Testing Assets Not a Business Benefit: ITAT Deletes Section 28(iv) Addition

Section 263 Revision Quashed: ITAT Restores Assessment Order on Multi-Issue Dispute

I. Club Expenses: Business Networking vs. Personal Use

The PCIT alleged that club membership fees (₹40.23 lakhs) were personal in nature and allowed without proper enquiry.

The Ruling: The Tribunal held that corporate memberships for employees are essential for business networking. Since the invoices were produced and the nexus with business was established, it does not partake the character of personal expenditure.
Conclusion: AO’s view was in line with settled law; Section 263 revision was unjustified.

II. ESOP Expenditure: Notional vs. Real Business Cost

The PCIT argued that ESOP charges (₹3.90 crores) were “notional” and required fresh verification.

The Ruling: Following the landmark Biocon Ltd. decision (Karnataka HC), the Tribunal reaffirmed that the difference between the fair market value and the grant price is a legitimate employee compensation cost.
Conclusion: The expenditure is deductible under Section 37(1) as it facilitates employee retention and is mandated by accounting standards (Ind AS 102).

III. CSR & Section 80G: The Interplay of Deductions

The revenue contended that CSR expenses are mandatory and lack the “voluntariness” required for a Section 80G donation.

The Ruling: The Tribunal clarified that while CSR spend is disallowed as a business expense under Section 37(1) (per Explanation 2), there is no statutory bar on claiming a deduction under Section 80G for the same payment, provided the donee is an approved institution.
Conclusion: Once the amount is added back to business income, it can be claimed as a donation from the Gross Total Income.

IV. Stock Exchange “Penalties”: Compensatory vs. Punitive

Charges paid to NSE/BSE (₹64.64 lakhs) for margin shortfalls or procedural lapses were challenged under Explanation 1 to Section 37(1).

The Ruling: Penalties for “offences prohibited by law” are not deductible. However, stock exchange bye-laws are contractual/regulatory. These charges (for client code modification, short delivery, etc.) are compensatory and operational in nature, not punitive statutory fines.
Conclusion: These are allowable business expenses and do not fall under the “prohibited by law” mischief.

V. Interest Capitalization: Nexus with CWIP

The PCIT sought to capitalize interest (₹26.45 lakhs) on the assumption it related to Capital Work-in-Progress (CWIP).

The Ruling: Revision cannot be based on mere suspicion. The assessee proved that borrowings were short-term commercial papers for working capital, not for asset acquisition.
Conclusion: Without a direct nexus between the loan and the CWIP, the proviso to Section 36(1)(iii) cannot be invoked.

IN THE ITAT MUMBAI BENCH ‘C’

ICICI Securities Ltd.

Principal Commissioner of Income-tax^*

Amit Shukla, Judicial Member
and SMT RENU JAUHRI, Accountant Member

IT Appeal No. 3766 (Mum) of 2025
[Assessment year 2020-21]

JANUARY 6, 2026

Riken Shah for the Appellant. Ms. Kavita Kaushik, Sr.DR for the Respondent.

ORDER

Amit Shukla, Judicial Member.- The present appeal has been preferred by the assessee against the order dated 28.03.2025 passed by the learned Principal Commissioner of Income Tax, Mumbai-4, in exercise of revisionary jurisdiction under section 263 of the Incometax Act, 1961, for the assessment year 2020-21.

2. Through the grounds of appeal, the assessee has, inter alia, challenged:

(i)

the very assumption of jurisdiction under section 263 of the Act as being bad in law;

(ii)

the revision in respect of deduction allowed for club membership expenses amounting to Rs. 40,23,516/- under section 37(1);

(iii)

the revision relating to deduction allowed for Employee Stock Option Plan (“ESOP”) expenditure amounting to Rs. 3,89,69,483/- under section 37(1);

(iv)

the revision of deduction under section 80G amounting to Rs. 7,22,00,000/- in respect of donations forming part of Corporate Social Responsibility (“CSR”) expenditure;

(v)

the revision pertaining to deduction allowed for penalties paid to the stock exchange amounting to Rs. 64,64,367/-; and

(vi)

the revision relating to deduction of interest expenditure amounting to Rs. 26,45,160/- under section 36(1)(iii) of the Act.

3. The material facts, as borne out from the record, are that the assessee-company filed its return of income on 13.02.2021 declaring a total income of Rs. 777,93,11,090/- for the assessment year under consideration. Subsequently, the assessee revised its return on 29.05.2021, reducing the total income to Rs. 568,10,45,800/-. The case was selected for scrutiny, and the assessment was completed by the Assessing Officer under section 143(3) read with section 144B of the Act on 24.09.2022, determining the total income at Rs. 777,93,11,090/-.

4. It is apparent from the record that certain audit objections were raised in respect of the assessment so completed. Pursuant thereto, an audit memo along with a proposal from the Assessing Officer was forwarded to the learned Principal Commissioner, recommending initiation of proceedings under section 263 of the Act on the following issues:

(a)

Allowability of club expenses amounting to Rs. 40,23,516/-;

(b)

Allowability of ESOP expenditure amounting to Rs. 12,65,00,000/-;

(c)

Allowability of deduction under section 80G amounting to Rs. 7,22,00,000/-;

(d)

Allowability of penalties paid to the stock exchange amounting to Rs. 64,64,367/-; and

(e)

Allowability of interest expenditure relatable to capital work-in-progress amounting to Rs. 26,45,160/-.

