2023 (10) TMI 1523 - AT - Income Tax

Disallowance of weighted deduction u/s 35(1)(ii) - donation given by the appellant as bogus donation - HELD THAT - This Tribunal involving identical facts and circumstances in the case of Inspiron Engineering Pvt. Ltd 2020 (3) TMI 1270 - ITAT AHMEDABAD for A.Y. 2014-15 has decided the issue in favour of the assessee as held AO is harping upon an information supplied by the survey tern of Calcutta. He has not specifically recorded statement of representatives of the donee. He has not brought on record a specific evidence wherein donee has deposed that donations received from the assessee was paid back in cash after deducting commission. On the basis of a general information collected from the donee the donation made by the assessee cannot be doubted. Neither representatives of the donee have been put to cross-examination nor any specific reply deposing that such donation was not received or if received the same was repaid in cash has been brought on record. In the absence of such circumstances donation given by the assessee to the donee on which the assessee no mechanism to check the veracity can be doubted more particularly when certificate to obtain donation has been cancelled after two years of the payment of donation. It is fact which has been unearthed subsequent to the donations. Therefore there cannot be any disallowance on this issue. Appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

(a) Whether the Assessing Officer (AO) was competent to reopen the assessment under section 147 of the Income Tax Act, 1961 ("the Act") on the basis of information received from the investigation wing and the subsequent CBDT notification withdrawing approval of the donee research society with retrospective effect.

(b) Whether the donation made by the assessee to the research society, which was duly approved under section 35(1)(ii) of the Act at the time of donation but whose approval was later withdrawn retrospectively by the CBDT, can be disallowed as a bogus donation and consequently the weighted deduction under section 35(1)(ii) denied.

(c) The validity and applicability of the CBDT notification dated 28-02-2019 withdrawing approval retrospectively and whether such retrospective withdrawal can affect the assessee's claim for deduction in respect of donations made prior to such withdrawal.

(d) Whether the assessee's claim of bona fide donation is supported by evidence and whether the disallowance of deduction under section 35(1)(ii) was justified in light of the investigation report and the procedural safeguards, including the principles of natural justice.

(e) The interpretation and application of relevant provisions including section 35(1)(ii), section 295(4), and Rules 5C and 5E of the Income Tax Rules, 1962 vis-`a-vis the CBDT notification and the retrospective withdrawal of approval.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Competency of AO to reopen assessment under section 147 based on investigation and CBDT notification

Legal Framework and Precedents: Section 147 empowers the AO to reopen assessment if he has reason to believe that income has escaped assessment. The CBDT notification withdrawing approval of the research society was issued under the powers vested in the CBDT and directed revenue authorities to take remedial action against donors claiming weighted deduction. The jurisdictional High Court has already ruled on the competency of AO to reopen in similar circumstances.

Court's Interpretation and Reasoning: The Tribunal noted that this question had been answered by the jurisdictional High Court in favor of the revenue, confirming the AO's competency to reopen the assessment on receipt of credible information from the investigation wing and CBDT notification. Therefore, no further adjudication was required on this point.

Application of Law to Facts: The AO reopened the assessment based on the CBDT notification dated 28-02-2019 which listed the assessee among donors whose claims required remedial action. The reopening was thus held valid.

Issue (b): Whether the donation made to the research society was bona fide and eligible for weighted deduction under section 35(1)(ii)

Legal Framework and Precedents: Section 35(1)(ii) provides weighted deduction for donations made to approved research associations or institutions. The approval must be valid at the time of donation. The CBDT notification withdrawing approval retrospectively raised the question whether such retrospective withdrawal can impact donations already made.

Several decisions of the Tribunal were cited, including a coordinate bench ruling in a case involving similar facts where donations made to an institution approved at the time of donation but later derecognized were held eligible for deduction. The Tribunal relied on the decision in ACIT v. M/s Thakkar Govindbhai Ganpatlal HUF and Inspiron Engineering Pvt. Ltd. vs. DCIT, where it was held that retrospective withdrawal of approval cannot be used to deny deduction for genuine donations made when the approval was in force.

Court's Interpretation and Reasoning: The Tribunal found that the assessee had made the donation to an approved research society at the relevant time. The subsequent cancellation of approval, based on investigation reports alleging accommodation entries, could not vitiate the genuineness of the donation made earlier. The assessee had no mechanism to verify the donee's misconduct at the time of donation. The Tribunal emphasized the absence of any direct evidence implicating the assessee in the alleged accommodation entries or bogus transactions.

Key Evidence and Findings: The CBDT notification was based on investigation reports against the donee society. However, the assessee's name did not appear in the investigation report as involved in any wrongdoing. No direct evidence was brought on record to show the donation was returned or was bogus. The AO relied solely on the notification and general investigation findings.

