2022 (6) TMI 470 - AT - Income Tax

Tribunal Upholds Assessee's Appeal, Emphasizes Due Process

The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection. It upheld the deletion of the addition made under section ... Disallowance of deduction u/s.35(1)(ii) towards donation given to M/s. School of Genetics and Population Health (SHG & PH) - subsequent withdrawal of approval with retrospective effect - Whether or not the subsequent cancellation of registration to SHG&PH vide CBDT order dated 15.09.2016 with retrospective effect can invalidate the assessee's claim of deduction under Sec. 35(1)(ii) - HELD THAT:- We find that the aforesaid research institution i.e, SHG&PH as on the date of giving of donation by the assessee was having a valid approval granted under the Act. On a perusal of the aforesaid 'Explanation' to Sec. 35(1)(ii) of the Act, it can safely be gathered that a subsequent withdrawal of such approval cannot form a reason to deny deduction claimed by the donor. As decided in Indian Council of Agricultural Research (1999 (10) TMI 55 - BOMBAY HIGH COURT] while dealing with an identical issue of denial of deduction under Sec. 35(1)(ii) of the Act due to a subsequent withdrawal of approval with retrospective effect, had observed, that such retrospective cancellation of registration will have no effect upon the deduction claimed by the donor, since such donation was given acting upon the registration when it was valid and operative. On a perusal of the aforesaid statutory provision i.e, Sec. 35(1)(ii) of the Act, as well as the ratio laid down in the aforesaid judicial pronouncements, it can safely be concluded that if an assessee acting upon a valid registration/approval granted to an institution had donated certain amount for which deduction is claimed, then, such deduction cannot be disallowed if at a later point of time the same is cancelled with retrospective effect. Also see M/S POOJA HARDWARE PVT. LTD. VERSUS THE ASSISTANT COMMISSIONER OF INCOME TAX – 13 (1) (1) , MUMBAI [2019 (10) TMI 1281 - ITAT MUMBAI].Thus we uphold the order of the CIT(A) who had vacated the disallowance of the assessee's claim for deduction u/s 35(1)(ii) - Decided in favour of assessee. Disallowance u/s.40A(2)(b) - payment of salary made to related party - HELD THAT:- A.O while working out the disallowance under the aforesaid statutory provision, had though observed that the payment of salary to the aforementioned two related parties in question was found to be excessive, but had fundamentally erred by not opining as to what as per him was the fair market value of the service which were being rendered by the aforementioned related persons, considering which the payments made to them by the assessee were to held as excessive. Before the CIT(Appeals) the state of affairs we find was no better, as he too without addressing the aforesaid fundamental and material requirement contemplated under Sec. 40A(2)(a) of the Act had though on an ad-hoc basis allowed some relief to the assessee, but had allowed the mistake of the AO to perpetuate. On the basis of our aforesaid observations, we are unable to concur with the view taken by either of lower authorities and holding a conviction that both of them had fundamentally erred in not appreciating the mandate of Section 40A(2)(a) of the Act in the right perspective, thus, set-aside the order of the CIT(Appeals) to the said extent and vacate the disallowance made by the A.O. - Decided against revenue. Issues Involved:1. Deletion of addition made under section 35(1)(ii) of the IT Act, 1961.2. Lack of material evidence against the donor and sharing of allegations with the assessee.3. Consideration of CBDT's Notification dated 15-09-2016.4. Restriction of disallowance made under section 40A(2)(b) based on comparison of NP rate of previous year.5. Cross-objection regarding the annulling of the Assessment Order and disallowance of salary payments under section 40A(2)(b).Detailed Analysis:1. Deletion of Addition under Section 35(1)(ii):The primary issue was whether the CIT(A) was justified in deleting the addition made under section 35(1)(ii) of the IT Act, 1961. The assessee had donated Rs. 40 lakhs to the School of Human Genetics and Pollution Health (SHG&PH) and claimed a weighted deduction of Rs. 70 lakhs under section 35(1)(ii). The CIT(A) observed that at the time of the donation, SHG&PH had a valid approval from the prescribed authority. The Tribunal upheld this view, citing the 'Explanation' to Section 35(1)(ii) which states that subsequent withdrawal of approval does not invalidate the deduction. The Tribunal referenced judicial pronouncements, including the Supreme Court's decision in CIT Vs. Chotatingrai Tea and the Bombay High Court's decision in National Leather Cloth Mfg. Co., which supported the assessee's claim. Thus, the Tribunal found no reason to differ from the CIT(A)'s order and dismissed the Revenue's appeal on this ground.2. Lack of Material Evidence and Sharing Allegations:The Revenue contended that the CIT(A) erred in holding that the AO had not provided material evidence against the donor and failed to share allegations with the assessee. The CIT(A) had noted that no adverse material surfaced during the survey against SHG&PH and emphasized the need for sharing allegations with the assessee for explanation. The Tribunal upheld the CIT(A)'s view, emphasizing the principles of natural justice, which require that any adverse material or allegations must be shared with the assessee for a fair opportunity to respond.3. Consideration of CBDT's Notification:The Revenue argued that the CIT(A) did not consider the CBDT's Notification dated 15-09-2016, which stated that the approval for SHG&PH was deemed not issued for any tax benefits. The Tribunal, however, reiterated that the assessee's donation was made when SHG&PH had a valid approval. The subsequent notification could not retrospectively invalidate the deduction claimed by the assessee. The Tribunal referenced similar cases where retrospective withdrawal of approval did not affect the validity of the deduction claimed.4. Restriction of Disallowance under Section 40A(2)(b):The issue was whether the CIT(A) was justified in restricting the disallowance under section 40A(2)(b) based on a comparison of the NP rate of the previous year. The AO had disallowed Rs. 5 lakhs out of the salary payments made to related parties, considering them excessive. The CIT(A) reduced this disallowance to Rs. 3 lakhs. The Tribunal found that both the AO and CIT(A) failed to determine the fair market value of the services rendered by the related parties, which is essential under Section 40A(2)(a). The Tribunal set aside the CIT(A)'s order to this extent and vacated the disallowance made by the AO, allowing the assessee's cross-objection.5. Cross-Objection on Annulment of Assessment Order and Salary Disallowance:The assessee's cross-objection argued that the Assessment Order was vitiated by principles of natural justice as adverse statements and survey findings were not provided for cross-examination. Additionally, the assessee contested the disallowance of Rs. 3 lakhs out of salary payments under section 40A(2)(b). The Tribunal agreed with the assessee, emphasizing the need for fair market value determination and the principles of natural justice. Consequently, the Tribunal allowed the assessee's cross-objection.Conclusion:The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection, emphasizing adherence to statutory provisions and principles of natural justice in the assessment process. The Tribunal upheld the CIT(A)'s deletion of the addition under section 35(1)(ii) and vacated the disallowance under section 40A(2)(b), providing a comprehensive resolution of the issues involved.