5. Based on the aforesaid proposal of the Assessing Officer, a show-cause notice under section 263 of the Act was issued to the assessee, alleging that the assessment order had been passed without making requisite enquiries or verifications in respect of the above issues and that the expenditures in question were not allowable either under section 37(1) of the Act or, in the case of interest, under section 36(1)(iii). In response, the assessee furnished detailed submissions on each and every issue, which have been reproduced in the impugned order from pages 4 to 33.

5.1. Notwithstanding the detailed explanations and documentary evidence placed on record by the assessee, the learned Principal Commissioner proceeded to set aside the assessment order on the ground that the Assessing Officer had failed to make enquiries which were warranted under the facts and circumstances of the case, thereby rendering the assessment order erroneous insofar as it was prejudicial to the interests of the Revenue. The findings recorded by the learned Principal Commissioner, issue-wise, may be summarised as under:

(1)

The revisionary jurisdiction under section 263 was invoked on the premise that the assessment order dated 24.09.2022 had been framed without carrying out such enquiries and verifications as were required in law. According to the learned Principal Commissioner, the Assessing Officer had mechanically accepted substantial claims without due application of mind, rendering the assessment order erroneous and prejudicial to the interests of the Revenue.

(2)

In respect of club expenses amounting to Rs. 40,23,516/-, it was observed that the Assessing Officer had allowed the expenditure without examining whether the same was incurred wholly and exclusively for the purposes of business. The learned Principal Commissioner noted that the club facilities were availed by senior executives and that mere production of invoices was insufficient to establish a proximate nexus with business exigencies. The absence of enquiry on this aspect was held to vitiate the assessment.

(3)

With regard to ESOP expenditure aggregating to Rs. 12.65 crores, the learned Principal Commissioner observed that while a portion of the expenditure had been suo motu disallowed by the assessee, the balance amount of Rs. 3,89,69,483/- was allowed by the Assessing Officer without examination. It was held that such ESOP expenditure was merely a notional charge representing the difference between the market price and the exercise price of shares and did not result in any real outflow or accrued liability. The failure of the Assessing Officer to examine the factual and legal sustainability of the claim under section 37(1) was treated as a serious lapse.

(4)

In so far as the deduction under section 80G amounting to Rs. 7,22,00,000/- was concerned, the learned Principal Commissioner held that the claim arose out of CSR expenditure incurred in compliance with section 135 of the Companies Act. Such expenditure, being mandatory in nature and lacking voluntariness, was held to be ineligible for deduction under section 80G. It was observed that the Assessing Officer had neither raised any query nor examined the legal interplay between CSR expenditure and section 80G.

(5)

In relation to penalties paid to the stock exchange amounting to Rs. 64,64,367/-, the learned Principal Commissioner observed that the Assessing Officer had failed to examine whether such expenditure was hit by Explanation 1 to section 37(1). According to the learned Principal Commissioner, payments arising out of regulatory defaults or non-compliances required careful scrutiny to ascertain whether they were incurred for an offence or for a purpose prohibited by law.

(6)

With respect to interest expenditure of Rs. 26,45,160/-relatable to capital work-in-progress, it was observed that the Assessing Officer had failed to verify the utilisation of borrowed funds and their nexus with acquisition of assets not yet put to use. Invoking the proviso to section 36(1)(iii), the learned Principal Commissioner held that interest attributable to such assets was liable to be capitalised.

(7)

The contention of the assessee that the assessment order represented a plausible view taken after due enquiry was expressly rejected. The learned Principal Commissioner held that the record clearly demonstrated lack of enquiry and nonapplication of mind on the part of the Assessing Officer.

(8)

Reliance was placed on the decision of the Hon’ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT ITR 83 (SC) to hold that failure to conduct necessary enquiries and incorrect assumption of facts justified invocation of section 263.

(9)

Accordingly, the assessment order dated 24.09.2022 was set aside on the aforesaid issues, with a direction to the Assessing Officer to carry out proper enquiries and pass a fresh order in accordance with law.

(10)

The revisionary order was confined strictly to the issues so identified, leaving the remaining portions of the assessment order undisturbed.

6. Aggrieved by the aforesaid revisionary order, the assessee is in appeal before us.

7. We have heard the rival submissions at length, perused the material placed on record, and carefully examined the impugned order. In substance, the central allegation of the learned Principal Commissioner across all issues is that the Assessing Officer failed to make adequate enquiries, thereby rendering the assessment order erroneous and prejudicial to the interests of the Revenue within the meaning of section 263 of the Act.

8. Before us, the learned counsel for the assessee submitted that each of the issues sought to be revised had been specifically examined by the Assessing Officer during the course of assessment proceedings; that detailed replies along with documentary evidence were furnished; and that the Assessing Officer, after due consideration, had taken a plausible and legally sustainable view. It was further submitted that even during the revisionary proceedings, voluminous submissions were filed, copies of which form part of the paper book placed before us.

