2024 (5) TMI 1598 - AT - Income Tax

Revision u/s 263 - donation received by Rashtriya Samajwadi Party(Secular)and Tara Foundation is bogus and cash has been received back by the assessee in lieu of cheque - as per CIT AO allowing deduction u/s 80GGC and section 80G(5) without adequate inquiry is erroneous and prejudicial to the interest of revenue - findings emanating from search action and post search investigation as well as survey action undertaken in the case of controller of dummy entities established the allegation of involvement inter-alia of Rashtriya Samajwadi Party(Secular) in the racket of bogus donation in connivance with the dummy/paper entities facilitating accommodation entries to the donors. HELD THAT - We are aware of the fact that the AO s role while framing an assessment is not only an adjudicator. AO has a dual role to dispense with i.e. he is an investigator as well as an adjudicator; therefore if he fails in any one of the roles as afore-stated his order will be termed as erroneous. We note that it is also a case of non-application of mind by the assessing officer so far deductions under section 80GGC of the Act and under section 80G(5) of the Act are concerned. Hence it is evidently clear that there is no enquiry on the part of the assessing officer therefore order passed by the assessing officer is erroneous as well as prejudicial to the interest of revenue. As stated above that the Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. We derive support for the proposition as stated above from the decision of Gee Vee Enterprises 1974 (10) TMI 29 - DELHI HIGH COURT . Therefore we find that what the talk to conduct further enquiry we note that assessing officer has never conducted enquiry so far donations to political party Rashtriya Samajwadi Party(Secular) and donation to Tara Foundation u/s 80G(5) of the Act are concerned. Hence we find merit in the submissions of Ld. DR to the effect that assessing officer has not conducted any enquiry so far these two deductions are concerned. Therefore order passed by the assessing officer is erroneous as well as prejudicial to the interest of revenue and therefore we uphold the order passed by ld PCIT u/s 263 - Decided against assessee.

Summary

ISSUES:

Whether the order passed by the Assessing Officer under section 143(3) of the Income-tax Act, 1961, allowing deduction under section 80GGC and section 80G(5) without adequate inquiry, is erroneous and prejudicial to the interest of revenue under section 263 of the Act.Whether the Assessing Officer conducted proper inquiries and verification regarding the genuineness of donations claimed as deduction under Chapter VI-A, particularly donations to a political party alleged to be involved in bogus donation racket.Whether the political party to which donation was made qualifies for exemption under section 13A of the Act and is entitled to receive donations under the Representation of People Act, 1951.Whether the doctrine that "fraud vitiates everything" applies to the transactions involving bogus donations and whether such transactions are void ab initio, negating the applicability of principles of natural justice.Whether the Principal Commissioner of Income-tax had jurisdiction to revise the assessment order under section 263 of the Act when the assessment order was subject matter of appeal before the Commissioner of Income-tax (Appeals).

RULINGS / HOLDINGS:

The order passed by the Assessing Officer under section 143(3), allowing deduction under sections 80GGC and 80G(5) without conducting proper inquiry, is held to be "erroneous in so far as it is prejudicial to the interests of the revenue" within the meaning of section 263 of the Act.The Assessing Officer failed to make necessary inquiries or verification regarding the genuineness of donations claimed, particularly the Rs. 30,00,000/- donation to the political party "Rashtriya Samajwadi Party (Secular)" which was found to be bogus based on search and investigation reports; thus the assessment order was passed "without making inquiries or verification which should have been made" as per Explanation 2(a) to section 263.The political party in question was not registered with the Election Commission of India, failed to file contribution reports as required under section 29C of the Representation of People Act, 1951, and was involved in a bogus donation racket; therefore, it was not entitled to claim exemption under section 13A of the Income-tax Act, rendering the donation deduction invalid.The principle that "fraud vitiates everything" applies, and transactions involving bogus donations are "void ab-initio," making any documents or receipts submitted by the assessee ineffective to establish genuineness; consequently, principles of natural justice do not apply to such fraudulently claimed deductions.The contention that the Principal Commissioner of Income-tax lacks jurisdiction to revise the assessment order under section 263 because the order is subject matter of appeal before the Commissioner of Income-tax (Appeals) is rejected; the jurisdiction under section 263 is independent and can be exercised notwithstanding pending appeals.

RATIONALE:

The Court applied the statutory framework of section 263 of the Income-tax Act, 1961, particularly Explanation 2 which expands the scope of revision to include orders passed without necessary inquiries or verification. The Assessing Officer's failure to investigate the genuineness of donations claimed under Chapter VI-A constituted an erroneous order prejudicial to revenue.The Court relied on findings from search and seizure operations under section 132 of the Act, statements recorded under oath, and investigation reports revealing the modus operandi of the political party involved in bogus donation scams, including routing donations through shell entities and returning cash to donors after deducting commission.The Court referred to the non-compliance by the political party with statutory requirements under the Representation of People Act, 1951, and non-filing of contribution reports, disqualifying it from exemption under section 13A of the Income-tax Act, thereby invalidating the deductions claimed by the assessee.The Court invoked the legal maxim "fraud vitiates everything," supported by authoritative Supreme Court precedents, holding that fraudulent transactions are void ab initio and that natural justice principles do not protect such frauds, thereby upholding the revisional order under section 263.In assessing whether the order was erroneous and prejudicial to revenue, the Court applied the twin conditions established by the Supreme Court in Malabar Industries Ltd. v. CIT, emphasizing that failure to apply mind and investigate facts by the Assessing Officer satisfies the test for revision under section 263.The Court distinguished the Assessing Officer's role as both investigator and adjudicator, underscoring the duty to conduct further inquiry when circumstances provoke suspicion, as supported by the Delhi High Court's decision in Gee Vee Enterprises, thereby concluding that failure to do so renders the order erroneous.The Court rejected the argument that pending appeal before the Commissioner of Income-tax (Appeals) bars revision under section 263, affirming the independent jurisdiction of the Principal Commissioner of Income-tax to revise erroneous orders prejudicial to revenue.