Section 80GGC | Cash-Back Political Donations Are Bogus Entries, Disallowing Deduction: ITAT Ahmedabad

The Income Tax Appellate Tribunal (ITAT), Ahmedabad, has delivered a significant ruling on the eligibility of deductions under Section 80GGC of the Income-tax Act, 1961. The Tribunal held that donations made to political parties, which are subsequently returned to the donor in cash after deducting a commission, constitute accommodation entries and are not eligible for tax deductions. This judgment reinforces the principle that mere banking transactions and donation receipts are insufficient to establish genuineness when overwhelming evidence suggests a systematic layering of funds for tax evasion.

Background & Facts

The Dispute

The appellant, Kanal Sanatkumar Raval, claimed a deduction of ₹1,80,000 under Section 80G of the Income-tax Act, 1961, for a donation made to the Rashtriya Samajwadi Party (Secular). The Assessing Officer (AO), relying on information from search and survey actions conducted under Sections 132 and 133A of the Act, alleged that the donation was part of a bogus donation racket. The investigation revealed that donors received the donated amounts back in cash through intermediaries after deducting a commission of 1.5% to 5%. Incriminating materials, including diaries, loose papers, WhatsApp chats, and bank statements, were seized during the search proceedings, evidencing cash-back arrangements.

Key Facts

• The appellant claimed a deduction of ₹1,80,000 under Section 80G for a donation to Rashtriya Samajwadi Party (Secular)

• The AO relied on search and survey actions conducted in Maharashtra, Bihar, Uttar Pradesh, NCR, and Silvassa

• Incriminating materials, including bank statements, revealed that donations were layered through multiple accounts and returned in cash

• A notice under Section 133(6) was issued to the political party, but no response was received

• The political party and its intermediaries were alleged to be shell entities facilitating tax evasion

• The appellant responded to notices under Sections 142(1) and 133(6) on 04.09.2024 and 22.10.2024, and to a show-cause notice dated 08.11.2024

• The AO disallowed the deduction, treating the donation as fictitious and adding ₹1,80,000 to the appellant’s total income for Assessment Year 2019-20

Procedural History

• 24.07.2025: Order passed by the Ld. Commissioner of Income Tax (Appeals), NFAC, Delhi, disallowing the deduction

• 28.08.2025: Appeal filed before the ITAT, Ahmedabad (ITA No. 2155/AHD/2025)

• 02.07.2026: Hearing conducted before the ITAT

• 13.07.2026: Judgment pronounced dismissing the appeal

The Parties' Positions

The appellant raised multiple grounds challenging the reassessment proceedings, including:

• Lack of prior approval from the competent authority under Explanation 2(iv) to Section 148

• Approval obtained under Section 151 from an incompetent authority (PCIT instead of PCCIT)

• Invocation of Section 149(1)(b) without fulfilling the threshold of ₹50,00,000 for escapement

• Unsigned approval under Section 151, violating Section 282A and the DSC Policy, 2018

• Jurisdictional error, as the matter emanated from search-related information, which should have been handled by the Central Circle

• Disallowance of the ₹1,80,000 deduction under Section 80GGC without proper appreciation of evidence

The respondent (Revenue) relied on:

• Investigation materials, including bank trails, WhatsApp chats, and statements recorded under Section 132(4)

• The established modus operandi of the political party, which involved receiving donations through cheques and returning them in cash after deducting commission

• The absence of genuine political or social activities by the political party, which was used as a vehicle for accommodation entries

• Precedents from co-ordinate benches of the ITAT, including Saurabh Pravinbhai Patel Vs. ITO (ITA No. 1017/Ahd/2023), which held similar donations to be bogus

Relief Sought

The appellant sought:

• Condonation of delay in filing the appeal

• Quashing of the reassessment proceedings on jurisdictional and procedural grounds

• Allowance of the ₹1,80,000 deduction under Section 80GGC

• Liberty to amend grounds of appeal during proceedings

The Legal Issue

The central legal question was whether a donation made to a political party, which was subsequently returned to the donor in cash after deducting commission, qualifies as a genuine contribution eligible for deduction under Section 80GGC of the Income-tax Act, 1961. Additionally, the Tribunal examined the validity of the reassessment proceedings, including the authority of the sanctioning officer and the procedural compliance under Sections 148, 149, and 151 of the Act.

Arguments Presented

For the Appellant

1. Jurisdictional and Procedural Defects:

   • The AO failed to obtain prior approval from the competent authority under Explanation 2(iv) to Section 148, rendering the reassessment proceedings invalid

   • Approval under Section 151 was obtained from the PCIT instead of the PCCIT, despite invoking Section 149(1)(b), which pertains to cases beyond three years where escapement exceeds ₹50,00,000

   • The approval was unsigned, violating Section 282A and the DSC Policy, 2018

   • The NFAC lacked jurisdiction as the matter emanated from search-related information, which should have been handled by the Central Circle

2. Merits of the Deduction:

   • The appellant furnished replies to notices and claimed that the donation was genuine

   • The disallowance of ₹1,80,000 under Section 80GGC was unjustified and contrary to the evidence on record

For the Respondent

1. Genuineness of the Donation:

   • The AO relied on investigation materials, including bank statements, WhatsApp chats, and statements recorded under Section 132(4), which revealed a systematic cash-back arrangement

   • The political party, Rashtriya Samajwadi Party (Secular), was found to be a shell entity engaged in providing accommodation entries

   • Donations received by the party were layered through multiple bank accounts and returned in cash after deducting commission

   • The party failed to respond to notices under Section 133(6) and summons under Section 131(1), and no genuine political activities were conducted

2. Precedents:

   • The Revenue relied on co-ordinate bench decisions, including Saurabh Pravinbhai Patel Vs. ITO (ITA No. 1017/Ahd/2023), which held that donations with cash-back arrangements are bogus and ineligible for deduction

   • The Tribunal in Milind Pankajbhai Shroff Vs. Pr. CIT-1, Rajkot (ITA No. 93/RJT/2023) upheld the disallowance of similar deductions, emphasizing that fraud vitiates all transactions

The Court's Analysis

The Tribunal conducted a detailed analysis of the facts, legal provisions, and precedents to determine the genuineness of the donation and the validity of the reassessment proceedings.

