Donation Deduction Issue Rendered Academic: ITAT declines to Examine Claim u/s 35(1)(ii) After Invalidating Reopening [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) held that there was no need for adjudication on the issue of deduction claimed for donations made to an approved scientific research institute under Section 35(1)(ii), as the reassessment proceedings were found to be invalid. Once the reassessment itself was quashed, the question of examining the allowability of the deduction became merely academic and did not require further consideration.

The assessee, Moons Technologies Limited, is engaged in the business of development of software technologies and services towards various segments, i.e., exchange business, brokerage and intermediaries services in India as well as outside India.

Assessee has incorporated its wholly owned subsidiaries and step-down subsidiaries, including exchange joint ventures, to represent its exchange business globally, since AY 2006-07. According to the assessee, details of these subsidiaries are reported every year in its annual report. These exchanges are an independent entity managed by an independent Board of Directors and professionals.

Assessee claimed deduction under Section 10AA in respect of export of computer software for its exchange business out of the said SEZ starting from AY 2011-12. For AY 2011-12, the original return was filed on, reporting total income at Rs 57,16,88,452/- after claiming deduction

of Rs 89,81,59,063/- under Section 10A and of Rs 4,33,44,906/- under Section 10AA, totalling to Rs 94,15,03,969/-. The case of the assessee was taken up for scrutiny assessment. In the course of the original assessment, the assessee filed extensive details about deductions under Section 10A and 10AA.

In this case, the Assessing Officer reopened the assessment for AY 2011–12 based on findings from the scrutiny proceedings for AY 2014–15, completed under section 143(3) r.w.s. 144C(3). During the 2014–15 assessment, it was observed that the assessee had exported software to four foreign subsidiaries that had accumulated losses of ₹870.82 crore, despite having small turnovers and weak financials.

The Assessing Officer noted that the assessee had invested ₹490.9 crore and advanced loans of ₹490.03 crore to these subsidiaries, suggesting that export receipts were effectively routed back through loans and investments, raising doubts about the genuineness of export proceeds. On this basis, he concluded that exemptions of ₹94.15 crore claimed under sections 10A and 10AA for AY 2011–12 had escaped assessment.

The assessee filed detailed objections contesting both the jurisdiction for reopening and the disallowance of exemptions under sections 10A and 10AA, but these objections were rejected by the Assessing Officer. Consequently, reassessment was completed, and the claim of deduction under these sections was disallowed in full.

Also the assessee claimed a deduction of donation made to an approved scientific research institute under Section 35(1)(ii. Even the deduction was not rendered academic. The assessee aggrieved of this order filed an appeal before the CIT(A)

The CIT(A) held that the Assessing Officer had merely formed a new opinion based on the same set of facts that were already on record and verified earlier. In the absence of any fresh evidence or material unearthed during the subsequent assessment, the reopening was deemed unjustified and based on assumptions.

Thus, the CIT(A) accepted the assessee’s contention that the reassessment was a case of “change of opinion” and invalidated the reopening. Aggrieved of this order, the revenue filed an appeal before the Tribunal.

The Tribunal observed that the reassessment proceedings had been initiated beyond four years from the end of the relevant assessment years, thereby attracting the conditions under the first proviso to Section 147. It noted that while the original assessments had been completed under, the Assessing Officer (AO) failed to demonstrate any specific failure by the assessee to disclose fully and truly all material facts necessary for the assessment.

The reasons recorded by the AO merely repeated the statutory language of Section 147 without identifying any concrete omission by the assessee.

Relying on the Bombay High Court’s ruling in Cedric De Souza Faria v. DCIT, the Tribunal held that mere reproduction of the phrase “failure to disclose fully and truly” is insufficient to assume jurisdiction for reopening after four years.

The Tribunal further noted that the AO had only referred to findings from a subsequent year’s assessment (AY 2014–15), which did not constitute new tangible material for reopening a concluded assessment.

Since reassessment cannot be used as a tool for review, and no fresh material had emerged post-original assessment, the Tribunal upheld the CIT(A)’s decision declaring the reassessment invalid. Consequently, the Revenue’s grounds on the jurisdictional issue of reopening were dismissed.

The two-member bench of Sandeep Gosain (Judicial Member) and Girish Agrawal (Accountant Member) held that in respect of deduction claimed under Section 35(1)(ii) which has been allowed by the CIT(A), the issue raised by the Revenue is rendered academic, since the initiation of reopening and the reassessment order passed thereupon itself has been held to be invalid and bad in law in terms of the observations and findings, hence no separate adjudication is required on this issue.

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