2020 (10) TMI 985 - AT - Income Tax

Disallowance u/s 35(i)(ii) - assessee had made donation to M/s. School of Human Genetics and Population Health a Trust which was approved by the Ministry of Finance (Department of Revenue) (Central Board of Direct Taxes) Notification New Delhi, dated 26.01.2009 u/s 35(i)(ii) r.w. Rule 5C and 5E of the Income Tax Rules, 1962 from the AY 2008-09 onwards in the category of Other Institution project engaged in research activities vide F.No.203/64/2009/ITA-II dated 20.01.2009 - HELD THAT - In SANTOSH SURESH KUMAR AGARWAL 2018 (9) TMI 1827 - ITAT KOLKATA AND M/S MACO CORPORATION (INDIA) PVT. LTD. 2018 (3) TMI 811 - ITAT KOLKATA AND Zenith Credit Corporation 2018 (7) TMI 1958 - ITAT KOLKATA considering fact that the donee has approached the Settlement Commission were also considered and it was held that these facts do not affect the claim of the assessee for deduction u/s 35(1)(ii). The case on hand, reliance was placed by the AO on the copy of statement of Smt. Samadrita Mukherjee Sardar, the Secretary of SHG PH. In the statement, the name of the assessee is not mentioned as a company which had indulged in bogus donation. Copy of the statement was not given to the assessee. It is well settled that when adverse material is not given to the assessee, the same cannot be used against them. No opportunity of cross examination of the witness of the Revenue was granted. Thus, these statements cannot form evidence, based on which an addition can be sustained. When the assessee had given a donation to the donee organization, the registration granted u/s 35(1)(ii)(iii) of the Act by the competent authority was in force. Just because this was withdrawn at a later date, the assessee to claim for deduction cannot be rejected. All these propositions have been laid down in the case law extracted above. Consistent with the view taken by different Benches of the ITAT on this very issue on similar facts, we hold that the assessee is entitled for deduction u/s 35(1)(ii) of the Act. In the result this ground of the assessee is allowed.

Summary

Issues Involved
1. Disallowance of the claim made by the assessee under Section 35(1)(ii) of the Income Tax Act, 1961.
2. Validity of the retrospective withdrawal of approval granted to the donee institution by the Central Government.
3. Opportunity for cross-examination and use of adverse material against the assessee.
4. Impact of the donee institution approaching the Settlement Commission on the assessee's claim.

Detailed Analysis

1. Disallowance of the claim made by the assessee under Section 35(1)(ii) of the Income Tax Act, 1961
The assessee made a donation of ?65 lakhs to M/s. School of Human Genetics and Population Health (SHG&PH), which was approved by the Ministry of Finance for weighted deduction under Section 35(1)(ii) of the Income Tax Act. The Assessing Officer (AO) disallowed the claim, citing information from the Principal Director of Income Tax (Investigation) that SHG&PH was involved in bogus donations. The AO concluded that the donation was routed back to the assessee after deducting a commission, and thus disallowed the deduction of ?1,13,75,000 claimed under Section 35(1)(ii).

2. Validity of the retrospective withdrawal of approval granted to the donee institution by the Central Government
The first appellate authority upheld the AO's disallowance, noting that the Ministry of Finance had rescinded the approval granted to SHG&PH with retrospective effect from April 1, 2007. The Tribunal, however, referred to the Taxation Laws (Amendment) Act, 2006, which introduced an explanation in Section 35 stating that the deduction shall not be denied merely because the approval granted to the institution has been withdrawn subsequent to the payment. The Tribunal held that the withdrawal of recognition with retrospective effect was unwarranted and did not affect the assessee’s right to claim the deduction.

3. Opportunity for cross-examination and use of adverse material against the assessee
The assessee argued that the adverse statements were not confronted to them, and no opportunity for cross-examination was provided. The Tribunal noted that the name of the assessee did not appear in the adverse statements, and these statements were recorded behind the back of the assessee. It emphasized that without providing an opportunity for cross-examination, reliance on such statements violates the principles of natural justice. The Tribunal cited several case laws, including the Supreme Court's decision in the case of Andaman Timber, to support this view.

4. Impact of the donee institution approaching the Settlement Commission on the assessee's claim
The Tribunal considered the fact that the donee institution had approached the Settlement Commission but held that this did not affect the assessee's claim for deduction under Section 35(1)(ii). It referred to previous decisions by the Kolkata Bench of the Tribunal, which had consistently held that the assessee's right to claim deduction is not impacted by the donee's subsequent actions or the withdrawal of approval.

Conclusion
The Tribunal allowed the appeal of the assessee, holding that the disallowance of ?1,13,75,000 under Section 35(1)(ii) was not justified. It reiterated that the assessee is entitled to the deduction as the approval was in force at the time of donation, and subsequent withdrawal of recognition does not affect the claim. The Tribunal emphasized the principles of natural justice, stating that adverse material not confronted to the assessee cannot be used against them. The appeal was allowed for statistical purposes.