2021 (5) TMI 436 - AT - Income Tax

Reopening of assessment u/s 147 - Disallowance of deduction under section 35(1)(ii) - HELD THAT - We held that A.O. was having bona fide belief, when he received information from the Investigation Wing of the department that income has been escaped assessment and assessee has not declared true and correct material fact for the purpose of original assessment. CIT(A) has rightly dismissed this ground of appeal and same does not require any kind of interference at our end. Ground relating to reopening are dismissed. Disallowance of deduction u/s 35(1)(ii) - As assessee has claimed to have made donation to School of Human genetics Population Health (SHG PH). - Since at the time of donation, donee was having all the requisite approval and permission from the authorities in order to accept the donation as per law we allow appeal of the assessee.

Issues Involved:
1. Disallowance of deduction under section 35(1)(ii) of the Income Tax Act.
2. Validity of reopening the assessment under section 143(3) read with Section 147.
3. Retrospective revocation of notification regarding the eligibility of the institution.
4. Reliance on statements from individuals accused of defrauding the department.
5. Violation of natural justice principles by the Assessing Officer (AO).

Detailed Analysis:

1. Disallowance of Deduction under Section 35(1)(ii):
The Assessee claimed a deduction for a donation made to the School of Human Genetics & Population Health (SHG&PH), which was initially approved under Section 35(1)(ii). However, the approval was retrospectively rescinded by the Central Board of Direct Taxes (CBDT) based on an investigation revealing that the institution was involved in fraudulent activities. The AO disallowed the deduction, relying on the investigation's findings. The Tribunal, referencing similar cases, concluded that the Assessee could not be penalized for the retrospective cancellation of the institution's approval, as the donation was made when the approval was valid. Thus, the disallowance was overturned.

2. Validity of Reopening the Assessment:
The AO reopened the assessment under Section 147 based on information from the Investigation Wing indicating that the Assessee had not declared true and correct material facts. The Tribunal upheld the reopening, stating that the AO had a bona fide belief that income had escaped assessment. The Assessee’s objections to the reopening were dismissed, affirming that the reopening was justified based on the information received.

3. Retrospective Revocation of Notification:
The Assessee argued that the retrospective revocation of the notification approving SHG&PH was unlawful and caused undue hardship. The Tribunal noted that at the time of the donation, the institution held all necessary approvals. Citing precedents, the Tribunal ruled that the Assessee should not suffer due to the retrospective cancellation, as they had no mechanism to verify the institution’s compliance post-donation. Therefore, the Tribunal allowed the appeal, rejecting the retrospective disallowance.

4. Reliance on Statements from Individuals Accused of Fraud:
The AO relied on statements from individuals involved in defrauding the department to disallow the deduction. The Tribunal found that these statements were not substantiated with specific evidence against the Assessee. It was emphasized that the Assessee had no means to verify the institution's fraudulent activities at the time of donation. The Tribunal ruled that general information from the investigation was insufficient to disallow the deduction, thus favoring the Assessee.

5. Violation of Natural Justice Principles:
The Assessee contended that the AO did not allow them to examine the statements relied upon for reopening the assessment, violating natural justice principles. The Tribunal agreed, noting that the AO failed to provide material evidence against the Assessee or prove receipt of cash by the Assessee. This procedural lapse further justified the Tribunal’s decision to allow the Assessee’s appeal.

Conclusion:
The Tribunal allowed the Assessee’s appeals, overturning the disallowance of the deduction under Section 35(1)(ii) and ruling that the reopening of the assessment was valid but the disallowance based on retrospective revocation and unsubstantiated statements was not justified. The Tribunal emphasized adherence to natural justice principles and the Assessee's inability to foresee the institution's fraudulent activities.

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