Club Expenses

9. From the tax audit report, it is noted that the assessee had incurred an amount of Rs. 40,23,516/- under the head “club expenses”, comprising primarily of club membership fees and subscription charges. According to the learned Principal Commissioner, such expenditure could not be regarded as having been incurred wholly and exclusively for the purposes of business and, therefore, was not allowable under section 37(1) of the Act. It was further alleged that the Assessing Officer had allowed the said expenditure without conducting any meaningful enquiry into the nature and purpose thereof.

10. Before the learned Principal Commissioner, the assessee had categorically submitted that this issue was no longer res integra and stood squarely covered by binding judicial precedents. It was explained that the expenditure had been incurred towards corporate membership of various clubs, obtained in the name of the company, and was intended to facilitate business meetings, professional networking, and business development. It was also emphasised that there was no element of personal expenditure or private benefit accruing to any individual employee.

11. In support of its claim, the assessee placed reliance on a catena of judicial authorities, including the decision of the Hon’ble Supreme Court in CIT v. United Glass Mfg. Co. Ltd. (SC), wherein, after considering several High Court judgments, it was held that club membership fees paid for employees constitute business expenditure allowable under section 37(1) of the Act. Reliance was also placed on the judgment of the Hon’ble Bombay High Court in Otis Elevator Co. (India) Ltd. v. CIT ITR 682 (Bom), wherein it was held that club fees paid with a view to improving business relations and prospects are allowable as business expenditure. Further reliance was placed on the judgment of the Hon’ble Delhi High Court in CIT v. Samtel Color Ltd ITR 425 (Delhi), as well as the judgment of the Hon’ble Gujarat High Court in Pr. CIT v. Bayer Vapi (P.) Ltd (Guj).

12. It was thus contended that the Assessing Officer, having allowed the expenditure in conformity with settled legal principles, could not be said to have committed any error, much less an error prejudicial to the interests of the Revenue. The assessee also pointed out that copies of invoices and supporting documents evidencing the incurrence of expenditure for business purposes had been placed on record.

13. On a careful consideration of the facts and the legal position, it is evident that the expenditure in question relates to corporate club membership obtained for business purposes and does not partake the character of personal expenditure. The allowability of such expenditure is now well-settled by authoritative pronouncements of the Hon’ble Supreme Court as well as the Hon’ble jurisdictional High Court. In view of these binding precedents, the Assessing Officer’s action in allowing the expenditure cannot be regarded as erroneous or unsustainable in law.

14. Therefore, on this issue, the learned Principal Commissioner was not justified in invoking the revisionary jurisdiction under section 263 of the Act. The revision on this count is accordingly set aside.

ESOP Expenses of Rs. 12,65,00,000/-

15. The next issue pertains to the revision of allowance of Employee Stock Option Plan (ESOP) expenditure. The brief facts, as emanating from the record, are that the assessee had formulated ESOP schemes in accordance with the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999, as well as the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014, as amended from time to time. Under these schemes, options were granted to eligible employees of the assessee, each option being convertible into one fully paid-up equity share of Rs.5 each upon exercise.

16. It is also an admitted fact that the parent company of the assessee, namely ICICI Bank Limited, had granted ESOPs to eligible employees of the assessee under its own ESOP scheme. Typically, the exercise period under these schemes extended up to five years from the date of vesting, and the options were non-transferable, vesting in a staggered manner subject to fulfilment of prescribed vesting conditions. The primary object of these schemes was to attract, motivate, retain, and appropriately reward employees for their contribution to the growth and performance of the organisation.

17. Upon exercise of the options, the difference between the fair market value of the shares on the date of exercise and the grant price was taxed in the hands of the employees as a perquisite under section 17(2)(vi) of the Act, in accordance with Rule 3 of the Income-tax Rules, 1962. The assessee duly deducted tax at source under section 192 of the Act on the value of such perquisite.

18. During the relevant previous year, the assessee debited a total ESOP expenditure of Rs. 12,64,77,536/- to its statement of profit and loss, computed in accordance with Indian Accounting Standard (Ind AS) 102 on “Share-based Payment”, following the fair value method. Out of this amount, a sum of Rs. 8,75,08,053/- pertained to ESOPs granted by the parent bank, while the balance amount of Rs. 3,89,69,483/- related to the ESOP scheme of the assessee company itself.

19. While computing the total income, the assessee suo motu disallowed the amount of Rs. 8,75,08,053/- in the computation of income, as reflected in Schedule BP, and claimed deduction under section 37 of the Act in respect of the balance amount of Rs. 3,89,69,483/-. The learned Principal Commissioner, however, proceeded on the premise that the ESOP expenditure represented a merely notional charge without any real outflow or accrued liability and that the Assessing Officer had allowed the claim without examination.

20. The assessee, in response, submitted that the learned Principal Commissioner had completely overlooked the factual matrix, including the partial disallowance already made by the assessee, as well as the settled judicial position recognising ESOP expenditure as an allowable business expenditure. It was contended that the learned Principal Commissioner had mechanically proceeded on the basis of the audit memo and the proposal of the Assessing Officer, without independently applying his mind to the detailed submissions and supporting material placed on record.

