CSR expenses, if given by way of donation to a trust eligible for 80G deduction, can be claimed under Section 80G. Restriction under Explanation 2 Section 37 does not apply to claim under section 80G

FACTS
During the previous year relevant to the assessment year under consideration, assessee company in its computation of total income disallowed a sum of Rs. 2.80 lakh being CSR expenses debited to Profit & Loss Account but claimed the same under Section 80G. While assessing assessee’s total income under Section 143(3) of the Act, the Assessing Officer (AO) did not disallow the claim so made under Section 80G.

The PCIT issued a show-cause notice to the assessee interalia observing that claim of Rs. 1.40 lakh has been made under Section 80G regarding CSR expenses of Rs. 2.80 lakh. CSR expenses are the assessee’s responsibility as per the Companies Act, 2013, and if it is spent through other trusts, then also, as per Rule 4(2) of CSR Rules, it is spent on behalf of the assessee. Therefore, the assessee cannot give a donation of CSR expenses even if it is given to a trust eligible for an 80G deduction. Hence, the same is not allowable. Failure of AO to consider CSR expense as disallowable as rendered the assessment order erroneous in so far as it is prejudicial to the interest of the revenue.

In response, the assessee made its submission (the submission made by the assessee to the PCIT on this issue is not reproduced in the order of the tribunal). However, the PCIT rejected the submission by holding that since both CSR expense and 80G donations are two different modes of ensuring fund for public welfare, treating the same expense under two different heads would defeat the very purpose of it. In the budget memorandum as well, the legislative intent was to ensure that companies with certain strong financials make the expenditure towards this purpose and by allowing deduction, the Government would be subsidizing one-third of it by way of revenue foregone thereon and hence the same was required to be disallowed in the assessment. Failure of the AO to examine the CSR expense as disallowable expense and to examine disallowance of deduction under Section 80G rendered the order erroneous and prejudicial to the interest of the revenue. He set aside the order of the AO with a direction to the AO to examine the above aspects with regard to allowability of deduction claimed under Section 80G as per law and frame a fresh assessment after affording an opportunity to the assessee of being heard.

Aggrieved, the assessee preferred an appeal to the Tribunal where relying on the decisions of the Bangalore Bench of the Tribunal in the case of FNF India Pvt. Ltd. vs. ACIT in ITA No. 1565/Bang./2019 dated 5th January, 2021 and Goldman Sachs Services Pvt. Ltd. vs. JCIT in ITA(TP) No. 2355/Bang./2019 it supported the action of the AO by contending that Explanation 2 under Section 37 is restricted to Section 37 only and nothing more and since the Explanation has been inserted below Section 37, it can be invoked only when expenditure is claimed as deduction as being for the purpose of business under Section 37 of the Act. Since the assessee has not claimed the said expenditure under Section 37 but has claimed it under Section 80G and the Act nowhere states that expenditure disallowed in terms of Explanation 2 to Section
37 cannot be allowed by way of deduction in terms of Section 80G.

HELD
The Tribunal noted that the Bangalore bench of the Tribunal in FNF India Pvt. Ltd. vs. ACIT (supra) while deciding the issue of deduction under Section 80G relating to donations which is part of CSR has remitted the issue to the AO to verify the additions necessary to claim deduction under Section 80G of the Act with a clear direction to the AO. Since in the present case the AO himself allowed the deduction under Section 80G, as claimed by the assessee, and the issue is debatable issue and the AO has taken one of the possible view, the Tribunal held that PCIT cannot invoke the provisions of Section 263 of the Act in order to bring on record his possible view.