Tribunal orders re-evaluation of donation claim under Income Tax Act for suspected fictitious transactions

The Tribunal allowed the appeal for statistical purposes, directing a re-evaluation by the Assessing Officer to determine the legitimacy of the donation claim under Section 35(1)(iii) of the Income Tax Act, 1961. The matter was remitted back for further examination due to suspicions of fictitious transactions and fund transfers, emphasizing the need for a thorough investigation into the chain of transactions and the involvement of the recipient society. The decision aimed at establishing the actual beneficiaries and validity of the donation claim, setting aside previous orders for a more detailed assessment.

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Issues: Disallowance of donation under Section 35(1)(iii) of the Income Tax Act, 1961.

Detailed Analysis:

1. The main issue in this case is the disallowance of a donation of Rs. 25,00,000 made by the assessee to a society under Section 35(1)(iii) of the Income Tax Act, 1961. The assessee borrowed the sum from a partnership firm and donated it to the Society for Welfare of Handicapped Persons, Durgapur, West Bengal. The Assessing Officer disallowed the claim based on allegations of misuse of funds by the recipient society due to non-compliance with KYC norms by Axis Bank while opening an account. The assessee argued that the approval granted by the Government of India under Section 35(1)(iii) should suffice for the deduction, regardless of the recipient's use of funds.

2. The counsel for the assessee contended that the recipient institution was approved under Section 35(1)(iii) and the assessee's donation should not be disallowed based on the recipient's actions post-receipt of funds. The counsel relied on judgments by the Calcutta High Court and Gauhati High Court to support the argument that as long as the donation was made to an approved institution, the assessee's obligation was fulfilled. The counsel emphasized that the assessee's intent was to donate to an approved institution, and any subsequent misuse of funds should not impact the deduction eligibility.

3. On the contrary, the Departmental Representative argued that the entire transaction was a sham, with the assessee and the recipient society engaging in deceptive practices to evade tax. The Departmental Representative highlighted that the funds were transferred to various other organizations not engaged in activities for which the recipient society was approved. The Assessing Officer's investigation revealed discrepancies in the transaction, leading to the disallowance of the claim.

4. The Tribunal, after considering both sides, found that similar transactions involving fictitious accounts and fund transfers had taken place, raising suspicions about the legitimacy of the donation. The Tribunal remitted the matter back to the Assessing Officer for further examination. The Tribunal directed the Assessing Officer to investigate the chain of transactions, the role of Axis Bank officials, and the recipient society's involvement in the fund transfer. The Tribunal emphasized the need for a thorough re-examination of the case to determine the actual beneficiaries and the validity of the donation claim.

5. Ultimately, the Tribunal allowed the appeal for statistical purposes, setting aside the lower authorities' orders and directing a re-evaluation of the matter by the Assessing Officer in accordance with the Tribunal's directions. The decision was based on the need for a more detailed investigation into the transaction and the parties involved to ascertain the legitimacy of the donation claim under Section 35(1)(iii) of the Income Tax Act, 1961.

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