The ITAT Mumbai has reaffirmed that donations to political parties involved in systematic, fraudulent schemes to launder funds through bogus transactions cannot qualify for tax deductions under Section 80-GGC, even if made via banking channels and accompanied by receipts. This ruling imposes a duty on taxpayers to conduct due diligence and establishes that mere formal compliance is insufficient to validate claims where the underlying transaction is demonstrably fictitious.
Background & Facts
The Dispute
The appellant, Mihir Bipinbhai Parekh, an individual trader in chemicals including Potassium Cyanide and Sodium Cyanide, claimed a deduction of Rs. 25,00,000 under Section 80-GGC of the Income Tax Act, 1961, for a donation made to the Kisan Party of India during the assessment year 2019-20. The Assessing Officer (AO) disallowed the deduction, treating the donation as bogus, on the grounds that the Kisan Party of India was one of several Registered Unrecognised Political Parties (RUPPs) identified in a search and seizure operation under Section 132 of the Act as part of a structured scam to facilitate fake donations. The Commissioner of Income Tax (Appeals) upheld this disallowance, prompting the present appeal before the ITAT.
Key Facts
- The assessee filed his original return of income on 29.10.2019, declaring total income of Rs. 49,02,840.
- He claimed a deduction of Rs. 25,00,000 under Section 80-GGC for a donation to Kisan Party of India, made via banking channel.
- The Kisan Party of India is registered under Section 29A of the Representation of the People Act, 1951, but has no electoral presence in Maharashtra or Mumbai, where the assessee resides.
- The party was among those targeted in a search operation conducted on 02.02.2021 by the Investigation Wing in Ahmedabad.
- The search revealed a modus operandi wherein donations received via cheque were routed through dummy agricultural intermediaries and returned to donors in cash, avoiding TDS.
- The assessee’s business involves chemical trading for electroplating; there is no nexus between his profession and agricultural welfare activities.
- The donation amount (Rs. 25 lakh) constituted approximately 40% of the assessee’s net profit before tax for the year.
- The assessee made no other charitable donations during the year.
- The donation receipts produced by the assessee were issued by a party registered in Bihar, with no evidence of its presence or outreach in Mumbai.
- The assessee claimed he was contacted repeatedly by party staff seeking moral support for farmers, but provided no documentary or testimonial evidence of such contact.
Procedural History
- 29.10.2019: Original return filed for AY 2019-20.
- 02.02.2021: Search and seizure conducted under Section 132 against RUPPs including Kisan Party of India.
- 2022-2023: Investigation Wing submitted report detailing fraudulent donation cycle.
- 2023: Notice under Section 148 issued to assessee for reassessment.
- 19.05.2023: Assessee filed revised return.
- 28.01.2025: AO passed reassessment order under Section 147 read with Section 144B, disallowing Rs. 25 lakh deduction.
- 08.01.2026: CIT(A) dismissed appeal, upholding AO’s order.
- 12.05.2026: ITAT Mumbai dismissed the appeal.
The Parties' Positions
For the Appellant
The assessee contended that:
- The donation was made through banking channel.
- A valid receipt was issued by the Kisan Party of India.
- The party is registered under the Representation of the People Act, 1951.
- He made the donation out of moral support for farmers, unaware of any illegality.
- He relied on decisions of Coordinate Benches allowing similar deductions.
For the Respondent
The Revenue contended that:
- The Kisan Party of India was part of a documented scam involving circular fund flows.
- The donation amount was disproportionate to the assessee’s income profile.
- No plausible connection existed between the assessee’s business and the party’s stated objective.
- The party had no operational presence in Maharashtra.
- The receipts were formalities masking a sham transaction.
Relief Sought
The appellant sought reversal of the disallowance of Rs. 25,00,000 under Section 80-GGC and deletion of the reassessment order. He also sought quashing of penalty proceedings under Section 270A.
The Legal Issue
Whether a donation made to a political party, which is part of a documented scam involving circular fund transfers and cash returns to donors, can still qualify for deduction under Section 80-GGC merely because it was made via banking channel and accompanied by a receipt?
