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Facts
The assessee claimed a deduction under Section 80G for CSR expenditure. The Assessing Officer allowed this deduction after specific inquiry. However, the PCIT initiated revision proceedings under Section 263, holding the AO's order erroneous and prejudicial to the revenue as CSR expenditure is not voluntary.
Held
The Tribunal held that the PCIT erred in invoking Section 263 because the issue of CSR expenditure eligibility for Section 80G deduction is debatable. Since the AO took a plausible view after due inquiry, the revision proceedings were not justified.
Key Issues
Whether the PCIT correctly invoked Section 263 to revise an assessment order allowing Section 80G deduction for CSR expenditure, when the issue is debatable and the AO conducted an inquiry.
Sections Cited
263, 80G, 142(1), 37(1), 143(3)
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Income Tax Appellate Tribunal, “A” BENCH, CHENNAI
Before: SHRI GEORGE GEORGE K
O R D E R Per Padmavathy S, AM:
This appeal by the assessee is against the order of the Principle Commissioner of Income Tax, Chennai-3 [in short 'PCIT'] passed under section 263 of the Income Tax Act, 1961 (the Act) dated 26.03.2025 for Assessment Year (AY) 2020-21. The assessee raised the following grounds of appeal:
1. The order of the Commissioner of Income Tax is contrary to law, facts and circumstances of the case.
2. The Commissioner of Income Tax erred in setting aside the assessment order on the ground that the original order passed by the Assessing officer is erroneous and prejudicial to the interest of the revenue.
M/s Super Auto Forge Pvt. Ltd. 3. The Commissioner of Income Tax erred in concluding that the order of the Assessing Officer is erroneous and prejudicial to the interests of the Revenue and hence requires revision u/s 263 of the IT Act, on the premise that the AO did not apply his mind / AO did not cause necessary enquiries, while stating as under: the Assessing Officer did not cause necessary enquiries which should have been done. When the Assessing Officer does not apply his mind to the issue at hand, the order shall be prejudicial to the interests of the Revenue. Also, an incorrect application of law by the AO would make the order of assessment erroneous and prejudicial to the interests of the Revenue.
The Commissioner of Income Tax, although evidently aware of the same, failed to appreciate that the AO had specifically called for details of donations vide notice u/s 142(1) during the course of assessment proceedings and the appellant had furnished response by way of furnishing donation receipts specifically stating that the purpose pose of the donations was "charitable purpose / corporate social responsibility".
The Commissioner of Income Tax failed to appreciate that the AO had clearly applied his mind and arrived at a conclusion that the appellant was entitled to deduction u/s 80G of the IT Act, knowing fully well that the subject donations represented CSR expenditure.
The Commissioner of Income Tax erred in concluding that appellant is not entitled to deduction u/s 80G of the IT Act in respect of expenditure claimed as CSR Expenditure (Corporate Social Responsibility) in terms of the Companies Act.
5. The Commissioner of Income tax erred in concluding that "since CSR expenditure is a mandatory expenditure and donations, to be eligible for deduction u/s 80G of the IT Act should be made voluntarily, CSR expenditure are not eligible for deduction u/s 80G of the IT Act".” 2. The assessee is a company and filed the return of income for AY 2020-21 on 10.02.2021 declaring a total income of Rs. 194,14,08,490/-. The case was selected for scrutiny and the order under section 143(3) dated 19.09.2022 was passed determining the income at Rs. 197,25,31,440/- after making addition on account of education cess and on account of disallowance under section 14A. The PCIT noticed from the records that the assessee has debited a sum of Rs. 1,97,00,982/- on account M/s Super Auto Forge Pvt. Ltd. of CSR Expenditure and the same has been disallowed under section 37 of the Act in the computation. The PCIT further noticed that the assessee has claimed Rs. 95,80,500/- as deduction under section 80G towards the CSR Expenditure disallowed. The PCIT was of the view that the CSR Expenditure are not voluntary and therefore cannot be claimed as a deduction under section 80G. The PCIT held that the AO without proper enquiry and verification has passed the assessment order without examining the claim of the assessee under section 80G of the Act. In this regard the PCIT issued a show-cause notice to the assessee under section 263 of the Act. The assessee made a detailed submission before the PCIT stating that all the relevant details are submitted during the course of assessment and that the AO after examining the details submitted has taken a conscious call to allow the claim of the assessee. On merits, the assessee submitted that the impugned payments towards CSR Expenditure are otherwise eligible for deduction under section 80G by placing reliance on various judicial precedents. The PCIT did not accept the submissions of the assessee and held the order of the AO to be erroneous and prejudicial to the interest of the revenue by holding that “8. I have considered the submissions of the assessee. However, as mentioned in the show-cause notice, the perusal of record shows that on the above issues the Assessing Officer did not cause necessary enquiries which should have been done. When the Assessing Officer does not apply his mind to the issue at hand, the order shall be prejudicial to the interests of the Revenue. Also, an incorrect assumption of facts or incorrect application of law by the AO would make the order of assessment erroneous and prejudicial to the interests of the Revenue.
Therefore, the failure of the Assessing Officer to cause necessary enquiries makes the assessment order dated 19.09.2022 as erroneous and prejudicial to the interests of revenue as per clause (a) and clause (b) of Explanation 2 to Section 263 of the Income-tax Act, 1961 and therefore, the order requires revision under section 263 of the Income-tax Act, 1961.
