Assessee not obliged to demonstrate actual utilization of donation u/s 35(1)(ii) for scientific research made to an eligible institution
In a recent judgment, ITAT Mumbai has held that Assessing Officer’s premise that the assessee must demonstrate actual utilization of the donation for scientific research betrays a fundamental misapprehension of the statutory architecture of section 35(1)(ii) of the Income Tax Act, 1961.
ABCAUS Case Law Citation:
5019 (2026) (01) abcaus.in ITAT
In the instant case, the appellant assessee had challenged the order passed by the CIT(A) in confirming disallowance of deduction claimed under section 35(1)(ii) of the Income Tax Act, 1961 (the Act) in respect of donation towards scientific research.
The assessee’s case was reopened after recording reasons to believe that income chargeable to tax had escaped assessment. The recorded reasons stated that during the assessment proceedings for relevant Assessment Year in the case of the done institution, it was claimed that one of its employees had opened and operated a bank account by misusing his position as an employee and authorized signatory, and had received donations in the name of the trust while issuing receipts certifying eligibility under section 35(1)(ii) of Act. It was further stated that the funds so received were diverted and allegedly repaid to donors through other means without the knowledge of the trust, and that the trust itself had denied any connection with the said bank account. It was also stated that complaints had been lodged by the trust against the said employee before the Superintendent of Police and Directorate of Income-tax (Investigation).
In this backdrop, it was alleged that the assessee, being one of the donors who had paid donation through the said account, had wrongly claimed deduction under section 35(1)(ii) of the Act.
In the reassessment proceedings, the assessee submitted that done institution was a reputed institution functioning under the leadership of one Padma Shri awardee and visited by several dignitaries including the Prime Minister and the President of India. It was stated that the trust is registered under section 12A and duly approved under section 35(1)(ii), and that the assessee had made donations bona fide for scientific research purposes.
The assessee furnished donation receipts, exemption certificates, Gazette notifications granting approval under section 35(1)(ii), PAN of the trust and supporting documents. It was contended that the assessee had no control over utilization of funds by the trust and that alleged misconduct of an employee of the trust could not invalidate its claim when the assessee had acted in good faith. It was also contended that the donations were genuinely made for scientific research and that past additions in earlier years could not ipso facto justify disallowance in the present year.
However, the Assessing Officer rejected the assessee’s explanation. He held that for claiming deduction under section 35(1)(ii), the assessee was required not merely to establish payment to an approved institution but also to demonstrate that the payment was in fact utilized for scientific research.
The CIT(A) concluded that the donation was not received in the bank account of the legitimate donee and that the onus lay on the assessee to establish authenticity and utilization, which it failed to discharge. The CIT(A) relied upon the ITAT Kolkata decision in a batch of appeals involving similar donations and reiterated the principle that fraud vitiates all.
The Tribunal observed that the Assessing Officer and the learned CIT(A) both had proceeded on the premise that the said employee misconduct ipso facto taints every donation purportedly routed through that account, including the donation made by the assessee. However, beyond this generalized allegation, no material whatsoever had been brought on record to establish any factual nexus between the assessee and the said employee of the done institution.
The Tribunal further observed that there was no material to demonstrate that the assessee was aware of, or participated in, any internal misconduct at the level of the trust. The allegation that funds received through the disputed account were diverted and repaid to donors remains a sweeping generality. No evidence was brought on record to show that any amount was repaid to this assessee. The Revenue’s case rested not on proof, but on suspicion.
The Tribunal opined that the Assessing Officer’s premise that the assessee must demonstrate actual utilization of the donation for scientific research betrays a fundamental misapprehension of the statutory architecture of section 35(1)(ii). The legislative scheme is unambiguous: the donor is required to establish payment to an institution approved at the relevant time. The statute does not impose upon the donor an obligation to audit, monitor, or prove the end-use of funds by the donee, for to judicially engraft such an onerous burden would be to render the statutory incentive illusory and unworkable. Once payment to a duly approved institution is demonstrated through contemporaneous documentary evidence, the statutory conditions stand fulfilled.
The Tribunal further held that any subsequent misconduct, misappropriation, or internal irregularity at the level of the donee institution cannot retroactively invalidate the assessee’s claim, unless it is shown, by cogent material, that the assessee was complicit therein or that the transaction was a sham from its inception.
The Tribunal further observed that the reliance placed by the CIT(A) on the ITAT Kolkata decision was wholly misplaced, for in that case there were detailed findings of organized fraud, round-tripping of funds, and conscious participation by the assessees, whereas no such findings existed in the case in hand; judicial precedents are not mechanical templates to be transplanted irrespective of factual dissimilarities, but principles to be applied in harmony with the factual matrix at hand.
The Tribunal held that the impugned disallowance was based on surmise, presumption, and third-party allegations, unbacked by any direct or credible evidence linking the assessee to any alleged fraudulent activity. The statutory conditions of section 35(1)(ii) stood fulfilled. The assessee had discharged its burden. The Revenue had failed to rebut the same by any cogent or tangible material.
Accordingly, the Tribunal deleted the disallowance made by the Assessing Officer and sustained by the CIT(A) being unsustainable both in law and on facts.
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