Section 35(1)(ii) IT Act | Deduction Cannot Be Denied Due to Post-Donation Cancellation of Research Institution Approval : ITAT Nagpur

The ITAT Nagpur has clarified that the statutory protection under the Explanation to Section 35(1)(ii) of the Income Tax Act shields an assessee from disallowance of a legitimate donation claim, even if the recipient institution’s approval is later cancelled. This ruling reinforces the principle that the validity of a deduction hinges on the status of the donee at the time of payment, not subsequent administrative actions.

Background & Facts

The Dispute

The assessee, Ashokkumar Gokulchand Sananda, proprietor of M/s Rana Traders, Khamgaon, claimed a deduction of Rs. 17,50,000 under Section 35(1)(ii) of the Income Tax Act, 1961, for a donation made to the School of Human Genetics & Population Health on 29.03.2014. The donation was made via banking channel, and a receipt evidencing the transaction was submitted. The institution had been duly approved under Section 35(1)(ii) by a CBDT notification dated 28.01.2010. The deduction was allowed in the regular assessment for A.Y. 2014-15, completed on 27.10.2016 under Section 143(3).

Key Facts

• The assessee filed his original return on 30.09.2014 declaring income of Rs. 2,23,54,457.
• Regular assessment under Section 143(3) was completed on 27.10.2016, allowing the deduction of Rs. 17,50,000 under Section 35(1)(ii).
• On 26.05.2017, a search and seizure operation was conducted under Section 132 against M/s Sri Renuka Mata Multi State Urban Co-op. Credit Society Ltd., which had transferred funds to the assessee.
• Based on a report from the Investigation Wing, Kolkata, received after the regular assessment, the Assessing Officer (AO) reopened the assessment under Section 147.
• The AO disallowed the deduction on the ground that the approval of the School of Human Genetics & Population Health had been cancelled by CBDT with retrospective effect from 2016.
• The AO also made an addition of Rs. 1,50,000 under Section 69C, alleging commission payments without evidence.
• The notice under Section 148 was issued on 15.03.2021, and the reassessment order was passed on 25.03.2022.
• The assessee filed an appeal before the Ld. Commissioner of Income Tax (Appeals), Delhi, which was dismissed on 10.06.2024.
• The assessee filed the present appeal before the ITAT Nagpur on 20.02.2026.

Procedural History

• 30.09.2014: Original return filed for A.Y. 2014-15.
• 27.10.2016: Regular assessment completed under Section 143(3); deduction under Section 35(1)(ii) allowed.
• 26.05.2017: Search and seizure conducted under Section 132 against Sri Renuka Mata Credit Society.
• 15.03.2021: Notice under Section 148 issued for reopening assessment.
• 25.03.2022: Reassessment order passed disallowing deduction under Section 35(1)(ii) and adding Rs. 1,50,000 under Section 69C.
• 10.06.2024: CIT(A) dismissed the appeal without addressing merits or providing reasoned findings.
• 20.02.2026: Appeal filed before ITAT Nagpur.
• 06.04.2026: Judgment pronounced by ITAT Nagpur.

The Parties' Positions

For the Assessee

• The donation was made in good faith when the institution held valid approval.
• The Explanation to Section 35(1) explicitly bars denial of deduction merely because approval was withdrawn after payment.
• The AO relied on a general investigation report not shared with the assessee, violating principles of natural justice.
• No incriminating evidence was produced to show the donation was bogus or routed back.
• Reliance was placed on C-DET Explosive Industries Pvt. Ltd. (ITAT Nagpur), Maco Corporation (India) Pvt. Ltd. (Calcutta HC), and Industrial Infrastructure Development Corporation (SC).

For the Revenue

• The approval of the institution was cancelled retrospectively, indicating the donation was part of a fraudulent scheme.
• The investigation report from Kolkata established a pattern of bogus donations.
• The deduction was therefore not genuine and should be disallowed.
• The CIT(A)’s reliance on Deviyani Dilip Patel and Mehndipur Balaji was sufficient to uphold the disallowance.

Relief Sought

The assessee sought:

• Deletion of the disallowance of Rs. 17,50,000 under Section 35(1)(ii).
• Deletion of the addition of Rs. 1,50,000 under Section 69C.
• Setting aside of the CIT(A)’s order dated 10.06.2024.
• Costs of litigation.

