The Income Tax Appellate Tribunal, Kolkata, has reaffirmed a critical principle in tax jurisprudence: an assessee cannot be penalized for the department’s retrospective cancellation of approval granted to a scientific research institution. This ruling provides clarity on the legal sanctity of deductions claimed under Section 35(1)(ii) when donations were made in good faith during the period of valid recognition.
Background & Facts
The Dispute
The appellant, Apoline Realtors Pvt. Ltd., claimed a deduction of ₹8,00,000 under Section 35(1)(ii) of the Income Tax Act, 1961, for a donation made to Herbicure Health Care Bio Herbal Research Foundation (HHBRF) during the assessment year 2012-13. The Assessing Officer (AO) disallowed this deduction after reopening the assessment under Section 147, alleging that HHBRF was engaged in money laundering through bogus donations and that its approval under Section 35(1)(ii) had been cancelled retrospectively by the CBDT.
Key Facts
- The assessee filed its original return for AY 2012-13 on 29.04.2012, declaring income of ₹6,71,770 and claiming the ₹8,00,000 deduction.
- HHBRF was duly approved under Section 35(1)(ii) at the time of donation.
- On 27.01.2015, a survey under Section 132A was conducted at HHBRF’s premises by the DDIT (Investigation), Unit-4, Kolkata, which revealed systemic misuse of the institution for laundering funds.
- The CBDT, New Delhi, issued Gazette Notification S.O. 2882(E) dated 06.09.2016 and Office Memorandum F. No. 203/09/2015/ITA.II dated 21.09.2016, cancelling the approval granted to HHBRF and similar entities with retrospective effect from 27.01.2015.
- The AO reopened the assessment on 19.03.2019 under Section 147 and added ₹8,00,000 to the assessee’s income, treating the donation as bogus.
- The assessee filed a revised return on 18.05.2019, maintaining the same income and deduction claim.
Procedural History
- 29.04.2012: Original return filed for AY 2012-13.
- 12.10.2015: DCIT, Kolkata, communicated findings regarding bogus donations to HHBRF.
- 27.01.2015: Survey conducted under Section 132A at HHBRF premises.
- 06.09.2016: CBDT issued Gazette Notification cancelling approvals of HHBRF and similar institutions.
- 19.03.2019: Notice under Section 147 issued; assessment reopened.
- 18.05.2019: Revised return filed by assessee.
- 11.11.2025: Commissioner of Income-tax (Appeals), Visakhapatnam, upheld the disallowance.
- 12.06.2026: Hearing before ITAT Kolkata.
- 16.06.2026: Judgment pronounced.
The Parties' Positions
For the Assessee: The donation was made when HHBRF was a duly approved institution under Section 35(1)(ii). The retrospective cancellation of approval by the CBDT cannot invalidate a transaction that was lawful at the time of payment. The assessee acted in good faith and should not bear the consequences of departmental error.
For the Revenue: The donation was to an institution later found to be a front for money laundering. The retrospective cancellation of approval renders the deduction invalid, regardless of the timing of the payment.
Relief Sought
The assessee sought deletion of the addition of ₹8,00,000, restoration of the deduction under Section 35(1)(ii), and consequential relief.
The Legal Issue
The central question was whether the retrospective cancellation of approval granted to a scientific research institution under Section 35(1)(ii) of the Income Tax Act can disallow a deduction claimed by an assessee for a donation made during the period when the institution was duly recognized.
Arguments Presented
For the Appellant
The assessee relied on the binding precedent of the Calcutta High Court in Principal Commissioner of Income Tax v. J.P. Financial Services Pvt. Ltd. (ITA/153/2023, dated 02.08.2023), which held that the department has no power to withdraw recognition under Section 35(1)(ii) with retrospective effect. The High Court emphasized that the assessee should not suffer for administrative mistakes. The donation was genuine, made in compliance with statutory requirements, and the approval was valid at the time of payment.
For the Respondent
The Revenue contended that since HHBRF was later found to be a sham entity engaged in money laundering, any deduction claimed on donations to it must be disallowed. The CBDT’s retrospective cancellation, they argued, nullifies the legal basis of the deduction from inception.
The Court's Analysis
The Tribunal observed that the facts of the present case were materially identical to those in J.P. Financial Services Pvt. Ltd., decided by the Calcutta High Court and followed by a co-ordinate Bench of the ITAT in ITA Nos. 2285 and 2206/KOL/2025. The High Court had held that while the department may withdraw approval prospectively, it cannot do so retrospectively without violating the principle of legitimate expectation and fairness.
"The department has power of withdrawal but in such cases withdrawal can be only with prospective effect. Further it was held that if the donation to the approved society is genuine, in that case withdrawal with retrospective effect does not affect the right of the assessee for deduction of the amount which has accrued to the assessee on the basis of the payment to an approved society under Section 35(1)(ii)."
The Tribunal noted that the assessee had no knowledge of the illicit activities of HHBRF at the time of donation. The law does not impose a duty on donors to investigate the internal affairs of approved institutions. The retrospective cancellation, even if legally valid for future purposes, cannot erase the legal status of the institution at the time of the transaction.
The Tribunal further held that the doctrine of nemo dat quod non habet applies: the department cannot take away a right that was lawfully vested at the time of the transaction. The assessee’s right to deduction crystallized on the date of payment, not on the date of subsequent administrative action.
The Verdict
The appeal of the assessee is allowed. The order of the Commissioner of Income-tax (Appeals) dated 11.11.2025 is set aside. The addition of ₹8,00,000 made by the Assessing Officer is deleted. The assessee is entitled to the deduction under Section 35(1)(ii) for the donation made to HHBRF in AY 2012-13. The Assessing Officer is directed to give effect to this decision in the assessment.
What This Means For Similar Cases
Retrospective Withdrawal Cannot Invalidate Past Deductions
- Practitioners must argue that any withdrawal of approval under Section 35(1)(ii) must be prospective only, as held by the Calcutta High Court.
- The burden shifts to the Revenue to prove that the donation was not genuine at the time of payment, not merely that the donee was later found to be fraudulent.
Due Diligence Not Required from Donors
- Assessees are not obligated to monitor the ongoing compliance of approved institutions.
- A deduction cannot be denied solely on the basis of subsequent discovery of misconduct by the donee, absent evidence of collusion or knowledge of fraud by the donor.
Precedent Binding Across Jurisdictions
- Decisions of the Calcutta High Court on matters of statutory interpretation under the Income Tax Act are binding on the ITAT within its jurisdiction.
- Co-ordinate benches must follow consistent rulings on identical facts, reinforcing doctrinal stability in tax litigation.
