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TMI Blog2018 (7) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction. CIT(A) has placed reliance on the cancellation of registration granted u/s 12AA to M/s Bioved Research Society with retrospective effect. The registration granted u/s 12AA and the approval granted u/s 35(1)(ii) operates on different field. CIT(A) was not justified in placing reliance on the order of cancellation of registration u/s 12AA of the Act. In the instant case, it is the contention of Ld A.R that the approval was not cancelled till date. Before us, the revenue did not furnish any material to refute the contentions of Ld A.R. There is no justification in rejecting the claim of weighted deduction claimed u/s 35(1)(ii) of the Act. Addition made u/s 56(2)(viia) - Held that:- Provisions of sec. 56(2)(viia) should be applicable only in cases where the receipt of shares become property in the hands of recipient and the shares shall become property of the recipient only if it is “shares of any other company”. In the instant case, the assessee herein has purchased its own shares under buyback scheme and the same has been extinguished by reducing the capital and hence the tests of “becoming property” and also “shares of any other company” fail in this case. The tax a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 12,67,410/- in proportion to average value of investments to the average value of total assets. The disallowance of administrative expenses under rule 8D(2)(iii) was computed at 0.50% of the average value of investments at ₹ 22,77,018/-. Accordingly the AO disallowed a sum of ₹ 43,66,781/- u/s 14A of the Act. 5. The Ld CIT(A) deleted the interest disallowance made under Rule 8D(2)(ii) of I T Rules by following decision rendered by Hon ble Bombay High Court in the case of HDFC Bank Ltd (366 ITR 505), since the own funds available with the assessee was more than the value of investments. With regard to disallowance made under Rule 8D(2)(iii), the Ld CIT(A) directed the AO to compute the disallowance by considering only those investments which have yielded income, which does not form part of total income. The Ld CIT(A) confirmed the disallowance of direct expenses under rule 8D(2)(i) as per the workings made by the AO. However, by following the decision rendered by Hon ble Delhi High Court in the case of Joint Investments P Ltd (ITA No.117/2015), the Ld CIT(A) directed the AO to restrict the amount of disallowance to the amount of exempt income. The assessee is st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oved Research Society, which was an institution undertaking scientific research. Since it was approved u/s 35 of the Act, the donation paid to it is eligible for weighted deduction of an amount equal to one and three fourth times of amount donated to it as per the provisions of sec. 35(1)(ii) of the Act. Accordingly the assessee claimed deduction of ₹ 87,50,000/- under the above said section on the donation of ₹ 50.00 lakhs paid by it. 9. During the course of assessment proceedings, the AO issued commission u/s 131(1)(d) of the Act to the Assistant Commissioner of Income tax (exemptions), Lucknow in order to verify the genuineness of the donation paid by the assessee. The Asst. Commissioner reported that the revenue has carried out survey operations in the hands of various persons and it revealed that those persons have paid donations to these kinds of trusts/societies, which were subsequently returned back in cash after deducting commission. These donors have claimed weighted deduction u/s 35(1)(ii) of the Act. Accordingly it was reported that the donations are, in fact, bogus in nature. The Asst. Commissioner also reported that the donations have been treated as an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the research association u/s 12AA is the condition for allowing deduction u/s 35(1)(ii) of the Act. 13. The Ld A.R submitted that an almost identical issue was considered by Hon ble Bombay High Court in the case of Ramdas Maneklal Gandhi v. Union of India (2000)(241 ITR 437). In the above said case, the assessee before Hon ble High Court paid donation of ₹ 1.00 lakh for Rural development Programme to a Society for integral development, which was approved by the prescribed authority at that point of time. The said payment was eligible for deduction u/s 35CCA of the Act and the assessee was accordingly allowed deduction. Subsequently the approval was withdrawn by the prescribed authority on 3.3.1987 with retrospective effect from 13.12.1982. The Income tax officer sought to withdraw the deduction granted u/s 35CCA of the Act by reopening the assessment. The assessee challenged the reopening of assessment by filing writ petition before the Hon ble Bombay High Court. The Hon ble Bombay High Court held that the assessee is entitled to rely upon certificate granted to the institution u/s 35CCA for claiming deduction under that section, which was valid and subsisting when donatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in his remand report about the survey conducted in the year 2015 in the hands of certain donors. Based on the survey findings, the assessment in the hands of Bioved Research Society has been completed on 29-03-2016. These facts show that the above said society was very much having approval in the financial year 2013-14. 