PRASHANT KIRIT SHAH,MUMBAI vs. ASSTT. CIT 26(2), MUMBAI

These are appeals by the assessee against the respective order of learned Commissioner of Income Tax (Appeals) [in short learned CIT(A)] pertaining to assessment year 2013-14 & 2014-15.

3. Grounds of appeal

for A.Y. 2014-15 read as under :-

1. On the facts and in the circumstances of the case and in aw the order passed by the Hon'ble CIT (Appeal) is invalid and bad in law.

2. The Ld. AO as well as Hon'ble CIT(Appeal) failed to interpret and apply the explanation to Section 35 which states that Explanation - "The deduction, to which the assessee is entitled in respect of any sum paid to a research association, university, college or other 'institution to which clause (ii) or clause (iii) applies, shall not be denied merely on the ground that, subsequent to the payment of such sum by the assessee, the approval granted to the association, university, college or other institution referred to in clause (ii) or clause (iii) has been withdrawn. " Despite the provisions of the law is so clear, the Hon'ble CIT(Appeal) has confirmed the addition (i.e. addition of Rs.3,62,940/-) made by Ld. AO.

The addition is made as well as confirmed without bringing any corroborative evidence on records.

The appellant hereby request you to delete the said disallowance made for Donations and also as result o; that disallowance made u/s 14A r.w. rule 8D. The disallowance u/s 14A r.w. rule 8D is not applicable as investment is made out of own funds.

On the facts and in the circumstances of the case and law, the charging of interest u/s.234B, 234C and 234D of the I.T. Act, 1961 are invalid and bad in law and even initiated penalty proceedings u/s 271(1)(c) are invalid and bad in law.

Prayer :-

1. 1. In the light of the above grounds, your appellant prays that the above disallowances/additions be deleted as contrary to facts and law and the income as per the return be restored.

2. The appellant craves leave to add, to alter or amend any of the above grounds of appeal as may be advised, at any time on or before the hearing of this appeal.”

4. Apropos issue of disallowance under section 35 of the Act Brief facts are that the assessee is an individual. During the year, the assessee has derived income from salary and interest income which was offered under the head income from other sources. The return of income declaring total Income of Rs,23,78,640/- was filed on 26.07.2014. The Assessing Officer noted that in this case, specific information was received from Pr. Director of Income Tax (Investigation), Kolkata related to bogus donation u/s 35(1)(ii) of the Act through various brokers in lieu of commission. That the assessee was one of the beneficiaries of transactions classified as bogus donations u/s. 35(1)(ii) of the Act. The case was reopened within the meaning of provisions of section 147 of the I.T. Act, 1961 after recording the reasons. The Assessing Officer made the disallowance by observing as under :- “6.2. During the course of survey proceedings, statements of key persons like secretary/Treasurer/President, auditors of these institutes and a number of brokers/entry operators were recorded and above mentioned modous operandi was confirmed. Also from the enquiries conducted during the survey action, it was found that these institutions have miniscule presence and their contribution to scientific research is too negligible for the kind of donation they have received. The research work they are showing is just reproduction of the published material.

6.3. Further, M/s. School of Human Genetics & Population Health had admitted to Settlement Commission that in lieu of service charge they have provided accommodation entries of donation to the donors.

Also, vide Notification No.82/2016 [F. No.203/64/2009/ITA.H dated 15.09.2015], the CBDT has rescinded the notification of the Government of India, Ministry of Finance, Department of Revenue, No.4/2010 dated 28.01.2010 issued in the case of M/s. School of Human Genetics & Population Health, Kolkata (PAN-AABAS4570M) with effect from 1st Aril, 2007.

