2025 (5) TMI 1391 - AT - Income Tax

Political party donations denied under Section 80GGC due to money laundering through accommodation entries

ITAT Ahmedabad denied deduction under section 80GGC for political party donations. The AO established that political parties' bank accounts were used by ... Denial of deduction u/s. 80GGC - donations purportedly given to certain political parties - HELD THAT:- AO has clearly brought out facts that bank accounts of above political parties have been used by the accommodation entry provider, where the donation received by cheques were layered through various bank accounts and ultimately cash was returned back. The same is not disputed by the assessee with relevant materials. AO made a detailed enquiry of RSP and its Bank accounts and transfer of funds to one Shri Mukesh Mehta proprietor of two firms and he transferred it to Waheguru Enterprise and Sapan Traders, which is clearly a systematic financial maneuver to legitimate illicit moneys and evade taxes. In the absence of any fresh materials in support of the assessee’s claim. The Grounds raised by the assessee is devoid of merits and liable to be dismissed. The core legal questions considered in this appeal revolve around the validity of the claim for deduction under section 80GGC of the Income Tax Act, 1961, made by the assessee for donations purportedly given to certain political parties. Specifically, the issues include:1. Whether the donations claimed by the assessee to the political parties, namely Kisan Party of India and Rashtriya Samajwadi Party (Secular), are genuine and eligible for deduction under section 80GGC of the Act.2. Whether the political parties in question were involved in financial irregularities such as round-tripping or accommodation entries, thereby rendering the donations bogus.3. The evidentiary burden on the assessee to prove the genuineness of donations claimed as deductions.4. The applicability of precedents concerning shell entities and accommodation entries in the context of donations to political parties.Issue-wise Detailed AnalysisIssue 1: Genuineness of Donations Claimed Under Section 80GGCRelevant Legal Framework and Precedents: Section 80GGC of the Income Tax Act provides for deduction of donations made to political parties from the gross total income. However, the deduction is permissible only if the donations are genuine and supported by adequate evidence. The burden lies on the assessee to establish the authenticity of the donations. The Tribunal's decision in Pavan Anil Bakeri vs. Deputy Commissioner of Income-tax and the Supreme Court ruling in Pavankumar M. Sanghvi v. ITO are pivotal precedents emphasizing the need to scrutinize the genuineness of transactions and reject those that are mere accommodation entries or shell transactions.Court's Interpretation and Reasoning: The Court observed that the assessee failed to provide any response to the show cause notice issued under section 133(6) to the political parties to confirm receipt of donations. The notices were bounced, and no corroborative evidence was furnished by the assessee. The Assessing Officer's detailed investigation revealed that the political parties were allegedly involved in large-scale round-tripping of funds, where donations were routed through multiple accounts and eventually returned to the donors, thus constituting accommodation entries.Key Evidence and Findings: The Assessing Officer relied on reports from news portals and Election Commission records, which indicated that the political parties in question had been declared inactive and failed to comply with statutory requirements. Bank statements of Rashtriya Samajwadi Party (Secular) showed that the donations received were immediately transferred to other entities and eventually returned to the donor or related parties. Physical inspection of the party's office revealed it was often closed, indicating lack of genuine business activity. Similar modus operandi was presumed for the Kisan Party of India based on these findings and corroborative media reports.Application of Law to Facts: Given the absence of any documentary evidence from the assessee and the detailed inquiry revealing the use of political party accounts for accommodation entries, the Court applied the principles from the cited precedents to conclude that the donations were not genuine. The Court emphasized that the assessee's claim was a colorable device to evade tax liability by exploiting the deduction under section 80GGC.Treatment of Competing Arguments: The assessee contended that the donations were genuine and relied on the mere filing of returns showing the donations. However, no fresh evidence or documentation was produced before the Tribunal to counter the detailed findings of the Assessing Officer and CIT(A). The Tribunal rejected the argument due to lack of substantiation and the consistency of the findings against the genuineness of the donations.Conclusion: The Court upheld the disallowance of the deduction claimed under section 80GGC on the ground that the donations were bogus and constituted accommodation entries.Issue 2: Role of Political Parties as Shell Entities or Accommodation Entry ProvidersRelevant Legal Framework and Precedents: The concept of shell entities and accommodation entries has been elaborated in the Tribunal's earlier rulings and Supreme Court judgments. Shell entities are characterized by lack of genuine business operations and are often used to launder illicit funds or evade taxes. The Supreme Court in Pavankumar M. Sanghvi v. ITO held that transactions involving shell entities lacking substance and genuine business purpose are liable to be treated as not genuine.Court's Interpretation and Reasoning: The