2021 (7) TMI 442 - AT - Income Tax

Tribunal allows deduction under Section 35(1)(ii) for valid donation approval

The Tribunal allowed the appeal filed by the assessee, holding that the deduction under Section 35(1)(ii) of the I.T. Act should be allowed as the ... Disallowance of item of expenditure u/s 35(1)(ii) with reference to payment of Rupees Ten crores - HELD THAT:- The payee was duly approved when the payment was done. By no stretch of imagination it can be said that the assessee could have done the impossible and known that subsequently the approval will be withdrawn. We set aside the order of authorities below. The assessee is therefore held to be eligible for deduction u/s 35(1)(ii) of the Act. - Appeal filed by the assessee is allowed. Issues Involved:1. Sustaining the disallowance of expenditure under Section 35(1)(ii) of the I.T. Act.2. Legitimacy of the donation made to the School of Human Genetics and Population Health (SHGPH) and subsequent withdrawal of approval by CBDT.Issue-wise Detailed Analysis:1. Sustaining the Disallowance of Expenditure under Section 35(1)(ii) of the I.T. Act:The assessee company, engaged in the tobacco business, claimed a deduction under Section 35(1)(ii) of the I.T. Act for a donation of Rs. 10 crores to SHGPH. The Assessing Officer (AO) disallowed the deduction, citing a survey under Section 133A of the Act, which revealed that SHGPH was involved in accepting bogus donations and returning the money to donors after deducting a commission. The AO argued that the Explanation to Section 35(1)(ii) did not apply in this case due to the fraudulent nature of SHGPH's activities. Consequently, the AO disallowed Rs. 17.5 crores, which included the weighted deduction claimed by the assessee.2. Legitimacy of the Donation and Subsequent Withdrawal of Approval by CBDT:The assessee appealed against the AO's decision, but the CIT(A) upheld the disallowance, relying on the same survey findings and the CBDT's notification withdrawing SHGPH's approval retrospectively from 20.01.2010. The assessee argued that the deduction should not be denied merely because the approval was withdrawn after the donation was made. The Tribunal considered several ITAT decisions on similar issues, where it was held that the withdrawal of approval to the payee organization does not affect the donor's right to claim a deduction if the donation was made when the approval was valid.Tribunal's Findings:The Tribunal noted that the facts of the case were identical to those in previous ITAT decisions, where it was consistently held that deductions under Section 35(1)(ii) should be allowed if the donation was made when the payee organization had valid approval. The Tribunal emphasized that the withdrawal of approval by the CBDT occurred after the donation was made, and the assessee could not have anticipated this withdrawal. The Tribunal referred to the decision in the case of Kitchen Essentials, which stated that the AO's reliance on statements recorded during the survey, without providing an opportunity for cross-examination, violated the principles of natural justice.Conclusion:The Tribunal concluded that the assessee was entitled to the deduction under Section 35(1)(ii) of the I.T. Act, as the donation was made when SHGPH had valid approval. The Tribunal set aside the orders of the lower authorities and allowed the appeal filed by the assessee.Pronouncement:The judgment was pronounced in the open court on 17.6.2021, allowing the appeal filed by the assessee.