Tribunal allows Section 35 deduction, rejects disallowance based on withdrawn notification. Clarifies rental income treatment.

The Tribunal set aside the CIT(A)'s decision and directed the AO to allow the deduction under Section 35 as claimed by the assessee, rejecting the disallowance of a claim based on a withdrawn institute's notification. Regarding the addition of depreciation on let-out property, the Tribunal directed the AO to treat rental income under the head "House Property" and disallow depreciation under Section 32, emphasizing properties not used for business purposes should not claim depreciation.

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Issues Involved:
1. Disallowance of Assessee’s Claim under Section 35 of the Income Tax Act.
2. Addition of Depreciation on Let-Out Property.

Issue 1: Disallowance of Assessee’s Claim under Section 35 of the Income Tax Act

The assessee’s appeal challenges the CIT(A)’s order confirming the AO’s disallowance of a Rs. 1,05,00,000/- claim under Section 35 of the Income Tax Act. The AO’s disallowance was based on information indicating a bogus donation to Matravaini Institute of Experimental Research Education, Kolkata. The CBDT had withdrawn the institute’s notification under Section 35(1)(ii) with retrospective effect from 21.08.2007, leading the AO to issue a show-cause notice to the assessee. Despite the assessee’s defense that the donation was genuine and made via cheque while the institute held valid approval, the AO disallowed the claim based on statements from the institute’s directors denying knowledge of the donation and the CBDT’s withdrawal of notification.

The CIT(A) upheld the AO’s decision, noting the investigation wing’s findings that the donation sums were returned to donors and the director’s statement denying awareness of the donation or the institute’s existence. The CIT(A) also found the donation receipt doctored and invalid, leading to the conclusion that the donation was bogus.

Upon review, the Tribunal observed that the donation was made when the institute held valid approval, and subsequent withdrawal of recognition with retrospective effect should not affect the donor. The Tribunal cited several decisions, including Borsad Tobacco Company Pvt. Ltd. vs. DCIT and Ram Das Maniklal Gandhi vs. UOI, which support the view that donors should not be penalized for subsequent withdrawal of recognition. Therefore, the Tribunal set aside the CIT(A)’s order and directed the AO to allow the deduction under Section 35 as claimed by the assessee.

Issue 2: Addition of Depreciation on Let-Out Property

The second issue pertains to the addition of Rs. 8,81,137/- towards depreciation on let-out property. The AO noted that the assessee claimed depreciation on premises let out during the year and treated the rental income as business income, allowing depreciation accordingly. However, the CIT(A) directed the AO to treat the rental income under the head “House Property,” allowing a 30% standard deduction from the rent received and reducing the depreciation claim under Section 38(2) of the Act.

The Tribunal noted that a similar issue in the assessee’s case for the previous year was remanded to the AO for verification. The Tribunal reiterated that if properties are let out and income is offered under the head “Income from House Property,” depreciation under Section 32 cannot be allowed. The Tribunal emphasized that the concept of Block of Assets should not be stretched to allow depreciation on properties not used for business purposes. The Tribunal directed the AO to follow the decision of the co-ordinate bench for A.Y. 2013-14 and decide the issue accordingly.

Order pronounced in the open court on 18.02.2020.

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