ITAT Allows 80G CSR Donations and Deletes Section 14A Disallowance

NATCO Pharma Ltd. Vs ACIT (ITAT Hyderabad)

Hyderabad ITAT: CSR Donations Eligible for Section 80G Deduction; Section 14A Cannot Apply to Equity Investments Yielding Taxable Dividends

In NATCO Pharma Ltd. v. ACIT, ITA No. 640/Hyd/2026 (AY 2022-23), order dated 21.08.2026, the Hyderabad ITAT allowed the assessee’s appeal on two significant issues. The AO had, inter alia, disallowed ₹5.86 crore under Section 80G relating to donations forming part of CSR expenditure and ₹62.55 lakh under Section 14A.

On the CSR donations, the Tribunal held that a donation otherwise satisfying Section 80G cannot be denied deduction merely because it was made in discharge of the company’s CSR obligation. The Legislature has expressly excluded CSR contributions to the Swachh Bharat Kosh and Clean Ganga Fund in the specified clauses of Section 80G; no similar restriction has been imposed on other eligible donations. Therefore, an additional prohibition cannot be read into Section 80G. Following Deloitte Tax Services India Pvt. Ltd. and Penna Cement Industries Ltd., the ITAT directed deletion of the ₹5.86 crore disallowance.

On Section 14A, the Tribunal held that its fundamental requirement is expenditure relating to income which does not form part of total income. After the Finance Act, 2020, dividend income from domestic companies is taxable from AY 2021-22. Hence, where the investments considered by the AO are equity shares capable of yielding taxable dividend income, Section 14A cannot be invoked. Importantly, the Explanation inserted in Section 14A does not convert taxable income into exempt income; it only addresses cases where income is inherently exempt but happens not to arise during the particular year. Accordingly, the ₹62,55,526 disallowance was deleted.

Thus, the assessee’s appeal was allowed, providing important rulings both on Section 80G deduction for eligible CSR donations and the post-Finance Act 2020 scope of Section 14A for equity investments yielding taxable dividends.

List of Cases Discussed / Relied Upon

• Optum Global Solutions (India) Private Limited Vs. DCIT, ITA Nos. 145 & 482/Hyd/2022 — ITAT Hyderabad considered deduction under section 80G for donations forming part of CSR expenditure and held the issue to be one requiring verification in the relevant circumstances.
• JMS Mining (P.) Ltd. Vs. PCIT, [2021] 190 ITD 702 (Kolkata – Trib.) — considered the allowability of section 80G deduction for eligible CSR donations and held that the revisionary order could not be sustained on the issue.
• Deloitte Tax Services India Private Limited Vs. DCIT, ITA Nos. 341 & 342/Hyd/2023, order dated 19.06.2024 — relied upon for the proposition that there is no blanket prohibition against section 80G deduction for otherwise eligible CSR donations, subject to the statutory exclusions referred to in the supplied material.
• ACIT Vs. Penna Cement Industries Limited, ITA Nos. 1083 & 1084/Hyd/2024, order dated 21.01.2026 — Coordinate Bench decision relied upon for holding that eligible donations forming part of CSR expenditure cannot be denied section 80G deduction merely because of their CSR character.
• Agilent Technologies (International) P. Ltd. Vs. ACIT/NFAC, Delhi, (2024) 205 ITD 551 (Delhi) — cited by the Departmental Representative in the section 80G controversy in support of the Revenue’s contention regarding CSR expenditure.
• Ahluwalia Contracts (India) Limited Vs. ACIT, ITA No. 7474/Del/2025, A.Y. 2023-24, order dated 30.03.2026 — relied upon on the section 14A issue for the proposition that dividend income taxable in the hands of the shareholder is not exempt income for purposes of section 14A.
• Cheminvest Limited Vs. CIT, ITA No. 749/2014, Delhi High Court, order dated 02.09.2015 — discussed in the material concerning the earlier position on section 14A where no exempt income was earned.
• CIT Vs. Holcim India (P.) Ltd., (2014) 272 CTR 282 (Delhi) — referred to in the section 14A discussion concerning the absence of disallowance where no exempt income was earned.
• PCIT Vs. Era Infrastructure (India) Ltd., ITA No. 204 of 2022, Delhi High Court, order dated 20.07.2022 — referred to in the material concerning the amendment to section 14A by the Finance Act, 2022 and its applicability from A.Y. 2022-23.

FULL TEXT OF THE ORDER OF ITAT HYDERABAD

This appeal is filed by NATCO PHARMA Ltd (“the assessee”), feeling aggrieved by the final assessment order passed by the Assessing Officer dated 24.12.2025 passed under section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (“the Act”) for the A.Y. 2022-23.

2. The assessee has raised the following grounds of appeal:

General Ground:

1. The order passed by the Learned Assessing Officer, Assessment Unit, Income-tax Department (“Ld. FAO”) pursuant to the directions issued by the Honorable Dispute Resolution Panel (‘the Hon’ble DRP”), is bad in law and liable to be set aside.

Grounds in relation to disallowance u/s 80G of the Act:

2. The Ld. FAO/Hon’ble DRP have erred in law and on facts, in denying the deduction of INR 5,86,00,000/-u/a 80G of the Act, pertaining to the donations made under Corporate Social Responsibility (‘CSR’) scheme, by specifying that the said deduction cannot be claimed on CSR donations, without appreciating that no such restriction is envisaged by the Income-tax Act, 1961 (‘the Act”)

3. The FAO/Hon’ble DRP have erred in law, in failing to appreciate that restrictions on deductibility of CSR donations u/s 80G of the Act is confined only to certain specified CSR donations which does not apply in the Instant case.

