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Weighted deduction u/s 35(1)(ii) is yet available if subsequent to date of contribution made by assessee, recognition granted to payee is withdrawn: ITAT

2019-TIOL-1530-ITAT-KOL

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘C’ KOLKATA

ITA Nos.1456 & 1457/Kol/2018
Assessment Years: 2008-09 & 2009-10

NAROTTAMKA COMMODITIES PVT LTD
ADMIN OFFICE A/503, RAASAZ CASTLE CHS LTD
MALPADONGRI NO. 1, WESTERN EXPRESS HIGHWAY
ANDHERI EAST, MUMBAI, MAHARASTHRA-400093
PAN NO: AAACN8807B

Vs

PRINCIPAL COMMISSIONER OF INCOME TAX
(PR. CIT), KOLKATA

S S Godara, JM & Dr. A L Saini, AM

Date of Hearing: April 25, 2019
Date of Decision: June 28, 2019

Appellant Rep by: Shri Bharat Kumar, CA
Respondent Rep by: 
Dr P K Srihari, CIT DR

Income Tax – Section 35(1)(ii).

Keywords – Claimed weighted average deduction – Bogus donation – Scientific research.

THE assessee company, filed its return of income for the relevant AY. The assessment was completed u/s 143(3) of the Act. Later on, the Pr. CIT exercised his jurisdiction u/s 263 of the Act. The Pr. CIT noticed from the computation of total income of the assessee that the assessee had claimed weighted average deduction u/s 35(1)(ii) of the Act to the tune of Rs.1,75,00,000/-, against donation made to school of Human Genesis & Population Health(SHG&PH) of Rs.1,00,00,000. A survey operation was conducted by the Investigation wing against the Institution School of Human Genesis &Population Health (SHG &PH). This institution was approved u/s 35(l)(ii) of the Act, as a scientific research. The Investigation wing revealed that instead of the research works, this institute was engaged in the tax evasion by providing accommodation entries in the nature of bogus donation. Bogus donations were taken vide cheque /RTGS and thereafter the same was routed back to the donor in the form of cash after taking commission. Moreover, SHG&PH admitted before the Settlement commission that it accepted cheque towards donations and refunded similar amount after retaining service charges for itself. Therefore, PCIT observed that during the course of assessment proceedings, the proper verification of the details regarding accounts and bank statements of the concerns involved in 3-4 layers route were not done by AO. Therefore, the PCIT was of the view that the deduction u/s 35(1)(ii) amounting to Rs.1,75,00,000/-, claimed by the assessee was not disallowed by AO while passing assessment order u/s 143(3) of the Act, which had resulted in underassessment of income of Rs.1,75,00,000/-. Hence, the PCIT was satisfied that it was a case of erroneous assessment insofar as it was prejudicial to the interests of the revenue. The PCIT set aside the assessment order and directed the AO to pass fresh assessment order. Aggrieved assessee filed appeal before Tribunal.

On appeal, Tribunal held that,

Whether if subsequent to the date of contribution by the assessee if the recognition granted to the payee is withdrawn still payer can get weighted deduction u/s 35(1)(ii) of the Act – YES : ITAT

++ the Assessing Officer passed order u/s 143(3) dated 31.03.2016 after getting himself fully satisfied about the claim of the donation made by assessee u/s 35(1) (ii) of the Act. The assessee had given donation of Rs.1,00,00,000/- to M/s. SHGPH and had claimed weighted deduction u/s 35(1)(ii) of the Act, which has to be allowed provided the assessee gives donation to any undertaking which has its objects of scientific research and such undertaking is approved for the purpose of this clause by the prescribed authority. During the assessment proceedings, the Assessing Officer has examined this fact and has clearly made a finding of fact that M/s. SHGPH is an approved undertaking u/s 35(1)(ii) of the Act after perusal of “Gazette of India”. In such a scenario, the action of the A.O cannot be held to be erroneous because the claim made by the assessee was valid. It has to be kept in mind that when the donation was given by assessee to M/s. SHGPH, the undertaking was enjoying approval as per law. The subsequent cancellation of the approval u/s 35(1)(ii) by Central Govt. cannot in any way undermine the claim of the assessee for the donation;

++ it is very clear that the payer would not get affected if the recognition granted to the payee had been withdrawn subsequent to the date of contribution by the assessee. Hence, no disallowance u/s 35(1)(ii) of the Act could be made in the instant case even if the approval has been rescinded later as it happened in this case. It is not the case of the Pr. CIT that when the contribution of Rs.1,00,00,000/- was made by the assessee to M/s. SHGPH, it was not recognized u/s 35(1)(ii) of the Act, so legally the AO’s action to allow weighted deduction u/s 35(1)(ii) of the Act cannot be held to be erroneous. Therefore, the A.O’s order dated 31.03.2016, cannot be termed as erroneous and therefore, the assumption of revisional jurisdiction of the Pr. CIT itself does not satisfy condition precedent to invoke the jurisdiction u/s 263 of the Act fails. The subsequent developments i.e. CBDT Notification rescinding the recognition for M/s. SHGPH cannot be a ground to hold that A.O’s order on 31.03.2016 is erroneous in the light of the Explanation in section 35(1)(ii) of the Act. Therefore, in any case the assumption of revisional jurisdiction of the Pr. CIT itself does not satisfy condition precedent to invoke the jurisdiction u/s 263 of the Act and, therefore, the order impugned is not sustainable and therefore, the order is reversed. In the result, both the appeals of the assessee are allowed.

