2025 (9) TMI 1006 - AT - Income Tax

Disallowance of section 35(1)(ii) weighted deduction upheld for donations to unregistered trust involved in bogus scheme

ITAT, Ahmedabad dismissed the appeal and upheld the AO's disallowance of a weighted deduction under section 35(1)(ii) for donations paid to a charitable ... Disallowance of deduction u/s 35(1)(ii) - donation given to Shri Arvindo Institute of Applied Scientific Research Trust - AO observed that the said trust was found to have indulged in large scale scam of issuing bogus donation received for the purpose of claiming weighted deduction u/s 35(1)(ii) and many assessee’s had benefitted by claiming such bogus donation through this scam HELD THAT:- In the case of Deviyani Dilip Patel [2017 (7) TMI 1047 - ITAT CHENNAI] which is directly on the issue of bogus donation scam of the same trust i.e., Shri Arvindo Institute of Applied Science and Research Institute, the ITAT Chennai denied deduction under Section 35(1)(ii) In the case of C K Zipper Private Limited [2024 (6) TMI 1349 - ITAT AHMEDABAD] also disallowed the claim of weighted donation for A.Y. 2016-17 u/s 35(1)(ii) of the Act to Arvindo Institute of Applied Science and Research Institute on the ground that at the time of grant of registration, it did not have a valid registration - Appeal of the assessee is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether weighted deduction under Section 35(1)(ii) is allowable where the recipient institution's approval under that provision had expired prior to the donation and the donor relied on purported renewal documents that are shown to be forged. 2. Whether a donation to an entity not recognized under Section 35(1)(ii) can be treated as deductible business expenditure under Section 37(1) when the donor asserts a business nexus. 3. Whether disallowance by the revenue invoking unexplained expenditure provisions (Section 69C) is sustainable where disallowance principally rests on absence of statutory approval for the recipient. 4. The evidentiary and due-diligence standard expected of a donor claiming weighted deduction under Section 35(1)(ii), particularly in light of a public advisory from the Board (CBDT) about a bogus-donation racket. ISSUE-WISE DETAILED ANALYSIS - Allowability under Section 35(1)(ii) Legal framework: Section 35(1)(ii) grants a weighted deduction for sums paid to an approved research association/university/ institution recognized by the Central Government; statutory recognition (notification/approval) is a precondition to claim the specific deduction. Precedent treatment: Tribunal authorities have consistently held that where recognition expired and was not valid on date of payment, donor cannot claim weighted deduction; where forged renewal documents were produced by the recipient, earlier allowances were set aside and deduction disallowed. Interpretation and reasoning: The Court treated statutory approval as an indispensable jurisdictional fact; a donor's claim under Section 35(1)(ii) is sustainable only if the recipient possessed valid recognition at the time of donation. Reliance on forged or non-existent renewal/notification cannot confer eligibility. A public CBDT advisory identifying the recipient as unrecognized and involved in a bogus donation racket is material that undermines the genuineness of the claimed deduction and justifies denial. Ratio vs. Obiter: Ratio - deduction under Section 35(1)(ii) is not allowable where recipient lacked valid recognition at the time of donation, and forged documents do not remedy that defect. Obiter - emphasis on administrative advice as persuasive material for field enquiries. Conclusion: Weighted deduction under Section 35(1)(ii) properly disallowed where the recipient's approval had expired (31.03.2006) and no valid renewed recognition existed; forged documents cannot validate the claim. ISSUE-WISE DETAILED ANALYSIS - Claim under Section 37(1) as business expenditure Legal framework: Section 37(1) permits deduction of business expenditure that is incurred wholly and exclusively for the purposes of business or profession; donations as such are not deductible unless they qualify under a specific provision. Precedent treatment: Tribunals have held that when a payment is made as a donation (not in consideration of a business purpose), it cannot be recharacterized as a business expenditure merely by asserting professional background or business nexus. Interpretation and reasoning: The Court rejected recharacterisation where the taxpayer had specifically declared the payment as a donation for scientific research and relied on recipient's purported approval. Where approval was absent and the claim rested on forged documents, the payment could not be treated as a business expenditure under Section 37(1). The nature of the payment as donation, coupled with absence of approval and apparent fraud, precludes allowance as business expenditure. Ratio vs. Obiter: Ratio - donations made to an unapproved entity, claimed under a false premise, are not allowable under Section 37(1) merely by asserting business connection. Obiter - donor's professional qualifications do not substitute for statutory criteria or genuine nexus evidence. Conclusion: Section 37(1) claim not maintainable; the payment being a donation to an unapproved entity (and supported by forged documentation) cannot be allowed as business expenditure. ISSUE-WISE DETAILED ANALYSIS - Invocation of Section 69C (unexplained expenditure) Legal framework: Section 69C applies where the assessee is found to be in possession of unexplained money, bullion, jewels, or other valuable articles and the expenditure is unexplained; requires AO to specify basis for invoking the provision. Precedent treatment: Tribunals have scrutinised whether the AO has explained why expenditure is unexplained, and whether source of funds is not satisfactorily explained, before invoking Section 69C. Interpretation and reasoning: The Court noted that invoking Section 69C was unwarranted where the record did not show that the source of the donation itself was unexplained; the core controversy was legitimacy of the deduction under Section 35(1)(ii), not unexplained source of funds. However, even if Section 69C invocation was misplaced, the disallowance of the specific deduction could independently stand on absence of statutory recognition. Ratio vs. Obiter: Ratio - improper invocation of Section 69C does not vitiate a correct substantive disallowance under the appropriate provision (here, Section 35(1)(ii)). Obiter - AO must articulate reasons to bring Section 69C into play. Conclusion: Section 69C invocation was improperly applied in the circumstances; nevertheless, the disallowance of the weighted deduction remains valid on substantive grounds. ISSUE-WISE DETAILED ANALYSIS - Evidentiary standard and due diligence of donor Legal framework: Claiming a statutory deduction requires the claimant to establish prerequisites (recipient's recognition, genuineness of transaction); taxpayers expected to exercise normal prudence when making substantial donations to entities claiming statutory status. Precedent treatment: Authorities have held that bona fide belief may be considered, but where information in public domain or official advisory indicates fraud or absence of recognition, a donor exercising ordinary prudence is expected to verify statutory recognition before claiming weighted deduction. Interpretation and reasoning: The Court accepted that donors will ordinarily rely on recipient documents but held that when approval is a matter of public record (Gazette notifications, CBDT lists) and when a specific CBDT advisory warns of forged renewals and bogus racket, a large donation without independent verification displays lack of genuineness or due diligence. The Court relied on prior Tribunal decisions addressing identical facts about the same recipient to reinforce this standard. Ratio vs. Obiter: Ratio - where public official advisory and available official records show absence of recognition, a donor's failure to verify undermines claim of bona fide reliance; such failure supports disallowance. Obiter - ordinary prudence includes checking government notifications and registries where practicable. Conclusion: Donor failed requisite due diligence; given official advisory and absence of valid recognition, the claim cannot be sustained. OVERALL CONCLUSION The Court affirms that the weighted deduction under Section 35(1)(ii) is disallowable where the recipient lacked valid statutory recognition at the time of donation and where reliance was placed on forged or non-existent renewal documents; a recharacterisation under Section 37(1) is impermissible; improper invocation of Section 69C does not affect the substantive disallowance; official CBDT advisory and consistent tribunal precedent are material and support denial of the claim. The appeal is dismissed.