2016 (8) TMI 1134 - AT - Income Tax

Disallowance of loan - misuse of funds - assessee submitted that Government of India granted approval under Section 35(1)(iii) and when the statutory provision allows deduction for the donation given by the assessee, the same cannot be disallowed by the Assessing Officer on the ground that the recipient-society misused the funds Held that - The Axis Bank at Kolkata opened a fictitious account to give credit to this kind of transactions and subsequently the same was transferred to various other institutions and persons. In one such transaction, a Division Bench of this Tribunal found one credit in the fictitious account opened in the Axis Bank by way of donation was, in fact, transferred to real account maintained by the Society itself in State Bank of India. Therefore, it is obvious that the so-called Society for Welfare of Handicapped Persons, Durgapur, West Bengal is also a party to the fraudulent transaction for receiving donation. On identical set of facts, this Tribunal remitted back the matter to the file of the Assessing Officer to examine the matter further and to find out the action taken against the officials of the Axis Bank for opening such fraudulent account at Kolkata. The Assessing Officer was also directed to give an opportunity to the assessee to cross-examine the persons who are In-charge of Society at the relevant point of time and find out how they were able to receive such kind of donation and transfer the same to other institutions. The Assessing Officer also needs to examine when the funds were credited in the so-called fictitious account, how this money credited into such fictitious account was transferred to real account maintained by the Society for Welfare of Handicapped Persons. These facts are not examined by the Assessing Officer. The chain of transactions, which happened to credit the large amount of funds with fictitious account opened by Axis Bank at Kolkata, the role played by the officials of Axis Bank and the receipt of society need to be examined. Therefore, this Tribunal is of the considered opinion that the matter needs to be re-examined.

Summary

Issues: Disallowance of donation under Section 35(1)(iii) of the Income Tax Act, 1961.

Detailed Analysis:

1. The main issue in this case is the disallowance of a donation of ?25,00,000 made by the assessee to a society under Section 35(1)(iii) of the Income Tax Act, 1961. The assessee borrowed the sum from a partnership firm and donated it to the Society for Welfare of Handicapped Persons, Durgapur, West Bengal. The Assessing Officer disallowed the claim based on allegations of misuse of funds by the recipient society due to non-compliance with KYC norms by Axis Bank while opening an account. The assessee argued that the approval granted by the Government of India under Section 35(1)(iii) should suffice for the deduction, regardless of the recipient's use of funds.

2. The counsel for the assessee contended that the recipient institution was approved under Section 35(1)(iii) and the assessee's donation should not be disallowed based on the recipient's actions post-receipt of funds. The counsel relied on judgments by the Calcutta High Court and Gauhati High Court to support the argument that as long as the donation was made to an approved institution, the assessee's obligation was fulfilled. The counsel emphasized that the assessee's intent was to donate to an approved institution, and any subsequent misuse of funds should not impact the deduction eligibility.

3. On the contrary, the Departmental Representative argued that the entire transaction was a sham, with the assessee and the recipient society engaging in deceptive practices to evade tax. The Departmental Representative highlighted that the funds were transferred to various other organizations not engaged in activities for which the recipient society was approved. The Assessing Officer's investigation revealed discrepancies in the transaction, leading to the disallowance of the claim.

4. The Tribunal, after considering both sides, found that similar transactions involving fictitious accounts and fund transfers had taken place, raising suspicions about the legitimacy of the donation. The Tribunal remitted the matter back to the Assessing Officer for further examination. The Tribunal directed the Assessing Officer to investigate the chain of transactions, the role of Axis Bank officials, and the recipient society's involvement in the fund transfer. The Tribunal emphasized the need for a thorough re-examination of the case to determine the actual beneficiaries and the validity of the donation claim.

5. Ultimately, the Tribunal allowed the appeal for statistical purposes, setting aside the lower authorities' orders and directing a re-evaluation of the matter by the Assessing Officer in accordance with the Tribunal's directions. The decision was based on the need for a more detailed investigation into the transaction and the parties involved to ascertain the legitimacy of the donation claim under Section 35(1)(iii) of the Income Tax Act, 1961.