21. It was further submitted that the allowability of ESOP expenditure under section 37(1) now stands conclusively settled by the judgment of the Hon’ble Karnataka High Court in CIT, LTU v. Biocon Ltd ITR 151 (Kar), as well as by the judgments of the Hon’ble Delhi High Court in CIT v. Lemon Tree Hotels Ltd. and CIT v. New Delhi Television Ltd., apart from a series of consistent decisions of various coordinate benches of the Tribunal.

22. On a careful appraisal of the facts and the legal position, it is evident that the assessee had incurred ESOP expenditure in the course of its business, in accordance with statutory regulations and accounting standards, and that such expenditure had a direct nexus with employee compensation and retention. The fact that a portion of the expenditure had already been disallowed by the assessee itself further demonstrates due compliance and application of mind.

23. In view of the settled judicial position recognising ESOP expenditure as an allowable business expenditure, the Assessing Officer’s action in allowing the claim cannot be regarded as erroneous or prejudicial to the interests of the Revenue. The learned Principal Commissioner, therefore, exceeded the permissible limits of section 263 in setting aside the assessment on this issue.

Deduction under section 80G amounting to Rs. 7,22,00,000/- (CSR Expenditure)

24. The next issue for consideration relates to the deduction claimed by the assessee under section 80G of the Act amounting to Rs. 7,22,00,000/-, being donations made during the year which also formed part of the Corporate Social Responsibility expenditure under section 135 of the Companies Act, 2013. The learned Principal Commissioner, while invoking revisionary jurisdiction, held that since the expenditure incurred towards CSR was mandatory in nature, it lacked the essential attribute of voluntariness and, therefore, could not qualify as a “donation” eligible for deduction under section 80G of the Act.

25. According to the learned Principal Commissioner, the Assessing Officer had failed to examine the interplay between Explanation 2 to section 37(1) and the provisions of section 80G, and had mechanically allowed the claim without proper verification. On this premise, it was concluded that the assessment order was erroneous and prejudicial to the interests of the Revenue.

26. Before the learned Principal Commissioner, the assessee had categorically submitted that it had already disallowed the entire CSR expenditure while computing business income under section 37(1) of the Act, in compliance with Explanation 2 thereto. It was further submitted that the deduction claimed under section 80G was not from business income, but from the gross total income under Chapter VIA, which operates in a distinct statutory field. The assessee also placed on record donation certificates evidencing that the donations were made to institutions duly approved and notified under section 80G of the Act.

27. The assessee contended that there is no statutory prohibition under section 80G which mandates that a donation must necessarily be voluntary in the sense contended by the Revenue. It was further submitted that wherever the legislature intended to exclude CSR-related donations from the ambit of section 80G, it has done so explicitly, as in clauses (iihk) and (iiihl) of section 80G(2)(a), pertaining to contributions to Swachh Bharat Kosh and Clean Ganga Fund. Admittedly, the assessee’s claim did not fall within these excluded categories.

28. At this juncture, it is relevant to note that this precise controversy namely, the allowability of deduction under section 80G in respect of donations made out of CSR expenditure after disallowance under section 37(1) now stands squarely covered by a series of decisions of coordinate benches of the Tribunal. The issue has been examined in detail and discussed threadbare in those decisions.

29. This issue stands covered by the following decision(s) of the Tribunal, wherein the matter has been discussed threadbare. The relevant observations are as under:-

“5. After giving thoughtful consideration to the material placed on record and the submissions of the learned Departmental Representative, it is evident that the sole controversy centres upon the allowability of deduction under section 80G in respect of donations made out of CSR funds, which the assessee had already disallowed while computing income under section 37. This precise issue has travelled before the Tribunal on several occasions, and the law is now fairly well settled. In particular, the decision in Blue Dart Express Limited has examined the question threadbare and has laid down the legal position in no uncertain terms. The relevant observations read as under:

“9. We have heard both the parties and also perused the relevant material referred to before us. First of all from the perusal of the re-assessment order which is the subject matter of revision u/s.263 by the ld. PCIT, we find that this was one of the ground for reopening and ld. AO has raised specific query as noted above on exactly same issue. The assessee has given its detailed reply and after examining those replies, the ld. AO has allowed the deduction u/s.80G holding that assessee has already disallowed CSR expenses u/s.37(1), and there is no bar for claiming deduction u/s.80G unless the same is not in accordance with the provision of the Section 80G and there is no issue of mutual exclusiveness of the claim found in this regard. Ld. PCIT has not brought on record any law or judicial precedence that such an observation and finding of the ld. AO is incorrect in law. Once the ld. AO has taken a possible view and there is no contrary law, then to take a different view in a revisionary jurisdiction u/s.263, cannot be held that the order of the ld. AO is erroneous and prejudicial to the interest of the Revenue. There is no case of invoking Explanation 2 to Section 263 which ld. PCIT has done, because ld. AO has made his enquiry and verification on the same issue. Ld. PCIT cannot cancel the assessment order to re-examine the same issue without finding any defect in such order that how the claim made u/s.80G is unsustainable in law.

