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

This appeal by the assessee is directed against the order of learned CIT(A) dated 24.1.2019 pertains to A.Y. 2014-15.

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granted to the association, university, college or other institution referred to in clause (ii) or clause (in) has been withdrawn."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.3,50,000/-) made by Ld. AO. The addition is made as well as confirmed without bringing any corroborative evidence on record. 3. The Hon'ble CIT(Appeal) has failed to understand the genuineness of the donation made by the assessee even though the assessee has provided all the details which were sufficient to prove that the donation made by the assessee is genuine. The Hon'ble CIT(Appeal) has not considered the details

2 Jayshree Kirit Shah which were submitted by the assessee during the course of hearing and passed the order. The Hon'ble CIT(Appeal) has failed to understand that the donation was made by the assessee when the trust had valid approval in force. The Hon'ble CIT [Appeal) has passed the order without providing the opportunity of cross examination. The Hon'ble CIT(Appeal) has failed to understand that the assessee has given donation as charity and not to avail higher deduction for the purpose of tax evasion. On the facts and in the circumstances of the case and in law, the charging of interest under section 234B, 234C and 234D of the I.T. Act, 1961 are invalid and bad in law and even initiated penalty proceedings under section 271(1)(c) of the Act are invalid and bad in law.”

3 Jayshree Kirit Shah On the contrary, as per the submission made by the assessee vide letter dated 01.11.2017, it is seen that the net profit margin of 'Business' have been constantly deteriorating from 53.05% to 49.14% from A.Y. 2012-13 to A.Y. 2014-15. In any case, the assessee is an Agent for Insurance, mutual funds and Bonds operating from residence, for which any 'Scientific Research' is highly unlikely to be required.

Further on the other hand, it has been proven beyond doubt that the activities of M/s. School of Human Genetics and Population Health; Kolkata are not genuine.”

7.2.7 The fact that appellant has failed to produce the alleged party or contact the alleged party and obtain confirmation indicates that such purported transactions are questionable as far as genuineness is concerned and in this context when the primary onus of proof has not been discharged by the appellant it is not tenable to complain that cross examination of the alleged party was not provided to the appellant. In this regard, reference is made to the ratio laid down by the Hon'ble ITAT Mumbai, 'C' Bench, Mumbai in the case of M/s. Soman Sun Citi, Kalyan vs JOT Range-2, Kalyan, in its order dated 23 October. 2017, wherein it is held as, "the view of the authorities below is supported by decision of Hon'ble Supreme court in the case of N.K. Protein Ltd. (supra). In these circumstances, we are of the considered view that no prejudice is caused to the assessee by non granting of opportunity of cross examination by the authorities below as right of cross examination is not absolute as in the instant case oven primary onus that fell on the assessee did not stand discharged. Had assessee discharged its primary onus, but still the authorities proceed to prejudice assessee based solely on the incriminating statements/affidavits of third parties will become absolute. It is not a case that the authorities below have merely/solely relied on the statement/affidavits of third parties namely hawala dealers recorded at the back of the assessee to cause prejudice to the assessee rather primary onus that lay on the assessee was not discharged by the assessee. Thus, we

4 Jayshree Kirit Shah uphold/sustain the orders of learned CIT(A) in which we do not find any infirmity, which we confirm/sustain. The assessee fails in this ground. We order accordingly."

7.2.8 In this regard, the pivotal point to be noted here is whether the appellant has proved that the donation given by her has been utilized by the said trust in carrying out scientific & industrial research activities for which it had been noticed by the Income Tax Authorities to avail the benefits of Section 35(l)(u)of the LT. Act, 1961. Unless the appellant has made sure that the said trust is into scientific research, it is very unlikely that the appellant would donate such a huge amount of money. In this regard, if is considered appropriate to take support of the ratio laid down by the Hon'ble ITAT “C" Bench, Mumbai in its order dated 21.06.2017 wherein the Hon'ble Tribunal in adjudicating the issue relating to Section 35(1)(iv) has held as under:-

