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Facts
The assessee, Rashleela Enterprises Pvt. Ltd., donated Rs. 1 Crore to a research trust. During investigation, the trust was found to be bogus. The AO disallowed the donation and made an addition. The CIT(A) upheld the AO's order. The assessee is in appeal before the ITAT.
Held
The Tribunal held that under Explanation to Section 35(1)(iii) of the Act, a deduction for a sum paid to a research organization shall not be denied merely because the approval granted to the organization was subsequently withdrawn. The onus is on the authorities to monitor the entity, not on the assessee to verify its genuineness.
Key Issues
Whether the assessee is entitled to deduction for donation to a research institution when the institution's approval was subsequently withdrawn retrospectively?
Sections Cited
147, 148, 151, 143(3), 35(1)(ii), 35CCA
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, JAIPUR BENCH “A”, JAIPUR
Before: Dr. S. SEETHALAKSHMI & SHRI GAGAN GOYAL
This appeal by assessee is directed against the order of CIT (A), Jaipur-4, dated 27.11.2024 passed u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’). The assessee has raised the following grounds of appeal: -
1. In the facts and circumstances of the case and in law, Ld. CIT(A) has erred in confirming the action of the Ld. AO in reopening the assessment under Section 147 of Income Tax Act, 1961 ("ITA"). The action of the Ld. CIT (A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing the reassessment proceedings being illegal and without any basis.
2. In the facts and circumstances of the case and in law, Ld. CIT (A) has erred in confirming the action of the Id. AO in issuing notice under Section 148 of the Act without obtaining proper sanction under Section 151 of the ITA. The action of the Ld. CIT (A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing the reassessment proceedings being illegal and without jurisdiction.
3. In the facts and circumstances of the case and in law, Ld. CIT(A) has erred in confirming the action of the Ld. AO, in passing the order without proper opportunity of cross examination. The action of the Ld. CIT (A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing the entire order passed by the Id. AO, being illegal and against the principle of natural justice.
4. In the facts and circumstances of the case and in law, Ld. CIT(A) has erred in confirming the action of the Id. AO in making disallowance of donation claimed under Section 35(1)(ii) amounting to Rs. 1,00,00,000. The action of the Ld. CIT (A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by allowing the claim under Section 35(1) (ii).
5. In the facts and circumstances of the case and in law, Ld. CIT(A) has erred in confirming the action of the Ld. AO in making addition of Rs. 8,00,000 (being 8% of Rs. 1,00,00,000). The action of the Ld. CIT (A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by deleting the said addition of Rs. 8, 00,000.
6. the assessee company craves its right to add, amend or alter any of the grounds on or before the hearing.
2. The brief facts of the case are that the assessee company filed its return of income on 26.09.2012 declaring total income at Rs. 7,22,80,700/-. The case of the assessee was assessed u/s. 143(3) of the Act vide order dated: 25.03.2015. Information received from the office of the DGIT (Inv.), Kolkata that the assessee under consideration has donated a sum of Rs. 1 Cr. To School of Human Genetics and Population Health Trust (SHGPH). During investigation by the office of DGIT (Inv.), Kolkata M/s. SHGPH found to be a bogus organization involved in the activity of accommodation entries in the guise of donations eligible for claim u/s. 35(1)(ii) of the Act. Based on these inputs, the case of the assessee was re-opened u/s. 148 vide notice dated: 27.09.2016. Ultimately after a detailed deliberation on the issue between the assessee and AO, the amount of donation of Rs. 1 Cr + 8 Lacs as commission disallowed/added back to the income of the Assessee. The assessee being aggrieved with this order preferred an appeal before the Ld. CIT (A), who in turn confirmed the order of the AO and dismissed the appeal of the assessee. The assessee being further aggrieved preferred the present appeal before us.
3. We have gone through the order of the AO, order of the Ld. CIT (A) and submissions of the assessee alongwith grounds taken before us. The assessee has taken as much as six grounds before us. Ground Nos. 1-3 is legal in nature and challenging the procedure adopted by the Revenue. These grounds we are not adjudicating and left open for the assessee and may be raised in future, if required. Ground No. 6 is general in nature and not pressed by the assessee, hence dismissed. In the present appeal we adjudicating ground nos. 4 and 5 based on the facts of the case and law applicable.