10. On merits also, we find that view of ld. AO is correct in law. Claiming a deduction from computation of business income as provided from sections 28 to 44DB is different from claiming a deduction under chapter VIA of the Act which is allowed from Total Income. As per Explanation 2 to Section 37, CSR expenditure is not allowable as deduction while computing the business income under the provision of Section 28-44DB, whereas deduction u/s.80G is allowed while computing the total income under Chapter VIA. There is no pre-condition that claim for deduction u/s.80G on a donation should be voluntary. It is independent of computation of business income as it is allowed from Gross Total Income. The assessee had disallowed the CSR expenses while computing business income. Further, there is no dispute that the assessee has filed complete details of donation and also filed the certificate u/s.80G which was enclosed before the AO. Section 80G (1) of the Act provides that in computing total income of the assessee, they shall be deducted in accordance with the provision of Section, such sum paid by the assessee in the previous year as a donation. Deduction under Chapter VIA provides deduction from the gross total income which is computed after making necessary allowances / disallowances in accordance with Section 28-44BB of the Act including Explanation to Section 37(1). Thus, Section 37(1) and Section 80G of the Act are independent and the principles governing what is not allowable u/s. 37(1) have been provided in the section itself. Even in section 80G also, what is not allowable has also been provided under the Act. For instance, Section 80G specifically mentions two clauses, viz., section 800(2)(a)(iihk) and (iiihl), i.e., contributions towards ‘Swacha Bharat Kosh’ and ‘Clean Ganga Fund’, where donation in the nature of CSR Expenditure is not allowable as deduction under section 80G of the Act. Therefore, the disallowances for deduction under section 80G vis-a-vis CSR can be restricted to contributions made to these Funds mentioned in Section 800(2)(a)(iiihk) and (iiihl) only. It is an undisputed fact that the assessee has not claimed any deduction against the aforesaid clauses of 80G (2)(a) of the Act and as such entire donation claimed by the assessee is allowable u/s 80G. The Ministry of Corporate Affairs (“MCA”) has issued “FAQs” through General circular no. 01/2016 dated January 12, 2016 (FAQ No. 6) and has clarified on the issue as follows:

“Question No. 6: What tax benefits can be availed under CSR?

Answer: No specific tax exemptions have been extended to CSR expenditure per se. The Finance Act, 2014 also clarifies that expenditure on CSR does not form part of business expenditure. While no specific tax exemptions have been extended to expenditure incurred on CSR, spending on several activities like Prime Minister’s Relief Fund, scientific research, rural development projects, skill development projects, agriculture extension projects etc, which fund place in Schedule VII, already enjoys exemptions under different sections of the Income-tax Act, 1961.”

11. This clarification being issued by the Ministry of Corporate Affairs, Government of India clarifies that donation covered under CSR Expenses which not are eligible for the deduction under section 80G of the Income-tax Act, 1961, but are allowed under different sections. Ergo, there is nothing that if any expenditure is disallowable u/s 37 the same cannot be allowed under other provisions of Act, if the conditions of allowability are satisfied. Thus, allowing the claim of deduction u/s.80G by the ld. AO cannot be held to be unsustainable in law or amounts to erroneous and prejudicial to the interest of the Revenue. Thus order of the Ld. PCIT is reversed on this point.

12. Thus, we hold that ld. PCIT is not correct in law in cancelling the assessment order by the ld. AO on this issue. Accordingly, the order of the ld. PCIT is quashed. Consequently, the appeal of the assessee is allowed.

6. The principles flowing from the aforesaid decision apply on all fours to the present case. The assessee has duly placed on record donation certificates, established that the donees were notified institutions under section 80G, and significantly, it is not even the case of the Revenue that the claim falls within the statutory exclusions carved out in clauses (iihk) and (iiihl) of section 80G(2)(a).

7. The matter has also been examined by a coordinate bench in ACIT v. Sikka Ports and Terminals Ltd. , where the Tribunal, after an exhaustive survey of arguments regarding voluntariness, statutory compulsion, and legislative intent, concluded that CSR contributions to approved institutions under section 80G continue to enjoy deductibility, subject of course to satisfaction of the statutory conditions. The Tribunal eloquently explained:

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The assessee during the year disallowed a sum of Rs.33.85 crores under section 37 towards the CSR Spend in compliance with section 135 of the Companies Act. Since the institutions to which the said amounts are given are registered under section BOG, the assessee claimed 50 per cent ie. Rs.16.93 crores of the same as deduction. The argument of the revenue is that the payment are made to comply with the mandate under the Companies Act, and therefore it cannot be treated as donations which are “voluntary” payments. The further argument of the revenue is that when the statute has denied the direct claim of the CSR spend under section 37, the assessee claiming the deduction indirectly under section 80G is against the intention of the legislature and cannot be allowed. The assessee’s contention is that there is no restriction under section 80G to the effect that the contribution should be voluntary and that the CSR spend is an application of income which is eligible for deduction from the gross total income of the assessee as per the provisions of section 80G.