Assessee’s appeal allowed

ORDER

Per: Dr. A L Saini:

The captioned two appeals filed by the assessee, pertaining to assessment years 2013-14 and 2014-15 are directed against the separate orders passed by the ld. Pr. Commissioner of Income Tax-1, Kolkata under section 263 of the Income Tax Act, 1961 (in short the ‘Act’) both dated 27.03.2018.

2. Since, the issues involved in these two appeals are common and identical; therefore, these appeals have been heard together and are being disposed of by this consolidated order. For the sake of convenience, the grounds as well as the facts narrated in assessee’s appeal in I.T.A. NO. 1456/Kol/2018, for assessment year 2013-14, have been taken into consideration for deciding the above appeals en masse.

3. By way of this appeal, the assessee has challenged the correctness of the order dt 27.03.2018, passed by the ld. PCIT. The grievances raised by the assessee are as follows:

“1. The order u/s 263 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) passed by the learned Principal Commissioner of Income Tax, Kolkata (hereinafter referred to as the “PCIT”) is without jurisdiction and bad in law as also on facts and deserves to be quashed and may kindly be quashed.

2. The learned ‘PCIT’ erred on facts as also in law in alleging that the order u/s 143(3) of the Act is erroneous and prejudicial to the interest of the revenue as the Assessing Officer (AO) has not made any independent inquiry/ verification in details / explanation submitted before him in respect of donation made.

3. The ld. PCIT further erred on facts in not properly considering the facts on record and appellant’s submissions. The order u/s 263 of the Act passed by the ld. PCIT is totally unjustified on facts as also in law and may kindly be quashed.

4. Your Honor’s appellant craves leave to add, to amend, alter, or withdraw any or more grounds of appeal on or before the hearing of appeal.

5. The Principal Commissioner of Income Tax-1, Kolkata has erred on facts and in laws in setting aside Assessment Order passed by the Deputy commissioner of Income Tax, Circle-2(2), Kolkata.”

4. The facts of the case which can be stated quite shortly are as follows: The assessee a resident company in India and filed its return of income for the A.Y. 2013-14, which was assessed by the Department under section 143(3) of the Act, on 31.03.2016 at a total income of Rs.3,00,05,920/-. Later on, the Pr. Commissioner of Income Tax-1, Kolkata, exercised his jurisdiction under section 263 of the Act.

The Pr. Commissioner of Income Tax (PCIT) noticed from the computation of total income of the assessee that the assessee had claimed weighted average deduction u/s35(1)(ii) of the Act to the tune of Rs.1,75,00,000/-, against donation made to school of Human Genesis & Population Health(SHG&PH) of Rs.1,00,00,000/- during the financial year 2012-13. A survey operation was conducted by the Investigation wing against the Institution School of Human Genesis &Population Health (SHG &PH). This institution was approved under section 35(l)(ii) of the I. T. Act, 1961 as a scientific research. The Investigation wing revealed that instead of the research works, this institute was engaged in the tax evasion by providing accommodation entries in the nature of bogus donation. Bogus donations were taken vide cheque /RTGS and thereafter the same was routed back to the donor in the form of cash after taking commission vide 3-4 layers. Moreover, SHG&PH admitted before the Settlement commission that it accepted cheque towards donations and refunded similar amount after retaining service charges for itself. Therefore, ld PCIT observed that during the course of assessment proceedings, the proper verification of the details regarding accounts and bank statements of the concerns involved in 3-4 layers route were not done by AO. Therefore, the ld PCIT was of the view that the deduction u/s 35(1)(ii) amounting to Rs.1,75,00,000/-, claimed by the assesse was not disallowed by AO while passing assessment order U/s 143(3) of the I.T. Act,1961, which had resulted in underassessment of income of Rs.1,75,00,000/-. Hence, the Principal Commissioner of Income Tax (PCIT) was satisfied that it was a case of erroneous assessment insofar as it was prejudicial to the interests of the revenue. The assessee was requested to show cause, as to why the provisions of section 263 of the Act should not be invoked in this case and the assessment completed by the Assessing officer should not be revised / modified or set-aside.