The Legal Issue

Can the Assessing Officer disallow a deduction claimed under Section 35(1)(ii) of the Income Tax Act merely because the approval of the research institution was cancelled after the donation was made, despite the statutory protection under the Explanation to Section 35(1)?

Arguments Presented

For the Appellant/Petitioner

The assessee’s counsel argued that the Explanation to Section 35(1) is explicit: "The deduction... shall not be denied merely on the ground that, subsequent to the payment of such sum by the assessee, the approval... has been withdrawn." The donation was made on 29.03.2014, when the institution’s approval was valid. The AO’s reliance on a post-facto investigation report, not disclosed to the assessee, violated natural justice. The Tribunal in C-DET Explosive Industries Pvt. Ltd. and the Calcutta High Court in Maco Corporation had consistently held that mere suspicion or retrospective cancellation cannot override statutory protection. The burden to prove the donation was sham lay with the Revenue, which failed to produce any evidence of routing or collusion.

For the Respondent/State

The Departmental Representative contended that the cancellation of approval with retrospective effect indicated the institution was never legitimate, rendering the donation bogus. The investigation report from Kolkata, though not shared, formed the basis for reopening under Section 147. The CIT(A)’s dismissal was justified as the assessee could not prove the genuineness of the transaction. Reliance was placed on Deviyani Dilip Patel and Mehndipur Balaji, though these were factually distinguishable.

The Court's Analysis

The Tribunal meticulously examined the statutory framework and judicial precedents. It observed that the Explanation to Section 35(1) is a clear legislative safeguard designed to protect bona fide donors from administrative overreach. The Hon’ble Calcutta High Court in Maco Corporation (India) Pvt. Ltd. had held that once the assessee fulfills all conditions for deduction at the time of payment, subsequent withdrawal of approval cannot be grounds for denial. The Supreme Court in Commissioner of Income Tax v. Chotatingrai Tea & Ors. affirmed that the assessee is not obligated to monitor the utilization of funds by the donee.

"The deduction, to which the assessee is entitled in respect of any sum paid to a research association... shall not be denied merely on the ground that, subsequent to the payment of such sum by the assessee, the approval... has been withdrawn."

The Tribunal noted that the CIT(A) failed to provide any reasoned analysis, merely citing two irrelevant decisions. The Deviyani Dilip Patel case involved no banking transaction and no prior allowance, while Mehndipur Balaji concerned Section 153A, which is inapplicable here. The AO’s disallowance was based on a general investigation report, never shared with the assessee, and contained no specific evidence linking the assessee to any fraudulent scheme.

The Tribunal further held that the addition under Section 69C of Rs. 1,50,000, based on an adverse inference of commission, was equally unsustainable. No documentary or testimonial evidence was produced to substantiate the allegation. The Tribunal emphasized that suspicion, however strong, cannot replace evidence.

The Tribunal also noted that the appeal against the validity of the Section 148 notice was rendered academic, as the relief was granted on merits.

The Verdict

The assessee succeeded. The ITAT Nagpur set aside the CIT(A)’s order dated 10.06.2024, deleted the disallowance of Rs. 17,50,000 under Section 35(1)(ii), and deleted the addition of Rs. 1,50,000 under Section 69C. The AO was directed to allow the deduction of Rs. 17,50,000 as claimed. The issue of the Section 148 notice was dismissed as academic. The appeal was partly allowed.

What This Means For Similar Cases

Statutory Protection Under Explanation to Section 35(1) Is Absolute

• Practitioners must argue that any disallowance based solely on post-donation cancellation of approval is legally unsustainable.
• The burden of proving the donation was fraudulent lies entirely on the Revenue; mere suspicion or investigation reports without disclosure are insufficient.
• The Explanation is not a mere procedural safeguard but a substantive right.

Evidence Must Be Specific and Disclosed

• AO cannot rely on undisclosed investigation reports to disallow deductions.
• Any adverse inference drawn under Section 69C requires concrete evidence of unexplained payments; generalized allegations are invalid.
• Assessee’s compliance with banking channels and submission of receipts creates a prima facie case that must be rebutted with specific evidence.

Precedents Are Binding Across Benches

• Decisions of coordinate benches, especially those affirmed by High Courts like Maco Corporation, must be followed.
• CIT(A)s and AOs cannot ignore binding precedents by citing unrelated or factually distinguishable cases.
• Appeals must be decided on merits, not by rote citation of irrelevant judgments.