The Income Tax Appellate Tribunal, Delhi, has clarified a critical ambiguity in the treatment of corporate social responsibility (CSR) donations under Section 80G of the Income Tax Act, 1961. In a significant ruling, the Tribunal held that such donations are not automatically disallowed merely because they stem from statutory CSR obligations, provided the recipient institution is duly registered under Section 80G. This decision resolves conflicting assessments and reinforces the principle that statutory exemptions must be interpreted in accordance with their express terms.
Background & Facts
The Dispute
The appellant, Kellog Brown and Root Private Limited, a company engaged in offshore engineering and IT/ITES services, made donations totaling Rs. 24,50,000 during the assessment year 2020-21. Of this, Rs. 12,25,000 was claimed as a deduction under Section 80G for contributions made to the Odisha State Disaster Management Authority (OSDMA), a government agency registered under Section 80G(5)(vi). The Assessing Officer (AO) disallowed this claim on the ground that the donation formed part of the company’s mandatory CSR expenditure under Section 135 of the Companies Act, 2013, and thus fell within the prohibition under Explanation 2 to Section 37(1). However, the AO had previously allowed deductions under Section 80G for donations made to the PM Cares Fund and National Defence Fund, which were also classified as CSR.
Key Facts
- The assessee made a donation of Rs. 24,50,000 during the previous year 2019-20
- Rs. 12,25,000 (50%) was claimed as deduction under Section 80G for contribution to OSDMA
- OSDMA produced a valid certificate under Section 80G(5)(vi) issued by the Government of Odisha, valid for AY 2020-21 (Receipt No. 027667)
- The assessee’s CSR expenditure for the year was Rs. 24,50,000, fully compliant with Section 135 of the Companies Act, 2013
- The AO allowed Section 80G deductions for Rs. 48,08,411 paid to PM Cares Fund and National Defence Fund, both also CSR contributions
- The AO disallowed only the OSDMA donation on the basis of its CSR nature, without citing any statutory bar under Section 80G
- The assessee filed objections before the DRP, which upheld the AO’s disallowance
Procedural History
- 01.07.2023: Transfer Pricing Officer (TPO) issued order proposing ALP adjustment of Rs. 9,61,64,469/- for ITES segment
- 23.04.2024: Dispute Resolution Panel (DRP) issued order directing reduction of ALP adjustment to Rs. 4,11,54,574/-
- 10.05.2024: TPO issued revised order giving effect to DRP directions
- 17.05.2024: AO passed final assessment order under Section 143(3) incorporating DRP directions and disallowing Section 80G deduction
- 16.07.2024: Appeal filed before ITAT Delhi (ITA No. 3310/Del/2024)
- 09.03.2026: Hearing concluded
- 05.06.2026: Judgment pronounced
Relief Sought
The appellant sought:
- Allowance of Rs. 12,25,000 as deduction under Section 80G for donation to OSDMA
- Reversal of ALP adjustment of Rs. 4,11,54,574/- on grounds of improper exclusion of foreign exchange gains
- Grant of double taxation relief of Rs. 1,11,34,019 under Section 90
- Cancellation of interest under Sections 234A, 234B, and 234C
- Withdrawal of penalty proceedings under Section 270A
The Legal Issue
The central question was whether a donation made by a company as part of its mandatory CSR obligation under Section 135 of the Companies Act, 2013, is ineligible for deduction under Section 80G of the Income Tax Act, 1961, merely because it is classified as CSR expenditure, when the recipient institution is duly registered under Section 80G.
Arguments Presented
For the Appellant
The appellant argued that Section 80G contains no express prohibition against claiming deductions for CSR donations. It relied on judicial precedents including Schenker India Private Limited (ITA No. 2391/Del/2022), Strides Pharma Science Limited (ITA No. 5721/Mum/2023), and Livlong Insurance Brokers Limited (2025) 176 taxmann.com 566, all of which held that Section 37(1) only disallows CSR as a business expense, but does not bar eligibility under Section 80G. The appellant emphasized that Section 80G(2)(a)(iiihk) and (iiihl) are the only specific exclusions, and OSDMA does not fall under them. It further highlighted the inconsistency in the AO’s treatment - allowing deductions for PM Cares Fund and National Defence Fund, both CSR donations, while denying the same for OSDMA.
For the Respondent
The Revenue contended that since CSR expenditure is disallowed under Explanation 2 to Section 37(1), any benefit derived from such expenditure, including deduction under Section 80G, should also be disallowed. It argued that allowing Section 80G benefit for CSR donations would amount to a double advantage - fulfilling statutory obligation and obtaining tax benefit. The Revenue did not cite any specific provision of Section 80G that excludes CSR donations, nor did it dispute the registration status of OSDMA.
The Court's Analysis
The Tribunal examined the statutory framework of both Section 80G and Section 37(1). It noted that while Explanation 2 to Section 37(1) prohibits the deduction of CSR expenditure as a business expense, Section 80G operates as a separate incentive provision with its own conditions. The Tribunal observed that Section 80G does not contain any language excluding donations made as CSR. The only exclusions under Section 80G(2)(a) are those explicitly listed - namely, contributions to the Swachh Bharat Kosh and Clean Ganga Fund.
"The prohibition under Section 37(1) relates to the nature of expenditure as a business cost. Section 80G, on the other hand, is a concessional provision that grants deduction for charitable contributions irrespective of their origin, provided the recipient is eligible."
The Tribunal further noted that the AO’s inconsistent treatment - granting Section 80G benefits for other CSR donations while denying the same for OSDMA - was arbitrary and violative of the principle of equal treatment. It held that the registration status of the donee under Section 80G is the sole determinant of eligibility, not the source of the donation.
The Tribunal also relied on the principle of statutory interpretation that exemptions must be construed liberally in favor of the assessee where the language is clear and unambiguous. Since Section 80G does not bar CSR donations, the denial was legally unsustainable.
The Verdict
The appeal was partly allowed. The Tribunal directed the Assessing Officer to allow the deduction of Rs. 12,25,000 under Section 80G for the donation made to Odisha State Disaster Management Authority. The ALP adjustment of Rs. 4,11,54,574 was set aside with respect to foreign exchange gains, and the matter was remanded for recomputation of operating margins with such gains included as operating income. The double taxation relief of Rs. 1,11,34,019 under Section 90 was restored to the file of the AO for verification and grant. Interest under Sections 234A, 234B, and 234C was dismissed as consequential. Penalty proceedings under Section 270A were held premature and dismissed.
What This Means For Similar Cases
CSR Donations Are Not Automatically Disqualified Under Section 80G
- Practitioners must now argue that Section 80G eligibility depends solely on the donee’s registration status, not the donor’s motive or statutory obligation
- Any disallowance based on CSR classification must be challenged on the ground that Section 80G contains no such exclusion
- Taxpayers should maintain clear documentation of donee registration certificates and donation receipts
Consistency in AO Treatment Is Mandatory
- If an AO allows Section 80G deductions for CSR donations to certain institutions (e.g., PM Cares Fund), it cannot arbitrarily deny the same for other registered institutions without objective justification
- Arbitrary distinctions violate Article 14 and the principle of non-discrimination in tax administration
- Taxpayers may cite this judgment to demand uniformity in assessment practices across jurisdictions
Foreign Exchange Gains on Export of Services Are Operating Income
- The Tribunal’s affirmation that foreign exchange gains on export of services are operating income under TNMM sets a binding precedent for IT/ITES exporters
- Taxpayers must ensure their transfer pricing studies treat such gains as part of operating profit unless they arise from speculative or hedging activities
- Safe harbor rules under Rule 10TA are optional and cannot override judicial precedents on the nature of income
