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2017 (4) TMI 1495 - AT - Income TaxDisallowance u/s 35(1)(ii) - AO denied the claim of the assessee on the ground that the above approval of the Central Government has been withdrawn retrospectively vide S.O. 2882(E) dated 06.09.2016 and the ld. CIT(A) confirmed the same - HELD THAT - The Institution was enjoying the approval of the prescribed authority at that time and the assessee made donation was also not under dispute, the disallowance made by the Assessing Officer cannot be sustained under law. Our observation is duly fortified by the decision in the case of Seksaria Biswan Sugar Factory 1990 (3) TMI 47 - BOMBAY HIGH COURT . The purport of the decision of Hon ble Bombay High Court was that when the institution was enjoying the approval within the meaning of section 35(1)(ii) of the Act as on the date of receipt of donation and retrospective cancellation of approval of the concerned institution, the deduction claimed in respect of donation cannot be denied. Under the above facts and circumstances, denial of exemption claimed in respect of donation cannot be sustained. With regard to the donation, M/s. Herbicure confirmed the voluntary donation of ₹.1 lakhs from the assessee. A copy of the trust s Corporation Bank statement in which the donation received was also sent by the trust. Based on the sworn statement of the Founder Director Shri Swapan Ranjan Das Gupta of M/s. Herbicure, wherein, he has admitted that his organization accept the donation and giving back of the same to the donor after deducting a commission @ 5% on the donation amount - Department has not made any effort to get any valid evidence that the organization has given back the donation to the donor after deducting a commission @ 5% on the donation amount. AO is directed to ascertain the means as well as actual amount repaid by the donee to the assessee and decide the issue afresh after giving sufficient opportunities of hearing to the assessee. Thus, the ground raised by the assessee is partly allowed for statistical purposes. Disallowance made u/s 14A - AO has made the disallowance over and above the dividend income earned by the assessee - HELD THAT - As relying on M/S. CHETTINAD LOGISTICS PVT. LTD. 2017 (4) TMI 298 - MADRAS HIGH COURT appropriate to remit the issue to the file of Assessing Officer to consider the disallowance under section 14A r.w. Rules 8D to find out whether interest bearings borrowed funds were used for making investments in shares and mutual funds. With this observation, we restore the issue to the file of Assessing Officer for fresh consideration.
Issues Involved:
1. Disallowance under Section 35(1)(ii) of the Income Tax Act, 1961. 2. Disallowance under Section 14A of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Disallowance under Section 35(1)(ii) of the Income Tax Act, 1961: The assessee, a partnership firm engaged in share trading, filed its return of income and claimed a weighted deduction for a donation made to M/s. Herbicure Healthcare Bio-Herbal Research Foundation. The donation was initially approved under Section 35(1)(ii) of the Act. However, during scrutiny, it was revealed through a sworn statement by the Founder Director of M/s. Herbicure that donations were accepted and then returned to the donors after deducting a commission. Consequently, the Assessing Officer disallowed the deduction claimed by the assessee. The Tribunal examined whether the withdrawal of approval under Section 35(1)(ii) applied retrospectively. It was noted that at the time of the donation, M/s. Herbicure was an approved institution. The Tribunal referred to the Hon’ble Bombay High Court's decision in Seksaria Biswan Sugar Factory, which established that retrospective cancellation of approval does not affect the deduction claimed if the institution was approved at the time of donation. Therefore, the disallowance made by the Assessing Officer was not sustained. However, the Tribunal directed the Assessing Officer to ascertain whether the donation was returned to the assessee after deducting a commission, as alleged. The case was remitted back for fresh consideration with instructions to provide the assessee sufficient opportunities for hearing. 2. Disallowance under Section 14A of the Income Tax Act, 1961: The Assessing Officer disallowed expenses incurred towards earning exempt income under Section 14A, amounting to ?2,89,666, which exceeded the dividend income of ?1,78,833 earned by the assessee. The Tribunal noted that the Assessing Officer did not provide a basis for the disallowance and failed to consider the relevant provisions of the Income Tax Rules. The Tribunal referred to the Hon’ble Delhi High Court's decision in Joint Investments Pvt. Ltd. v. CIT, which held that disallowance under Section 14A cannot exceed the exempt income earned. Additionally, the Hon’ble Karnataka High Court in United Breweries Ltd. v. DCIT emphasized the necessity for the Assessing Officer to ascertain the use of interest-bearing borrowings for making investments. Following these precedents, the Tribunal remitted the issue back to the Assessing Officer to determine the extent of interest-bearing borrowings used for investments in shares and mutual funds, directing a fresh consideration of the disallowance under Section 14A read with Rule 8D. Conclusion: The appeal filed by the assessee was partly allowed for statistical purposes, with the Tribunal remitting both issues back to the Assessing Officer for fresh consideration and appropriate action based on the detailed observations and directions provided.
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