6.4. In view of the above discussion, it is considered that donation of Rs.2,00,000/- made by the assessee to M/s. School' of Human Genetics & Population Health is not genuine. Accordingly, the assessee was show caused vide order sheet noting dated 14.12.2017 to explain as to why the said donation should not be treated as bogus and deduction of Rs.3,50,000/- claimed in the ROI should not be disallowed and added to the income of the assessee u/s. 68 of the Act. In response, the AR vide letter dated 16.12.2017 submitted as under:-

"The assessee has given donation of Rs.2,00,000/- in FY 2012-13 to 'School of Human Genetics and Population Health' and has claimed deduction u/s, 35(1)(ii) of Income Tax Act, 1961, The "School of Human Genetics and Population Health" is a recognized organization approved by the central government for the purpose of clause (ii) of sub-section (1) of section 35 of the Income Tax Act, 1961. Thus the donation made to the "Scholl of Human Genetics and Population Health" is eligible for deduction u/s. 35(1)(ii) for the assessee's having Income from Business and Profession."

6.5. Reply of the assessee was duly considered but found not to be acceptable. From the findings of survey conducted on M/s. School of Human Genetics & Population Health and action taken by the CBDT vide Notification No. 82/2016, it is concluded that donation of Rs.2,00,000/- made by the assessee to M/s. School of Human Genetics & Population Health is not genuine. Hence, deduction of Rs.3,50,000/- claimed u/s. 35(1)(ii) of the Act in the ROI is hereby disallowed and added to the total income of the assessee u/s. 68 of the Act”.

5.3 In this case information has been received from DGIT (Inv.), Kolkata that a survey u/s. 133A of the Income Tax Act, 1961 was conducted by the Investigation Wing, Kolkata in the following research organizations eligible for deduction u/s. 35(l)(ii) of the Act :- i.) School of Human Genetics & Population Health. ii.) Herbicure Health Care bio-herbal Research Foundation. iii.) Institute of Experimental Research & Foundation.

In these cases it was concluded that bogus donations to the tune of Rs.750 crores were paid to these trusts/societies. The modus operandi of these research organizations is to receive donation through RTGS/NEFT/ Cheque etc and return the same amount subsequently in cash after deducting commission. A list of beneficiaries or bogus donors was also enclosed. From the said list it is seen that the assessee has also made bogus donation of Rs.2,00,000/- to M/s School of Human Genetics and Population Health during the year and claimed deduction of Rs. 3,50,000 /- u/s. 35(1)(ii) of the Act.

5.4 During the course of survey action, it was found that these organizations are running bogus donation syndicate through various brokers in lieu of commission. Bogus donations are being taken vide cheque/ RTGS and thereafter after taking commission, the same is routed back to the donor in. the form of cash vide 3-4 layers. As the benefit is 175% of donated amount a large number of assessee is lured by these brokers. The whole cycle of transaction take place within 1 to 3 days.

5.5 During the course of survey proceedings, statements of key persons like secretary/Treasurer/President, auditors of these institutes and a number of brokers/entry operators were recorded and above mentioned modus operand) was confirmed. Also from the enquiries conducted during the survey action, it was found that these institutions have miniscule presence and their contribution to scientific research is too negligible for the kind of donation they have received. The research work they are showing is just reproduction of the published material. Further, M/s. work they are showing is just reproduction of the published material. Further, M/s. School of Human Genetics & Population Health had admitted to Settlement Commission that in lieu of service charge they have provided accommodation entries of donation to the donors.

5.6 Also, vide Notification No.82/2016 |F.No.203/64/2009/ITA.H dated 15.09.2015], the CBDT has rescinded the notification of the Government of India, Ministry of Finance, Department of Revenue, No.4/2010 dated 28.01.2010 issued in the case of M/s. School of Human Genetics & Population Health, Kolkata (PAN-AABAS4570M) with effect from 1st April, 2007.