Here before discussing the facts of the case, we deem it fit to refer the provisions of section 35 of the Act, under which the assessee had claimed expenditure as under:
(1) In respect of expenditure on scientific research, the following deductions shall be allowed— (i) any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business. Explanation.—Where any such expenditure has been laid out or expended before the commencement of the business (not being expenditure laid out or expended before the 1st day of April, 1973) on payment of any salary [as defined in Explanation 2 below sub- section (5) of section 40A] to an employee engaged in such scientific research or on the purchase of materials used in such scientific research, the aggregate of the expenditure so laid out or expended within the three years immediately preceding the commencement of the business shall, to the extent it is certified by the prescribed authority to have been laid out or expended on such scientific research, be deemed to have been laid out or expended in the previous year in which the business is commenced ; (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; (iia) any sum paid to a company to be used by it for scientific research:
Provided that such company— (A) is registered in India, (B) has as its main object the scientific research and development, (C) is, for the purposes of this clause, for the time being approved by the prescribed authority in the prescribed manner, and (D) fulfils such other conditions as may be prescribed; (iii) any sum paid to a research association which has as its object the undertaking of research in social science or statistical research or to a university, college or other institution to be used for research in social science or statistical 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. 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) or to a company to which clause (iia) 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) or to a company referred to in clause (iia) has been withdrawn; (iv) in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of sub-section (2):
Provided that the research association, university, college or other institution referred to in clause (ii) or clause (iii) shall make an application in the prescribed form and manner to the Central Government for the purpose of grant of approval, or continuance thereof, under clause (ii) or, as the case may be, clause (iii): Provided further that the Central Government may, before granting approval under clause (ii) or clause (iii), call for such documents (including audited annual accounts) or information from the research association], university, college or other institution as it thinks necessary in order to satisfy itself about the genuineness of the activities of the research association, university, college or other institution and that Government may also make such inquiries as it may deem necessary in this behalf : Provided also that any notification issued, by the Central Government under clause (ii) or clause (iii), before the date on which the Taxation Laws (Amendment) Bill, 2006 receives the assent of the President, shall, at any one time, have effect for such assessment year or years, not exceeding three assessment years (including an assessment year or years commencing before the date on which such notification is issued) as may be specified in the notification: Provided also that where an application under the first proviso is made on or after the date on which the Taxation Laws (Amendment) Bill, 2006 receives the assent of the President, every notification under clause (ii) or clause (iii) shall be issued or an order rejecting the application shall be passed within the period of twelve months from the end of the month in which such application was received by the Central Government: Provided also that every notification under clause (ii) or clause (iii) in respect of the research association, university, college or other institution or under clause (iia) in respect of the company issued on or before the date on which this proviso has come into force, shall be deemed to have been withdrawn unless such research association, university, college or other institution referred to in clause (ii) or clause (iii) or the company referred to in clause (iia) makes an intimation in such form and manner, as may be prescribed, to the prescribed income-tax authority within three months from the date on which this proviso has come into force, and subject to such intimation the notification shall be valid for a period of five consecutive assessment years beginning with the assessment year commencing on or after the 1st day of April, 2022: Provided also that any notification issued by the Central Government under clause (ii) or clause (iia) or clause (iii), after the date on which the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Bill, 2020 receives the assent of the President, shall, at any one time, have effect for such assessment year or years, not exceeding five assessment years as may be specified in the notification. (1A) Notwithstanding anything contained in sub-section (1), the deduction in respect of any sum paid to the research association, university, college or other institution