5. In response to the notice issued by the ld PCIT, the assessee filed the written submission which is reproduced below:

“Kindly refer to your notice u/s. 263(1) of tire income tax act, 1961 dated 15/03/2013 under which your honor has formed a belief that the assessment made by the AO for the year under consideration is erroneous and prejudicial, to the interest of the revenue on following grounds:-

Examination of the record it was observed from the computation of income that assessee had claimed as weighted average deduction u/s. 35(l)(ii) of Rs. 1,25,00,000/- against donation made to school of Human Genesis & Population Health.(SHG&PH) of Rs. 1,00,00,000/- during the financial year 2012-13. A survey operation was conducted by the investigation wing against the Institution School of Human Genesis & Population Health (SHG & PH). This institution was approved u/s. 35(l)(ii) of the I.T. Act, 1961 as a scientific research. Investigation wing revealed that instead of the research works, this institute was engaged in the tax evasion by providing accommodation entries in the nature of bogus donation. Bogus donations were taken vide cherub/RTGS and thereafter the same was routed bach to the donor in the form of cash after taking commission vide 3-4 layers.

Moreover, SHG & PH admitted before the settlement commission that it accepted cherub towards donations and refunded similar amount after retaining service charges for itself.

During the course of assessment proper verification of the details regarding accounts and bank statements of the concerns involved in 3-4 layers route were not done. The deduction u/s. 35(1)(ii) amounting to Rs. 1,25,00,000/-as claimed by the assessee was not disallowed while passing assessment order u/s. 143(3) of the I.T. Act, 1961 resulted in underassessment of income of Rs. 1,25,00,000/ –

The same observation has been raised by assessing officer during the course of assessment proceedings and we have replied to your income tax officer vide our letter dated:- 29/02/2016 and for your reference we are enclosing herewith the copy of above letter dated 29/02/2016. We also requested him to provide opportunity for cross examination and provide necessary evidence which you are on rely. But he didn’t provide any evidence as well as cross examination. When we have donated this institution it was doing work for

rural development and we have donated this institution by their site which was available at that time. Under which circumstances they have given such statement that we do not know.

1) On the grounds that the company had made bogus donation of Rs. 1,25,00,000/- for the F.Y. 2012-13 respectively to School of Human Genetics and Population Health you have asked the assessee to show cause as to why the said order should not be revised.

2) First of all the assessment order passed by the AO is neither erroneous nor prejudicial to the interest of revenue but a balanced order in accordance of law. All the grounds raised vide notice u/s 263 issued for the purpose to invoke the provisions of section 263 of the Act, have duly been considered by the AO in the course of assessment in detail. Grounds wise verification carried by the AO are briefly furnished as under.

In this connection we have to submit that we have availed weighted deduction u/s. 35(1)(ii) of Rs. 1,25,00,000/- for the A.Y. 2013-14.

For both years regular assessment u/s. 143(3), have been completed by the Assessing officer i.e. the DOT Circle-2(2), Kolkata on 31/03/2016.

During the course of assessing processing the assessing officer asked us to “Substantiate the claim on account of donation.

The assessee has fled the written submission on 22-03-2016 to prove the genuineness of the donations. These facts have been clearly recorded in para-2 of the assessment order. After considering the written submission the learned Assessing Officer has accepted the claim of the assessee for deduction u/s. 35(l)(ii) by passing a speaking order u/s. 143(3). The Assessing Officer has neither detected any bogus donations nor any fraudulent claim, for weighted deduction u/s. 35(l)(ii) nor can be seen from the assessment records.

In this connection u/e have to submit that approval given to school of human genetic and population health Kolkata was in force when we have given the donation to institution and even the same in force on the date completion of the assessment otherwise the Assessing Officer ought not to have granted weight deduction claimed by us.

Our client has furnished all the necessary documents along with explanation submitted during the course of assessment order by our letter dated 21/02/2016. After going through all the furnished documents the income tax officer has passed an assessment order. In that assessment order in second page, first para the observation is as under: –

In the course of hearing the A/R was requested to substantiate the claim on account of donation. However, the assessee in course of hearing desired to cross -examine the Principal Officer/ Treasurer of the concern School of Human Genetics and Population Health (SHG&PH). Accordingly, summon u/s. 131 was issued to SHG&PH on 17.03.2016. However, there was no compliance. The assessee on 22.03.2016 filed a written submission claiming the donation as genuine. However, the assessment records as well as the submissions have been perused carefully. So it is a speaking order as per Income Tax Officer.

1. In view of the facts and legal position explained above, there is no case of any under statement of income and thereby no action u/s. 263 is called for. The proceedings initiated vide notice dated 07.01.2016 deserves to be vacated.