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The word “donation” has not been defined under the Act. However the Supreme Court in the context of Expenditure Tax Act in the case of Commissioner of Expenditure Tax v. PVG. Raju(1975) 101 ITR 465 (SC) has described the meaning of the word “donation”

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Therefore to examine if CSR spending of the assessee would be a donation it is essential to examine whether the donations given by the assessee to Rellance Foundation and Shyam Kothari Foundation without any material return and without any consideration and whether it was a grant for quid pro quo. It is not the case of the revenue that the assessee has made contributions to these institutions with an Intention get something in return. The only contention of the revenue is that the contributions are made as part of a mandate and not voluntary. However, the Supreme Court in the above case has laid down the basic principle that a payment made without any material return and without any consideration and not for quid pro quo is a donation. Therefore, the payment made whether voluntarily or as part of a mandate does not negate the intention of the contribution made.

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Now coming to the intention of legislature while amending the provisions of section 37 whereby the CSR spend are not allowed to be claimed as a deduction under the said section. Finance (No.2) Act, 2014 brought in the amendment to section 37 by inserting Explanation 2 to the said section with effect from 1-4-2015.

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The “Explanatory Notes to the provisions of Finance (No.2) Act, 2014” issued by the Central Board of Direct Taxes vide its Circular No.01/2015 dated 21-1-2015 explaining the aforesaid amendment, clarifies that the objective of CSR is to share burden of the Government in providing social services by companies having net worth/turnover/profit above a threshold and that if such expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure. However, it is pertinent to note that though, the expenditure Incurred towards CSRs is not an expenditure incurred for the purpose of business, if the spend is of the nature described in sections 30 college or other institution to be used for scientific research etc., which are approved under section 35 n For example if the contribution is made to a scientific research association, or to a university or to s part of CSR spending then deduction can be allowed subject to the fulfilment of conditions prescribed under section 35. This explanatory note though selfcontradictory Le, denying deduction under section 31 but allowing the assessee to claim deduction under sections 30 to 36, also makes it clear that there is no bar regarding the admissibility of CSR expenditure under any other provision of the Act, except under section 37(1). In other words, the intention of the legislature is not to restrict the right of the assessee to claim deduction towards the CSR spend if the payment is otherwise allowable under a specific provision of the Act. Further wherever the intention is to restrict the claim of deduction under any other provisions of the Act the same is explicitly provided for to that effect by the legislature. This view is supported by the Explanatory Memorandum to Finance Bill 2015 which brought in the specific restriction for claiming deduction under section 80G towards the CSR spend towards donation to Swachh Bharat Kosh and Clean BOG is against the intention of the legislature which restricts the same to be claimed as a deduction under Ganga Fund. Therefore, the contention that the CSR spend being claimed as a deduction under section section 37 cannot be appreciated.

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The next issue is whether the impugned payments are otherwise eligible for deduction under section 80G It has already been established that the payments made by the assessee are donations and therefore if the other conditions for the deduction under section 80G are fulfilled then there should not be any restriction for the assessee to claim the deduction. Before holding so the contention of the revenue that the payments made towards CSR spend are monitored and controlled by the assessee and are not voluntary is addressed section 135 of Companies Act 2013, there are many prescribed modes and activities under Schedule VII In this regard it is relevant to note that though there is a statutory obligation of CSR expenditure under CSR expenditure, (the list is not exhaustive but ofither section 135 of the Companies Act nor Schedule VII to the Companies Act nor the CSR Rules, mandates donations to the institutes/funds prescribed under section 80G. Therefore, there is merit in the submission of the assessee that though the quantum of CSR spend is mandatory there is no mandate on how amount is to be spent or to whom the contribution is to be made. Accordingly the act of the assessee to choose to Reliance Foundation and Shyam Kothari Foundation which are eligible to accept donations under section 80G is voluntary and is not mandated by section 135 of the Companies Act 2013. Further from the perusal of CSR Rules as applicable in assessee’s case, it is noticed that the monitoring of the CSR spend is to ensure that the same is as per the CSR policy of the company and it does not provide for monitoring the utilization of the funds by the third party donees. In any case the donations made for a specific cause does not result in denial of deduction which is otherwise allowable as per the provisions of section 80G.

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One more point that needs to be considered while deciding the deduction under section 80G for CSR spend is that the restriction on the allowability of the said spend as provided in Explanation 2 to section 37 is for computing the business income under the provision of section 28-44DB whereas the deduction fer section 80G is claimed under Chapter VIA ie. after computing the Gross Total Income. The provisions of section 80G does not impose any condition that the contribution should be voluntary and provefore when the CSR spend is evaluated independently under the provisions of the Act, it is viewed that there is no restriction for the assessee to claim deduction under section 80G provided the CSR spend meets the conditions specified therein. In other words, the provisions of section 37 is computation provision whereas section 80G is a beneficial provision which allows deduction towards payments made by the assessee for charitable purposes and therefore these two sections are independent of each other. For example, when a company which is not required to comply with the provisions of section 135 of the Companies Act 2013 makes a donation or a company makes donations in excess of 2 per cent even then the payment may get disallowed under section 37 but in that case the revenue would not impose any restriction to evaluate the payment for claiming deduction under section 80G. If the same analogy is applied to the CSR spend it is viewed that the assessee should be able to claim deduction under section 80G if the other conditions are fulfilled. Denying the claim for the reason that there is a specific mention under section 37 for disallowance and that the payments are made in compliance with section 135 of the Companies Act is not legally tenable unless there is an explicit provision for e.g. contributions towards “Swacha Bharat Kosh” and “Clean Ganga Fund.