referred to in clause (ii) or clause (iii), or the company referred to in clause (iia) of sub-section (1), shall not be allowed, unless such research association, university, college or other institution or company— (i) prepares such statement for such period as may be prescribed and deliver or cause to be delivered to the said prescribed income-tax authority or the person authorised by such authority such statement in such form, verified in such manner, setting forth such particulars and within such time, as may be prescribed: Provided that such research association, university, college or other institution or the company may also deliver to the prescribed authority a correction statement for rectification of any mistake or to add, delete or update the information furnished in the statement delivered under this sub-section in such form and verified in such manner as may be prescribed; (ii) Furnishes to the donor, a certificate specifying the amount of donation in such manner, containing such particulars and within such time from the date of receipt of sum, as may be prescribed. (2) For the purposes of clause (iv) of sub-section (1), — (i) in a case where such capital expenditure is incurred before the 1st day of April, 1967, one-fifth of the capital expenditure incurred in any previous year shall be deducted for that previous year; and the balance of the expenditure shall be deducted in equal instalments for each of the four immediately succeeding previous years; (ia) in a case where such capital expenditure is incurred after the 31st day of March, 1967, the whole of such capital expenditure incurred in any previous year shall be deducted for that previous year :] Provided that no deduction shall be admissible under this clause in respect of any expenditure incurred on the acquisition of any land, whether the land is acquired as such or as part of any property, after the 29th day of February, 1984.] Explanation 1. —Where any capital expenditure has been incurred before the commencement of the business, the aggregate of the expenditure so incurred within the three years immediately preceding the commencement of the business shall be deemed to have been incurred in the previous year in which the business is commenced. Explanation 2. —For the purposes of this clause, — (a) "land" includes any interest in land; and (b) the acquisition of any land shall be deemed to have been made by the assessee on the date on which the instrument of transfer of such land to him has been registered under the Registration Act, 1908 (16 of 1908), or where he has taken or retained the possession of such land or any part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882), the date on which he has so taken or retained possession of such land or part ;] (ii) notwithstanding anything contained in clause (i), where an asset representing expenditure of a capital nature incurred before the 1st day of April, 1967, ceases to be used in a previous year for scientific research related to the business and the value of the asset at the time of the cessation, together with the aggregate of deductions already allowed under clause (i) falls short of the said expenditure, then—
(a) there shall be allowed a deduction for that previous year of an amount equal to such deficiency, and (b) no deduction shall be allowed under that clause for that previous year or for any subsequent previous year; (iii) if the asset mentioned in clause (ii) is sold, without having been used for other purposes, in the year of cessation, the sale price shall be taken to be the value of the asset at the time of the cessation ; and if the asset is sold, without having been used for other purposes, in a previous year subsequent to the year of cessation, and the sale price falls short of the value of the asset taken into account at the time of cessation, an amount equal to the deficiency shall be allowed as a deduction for the previous year in which the sale took place ; (iv) where a deduction is allowed for any previous year under this section in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed under clause (ii) of sub-section (1)] of section 32 for the same or any other previous year in respect of that asset; (v) where the asset mentioned in clause (ii)] is used in the business after it ceases to be used for scientific research related to that business, depreciation shall be admissible under clause (ii) of sub-section (1) of section 32.
(2A) Where , before the 1st day of March, 1984, the assessee pays any sum (being any sum paid with a specific direction that the sum shall not be used for the acquisition of any land or building or construction of any building) to a scientific research association or university or college or other institution referred to in clause (ii) of sub-section (1) or to a public sector company to be used for scientific research undertaken under a programme approved in this behalf by the prescribed authority having regard to the social, economic and industrial needs of India, then,— (a) there shall be allowed a deduction of a sum equal to one and one-third times the sum so paid; and (b) no deduction in respect of such sum shall be allowed under clause (ii) of sub-section (1) for the same or any other assessment year.
