Deduction under Section 35(1)(ii) denied for donations to trusts involved in organized fraud

ITAT Kolkata denied deduction u/s 35(1)(ii) for donations made to trusts SHGHP and MIERE. The assessee initially claimed deduction u/s 80G but later sought correction to claim u/s 35(1)(ii). Following Supreme Court precedent in Batanagar Education and Research Trust, the tribunal found the donee trusts were involved in organized fraud based on survey findings and post-survey enquiries. The tribunal held that Revenue successfully disproved the donor's claim with credible material evidence. CIT(A)'s relief was set aside, and Revenue's grounds were allowed.

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Issues Involved:

1. Deletion of addition of Rs. 1,75,00,000/- as bogus donation claimed under section 35(1)(ii) of the Income Tax Act, 1961.
2. Withdrawal of recognition by CBDT for the donee institutions and its impact on the claim of deduction.
3. Consideration of the jurisdictional High Court's decision in Swati Bajaj and its relevance to the case.
4. Restriction of addition under section 14A of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 1,75,00,000/- as Bogus Donation:

The primary issue revolves around whether the CIT(A) erred in law in deleting the addition made by the Assessing Officer (AO) for a bogus donation claimed under section 35(1)(ii) of the Income Tax Act, 1961. The AO disallowed the deduction claimed by the assessee on donations made to two institutions, School of Human Genetics & Population Health (SHGPH) and Matrivani Institute of Experimental Research & Education (MIERE), citing that these institutions were engaged in accepting bogus donations and returning the amounts to donors in cash. The CIT(A) allowed the deduction based on the fact that the institutions had valid registration and approval at the time the donations were made, relying on the decision of the Hon'ble Calcutta High Court in the case of Maco Corporation (India) (P) Ltd. However, the Tribunal, while considering the decision of the Hon'ble Supreme Court in Batanagar Education and Research Trust, highlighted that the donations were part of an organized fraud and hence, the deduction under section 35(1)(ii) was not permissible. The Tribunal set aside the relief granted by the CIT(A) on this issue.

2. Withdrawal of Recognition by CBDT:

The revenue contended that the CBDT had withdrawn the recognition granted to the donee institutions, which invalidated their authority to receive donations for the purpose of claiming deductions under section 35(1)(ii). The CIT(A) observed that the withdrawal of approval had a retrospective effect, but the deduction should not be denied merely on the grounds of subsequent withdrawal. The Tribunal, however, found that the retrospective withdrawal was justified based on the fraudulent activities of the institutions, as evidenced by the survey and investigation reports. The Tribunal concluded that the assessee's claim for deduction was not sustainable due to the organized fraud and misuse of the charitable status by the donee institutions.

3. Consideration of Jurisdictional High Court's Decision in Swati Bajaj:

The revenue argued that the CIT(A) ignored the jurisdictional High Court's decision in Swati Bajaj, which upheld additions based on findings of the Investigation Wing. The Tribunal noted that similar issues of bogus claims and fraudulent activities were addressed in the Swati Bajaj case, where the High Court had set aside ITAT orders favoring assessees. The Tribunal applied the reasoning from Swati Bajaj, emphasizing that the deductions claimed were part of an organized fraud, and upheld the revenue's stance against the deduction under section 35(1)(ii).

4. Restriction of Addition under Section 14A:

The revenue also contested the CIT(A)'s decision to restrict the addition under section 14A to Rs. 26,610/-. The CIT(A) had considered the assessee's own funds and investments yielding exempt income, along with the suo moto disallowance by the assessee. The Tribunal found no reason to interfere with the CIT(A)'s findings on this issue and dismissed the revenue's grounds related to section 14A.

Conclusion:

The Tribunal partly allowed the revenue's appeal, setting aside the relief granted by the CIT(A) regarding the deduction under section 35(1)(ii) due to the fraudulent nature of the donations and upheld the CIT(A)'s decision on section 14A. The judgment underscores the importance of genuine compliance with statutory provisions and the repercussions of engaging in fraudulent tax practices.

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