Court relied on the detailed findings of the Assessing Officer and CIT(A) that the Rashtriya Samajwadi Party (Secular) operated in a manner consistent with shell entities. The bank account transactions showed layering and immediate transfer of funds to other entities, with no genuine expenditure reflecting in the accounts. The physical inspection of the party's office and the closure of related proprietorship firms reinforced the conclusion that these entities were fronts for accommodation entries.Key Evidence and Findings: The bank statements revealed large cash credits followed by immediate debits to other entities on the same day. The entities receiving these funds had closed offices and no stock or genuine business activity. The political party's failure to respond to notices and maintain compliance with statutory requirements further supported the shell entity characterization.Application of Law to Facts: Applying the legal principles from the precedents, the Court concluded that the political parties were used as vehicles for financial manoeuvring to legitimize illicit monies. The donations claimed were part of a systematic scheme to evade taxes by routing funds through these entities and claiming deductions unlawfully.Treatment of Competing Arguments: The assessee's reliance on the existence of the political parties and the filing of returns was found insufficient in the face of overwhelming evidence of non-genuine operations. The Court emphasized that the mere registration of a political party does not confer legitimacy on suspicious financial transactions.Conclusion: The Court affirmed that the political parties functioned as shell entities providing accommodation entries, rendering the donations claimed as deductions invalid.Issue 3: Burden of Proof and Evidentiary Standards for Claiming Deduction Under Section 80GGCRelevant Legal Framework: The Income Tax Act places the onus on the assessee to prove the genuineness of the donations claimed as deductions. Where the Assessing Officer raises suspicion and calls for evidence, failure to produce adequate documentation or explanation can lead to disallowance.Court's Interpretation and Reasoning: The Court noted that the assessee did not furnish any documentary evidence or response to show cause notices issued to the political parties. The absence of corroborative evidence, despite opportunity, led to the conclusion that the assessee failed to discharge the burden of proof.Key Evidence and Findings: The assessee's submissions were limited to documents already on record before the Assessing Officer, with no new evidence presented before the Tribunal. The political parties themselves did not respond to notices, and their bank accounts showed suspicious transactions.Application of Law to Facts: In light of the evidentiary vacuum and adverse findings, the Court applied the principle that the burden lies on the claimant to establish the validity of the deduction. The failure to do so justified the disallowance.Treatment of Competing Arguments: The assessee's argument that the donations were genuine was unsupported by evidence. The Court underscored that unsubstantiated claims cannot override the detailed inquiry and findings of the tax authorities.Conclusion: The Court held that the assessee failed to meet the evidentiary standards required to claim deduction under section 80GGC.Significant Holdings'The Assessing Officer has clearly brought out facts that bank accounts of above political party have been used by the accommodation entry provider where the donation received by cheques were layered through various bank accounts and ultimately cash was returned back.''The modus operandi of the political party named Rashtriya Samajwadi Party (Secular) was found to be a systematic financial maneuver to legitimate illicit moneys and evade taxes.''The claim made by the assessee is far from truth and nothing but a colourable device to hoodwink the tax department and to evade tax liability in the guise of Sec. 80GGC.''The burden lies on the assessee to support its claim with corroborative evidences. However, the assessee failed in furnishing the documentary evidences called for verification, thereby the genuineness of donation made to political party was not proved beyond doubt.''A shell entity, by itself, is not an illegal entity but it is their act of abatement, of, and being part of financial manoeuvring to legitimize illicit monies and evade taxes, that takes its actions beyond what is legally permissible.''In the absence of any evidence from the assessee, the grounds raised by the assessee are untenable and therefore the same is rejected.'Core principles established include:Donations to political parties claimed under section 80GGC must be genuine and supported by evidence.Political parties used as conduits for accommodation entries or round-tripping of funds negate the genuineness of donations.The burden of proof to establish genuineness lies squarely on the assessee.Failure to respond to notices or produce corroborative evidence justifies disallowance of deductions.Shell entities and accommodation entries are recognized as mechanisms to evade taxes and cannot be legitimized by mere registration or superficial compliance.Final determinations on each issue are as follows:The donations claimed by the assessee to the political parties are not genuine and are disallowed under section 80GGC.The political parties in question functioned as shell entities providing accommodation entries, invalidating the claim for deduction.The assessee failed to discharge the burden of proof to establish the genuineness of the donations.The appeal filed by the assessee is dismissed, and the disallowance of Rs. 1,13,51,000/- is upheld.