Explanation. —For the purposes of this sub-section, "public sector company" shall have the same meaning as in clause (b)of the Explanation below sub-section (2B) of section 32A. (2AA) Where the assessee pays any sum to a National Laboratory or a University or an Indian Institute of Technology or a specified person with a specific direction that the said sum shall be used for scientific research undertaken under a programme approved in this behalf by the prescribed authority, then— (a) there shall be allowed a deduction of a sum equal to one and one-half times the sum so paid; and (b) no deduction in respect of such sum shall be allowed under any other provision of this Act:
Provided that the prescribed authority shall, before granting approval, satisfy itself about the feasibility of carrying out the scientific research and shall submit its report to the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General in such form as may be prescribed:] Provided further that where any sum is paid to such National Laboratory or university or Indian Institute of Technology or specified person in a previous year relevant to the assessment year beginning on or after the 1st day of April, 2021, the deduction under this sub-section shall be equal to the sum so paid. Explanation 1. —The deduction, to which the assessee is entitled in respect of any sum paid to a National Laboratory, University, Indian Institute of Technology or a specified person for the approved programme referred to in this sub-section, shall not be denied merely on the ground that, subsequent to the payment of such sum by the assessee, the approval granted to, — (a) such Laboratory, or specified person has been withdrawn; or (b) the programme, undertaken by the National Laboratory, University, Indian Institute of Technology or specified person, has been withdrawn.] Explanation [2]. —For the purposes of this section, — (a) "National Laboratory" means a scientific laboratory functioning at the national level under the aegis of the Indian Council of Agricultural Research, the Indian Council of Medical Research, the Council of Scientific and Industrial Research, the Defence Research and Development Organisation, the Department of Electronics, the Department of Bio-Technology or the Department of Atomic Energy and which is approved as a National Laboratory by the prescribed authority in such manner as may be prescribed ; (b) "University" shall have the same meaning as in Explanation to clause (ix) of section 47; (c) "Indian Institute of Technology" shall have the same meaning as that of "Institute" in clause (g) of section 3 of the Institutes of Technology Act, 1961 (59 of 1961)]; (d) "Specified person" means such person as is approved by the prescribed authority.] (2AB)(1) Where a company engaged in the business of bio-technology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of a sum equal to one and one-half times of the expenditure so incurred: Provided that where such expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility is incurred 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 expenditure so incurred. Explanation. —For the purposes of this clause, "expenditure on scientific research", in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970). (2) No deduction shall be allowed in respect of the expenditure mentioned in clause (1) under any other provision of this Act. (3) No company shall be entitled for deduction under clause (1) unless it enters into an agreement with the prescribed authority for co-operation in such research and development facility and [fulfils such conditions with regard to maintenance of accounts and audit thereof and furnishing of reports in such manner as may be prescribed. (4) The prescribed authority shall submit its report in relation to the approval of the said facility to the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General in such form and within such time as may be prescribed. (5) [***] (6) No deduction shall be allowed to a company approved under sub-clause (C) of clause (iia) of sub-section (1) in respect of the expenditure referred to in clause (1) which is incurred after the 31st day of March, 2008. (2B)(a) Where , before the 1st day of March, 1984, an assessee has incurred any expenditure (not being in the nature of capital expenditure incurred on the acquisition of any land or building or construction of any building) on scientific research undertaken under a programme approved in this behalf by the prescribed authority having regard to the social, economic and industrial needs of India, he shall, subject to the provisions of this sub-section, be allowed a deduction of a sum equal to one and one-fourth times the amount of the expenditure certified by the prescribed authority to have been so incurred during the previous year. (b) Where a deduction has been allowed under clause (a) for any previous year in respect of any expenditure, no deduction in respect of such expenditure shall be allowed under clause (i) of sub-section (1) or clause (ia) of sub-section (2) for the same or any other previous year. (c) Where a deduction is allowed for any previous year under this sub-section in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed in respect of that asset under clause (ii) of sub-section (1) of section 32 for the same or any subsequent previous year. (d) Any deduction made under this sub-section in respect of any expenditure on scientific research in excess of the expenditure actually incurred shall be deemed to have been wrongly made for the purposes of this Act if the assessee fails to furnish within one year of the period allowed by the prescribed authority for completion of the programme, a certificate of its completion obtained from that authority, and the provisions of sub-section (5B) of section 155 shall apply accordingly.] (3) If any question arises under this section as to whether, and if so, to what extent, any activity constitutes or constituted, or any asset is or was being used for, scientific research, the Board shall refer the question to— (a) the Central Government, when such question relates to any activity under clauses (ii) and (iii) of sub-section (1), and its decision shall be final; (b) the prescribed authority, when such question relates to any activity other than the activity specified in clause (a), whose decision shall be final.