2. It is needless to state that any variation to the finding of the AO while framing the original assessment would tantamount to be a change of opinion which with due respect cannot be a subject matter of action u/s 263 of the Act Reliance is placed on the decision of Hon’ble Supreme Court of India has in the case of Parshuram Pottary Works Co. Ltd. Vs. ITO (106 ITR 01) = 2002-TIOL-573-SC-IT observed that; ” It has been said that the taxes are the price that we pay for civilization. If so, it is essential that those who are entrusted with the task of calculating and realizing that price should familiarize themselves with the relevant provisions and became well versed with the law on the subject. Any remissness on their part can only be at the cost of the national exchequer and must necessarily result in loss of revenue. At the same time, we have to bear in mind that the policy of law Is that there must be a point of finding in all legal provisions and state issued should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set as rest judicial and quasi judicial controversies as it must in other spheres of human activity.”

3. Hon’ble Supreme Court in the case of Malbar Industrial Co. Ltd v. CIT 243 ITR 83 = 2002-TIOL-491-SC-ITwherein it is observed on page 88 that; “there can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the assessing officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall the orders passed without applying the principle of natural justice or without application of mind”.

The assessee in this respect states that” a bare reading of section 263(1) makes it clear that the prerequisite to exercise of jurisdiction by the commissioner suo motu under it, is that the order of the AO is erroneous in so far as it is prejudicial to the interest of the revenue. The commissioner has to be satisfied with twin conditions, namely, (a) the order of the AO sought to be revised is erroneous; and (b) it is prejudicial to the interest of the revenue. If one of them is absent – if the order of the AO is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue or if it. is not erroneous but is prejudicial to the revenue – recourse cannot be had to section 263(1)”.

4. It may be observed from the judgment that Supreme Court lays down that the subject matter of revision under consideration has to be erroneous and that error must be prejudicial to the interest of the revenue. The words “prejudicial to the interests of the revenue” have not been defined but legally it is well settled that they mean that the orders under consideration are not in accordance with law and, in consequence whereof the lawful revenue due to the state has not been realized or cannot be realized. Thus, when assessing officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two view are possible and the assessing officer has taken one view with which the commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue, unless the view taken by the assessing officer is unsustainable in law.

5. The decision in the case of Malaber Industries has been followed by the Gujarat High Court in the case of CIT v/s Arving Jewellers (259 ITR 502) where the High Court held as follows: from the above observations made by the Supreme Court, it is clear that the provisions of section 263 cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous, that section will be attracted and incorrect assumption of facts or as incorrect application of law will satisfy the requirement of the order being erroneous…

What is significant about this binding decision is the ration that even when on facts, two reasonable views are possible and after investigating, If the AO has adopted one of the possible views, CIT cannot revise such order u/s. 263 of the Act.

Or where two vies are possible and the Income-tax Officer has taken one view with which the commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of revenue unless the view taken by the Income-tax Officer if unsustainable in law:

6. Similarly, while making assessment, if the Assessing Officer had made reasonable and requisite enquiries on issue raised by the Commissioner during proceedings under section 263, no order under section 263 could be passed [Jagjit Industries Ltd v CIT (Asst.) (1997) 60 ITD 295 (Del)].

7. Where an assessment order I passed, keeping in view not only the provisions of the Act, but also Boards Circulars and instructions, the order cannot be erroneous [CIT v Tukaram Ramchandra Shinde (1994) 121 Taxation 251 (Bom)]

8. Where the assessee, engaged in business of manufacturing and export of jewellery, incurred certain expenses for creation of brand and claimed deduction of same as revenue expenditure and the Assessing Officer allowed major part of amount claimed, it was held that (i) Assessing Officer had made specific enquiry on this issue during assessment proceedings and nature of expenditure was explained by assessee to him and (ii) view taken by Assessing Officer was a possible view, order of Assessing officer could not be set aside in exercise of power under section 263. [CIT v Fine Jewellery (India) Ltd. [2015] 55 taxmann.com 514 (Bom)] = 2015-TIOL-390-HC-MUM-IT.

9. Since the interpretation of expression “erroneous in so far as it is prejudicial to the interest of the revenue” has been a contentious one, the Finance Act, 2015 has inserted the following explanation 2 to section 263(1) w.e.f 1-62015 in order to provide clarity on the issue.

a. The order is passed without making inquired or verification which should have been made;

b. The order is passed allowing any relief without inquiring into the claim;

c. The order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or

d. The order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.

10. Action of the Assessing Officer as on the date of assessment to be the subject matter of revision. – when the Commissioner issues notice under section 263, he has to judge the action of assessing officer as on the date when the assessment was made on the basis of the returns filed. CIT v Seth (O P) (1993) 201 ITR 635 (Del).

11. Orders becoming erroneous due to retrospective amendments. – Order, which has become erroneous due to retrospective amendment of provision and section 263 will apply. CIT v Vincast Engineering (2006) 280 ITR 385 (All); CIT v Max India Ltd (2007) 295 ITR 282 (SC) = 2007-TIOL-203-SC-IT.

