ACIT Vs Praveen Sushil Kanda (ITAT Raipur)
ACIT-1(1) vs. Praveen Sushil Kanda ITA No.188/RPR/2018 (Date of Order : 27.05.2022) relating to disallowance of bogus donation u/s.35(1)(ii) and disallowance out of salary to relatives u/s.40A(2)(b). Entire disallowances deleted.
Disallowance of bogus donation u/s.35(1)
SHG&PH as on the date of giving of donation by the assessee was having a valid approval granted under the Act. On a perusal of the aforesaid ‘Explanation’ to Sec. 35(1)(ii) of the Act, it can safely be gathered that a subsequent withdrawal of such approval cannot form a reason to deny deduction claimed by the donor. By way of an analogy, we may herein observe that the Hon’ble Supreme Court in the case of CIT Vs. Chotatingrai Tea (2003) 126 taxman 399 (SC) while dealing with Sec. 35CCA of the Act, had concluded, that a retrospective withdrawal of an approval granted by a prescribed authority would not lead to invalidation of the assessee’s claim of deduction. On a similar footing the Hon’ble High Court of Bombay in the case of National Leather Cloth Mfg. Co. Vs. Indian Council of Agricultural Research (2000) 100 Taxman 511 (Bom), while dealing with an identical issue of denial of deduction under Sec.35(1)(ii) of the Act due to a subsequent withdrawal of approval with retrospective effect, had observed, that such retrospective cancellation of registration will have no effect upon the deduction claimed by the donor, since such donation was given acting upon the registration when it was valid and operative. On a perusal of the aforesaid statutory provision i.e, Sec. 35(1)(ii) of the Act, as well as the ratio laid down in the aforesaid judicial pronouncements, it can safely be concluded that if an assessee acting upon a valid registration/approval granted to an institution had donated certain amount for which deduction is claimed, then, such deduction cannot be disallowed if at a later point of time the same is cancelled with retrospective effect. We have perused the aforesaid judicial pronouncements relied upon by the ld. A.R and are persuaded to accept his claim that the issue involved in the present appeal is squarely covered by the view taken by the co-ordinate benches of the Tribunal. Recently, a co-ordinate bench of Tribunal i.e ITAT Mumbai Bench “C”, Mumbai in the case of M/s Pooja Hardware Pvt. Ltd. Vs. The Assistant Commissioner of Income Tax-13(1)(1), Mumbai [ITA No. 3712/Mum/2018 dated 28.10.2019] had after relying on the earlier orders of the co-ordinate benches of the Tribunal on the issue pertaining to the allowability of deduction under Sec. 35(1)(ii) of the Act in respect of a donation given to SHG&PH by the assessee’s before them had vacated the disallowance of the assessee’s claim for deduction under Sec.35(1)(ii) of the Act.
Considering the fact that the issue involved in the present appeal is squarely covered by the aforesaid orders of the co-ordinate benches of the Tribunal, we, thus, finding no justifiable reason to take a different view respectfully follow the same. Accordingly, we uphold the order of the CIT(A) who had vacated the disallowance of the assessee’s claim for deduction of Rs. 70 lac under Sec.35(1)(ii) of the Act.
Disallowance out of salary to relatives u/s.40A(2)(b)
A.O after forming an opinion that the expenditure incurred by the assessee in respect of which payment has been or is to be made to any related party [as specified in clause (b) of Sec. 40A(2) of the Act], is found to be excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him there from, then, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. However, in the case before us, we find that though the A.O while working out the disallowance under the aforesaid statutory provision, had though observed that the payment of salary to the aforementioned two related parties in question was found to be excessive, but had fundamentally erred by not opining as to what as per him was the fair market value of the service which were being rendered by the aforementioned related persons, considering which the payments made to them by the assessee were to held as excessive. Before the CIT(Appeals) the state of affairs we find was no better, as he too without addressing the aforesaid fundamental and material requirement contemplated under Sec. 40A(2)(a) of the Act had though on an ad-hoc basis allowed some relief to the assessee, but had allowed the mistake of the AO to perpetuate. On the basis of our aforesaid observations, we are unable to concur with the view taken by either of lower authorities and holding a conviction that both of them had fundamentally erred in not appreciating the mandate of Section 40A(2)(a) of the Act in the right perspective, thus, set-aside the order of the CIT(Appeals) to the said extent and vacate the disallowance made by the A.O.