Treatment of Competing Arguments: The revenue argued that the donation was bogus as the donee was involved in accommodation entries and the approval was rightly withdrawn retrospectively. The assessee contended that the donation was bona fide and the retrospective withdrawal could not affect her claim. The Tribunal favored the assessee's argument, relying on precedents and the principle that retrospective withdrawal cannot prejudice bona fide donors.

Conclusions: The Tribunal held that the donation was bona fide and the assessee was entitled to weighted deduction under section 35(1)(ii) for the donation made when the donee was approved.

Issue (c): Validity and effect of CBDT notification dated 28-02-2019 withdrawing approval retrospectively

Legal Framework and Precedents: The CBDT's power to issue notifications and rules under the Act is subject to the principles of natural justice and statutory limits. Section 295(4) empowers CBDT to make rules, but the retrospective withdrawal of approval by notification was challenged as beyond the statutory power and prejudicial to the assessee.

Court's Interpretation and Reasoning: The Tribunal observed that the retrospective withdrawal of approval cannot be used to deny deduction for donations made when approval was valid. The retrospective effect of the notification cannot be applied to undo the assessee's right to claim deduction for bona fide donations. The Tribunal distinguished between the power to make rules and the power to issue notifications, finding the latter cannot be exercised in a manner prejudicial to the assessee retrospectively.

Application of Law to Facts: The assessee's donation was made when the donee was approved. The notification withdrawing approval retrospectively was held invalid to the extent it prejudices the assessee's claim for deduction.

Issue (d): Whether the assessee's claim of bona fide donation was supported by evidence and whether principles of natural justice were observed

Legal Framework and Precedents: The burden lies on the revenue to prove that a donation is bogus. Mere suspicion or adverse findings against the donee do not automatically render all donations bogus. Principles of natural justice require that the assessee be given an opportunity to rebut allegations and cross-examine witnesses or evidence.

Court's Interpretation and Reasoning: The Tribunal found that the AO did not bring any direct evidence that the donation was returned or was not genuine. The investigation report did not name the assessee or allege her involvement in wrongdoing. The assessee's submissions and documentary evidence were not fully considered by the lower authorities. The Tribunal also noted that statements recorded during survey operations were not cross-examined, thus could not be used against the assessee.

Treatment of Competing Arguments: The revenue relied on the investigation report and CBDT notification to deny deduction. The assessee argued that no direct evidence was produced against her and that the donation was genuine. The Tribunal favored the assessee, emphasizing the lack of concrete evidence and the need for procedural fairness.

Conclusions: The Tribunal concluded that the assessee's donation was bona fide and that the disallowance violated principles of natural justice and evidentiary requirements.

Issue (e): Interpretation of section 35(1)(ii) and Rules 5C and 5E of the Income Tax Rules, 1962 vis-`a-vis CBDT notification

Legal Framework and Precedents: Section 35(1)(ii) allows weighted deduction for donations to approved research associations. Rules 5C and 5E prescribe procedures for approval and its withdrawal. The CBDT notification purported to withdraw approval retrospectively under these provisions.

Court's Interpretation and Reasoning: The Tribunal held that the retrospective withdrawal of approval under these rules and notification cannot be applied to deny deduction for donations made when approval was valid. The Tribunal found that the lower authorities misinterpreted the provisions and ignored the explanation to section 35(1) inserted by the Taxation Laws (Amendment) Act, 2006, which supports the assessee's position.

Application of Law to Facts: The assessee's donation was made when the donee was approved under section 35(1)(ii). The retrospective withdrawal under rules and notification could not affect the assessee's claim.

3. SIGNIFICANT HOLDINGS

"The assessee cannot be denied the benefit of deduction provided under section 35(1)(ii) of the Act merely on the ground that the approval was withdrawn by the Government on a later date."

"The retrospective cancellation of approval of the donee institution by issuing notification cannot vitiate the genuine donation made by the assessee when such approval was valid."

"In the absence of any direct evidence against the assessee or any mechanism to verify the genuineness of the donee at the time of donation, the donation cannot be treated as bogus."

"Statements recorded during survey operations which are not subjected to cross-examination cannot be used against the assessee."

"The AO was competent to reopen the assessment on the basis of credible information and CBDT notification, but the disallowance of deduction must be based on cogent evidence."

"The power of the CBDT to issue notifications or make rules cannot be exercised retrospectively in a manner prejudicial to the assessee's vested rights."

Final determination: The Tribunal allowed the appeal of the assessee, setting aside the disallowance of weighted deduction under section 35(1)(ii) of the Act for the donation of Rs. 17,50,000/-. The donation was held to be bona fide and eligible for deduction as the donee was approved at the time of donation and no direct evidence of bogus donation was established against the assessee.