“11. We fail to understand how the assessee incurs only capital expenditure on R&D relating to its own business without incurring any revenue expenditure on R&D. Therefore, when the assessee accepts that the revenue expenditure on R&D is relating to the business of the parent company logically it must follow that the capital expenditure on R&D also belongs 'to the parent company. The assessee cannot blow hot and cold at the same time by claiming capital expenditure on R&D on its own account and revenue expenditure on R&D in the account of its parent company. In any case of the mater, the assessee has not brought any evidence before us to conclusively prove that the capital expenditure claimed a deduction u/s.35(1)(iv) of the Act is related to R&D activities carried on for assessee's own business. In that view of the matter, one of the conditions of the section 35(1)(iv)of the Act is not Justified. In other words, the assesses has failed to prove that the scientific research in relation to which capital expenditure was incurred is carried on for assessee's own business. That being the case, assessee is not eligible to claim deduction Under Section 35(1)(iv) of the Act. Resultantly the Assessing Officer was in error while allowing deduction claimed Under Section 35(1)(iv) of the Act which has caused prejudice to the revenue. Therefore, CIT was justified in revising the Assessment Order by invoking his powers Under Section 263 of the Act. Before parting we may briefly analyze the decisions cited before its. In case of CIT v. Sandoz India Ltd. (74 Taxman 225), the claim of capital expenditure was in respect of an approach road to the R&D facilities of the assessee. The department disallowed assessee's claim of deduction Under 'Section 35(1)(iv) of the Act on the reasoning that the road can be used not only by assessee but by others also. In this context the Hon'ble High Court held that primarily the expenditure incurred for the approach road was related to the business of the assessee. The fact that the approach road may benefit third parties would not disentitle the assessee from claiming the deduction. However, the facts in assessee's case are different as discussed by us earlier, the entire R&D activities, was carried on by the assessee for the benefit of its parent company and not for itself. Therefore, one of the basic

5 Jayshree Kirit Shah conditions of Section 35(l)(iv) of the Act is not fulfilled. Similarly, in case of the ACIT v. Consolidated Energy Consultants Ltd (63 SOT 10) (Indore Tribunal) it was found as a fact that the assessee was doing research in the field of development of wind power on its own which was used for the benefit of public. Therefore, it was held that the assessee was eligible for deduction Under Section 35(1)(iv) of the Act However, the facts are different in case of the assessee, as the assessee is not doing anything for the benefit of the public. On the other hand, in case of Ciba India (P.) Ltd. v. Income tax Officer, 9(1)3, Mumbai (Supra) the Tribunal held that assessee is not entitled to claim deduction Under Section 35(1)(iv) of the Act as the capital expenditure on scientific research related to its subsidiaries. The (AY.2007-08) M/s SI GROUP INDIA LTD other decisions cited by the Learned. AR were found to be factually distinguishable, hence, not applicable to the assessee's case. In view of the aforesaid upholding the impugned order of Ld. CIT we dismiss the grounds raised by the assessee.”

9. I have heard learned Departmental Representative and perused the record. I note that the assessee has submitted the necessary evidence for the payment as noted above by learned CIT(A) himself. Learned CIT(A) is passing a peculiar order, when he says that the party to whom payment has been made has been made found to be bogus entity, at the same time learned CIT(A) says that since assessee has not produced the party or obtained a confirmation, it cannot be said that the payment is made to the said party. It is further strange that the assessee’s plea of cross examination opportunity the said party is being rejected by counter observation that the same party has not been produced by the assessee. Be as it may I note that the issue is squarely covered against the Revenue by the decision of the ITAT in the case of Sopariwala Exports Pvt. Ltd. (ITA No.2039/Mum/2018 vide order dated 17.6.2021) has decided the identical issue in favour of the assessee by observing as under :- 11. Upon careful consideration we note that identical issue was decided in favour of the assessee in the aforesaid decisions of the ITAT. We may refer to the decision in the case of Kitchen Essentials (supra) as under :-

6 Jayshree Kirit Shah “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

7 Jayshree Kirit Shah 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 8 Jayshree Kirit Shah 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

9 Jayshree Kirit Shah 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 10 Jayshree Kirit Shah 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.”

Pronounced in the open court on 21.10.2021.