12. The view that order of revision under section 263 to give effect to retrospective amendment is no longer valid. Where the Assessing Officer passed an order under section 80HHC relating to export profits deduction, when two views about “profits” were prevalent, adopting the view then prevailing in 1997, notwithstanding retrospective amendment in 2005 of section 80HHC, it was held that Commissioner was not entitled to revise the order on the basis of retrospective amendment as held by the Supreme Court in this far-reaching judgment. CIT v Max India Ltd (2007) 295 ITR 282 (SC) = 2007-TIOL-203-SC-IT.

13. Where a payment was made to the society carrying out rural development and the Assessing Officer allowed deduction under section 35CCA, but approval to the society was later withdrawn retrospectively, the Commissioner set aside the order of Assessing Officer by an order under section 263. It was held that the Commissioner’s order was not justified [CIT v General Magnets Ltd (2002) 256 ITR 471 (Cal); CIT v Chotatingrai Tea (2002) 258 ITR 529 (SC)] = 2002-TIOL-1668-SC-IT. Commissioner has no powers to control the direction of the Assessing Officer to elect one mode of assessment.

14. From the facts as above, there is no new information / findings in your show cause notice. On the same issue our above named client has explained all the issue furnished with necessary evidences and produced to the assessing officer during the course of assessment proceedings u/s 143(3). The Id AO has made enquiries and verified all evidences with them and accepted and decided issue and passed the assessment order u/s 143 (3). Thus, it may kindly be appreciated that the order passed by the AO is neither erroneous not prejudicial to the interest of revenue, it is therefore, requested that the proceedings initiated u/s. 263 of the Act may kindly be dropped and oblige.

Hence, we have to submit that deduction u/s. 35(i)(ii) have been rightly claim and allowed in accordance with the law in force.”

6. However, the ld. PCIT rejected the contention of the assessee and observed that the assessee, an NBFC Company, had claimed deduction u/s 35(1)(ii) of the Act to the tune of Rs.1,75,00,000/-, against donation made to School of Human Genesis of Population Health (SHGPH in short) of Rs. 1,00,00,000/ – during the relevant year. This claim was allowed by AO while passing the impugned assessment order U/s 143(3) of the Act. It transpires that M/s SHGPH, in its application before the Hon’ble Income Tax Settlement Commission (ITSC), Kolkata Bench, admitted to not performing any function of research except return of donations to donors after charging their commission. They accordingly offered their earnings by way of commission as undisclosed income and the Hon’ble ITSC vide order u/s 245D(4) of the Income Tax Act, 1961, dated 22.07.2016 admitted the disclosure made before them. Thereafter, M/s SHGPH was denotified as per Notification No. 82/2016/F.No.203/64/2009/ITA-II, dated 15.09.2016 for reasons enumerated in the show cause notice. The ld PCIT further noticed that in the assessee`s case the assessment for the year was completed on 31.03.2016 u/s 143(3) of the Act. The AO had asked for substantiation of claim on account of donations and the same was allowed as fraudulent claim and bogus donation was not detected. It was also stated that approval to M/s SHGPH was in force during that point of time. Assessee, however admits that summons u/s 131 to M/s SHGPH by AO was not complied with. In other words, the impugned assessment order could not be held to be erroneous and prejudicial to interest of revenue. The fact of the matter is that M/s SHGPH turned out to be a fake institution. So, donations to it in the garb of scientific/medical research and claiming weighed deduction of 175% u/s 35(1)(ii) of the Act, which was allowed by the AO then, have caused loss of revenue which naturally makes the impugned assessment order erroneous and also prejudicial to the interest of revenue. The ld PCIT held that the AO did not conduct verification of details regarding accounts, bank statement of concerns involving 3-4 layer routes.

7. Considering the facts and circumstances of the case, as explained above, the ld. PCIT held that impugned assessment order dated 31.03.2016 passed by the Assessing Officer U/s 143(3) of the Act, is erroneous insofar as it is prejudicial to the interest of the revenue. Therefore, the ld PCIT set aside the assessment order and directed the Assessing Officer to pass fresh assessment.

8. Aggrieved by the order of the ld Principal Commissioner of Income Tax (PCIT) u/s 263 of the Act, the assessee is in appeal before us.

