It is for this reason that this expenditure was clarified to be an expenditure not incurred fully and wholly for the purpose of business through Explanation 2 u/s 37 (1) of the Act.
In this connection it is relevant to reproduce the provisions of the section 37 of the Income-tax Act and section 135(5) of the Companies Act, 2013. Section 37 of the Income-tax Act, 1961 reads as under:-
"Any expenditure (not being expenditure of the nature described in section 30 to 36 and not being in the nature of capital expenditure or personal expenditure of the assessee) laid out for or expended wholly and exclusively for the purpose of the business or Profession shall be allowed in computing the Income chargeable under the head Profit and gains of business and Profession:
Explanation2:- For the removal of doubts, it is hereby declared that for the purpose of sub section (1) any expenditure incurred by an assessee on the activities relating to the corporate social responsibilities referred to in section 135
of the companies Act 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purpose of the business or profession."
Section 135(5) of the Company Act 2013 reads as under:-
"The Board of av Company referred company spends, in every financial year
Fallee Section (1) shall ensure that 2% of the average net profit of the company made during the three immediately preceding financial years or where the Millennium Developers Pvt. Ltd.
company has not completed three financial years. Since its incorporation, during such immediately preceding financial years, in pursuance of its CSR Policies."
11.2 The legislative intent of introduction of this Explanation is elaborated in the Explanatory Notes to the Finance Bill 2014 which is reproduced below:
"CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business. As the application of income is not allowed deduction for the purposes of computing taxable income of a company, amount spent on CSR cannot be allowed as deduction for computing the taxable income of the company. Moreover, the objective of CSR is to share burden of the Government in providing social services by companies having net worth/turnover/profit above a threshold. If such expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure."
As may be seen, it is made clear at the beginning itself that it is an application of income. Though called as expenditure, as it being an outflow for the company, it is strictly not an expenditure. Therefore, no deduction what so ever can be allowed for appropriation of profits. It is trite law that what cannot be allowed in view of specific provisions cannot be allowed indirectly unless specifically provided in the Act, thereby defeating the purpose of the section. The other argument that only two funds mentioned in section 80G to which donations given as part of CSR expenditure are not eligible, is also not tenable. It does not Imply that donations to other funds towards CSR are eligible for deduction. Further, it is to be noted that in the orders relied upon by the assessee there is no discussion on the Explanatory Notes to the Finance Bill 2014, wherein reference was made to the CSR expenditure as application of income and the same was not explicitly considered.
Millennium Developers Pvt. Ltd.
12. From the above, it is clear that the assessee has made CSR expenses to the extent of Rs/13900000/- and disallowed the same in the computation if income u/s 37(1) of the Act. Further the assessee has claimed the said expenditure in the guise of donation and claimed deduction on it. Though it is a disallowable expenditure, the assessee company claimed the same as a deduction u/s 80G and the FAQ In the order section 144 rws144B r.w.s 148 has allowed it. Therefore, the order of the FAO/s u/s 144 rws 147 rws 144B dt 17.01.2022 is erroneous in so far as it is prejudicial t to the Interest of the revenue.
13. In light of the above discussions, I reject the arguments of the assessee, the order u/s. 144 rws 147 rws 144B dt 17.01.2022 is set aside u/s 263 of the assessee, the order u/s 263 of t the Act and AO is directed to disallow the deduction w/s:80G of the Act-in respect of donation claimed out of CSR expenditure after due verification and giving opportunity of being heard to the assessee.
10. We have also examined the order of AO wherein he has allowed the benefit of section 80G of the Act to the assessee and has accepted the return of income. The operative portion of the order of AO is reproduced below:-
The assessee is a Company engaged in real estate business. The case was selected for Scrutiny u/s 147 on the basis of the reason cited below:-
"The assessee had debited an amount of Rs. 1,39,00,000/- towards Corporate
Social Responsibility and had claimed deduction of Rs. 50,86,981/-. As the expenditure has been Incurred towards CSR which is not allowable expenditure u/s 37(1) of the Act."
Notice u/s 148 of the Income tax Act, 1961 was issued on 30.03.2021. Subsequently notice u/s 142(1) of the Income Tax Act, 1961 was issued on 17.06.2021 to file his return of income and duly served upon the assessee. Further,
Millennium Developers Pvt. Ltd.
notice u/s 142(1) was issued on 25.11.2021 along with questionnaire seeking compliance on 02.12.2021. As per notice u/s 142(1), dated 25.11.2021 you had been asked to furnish the following:-
"1. Nature of Business and modus operandi of the same.
2. Details of all bank account and statements for the F.Y. 2016-17 relevant to the A.У. 2017-18. 3. As per the record you have claimed deduction of Rs. 50,86,981/- citing reason that the same has been incurred towards Corporate Social Responsibility (CSR) amounting to Rs. 1,39,00,000/-. Kindly furnish details of expenditure incurred towards CSR. Also fumish documentary evidence to substantiate that this is your business expenditure and allowable as per Act."
In response to the said notice assessee filed submission on 02.12.2021. In his submission assessee has mentioned that he has incurred CSR expenditure of Rs.
1,39,00,000/- as under:-
Sr.No.
Donation given to the Trust
PAN of the Trust
Amount

