CSR Donations Eligible for Section 80G; PCIT Revision Quashed by ITAT Mumbai

2. The brief facts, as culled out from the material placed before us, are that the assessee filed its return of income on 02.12.2020 declaring total income of ₹387,34,87,870. The case was selected for scrutiny and the final assessment was completed on 30.09.2023 under section 143(3) read with section 144C(3), determining the total income at ₹546,98,35,144. The assessed income included, inter alia, a transfer-pricing adjustment of ₹159,58,60,520 and a disallowance of ₹4,86,754 out of the deduction claimed under section 80G.

3. Subsequently, on examination of the assessment record, the learned PCIT observed that the assessee had debited an amount of ₹4,80,77,487 under the head ―CSR Expenses‖ in its profit and loss account. While computing its business income, the assessee had added back the entire CSR expenditure in conformity with Explanation 2 to section 37(1). Against donations aggregating to ₹4,60,14,793 disclosed in the return, the assessee had claimed deduction of ₹2,32,22,006 under section 80G. The Assessing Officer had disallowed an amount of ₹4,86,754 and allowed the balance deduction of ₹2,27,35,252. According to the learned PCIT, the Assessing Officer had examined merely the factual aspects of the donation receipts, without examining the legal admissibility of deduction under section 80G in the light of Explanation 2 to section 37(1), section 135 of the Companies Act, 2013 and CBDT Circular No. 1/2015 dated 21.01.2015. He accordingly issued a show-cause notice under section 263 on 26.02.2026.

4. In response, the assessee submitted that the impugned claim had been duly examined during the original assessment proceedings. It was pointed out that notices under section 142(1) had been issued on 14.10.2022 and 02.08.2023, in response to which the assessee furnished the relevant details vide submission dated 18.08.2023. Thereafter, a specific show-cause notice dated 23.08.2023 was issued, which was responded to by the assessee on 25.08.2023 along with the donation receipts and other supporting documents. It was further submitted that the assessee had already added back the entire CSR expenditure while computing its business income under section 37(1), whereas deduction under section 80G was claimed independently from the gross total income under Chapter VI-A. The institutions to which the donations had been made were duly approved under section 80G and there was no statutory embargo upon claiming deduction merely because the donations also constituted CSR expenditure. It was thus contended that the Assessing Officer, after making due enquiry and verification, had adopted a legally sustainable view, which could not be revised merely because the learned PCIT entertained a different opinion.

5. The learned PCIT, however, rejected the explanation of the assessee. According to him, CSR expenditure was incurred pursuant to the statutory obligation cast under section 135 of the Companies Act, 2013 and, therefore, lacked the essential attribute of voluntariness ordinarily associated with a donation. He further held that Explanation 2 to section 37(1) reflected a clear legislative intention not to grant any tax benefit in respect of CSR expenditure and that allowance of deduction under section 80G would indirectly defeat such legislative intent and result in subsidisation of expenditure which the assessee was statutorily obliged to incur. He accordingly concluded that the assessment order had been passed without the requisite enquiry and verification and was, therefore, erroneous insofar as it was prejudicial to the interests of the Revenue. The assessment order was set aside with a direction to the Assessing Officer to complete the assessment de novo after conducting the necessary verification and enquiries.

6. Before us, the learned counsel for the assessee submitted that the very foundation upon which the learned PCIT had assumed revisionary jurisdiction was legally untenable. He drew our attention to the notices issued and the replies filed during the original assessment proceedings to demonstrate that the issue had been specifically examined by the Assessing Officer. He further submitted that the controversy now stands squarely covered by a series of decisions of the coordinate Benches, including ICICI Securities Ltd. v. PCIT, [2026] 182 taxmann.com 233 (Mum.–Trib.); Colgate Palmolive (India) Ltd. v. PCIT, [2025] 179 taxmann.com 149 (Mum.–Trib.); Hemani Industries Ltd. v. PCIT, [2025] 177 taxmann.com 673 (Mum.–Trib.); Inter Gold (India) Pvt. Ltd. v. PCIT, ITA No. 4400/Mum/2023; Rishabh Instruments Ltd. v. PCIT, [2025] 179 taxmann.com 476 (Mum.–Trib.); and ACIT v. Sikka Ports and Terminals Ltd., [2025] 173 taxmann.com 366 (Mum.–Trib.). The learned Departmental Representative, on the other hand, strongly relied upon the reasoning and findings recorded by the learned PCIT and submitted that the Assessing Officer had failed to examine the legal interplay between Explanation 2 to section 37(1) and section 80G.