4. The Ld. FAO/Hon’ble DRP have erred in law, by deviating from the explicit provisions of section 80G of the Act and incorporating artificial restrictions on the deductibility of CSR donations, without appreciating that such restrictions are not envisaged by the Act

Grounds in relation to disallowance u/s 14A of the Act:

5. The Ld. FAO/ Hon’ble DRP have erred in law and on facts, in disallowing an amount of INR 62,55,526/-u/s 14A of the Act, by specifying that the investments of the Company are capable of yielding exempt income, without appreciating that the provisions u/s 14A of the Act has no applicability in the instant case, as income from all of our investments would be taxable under the provisions of the Act.

6. The Ld. AO/ Hon’ble DRP have erred in law, in failing to recognize the legislative amendment brought in by the Finance Act, 2020 wherein dividend from equity investments was brought into the purview of taxation with effect from 01 April 2020 and therefore, the provisions of Section 14A of the Act are not applicable to investments yielding dividend income.

7. The Ld. FAO has erred in facts in specifying that the Appellant has failed to establish that its investments were made out of own funds and not borrowed funds, without appreciating that the financial statements submitted during Assessment proceedings clearly specify that our borrowings could be utilized only for meeting working capital requirements and not for making investments.

Prayer:

8. The Appellant prays that direction be given to grant all reliefs arising from the grounds of appeal mentioned
supra and all consequential relief thereto.

9. Each of the grounds raised by the Appellant herein are independent and without prejudice to each other.

10. The Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this appeal.

3. The brief facts of the case are that the assessee is a company engaged in the business of pharmaceuticals comprising research and development, manufacture and sale of bulk drugs and finished dosage formulations. The assessee filed its revised return of income for the Assessment Year 2022­23 on 29.12.2022 declaring total income at Rs. Nil. The case of the assessee was selected for complete scrutiny and, accordingly, notice under section 143(2) of the Income-tax Act, 1961 (“the Act”) dated 02.06.2023 was issued by the Assessing Officer. Since the assessee had entered into international transactions with its Associated Enterprises (“AEs”), the case of the assessee was referred to the Learned Transfer Pricing Officer (“Ld. TPO”) for determination of the arm’s length price. The Ld. TPO, vide order passed under section 92CA(3) of the Act dated 28.01.2025, proposed a total transfer pricing adjustment of Rs. 6,09,28,523/-. After considering the order of the Ld. TPO, the Assessing Officer passed the draft assessment order under section 144C(1) of the Act dated 24.03.2025 proposing an addition of Rs. 6,09,28,523/- on account of transfer pricing adjustment. The Assessing Officer further proposed disallowances of Rs. 5,86,00,000/- in respect of deduction claimed under section 80G of the Act towards donations made out of CSR expenditure, Rs. 62,55,526/-under section 14A of the Act and Rs. 32,500/- on account of excess depreciation claimed by the assessee.

4. Aggrieved by the draft assessment order, the assessee filed objections before the Learned Dispute Resolution Panel (“Ld. DRP”). The Ld. DRP issued directions under section 144C(5) of the Act dated 16.12.2025. Pursuant thereto, the Assessing Officer passed the final assessment order under section 143(3) read with sections 144C(13) and 144B of the Act dated 24.12.2025, making additions/disallowances of Rs. 6,09,28,523/- on account of transfer pricing adjustment, Rs. 5,86,00,000/- on account of disallowance of deduction under section 80G of the Act, Rs. 62,55,526/-under section 14A of the Act and Rs. 32,500 on account of excess depreciation claimed, thereby determining the total income of the assessee at Rs. 12,58,16,549/-.

5. Aggrieved by the final assessment order, the assessee is in appeal before the Tribunal. At the outset, the Learned Authorized Representative (“Ld. AR”) submitted that, out of the grounds raised by the assessee, only two issues survive for adjudication, namely, disallowance of deduction of Rs. 5,86,00,000/- under section 80G of the Act in respect of donations forming part of CSR expenditure and disallowance of Rs. 62,55,526/- under section 14A of the Act.

6. Ground Nos. 2 to 4 raised by the assessee relate to the disallowance of deduction of Rs. 5,86,00,000/- claimed under section 80G of the Act. In this regard, the Ld. AR invited our attention to para no. 2 at page no. 77 of the draft assessment order and submitted that the Assessing Officer had disallowed the deduction on the ground that the donations made by the assessee formed part of the CSR expenditure incurred pursuant to the mandatory requirement under section 135 of the Companies Act, 2013 and, therefore, according to the Assessing Officer, such expenditure was not incurred voluntarily and was not eligible for deduction under section 80G of the Act. The Ld. AR further submitted that the identical issue has already been decided by the Hyderabad Bench of the Tribunal in the cases of Deloitte Tax Services India Private Limited Vs. DCIT in ITA Nos. 341 & 342/Hyd/2023, order dated 19.06.2024 and ACIT Vs. Penna Cement Industries Limited in ITA Nos. 1083 & 1084/Hyd/2024, order dated 21.01.2026. The Ld. AR submitted that the Tribunal has held that section 80G(2)(a)(iiihk) and section 80G(2)(a)(iiihl) of the Act specifically exclude from deduction the sums contributed towards Swachh Bharat Kosh and Clean Ganga Fund respectively where such sums are spent by the assessee in pursuance of CSR under section 135(5) of the Companies Act, 2013. It was submitted that when the Legislature has specifically provided such restriction in respect of the aforesaid two funds, but has not provided any similar restriction in respect of other donations otherwise eligible under section 80G of the Act, such restriction cannot be extended to other eligible donations merely because they form part of CSR expenditure. Accordingly, the Ld. AR prayed that the disallowance of Rs. 5,86,00,000/- made by the Assessing Officer be deleted.

