ITAT Hyderabad: CSR Donations Eligible for Section 80G Deduction; No Section 14A Disallowance Without Exempt Income; Section 68 Cannot Create Double Taxation on Business Turnover

Overview of the Dispute

The Hyderabad 'B' Bench of the Income Tax Appellate Tribunal addressed two Revenue appeals — ITA No. 1083/Hyd/2024 for Assessment Year 2017-18 and ITA No. 1084/Hyd/2024 for Assessment Year 2018-19 — through a single consolidated order. Both appeals arose from the CIT(Appeals) order dated 22.08.2024, which had in turn emerged from assessment orders passed by the Assessing Officer under Section 143(3) read with Section 144B of the Income-tax Act, 1961, dated 26.09.2021 and 03.09.2021 respectively.

The assessee, Penna Cement Industries Limited, carries on the business of manufacturing and selling cement and also operates captive power generation units. The matters raised in these two appeals touched upon four distinct legal issues: disallowance under Section 14A read with Rule 8D, denial of deduction under Section 80G on CSR-related donations, disallowance of Section 80IA deductions pertaining to power generation units, and an addition under Section 68 in connection with alleged bogus transactions. The Tribunal dismissed both Revenue appeals in their entirety, upholding the relief granted by the CIT(Appeals).

Assessment Year 2017-18: Key Issues Examined

Issue 1 — Section 14A Disallowance of Rs. 74,92,000 in the Absence of Exempt Income

The Assessing Officer applied Section 14A read with Rule 8D and disallowed Rs. 74,92,000, reasoning that investments of such a scale must necessarily involve expenditure in the form of manpower, decision-making capacity and technical expertise, even if not explicitly recorded. The AO also placed reliance on CBDT Circular No. 5/2014 dated 11.02.2014 and invoked Section 14A(3) to suggest applicability irrespective of whether expenditure was actually incurred.

The assessee demonstrated that during the Financial Year 2016-17 it had not received any exempt income whatsoever. It further established that the investments — made in Pioneer Cement Industries Ltd (Rs. 58.32 crore), Parasakti Cement Industries Ltd (Rs. 16.50 crore) and Andhra Pradesh Gas Power Corporation Ltd (Rs. 1.70 crore) — were strategic in character, intended to expand the cement business, and had been funded entirely from the assessee's own interest-free capital and free reserves. No dividends or other exempt receipts were generated from these holdings during the year.

The Tribunal, after examining the record and the applicable judicial precedents, upheld the CIT(Appeals)'s deletion of this disallowance. The Tribunal observed that it is now well-settled that under the law as it stood prior to the Finance Act, 2022 amendment, no disallowance under Section 14A is permissible where the assessee has not earned any exempt income during the relevant year. It relied upon:

  • NCC Infrastructure Holdings Limited Vs. ACIT, Circle 16(1), Hyderabad, ITA No. 144/Hyd/2023, dated 12/06/2023
  • Pr. CIT (Central) Vs. Era Infrastructure (India) Ltd., (2022) 141 taxmann.com 289 (Delhi)
  • PCIT Vs. IL&FS Energy Development Co. Ltd., (2017) 84 taxmann.com 186 (Delhi)
  • Commissioner of Income Tax Vs. Chettinad Logistics Pvt. Ltd., (2017) 248 Taxman 55 (Mad.)
  • Principal Commissioner of Income Tax Vs. Oil Industry Development Board, (2019) 262 Taxman 102 (SC)

The Supreme Court had dismissed both the Revenue's Special Leave Petition in CIT Vs. Chettinad Logistics (P) Ltd., (2018) 95 taxmann.com 250 (SC) and the subsequent review petition in Commissioner of Income Tax (Central) Vs. M/s. Chettinad Logistics Pvt. Ltd., (2019) 105 CCH 226 (SC). Similarly, the SLP against Principal Commissioner of Income Tax Vs. Oil Industries Development Board, (2018) 101 CCH 452 (Delhi) was also dismissed by the Apex Court.

The Revenue argued that since its appeals in the assessee's own case for AY 2013-14 and AY 2014-15 (ITTA Nos. 178/2019 and 179/2019) were pending before the High Court, the Tribunal's earlier orders were effectively in doubt and the CIT(Appeals) ought not to have followed them. The Tribunal firmly rejected this argument, holding that unless and until a Tribunal order is stayed or set aside by a superior court, it remains operative and binding. Reliance was placed on Union of India and Others Vs. Kamlakshmi Finance Corporation Limited, AIR 1992 SC 711, wherein the Apex Court had categorically held that departmental officers are obliged to follow higher judicial rulings unless the relevant order has been stayed, and that the mere filing of an appeal does not constitute justification for non-compliance.

The Tribunal also addressed the Finance Act, 2022 amendment, which inserted an Explanation to Section 14A purporting to apply the section even where exempt income has not accrued, arisen or been received during the year. It held that this amendment is effective prospectively from 01.04.2022 and cannot be read as retrospectively altering the position for earlier assessment years. This view drew support from Pr. CIT Vs. Era Infrastructure (India) Ltd. and Pr. CIT Vs. Keti Constructions, (2024) 162 taxmann.com 278 (MP). Grounds of appeal Nos. 1 and 2 raised by the Revenue were accordingly dismissed.

Issue 2 — Section 80G Deduction of Rs. 1,88,97,644 on CSR Donations

The Assessing Officer disallowed the assessee's claim for deduction of Rs. 1,88,97,644 under Section 80G of the Income-tax Act, 1961, on the ground that CSR expenditure is mandatory under the Companies Act, 2013, and not voluntary in nature. The AO reasoned that permitting a Section 80G deduction in respect of expenditure that is compulsorily incurred under statute would amount to indirect subsidisation by the government. The Revenue's representative before the Tribunal further cited Explanation-2 to Section 37(1) of the Act, which expressly excludes CSR expenditure from the category of business expenditure, and also relied upon Agilent Technologies (International) P. Ltd. Vs. ACIT/NFAC, Delhi, (2024) 205 ITD 551 (Delhi).