2020 (4) TMI 399 - AT - Income Tax

Disallowance u/s. 35(1)(ii) deduction claim - recipient concern, M/s. Heribicure Healthcare Bio- Herbal Research Foundation was found as an accommodation entry provider - Disallowance based on statement recorded on oath during survey - HELD THAT - As decided in RAJ KARAN DASSANI VERSUS ITO, WARD - 36 (1) , KOLKATA 2019 (5) TMI 840 - ITAT KOLKATA AO got swayed away with the statement recorded on oath of Mr. Swapan Ranjan Dasgupta during survey conducted at the premises of M/s. Herbicure. We have reproduced Question no. 22 and 23 and answers given by Shri Swapan Ranjan Dasgupta, wherein he admits to provide accommodation entries in lieu of cash. This information we should say can be the tool to start an investigation when the assessee made the claim for weighted deduction. The general statement of Shri Swapan Ranjan Dasgupta against donation made the claim of assessee for deduction suspicious. However, when the AO investigated, Shri Swapan Ranjan Dasgupta has confmned that M/s. Herbicure was in receipt of the donation and it has not given any refund in cash, then the sole basis of disallowance of claim as a matter of fact disappeared. It should be remembered suspicion howsoever strong cannot take the place of evidence. The confirmation from Shri Swapan Ranjan Dasgupta the claim of the assessee for weighted deduction u/s. 35(1)(ii) of the Act. The sole basis of the addition/disallowance based on statement recorded on oath during survey cannot be allowed as held by Hon'ble Supreme Court in Kader Khan sons (supra). Moreover, we note that if the AO was hell bent determined to disallow the claim of the assessee, then he should have granted an opportunity to cross examine Shri Swapan Ranjan Das Gupta and Shri Kishan Bhawasingka as held by Hon'ble Supreme Court in Andaman Timber 2015 (10) TMI 442 - SUPREME COURT We cannot sustain the order of the authorities below. Therefore, we set aside the impugned order and direct the AO to allow the deduction u/s. 35(1)(ii) - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of deduction under Section 35(1)(ii) of the Income-tax Act, 1961.
2. Validity of the statements recorded during the survey.
3. Entitlement to cross-examination of witnesses.
4. Retrospective cancellation of approval under Section 35(1)(ii).

Issue-wise Detailed Analysis:

1. Disallowance of Deduction under Section 35(1)(ii):
The sole substantive grievance of the assessee was the disallowance of a ?35 lakhs deduction claim under Section 35(1)(ii) on the grounds that the recipient, M/s. Heribicure Healthcare Bio-Herbal Research Foundation (HHBRF), was an accommodation entry provider. The Revenue argued that HHBRF admitted to providing entries to donors and cited landmark judgments and statements from HHBRF's authorized persons. However, the Tribunal found no merit in the Revenue's reason, referencing a previous decision in ITA No. 2346/Kol/2018, which dealt with similar issues against the department. The Tribunal emphasized that HHBRF was approved under Section 35(1)(ii) at the time of the donation, and there was no proof that the assessee received back the money in cash.

2. Validity of the Statements Recorded During the Survey:
The Revenue's case relied heavily on statements recorded during a survey under Section 133A of the Act from various individuals associated with HHBRF. However, the Tribunal noted that these statements were not corroborated by any other evidence. Specifically, Mr. Kishan Bhawsinghka, a broker, denied the allegations made by HHBRF's founder director, Mr. Swapan Ranjan Dasgupta, and other individuals. The Tribunal highlighted that statements made during a survey do not have conclusive evidentiary value unless supported by corroborative evidence.

3. Entitlement to Cross-Examination of Witnesses:
The Tribunal underscored the importance of cross-examination, stating that the assessee was not provided copies of the statements nor given the opportunity to cross-examine the individuals who made the statements. This was a significant flaw, as it violated the principles of natural justice. The Tribunal referenced the Hon'ble Supreme Court's decision in Andaman Timber Industries Ltd. vs. Commissioner of Central Excise, which held that not allowing cross-examination of witnesses whose statements were used as the basis for an order is a serious flaw that makes the order a nullity.

4. Retrospective Cancellation of Approval under Section 35(1)(ii):
The Tribunal discussed the provisions of the Explanation to Section 35(1)(ii), which states that the deduction should not be denied merely because the approval granted to the research association was withdrawn after the donation was made. The Tribunal found that the assessee made the donation when HHBRF's approval was valid, and thus, the deduction was in order. The Tribunal also noted that the Hon'ble Jurisdictional High Court had held that there was no power to cancel the registration retrospectively.

Conclusion:
The Tribunal adopted the detailed reasoning from the previous decision in ITA No. 2346/Kol/2018 and directed the Assessing Officer to grant the deduction under Section 35(1)(ii) of the Act. The assessee's appeal was allowed, and the impugned disallowance of ?35 lakhs was deleted. The order was pronounced in the Court on 31-01-2020.