1
Gondia Educton Societ,
Gonda, Maharashtra
AAATG0564F
Rs.1,28,00,000/-

2
The Indian Council for Mental Health Mumbai,
Maharashtra
, AAAT110778
Rs. 11,00,000/-

Assessee further submitted that he has expenditure of Rs. 1,39,00,000/- from Shot claimed any deduction for CSR its business profit Rather he has claimed deduction of Rs. 50,86,981/- u/s 80G. The same was Verified from the income computation given by the assessee and the return filed by the assessee. Assessee has also submitted donation receipt from Gondia Education Society and The Indian Council for Mental Health. The same was cross verified with the bank statement of the assessee.
Millennium Developers Pvt. Ltd.
After examination of the submission filed by the assessee in light of the reason for reopening the case, return Income is accepted.
Assessed u/s 144 read with section 147 of the Income Tax Act, 1961. Penalty u/s 271F for not filing of ROI in response of notice u/s 148 is initiated separately.
Issue demand notice accordingly.
11. Now it is to be seen whether the above order of the Ld. AO is suffering from the lack of enquiry or the AO has examined the issue as per law before reaching to the conclusions of giving benefit to the assessee. The Hon'ble
High Court of Delhi recently in PCIT -2 Delhi Vs. M/s. Clix Finance India
Pvt. Ltd., ITA No. 1428/2018, order dated 01.03.2024 while relying on the case of Malabar Industrial Co. Ltd referred (supra) has held that"the phrase "prejudicial to the interests of the Revenue" has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the Millennium Developers Pvt. Ltd.
interests of the Revenue unless the view taken by the Income Tax Officer is unsustainable in law."
12. The Hon'ble High Court of Delhi was further pleased to hold in para no. 27 of the same judgment that “inadequacy of enquiry by the AO with respect to certain claims would not in itself be a reason to invoke the powers enshrined in Section 263 of "the Act".
13. On perusal of the order of AO, it is evident that he has issued the notice u/s 142(1) of the Act, wherein para 16 shows that he has categorically asked the assessee to explain the claim u/s 80G of the Act which are reproduced as under:-
16. You are requested to furnish explanation along with the documentary evidences in respect of following CASS reason:
1. Large Low receipt from house property in ITR as compared to rental receipts in 26A.
2. Large deduction under chapter VI-A from Total Income.
3. Expenses debited to P&L A/c for earning exempt income as per schedule
BP of ITR is significantly lower as compared to investments made to earn exempt income.
Millennium Developers Pvt. Ltd.
14. In reply dated 3rd May 2019, assessee in para no. 16(ii) has given the explanation to the notice issued u/s 142(1) of the Act and the same are reproduced below:-
(ii) Large Deduction under Chapter VI-A Assessee is required to spend 2% of the average pre-tax profits of the preceding three years towards its corporate social responsibility (CSR) as specified u/s 135
of the Companies Act, 2013. To meet this regulatory requirement, assessee contributed a sum of Rs.1,39,00,000/- towards education projects of following institutes registered for the purposes of section 80G of the Act.
Name of the Party

PAN

Amount
Gondia Education Society

AAATG0564F
1,28,00,000
The Indian Council of Mental Health
AAATI1077R
11,00,000
Total 1,39,00,000

Scanned copy of donation receipts and assessee's bank statement, highlighting these payments are attached herewith. Deduction of Rs.50,86,981/-, computed in accordance with provisions of section 80G has been claimed in the ITR filed. No other deductions under Chapter VI-A of the Act have been claimed.
15. Similarly in the notice u/s 142(1) dated 06.09.2019, AO has asked the assessee question no. 14 as under :-
14. If you have claimed deduction /exemption under chapter VIA, if any kindly justify your claim of deduction /exemption alongwith supporting evidences.
16. On perusal of the order of AO, it is noticed that AO while allowing the benefit u/s 80G of the Act has observed that the claim of the assessee that Millennium Developers Pvt. Ltd.
he has not claimed deduction of CSR expenditure of Rs. 1,39,00,000/- from its business profit as he has claimed deduction u/s 80G of Rs. 50,86,981/- and the same was verified from the income computation given by the assessee and returned filed by the assessee. It is further observed that assessee has also submitted donation receipt from Gondia Education
Society and The Indian Council for Mental Health and the same was cross verified with the bank statement of the assessee. Therefore, it is held by the AO that after examination of the submission filed by the assessee in light of the reason for reopening the case, return income is accepted.
17. These observations of AO shows that he has examined the reply of the assessee and has passed an assessment order after diligently carrying out the assessment and there is no reason to assail the same on the ground of non-application of mind. Thus, it is not a case of lack of enquiry and even if the enquiry would have been inadequate, that would not by itself give occasion to the Ld. Principal Commissioner to pass the order u/s. 263 of "the Act" reliance can be safely placed upon the judgment of Commissioner of Income Tax Vs. Sunbeam Auto Ltd. (2009) SCC Online Delhi 4237, dated 11.09.2009 and also Hon’ble High Court of Delhi in ITA No.
1428/2018 dated 01.03.2024. Millennium Developers Pvt. Ltd.
18. In view of the above, we are of the considered opinion that the Ld.
PCIT was not justified in invoking revision power u/s. 263 of the Act on the ground that the Ld. AO has failed to properly examine the issue before allowing benefit u/s. 80G of the Act to the assessee and mentioning, the order was erroneous and prejudicial to the interest of revenue.
19. With regard to claim of deduction u/s 80G of the Act, the AR has relied on following cases:-
1. Blue Cross Laboratories Pvt. Ltd. vs. PCIT-3 in ITA No.1806/MUM/2023 for A.Υ. 2018-19 dated 30th August, 2023. 2. Worley Services India Pvt. Ltd (Formerly Worley India Pvt. Ltd.) vs. Pr.CIT-2
in ITA No. 554/MUM/2024 for A.Y. 2018-19 dated 3rd June, 2024. 3. Naik Seafoods Pvt. Ltd. vs. Pr.CIT2 in ITA No. 490/MUM/2021 for Α.Υ. 2016-
17 dated 22.07.2021

Copy of the Order forwarded to:

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BY ORDER

(Asstt.