2017 (9) TMI 1842 - AT - Income Tax

Deduction u/s 35(1)(ii) - bogus transactions of donations - survey was conducted in the premises of the above said two research organizations at Kolkata and it was found during the course of survey that transactions of donations were not genuine and it was only accommodation entry routed through banking channel - AO after reproducing the statement recorded from the respective persons, has concluded that the claim of donation more than 50% of profit was far-fetched one - whether the assessee is entitled to receive copy of statement and other material which were relied upon by the AO in the assessment order? HELD THAT - Admittedly, AO placed reliance on the statement recorded during the course of survey operation and other material found during the course of survey operation. Principles of natural justice is one of the cordial rule to be followed in the adversary system of judicial administration. Rule of law is supreme in this country, therefore, unless it otherwise provided in the relevant statute enacted by the Legislature, the principles of natural justice cannot be taken away by means of the procedure or the formalities prescribed in the Office Manual which is meant for the internal administration of Department. In this case, even the Office Manual was not brought to the notice of the Bench even though the D.R. claims that as per Office Manual, copies need to be furnished only on request. Irrespective of the request of the assessee for the copies of statement and documents, the same shall be furnished to the assessee in case the AO intended to rely on such statement and the documents. In this case, the copies of the statement and other documents relied upon by the AO were not furnished to the assessee, therefore, there was gross violation of principles of natural justice. Authorities below are set aside and the entire issue is remitted back to the file of the AO. AO shall furnish the copies of documents and statement to the assessee and give sufficient opportunity to rebut the same, and thereafter decide the issue afresh in accordance with law. This being an accommodation entry and such type of donations are rampant from Chennai to Kolkata institutions, AO shall make a thorough investigation. AO shall also examine, if necessary, through his counterpart at Kolkata how the bank accounts are opened at Kolkata by such institutions. Whether any bank officials were involved in opening such accounts also needs to be found out so that this kind of irregularities can be put to an end at earlier stage. Appeal of the assessee is allowed for statistical purposes.

Summary

Issues:
1. Eligibility for deduction under Section 35(1)(ii) of the Income-tax Act, 1961 based on donations made to research institutions.
2. Violation of principles of natural justice due to non-furnishing of relevant documents and statements to the assessee during assessment proceedings.

Analysis:
1. The appeal dealt with the eligibility of the assessee for deduction under Section 35(1)(ii) of the Income-tax Act, 1961 based on donations made to research institutions. The counsel for the assessee argued that the donations were genuine and made to legitimate research organizations. However, the Revenue authorities found during a survey that the donations were accommodation entries routed through banking channels. The counsel emphasized that the assessee transferred funds through RTGS mode to the respective institutions, supporting the genuineness of the donations. The Tribunal noted discrepancies in the donations and the conduct of the research institutions, leading to doubts about the legitimacy of the claimed deductions.

2. The issue of violation of principles of natural justice arose due to the non-furnishing of relevant documents and statements to the assessee during the assessment proceedings. The Tribunal highlighted the importance of providing the assessee with copies of materials relied upon by the Assessing Officer to ensure a fair opportunity for rebuttal. Citing the Apex Court and Delhi High Court judgments, the Tribunal emphasized the necessity of confronting evidence to the assessee for a fair assessment process. It was concluded that the failure to provide the documents and statements to the assessee constituted a gross violation of principles of natural justice, leading to the setting aside of the lower authorities' orders and remitting the issue back to the Assessing Officer for proper consideration.

3. The Tribunal underscored the significance of adhering to principles of natural justice in judicial proceedings, emphasizing that the adversary system in India necessitates furnishing relevant documents and statements to the assessee for a fair assessment. The Tribunal criticized the reliance on the Office Manual as a basis for not providing copies of documents, asserting that natural justice cannot be compromised by procedural formalities. It was ruled that regardless of the assessee's request, the Assessing Officer must furnish copies of statements and documents if relied upon, ensuring a just and transparent assessment process. The Tribunal directed the Assessing Officer to conduct a thorough investigation into the accommodation entries and donations, particularly focusing on the Chennai to Kolkata donation pattern and potential involvement of bank officials in opening accounts for such institutions.

4. Ultimately, the Tribunal allowed the appeal of the assessee for statistical purposes, highlighting the need for a comprehensive investigation into the irregularities observed in the donations made to research institutions. The judgment emphasized the importance of upholding principles of natural justice and ensuring a fair assessment process in tax matters.