Arguments Presented
For the Appellant
The learned Authorized Representative relied on the formal compliance with Section 80-GGC: the donation was made via banking channel, the recipient was a registered political party, and a receipt was issued. He cited several Coordinate Bench decisions where deductions were allowed under similar circumstances, arguing that the burden of proving the donation was bogus lay with the Revenue. He emphasized the absence of direct evidence linking the assessee to the fraudulent scheme and contended that the assessee acted in good faith.
For the Respondent
The Departmental Representative relied on the detailed findings from the Section 132 search operation, which established a clear modus operandi: donations received via cheque were routed through dummy agricultural entities and returned to donors in cash through intermediaries to evade TDS. The Revenue argued that Section 80-GGC requires the donation to be genuine and not a facade for money laundering. The disproportionate size of the donation relative to the assessee’s income, coupled with the lack of any plausible connection between the donor and the recipient party, rendered the claim suspect. The Revenue further argued that the Coordinate Bench decisions cited were factually distinguishable.
The Court's Analysis
The Tribunal undertook a rigorous factual and contextual analysis, rejecting the appellant’s reliance on formal compliance alone. It emphasized that Section 80-GGC is not a blanket provision for political donations but requires the transaction to be genuine and not a device to circumvent tax laws.
"The modus operandi detected in the course of the search operation and assessment proceedings revealed that the donation is received through cheque in the bank account of the Political Party... Thereafter, such amounts are routed to an Intermediary in the form of payments for purchase of agricultural produce... The purchase is bogus and non-genuine and this is done only to transfer the moneys into the account of the intermediary."
The Tribunal noted that the Kisan Party of India had no presence in Maharashtra, the state where the assessee resided and carried on business. There was no evidence of how the party’s staff came into contact with the assessee, a chemical trader with no connection to agriculture. The donation amount of Rs. 25 lakh constituted 40% of the assessee’s net profit, an extraordinary proportion for a single philanthropic act, especially in the absence of any other charitable contributions.
The Tribunal further held that the decisions cited by the appellant were factually distinguishable. In Abhishek Jayketu Joshi, the political party was not implicated in a search operation. In Vitthaldas Nathubhai Shah, the issue related to Section 263 proceedings, not Section 80-GGC. In ACIT v. Armee Infotech, the denial was based on misuse of funds, not sham donation. In ACIT v. Anuj Prakash Gupta, the political party was different.
The Tribunal concluded that the assessee failed to discharge the burden of proving the genuineness of the transaction. The mere existence of a receipt and banking trail does not validate a donation when the recipient entity is part of a systemic fraud. The Tribunal held that the Revenue’s findings, based on concrete investigative evidence, were sufficient to rebut the presumption of genuineness.
The Verdict
The appeal was dismissed. The ITAT upheld the disallowance of Rs. 25,00,000 under Section 80-GGC and confirmed the reassessment order dated 28.01.2025. The penalty proceedings under Section 270A were also dismissed as premature, without prejudice to their initiation upon final determination of income. The order of the CIT(A) dated 08.01.2026 was affirmed.
What This Means For Similar Cases
Genuine Intent Must Be Demonstrated, Not Just Formal Compliance
- Practitioners must advise clients that claiming deductions under Section 80-GGC requires more than a receipt and bank transfer.
- Donations to RUPPs, especially those flagged in search operations, will face heightened scrutiny.
- Taxpayers must document the rationale for the donation, including how and why they chose the party.
- Large donations relative to income (e.g., >25% of net profit) will be viewed with suspicion.
Due Diligence Is a Legal Obligation
- Taxpayers cannot claim ignorance if the recipient party is widely known in enforcement circles for fraudulent activity.
- The Tribunal’s reasoning implies a duty to inquire into the credibility of political parties before making substantial donations.
- Failure to conduct basic due diligence may render the claim vulnerable to disallowance, even if made in good faith.
Coordinate Bench Decisions Are Not Binding Unless Factually Identical
- Relying on past rulings allowing deductions under Section 80-GGC is risky unless the facts are materially identical.
- Each case must be judged on its own evidence, particularly the nature of the recipient party and the donor’s connection to it.
- Practitioners should avoid blanket reliance on precedent and instead focus on the specific investigative findings against the recipient party.