(4) The provisions of sub-section (2) of section 32 shall apply in relation to deductions allowable under clause (iv) of sub-section (1) as they apply in relation to deductions allowable in respect of depreciation. (5) Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers to the amalgamated company (being an Indian company) any asset representing expenditure of a capital nature on scientific research, — (i) the amalgamating company shall not be allowed the deduction under clause (ii) or clause (iii) of sub-section (2); and (ii) the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the latter had not so sold or otherwise transferred the asset.
5. The above provisions of section 35 of the Act alongwith similar set of facts thoroughly analysed by the Hon’ble Calcutta high Court in the case of [2022] 144 taxmann.com 39 (Cal.) PCIT vs. Maco Corpn. (India) (P.) Ltd. and held as under:
“4. The short issue involved in the instant case is whether the donation given by the assessee to two organizations can be held to be not genuine on the ground that the registration granted to those organisations under section 35C of the Act having been cancelled with retrospective effect. On facts, the tribunal noted that there is nothing on record to show that the respondent/assessee connived with the scheme of arrangement between the concerns in bogus billing etc. The factual finding recorded by the CIT (A) is to the following effect: "5.5 It has been brought to my notice that vide notification No. 82/2016 dated 15-9- 2016 and notification No. 79/2016 dated 6-9-2016 the registration of SHG&PH & HHBHRF respectively has been cancelled by CBDT. Thus, there remains no doubt that these concerns were engaged in the improper utilization of moneys received by them. If the statements are taken at face value, then on perusal of extracts of statements of brokers/mediators/and entry operators as reproduced in the assessment order I find that there remains no doubt that the management of these concerns were directly or indirectly engaged is misappropriating the funds and not utilizing the donation amounts entirely for research related activities. However, the connivance of appellant in this scheme of arrangements between these concerns as well as the bogus billing parties is not established either by DDIT, (Inv.), Kolkata or by the AD. The allegation that the cash was refunded to the appellant after deducting commission by these concerns remains in serious doubt. It is observed that a suspicion how so ever strong it may be cannot form disallowing any claim of the appellant until any material is brought on record."
After noting the above factual position, the tribunal examined the law on the subject and took note of the decision of the Hon'ble Supreme Court in the case of Industrial Infrastructure Development Corpn. (Gwalior) M.P. Ltd. v. CIT [2018] 90 taxmann.com 281/253 Taxman 480/403 ITR 1.
6. In our considered view, we need not travel thus far to decide the substantial question of law in the case on hand as we are considering the case falling under section 35 of the Act. In terms of Explanation to section 35(1)(iii) of the Act, deductions to which the assessee is entitled to in respect of any sum paid to a research organisation, university etc. shall not be denied merely on the ground that subsequent to the payment of such sum by the assessee, the approval granted to the research organisation or university etc. has been withdrawn. This issue was considered by the Hon'ble Supreme Court in the case of CIT v. Chotatingrai Tea [2003] 126 Taxman 399/ [2002] 258 ITR 529. The operative portion of the said decision is as follows: "It is not in dispute that the assessee had made donations to the Society for Integral Development, Calcutta, which had as its object the undertaking to carry out approved programmes of rural development. The society had granted a certificate to the assessee which had also been approved by the prescribed authority.
