CSR expenses incurred to make donations to Trusts eligible for deduction

This ruling clarifies whether Corporate Social Responsibility (CSR) expenses donated to Trusts can be claimed as a tax deduction. The court found that the Assessing Officer's (AO) allowance of such deductions was not erroneous. The Commissioner's attempt to revise this decision under Section 263 of the Income Tax Act was deemed invalid, as the AO had properly considered the appellant's explanations and relevant case law.

In JMS Mining (P.) Ltd. v. Principal Commissioner of Income-tax, Kolkata-2 [IT APPEAL NO. 146 (KOL.) OF 2021 dated July 22, 2021], the current appeal has been filed against the orderdated March 30, 2021 ("the Impugned order") passed by Ld. Principal Commissioner of Income-tax ("the Respondent") under Section 263 of Income Tax Act, 1961 ("the IT Act"). It is challenged on the ground of the invocation of jurisdiction by the Respondent without satisfying the essential condition mentioned in Section 263 ibid which provides that the Assessing Officer's ("the AO") order has to be considered aserroneous and prejudicial to the interest of the revenue.

JMS Mining (P.) Ltd ("the Appellant") claimed deduction on Income Tax Assessment under Section 80G of the IT Act which provides for claiming of deduction to certain funds, charitable institutions etc. The Appellant donated a certain sum of amount to Shree Charity Trust and a Music Academy Trust as contribution towards Corporate Social Responsibility ("CSR") activities. The same was allowed by the AO. Further, it was challenged by the Respondent by invoking revision jurisdiction under Section 263 ibid on the ground that the action of AO to allow deduction of CSR expenses was erroneous as it could not be allowed as per express prohibition under Explanation 2 to Section 37(1) of the IT Act. Explanation 2 of Section 37 of the IT Act provides that expenditure of the activities relating to CSR shall not be deemed to expenditure of business or profession.

The Respondent contended that the AO passed the Impugned order without making enquiries or verification which should have been made therefore, clause (a) of Explanation 2 of Section 263(1) of the IT Act is attracted in this case. The section provides power to the Commissioner to call for or examine record of any proceeding if he considers the order passed by AO to be erroneous.

The Hon'ble Supreme Court on discussing that whether the AO's order was erroneous relied on the case of Malabar Industries Ltd. v. CIT [CIVIL APPEAL NO. 3646 of 1993 dated FEBRUARY  10, 2000]wherein it was held that in order to invoke revisional jurisdiction under Section 263 of the IT Act, the phrase "prejudicial to the interest of the revenue" has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence to an order of AO cannot be treated as prejudicial to the interest of the revenue.

Noted that the AO after enquiring and receiving the reply from the Appellant explaining as to how the Appellant claimed deduction of CSR expenses along with reliance on case laws, it disentitles the contention of the Respondent that the AO did not verify or enquire making the same factually incorrect. Therefore, the assertion by the Respondent that clause (a) of Explanation 2 of Section 263 of IT Act is erroneous.

Further, noted that the Appellant satisfied the conditions under Section 80G of the IT Act, thus, the action of AO allowing the claim is plausible. The Respondent on the other hand has not been able to make out a case on the issue raised. Hence, usurpation of jurisdiction by the Respondent under Section 263 ibid is bad in law and thereby needs to be quashed.