9. The ld. Counsel for the assessee submitted before us that show cause notice issued by Pr. CIT u/s 263(1) is without any base, as the order passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of the revenue. The ld. Counsel for the assessee took us through the show cause notice issued by ld. PCIT, which is being reproduced below for ready reference:

“Sub: Show Cause notice u/s 263(1) of the I TAct,1961 in respect of assessment order for A.Y. 2013-14 – Matter Regarding,

Whereas the undersigned had called for and examined the record of your case and it is considered that the impugned assessment order passed u/s143(3) of the Income TaxAct, 1961 by the ACIT, Circle-2(2), Kolkata on 31.03.2016 for AY. 2013-14 determining a total income of Rs.3,00,05,920/- is, prima facie, erroneous in so far as it is prejudicial to the interests of the revenue for the following reasons:

i) Examination of the record it was observed from the computation of that assessee had claimed as weighted average deduction u/s. 35(1)(ii) of Rs. 1,75,00,000/- against donation made to school of Human Genesis & Population Health(SHG&PH)of Rs.1,00,00,000/- during the financial year 2012-13. A survey operation was conducted by the Investigation wing against the institution School of Human Genesis & Population Health(SHG &PH). This institution was approved u/s 35(1)(ii) of theI.T.Act,1961 as a scientific research. Investigation Wing revealed that instead of the research works, this institute was engaged in the tax evasion by providing accommodation entries in the nature of bogus donation. Bogus donations were taken vide cheque /RTGS and thereafter the same was routed back to the donor in the form of cash after taking commission vide 3-4 layers. Moreover, SHG & PH admitted before the Settlement commission that it accepted cheque towards donations and refunded similar amount after retaining service charges for itself. During the course of assessment proper verification of the details regarding accounts and bank statements of the concerns involved in 3-4 layers route were not done. The deduction u/s 35 (1)(ii) amounting to Rs.1,75,00,000/- as claimed by the assessee was not disallowed while passing assessment order u/s 143(3) of the I.T.Act,1961 resulted in underassessment of income of Rs.1,75,00,000/- and undercharge of tax of Rs.56,77,875/-.

ii) AO has passed the impugned assessment order without making enquiries or verification which should have been made in this case.

2. Having regard to the facts and circumstances of the case and in law and in accordance with the provisions of Sec. 263(1) of I. T. Act, 1961 you are hereby given an opportunity of being heard to show cause as to why the impugned assessment order passed u/s 143(3) by DCIT, Circle – 3(1), Kolkata on 31.03.2016 for A.Y. 2013-14 should not be held as erroneous in so far as it is prejudicial to the interests of the revenue. You may accordingly furnish you written submissions u/s 263( 1) of I.T.Act, 1961 on or before 27.02.2018 at 1:30 P.M. In this regard, either personally or through an authorised representative elaborating and/or evidencing your contentions / submissions.

3. In case of failure to respond to this notice, a decision may be taken on the merits of the case without providing further opportunities and it shall be presumed that you have no objection to the proposed action.”

The ld. Counsel for the assessee submitted before the Bench that at the time of making donation the certificate of registration was valid and effective U/s 35(1) (ii) of the Act in the hands of the Donee, when the donor made the donation therefore, deduction should be allowed in the hands of the assessee (donor), even if the registration certificate of the trust is cancelled by the appropriate authority after making the donation. Hence, the assessing officer has taken a possible view therefore, order passed by him under section 143(3) is neither erroneous nor prejudicial to the interest of Revenue.

10. On the other hand, ld. DR for the Revenue submitted before us that the assessee admitted that summons u/s 131 to M/s SHGPH by AO was not complied with. The fact of the matter is that M/s SHGPH turned out to be a fake accommodation providing institution. So, donations to it in the garb of scientific/medical research and claiming weighed deduction of 175% u/s 35(1)(ii) of the Act, which was allowed by the AO then, have caused loss of revenue which naturally makes the impugned assessment order erroneous and also prejudicial to the interest of revenue. Therefore, the ld PCIT held that the AO did not conduct verification of details regarding accounts, bank statement of concerns involving 3-4 layer routes. The ld DR further submitted that certificate under section 35(1) (ii) of Donee organistaion, M/s SHGPH was cancelled by the Government as per notification No. 82/2016/F.No.203/64/2009/ITA-II dated 15.09.2016. Hence, ld PCIT has rightly exercised his jurisdiction under section 263 of the Act and therefore order passed by the ld PCIT should be upheld.

11. We have heard both the parties and perused the material available on record. We note that the law with regard to exercise of jurisdiction u/s.263 of the Act on the ground that the AO failed to make enquiries which he ought to have made in the given circumstances of a case is well settled. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. It is because it is incumbent on the Income-tax Officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word “erroneous” in section 263 includes the failure to make such an enquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. We derive support for the proposition as stated above from the decision of the Hon’ble Delhi High Court in the case of Gee Vee Enterprises 99 ITR 375 (Del) = 2003-TIOL-329-HC-DEL-IT.