5.7 In view of the above discussion, it is considered that donation of Rs.2,00,000/-made by the assessee to M/s. School of Human Genetics 8s Population Health is not genuine. Accordingly, the assessee was show caused 'vide order sheet noting dated 14.12.2017 to explain as to why the said donation should not be treated as bogus and deduction of Rs 3,50,000/- claimed in the ROI should not be disallowed and added to the income of the assessee u/s. 68 of the Act. In response, the AR vide letter dated 16.12.2017 submitted as under :-

The assessee has given donation of Rs.2,00,000/- in F.Y.2012-13 to 'School of Human Genetics and Population Health' and has claimed deduction u/s. 35(l)(ii) of Income Tax Act, 1961. The "School of Human Genetics and Population Health" is a recognized organization approved by the central government for the purpose of clause (ii) of subsection (1) of section 35 of the Income Tax Act, 1961. Thus the donation made to the "School of Human Genetics and Population Health is eligible for deduction u/s. 35(l)(ii) for the assessee's having Income from Business and Profession."

5.8 Reply of the assessee was duly considered but was found not acceptable. From the findings of survey conducted on M/s. School of Human Genetics 8s Population Health and action taken by the CBDT vide Notification No. 82/2016, it is concluded that donation of Rs.2,00,000/- made by the assessee to M/s. School of Human Genetics 86 Population Health is not genuine. Hence, deduction of Rs.3,50,000/- claimed u/s. 35.(1)(ii) of the Act in the ROI is hereby disallowed and added to the total income of the assessee u/s. 68 of the Act.”

“We have heard the rival submissions and perused the material on record including the decisions cited by the Id. AR. The undisputed facts are that the assessee has made donations of Rs.50 lakhs to the "The School of Human Genetics and Population Health" and claimed deduction u/s.35(1)(ii) of the Act equal to Rs.87,50,000/- being 175% of the amount paid. A survey was conducted at the office premises of the school namely, "The School of Human Genetics and Population Health" u/s.133A of the Act on 27.01.2015 and it was observed by the survey team that this institute in connivance with donors, brokers and accommodation entry providers has indulged in a duvious scheme of tax evasion, under which bogus donations were received from donors and money used to be returned back to the donors in lieu of commission, even while the donor availed of deductions u/s.35(1)(ii) of the Act. The registration of the institution was cancelled by the Government of India with retrospective effect and it was held that the institution has misused the exemption. However, under similar facts and circumstances, various coordinate benches have taken the view that mere admission on the part of the office bearers of the body/trust, the assessee cannot be penalized and the amount of donations claimed by the assessee on account of payment to the said school cannot be denied. In the case of Narbheram Vishram Qua, order dated 27.07.2018, the Kolkata Bench of the Tribunal under similar circumstances and facts has held as under:-

"13 we have given a careful consideration to the rival submissions and perused the materials available on record, we note that the assesses has challenged disallowance of weighted deduction of Rs.4,81,25,0007- for A.Y. 2013-14 and disallowance of weighted deduction of Rs.10,50,00,000/-, for A.Y. 2014-15, claimed by him under section 35(l)(ii) of the Act in respect of the amounts of donations made to two Institutions viz. 'Matrivani Institute Experimental Research & Education' (hereinafter referred to as 'Matrivani') and 'The School of Human Genetics and Population Health' (hereinafter referred to as 'SHG'). The Assessee Firm in A.Y. 2014-15, made donation of Rs,2,00,00,000/ to Matrivani and Rs,4,00,00,000/ to SHG and claimed weighted deduction of Rs.10,50,00,000 under section 35(l)(ii) of the Income Tax Act, 1961, being 175% of the aggregate sum of Rs.6,00,00,000/-(Rs,2,00,00,000 + Rs,4,00,00,000) donated to these two institutes which were approved by the Central Government for the purposes of section 35(1) (ii) of the Act read with Rule 5C and SE of the Income Tax Rules, 1962. In the assessment year 2013-14, the assessee claimed weighted deduction of Rs.4,81,25,000/- under section 35(1) (ii) of the Act, which is 175% of the amount of donation being the sum of Rs.2,75,00,0007- in respect of the donation given to 'The School of Human Genetics and Population Health'. We note that the Notifications to this effect, that these two institutions viz. 'Matrivani' and 'SHG', were approved by the Central Government for the purpose of section 35(1)(ii) of the Act, was published in the Gazette of India. However, the deduction claimed by the assessee was denied by the Assessing Officer on the basis of the allegations contained in the report of the Investigation Wing of Kolkata that the said donations were bogus. The reasons stated therein, in short, were that statements of some key persons of these two donee institutions were recorded by the Investigation authority in course of survey proceedings in their cases. The said key person, in their statements, accepted to have received donations from various entities in lieu of cash returned to them after deducting commission there from.