7. We have heard the rival submissions, perused the impugned order and the material placed on record, and examined the legal position applicable to the controversy. At the outset, it is an admitted fact that the assessee had added back the entire CSR expenditure of ₹4,80,77,487 while computing its business income. Thus, the assessee had neither claimed nor been allowed deduction of the said expenditure under section 37(1). Deduction of ₹2,32,22,006 was claimed separately under section 80G from the gross total income under Chapter VI-A, out of which the Assessing Officer disallowed ₹4,86,754 and allowed the balance amount of ₹2,27,35,252. Therefore, there is no question of the assessee having secured a double deduction in respect of the same expenditure.

8. Explanation 2 to section 37(1) provides that any expenditure incurred by an assessee on activities relating to CSR referred to in section 135 of the Companies Act, 2013 shall not be deemed to be expenditure incurred for the purposes of business or profession. The restriction created by this Explanation operates within the field of computation of business income under section 37(1). Section 80G, on the other hand, is contained in Chapter VI- A and grants deduction, subject to the conditions prescribed therein, from the gross total income. These provisions operate at distinct stages of computation and in separate statutory fields. Once the assessee has added back the CSR expenditure while computing its business income, the eligibility of a payment under section 80G has to be examined independently on the touchstone of the conditions contained in that provision. An expenditure which is inadmissible under the residuary provision of section 37(1) does not, for that reason alone, become incapable of consideration under another specific provision of the Act.

9. This construction also stands reinforced by the clarification issued by the Ministry of Corporate Affairs in FAQ No. 6 forming part of General Circular No. 01/2016 dated 12.01.2016. The Ministry clarified that no specific tax exemption had been extended to CSR expenditure per se and that such expenditure does not form part of business expenditure. At the same time, it expressly recognised that spending on several activities falling within Schedule VII— such as contributions to the Prime Minister’s Relief Fund, scientific research, rural development, skill development and agricultural extension projects—may already enjoy tax benefits under different provisions of the Income-tax Act. Thus, the clarification does not postulate any blanket prohibition against allowance of CSR-related payments under every provision of the Act; rather, it recognises that although CSR expenditure is not allowable under section 37(1), its admissibility under another specific provision must be independently examined by applying the conditions governing that provision. CBDT Circular No. 1/2015 dated 21.01.2015, relied upon by the learned PCIT, also does not carry the matter any further in favour of the Revenue, since it explains the restriction introduced by Explanation 2 to section 37(1), but does not enact or suggest a general prohibition against deduction under Chapter VI-A.

10. The statutory architecture of section 80G itself places the matter beyond ambiguity. In the clauses relating to contributions made to the Swachh Bharat Kosh and Clean Ganga Fund, the legislature has expressly excluded contributions made in pursuance of CSR obligations under section 135(5) of the Companies Act. If every donation forming part of CSR expenditure were inherently ineligible for deduction under section 80G, there was scarcely any occasion for Parliament to enact these specific exclusions. Their presence unmistakably indicates that the disqualification is particular and not universal. A general prohibition covering all CSR-related donations cannot be introduced through interpretative implication when Parliament has chosen to enact express restrictions only in specified cases.

11. We are also unable to accept the reasoning that a payment necessarily loses the character of a donation merely because the assessee is statutorily required to incur CSR expenditure of a prescribed quantum. Section 135 of the Companies Act mandates the quantum of CSR spending, but does not ordinarily compel an assessee to make a contribution to one identified institution approved under section 80G. Within the framework of section 135 and Schedule VII, the assessee retains the choice of the activity, the mode of implementation and the recipient institution. Further, section 80G does not prescribe any general condition that a donation must be voluntary in the restricted sense understood by the learned PCIT. Where a payment is made without any material return or quid pro quo, bears the character of a donation and otherwise satisfies the conditions stipulated in section 80G, deduction cannot be denied by importing an additional disqualification which the legislature has not chosen to enact.

12. The aforesaid principles are no longer res integra and this precise controversy has been considered by us in ICICI Securities Ltd. v. PCIT (supra), wherein also the assessee had disallowed the entire CSR expenditure while computing its business income and thereafter claimed deduction under section 80G in respect of donations made to approved institutions. The learned PCIT therein had invoked section 263 on the identical premise that CSR expenditure was mandatory, lacked voluntariness, and that the Assessing Officer had failed to examine the interplay between Explanation 2 to section 37(1) and section 80G. After examining the statutory provisions and the earlier decisions of the coordinate Benches, the Tribunal held that once the CSR expenditure had been disallowed under section 37(1), there was no embargo upon claiming deduction under section 80G, subject to fulfilment of the conditions prescribed therein. It was further held that deduction under section 80G flows from the gross total income under Chapter VI-A and stands on an independent statutory footing from the computation of business income under sections 28 to 44DB. Consequently, the view adopted by the Assessing Officer was held to be a plausible and legally sustainable view which could not be displaced in exercise of revisionary jurisdiction.