7. Per contra, the Learned Departmental Representative (“Ld. DR”) relied upon the orders of the Assessing Officer and the directions issued by the Ld. DRP and submitted that the expenditure incurred by the assessee towards CSR was pursuant to the statutory obligation imposed under section 135 of the Companies Act, 2013 and, therefore, the Assessing Officer was justified in denying the deduction claimed by the assessee under section 80G of the Act.

8. We have heard the rival submissions and perused the material available on record including the case laws relied upon. The issue before us is whether a donation otherwise eligible for deduction under section 80G of the Act can be denied such deduction merely for the reason that the donation also forms part of the CSR expenditure incurred by the assessee pursuant to section 135 of the Companies Act, 2013. We find that the identical issue has already been considered by the Coordinate Bench of this Tribunal in the case of ACIT Vs. Penna Cement Industries Limited (Supra), wherein, in para nos. 14 to 18 of the order, this Tribunal has held as under:

14. We shall now take by the grievance of the revenue that the CIT(A) has erred in law and facts of the case in vacating the disallowance of the claim of the assessee company for deduction under section 80G of the Act of Rs. 1,88,97,644/- in respect of donations made as part of CSR expenditure.

15. The Ld. CIT-DR submitted that the AO had disallowed the aforesaid claim of the assessee company on the ground that CSR expenditure is mandatory in nature and allowing deduction of the same ITA No.1083 & 1084/Hyd/2024 ACIT VS. Penna Cement Industries Ltd under section 80G would result in indirect subsidisation by the Government. The Ld. CIT-DR submitted that section 37(1) of the Act provided that, deduction for any expenditure shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. It was submitted by him that as the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditure cannot be allowed as a deduction under the provisions of Section 37 of the Act. The Ld. CIT-DR had further drawn our attention to the observations of the AO recorded in the assessment order. It was submitted by him that, as observed by the AO by referring to the intention of the legislature as could be gathered from the “memorandum” to the Finance Act, 2014, the CSR expenditure, being an application of income, could not be allowed as a deduction for computing the taxable income of the assessee company. Elaborating further on his contention, the Ld. CIT-DR submitted that the CSR expenditure is not voluntary, but mandatory in nature. The Ld. CIT-DR submitted that in case CSR expenditure, which, as per the Companies Act, 2013, is mandatory and not voluntary, is allowed as a deduction under section 80G of the Act, then the same will contradict the very nature of the said expenditure. Coming to the claim of the assessee company for deduction of CSR expenditure under Section 80G of the Act, the Ld. CIT-DR submitted that, as there was no specific exemption provided for the type of donations made by the assessee company in respect of its CSR expenses, therefore, its claim for deduction under section 80G had rightly been disallowed by the AO. The Ld. CIT-DR to support his contention, had relied upon the order of ITAT, Delhi, Bench “I” in Agilent Technologies (International) P. Ltd. Vs. ACIT/NFAC, Delhi (2024) 205 ITD 551 (Delhi).

16. Per Contra, the Ld. AR submitted that there was no blanket prohibition under the Act for claiming deduction under section 80G of the CSR related donations, and the said prohibition was restricted only to the extent of the sums paid by the assessee company as donations towards “Swach Bharat Kosh” and “Clean Ganga Fund” set up by the Central Government in pursuance of Corporate Social Responsibility (CSR) under sub-section (5) of section 135 of the Companies Act, 2013 (18 of 2013) as provided under section 80G(2)(iiihk) and section 80G(2)(iiihl), respectively. Elaborating further on his contention, the Ld. AR submitted that as the claim of the assessee company for deduction under section 80G was not in respect of any CSR related donations made towards either of the aforesaid two funds, i.e., “Swach Bharat Kosh” or “Clean Ganga Fund”, therefore, its claim for deduction was in order and thus, had rightly been allowed by the CIT(A). The Ld. AR in support of his aforesaid contention had relied on the consolidated order of the ITAT, Hyderabad Benches “B”, Hyderabad in Deloitte Tax Services India Private Limited Vs. DCIT-Circle 8(1), Hyderabad, ITA No.1063 & 1084/Hyd/2023, dated 19/06/2024 and Deloitte Touche Assurance & Enterprise Risk Services India Private Limited Vs. DCIT, Circle 8(1), Hyderabad, ITA No. 342/Hyd/2023, dated 19/06/2024.