I have considered the submissions of the assessee. It is seen from the return of income filed by the assessee company has debited an amount of Rs.1,97,00,982/- towards CSR expenditure. This expenditure has not been M/s Super Auto Forge Pvt. Ltd. added back to the total income of the assessee company. The intent of the legislature was never to allow deduction for CSR expenditure, also it could result in subsidizing the expenditure. Furthermore, CSR expenditure is not 'voluntary but mandatory. In view of explanation 2 of provisions of Sec.37(1) of the Act, the assessee is required to disallow the expenditure made on account of CSR and brought to tax. Since the donations which are part of CSR expenditure, was mandatory to be given /spent as per the provisions of Companies Act, this donation is not voluntary and thus not eligible for donation u/s.80G of the Act. Therefore, the claim of deduction u/s.80G of Rs.95,80,500/- on the donation of Rs. 1,66,61,000/-requires to be disallowed and brought to tax.
While completing the assessment, these issues were not property examined by the Assessing Officer. Therefore, the assessment is erroneous as it is prejudicial to be interest of revenue. In view of this, I hereby partially set aside the assessment to the file of the Assessing Officer to examine the issues mentioned above in detail and complete the assessment after affording reasonable opportunity of being heard to the Assessee.”
The ld. AR submitted that the twin conditions for invoking the provisions of section 263 are that the order should be erroneous and prejudicial to the interest of the revenue. The ld. AR further submitted that in assessee's case the AO called on the assessee to furnish the details pertaining to the claim of deduction under section 80G during the course of assessment and that based on the details submitted has taken the conscious call to allow the deduction. In this regard the ld. AR took us through the notice under section 142(1) of the Act (page 13 to 15 of PB) and the response filed by the assessee (page 16 to 22 of PB). The ld. AR also submitted that various judicial pronouncements have held that CSR Expenditures are eligible for deduction under section 80G and therefore on merits also there is no error which is prejudicial to the interest of the revenue in the order of the AO. The ld. AR argued that even otherwise the issue is debatable and therefore do not fall within the ambit of section 263 of the Act. The ld. AR placed reliance on the various decisions of the Co-ordinate Bench in this regard.
We heard the parties and perused the material on record. The PCIT has held the order of the AO to be erroneous and prejudicial to the interest of the revenue for the reason that the AO has not conducted proper enquiry towards deduction claimed under section 80G. The PCIT while holding so, has invoked the provisions of explanation 2 to section 263. It is apposite now to take note of the relevant extract of section 263 and the Explanation (2) to section 263 of the Act, which read as under :-
Revision of orders prejudicial to revenue. 263. (1) The [Principal Chief Commissioner or Chief Commissioner or Principal Commissioner] or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer 89[or the Transfer Pricing Officer, as the case may be,] is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, 90[including,— **** Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer 94[or the Transfer Pricing Officer, as the case may be,] shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal 95[Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner,— (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.
M/s Super Auto Forge Pvt. Ltd.
Thus, from close scrutiny of the provisions of section 263, it is evident that twin conditions are required to be satisfied for exercise of revisional jurisdiction under section 263 of the Act i.e., firstly, the order of the Assessing Officer is erroneous; and secondly, it is prejudicial to the interests of the revenue on account of error in the order of assessment. Explanation 2 provides that when the AO fails to make the enquiry are verification that ought to have been then the order can be held to be erroneous and prejudicial to the interest of the revenue. In the light of the above provisions of the Act, we will now look at the facts in the present case. From the perusal of the details submitted by the assessee during the course of hearing and the order of the AO, it is obvious that the AO has raised specific queries with regard to the deduction claimed under section 80G (page 13 to 15 of paper book). We further notice that the assessee has submitted the relevant details along with the documentary evidences in this regard (page 16 to 22 of paper book). In view of these facts, the ld AR argued that explanation 2 to section 263 should not have been invoked by the PCIT in this case.
Besides lack of enquiry the reason for the PCIT to invoke the provisions of section 263 is that the AO has erroneously allowed the deduction claimed by the assessee under section 80G of the Act. In this regard we notice that the Co-ordinate Bench in various cases have been consistently holding that there is no restriction under the law for the assessee to claim the expenses incurred towards CSR as deduction under section 80G provided the payments made are otherwise eligible for deduction under the said section. The revenue's argument is that the payments made towards CSR expenditure are not voluntary and therefore cannot be regarded as donation by placing reliance on the decision of the Hon'ble Supreme Court. From these discussions it is clear that whether the expenditure disallowed under section 37(1) towards CSR whether can be claimed as a deduction under section 80G is a M/s Super Auto Forge Pvt. Ltd. debatable issue though the issue is reasonably settled at Tribunal level. The Hon'ble Supreme Court in the case of Malabar Industries Co. Ltd. [(2000) 243 ITR 83 (SC)] has laid down the ratio that when the issue is debatable and where there are two views are possible and where the AO has taken one of the plausible views, the revision proceedings cannot be initiated on the ground of the order being erroneous. In our considered view the above said ratio lay down by the Hon'ble Supreme Court is applicable in assessee's case and accordingly we hold that the PCIT is not correct in invoking the provisions of section 263. The order of the PCIT thus is quashed.
In result, appeal of the assessee is allowed.