2024 (7) TMI 438 - AT - Income Tax

Disallowance of deduction claimed u/s 35(1)(ii) - institutions are involved in issuing bogus donations receipts - AO disallowed these deductions based on a report from the Investigation Wing which alleged that the donations were bogus and provided in exchange for commissions - HELD THAT - AO has relied upon the report given by the Investigation wing. He did not make any independent enquiry to prove that the view expressed by the Investigation wing would be applicable to the assessee. AO has not brought any material to disprove the evidences furnished by the assessee with regard to the donations paid by it to the institutions. There is also no proof to show that the cheque paid by the assessee has been ploughed back by way of cash to the assessee. It is settled proposition that the subsequent withdrawal of recognition granted u/s 35(1)(ii) will not be a bar for granting deduction to the donations paid earlier. Accordingly we hold that the claim made by the assessee u/s 35(1)(ii) of the Act in both the years should be allowed. Assessee appeal allowed.

Issues Involved:
1. Disallowance of deduction claimed under Section 35(1)(ii) of the Income Tax Act, 1961.
2. Validity of donations made to scientific research institutions.
3. Reliance on the Investigation Wing's report by the Assessing Officer (AO).
4. Subsequent withdrawal of recognition of the institutions by the Central Government.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction Claimed under Section 35(1)(ii):
The assessee, a partnership firm engaged in the export business, claimed deductions under Section 35(1)(ii) of the Income Tax Act, 1961, for donations made to two scientific research institutions. For the assessment years 2014-15 and 2015-16, the assessee donated Rs. 75,00,000 and Rs. 55,00,000 respectively, and claimed weighted deductions of 175% of the donation amounts. The AO disallowed these deductions based on a report from the Investigation Wing, which alleged that the donations were bogus and provided in exchange for commissions. The learned CIT(A) confirmed the disallowance, leading the assessee to appeal before the Tribunal.

2. Validity of Donations Made to Scientific Research Institutions:
The assessee argued that the donations were made through banking channels and supported by valid donation receipts and recognition certificates under Section 35(1)(ii). The AO did not dispute the documents submitted by the assessee but relied on the Investigation Wing's report. The Tribunal observed that the AO did not conduct an independent inquiry or provide evidence to prove that the donations were bogus or that the money was returned to the assessee. The Tribunal emphasized that the subsequent withdrawal of recognition does not affect the validity of the donations made earlier.

3. Reliance on the Investigation Wing's Report by the Assessing Officer (AO):
The Tribunal noted that the AO's reliance on the Investigation Wing's report without independent verification was not justified. The report indicated that the institutions issued bogus donation certificates in exchange for commissions, but there was no specific evidence against the assessee. The Tribunal cited previous decisions, including the case of Sopariwala Exports Pvt. Ltd., where similar disallowances were overturned due to lack of direct evidence against the assessee and the principle of natural justice being violated by not allowing cross-examination of the witnesses.

4. Subsequent Withdrawal of Recognition of the Institutions by the Central Government:
The Tribunal referred to multiple precedents where it was held that the withdrawal of recognition of the institutions by the Central Government does not retroactively invalidate the donations made when the institutions were duly recognized. The Tribunal reiterated that the assessee could not have anticipated the withdrawal of recognition and that the donations were valid at the time they were made.

Conclusion:
The Tribunal concluded that the AO's disallowance of the deductions was not justified as there was no independent inquiry or evidence to support the claim that the donations were bogus. The Tribunal set aside the orders of the learned CIT(A) and directed the AO to allow the deductions claimed by the assessee under Section 35(1)(ii) for both assessment years. The appeals filed by the assessee were allowed, and the order was pronounced in the open court on 05/07/2024.

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