RAJDA POLYMERS,KOLKATA vs. DCIT, CIR-36,KOLKATA, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : KOLKATA [Before Hon’ble Shri M.Balaganesh, AM & Shri S.S.Viswanethra Ravi, JM] I.T.A No. 333/Kol/2017 Assessment Year : 2013-14 Rajda Polymers -vs- DCIT, Circle-36, Kolkata [PAN: AADFR 2816 C] (Appellant) (Respondent)

For the Appellant : Shri Miraj D. Shah, AR For the Respondent : Shri Saurabh Kumar, Addl. CIT (DR)

Date of Hearing : 17.10.2017 Date of Pronouncement : 08.11.2017

ORDER Per M.Balaganesh, AM

2 ITA No.333/Kol/2017 Rajda Polymers A.Yr.2013-14 4. The brief facts of this issue is that the assessee is a partnership firm engaged in the business of trading in polymers, master batch & plastic granules and also acting as commission agent. The return of income for the Asst Year 2013-14 was filed by the assessee on 20.9.2013 disclosing total income of Rs 29,96,220/-. The ld AO observed that the assessee claimed donation of Rs 24,50,000/- (being 175% of Rs 14,00,000/-) u/s 35(1)(ii) of the Act for the donation made to The Herbicure Healthcare Bio-Herbal Research Foundation (HHBRF in short). A survey operation u/s 133A of the Act was conducted on 27.1.2015 in the case of HHBRF by the Directorate of Investigation, Kolkata. It was noticed that HHBRF is a non-profit organization which is registered as a private company limited by shares and licensed u/s 25 of the Companies Act, 1956. The organization is registered u/s 12AA of the Act. It was also approved u/s 35(1)(ii) of the Act as a scientific research organization for the purpose of deduction of account of expenditure on scientific research. The founder director of the said organization is Shri Swapan Ranjan Dasgupta. Pursuant to the survey, it came to light that HHBRF, in connivance with various persons as donors, brokers and accommodation entry providers has indulged in a devious scheme of tax evasion by defrauding revenue and has ill- profited from the incentives provided by the Government to advance and encourage scientific research or research in social science or statistical research in the country. The modus operandi involved was that after the amount of donations are received through cheque or RTGS, the amount is routed back to the donor in cash after retaining a part of the amount as commission through layers of concerns of brokers, entry operators, beneficiaries of other accommodation entries.

4.1. The assessee herein, paid a sum of Rs 14,00,000/- to HHBRF and claimed weighted deduction of 175% of the sum paid amounting to Rs 24,50,000/- (1400000 * 175% = 2450000) , u/s 35(1)(ii) of the Act in the return of income for the Asst Year 2013-14 filed on 20.9.2013. During the survey operation , statement of Shri Swapan Ranjan Dasgupta (Founder Director of HHBRF) was recorded on oath u/s 131 of the 2

3 ITA No.333/Kol/2017 Rajda Polymers A.Yr.2013-14 Act, wherein he admitted to engage in providing accommodation entries. Based on the statement of Shri Swapan Ranjan Dasgupta, the ld AO was of the opinion that the claim u/s 35(1)(ii) of the Act made by the assessee was bogus, and therefore, proceeded to disallow the claim in the sum of Rs 24,50,000/- in the assessment. This action of the ld AO was upheld by the ld CITA. Aggrieved, the assessee is in appeal before us on the following grounds:- 2. For that the additions were made on statement and evidences which were collected behind the back of the assessee and no opportunity of cross examination was allowed to the assessee. Hence, the addition should be deleted.

4 ITA No.333/Kol/2017 Rajda Polymers A.Yr.2013-14 d) HHBRF was recognized vide Gazette Notification No. 35/2008 dated 14.3.2008 issued by the Central Board of Direct Taxes (CBDT in short), Ministry of Finance, Government of India, u/s 35(1)(ii) of the Act.

