SRI. SENAPATHY GOPALAKRISHNAN,BANGALORE vs. INCOME TAX OFFICER, WARD- 3(1)(4), BANGALORE

The only issue that arises for consideration in this appeal is as to, whether the revenue authorities were justified in denying the benefit of

The assessee is an individual. For the AY 2016-17, he filed a return of income declaring total income of Rs.NIL and claiming a refund of Rs.1,12,08,993. The computation of total income filed by the assessee is extracted in page 4 of the order of the AO and the same is as follows:-

It can be seen from the aforesaid computation of total income that under the head ‘income from business or profession’, the assessee had claimed loss of Rs.4,52,77,277. During the previous year, the assessee received management & consultancy fee of Rs.72,35,915 and the same

In reply to the aforesaid query of the AO, the assessee submitted that Section 35(1)(i ) governs the expenditure laid out or expended on scientific research related to assessee's business. whereas. Section 35(1)(ii) deals with deduction allowable in respect of amount paid to many undertaking of scientific research or to a university, college or other institution to be used for scientific research. In other words. deduction u/s. 35(1)(ii) is not dependent on whether the amount paid is related to assessee’s business or not. Since the above section is placed in Part D of Chapter IV which deals with computation of profits and gains of business or profession, the only condition to be fulfilled by the assessee is, he needs to have income chargeable under the head 'Income from Business or Profession'.

It was submitted that the assessee is not eligible to claim the same under 80GGA which deals with deductions in respect of Donations to Scientific Research/ Social Research or Rural Development since the sub-section (3) of 80GGA bars the deductions to assessee whose gross total income includes income chargeable under the head "Profits and Gains of Business or Profession".

It was further submitted that the assessee earns management consultancy income from foreign companies for which a separate bank account (No.400024451750019) is maintained with Deutsche Bank which is exclusively used for his foreign consultancy income. Financials are prepared only for his consultancy income which were subjected to tax audit u/s. 44AB of the Act. Copy of the financials and Bank statement for the year ended 31st March 2016 was furnished before the AO. However, the said donation to NCBS was made out of his personal bank account with ICICI Bank. a copy of which was already furnished to the AO and hence the said donation is not appearing in his Income and Expenditure account. The Assessee claimed that since he

The AO, however, held that income in the form of management consultancy fee received by the assessee during the previous year was only Rs.72,35,915 and this sum after setting off expenses was transferred to assessee’s capital account. According to the AO, it was therefore clear that the sum of Rs.3 crores paid to NCBS(TIFR) was not paid out of business income and that the same was paid out of exempt income earned by assessee and therefore cannot be said to be incurred for the purpose of business of assessee. According to the AO, since the expenditure in question was not incurred as business expenditure, the claim of deduction u/s. 35(1)(ii) cannot be allowed.

Before the CIT(Appeals), the assessee reiterated the submissions made before the AO that to claim deduction u/s. 35(1)(ii), the expenditure need not be related to the business of assessee. The assessee also submitted that it is not a condition precedent for allowing deduction u/s. 35(1)(ii) that the contribution/donation should be given out of business income. In this regard, the assessee placed reliance on the decision of the ITAT Bangalore Bench in the case of Infosys Technologies Ltd. v. JCIT [2008] 19 SOT 7 (Bang) (URO). In the aforesaid decision, deduction u /s. 80G claimed by the assessee was denied on the ground that donation was made out of profits of an unit which was exempt u/s. 10A of the Act. The Tribunal, however, held that there is no stipulation in section 80G of the Act that the donation is to be paid only out of taxable income of the year [para 4.6 of the aforesaid decision of Tribunal]. Based on the same analogy, the assessee contended that though the donation was given out of income earned by the assessee, which was exempt, deduction u/s. 35(1)(ii) cannot be denied to assessee.

The CIT(Appeals), however, sustained the order of the AO on the only basis that donation in question was made to the corpus fund and therefore it cannot be said that it is a donation made for the purpose of scientific research. For coming to the aforesaid conclusion, the CIT(A) relied on the bank statement of the assessee, which evidences the payment of donation to NCBS. The entry in the Bank Statement had a description “NCBS Corpus”. This is the basis on which the CIT(A) came to the conclusion that the assessee made donation to corpus fund and since the donation was to a corpus fund, deduction cannot be used for scientific research. The CIT(A) relied on the decision of ITAT Bombay Bench in the case of Sherpur Medical Research Co. v. ITO [1986] 18 ITD 303 (Bom) wherein the Tribunal took the view that deduction u/s. 35(1) cannot be allowed if donation is paid towards corpus fund. The CIT(A) accordingly upheld the order of AO.

Aggrieved by the order of CIT(A), the assessee is in appeal before the Tribunal.

The assessee has filed an application under Rule 29 of the ITAT Rules, 1963, seeking to file additional evidence of the approval granted to NCBS-TIFR u/s. 35(1)(ii) of the Act. The assessee has also filed a letter dated 4.6.2019 written by NCBS to assessee pointing out that the donation of Rs.3 crores paid by the assessee was not towards any corpus fund and that NCBS was free to use the aforesaid sum for scientific research. In the application for admission of additional evidence, the assessee has stated that the CIT(A) did not confront the assessee about his intention to confirm the order of AO on the ground that donation was made to a corpus fund and therefore it cannot be regarded as a donation to be used for scientific research. It is only after the receipt of the impugned order of CIT(A) that the assessee made a request to NCBS to confirm the fact that donation

We have considered the request of assessee for admission of additional evidence and are satisfied that the additional evidence relied upon by the assessee is necessary for proper adjudication of the dispute in this appeal and the same is accordingly admitted. We also find that the first date of hearing was 22.5.2019 and the submissions of the assessee in the appeal before CIT(A) were filed on 22.5.2019. The impugned order of the CIT(A) was passed on 30.5.2019 and there was no other hearing date between 22.5.2019 and 30.5.2019. Therefore there is merit in the submission of assessee that CIT(A) did not confront the assessee about his proposal to sustain the order of AO on the ground that the donation made by assessee to NCBS was towards corpus and therefore not eligible for deduction u/s. 35(1)(ii) of the Act. The additional evidence is therefore admitted for adjudication.

The ld. counsel for assessee while reiterating the submissions made before the CIT(Appeals) further submitted that in the light of the confirmation now filed before the Tribunal, it cannot be said that the donation made by the assessee was to a corpus fund and therefore the decision of ITAT Bombay in the case of Sherpur Medical Research Co. (supra) cannot be applied to the facts of assessee’s case. Since the assessee satisfied all other conditions for grant of deduction, the same should be allowed to the assessee.

The ld. DR relied on the order of CIT(Appeals).

After considering the rival submissions, we are of the view that the case made out by the AO has not been sustained by the CIT(Appeals) and therefore the only basis on which addition has been sustained by the

In the result, the appeal of the assessee is allowed for statistical purposes.