12. We note that the assessee company has challenged in the first place, the very usurpation of jurisdiction by ld. Principal CIT to invoke his revisional powers enjoyed u/s 263 of the Act. Therefore, first we have to see whether the requisite jurisdiction necessary to assume revisional jurisdiction is there existing before the Pr. CIT to exercise his power. For that, we have to examine as to whether in the first place the order of the Assessing Officer found fault by the Principal CIT is erroneous as well as prejudicial to the interest of the Revenue. For that, let us take the guidance of judicial precedence laid down by the Hon’ble Apex Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) = 2002-TIOL-491-SC-IT wherein their Lordship have held that twin conditions needs to be satisfied before exercising revisional jurisdiction u/s 263 of the Act by the CIT. The twin conditions are that the order of the Assessing Officer must be erroneous and so far as prejudicial to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous order, that is (i) if the Assessing Officer’s order was passed on incorrect assumption of fact; or (ii) incorrect application of law; or (iii)Assessing Officer’s order is in violation of the principle of natural justice; or (iv) if the order is passed by the Assessing Officer without application of mind; (v) if the AO has not investigated the issue before him; then the order passed by the Assessing Officer can be termed as erroneous order. Coming next to the second limb, which is required to be examined as to whether the actions of the AO can be termed as prejudicial to the interest of Revenue. When this aspect is examined one has to understand what is prejudicial to the interest of the revenue. The Hon’ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. “prejudicial to the interest of the revenue” has to be read in conjunction with an erroneous order passed by the Assessing Officer. Their Lordship held that it has to be remembered that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue “unless the view taken by the Assessing Officer is unsustainable in law”.

13. Now, coming to the facts of the case of the assessee company, we note that assessee, is a NBFC company and made a donations to M/s School of Human Genetics and population Health and claimed weighted deductions for the above mentioned two assessment years under section 35(1)(ii) of the Act. The AO, after taking note of the Gazette Notification dated 28.01.2010, issued by the CBDT, which recognized M/s SHGPH as an institution which was entitled for weighted deduction u/s 35(1)(ii) of the Act, allowed the weighted deduction for the donations given by it. The details regarding amount of donation and weighted deduction claimed by the assessee for both the years are given below:

ParticularsAY 2013-14AY 2014-15
Amount of donation1,00,00,000/-1,80,00,000/-
Weighted deduction claimed1,75,00,000/-3,15,00,000/-
Assessee Reply to Assessing Officer22-28 of P.B.61-65 of P.B.
Show cause notice u/s 26301-02 of the P.B.36-37 of the P.B.
Reply of show cause notice issued u/s 263Page 02-10 of the P.B.Page 38-45 of the P.B.

During the course of assessment proceedings (A.Y. 2013-14) the AO asked the assessee, vide show cause notice dated 24.02.2016, to explain as to why the deduction of Rs. 1,00,00,000/- claimed by it u/s 35(1)(ii) of the Act, in respect of donation made to SHGPH be not disallowed since the alleged donation made by it to SHGPH was bogus. In support of the allegation made by the Assessing Officer, he furnished to the assessee the order u/s 245(D)(1) of the Act passed by Hon’ble Settlement Commission in the case of SHGPH and the copy of the statement of Mr. Samadrita Mukherjee Sardar recorded by DDIT(Inv) Unit4(3), Kolkata recorded on 27th January, 2015 in course of survey u/s 133A on SHGPH. In respect of above show cause notice, Assessee filed a detailed reply (page 22to 28 of Paper Book). It also requested the AO to allow to cross-examine the witness whose statements were recorded behind its back. After considering the submissions of the assessee, the AO allowed the claim.

We note that the donee organization, M/s School of Human Genetics and population Health (SHGPH) is scientific research association approved by the Central Government under section 35(1) (ii) of the Income Tax Act and published in the official gazette of India. At the time of making donation by assessee (Donor) the certificate of the Donee (SHGPH) U/s 35(1) (ii) of the Act was in force therefore, the assessing officer allowed the weighted deduction to the assessee in respect of the donation made by it. Therefore, action of the assessing officer is sustainable in law. That is, when the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the Pr. CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenueunless the view taken by the Assessing Officer is unsustainable in law. Therefore, we are of the view that order passed by the assessing officer U/s 143(3) is not erroneous order.

14. Now we deal with the main grievance of the ld DR for the Revenue. The ld DR submitted before us that certificate under section 35(1) (ii) of Donee organistaion M/s SHGPH was cancelled by the Government as per notification No. 82/2016/F.No.203/64/2009/ITA-II dated 15.09.2016. Hence, ld PCIT has rightly exercised his jurisdiction under section 263 of the Act and therefore order passed by the ld PCIT should be upheld.

We note that the withdrawal of recognition u/s 35(1)(ii) of the Act in the hands of the payee organizations would not affect the rights and interests of the assessee herein for claim of weighted deduction u/s 35(1)(ii) of the Act, for that we rely on the judgment of the Coordinate Bench, Kolkata, in the case of M/s Maco Corporation India (P) Ltd, ITA No.16/Kol/2017, for Assessment Year 2013-14, wherein it was held as follows:

“29. All the three High Courts after examining the issue, in the light of the object of Section 12A of the Act and Section 21 of the General Clauses Act held that the order of the CIT passed under Section 12A is quasi judicial in nature. Second, there was no express provision in the Act vesting the CIT with power of cancellation of registration till 01.10.2004; and lastly, Section 21 of the General Clauses Act has no application to the order passed by the CIT under Section 12A because the order is quasi judicial in nature and it is for all these reasons the CIT had no jurisdiction to cancel the registration certificate once granted by him under Section 12A till the power was expressly conferred on the CIT by Section 12AA(3) of the Act w.e.f 01.10.2004.