17. We have given thoughtful consideration to the aforesaid issue, and find that the CIT(Appi had deleted the disallowance of the claim of the assessee company for deduction under section of the Act of Rs. 1.88 crore (approx) by following the decision of the ITAT, Hyderabad in OF Global Solutions (India) Private Limited Vs. DCIT Circle 5(1), Hyderabad, ITA te 482/Hyd/2o22, dated 16/08/2023, wherein it has been held that there is no blanket prohib: under the Income-tax Act against allowing deduction under section 8oG in respect of CSR-rel donations, except in cases specifically barred under section 8oG(2)(iiihk) and section 800(2)(i For the sake of clarity, we deem it apposite to cull out the observations recorded by the Tribun the case of Optum Global Solutions (India) Private Limited Vs DCIT(supra), as under:

“10. We have gone through the record in the light of the submissions made on either side. Insofar as the payments made to the PM Relief Fund and to the institutions enumerated by the learned AR are concerned, it is a matter of verification. Learned Assessing Officer disallowed such a deduction not on the ground of non-payments, but because the assessee claimed such spending incompliance with their legal obligation under section 135 of the Companies Act. According to the learned Assessing Officer, by showing such an amount as spending incompliance with section 135 of the Companies Act, the assessee had the benefit of compliance with such a provision and, therefore, the matter ends there insofar as such payments are concerned. Except the business expenditure covered by section 3o to ITA No.1083 & 1o84/Hyd/2024 ACIT VS. Penna Cement Industries Ltd 36 of the Act as stipulated under section 37(1) of the Act, no other expenditure is allowable and this position is made amply clear by insertion of Explanation-2 to section 37(1) of the Act. It says that any expenditure incurred towards the activities relating to CSR, shall not be deemed to be an expenditure incurred for the purpose of business.

11. It is, therefore, clear that the question that is relevant to be answered on this issue is whether the donations given for compliance with the provisions under section 135 of the Companies Act, to the institutions mentioned in section 8oG(2) of the Act are qualified for deduction under section 8oG of the Act also.

12. Explanation-2 to section 37(1) of the Act says that any expenditure relatable to the discharge of CSR, is not a business expenditure and cannot be allowed as such. On this aspect, there is no contradiction of the fact submitted by the learned AR that in compliance with this requirement, the assessee does not claim any deduction of such amount spent as CSR under any of the provisions between 3o and 36 of the Act, and suo moto disallowed the same by adding it back to the P&L account. It is only thereafter the business income of the assessee is computed in accordance with the principles laid down for computation of the profits and gains of business or profession in sections 28 to 44DB of the Act. By this, the assessee seeks compliance with Explanation-2 of section 37 of the Act and, therefore, the Revenue shall not have any grievance. Whether or not the assessee suo moto disallowed the spend towards the CSR while computing the business income is a verifiable fact.

13. After computing the business income, while computing the total income of the assessee, the assessee is invoking the benefit under chapter-VIA by claiming deduction of the sums under section $oG of the Act. According to the Revenue, when once such sum went to satisfy the requirement of section 135 of the Companies Act, the benefit gets exhausted and such an amount is no more available for the purpose of claiming deduction under section $0G of the Act.

14. Coming to the Income-tax Act, 1961, there is no express provision to support the contention of Revenue. On the other hand, section 8oG(2)(iiihk) and (iiihl) of the Act expressly provide that such sums donated for Swatch Bharath Kosh and Clean Ganga Fund shall be the amounts other than the sums spent by the assessee in pursuance of CSR, meaning thereby the donations made towards Swatch Bharath Kosh and Clean Gangs Fund spent as a part of CSR are not qualified for deduction under section 8oG of the Act. Out of so many entries under section 800(2) of the Act, only donations in respect of two entries are restricted if such payments were towards the discharge of the CSR. The Legislature could have put a similar embargo in respect of the other entries also, but such a restriction is conspicuously absent for other entries. The irresistible conclusion that ITA Nolo83 & 1084/Hyd/2024 ACIT VS. Penns Cement Industries Ltd would flow from it is that it is not the legislative intention to bar the payments covered by section 800(2) of the Act which were made pursuant to the CSR, and other than covered by section 800(2)(iiihk) and (iiihl) of the Act. As stated above, clue can be had from the restrictions by way of section 8oG(2)(iiihk) and (iiihl) of the Act.

15. This aspect has been dealt with by successive Co-ordinate Benches in the cases relied upon by the assessee. While elaborately discussing this issue in the case of JMS Mining (P.) Ltd. (supra), the Kolkata Bench of the Tribunal discussed this issue in the following manner:

“22. From a bare reading of the section 8oG of the Act we note that deduction under this section has to be made in accordance with and subject to the provisions of this section i.e. section 800 of the Act. As per this section i.e. section $oG of the Act, an amount equal to fifty percent (so%) of the aggregate of the sums specified in sub-section 2 [refer sub-clause (iv) of clause (a) of Sub-section 2 of section 800 of the Act read with section 8o0 (1) (ii)] which allows the donation given to any other Fund or any institution to which this section applies and if it satisfies the requirement of sub-section (5) of section $0G of the Act, then 50% of the donation is allowable expenditure [refer section 8oG (1) (ii)]even if the assessee has included the expenditure as CSR Expenditure because there is no prohibition or restriction placed by the Parliament on such a donation even if shown as CSR expenditure. The reason for saying so is that in section 800 of the Act certain restrictions in respect of deduction in respect of two (2) donations are expressly seen in this section.