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In view these discussions and considering the judicial precedence in this regard, it is viewed that there is no infirmity in the order of the Commissioner (Appeals) in allowing the deduction under section 80G to the assessee towards donations made to Reliance Foundation and Shyam Kothari Foundation. Accordingly the grounds raised by the revenue are dismissed.

8. From the above authoritative pronouncements, the position of law emerges with clarity. Once the assessee has disallowed CSR expenditure under section 37(1), any donation to an institution registered under section 80G stands on an independent footing. The deduction flows not from the head of business income, but from the gross total income under Chapter VIA, which operates in a distinct statutory compartment. The Assessing Officer, having examined the claim and allowed it on this basis, adopted a view that is not only plausible but squarely supported by judicial precedent.

9. Therefore, the order passed by the Assessing Officer cannot be said to be erroneous or prejudicial to the interests of the Revenue. The learned PCIT has merely substituted his own opinion in place of that taken by the Assessing Officer, which is not permissible under section 263.”

30. Respectfully following the binding judicial position emanating from the aforesaid decisions, and applying the same to the facts of the present case, it is evident that once the assessee has disallowed CSR expenditure under section 37(1), there is no embargo in law on claiming deduction under section 80G, provided the statutory conditions thereof are satisfied. The Assessing Officer, having examined the claim and allowed the deduction, had taken a plausible and legally sustainable view.

31. In such circumstances, the learned Principal Commissioner could not have invoked section 263 merely because he held a different opinion on the matter. Substitution of one plausible view by another is impermissible in revisionary proceedings. Accordingly, on this issue also, the assumption of jurisdiction under section 263 is held to be unsustainable.

Penalties paid to Stock Exchange amounting to Rs.64,64,367/-

32. The next issue pertains to the allowability of expenditure incurred by the assessee towards penalties paid to the stock exchange amounting to Rs. 64,64,367/-. The learned Principal Commissioner observed that the Assessing Officer had allowed the said expenditure without examining whether it was hit by Explanation 1 to section 37(1) of the Act, which disallows expenditure incurred for any purpose which is an offence or which is prohibited by law.

33. It was noted by the learned Principal Commissioner that the tax auditor had reported the said amount under the head “expenditure by way of any other penalty or fine” in Form 3CD, and that the Assessing Officer had failed to enquire into the true nature of the payments so made.

34. Before the learned Principal Commissioner as well as before us, the assessee submitted that mere reporting of an amount as “penalty” in the tax audit report is only a disclosure requirement and cannot, by itself, lead to the conclusion that the expenditure is hit by Explanation 1 to section 37(1). It was submitted that the nature of the levy and the context in which it is imposed must be examined to determine its allowability.

35. It was explained that out of the total amount of Rs. 64,64,367/-, a sum of Rs. 35,95,617/- pertained to charges levied by the stock exchange during the financial year on account of bad delivery/short delivery, late reporting, security deposit shortages, fund shortages, client code modification, and shortfall of margin money, as per various circulars issued by the National Stock Exchange. The balance amount of Rs. 28,68,750/- was paid pursuant to a settlement order passed by the Securities and Exchange Board of India under section 15JB of the SEBI Act, 1992.

36. The assessee further placed reliance on the relevant SEBI and stock exchange circulars, clarifying that such charges are regulatory and compensatory in nature, intended to streamline compliance and discipline in the functioning of the market, and are not punitive in the sense of being imposed for an offence or an act prohibited by law.

37. The relevant extract of the stock exchange circular, explaining the nature of such penalties and disciplinary actions, has been reproduced in the original draft and demonstrates that the charges levied depend upon the frequency and gravity of the violation and are designed to ensure adherence to compliance requirements.

38. Upon a careful consideration of the material on record, it is evident that the penalties in question are not statutory penalties imposed for violation of law, but are in the nature of compensatory charges levied for operational and procedural lapses under the bye-laws and regulations of the stock exchange. Such payments do not fall within the mischief of Explanation 1 to section 37(1).

39. The distinction between expenditure incurred for an offence or for a purpose prohibited by law, and expenditure incurred in the ordinary course of business for regulatory non-compliances of a technical or procedural nature, is well recognised in law. The latter category of expenditure has consistently been held to be allowable.

40. In this context, reliance placed by the assessee on judicial precedents, including the decision of the Hon’ble Karnataka High Court in J.K. Panthaki & Co. v. ITO ITR 329 (Kar), clearly brings out the scope and ambit of Explanation 1 to section 37(1) and supports the assessee’s case.

41. It is also an undisputed fact that in the assessee’s own case for an earlier assessment year, the Tribunal has held that penalties levied by the stock exchange on account of similar operational lapses are allowable as business expenditure. The Assessing Officer, by allowing the claim, had thus followed a consistent view.

42. In view of the above factual and legal position, it cannot be said that the Assessing Officer committed any error in allowing the expenditure, much less an error prejudicial to the interests of the Revenue. The learned Principal Commissioner was, therefore, not justified in invoking revisionary jurisdiction on this issue.

