ITAT Ahmedabad Upholds Rejection Of Tax Deduction Claim On ₹12 Lakh Donation To Political Party

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has upheld the denial of a tax deduction claimed by a salaried taxpayer on a ₹12 lakh donation made to a political party, holding that he failed to establish that the contribution was genuine and eligible for deduction.

A division bench of Vice-President Dr. B.R.R. Kumar and Judicial Member Rahul Chaudhary observed, "the assessee has failed to establish that the impugned contribution represented a genuine donation eligible for deduction under section 80GGC of the Act."

The assessee had claimed a deduction for a ₹12 lakh donation made to Rashtriya Samajwadi Party (Secular) while filing his income tax return for the 2019-20 assessment year. The Assessing Officer disallowed the claim after concluding that the donation was not genuine. This was affirmed by the Commissioner(Appeal) leading to the present case.

Before the tribunal, the assessee argued that the donation had been made through banking channels to a political party registered under the Representation of the People Act, 1951. He contended that he had complied with all legal requirements for claiming the deduction and that the Income Tax Department had produced no direct evidence to show the money had been returned to him. He also maintained that any alleged wrongdoing by the recipient political party could not automatically be attributed to him.

The revenue countered that extensive investigations had uncovered an accommodation-entry arrangement involving the recipient political party. It relied on search material, statements recorded during search proceedings, analysis of bank accounts and the movement of funds through intermediary shell entities.

According to the Revenue, the evidence showed that donations received by the party were layered through shell entities before being converted into cash.

The tribunal agreed with the Revenue. It held that payment through banking channels and production of donation receipts were insufficient where the investigation established that the recipient political party itself functioned as a conduit for accommodation entries.

"Mere payment through banking channels and production of donation receipts cannot, in the facts of the present case, override the overwhelming evidence demonstrating that the recipient political party was engaged in providing accommodation entries through a systematic layering of funds," the tribunal observed.

Rejecting the assessee's contention that there was no direct evidence of cash being returned, the tribunal observed that such evidence is rarely available in cases involving tax evasion and accommodation entries.

It held that once the Revenue produced cogent material showing the recipient political party was engaged in systematic accommodation-entry operations and that the assessee's transaction formed part of that chain, the burden shifted to the assessee to rebut the material with credible evidence.

The tribunal found that the assessee had relied only on banking records and donation receipts and had produced nothing to dislodge the findings of the investigation.

The tribunal also rejected the argument that the party's registration under the Representation of the People Act established the genuineness of the donation.

It held that such registration merely recognised the legal existence of a political party and could not validate transactions subsequently found to be sham. Eligibility for the deduction depended on the genuineness of the contribution itself.

It further held that the Supreme Court decisions relied upon by the assessee, including CIT v. Orissa Corporation (P.) Ltd., CIT v. Divine Leasing & Finance Ltd. and K.P. Varghese v. ITO, did not assist his case because they arose in different factual contexts.

The tribunal found that, unlike those cases, the revenue here had conducted extensive investigations, traced the movement of funds and placed search material and witness statements on record.

Referring to the Supreme Court's rulings in CIT v. Durga Prasad More and Sumati Dayal v. CIT, the tribunal reiterated that tax authorities are entitled to examine surrounding circumstances and apply the test of human probabilities to determine the real nature of a transaction instead of accepting documentary evidence at face value.

Finding no infirmity in the order of the Commissioner (Appeals), the tribunal dismissed the appeal.

For Appellant: Ashish B. Kanabar and Shri Om Kanabar, ARs

For Respondent: Aroon Kumar, CIT-DR