ITAT allows deduction under section 35(1)(ii) - Payment via banking channels eligible for deduction

The ITAT allowed the appeal, holding that the assessee was entitled to the deduction under section 35(1)(ii) and that the reopening of the assessment was not justified. The ITAT set aside the lower authorities' orders, emphasizing that the payment was made through banking channels and the entity was eligible for the deduction at the time. The ITAT concluded that withdrawal of approval to the payee institution did not affect the assessee's right to claim the deduction if payment was made when approval was valid.

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Issues Involved:
1. Validity of notice under section 148 of the Income Tax Act.
2. Disallowance of weighted deduction under section 35(1)(ii) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Validity of Notice under Section 148:
The assessee challenged the validity of the notice issued under section 148 of the Income Tax Act, asserting that the notice was issued without jurisdiction and was based on vague, insufficient, and unsubstantiated reasons. The assessee contended that the reopening of the assessment was bad in law as the reasons recorded by the Assessing Officer (AO) were not specific and lacked independent inquiry. The assessee also argued that the assessment had been reopened based on information from the Directorate of Income Tax (Investigation), Kolkata, without providing any opportunity for cross-examination of the persons whose statements were relied upon.

The CIT(A) rejected these contentions, holding that the AO had a valid reason to believe that income had escaped assessment based on the information received. The CIT(A) stated that under the scheme of the Act, the AO has limited power to make inquiries when proceedings are not pending before him and that it is not necessary for the AO to conclusively prove that income had escaped assessment before reopening the assessment.

2. Disallowance of Weighted Deduction under Section 35(1)(ii):
The AO disallowed the assessee's claim of a weighted deduction of Rs. 35,00,000 under section 35(1)(ii) on the grounds that the donation receipt of Rs. 20,00,000 was not submitted. The AO received information that the institution, M/s. Herbicure Healthcare Bio-Herbal Research Foundation (HHBHRF), was involved in providing accommodation entries for bogus donations. The AO concluded that the donation was not genuine and that the assessee had made a bogus claim for the deduction.

The CIT(A) upheld the AO's decision, noting that the approval for HHBHRF under section 35(1)(ii) had been withdrawn retrospectively. The CIT(A) also found that the receipt provided by the assessee was merely an acknowledgment of a letter sanctioning the donation and not proof of payment. Therefore, the CIT(A) concluded that the assessee had failed to furnish valid proof of the donation.

The assessee appealed to the ITAT, arguing that the issue was covered in its favor by several judicial precedents. The ITAT noted that the reopening of the assessment was based on general information without any specific evidence against the assessee. The ITAT observed that the payment was made through banking channels and that the entity was eligible for the deduction at the time of payment. The ITAT also referred to several decisions where similar disallowances were overturned, emphasizing that the withdrawal of approval to the payee institution does not affect the assessee's right to claim the deduction if the payment was made when the approval was valid.

The ITAT concluded that the assessee was eligible for the deduction under section 35(1)(ii) and set aside the orders of the lower authorities. The ITAT also noted that since the issue was decided on merits, the adjudication on the reopening of the assessment was of academic interest and did not need to be addressed.

Conclusion:
The ITAT allowed the appeal filed by the assessee, holding that the assessee was entitled to the deduction under section 35(1)(ii) and that the reopening of the assessment was not justified based on the available evidence. The decision was pronounced in the open court on 5.10.2021.

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