Disallowance of Interest Expenditure of Rs.26,45,160/-under section 36(1)(iii)

43. The last issue which arises for consideration pertains to the disallowance of interest expenditure amounting to Rs. 26,45,160/- under section 36(1)(iii) of the Act, which the learned Principal Commissioner held to be relatable to capital work-in-progress (CWIP) and, therefore, liable to be capitalised.

44. The learned Principal Commissioner, in the impugned order, observed that the Assessing Officer had failed to verify the utilisation of borrowed funds and their nexus with assets under CWIP. Invoking the proviso to section 36(1)(iii), it was held that interest attributable to acquisition of assets not yet put to use could not be allowed as a revenue deduction.

45. Per contra, the assessee consistently maintained that the borrowed funds were utilised entirely for regular business purposes and not for acquisition of capital assets or for CWIP. In support of this contention, detailed submissions along with supporting documents were placed on record before the learned Principal Commissioner and also before us, forming part of the paper book.

46. From the material placed on record, it is evident that the amounts reflected under CWIP broadly pertain to advances paid to vendors for software, vehicles, leasehold improvements, and laptops, which were not in a “ready-to-use” condition during the relevant financial year. It is also an undisputed fact that no depreciation was charged on CWIP either in the books of account or claimed in the return of income.

47. It has further been explained that once the relevant assets are ready for use, the corresponding amounts are transferred from the CWIP account to the appropriate head under Property, Plant and Equipment or Intangible Assets, and depreciation is thereafter claimed in accordance with law. These assets are ultimately utilised wholly for the purposes of the assessee’s business.

48. As directed during the course of hearing, the assessee furnished a detailed statement giving date-wise capitalisation of advances from the CWIP account as on 31.03.2020. From a perusal of the same, it is seen that the statement sets out the closing balance, date of capitalisation, amount capitalised, nature of work, and asset type, thereby clearly establishing that capitalisation occurred only when the assets became ready for use.

49. The assessee further demonstrated that during the relevant previous year, borrowings were raised by way of issuance of commercial papers, which were utilised exclusively for business purposes such as trade funding for clients, placement of fixed deposits as margin with the stock exchange, and meeting working capital requirements. It was categorically stated, and substantiated through sample offer letters of commercial papers, that none of the borrowings were raised for acquisition of fixed assets or for funding CWIP.

50. It is also material to note that the commercial papers issued by the assessee were of a short-term nature, with maturities ranging between 7 to 365 days. Such short-term borrowings, by their very nature, are inconsistent with financing acquisition of capital assets or long-term projects. Apart from commercial papers, the assessee did not have any other borrowings during the year.

51. The assessee also explained that the financial year 2019-20 was the first year in which it adopted Indian Accounting Standard (Ind AS) 116 relating to leases. Pursuant thereto, the assessee recognised right-of-use (ROU) assets and corresponding lease liabilities in its books of account. The interest component arising from such lease liabilities was disclosed as finance cost in the audited financial statements.

52. However, while computing the total income, the assessee reversed the entire impact of Ind AS adjustments, including the interest component on lease liabilities, and disallowed the same in the computation of income. It was also pointed out that no depreciation was claimed on ROU assets. Thus, the Ind AS-related accounting entries had no bearing on the allowability of interest under section 36(1)(iii).

53. From the cumulative appreciation of the above facts, it clearly emerges that the interest expenditure in question was incurred wholly in relation to general business borrowings and not for acquisition of capital assets or for CWIP. There is no material on record to establish any direct or indirect nexus between the borrowings and the CWIP.

54. In the absence of such nexus, the proviso to section 36(1)(iii) has no application. The Assessing Officer, having examined the nature of borrowings and their utilisation, was justified in allowing the interest expenditure as a revenue deduction.

55. The learned Principal Commissioner, in invoking section 263 on this issue, has proceeded merely on presumptions, without pointing out any specific error in the assessment order or demonstrating how the view taken by the Assessing Officer was unsustainable in law.

56. In these circumstances, the assessment order cannot be said to be erroneous or prejudicial to the interests of the Revenue on this issue. The assumption of revisionary jurisdiction under section 263 is, therefore, unsustainable even on this count.

57. On an overall consideration of the facts and the legal position governing the scope of section 263 of the Act, it is evident that in respect of each of the issues sought to be revised, the Assessing Officer had either conducted enquiries and taken a plausible view, or the view adopted was squarely supported by binding judicial precedents.

58. It is trite law that where two views are possible and the Assessing Officer has adopted one such view, the same cannot be branded as erroneous merely because the Principal Commissioner prefers another view. The revisionary jurisdiction under section 263 cannot be invoked to substitute the subjective satisfaction of the revisional authority in place of a legally tenable view taken by the Assessing Officer.

59. In the present case, the learned Principal Commissioner has not demonstrated any error of law or fact in the assessment order which could be said to be prejudicial to the interests of the Revenue. The impugned order has been passed primarily on the premise of alleged inadequacy of enquiry, without establishing that the assessment order suffered from any inherent infirmity.

60. Accordingly, the impugned order passed by the learned Principal Commissioner under section 263 of the Act is set aside on all issues.

61. In the result, the appeal filed by the assessee is allowed.