2018 (11) TMI 1314 - AT - Income Tax

Tribunal grants deductions for donations and directs reassessment for exempt income investments.

The Tribunal allowed the assessee's appeal regarding the disallowance of weighted deductions under section 35(1)(ii) of the Income Tax Act for donations ... Disallowance u/s 35(1)(ii) - Donation made to 'The School of Human Genetics and Population Health', an Institute approved by the Central Government - eligibility to claim weighted deduction @175% - Held that:- We note that the statements of the various parties and persons were recorded behind the back of the assessee and the AO did not allow opportunity of cross examination. We note that in absence of opportunity of cross-examination no reliance could be made on such statements to draw any adverse inference against the assessee firm. The assessee firm denied its knowledge of the statements made by these institutes which were relied on by the Investigation Wing and the Assessing Officer. We note that not providing the opportunity of cross-examination is against the principle of natural justice and for that we rely of the judgment of CIT vs. Dharam Pal Prem Chand Ltd.[2007 (5) TMI 131 - HIGH COURT, DELHI]. We note that the withdrawal of recognition u/s 35(1)(ii) in the hands of the payee organizations would not affect the rights and interests of the assessee herein for claim of weighted deduction u/s 35(1)(ii). As relying on DCIT, CIRCLE-12 (1), KOLKATA VERSUS M/S MACO CORPORATION (INDIA) PVT. LTD. [2018 (3) TMI 811 - ITAT KOLKATA] we direct the AO to grant deduction u/s 35(1)(ii). Disallowance u/s 14A - Held that:- We note that in this ground of appeal the Assessee Firm has challenged the disallowance u/s 14A. We note that in the case of REI Agro Ltd.[2014 (4) TMI 713 - CALCUTTA HIGH COURT] has held that it is only the investments which yields dividend during the previous year that has to be considered while adopting the average value of investments for the purpose of Rule 8D(2)(ii) & (iii) of the Rules. The assessee has submitted the details of dividend income vis a vis the value of investments in those shares. We direct the AO to compute disallowance u/s 14A read with rule 8D, only after considering the investments which earned the exempt income. Therefore, we allow this ground for statistical purposes. Issues Involved:1. Disallowance of weighted deduction under section 35(1)(ii) of the Income Tax Act, 1961.2. Disallowance under section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.Issue-Wise Detailed Analysis:1. Disallowance of Weighted Deduction under Section 35(1)(ii):Facts and Arguments:- The assessee challenged the disallowance of a weighted deduction of Rs. 4,81,25,000 for AY 2013-14 and Rs. 10,50,00,000 for AY 2014-15 under section 35(1)(ii) of the Income Tax Act, 1961, for donations made to 'The School of Human Genetics and Population Health' (SHG) and 'Matrivani Institute Experimental Research & Education' (Matrivani).- The Assessing Officer (AO) disallowed the deductions, alleging the donations were bogus based on a report from the Investigation Wing and statements from key persons of the donee institutions.- The assessee contended that the donations were genuine and that the institutions were approved for deductions under section 35(1)(ii) at the time of donation. They argued that subsequent cancellation of the institutions' certificates should not affect their claim.Tribunal’s Findings:- The Tribunal noted that the statements used by the AO were recorded behind the assessee's back without allowing cross-examination, violating the principles of natural justice.- The Tribunal referenced the case of Rajda Polymers (ITA No.333/Kol/2017) and the judgment of Hon’ble Delhi High Court in CIT vs. Dharam Pal Prem Chand Ltd. [2007] 295 ITR 105, which emphasized the necessity of cross-examination.- The Tribunal also cited the case of M/s Maco Corporation India (P) Ltd (ITA No.16/Kol/2017), which held that the withdrawal of recognition under section 35(1)(ii) in the hands of the payee organizations would not affect the assessee's right to claim deductions.Conclusion:- The Tribunal directed the AO to grant the deduction under section 35(1)(ii) of Rs. 4,81,25,000 for AY 2013-14 and Rs. 10,50,00,000 for AY 2014-15, as claimed by the assessee.2. Disallowance under Section 14A Read with Rule 8D:Facts and Arguments:- The AO disallowed Rs. 66,08,861 under section 14A read with Rule 8D, which the assessee contested, arguing that the disallowance should only consider investments that earned exempt income.- The AO had included both dividend and non-dividend bearing investments in the computation, which the assessee claimed was incorrect.Tribunal’s Findings:- The Tribunal referred to the case of REI Agro Ltd. Vs. DCIT 144 ITD 141 (Kol-Trib), affirmed by the Hon’ble Calcutta High Court, which held that only investments yielding dividend during the previous year should be considered for Rule 8D(2)(ii) & (iii).Conclusion:- The Tribunal directed the AO to recompute the disallowance under section 14A read with Rule 8D, considering only those investments that earned exempt income, thereby allowing the ground for statistical purposes.Final Order:- The appeals related to the disallowance under section 35(1)(ii) are allowed.- The appeal concerning the disallowance under section 14A is partly allowed for statistical purposes.- The order was pronounced in the open court on 27.07.2018.