2021 (2) TMI 97 - AT - Income Tax

Disallowance of weighted deduction claimed u/s 35(1)(ii) - approval granted to the donee organization was rescinded with retrospective effect - HELD THAT - There is no conclusive evidence on record to show that the appellant company had received back the money from the donee made either in cash or any other or through banking channels. Nor is there any other material to show that the appellant company is also a party to the fraud committed by the donee organization. No doubt the doctrine of promissory estoppels has no application to tax concession granted by the Legislature. However, keeping in view the provisions of Explanation inserted to section 35(1)(ii) by Finance Act, 2006, w.e.f. 01.04.2006 providing that the deduction in the hands of the donor shall not be denied merely because of the fact that an approval granted to the University which is the Research University, Colleges and other University which has been withdrawn subsequently to the payment of donations, the donors should not suffer on account of withdrawal of the approval to done organization. The intent of the Legislature is clear that the donors should not be made suffer on account of fraud committed by the donee organization Hon ble Supreme Court in the case of CIT vs. Chotatingrai Tea Ors. 2002 (10) TMI 3 - SUPREME COURT following the decision of CIT vs. Bhartia Cutler Hammer Co., 1997 (12) TMI 91 - CALCUTTA HIGH COURT held that notwithstanding the fact that the approval granted earlier to the Research Organization was withdrawn subsequent to the payment of donation, the deduction cannot be withdrawn in the hands of the donors. Also see National Leather Cloth Manufacturing Co. vs. Indian Council of Agricultural Research Ors., 1999 (10) TMI 55 - BOMBAY HIGH COURT The above judgements of the Hon ble Supreme Court in the case of Chotatingrai Tea Ors. (supra) was rendered much prior to the insertion of the Explanation to section 35(1)(ii) of the Act and the Explanation inserted by the Finance Act, 2006 w.e.f. 01.04.2006 which means that the Parliament is deemed to have knowledge of the above judicial precedents and accepted the dictum laid therein. Therefore, this clearly establishes the legislative intent of Parliament to allow the deduction u/s 35(1)(ii) in the hands of the donors, notwithstanding the fact that the approval granted earlier to the Research Organization was withdrawn retrospectively. Therefore, the very fact that the approval granted to the donee organization i.e. SHGPH was rescinded with retrospective effect has no relevance to decide the allowability of deduction in the hands of the donors.. The claim made by the assessee company towards deduction u/s 35(1)(ii) of the Act on account of donation made to SHGPH is clearly allowable. Accordingly, the grounds of appeal filed by the assessee are allowed.

Summary

Issues Involved:
1. Addition of ?2,18,75,000/- being weighted deduction claimed under Section 35(1)(ii) of the Income Tax Act.
2. Withdrawal of weighted deduction under Section 35(1)(ii) based on a third-party statement without offering the opportunity for cross-examination, leading to a denial of natural justice.
3. Withdrawal of weighted deduction under Section 35(1)(ii) without appropriate enquiries and based on a general statement by a third party.

Detailed Analysis:

Issue 1: Addition of ?2,18,75,000/- as Weighted Deduction under Section 35(1)(ii)
The assessee, a company engaged in transport solutions, filed its return of income for the assessment year 2013-14, disclosing an income of ?3,07,22,727/-. The Assessing Officer (AO) disallowed the claim for deduction under Section 35(1)(ii) amounting to ?2,18,75,000/- and made an additional disallowance of ?10,00,000/- for lorry expenses. The disallowance was based on the information that the donee, School of Human Genetics and Population Health (SHGPH), admitted to providing accommodation entries for donations and refunding the money to donors after retaining service charges.

Issue 2: Denial of Natural Justice
The AO conducted a survey operation and recorded a statement from the Joint Managing Director of the appellant company, who admitted to making the donation but pleaded ignorance of the donee's modus operandi. The appellant later retracted this admission and requested a cross-examination of SHGPH, which was not facilitated by the AO. The AO's failure to enforce the attendance of SHGPH officers for cross-examination led to a denial of natural justice.

Issue 3: Withdrawal of Deduction without Appropriate Enquiries
The AO's decision to disallow the deduction was based on the general statement made by SHGPH and the retrospective rescinding of SHGPH's approval by the Central Board of Direct Taxes (CBDT). The appellant argued that the deduction should not be denied merely because the approval was withdrawn retrospectively, citing legislative intent and judicial precedents.

Judgment:
The Tribunal noted that there was no conclusive evidence that the appellant received back the donation in any form. The legislative intent, as evident from the Explanation inserted to Section 35(1)(ii) by the Finance Act, 2006, is to allow the deduction in the hands of the donors, notwithstanding the retrospective withdrawal of approval granted to the donee organization.

The Tribunal referred to several judicial precedents, including the Hon'ble Supreme Court's decision in CIT vs. Chotatingrai Tea & Ors., which held that the deduction cannot be withdrawn in the hands of the donors even if the approval to the research organization is withdrawn subsequently.

The Tribunal concluded that the claim made by the assessee company towards deduction under Section 35(1)(ii) on account of donation made to SHGPH is allowable. The grounds of appeal filed by the assessee were allowed, and the appeal was decided in favor of the assessee.

Conclusion:
The appeal of the assessee was allowed, and the addition of ?2,18,75,000/- as weighted deduction under Section 35(1)(ii) was set aside. The Tribunal emphasized the legislative intent to protect the donors from the consequences of the donee's fraud and the necessity of providing an opportunity for cross-examination to ensure natural justice.