We note that the statements of the various parties and persons were recorded behind the back of the assessee and the Assessing Officer did not allow opportunity of cross examination. We note that in absence of opportunity of cross-examination no reliance could be made on such statements to draw any adverse inference against the assessee firm. The assessee firm denied its knowledge of the statements made by these institutes which were relied on by the Investigation Wing and the Assessing Officer. We note that not providing the opportunity of cross- examination is against the principle of natural justice and for that we rely of-the judgment of Hon'ble Delhi High Court in the case of CIT vs. Dharam Pal Prern Chand Ltd. [2007] 295 ITR 105, 108 (del). We note that on identical facts, the similar proposition was upheld by the Coordinate Bench of Kolkata in the case of Rajda Polymers, Assessment Year 2013-14 wherein it was held as follows:-

"10. ....Thus we note from the entire facts and circumstances, that the AO got swayed away with the statement recorded on oath of Mr. Swapan Ranjan Dasgupta during survey conducted at the premises of M/s. Herbicure. We have reproduced Question no. 22 and 23 and answers given by Shri Swapan Ranjan Dasgupta, wherein he admits to provide accommodation entries in lieu of cash. This information we should say can be the tool to start an investigation when the assessee made the claim for weighted deduction. The general statement of Shri Swapan Ranjan Dasgupta against donation made the claim of assessee for deduction suspicious. However, when the AO investigated, Shri Swapan Ranjan Dasgupta has confirmed that M/s. Herbicure was in receipt of the donation and it has not given any refund in cash, then the sole basis of disallowance of claim as a matter of fact disappeared. It should be remembered suspicion howsoever strong cannot take the place of evidence. The confirmation from Shri Swapan Ranjan Dasgupla fortifies the claim of the assessee for weighted deduction u/s. 35(1)(ii) of the Act. The sole basis of the addition/disallowance based on statement recorded on oath during survey cannot be allowed as held by Hon'ble Supreme Court in Kader Khan & sons (supra). Moreover, we note that if the AO was hell bent determined to disallow the claim of the assessee, then he should have granted an opportunity to cross examine Shri Swapan Ranjan Das Gupta and Shri Kishan Bhawasingka as held by Hon'ble Supreme Court in Andaman Timber (supra).

11. In the light of the aforesaid facts and circumstances, we cannot sustain the order of the authorities below. Therefore, we set aside the impugned order and direct the AO to allow the deduction of Rs.26,28,500/- u/s. 35(l)(ii) of the Act.

We note that the withdrawal of recognition u/s 35(l)(ii) of the Act in the hands of the payee organizations would not affect the rights and interests of the assesses herein for claim of weighted deduction u/s 35(1 )(ii) of the Act, for that we rely on the judgment of the Coordinate Bench, Kolkata, in the case of M/s Maco Corporation India (P) Ltd, for Assessment Year 2013-14, wherein it was held as follows:

"29. All the three High Courts after examining the issue, in the light of the object of Section 12A of the Act and Section 21 of the General Clauses Act held that the order of the CIT passed under Section 12A is quasi judicial in nature. Second, there was no express provision in the Act vesting the CIT with power of cancellation of registration fill 01.10.2004; and lastly. Section 21 of the General Clauses Act has no application to the order passed by the CIT under Section 12A because the order is quasi judicial in nature and it is for all these reasons the CIT had no jurisdiction to cancel the registration certificate once granted by him under Section 12A till the power was expressly conferred on the CIT by Section I2AAC3) of the Act w.e.f. 01.10.2004.