According to the Revenue authorities the assessee was not entitled to deduction as claimed despite the aforesaid because subsequently the approval granted by the prescribed authority was withdrawn with retrospective effect. It was also alleged that the assessee had received back the donation which had been made by them to the society. When the matter came up before the Tribunal at the instance of the assessee, the Tribunal found, as a matter of fact that the assessee had fulfilled all the conditions under section 35CCA of the Act for grant of deduction there under. The Tribunal also found that the assessee’s position could not be affected by any subsequent withdrawal of the certificate granted by the prescribed authority under section 35CCA but found that there was no evidence in support of the Revenue's case that the assessee had received back the amount donated by them to the society. However, the matter was remanded back to the Assessing Officer for fresh disposal for the purpose of determining whether the money had in fact been utilised for an approved programme. Pursuant to the directions of the High Court the following questions were referred under section 256(2) of the Act (page 645): (1) Whether, on the facts and in the circumstances of the case, the Tribunal having held that the assessee have fulfilled all the conditions laid down in section 35CCA of the Income-tax Act, 1961, read with rule 6AAA of the Income-tax Rules for deduction of the amount donated to the approved society, which had not come back to the assessee soon after or later on in some form or the other, that the Tribunal was justified in law in restoring the matter to the Assessing Officer on the reasons and grounds given in the order passed on appeal? (2) Whether, on the facts and in the circumstances of the case, and in view of the findings of facts recorded by the Tribunal on questions of facts arising for decision, the Tribunal was justified in law in holding that the entitlement of the assessee for claiming deduction of the amount donated to the approved society would depend upon the utilisation of such fund by the approved society in the approved programme before the date specified in the section and on this basis only restoring the matter to the Assessing Officer?" The High Court followed the reasoning of the Calcutta High Court in CIT v. Bhartia Culter Hammer Co. [1998] 232 ITR 785, and came to the conclusion that once it was found that the assessee had fulfilled all the conditions which had been laid down under section 35CCA of the Act for claiming deduction of the amount donated by it, there was no obligation on the part of the assessee to see that the amount was utilised for the purpose for which it was donated. Furthermore, the deduction was allowed on the certificate furnished and it was not for the assessee to show whether the institution to which the money had been donated was carrying on the rural development work, as envisaged under section 35CCA of the Act. In our view, the reasoning of the High Court while answering the question referred to it in favour of the assessee is sound and calls for no interference."
[2003] 126 Taxman 399 (SC) CIT vs. Chotatingrai Tea
“These appeals have been preferred from the decision of the Gauhati High Court in the case of Chotatingrai Tea Estate (P.) Ltd. v. CIT [1999] 236 ITR 644 in which the High Court has set aside the order passed by the Income-tax Appellate Tribunal, Gauhati ('the Tribunal'), remanding the matter back to the Assessing Officer for the purpose of determining whether the assessee who had, admittedly, fulfilled the conditions for claiming deduction under section 35CCA of the Income-tax Act ('the Act'), could subsequently become disentitled to the said deduction by reason of subsequent events. Section 35CCA provides: "Expenditure by way of payment to associations and institutions for carrying out rural development programmes. — (1) Where an assessee incurs any expenditure by way of payment of any sum— (a)to an association or institution, which has as its object the undertaking of any programme of rural development, to be used for carrying out any programme of rural development approved by the prescribed authority; or **" ** ** The assessee shall, subject to the provisions of sub-section (2), be allowed a deduction of the amount of such expenditure incurred during the previous year. (2) The deduction under clause (a) of sub-section (1) shall not be allowed in respect of expenditure by way of payment of any sum to any association or institution referred to in the said clause unless the assessee furnishes a certificate from such association or institution to the effect that—
(a) the programme of rural development had been approved by the prescribed authority before the 1st day of March, 1983; and (b) where such payment is made after the 28th day of February, 1983, such programme involves work by way of construction of any building or other structure (whether for use as a dispensary, school, training or welfare centre, workshop or for any other purpose) or the laying of any road or the construction or boring of a well or tube-well or the installation of any plant or machinery, and such work has commenced before the 1st day of March, 1983.
(2A) the deduction under clause (b) of sub-section (1) shall not be allowed in respect of expenditure by way of payment of any sum to any association or institution unless the assessee furnishes a certificate from such association or institution to the effect that—
(a) the prescribed authority had approved the association or institution before the 1st day of March, 1983; and (b) the training of persons for implementing any programme of rural development had been started by the association or institution before the 1st day of March, 1983.