So the Parliament has expressed its intention clearly by bringing in restriction in respect of expenditure classified by an assessee company while claiming deduction u/s. 8oG of the Act i.e. CSR expenditure related to Swachh Bharat Kosh and Clean Ganga Fund. So if an assessee makes some donation to these projects and include/classify it as CSR expenditure while claiming deduction u/s. 8oG of the Act then it will be allowed only the amount that is other than the sums spent by the assessee in pursuance of CSR u/s. 135 of the Companies Act. In other words, if an assessee company spends only the mandatory expenditure of 2% of net profit for CSR activity, which includes the amount of donation to Swach Bharat Kosh & Clean Ganga Fund (iiihk) and (iiihi) of clause (a) of sub-section (2) of section 8oG of the Act, then deduction u/s. 8oG of the Act is not allowable, which can be illustrated by giving certain examples (infra). However, in a case scenario, wherein the assessee expends the mandatory expenditure and gives donation to these two projects i.e. over and above the mandatory CSR expenditure u/s. 135 of Companies Act, that sum donated to Swach Bharat Kosh & Clean Ganga Fund will be eligible for ITA No.1083 & 1o84/Hyd/2024 ACIT VS. Penna Cement Industries Ltd i00% deduction u/s. 8oG of the Act [refer section 8o0 (1)(i) and subject to section 8oG (4)]. However, such a restriction in respect of expenditure made by an assessee to any other fund or institution as referred to in sub clause (iv) of clause (a) of sub- section 2 of section 8oG of the Act had not been placed by the Legislature. And if the Parliament desired, it could have been made such kind of restriction or any restriction like in the case of donation to Swach Bharat Kosh & Clean Ganga Fund. So the assertion of Ld. PCIT that AO could not have allowed deduction u/s 8oG of the Act to an assessee on the CSR expenditure/donation to an institution u/s 8oG(2)(a)(iv) which is enjoying certificate 8oG(5)(vi) of the Act, is erroneous and therefore cannot be accepted. For this, we rely on the interpretation maxim “Expressio Unius Esl Exclusio Alterius”

which is a Latin phrase that means “express mention of one thing excludes all others. This is one of the rules used in interpretation of Statutes. The phrase indicates that items not on the list are assumed not to be covered by the Statute. When something is mentioned expressly in a Statute, it leads to the presumption that the things not mentioned are excluded. This is an aid to the construction of Statutes. Applying the legal maxim ‘expressio uniusest exclusio alterius’, it can be safely inferred that when the Legislature in particular has provided for only the above referred two specific exceptions in section 8o0, then it is the implied intent of the Legislature to permit deduction u/s 8oG in respect of CSR contributions made to funds/organizations referred to in all other sub-clauses of section 8oG [other than (iiihk) and (iiihi)] of the Act. The above analysis made by us, can be cumulatively illustrated by the following examples for ease of understanding purpose only and should not be cited for making claim which should be made subject to the facts and law involved in each case and also subject to section 800(4) of the Act:

Example.–A company has reported eligible net profit u/s 135 of Companies Act, 2013 at Rs. 100 crores. The minimum CSR contribution of a% under section 135(5) of the Act works out to be Rs. 2 crores.

Situation 1 The company has been spent the required minimum CSR contribution of Rs. 2 crores towards construction of roads & schools in the vicinity of the backward area where the factory is located.

Tax Treatment: The entire CSR expenditure of Rs. 2 crores is to be disallowed and added back in terms of Explanation 2 to section 37(1) of the Act.

ITA No.ro83 & 1084/Hyd/2024 ACIT VS. Penna Cement Industries Ltd Situation 2 : The company has contributed Rs. 3 crores to Swach Bharat Kosh.

Tax Treatment: The entire CSR expenditure of Rs. 3 crores is to be disallowed and added back in terms of Explanation 2 to section 37(1) of the Act. In terms of section 135(5) of the Act read with section 80G(iiihk) only the excess sum paid amounting to Rs. 1 crones [ 3 crores – 2% of 100 crores] can be availed as deduction u/s 8oG of the Act.

Situation 3 : The company has contributed Its. 1 crore to Swach Bharat Kosh and Rs. 1 crore to any other charitable trust registered u/s 800(5) of the Act.

Tax Treatment: The entire CSR expenditure of Rs. 2 crores is to be disallowed and added back in terms of Explanation 2 to section 37(1) of the Act. In terms of section 135(5) of the Act read with section 8oG(iiihk) the donation of Its. 1 crores made to Swach Bharat Kosh is not eligible for deduction u/s 8oG of the Act. The company can claim deduction of fifty percent of the donation of Its. 1 crores paid to any other registered charitable trust u/s 80G(2)(iv) read with section 80G(1)(ii) of the Act.

Situation 4 : The company has contributed Rs. 1 crore to Prime Minister’s National Relief Fund and Rs. 1 crore to any other charitable trust registered u/s 800(5) of the Act.

Tax Treatment: The entire CSR expenditure of its. 2 crores is to be disallowed and added back in terms of Explanation 2 to section 37(1) of the Act.

The company can claim deduction for hundred percent of the donation of Rs. I crores paid to Prime Minister’s National Relief Fund u/s 8oG(2)(iiia) read with section $oG(1)(i) of the Act.

The company claim deduction to the extent of fifty percent of the donation of Its. i crores paid to any other registered charitable trust u/s 8oG(2)(iv) read with section 8o0(1)(ii) of the Act.