17. It is also an undisputed fact that the revenue did not carry on any survey operations in the hands of the assessee. It is also not clear as to whether any survey operation was conducted in the hands of Bioved Research Society also. Be that as it may, the various case laws relied upon by the Ld A.R would show that the deduction claimed by the assessee u/s 35(1)(ii) cannot be rejected on the basis of subsequent events. The Hon ble Bombay High Court was considering the issue of deduction claimed u/s 35CCA of the Act in the case of Ramdas Maneklal Gandhi (supra). The head notes of the said decision reads as under:- Section 35CCA of the Income tax Act, 1961 Rural development programme, expenses for Assessment year 1985-86 Notice issued to withdraw deduction allowed under section 35CCA in respect of donation to an institution whose approval was withdra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the approval exemption to the society has been withdrawn with retrospective effect, can the order of the assessing officer be said to be erroneous or prejudicial to the interests of Revenue; our answer will be in the negative. When the assessee has paid donation to the society which held valid approval under Section 35CCA of the Act and that has not been withdrawn not only in the accounting year but till the assessment was made. That approval to society withdrawn in March, 1987, though with retrospective effect, the benefit under Section 35CCA cannot be denied. 16. For no fault of the assessee, he should not suffer and once the approval is given to the society under Section 35CCA and the assessee has paid the amount donation to that society, he cannot be denied the deduction for which he was entitled under the valid certificate issued by the society which is approved by the Department on the date of payment to that society. 17. Assuming by mistake the approval has been given to the wrong society. But for mistake of the department, why should the assessee suffer? That withdrawal of approval to the society with retrospective effect is itself bad. No assessee should suffer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscussions, we are of the view that there is no justification in rejecting the claim of weighted deduction claimed u/s 35(1)(ii) of the Act. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the weighted deduction claimed u/s 35(1)(ii) of the Act. 23. The last issue urged by the assessee relates to the addition of ₹ 82.89 lakhs made u/s 56(2)(viia) of the Act. The facts in brief are that the assessee, during the year under consideration, made an offer to existing shareholders for buy back of 25% of its existing share capital at a price of ₹ 26/- per share. The offer was open between 8th May, 2013 and 22nd May, 2013. One of the directors Shri Kashyap Vora offered 12,19,075 shares under the buyback scheme and accordingly the assessee bought those shares paid a consideration of ₹ 316.95 lakhs on 24.05.2013. The AO noticed that the book value of shares as on 31.3.2013 was ₹ 32.80 per share, whereas the assessee company has bought back the shares at ₹ 26/- per share. 24. The AO proposed to invoke the provisions of sec.56(2)(viia) of the Act to this transaction of buy back. The said provisions read as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sec. 56(2)(viia) of the Act in the instant case. In this regard, the Ld A.R placed reliance on the Memorandum Explaining the provisions in Finance Bill, 1999 available in (1999) 236 ITR (St.) 155. 26. He submitted that the provisions of sec.56(2)(vii) were introduced as counter evasion mechanism as explained in the Memorandum Explaining the provisions in the Finance Bill, 2010 (2010)(321 ITR (St.) 110) , which is extracted below:- B. The provisions of section 56(2)(vii) were introduced as a counter evasion mechanism to prevent laundering of unaccounted income under the garb of gifts, particularly after abolition of the Gift Tax Act. The provisions were intended to extend the tax net to such transactions in kind. The intent is not to tax the transactions entered into in the normal course of business or trade, the profits of which are taxable under specific head of income. It is, therefore, proposed to amend the definition of property so as to provide that section 56(2)(vii) will have application to the property which is in the nature of a capital asset of the recipient and therefore would not apply to stock-in-trade, raw material and consumable stores of any business of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was ₹ 32.80 shares. Accordingly he submitted that the AO has rightly assessed the difference u/s 56(2)(viia) of the Act. 30. We have heard rival contentions on this issue and perused the record. The provisions of sec. 56(2)(viia) reads that where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010, any property, being shares of a company not being a company in which the public are substantially interested The words firm or a company any property, being shares of a company are important here. In this regard, we may refer to the Memorandum explaining the insertion of Provisions of sec. 56(2)(viia) by the Finance Act, 2010, which reads as under:- Under the existing provisions of section 56(2)(vii), any sum of money or any property in kind which is received without consideration or for inadequate consideration (in excess of the prescribed limit of ₹ 50,000) by an individual or an HUF is chargeable to income-tax in the hands of recipient under the head income from other sources . However, receipts from relatives or on the occ ..... 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