5.1. We find that the assessee had explained about its commercial objective for association with such an accredited institution apart from getting an immediate tax benefit via weighted deduction for any donation made to the institution. We find that when the ld AO informed the assessee that Director of HHBRF had given some statement before the Investigation wing as per which the donation made by the assessee was to be held as a bogus transaction and assessee would be invited with consequential disallowance thereon, the assessee asked for all the adverse materials which the ld AO proposed to rely upon and also sought an opportunity to cross examine the directors of HHBRF. We find from the perusal of the assessment order, that the ld AO had denied the cross examination and by placing reliance on the statement given by directors of HHBRF , proceeded to frame the assessment u/s 143(3) of the Act in the hands of the assessee by disallowing the deduction claimed u/s 35(1)(ii) of the Act. Hence it could be safely concluded that there was no cross examination of the adverse witnesses.

5.2. We find that on the other hand, the assessee had submitted all the documents pertaining to the claim of deduction u/s 35(1)(ii) of the Act before the ld AO. The undisputed fact before us is that the assessee had paid a sum of Rs 14,00,000/- vide Cheque No. 786400 dated 28.11.2012 drawn on Canara Bank, Brabourne Road Branch, Kolkata to HHBRF, which has been acknowledged vide letter dated 6.12.2012. This payment of Rs 14,00,000/- was duly reflected in the bank statement of the assessee. Hence the source for making this payment stood clearly explained and is not in dispute before us. We find that the entire assessment is based upon the statement of directors of HHBRF. It is an undisputed fact that neither a copy of the statement was supplied to the assessee (the assessee was asked to read the same in the presence of the ld AO), nor 4

5 ITA No.333/Kol/2017 Rajda Polymers A.Yr.2013-14 was any opportunity of cross examination given by the ld AO. In this regard , the reliance placed by the ld AR on the decision of the Hon’ble Apex Court in the case of Andaman Timber Industries Ltd vs Commissioner of Central Excise in Civil Appeal No. 4228 of 2006 reported in (2015) 62 Taxman 3 (SC) is very well founded, wherein it was held that :-

"According to us, not allowing the assessee to cross-examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the assessee was adversely affected”.

5.3. We find that similar views were taken in the following decisions :-

a) Decision of Hon’ble Bombay High Court in the case of H R Mehta vs CIT reported in 387 ITR 561 (Bom) b) Decision of Hon’ble Delhi High Court in the case of CIT vs Ashwani Gupta reported in 322 ITR 396 (Del) c) Decision of Hon’ble Delhi High Court in the case of CIT vs SMC Chare Brokers Ltd reported in 288 ITR 345 (Del) d) Decision of Hon’ble Supreme Court in the case of Prakash Chand Nahta vs Union of India reported in 247 ITR 274 (SC) e) Decision of Hon’ble Jurisdictional High Court in the case of CIT vs Eastern Commercial Enterprises reported in 210 ITR 103 (Cal) f) Decision of Hon’ble Kerala High Court in the case of P.S.Abdul Majeed vs Agricultural Income Tax & Sales Tax Officer & Ors reported in 209 ITR 821 (Ker) 5.4. We find that the ld AO did not provide the material rather he merely allowed the assessee to read the statement. This, in our considered opinion, was not justified. The assessee cannot be expected to give reply to the statement without going through the 5

6 ITA No.333/Kol/2017 Rajda Polymers A.Yr.2013-14 same in detail and prepare its counter thereon. Hence it could be safely concluded that in the instant case, the ld AO did not provide the relevant materials to the assessee. Further despite request for cross examination being made by the assessee, the same was not allowed by the ld AO and hence respectfully following the aforesaid decisions of the Hon’ble Supreme Court and various High Courts supra , we hold that there was no material available with the reveneue on the basis of which it could justify its action of disallowing the claim of deduction u/s 35(1)(ii) of the Act.

5.5. Moreover, we find that the provisions of Explanation to section 35(1)(ii) of the Act also comes to the rescue of the assessee. For the sake of convenience, the said Explanation is reproduced below:-

Section 35(1)(ii) – 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.