We hold that the ratio decidendi of the aforesaid judgment of the Hon’ble Apex Court would squarely be applicable to the facts of the instant case. In fact the assessee’s case herein falls on a much better footing than the facts before the Hon’ble Apex Court. In the case before Hon’ble Apex Court, the power of cancellation of registration u/s 12A of the Act was conferred by the Act on the ld CIT w. e. f. 1. 10.2004 and the Hon’ble Apex Court held that prior to that date, no cancellation of registration could happen. But in the instant case, there is absolutely no provision for withdrawal of recognition u/s 35(1)(ii) of the Act. Hence we hold that the withdrawal of recognition u/s 35(1)(ii) of the Act in the hands of the payee organizations would not affect the rights and interests of the assessee herein for claim of weighted deduction u/s 35(1 )(ii) of the Act,”

In view of the aforesaid findings in the facts and circumstances of the case and respectfully following the various judicial precedents relied upon hereinabove, we note that assessing officer has acted within the four corners of law. We also note that statements recorded by the Department do not contain any evidence that the money donated by the assessee (Donor) returned back to him, hence order passed by the assessing officer is neither erroneous nor prejudicial to the interest of the Revenue.

15. We note that the Assessing Officer passed order u/s 143(3) dated 31.03.2016 after getting himself fully satisfied about the claim of the donation made by assessee u/s 35(1) (ii) of the Act. The assessee had given donation of Rs.1,00,00,000/- to M/s. SHGPH and had claimed weighted deduction u/s 35(1)(ii) of the Act, which has to be allowed provided the assessee gives donation to any undertaking which has its objects of scientific research and such undertaking is approved for the purpose of this clause by the prescribed authority. During the assessment proceedings, the Assessing Officer has examined this fact and has clearly made a finding of fact that M/s. SHGPH is an approved undertaking u/s 35(1)(ii) of the Act after perusal of “Gazette of India”. In such a scenario, the action of the A.O cannot be held to be erroneous because the claim made by the assessee was valid. It has to be kept in mind that when the donation was given by assessee to M/s. SHGPH, the undertaking was enjoying approval as per law. The subsequent cancellation of the approval u/s 35(1)(ii) by Central Govt. cannot in any way undermine the claim of the assessee for the donation given by him because Parliament in its wisdom has envisaged such an eventuality and inserted by Taxation Laws (Amendment) Act, 2006 with retrospective effect from 01.04.2006 an Explanation in Section 35 of the Act which reads as under an Explanation to section 35(1)(ii) which reads as under:

“Section 35(1)(ii) – Explanation

The deduction, to which the assessee is entitled in respect of any sum paid to a research association, university, college or other institution to which clause (ii) or clause (iii) applies, shall not be denied merely on the ground that, subsequent to the payment of such sum by the assessee, the approval granted to the association, university, college or other institution referred to in clause (ii) or clause (iii) has been withdrawn.”

From the reading of the aforesaid provision, it is very clear that the payer (the assessee herein) would not get affected if the recognition granted to the payee had been withdrawn subsequent to the date of contribution by the assessee. Hence, no disallowance u/s 35(1)(ii) of the Act could be made in the instant case even if the approval has been rescinded later as it happened in this case. It is not the case of the ld. Pr. CIT that when the contribution of Rs.1,00,00,000/- was made by the assessee to M/s. SHGPH, it was not recognized u/s 35(1)(ii) of the Act, so legally the AO’s action to allow weighted deduction u/s 35(1)(ii) of the Act cannot be held to be erroneous. Therefore, the A.O’s order dated 31.03.2016, cannot be termed as erroneous and therefore, the assumption of revisional jurisdiction of the ld. Pr. CIT itself does not satisfy condition precedent to invoke the jurisdiction u/s 263 of the Act fails. The subsequent developments i.e. CBDT Notification rescinding the recognition for M/s. SHGPH cannot be a ground to hold that A.O’s order on 31.03.2016 is erroneous in the light of the Explanation in section 35(1)(ii) of the Act (supra). Therefore, in any case the assumption of revisional jurisdiction of the ld. Pr. CIT itself does not satisfy condition precedent to invoke the jurisdiction u/s 263 of the Act and, therefore, the order impugned is not sustainable and therefore, the order is reversed.

16. In the result, both the appeals of the assessee are allowed.

(Order pronounced in the Court on 28.06.2019)

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