Donation deduction to approved institution cannot be denied on mere allegations of donee-level fraud without proof of assessee complicity.

Deduction for donation under section 35(1)(ii) cannot be denied merely because of alleged fraud at the donee's end, where the assessee paid through banking channels to an institution approved at the relevant time and held contemporaneous donation receipts and exemption certificates. The donor is not required to prove the ultimate use of funds by the donee. In the absence of direct evidence of nexus, sham routing, or any cash return to the assessee, third-party allegations against an employee of the donee institution do not invalidate the claim. Fraud must be established by cogent material linking the assessee to the irregularity.

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Issues: Whether the disallowance of deduction claimed for donation under section 35(1)(ii) of the Income-tax Act, 1961 was sustainable where the assessee had made payment through banking channels to an institution approved at the relevant time, but the Revenue relied on allegations of internal fraud at the donee level.

Analysis: The Revenue's case rested on third-party allegations that an employee of the donee institution had misused a bank account and issued receipts without authority. However, there was no direct evidence linking the assessee to any fraudulent arrangement, no material showing that the assessee's donation was routed through the disputed account, no statement or document implicating the assessee, and no proof of any cash return or refund to the assessee. The assessee had contemporaneous donation receipts, exemption certificates, and proof of payment through banking channels to an institution that stood approved under section 35(1)(ii) at the relevant time. The statutory requirement was payment to an approved institution, and the donor was not required to prove the ultimate utilization of funds by the donee. Alleged misconduct by the donee's employee could not, without proof of nexus or complicity, invalidate the assessee's claim. The maxim that fraud vitiates all could not replace evidence.

Conclusion: The disallowance under section 35(1)(ii) was unsustainable and was deleted; the issue was decided in favour of the assessee.

Final Conclusion: The appeal succeeded, and the deduction claim was restored while the addition made on account of donation was set aside.

Ratio Decidendi: A donor claiming deduction for payment to an approved institution under section 35(1)(ii) cannot be denied the benefit merely on allegations of fraud at the level of the donee unless the Revenue proves, by cogent material, that the assessee was complicit in a sham or sham routing of the donation.

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