23. As discussed supra, we concur with the contention of the assessee that since Parliament intended certain restrictions to only CSR expenditure in respect of two donations included by an assessee as CSR expenditure i.e. [Swachh Bharat Kosh and

9. On perusal of the above, we find that the Coordinate Bench, after considering the provisions of section 80G of the Act, has held that once the conditions prescribed under section 80G of the Act are satisfied, deduction cannot be denied merely because the donations also form part of the CSR expenditure of the assessee. We further find that the Coordinate Bench has taken note of the specific language employed by the Legislature in section 80G(2)(a)(iiihk) and section 80G(2)(a)(iiihl) of the Act. Under these provisions, contributions to Swachh Bharat Kosh and Clean Ganga Fund respectively are eligible for deduction subject to the specific exclusion of sums spent by an assessee in pursuance of CSR under section 135(5) of the Companies Act, 2013. Thus, wherever the Legislature intended to exclude a donation made pursuant to CSR obligations from the benefit of deduction under section 80G of the Act, it has specifically provided for such exclusion. The Legislature, in its wisdom, while expressly excluding the aforesaid CSR-related contributions from the ambit of deduction under section 80G of the Act, has not extended any similar exclusion to other donations otherwise eligible for deduction under section 80G of the Act. Therefore, in the absence of any such statutory restriction, an additional condition cannot be read into section 80G of the Act so as to deny deduction merely on the ground that the eligible donation was made by the assessee in discharge of its CSR obligation. The specific exclusion made by the Legislature in respect of the aforesaid two funds, while leaving other eligible donations unaffected, also supports the conclusion that there is no general prohibition under section 80G of the Act against deduction of donations forming part of CSR expenditure. We also find that the Coordinate Bench in the case of Deloitte Tax Services India Private Limited Vs. DCIT (Supra) has taken a similar view. Thus, the issue is squarely covered in favour of the assessee by the decisions of the Coordinate Benches.

10. In the present case, the Revenue has not brought before us any material to demonstrate that the donations in question do not otherwise satisfy the conditions prescribed under section 80G of the Act or that any of the donations fall within the specific exclusions provided in section 80G(2)(a)(iiihk) or section 80G(2)(a)(iiihl) of the Act. The deduction has been denied essentially on the ground that the donations were made as part of the assessee’s CSR expenditure. In view of the aforesaid decisions of the Coordinate Benches, such a ground by itself cannot justify denial of deduction under section 80G of the Act. Accordingly, respectfully following the decisions of the Coordinate Benches in the cases of Deloitte Tax Services India Private Limited Vs. DCIT (supra) and ACIT Vs. Penna Cement Industries Limited (supra), we hold that the assessee is entitled to deduction under section 80G of the Act in respect of the eligible donations forming part of its CSR expenditure. We, therefore, direct the Assessing Officer to delete the disallowance of Rs. 5,86,00,000/- made on this account. Accordingly, Ground Nos. 2 to 4 raised by the assessee are allowed.

11. Ground Nos. 5 to 7 raised by the assessee relate to the disallowance of Rs. 62,55,526/- made by the Assessing Officer under section 14A of the Act. In this regard, the Ld. AR invited our attention to the relevant portion of the draft assessment order at page nos. 81 to 83 and submitted that the Assessing Officer had computed the impugned disallowance with reference to the investments made by the assessee in equity shares by relying upon the Explanation inserted in section 14A of the Act with effect from 01.04.2022. The Ld. AR submitted that the reliance placed by the Assessing Officer on the said Explanation is misplaced. Inviting our attention to the provisions of the Explanation to section 14A, the Ld. AR submitted that the said Explanation only clarifies that the provisions of section 14A would apply where expenditure has been incurred in relation to income which does not form part of the total income under the Act, notwithstanding that such exempt income has not accrued or arisen or has not been received during the relevant previous year. It was, therefore, submitted that the fundamental requirement for invoking section 14A continues to be that the expenditure must have been incurred in relation to income which does not form part of the total income under the Act. The Ld. AR further invited our attention to section 10(34) of the Act and submitted that, pursuant to the amendments made by the Finance Act, 2020, dividend income arising from investment in equity shares ceased to be exempt with effect from 01.04.2020 and is taxable in the hands of the shareholder from Assessment Year 2021­22 onwards. Therefore, where the investments made by the assessee in equity shares are capable of yielding only taxable dividend income, the provisions of section 14A of the Act cannot be invoked in relation to such investments. It was submitted that the Explanation to section 14A of the Act does not alter this position, since the Explanation cannot bring within the ambit of section 14A of the Act expenditure incurred in relation to income which itself forms part of the total income. In support of his contention, the Ld. AR relied upon the decision of the Delhi Bench of the Tribunal in the case of Ahluwalia Contracts (India) Limited Vs. ACIT in ITA No. 7474/Del/2025 for Assessment Year 2023-24, order dated 30.03.2026, wherein the Tribunal held that, with effect from Assessment Year 2021-22, dividend income is not in the nature of exempt income and, therefore, no disallowance under section 14A of the Act can be made in relation to investments yielding such taxable dividend income. The Ld. AR further invited our attention to the order passed by the Ld. PCIT under section 263 of the Act in the assessee’s own case for Assessment Year 2021-22 and, more particularly, page no. 9 thereof, placed at page no. 30 of the paper book, and submitted that the Ld. PCIT himself had held that the provisions of section 14A of the Act were not applicable in the case of the assessee. Accordingly, the Ld. AR prayed that the disallowance of Rs. 62,55,526/- made by the Assessing Officer under section 14A of the Act be deleted.

12. Per contra, the Ld. DR relied upon the order of the Assessing Officer and the directions issued by the Ld. DRP and submitted that the Assessing Officer had rightly invoked the provisions of section 14A of the Act and computed the disallowance in accordance with law.