13. The same principle has consistently been followed in Inter Gold (India) Pvt. Ltd. (supra), Colgate Palmolive (India) Ltd. (supra), Hemani Industries Ltd. (supra), Rishabh Instruments Ltd. (supra) and Sikka Ports and Terminals Ltd. (supra). The consistent line of decisions recognises that Explanation 2 to section 37(1) does not constitute a plenary prohibition against allowance of CSR expenditure under every other provision of the Act. The prohibition is confined to section 37(1), and if a payment independently satisfies the conditions of section 80G or any other specific provision, its admissibility has to be determined under that provision. No material distinguishing feature has been brought before us which could warrant departure from the aforesaid judicial position.

14. Even on the jurisdictional aspect, the impugned order cannot be sustained. The material placed before us shows that during the original assessment proceedings the Assessing Officer had issued notices under section 142(1), followed by a specific show-cause notice dated 23.08.2023, and the assessee had furnished its replies along with the donation receipts and supporting particulars. The Assessing Officer did not accept the claim mechanically in its entirety; rather, he disallowed an amount of ₹4,86,754 and allowed only the balance deduction. This itself indicates examination and application of mind to the claim. The fact that the assessment order does not contain an elaborate discussion on the interaction between section 37(1) and section 80G cannot, by itself, lead to the conclusion that there was no enquiry. An assessment order is not rendered erroneous merely because its discussion is succinct or because the revisional authority would have preferred a more elaborate exposition of the reasons.

15. The distinction between lack of enquiry and perceived inadequacy of enquiry cannot be obliterated. Where no enquiry whatsoever has been made on an issue which demonstrably required examination, the power under section 263 may undoubtedly be attracted, subject to fulfilment of the statutory conditions. However, where the Assessing Officer has called for the relevant information, examined the claim and adopted a view which is permissible in law, the learned PCIT cannot invoke section 263 merely because, in his estimation, the enquiry should have been conducted in some other manner or carried further. Explanation 2 to section 263 does not authorise a revisionary review of every assessment in which the enquiry is not conducted in the precise manner contemplated by the revisional authority. The learned PCIT must still identify a demonstrable error in the assessment order and establish the resultant prejudice to the Revenue.

16. In the present case, the learned PCIT has not pointed out any specific defect in the donation receipts, approval particulars of the donee institutions, mode of payment or computation of deduction under section 80G, nor is any such defect discernible from the impugned order. He has also not shown that the donations in question fell within any of the specific statutory exclusions applicable to CSR contributions. His conclusion rests essentially upon the general proposition that no deduction under section 80G can be allowed in respect of any payment forming part of CSR expenditure. As discussed above, this proposition is not borne out from the statutory provisions and stands directly contradicted by the consistent decisions of the coordinate Benches. The learned PCIT has thus sought to substitute his understanding for the view taken by the Assessing Officer, which was not merely a possible view but a view squarely supported by judicial precedent. Such substitution falls beyond the legitimate province of section 263.

17. There is also an inherent incongruity in the impugned order. Having categorically held that CSR expenditure is legally ineligible for deduction under section 80G, the learned PCIT has nevertheless set aside the assessment for a de novo examination by the Assessing Officer. Once the legal issue has already been prejudged by the revisional authority, the proposed enquiry before the Assessing Officer becomes largely an empty formality. Conversely, if factual verification was genuinely required, the learned PCIT could not have predetermined the legal and factual outcome without identifying any specific defect in the material already examined by the Assessing Officer. Section 263 cannot be employed to set aside a completed assessment for undertaking a roving or exploratory exercise in the hope that some basis for disallowance may subsequently emerge.

18. Accordingly, in the facts and circumstances of the case, we hold that the assessment order dated 30.09.2023 cannot be regarded as erroneous insofar as it is prejudicial to the interests of the Revenue merely because the learned PCIT entertained a contrary opinion regarding the allowability of deduction under section 80G. The twin conditions precedent for the assumption of jurisdiction under section 263 are not satisfied. The impugned order dated 20.03.2026 is, therefore, quashed and the assessment order passed by the Assessing Officer is restored.

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