FULL TEXT OF THE ORDER OF ITAT RAIPUR
The present appeal filed by the department is directed against the order passed by the CIT(Appeals)-II, Raipur, dated 09.07.2018, which in turn arises from the order passed by the A.O under Sec.143(3)of the Income-tax Act, 1961 (in short ‘the Act’) dated 16.12.2016 for assessment year 2014-15. Before us the Revenue has assailed the impugned order on the following grounds of appeal :
“1. “Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in deleting the addition made under section 35(1)(ii) of the IT Act, 1961 holding that during the relevant period when the said donation was made, i.e. in March, 2014, the society had the exemption from the prescribed authorities?
2. “Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in holding that the A.O. had not brought any material evidence on record against the donor and ignoring the fact that the credible information was on the basis of survey conducted by the Investigation Wing after due verification of material found during such action?
3. “Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in holding that if there were any allegations or reports against the assessee, the same ought to have been shared and provided to the assessee for his explanation, in spite of the fact that the A.O. had provided copy of notification vide which approval was withdrawn, to the assessee for his explanation?
4. “Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified by not considering the CBDT’s Notification dated 15-09-2016, which categorically specified that “….Shall be deemed that the said notification has not been issued for any tax benefits under the Income Tax Act, 1961 or any other law for the time being in force?”
5. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in restricting the disallowance made u/s.40A(2)(b) on the basis of comparison of NP rate of previous year?
6. The Order of the Ld. CIT (A) is erroneous both in law and on fact.
7. Any other ground that may be adduced at the time of hearing.”
Also, the assessee is before us as a cross-objector on the following grounds:
1. “On the facts and in the circumstances of the case as well as in law, the Learned Commissioner of Income Tax (Appeals) —II, Raipur [‘the Ld. CIT(A)’] has grossly erred in not annulling the Assessment Order passed by the Learned Assessing Officer [‘the Ld.AO’] under section 143(3) of the Income Tax Act, 1961 [‘the Act’]. The Ld. CIT(A) has failed to appreciate that neither the contents of the purported adverse statements of persons recorded in the course of survey u/s.133A nor the contents/findings of the survey report of Investigation Wing of DDIT, Kolkata were provided to the respondent nor such persons were made available for cross-examination thereby rendering the Assessment Order as vitiated by the principles of natural justice.
The Ld. CIT(A) ought to have held that the Assessment Order passed by the Ld.AO under section 143(3) of the Act is bad in law, highly illegal, vitiated by principles of natural justice and nullity in the eyes of law and hence, it is requested that the Assessment order may please be quashed and set aside.
2. On the facts and in the circumstances of the case as well as in law, the Ld. CIT(A) has grossly erred in confirming the disallowance of Rs.3,00,000/- {Disallowance made by Ld.AO to the extent of Rs.5,00,000/-} out of payment of salary made to persons specified under section 40A(2)(b) of the Act which is highly unjustified, unwarranted and not in accordance with the provisions of law hence, it is requested that disallowance of Rs.3,00,000/- confirmed by the Ld. CIT(A) may please be deleted.
3. That the cross objector craves leave to add, amend, alter or delete all or any of the grounds of cross objection at the time of hearing of the appeal.”
Succinctly stated, the assessee had filed his return of income for the assessment year 2014-15 on 29.04.2014, declaring an income of Rs.61,69,750/-.Original assessment was, thereafter, framed by the A.O vide his order passed u/s.143(3), dated 16.12.2016 determining the income of the assessee at Rs.1,36,69,750/- after, inter alia, making the following additions/disallowances:
