ITAT Hyderabad Clarifies 80G Deduction on CSR Donations and Scope of Section 14A Post-Finance Act 2020

The Hyderabad Bench of the Income Tax Appellate Tribunal, in the case of NATCO Pharma Ltd. Vs ACIT (ITAT Hyderabad) for Assessment Year 2022-23, delivered an important order dealing with:

  1. Eligibility of donations made as part of Corporate Social Responsibility (CSR) expenditure for deduction under Section 80G of the Income Tax Act 1961, and
  2. Applicability of Section 14A disallowance on investments in equity shares that yield taxable dividend income after the amendments brought in by the Finance Act 2020.

The Tribunal ultimately allowed the assessee’s appeal on both these issues, deleting:

  • Disallowance of ₹5.86 crore claimed as deduction under Section 80G in respect of CSR-related donations, and
  • Disallowance of ₹62,55,526 made under Section 14A read with Rule 8D.

Below is a structured analysis of the key aspects and reasoning of the ITAT, based on the full text of the order.

Background of the Case

Business Profile and Assessment Proceedings

The assessee, NATCO PHARMA Ltd., is engaged in the pharmaceuticals sector, covering research and development, manufacturing and sale of bulk drugs and finished formulations.

  • A revised return of income for A.Y. 2022-23 was filed on 29.12.2022, declaring total income at Nil.
  • The case was selected for complete scrutiny and notice under Section 143(2) was issued on 02.06.2023.
  • Since international transactions with Associated Enterprises were reported, reference was made to the Transfer Pricing Officer (Section 92CA(3)), who proposed a transfer pricing adjustment of ₹6,09,28,523 by order dated 28.01.2025.
  • Based on this, the Assessing Officer (AO) passed a draft assessment order under Section 144C(1) on 24.03.2025, proposing:
    • Transfer pricing addition of ₹6,09,28,523,
    • Disallowance of ₹5,86,00,000 claimed as Section 80G deduction (CSR donations),
    • Disallowance of ₹62,55,526 under Section 14A, and
    • Disallowance of ₹32,500 towards excess depreciation.

The assessee filed objections before the Dispute Resolution Panel (DRP). Following DRP directions under Section 144C(5) dated 16.12.2025, the AO passed a final order under Section 143(3) read with Sections 144C(13) and 144B on 24.12.2025, confirming all additions and computing total income at ₹12,58,16,549.

Only two issues survived in appeal before the ITAT:

  1. Denial of deduction of ₹5,86,00,000 under Section 80G in respect of CSR donations.
  2. Disallowance of ₹62,55,526 under Section 14A.

Issue 1: Deduction under Section 80G for CSR Donations

AO’s Stand and DRP Directions

The AO had rejected the assessee’s claim of ₹5.86 crore under Section 80G for donations that were part of CSR expenditure required under Section 135 of the Companies Act 2013. The reasoning was:

  • CSR expenditure is a mandatory statutory obligation, not a voluntary outgo.
  • Such CSR spending is not in the nature of purely voluntary donations, hence should not be eligible for Section 80G deduction.

The DRP endorsed this view and sustained the disallowance.

Assessee’s Arguments before the Tribunal

The assessee, through its Authorised Representative, advanced the following key submissions:

  1. No General Bar in Section 80G on CSR Donations

    • Section 80G does not contain a blanket prohibition against allowing deduction for donations that also qualify as CSR expenditure.
    • The only specific exclusions in Section 80G are in Section 80G(2)(a)(iiihk) and Section 80G(2)(a)(iiihl), pertaining to:
      • Swachh Bharat Kosh, and
      • Clean Ganga Fund,
        where the statute restricts deduction to amounts other than sums spent in pursuance of CSR under Section 135(5) of the Companies Act 2013.

  2. Legislative Intent is Expressly Limited

    • Since Parliament has consciously carved out only these two exclusions for CSR-related contributions, it cannot be presumed that all CSR donations are ineligible under Section 80G.
    • Extending the CSR bar to other donations is tantamount to judicial legislation, which is impermissible.

  3. Reliance on Coordinate Bench Decisions

    • The Hyderabad ITAT had already addressed identical disputes and held in favour of assessee in:
      • Deloitte Tax Services India Private Limited Vs. DCIT, ITA Nos. 341 & 342/Hyd/2023, order dated 19.06.2024.
      • ACIT Vs. Penna Cement Industries Limited, ITA Nos. 1083 & 1084/Hyd/2024, order dated 21.01.2026.
    • In these rulings, the Tribunal held there is no comprehensive bar on Section 80G deduction for donations forming part of CSR outlays, except for what is explicitly excluded by the statute.

On these grounds, deletion of the disallowance was sought.

Revenue’s Contentions

The Departmental Representative argued: