Reviving assessment based on subsequent provisions not sustainable: Bombay High Court rules in favour of Maharashtra State Power Generation
The AO disallowed the CSR expenditure for 2013-2014, relying on Section 37(1) of the IT Act, though the provision was inserted in 2015-2016
The Bombay High Court has provided relief to the Maharashtra State Power Generation Company Limited (petitioner) by quashing the notice issued by the Assistant Commissioner of Income Tax (respondent) under Section 148 of the Income Tax Act. It also prohibited the authorities from taking further steps related to the notice.
The decision was made based on the court's finding that there was a lack of tangible material on record to support the conclusion that income had escaped assessment.
The petitioner is a company involved in electricity generation for the state of Maharashtra.
It filed the petition, challenging a notice issued by the respondent under the IT Act. The notice aimed to reopen the assessment for the year 2013-2014. The petitioner also challenged the order, which rejected the objections raised against the aforementioned notice.
The Bench comprising Justice Dhiraj Singh Thakur and Justice Kamal Khata observed that the reasons recorded by the respondent for reopening the assessment relied upon the facts and figures available from the audited account. However, all material regarding the expenditure was disclosed in Note No. 20, and an assessment order under Section 143(3) was passed on 30 December 2016, based on those disclosures.
Also, the assessing officer (AO) had disallowed the entire expenditure as CSR expenditure, relying on Explanation 2 to Section 37(1) of the Act. However, it was noted that the provision was inserted with effect from 1 April 2015 for the Assessment Year 2015-2016. Thus, it was not applicable during the year under consideration.
Citing the SGS India (P) Ltd. vs ACIT [LQ/BomHC/2007/260] case, the Bench observed that reopening the assessment based on provisions inserted subsequently cannot be sustained.
The Bench also observed that various courts also held that CSR expenditure was allowable under Section 37(1) of the Act, and the insertion of Explanation 2 operated prospectively.
The Judges held that Explanation 1 would not be applicable as the CSR expenditure incurred by the company was in compliance with Section 135 of the Companies Act, 2013. They emphasized that the proposed disallowance of CSR expenditure did not constitute an offense.
The Bench, thus remarked, “The AO acted in excess of the limit of his jurisdiction to reopen the assessment in the exercise of powers under Section 147 read with Section 148 of the Act.”