In the instant case, the ld DR argued that the recognition u/s 35(1)(ii) of the Act was withdrawn in the case of HHBRF by the CBDT with retrospective effect. In response to this, the ld AR argued that on the date on which donation was given, the notification u/s 35(1)(ii) of the Act was in force and valid and therefore the deduction claimed by the assessee was in order. We find that the ld CITA had ignored the provisions of the Act (i.e the Explanation to Section 35(1)(ii) of the Act) by merely stating that HHBRF had subsequently declared before the Hon’ble Settlement Commission, Department of Revenue, Government of India , additional income and admitted to the modus operandi of various transactions carried out by them. But this in our considered opinion, would not serve the purpose of the revenue. Merely because the donee goes to Hon’ble

7 ITA No.333/Kol/2017 Rajda Polymers A.Yr.2013-14 Settlement Commission and declares some additional income thereon, it does not automatically implead the assessee herein on the negative side and the express provisions of the Act cannot be ignored thereon. There cannot be any malafide that could be attributed on the assessee herein. We find that the assessee was under the bonafide belief and had made proper due diligence before granting donation to HHBRF which was duly recognized u/s 35(1)(ii) of the Act at the time of giving donation. We hold that if the subsequent notification cancelled the registration u/s 35(1)(ii) of the Act, the same does not affect the donation made by the assessee when the said notification was in force. The bonafide belief of the assessee donor at the time of granting donation to an institution on the basis of recognition then available, cannot be disturbed by subsequent event. This is more clearly spelt out in the provisions of the Act itself by way of an Explanation to Section 35(1) of the Act. Hence even as per the provisions of the Act, the denial of deduction u/s 35(1)(ii) of the Act is not in order. We also find that the Hon’ble Jurisdictional High Court in the caes of B.P.Agarwalls & Sons Ltd vs CIT reported in 208 ITR 863 (Cal) and Jai Kumar Kankaria vs CIT reported in 251 ITR 707 (Cal) had held that there was no power to cancel the registration retrospectively. Hence even on this count, the deduction claimed u/s 35(1)(ii) of the Act by the assessee deserves to be allowed.

5.6. We find that the ld CITA had made an observation which has been heavily relied upon by the ld DR that the assessee’s line of business has got nothing to do even remotely with the healthcare or herbal healthcare industry much less in the area of research thereon and accordingly there was no need for the assessee to give donation of Rs 14,00,000/- to HHBRF . We find that this aspect has been duly addressed by the assessee by stating that one Cardiologist Doctor had introduced the assessee to HHBRF and donations were given after due satisfaction of the assessee based on personal visits to the two research centres of HHBRF and activities carried on by them. Moreover, it is well settled that it is always the prerogative of the assessee to give or not to give any 7

8 ITA No.333/Kol/2017 Rajda Polymers A.Yr.2013-14 donation to a particular institution, which wisdom cannot be questioned by the revenue. The question of business expediency of an expenditure had to be viewed from the point of view of the businessman and not from the view point of the revenue. The businessman knows his interest best. However, it cannot be denied that this donation paid to HHBRF is free from any suspicion. It definitely leads to further probe by the revenue, which has been carried out by the revenue by summoning the Director of HHBRF . The said Director Shri Swapan Ranjan Dasgupta, though could not appear in person before the ld AO for cross-examination (which was sought by the assessee) but had confirmed in writing that the donations given by the assessee to HHBRF were genuine in nature and had further confirmed that HHBRF had not paid any cash back to assessee in lieu of cheque donations paid to them. The revenue had left the matter at this stage itself and did not further probe into it to check the veracity of the confirmation made by Shri Swapan Ranjan Dasgupta. Therefore, the ld AO proceeded to make the addition only based on the statement recorded from Swapan Ranjan Dasgupta at the time of survey. It may be true that in the said statement, Swapan Ranjan Dasgupta may have deposed to the fact that HHBRF were in receipt of various donations from various persons in cheques and the same were routed back to the donors in cash after retaining certain portion as their commission and intermediaries’ commission. This is only a general statement given by Swapan Ranjan Dasgupta about the modus operandi carried out by HHBRF. But nowhere in the said statement or in the subsequent enquires / investigation , it came to light that the assessee herein had indeed received back the cash in lieu of cheque donations given to HHBRF. This serves as a clinching missing evidence in the entire gamut of this case.

