2020 (11) TMI 700 - AT - Income Tax

Revision u/s 263 by CIT - CSR expenses allowability - HELD THAT - AO had called for and obtained explanation for CSR expenses incurred by the assessee. The explanation given by the assessee before the AO is extracted by it, in its reply to the PCIT u/s 263 - This is not a case where there was no enquiry on this issue by the A.O. It is also not a case of non-application of mind nor in the case where the AO had not examined these particular expenses claimed by the assessee, as alleged in point No. (ii) of the show cause notice by the Pr. CIT. Though the Pr. CIT had made this allegation in his Show Cause Notice, no such finding has been given by the Pr. CIT in his order u/s 263 of the Act. Admittedly, the expenditure in question is audited and is allowable as deduction. The amendment brought about by way of Explanation 2 to section 37 by Finance Act, 2014, was only with effect from 01.04.2015. In the case of Misrilall Mines Pvt. Ltd. 2018 (6) TMI 893 - ITAT KOLKATA and Jindal Power Ltd., Raipur Bench 2016 (7) TMI 203 - ITAT RAIPUR ITAT held that the amendment in question is not retrospective. Expenditure incurred in CSR in accordance with guidelines issued by the Govt. of India is allowable as a deduction for both A.Y. 2013-14 and A.Y. 2014-15. In view of the above discussion, we are of the considered view that there is no error in the order of the Assessing Officer passed u/s 143(3) of the Act in both the assessment year, much less an error, in so far as it is prejudicial to the interest of Revenue. Thus we cancel the orders passed by the Pr. CIT u/s 263 - Decided i favour of assessee. There is no error in the order of the Assessing Officer passed u/s 143(3) of the Act in both the assessment year, much less an error, in so far as it is prejudicial to the interest of Revenue. Thus we cancel the orders passed by the Pr. CIT u/s 263 - Decided in favour of assessee.

Summary

Issues Involved:
1. Allowability of Corporate Social Responsibility (CSR) expenses under Section 37 of the Income Tax Act for the Assessment Years 2013-14 and 2014-15.
2. Validity of the Principal Commissioner of Income Tax’s (Pr. CIT) revision of the assessment orders under Section 263 of the Act.

Issue-wise Detailed Analysis:

1. Allowability of CSR Expenses:
The assessee, a public limited company under the Ministry of Defence, filed its returns for the Assessment Years 2013-14 and 2014-15. The assessments were completed under Section 143(3) of the Act. The Pr. CIT issued show cause notices proposing to revise these assessments under Section 263, alleging the assessment orders were erroneous and prejudicial to the interest of Revenue due to the allowance of CSR expenses amounting to ?300.54 lakh.

The assessee contended that the CSR expenses were incurred for business facilitation in the local areas where it operated, such as vocational training, health welfare programs, and infrastructure improvements in local schools. These expenses were claimed to be necessary for the smooth operation of its business and were thus allowable under Section 37(1) of the Act. The assessee argued that the amendment to Section 37(1) by insertion of Explanation 2, which disallows CSR expenses, was effective from 01.04.2015 and thus not applicable to the Assessment Years in question.

2. Validity of Pr. CIT’s Revision under Section 263:
The Pr. CIT rejected the assessee’s contentions, holding that the assessment orders were erroneous and prejudicial to the interest of Revenue. The Pr. CIT directed the Assessing Officer (AO) to re-examine the nature and reasons for the CSR expenses, asserting that the AO had not made adequate inquiries or verifications.

Upon appeal, the Tribunal referred to precedents, including decisions by the Kolkata 'A' Bench in Hindustan Copper Ltd. vs. CIT and the Raipur Bench in ACIT vs. Jindal Power Limited, which held that Explanation 2 to Section 37(1) is prospective and applicable from Assessment Year 2015-16 onwards. Therefore, CSR expenses incurred before this period were allowable as business expenditures.

The Tribunal noted that the AO had indeed called for and obtained explanations for the CSR expenses during the original assessments. It concluded that the AO had applied his mind and examined the expenses, contrary to the Pr. CIT’s allegations. The Tribunal also emphasized that the CSR expenses were audited and allowable as deductions for the relevant assessment years.

The Tribunal found that the Pr. CIT failed to establish that the assessment orders were erroneous or prejudicial to the interest of Revenue. It held that the AO’s acceptance of the CSR expenses was a possible view, supported by judicial precedents, and thus, the Pr. CIT’s assumption of revision jurisdiction under Section 263 was not sustainable.

Conclusion:
The Tribunal allowed the assessee’s appeals, canceling the Pr. CIT’s orders under Section 263 and restoring the original assessment orders passed under Section 143(3) for both Assessment Years 2013-14 and 2014-15. The Tribunal concluded that there was no error in the AO’s orders, and the CSR expenses were rightly allowed as business expenditures.