Jurisdictional and Procedural Validity

The Tribunal noted the appellant’s objections regarding the reassessment proceedings but did not adjudicate them in detail, as the merits of the case were dispositive. However, it observed that:

• The AO relied on information from search and survey actions, which typically fall under the jurisdiction of the Central Circle

• The reassessment proceedings were initiated based on third-party search information, raising questions about the authority of the NFAC to handle such matters

Genuineness of the Donation

The Tribunal placed significant reliance on the investigation materials and the established modus operandi of the political party:

"The investigation revealed that donors had allegedly made donations through banking channels and subsequently received the donated amounts back, mainly in cash, through intermediaries after deduction of commission ranging from 1.5% to 5%."

The Tribunal examined the bank trails and found that:

• The political party received donations through cheques, which were then layered through multiple accounts

• The funds were ultimately returned to the donors in cash after deducting commission

• The party did not engage in genuine political or social activities and was used as a vehicle for accommodation entries

• Statements recorded under Section 132(4) from office bearers of the party confirmed the cash-back arrangements

The Tribunal cited the decision in Saurabh Pravinbhai Patel Vs. ITO (ITA No. 1017/Ahd/2023), which involved an identical issue:

"The AO made a detailed enquiry of RSP and its Bank accounts and transfer of funds to one Shri Mukesh Mehta proprietor of two firms and he transferred it to Waheguru Enterprise and Sapan Traders, which is clearly a systematic financial maneuver to legitimate illicit moneys and evade taxes."

The Tribunal also relied on the principles laid down by the Hon’ble Supreme Court in CIT v. Durga Prasad More (1971 82 ITR 540) and Sumati Dayal v. CIT (1995 214 ITR 801), which hold that taxing authorities are entitled to look beyond documentary evidence and examine the surrounding circumstances to ascertain the real nature of a transaction. Where the cumulative facts suggest that the apparent is not the real, the Revenue is justified in drawing inferences based on preponderance of probabilities.

Legal Principles Applied

1. Accommodation Entries: The Tribunal reiterated that shell entities, though appearing genuine on paper, lack real operations and are used to facilitate financial maneuvers for tax evasion. The political party in question was found to be such an entity.

2. Burden of Proof: The Tribunal held that the appellant failed to discharge the burden of proving the genuineness of the donation. Mere banking transactions and donation receipts were insufficient in light of overwhelming evidence of cash-back arrangements.

3. Section 80GGC Eligibility: The Tribunal clarified that Section 80GGC allows deductions only for genuine contributions to political parties. Donations that are part of a systematic layering of funds to evade taxes do not qualify for deduction.

4. Fraud Vitiates Everything: The Tribunal relied on the principle that fraud vitiates all transactions, citing the decision in Abhishek Ashok Lohade (ITA No. 816/PUN/2018). Even if the assessee submits documents, the presence of fraud renders them irrelevant.

The Verdict

The Tribunal dismissed the appeal, upholding the disallowance of the ₹1,80,000 deduction claimed under Section 80GGC. The key holdings were:

1. The donation made to Rashtriya Samajwadi Party (Secular) was part of a bogus donation racket and constituted an accommodation entry

2. The appellant failed to establish the genuineness of the donation, rendering it ineligible for deduction under Section 80GGC

3. The reassessment proceedings, though challenged on jurisdictional grounds, were upheld on merits

4. The grounds raised by the appellant were dismissed, and the appeal was dismissed in its entirety

What This Means For Similar Cases

Shell Entities and Accommodation Entries

• Burden of Proof: Taxpayers claiming deductions under Section 80GGC must establish the genuineness of the donation. Mere banking transactions and receipts are insufficient if investigation materials suggest otherwise

• Investigation Materials: Authorities can rely on bank trails, WhatsApp chats, diaries, and statements recorded under Section 132(4) to disprove the genuineness of transactions

• Fraudulent Transactions: If a transaction is found to be fraudulent, the entire claim is vitiated, regardless of documentary evidence submitted by the assessee

Political Parties as Vehicles for Tax Evasion

• Modus Operandi: Political parties exempt under Section 13A of the Act can be misused to facilitate accommodation entries. Donations received through cheques are layered through shell entities and returned in cash

• Due Diligence: Donors must conduct due diligence to ensure that the political party is engaged in genuine activities. Failure to do so may result in disallowance of deductions

• Jurisdictional Risks: Matters emanating from search-related information should be handled by the Central Circle. Assessees should challenge the jurisdiction of the NFAC if reassessment proceedings are initiated based on third-party searches

Procedural Compliance in Reassessment

• Competent Authority: Approval under Section 151 must be obtained from the correct authority (PCCIT for cases beyond three years with escapement exceeding ₹50,00,000). Approval from an incompetent authority renders the proceedings void

• Signed Approval: Reassessment proceedings initiated based on unsigned approvals violate Section 282A and the DSC Policy, 2018, and are invalid

• Threshold for Escapement: For cases beyond three years, the escapement must exceed ₹50,00,000 under Section 149(1)(b). Assessees should verify whether this threshold is met before challenging reassessment proceedings