5.7. Now let us come to yet another legal aspect as to whether any addition / disallowance could be made merely based on statement recorded during survey which is not backed by any other supporting material. It would be pertinent to note that the sworn statement recorded during survey does not have any evidentiary value. In this regard, 8

9 ITA No.333/Kol/2017 Rajda Polymers A.Yr.2013-14 the decision of the Hon’ble Madras High Court in the case of S.Khader Khan (2008) 300 ITR 157 (Mad) assumes significance, wherein it was held that :-

“An admission is an extremely important piece of evidence , but it cannot be said that it is conclusive and it is open to the person , who made it, to show it has incorrectly been made and the person, making the statement should be given proper opportunity to show that it does not show the correct state of facts.”

It was further held that the materials found in the course of survey could not be the basis for making any addition in the assessment. The word “may” used in section 133A(3)(iii) of the Act makes it clear that the material collected and statement recorded during the survey u/s 133A of the Act are not conclusive piece of evidences by itself. This decision of Hon’ble Madras High Court was affirmed by the Hon’ble Apex Court in the case of CIT vs S Khader Khan Sons reported in 352 ITR 480 (SC) , wherein their Lordships of Supreme Court held as under:-

“Heard Counsel on both the sides. Leave granted. The civil appeal filed by the department pertains to Assessment Year 2001-02. In view of the concurrent findings of fact, this civil appeal is dismissed. ”

We find that the sole basis of ld AO making this disallowance of deduction u/s 35(1)(ii) of the Act was on the basis of statement recorded during survey from the Director of HHBRF which does not have any evidentiary value. Hence respectfully following the aforesaid decision of the Hon’ble Madras High Court affirmed later by the Hon’ble Apex Court supra, we hold that there is no case made out by the ld AO for making this disallowance u/s 35(1)(ii) of the Act.

5.8. We also find that similar issue came up before the co-ordinate bench of this tribunal in the case of Saimed Innovation vs ITO in ITA No. 2231/Kol/2016 for Asst Year 2013- 14 dated 13.9.2017, wherein it was held as under:-

10 ITA No.333/Kol/2017 Rajda Polymers A.Yr.2013-14 “9. We note that the sole basis for making the addition is on the basis of the statement recorded on oath during survey at M/s. Herbicure of Shri Swapan Ranjan Dasgupta, other than the said statement there is no other evidence to show that the assessee has received back the donation as suggested in his general statement about providing accommodation entry by Shri Swapan Ranjan Dasgupta. We also note that the said Shri Swapan Ranjan Dasgupta has not stated anywhere that the assessee indulged in bogus donation or that the amount donated to it (M/s. Herbicure) was given back to the assessee after deducting the commission. We note that the statement recorded on oath during survey cannot be the sole basis for making the disallowance as decided by the Hon'ble Supreme Court in CIT Vs. S. Kader Khan Son (2013) 352 ITR 480 (SC). In any case, if the AO was of the opinion that the statement of Shri Swapan Ranjan Dasgupta, the founder Director of M/s. Herbicure has adversely affected the veracity of the donation made by the assessee then he was duty bound to summon Shri Swapan Ranjan Dasgupta and allowed the assessee to have cross examined him, failing which the statement of Shri Swapan Ranjan Dasgupta could not be used against the assessee trust as held by the Hon'ble Supreme Court in Andaman Timbers Ltd. Vs. Commissioner of Central Excise 62 Taxman 3. We note that the AO had in fact, recorded the fact that the partners of the assessee firm desired to cross examine the founder Director of M/s. Herbicure Shri Swapan Ranjan Dasgupta regarding the purported deposition made at the time of survey. However, AO did not grant him that opportunity to cross examine Shri Swapan Ranjan Dasgupta. We also note that the AO issued notice u/s. 131 of the Act to the partners of the assessee firm and has recorded their statement on oath on 28.12.2015. We note for question no. 14 as to how the partner knew about M/s. Herbicure, the partner of the assessee firm has answered that Dr. Bhuban Chakraborty, a Cardiologist friend introduced them to M/s. Herbicure and to question no. 15 as whether the partners have visited the office of M/s. Herbicure to which the partners answered that they had visited the premises of M/s. Herbicure on two occasions and for question no. 16 as to whether the partners were satisfied with the work of scientific research carried on by the said M/s. Herbicure, the partners of the assessee firm had replied that during their visit at Pailan and Baral they were satisfied with the scientific research work and for question no. 17 the partners replied that they had seen the certificate issued by Govt. of India and also have gone through the research paper of the people working there. For question no. 20 they have given the name of the doctor who was a Cardiologist who introduced them to M/s. Herbicure. We note that the AO enquired about Dr. Bhuban Chakraborty's address for which the partner replied that the doctor resides at Kshudiram Sarani, Rathtala, Kolkata. For question no. 21 as to whether they knew about the Directorate of Investigation, Kolkata carried out survey u/s. 133A and that its investigation is found that the activities were not genuine, the partners replied that they were not aware of the survey, however, they added that after their visit of the two centers they were on a bonafide belief that M/s. Herbicure was a competent institute and based on the recommendation of the Cardiologist Dr. Bhuban Chakrabrty they 10

