Weighted deduction u/s 35(1)(ii) denied where research institute used forged approval; donation cannot qualify for benefit

ITAT Ahmedabad allowed Revenue's appeal and restored the disallowance of weighted deduction u/s 35(1)(ii). The assessee had claimed deduction on donations made to a research institute which, after 31.03.2006, did not possess valid approval u/s 35(1)(ii) and had obtained donations on the basis of forged approval documents. Relying on undisputed factual findings and consistent tribunal precedent, ITAT held that a donation supported by fraudulent or forged approval cannot qualify for weighted deduction, irrespective of the assessee's reliance on such documents. The CIT(A)'s order granting relief to the assessee was quashed and the AO's disallowance was upheld.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether weighted deduction under Section 35(1)(ii) of the Income-tax Act, 1961 is allowable in respect of donation made during the relevant assessment year to a research institute whose approval under that provision had expired and whose activities were found to be non-genuine.

1.2 Whether the Revenue's appeal before the Tribunal is maintainable notwithstanding the monetary limits prescribed by CBDT Circular No. 09/2024, in view of the exceptions contained in CBDT Circular No. 05/2024 and the CBDT notification dated 14.12.2018 regarding bogus donations under Section 35(1)(ii).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Allowability of weighted deduction under Section 35(1)(ii)

Legal framework (as discussed):

2.1 The Court proceeded on the basis of the statutory scheme of Section 35(1)(ii), which allows weighted deduction for donations made to an institution approved for the purposes of scientific research. The Court also referred to the requirement that such institution must hold a valid approval from the prescribed authority for the relevant period to be eligible to receive donations qualifying for deduction.

2.2 The Court noted the CBDT notification/communication dated 14.12.2018, which recorded that the concerned trust had been earlier approved under Section 35(1)(ii) up to 31.03.2006 only, and that subsequent donations were raised on the basis of forged certificates, leading to "irregularly claimed weighted deduction u/s 35(1)(ii)."

Interpretation and reasoning:

2.3 The Assessing Officer had undertaken enquiries by issuing notice under Section 133(6) to the institute, which remained unanswered, and by obtaining confirmation from the jurisdictional Commissioner of Income-tax (Exemption) that no approval under Section 35(1)(ii) existed for the institute for the relevant assessment year and that its registration under Section 12AA had been cancelled and its activities held to be not genuine.

2.4 The Court treated as an undisputed fact that the institute's approval under Section 35(1)(ii) had expired on 31.03.2006 and that all donations received thereafter, including in the relevant assessment year, were supported by forged documents. The CBDT's advisory letter dated 14.12.2018 directing field formations to examine irregular claims of weighted deduction in relation to this institute was specifically taken into account.

2.5 The Court held that the mere fact that the assessee, at the time of making the donation, relied on documents furnished by the institute and was not aware of the expiry of approval or of any adverse material against the institute, does not convert an otherwise ineligible donation into one eligible for deduction under Section 35(1)(ii). The genuineness of the assessee's belief or the absence of evidence of cash-back to the assessee was held to be irrelevant for the statutory condition of valid approval of the donee institute.

2.6 The Court relied on consistent decisions of co-ordinate Benches in relation to the same institute, wherein denial of weighted deduction under Section 35(1)(ii) on donations to this institute had been upheld on the ground that it was neither recognised for the purposes of Section 35(1)(ii) nor eligible to raise donations for scientific research during the relevant period (including decisions in Iolite Cube Inframaterial Limited, C K Zipper (P.) Limited, Kapadia Marketing Inc., and Parag Dave).

Conclusions:

2.7 The Court concluded that, since the institute did not hold a valid approval under Section 35(1)(ii) after 31.03.2006 and had raised donations on the basis of forged documents, the assessee's donation could not qualify for weighted deduction under Section 35(1)(ii) for the assessment year in question.

2.8 The disallowance of the weighted deduction made by the Assessing Officer was held to be in accordance with law and was upheld. The order of the appellate authority granting the deduction was set aside, and the Revenue's appeal on this issue was allowed.

Issue 2: Maintainability of Revenue's appeal in view of CBDT monetary limit circulars

Legal framework (as discussed):

2.9 The assessee relied on CBDT Circular No. 09/2024 dated 17.09.2024, which prescribes monetary limits for filing appeals in income-tax cases and, specifically, a limit of Rs. 60,00,000 of tax effect for filing an appeal before the Tribunal. On that basis, the assessee contended that, as the tax effect in the case was about Rs. 20,66,348, the Revenue's appeal was not maintainable.

2.10 The Revenue relied on CBDT Circular No. 05/2024 dated 15.03.2024, particularly clause (m) of paragraph 3.1, which provides an exception to the monetary limits for "any other case or class of cases where in the opinion of the Board it is necessary to contest in the interest of justice or revenue and specified so by a circular issued by Board in this regard."

2.11 The Court further relied on CBDT notification F.No.225/351/2018-ITA(II) dated 14.12.2018 titled "Information regarding bogus donation racket under section 35(1)(ii) of the Act, 1961," which recorded that the concerned trust's approval under Section 35(1)(ii) expired on 31.03.2006, that it had thereafter raised substantial donations on the basis of a forged certificate, and that donors had irregularly claimed weighted deductions under Section 35(1)(ii). The notification directed that scrutiny assessment cases of such donors should be handled in the light of these facts and that a list of donors for specified years be drawn and circulated for appropriate examination.

Interpretation and reasoning:

2.12 The Court interpreted clause (m) of paragraph 3.1 of Circular No. 05/2024 to mean that where the Board has, by a separate circular/notification, identified a case or class of cases requiring contest in the interest of justice or revenue, such cases fall outside the monetary thresholds for filing appeals.

2.13 Referring to the 14.12.2018 notification, the Court held that the CBDT had expressly treated the class of cases involving bogus/irregular weighted deductions under Section 35(1)(ii) in respect of donations to the concerned trust as a special category requiring particular scrutiny and action. The direction to the field formations to examine claims and pass suitable assessment orders in such donor cases was viewed as an explicit instruction to treat these matters as requiring contest irrespective of monetary limits.

2.14 On that basis, the Court held that donor cases involving this institute and claims of weighted deduction under Section 35(1)(ii) constituted a class of cases covered by the exception in clause (m) of Circular No. 05/2024. Consequently, the general monetary limit prescribed by Circular No. 09/2024 for filing appeals could not bar the Revenue's appeal in such cases.

Conclusions:

2.15 The Court held that the Revenue's appeal was maintainable despite the tax effect being below Rs. 60,00,000, because the case fell within the exception contemplated in clause (m) of CBDT Circular No. 05/2024, read with the CBDT notification dated 14.12.2018 on bogus donations under Section 35(1)(ii).

2.16 The cross objection of the assessee seeking dismissal of the Revenue's appeal on the ground of low tax effect was rejected and dismissed.

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