13. We have heard the rival submissions and perused the material available on record including the case laws relied upon. We have gone through relevant portion of the draft order of the Assessing Officer at page nos.81 to 83, which is to the following effect:

Further, the explanation to the section 14A introduced w.e.f. 01.04.2022 which clearly states that the provisions of the section 14A shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming of the total income.

On facts of the case it is noted that investments in subsidiary has been made by the assessee and the same has been excluded from computation of the exempt income u/s 14 A in the table provided below. However with regard to the other investment in equities (listed or unlisted) no scripwise data of dividend received has been provided by the assessee therefore rebate of only investment in subsidiary has has been given, rest other investments being treated as yielding income has been taken for calculation of disallowance u/s 14A. It may be noted that interest bearing funds have not been taken in calculation. Based on the above discussion, having noted that the assessee has not provided the monthly average figures of investment as required by the rule, the onus cast upon the assessee has not been discharged by it, to provide the monthly figures of opening and closing figures of investments, therefore a the disallowance u/s 14A r.w. Rule 8D of the Income tax Rules, 1962 isrequired to be made &computed as under:

The proposed calculation of the expenditure attributable to such investments as per figures on records and as per provisions of 8D.

Thus, an amount of Rs.62,55,526/- is proposed to be disallowed.

The proposed calculation of the expenditure attributable to such investments as per figures on records and as per provisions of 8D.Thus, an amount of Rs.62,55,526/- is to be disallowed in the case u/s 14A of the IT Act

(Addition of Rs.62,55,526/-)

14. On perusal of the above, we find that the Assessing Officer has made the impugned disallowance under section 14A of the Act with reference to the investments made by the assessee in equity shares and has relied upon the Explanation inserted in section 14A of the Act with effect from 01.04.2022. We have also gone through the provisions of section 14A of the Act, which is to the following effect:

“Expenditure incurred in relation to income not includible in total income.

14A. (1) ⁷⁷[Notwithstanding anything to the contrary contained in this Act, for the purposes of] computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.

(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed⁷⁸, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.

(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act :

Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.

[Explanation.—For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income.]”

15. On perusal of the above, we find that the essential requirement for applicability of the said provision is that expenditure should have been incurred in relation to income which does not form part of the total income under the Act. The Explanation inserted in section 14A provides, inter alia, that the provisions of the said section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and expenditure has been incurred during the said previous year in relation to such exempt income. Thus, the Explanation addresses a situation where the relevant income is otherwise of a nature which does not form part of the total income, but no such income has actually accrued, arisen or been received during the relevant previous year. In our considered view, the said Explanation does not dispense with the basic requirement that the income to which the expenditure relates must be of a nature which does not form part of the total income under the Act. It is not in dispute that the investments considered by the Assessing Officer for the purpose of computing the disallowance are investments in equity shares. Consequent to the amendments made by the Finance Act, 2020, dividend income from domestic companies is taxable in the hands of the shareholder with effect from Assessment Year 2021-22. Therefore, dividend income arising from such equity investments is no longer income which does not form part of the total income under the Act. Once the income capable of arising from the investments under consideration is taxable and forms part of the total income, the foundational requirement for invoking section 14A in relation to such income is absent. We have also gone through para nos. 4 & 5 at page no. 9 of the order passed by the Ld. PCIT under section 263 of the Act in the assessee’s own case for Assessment Year 2021­22, placed at page no. 30 of the paper book, which is to the following effect:

4. The assessment order and the submissions of the assessee have been perused. With regard to the disallowance u/s. 14A of the Act, the assessee submitted that the Company had investments in equity shares of its subsidiaries, equity shares of Indian Companies, Compulsorily Convertible Preference Shares, Perpetual Bonds, Non-convertible Debentures and Commercial papers of different companies. The aforesaid investments generate income either in the form of Interest or dividend. While interest was always been a taxable income, dividend was specifically brought into the purview of taxation with effect from 01 April 2020, by the Finance Act, 2020. Therefore, the company’s investment’s portfolio will not yield exempt income and thus, fall outside the purview of section 14A of the Act. The contention of the assessee is found to be in order as both the interest and dividend are not exempt incomes and accordingly, provisions of Section 14A do not apply in this case.

5. In view of the above factual matrix of the case and the submissions of the assessee duly supported by documentary evidence brought out in the instant proceedings u/s.263 of the Act, I do not find that on this aspect the assessment order for AY 2021-22 passed by the Assessing Officer u/s.143(3) r.w.s. 144C(3) read with section 144B of the Act dated 01.02.2024 is either erroneous nor prejudicial to the interest of revenue and not required for revision u/s.263 of the Act. Hence, the proceedings-initiated u/s.263 of the Act, for the above issue is hereby dropped.