(2B) No certificate of the nature referred to in sub-section (2) or sub-section (2A) shall be issued by any association or institution unless such association or institution has obtained from the prescribed authority authorisation in writing to issue certificates of such nature. Explanation. —For the purposes of this section, 'programme of rural development' shall have the meaning assigned to it in the Explanation to sub-section (1) of section 35CC." It is not in dispute that the assessee had made donations to the Society for Integral Development, Calcutta, which had as its object the undertaking to carry out approved programmes of rural development. The society had granted a certificate to the assessee which had also been approved by the prescribed authority. According to the Revenue authorities the assessee was not entitled to deduction as claimed despite the aforesaid because subsequently the approval granted by the prescribed authority was withdrawn with retrospective effect. It was also alleged that the assessee had received back the donation which had been made by them to the society. When the matter came up before the Tribunal at the instance of the assessee, the Tribunal found, as a matter of fact that the assessee had fulfilled all the conditions under section 35CCA of the Act for grant of deduction there under. The Tribunal also found that the assessee’s position could not be affected by any subsequent withdrawal of the certificate granted by the prescribed authority under section 35CCA but found that there was no evidence in support of the Revenue's case that the assessee had received back the amount donated by them to the society. However, the matter was remanded back to the Assessing Officer for fresh disposal for the purpose of determining whether the money had in fact been utilised of an approved programme. Pursuant to the directions of the High Court the following questions were referred under section 256(2) of the Act:
"1. Whether, on the facts and in the circumstances of the case, the Tribunal having held that the assessee have fulfilled all the conditions laid down in section 35CCA of the Income-tax Act, 1961, read with rule 6AAA of the Income-tax Rules for deduction of the amount donated to the approved society, which had not come back to the assessee soon after or later on in some form or the other, that the Tribunal was justified in law in restoring the matter to the Assessing Officer on the reasons and grounds given in the order passed on appeal ?
Whether, on the facts and in the circumstances of the case, and in view of the findings of facts recorded by the Tribunal on questions of facts arising for decision, the Tribunal was justified in law in holding
that the entitlement of the assessee for claiming deduction of the amount donated to the approved society would depend upon the utilisation of such fund by the approved society in the approved programme before the date specified in the section and on this basis only restoring the matter to the Assessing Officer ?" (p. 645)
The High Court followed the reasoning of the Calcutta High Court in CIT v. Bhartia Cutler Hammer Co. [1998] 232 ITR 785, and came to the conclusion that once it was found that the assessee had fulfilled all the conditions which had been laid down under section 35CCA of the Act for claiming deduction of the amount donated by it, there was no obligation on the part of the assessee to see that the amount was utilised for the purpose for which it was donated. Furthermore, the deduction was allowed on the certificate furnished and it was not for the assessee to show whether the institution to which the money had been donated was carrying on the rural development work, as envisaged under section 35CCA of the Act. In our view, the reasoning of the High Court while answering the question referred to it in favour of the assessee is sound and calls for no interference. The final submission of learned counsel appearing on behalf of the appellant is that the High Court's final observation that the order of the Tribunal remanding the matter back for decision would stand quashed and that the assessee were entitled to claim deduction was beyond the jurisdiction of the High Court. Learned counsel for the appellant may be technically correct but what has been observed by the High Court was as a necessary corollary to the answer on the referred question which was merely spelt out by the High Court.
It is observed that no live link has been established by the department, further the case of bogus accommodation entries like cash credits, LTCG/STCL can’t be equated with the matter under consideration, the reason being the specific provisions of the section 35 of the Act Itself. Section 35 of the Act have two limbs, i.e. first limb of the section deals with the donations made by the donor entity and the second limb deals with the donee, i.e. the institution accepted the donations. The relevant provisions of section 35 of the Act are already reproduced and discussed (supra).
Till Section 35(1) of the Act with its sub-clauses, two explanations and four provisos it deals with the matter of deduction allowable to the donor. Rest of the section regulates the part of the organisation receiving the donations. A detailed check and balance mechanism is there and top officials including the Central Board of Direct Taxes (CBDT) are involved in the process of granting registration and concurrent verification and scrutiny process, that’s why here the onus is on the official and CBDT involved to monitor the operations of the entity registered u/s. 35 of the Act. There is no burden on the assessee to verify the facts about genuineness or otherwise of the operations of the donee organisation. To further strengthen its intent, legislature in its own wisdom provided explanation-2 below section 35(1) of the Act as reproduced (supra). In view of the above facts and legal preposition, the AO is directed to allow the claim of the assessee and order of the authorities below are set-aside.
In the result, the appeal of the assessee is allowed.
Order is pronounced in the open court on the 25th day of March 2025.