We hold that the ratio decidendi of the aforesaid judgement of the Hon'ble Apex Court would squarely be applicable to the facts of the instant case. In fact the assessee's case herein falls on a much better footing than the facts before the Hon'ble Apex Court. In the case before Hon'ble Apex Court, the power of cancellation of registration us 12A of the Act was conferred by the Act on the Id CIT w.e.f. 1.10.2004 and the Hon'ble Apex Court held that prior to that date , no cancellation of registration could happen. But in the instant case, there is absolutely no provision for withdrawal of recognition u/s 35(l)(ii) of the Act. Hence we hold that the withdrawal of recognition u/s 35(l)(ii) of the Act in the hands of the payee organizations would not affect the rights and interests of the assessee herein for claim of weighted deduction u/s 35(1)(H) of the Act."

16.1n view of the aforesaid findings in the facts and circumstances of the case and respectfully following the various judicial precedents relied upon hereinabove, we direct the Id AO to grant deduction u/s 35(1 )(ii) of the Act, in the sum of Rs. 4,81,25,000/- for A. Y, 2013-14 and in the sum of Rs. 10,50,00,000/-, for A. Y. 2014-15, as claimed by him under section 35(l)(ii) of the Act in respect of the amounts of donations made to two Institutions viz. 'Matrivani Institute Experimental Research & Education' and The School of Human Genetics and Population Health'. Accordingly, the Grounds 1 to 4 raised by the assessee for A.Y. 2013-14 and the Grounds 1 to 5 raised by the assessee for A. Y. 2014-15 are allowed."

12. We note that facts in the present case are identical. The withdrawal of the approval to the payee has taken place subsequent to the payment by the assessee. The assessee’s case duly follows under section 35(1)(ii) of the Act which read as under :-

Section 35(1)(ii) : an amount equal to one and one half times of any sum paid to a research association which has as its object the undertaking of scientific research or to a university, college or other institution to be used for scientific research : Provided that such association, university, college or other institution for the purposes of this clause— (A) is for the time being approved, in accordance with the guidelines, in the manner and subject to such conditions as may be prescribed; and (B) such association, university, college or other institution is specified as such, by notification in the Official Gazette, by the Central Government :

Provided further that where any sum is paid to such association, university, college or other institution in a previous year relevant to the assessment year beginning on or after the 1st day of April, 2021, the deduction under this clause shall be equal to the sum so paid; 13. Hence the payee was duly approved when the payment was done. By no stretch of imagination it can be said that the assessee could have done the impossible and known that subsequently the approval will be withdrawn. Accordingly, following the above said precedent and noting that it is not the case that Hon'ble Bombay High Court has reversed the decision, we set aside the order of authorities below. The assessee is therefore held to be eligible for deduction under section 35(1)(ii) of the Act.”

The Assessing Officer made the disallowance by observing as under :- “During the year, the assessee has received exempt income in the form of Dividend income of Rs, 1,56,084/- and Interest of Rs.44,238/-. However, the assesses has not made disallowance n/s. 14A r.w.r. 8D of the Act. During the course of proceedings, the AR of the assessee has furnished the working of disallowance of Rs.12,940/- u/s. 14A r.w.r. 8D of the Act on 30.11.2017. Considering the same, disallowance of Rs.12,940/- is made under the provisions of Sec. 14A r.w.r. 8D.”

9. Upon assessee’s appeal learned CIT(A) held as under :- “On duly considering the facts of the case, I find that during the year, the assessee has received exempt income in the form of in the form dividend income of Rs.1,56,084/- and interest of Rs.44,238/-, However, the assessee has not made disallowance u/s. 14A r.w.r. 8D of the Act. It is gathered from the assessment order that during the assessment proceedings, the AR of the assessee has furnished the working of disallowance of Rs. 12,940/- u/s. 14A r.w.r. 8D of the Act on 30.11.2017. I find, that the AO considering the same amount worked out by the AR of the assesses, made disallowance of Rs.12,940/- under the provisions of Sec. 14A r.w.r. 8D. Since the addition made in this regard is the same amount offered by the appellant, I do not find any reason to interfere with the action of the AO.”

Pronounced in the open court on 29.10.2021.