16. On a perusal of the above, we find that, the Ld. PCIT has taken the view that the provisions of section 14A of the Act are not applicable in the case of the assessee. Though the said finding pertains to the immediately preceding assessment year, the same supports the contention of the assessee regarding the nature of the investments and applicability of section 14A of the Act thereto. We have further gone through para nos. 5 and 5.1 of the order of the Delhi Bench of the Tribunal in the case of Ahluwalia Contracts (India) Limited Vs. ACIT (supra), which is to the following effect:

“5. We have heard both the parties and perused the material available on record. The Ld. CIT(A) confirmed the disallowance made by the AO by observing that however, after the amendment to Section 14A by the Finance Act, 2022, effective from AY 2022-23, disallowance under Section 14A read with Rule 8D is applicable even if no exempt income is earned in the current year. The Ld. CIT(A) further observed that this Explanation clarifies, for the removal of doubts, that the provisions of Section 14A shall apply even in cases where no exempt income has accrued, arisen, or been received during the previous year, but expenditure has been incurred in relation to such income. The relevant extracts of the order of the Ld. CIT(A) are reproduced as under:

“8.1 The appellant has primarily submitted that there is no exempt income so sec. 14 A is not applicable. The appellant has also placed reliance on several judgements of Hon’ble Courts in which it was decided that no disallowance u/s 14A shall be made in case no exempt income has been earned by the tax payer in that particular year. The ratio of the decision of the jurisdictional Delhi High Court in the case of Cheminvest Limited v. CIT (2015) ΙΤΑ 749/2014 dated 02.09.2015 is applicable in the case of the appellant. In that case, question before Hon’ble Delhi High court was whether disallowance under section 14A. of the Act can be made in a year in which no exempt income has been earned or received by the assessee. Hon’ble Delhi High Court after relying on its own judgment in Holcim India (P) limited held that no exempt income was earned by the assessee in the relevant assessment year therefore there will be no disallowance under section 14A. Hon’ble Delhi High Court in the case of PCIT v/s Era Infrastructure (India) Ltd. dated 20.07.2022 has held that the amendment in Section 14A brought by Finance Act 2022 would be applicable w.e.f., 01.04.2022 (i.e. from AY 2022-23).

8.2 However, after the amendment to Section 14A by the Finance Act, 2022, effective from AY 2022-23, disallowance under Section 14A read with Rule 8D is applicable even if no exempt income is earned in the current year. This Explanation clarifies, for the removal of doubts, that the provisions of Section 14A shall apply even in cases where no exempt income has accrued, arisen, or been received during the previous year, but expenditure has been incurred in relation to such income. The intent of this amendment, as outlined in the Memorandum to the Finance Bill, 2022, is to address situations where taxpayers hold investments capable of generating exempt income, but no such income is earned in a particular year. The amendment ensures that expenditure incurred on maintaining such investments is not deductible, preventing the erosion of the tax base. Though the appellant has demonstrated through submissions that no exempt income was generated in the current year, however, it cannot be ruled out entirely. It is also noteworthy that while dividends are generally taxable post-Finance Act, 2020, the presence of deductions like Section 80P effectively renders certain income non-taxable, warranting application of Section 14A.

8.3 All case laws relied upon by the appellant pertain to earlier years, and after the insertion of the Explanation, there is no jurisprudence available supporting the appellant’s position for AY 2023-24 onwards. Accordingly, following the AO’s order and the amended provisions, the disallowance of Rs.6,28,000/- is confirmed. Ground Nos. 1 to 4 are dismissed.”

(emphasis supplied by us)

5.1 The above findings of the Ld. CIT(A) have been considered very carefully but not found to be acceptable. The Ld. CIT(A) held that disallowance u/s 14A of the Act r.w. Rule 8D of the IT Rules 1962 has to be made even if no exempt income is earned in the current year but in arriving at the findings, the Ld. CIT(A) did not appreciate the underlying principle that disallowance u/s 14A of the Act r.w. Rule 8D of the I.T. Rules, 1962 will be permissible only if the nature of such income would be exempt and not taxable. The fundamental condition for invoking Section 14A is that the expenditure sought to be disallowed must be incurred in relation to income which does not form part of the total income under the Act. In other words, the applicability of Section 14A is contingent upon the existence of exempt income. Pursuant to the amendment to Section 10(34) by the Finance Act, 2020, effective from AY 2021-22, dividend income is taxable in the hands of the recipient and hence dividend income is no longer exempt in the hands of the shareholder. Thus, in the present case, the assessee even though did not earn dividend income, yet even if it was earned, it would not have been in the nature of exempt income. Therefore, the very foundation for invoking Section 14A is absent in the present case. In view of the above discussion, the submission of the assessee that no disallowance can be made u/s 14A of the Act is acceptable. Thus, the disallowance of Rs. 6,28,000/- made by the AO and confirmed by the Ld. CIT(A) is not sustainable and the same is deleted.”

17. On perusal of the above, we find that the Tribunal has considered an identical issue and held that, with effect from Assessment Year 2021-22, dividend income is not in the nature of exempt income and, therefore, no disallowance under section 14A of the Act can be made in respect of expenditure relatable to investments yielding such taxable dividend income. We find that the ratio of the aforesaid decision squarely applies to the facts of the present case. In view of the above discussion, we are of the considered opinion that where the investments considered by the Assessing Officer are in equity shares and the dividend income arising therefrom is taxable in the hands of the assessee, the provisions of section 14A of the Act cannot be invoked merely by relying upon the Explanation inserted therein. The said Explanation does not convert taxable income into exempt income nor does it extend the operation of section 14A of the Act to expenditure incurred in relation to income which forms part of the total income under the Act. Accordingly, we hold that the Assessing Officer was not justified in making the disallowance of Rs. 62,55,526/- under section 14A of the Act. We, therefore, direct the Assessing Officer to delete the said disallowance. Accordingly, Ground Nos. 5 to 7 raised by the assessee are allowed.

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

Order pronounced in the Open Court on 21st August, 2026.