11 ITA No.333/Kol/2017 Rajda Polymers A.Yr.2013-14 made donation to the said concern. We also note that the AO issued summons to Shri Swapan Ranjan Dasgupta who did not appear for cross examination due to ill health but the said Shri Dasgupta confirmed the donations made by the assessee firm to M/s. Herbicure in writing to the AO and clearly stated that no money was refunded back to assessee firm, which fact has been reproduced by the AO at page 7 of his order as under:

"Shri Swapan Ranjan Dasgupta, Director of M/s Herbicure Healthcare Bio- Herbal Research Foundation had filed a letter on 28/01/2016 stating "Referring to the above and your comments on my reply dated 22.01.2016, I would further request your good office to elaborate the financial years in question to enable our Accounts Deptt for verification and submission. However, we apparently observe from our records that following donations were received by us from M/s. Saimed Innovation, the assessee in the financial years mentioned against each: F.Ys Amount Mode of transaction Date Receipt No. 7,51,000/- 15.03.2013 2012- RTGS:UTR No. HHBHRF/15-03- 13 BARBH13074606758 13/004 7,51,000/- 26.03.2013 2012- RTGS:UTR No HHBHRF/26-03- 13 BARBH 13085899500 13/004

Further, it is submitted for your kind record that no money was refunded to the above named assessee against donations given by them. Meantime, I may submit that I am critically indisposed due to acute lumber scoliosis and am not able to move. I am under strict medical supervision. As such, my personal appearance may kindly be waived on compassionate ground. I am attaching the current medical prescription/advice along with MRI reports for your kind record. However, the information as submitted above may please recorded as my witness."

12 ITA No.333/Kol/2017 Rajda Polymers A.Yr.2013-14 take the place of evidence. The confirmation from Shri Swapan Ranjan Dasgupta 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(1)(ii) of the Act. 12. In the result, appeal of assessee is assessee is allowed”.

5.9. In 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 ld AO to grant deduction u/s 35(1)(ii) of the Act in the sum of Rs 24,50,000/- to the assessee. Accordingly, the Grounds 2 to 5 raised by the assessee are allowed.

13 ITA No.333/Kol/2017 Rajda Polymers A.Yr.2013-14 require any specific adjudication.

Order pronounced in the Court on 08.11.2017

Sd/- Sd/- [S.S. Viswanethra Ravi] [ M.Balaganesh ] Judicial Member Accountant Member

Dated : 08.11.2017 SB, Sr. PS

Copy of the order forwarded to: 1. Rajda Polymers, C/o, D J Shah & Co. Kalyan Bhavan, 2, Elgin Road, Kolkata-700020 2. DCIT, Circle-36, 110, Shanti Palli, Oppo. Ruby Hospital, Kasba, E.M. Bypass, Kolkata- 700107 3..C.I.T.- 4. C.I.T.- Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.