The Commissioner of Income Tax (Appeals), through the National Faceless Appeal Centre (NFAC), has quashed a reassessment concerning a ₹3 lakh political donation, holding that the Income Tax Department could not invoke the ordinary reassessment provisions when the proceedings were founded on taxpayer-specific material seized during a search conducted before April 1, 2021.
The appellate authority held that proceedings, if otherwise permissible, were required to be initiated under Section 153C read with Section 153A of the Income-tax Act, 1961. Consequently, the notice issued under Section 148 and the reassessment order passed under Section 147 read with Section 144B were quashed.
The relief was granted on the jurisdictional issue. In its alternative examination of the merits, however, the authority observed that a donation receipt and payment through banking channels did not conclusively establish the genuineness of a political contribution when specific adverse search material existed.
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Background: ₹3 Lakh Donation Claimed Under Section 80GGC
The dispute concerned Assessment Year 2019-20. The taxpayer filed his income tax return on August 31, 2019, declaring a total income of ₹74,82,750 and claiming a deduction of ₹3 lakh under Section 80GGC for a contribution to Kisan Party of India, a registered unrecognised political party.
The donation receipt was dated February 22, 2019.
The Department subsequently received information arising from a search conducted on February 2, 2021, covering three registered unrecognised political parties, including Kisan Party of India, and two charitable organisations.
According to the investigation findings recounted in the appellate order, a party functionary admitted that donations received through banking channels were returned to donors in cash or through banking transactions after retaining a commission. The Department alleged that funds were routed through intermediary entities under the guise of agricultural purchases.
The investigation material also referred to an Excel file named “80G” found on an intermediary’s laptop. The information extracted from the seized data specifically identified the taxpayer by name, PAN, financial year and the donation amount of ₹3 lakh.
Assessing Officer Treated Donation As An Accommodation Entry
A notice under Section 148A(b) was issued on March 29, 2023. After considering the taxpayer’s response, the jurisdictional Assessing Officer passed an order under Section 148A(d) and issued a notice under Section 148 on April 26, 2023.
The taxpayer maintained that the contribution was genuine, had been made from salary income and was supported by a donation receipt and bank statement. He denied receiving money back or paying any commission.
The Assessing Officer rejected the explanation and treated the donation as an accommodation entry. By an assessment order dated January 6, 2025, the officer disallowed the ₹3 lakh deduction and assessed total income at ₹77,82,750.
Separate penalty proceedings under Section 270A were also initiated for alleged under-reporting of income in consequence of misreporting.
Taxpayer Argued That Section 153C Was The Applicable Route
Before the appellate authority, the taxpayer challenged both the validity of the reassessment and the disallowance.
The principal jurisdictional argument was that the reopening arose from material seized during a search conducted on February 2, 2021. Since the search preceded April 1, 2021, the taxpayer contended that the Department was required to follow Section 153C read with Section 153A.
The taxpayer relied on the second proviso to Section 149(1), which excluded the application of that subsection where a notice under Section 153A, or Section 153C read with Section 153A, was required in relation to a search initiated on or before March 31, 2021.
Seized Data Had A Direct Bearing On Taxpayer’s Income
Accepting this contention, the CIT(A) distinguished the case from one involving only general investigation information.
The authority noted that the Department’s own material identified the taxpayer, the relevant year and the exact donation amount in an electronic record described as seized data. The Department relied on that entry as having a bearing on the taxpayer’s taxable income.
These features, the authority held, attracted the substantive jurisdictional requirements of Section 153C.
The order further explained that circulating the search-derived information through the Department’s Risk Management Strategy did not change the original character of the material or justify bypassing the special statutory procedure.
The absence of the satisfaction note or original electronic file from the appeal record could not validate recourse to Section 148 when the Assessing Officer’s own foundation expressly rested on taxpayer-specific seized material.
Reassessment Notice And Assessment Order Quashed
Relying on the Rajasthan High Court decision in Tirupati Construction Company v. ITO, as discussed in the order, the appellate authority held that the special search assessment route applied to the facts.
Since the search had been initiated before April 1, 2021, and the reopening was founded on taxpayer-specific information contained in seized data, proceedings were required to be taken, if otherwise permissible, under Section 153C read with Section 153A.
Recourse to Section 148 was therefore barred by the second proviso to Section 149(1), the authority held.
It accordingly quashed the Section 148 notice dated April 26, 2023, and the consequential reassessment order dated January 6, 2025.
Limitation And Sanction Objections Were Rejected
The taxpayer did not succeed on every jurisdictional objection.
The CIT(A) rejected the argument that the March 29, 2023 notice merely initiated an enquiry without disclosing information suggesting escaped income. It found that the notice and its attachments contained specific information connecting the taxpayer’s donation with the search findings.
The authority also rejected the limitation objection. Although the ordinary three-year period for AY 2019-20 expired on March 31, 2023, it held that the time allowed for responding to the Section 148A(b) notice had to be excluded under the statutory provisos.
On the computation adopted in the order, the limitation period extended to April 27, 2023. The notice issued on April 26, 2023 was therefore within that extended period, and the ₹50 lakh threshold applicable to the longer reopening window was not attracted.
The authority also upheld approval by the Principal Commissioner of Income Tax, Ahmedabad-1. It treated references in the approval papers to ₹6 lakh instead of ₹3 lakh, and to a different limitation clause, as clerical inconsistencies insufficient to invalidate the approval in the circumstances.
The reassessment ultimately failed because the Department had adopted the wrong statutory route for acting on the seized material.
Bank Payment And Receipt Not Conclusive Proof Of Genuine Donation
Although the reassessment had been quashed, the CIT(A) examined the merits in the alternative.
It observed that Section 80GGC contemplates a genuine contribution. A transaction involving the return of money to the donor after retention of commission would not constitute a contribution in substance.
The donation receipt and bank statement established the apparent payment and its banking mode. According to the authority, they did not, by themselves, conclusively establish that an equivalent amount had not been returned outside the recorded banking channel.
The authority placed weight on the taxpayer-specific entry in the seized electronic data, read together with the statement describing the alleged accommodation-entry mechanism.
It also noted the absence of satisfactory independent evidence addressing those adverse circumstances. The order nevertheless clarified that the investigation findings did not establish an inflexible rule requiring disallowance of every payment to Kisan Party of India.
These observations remained alternative findings. They did not preserve the ₹3 lakh disallowance after the reassessment itself had been quashed.
Cross-Examination Objection Examined
The taxpayer also objected to reliance on third-party statements without complete disclosure or an opportunity for cross-examination.
The CIT(A) acknowledged the principle that denial of a specifically requested opportunity to cross-examine witnesses can constitute a serious violation of natural justice.
On the record before it, however, the authority found that no specific request to cross-examine the persons concerned had been made during the assessment proceedings. It also noted that the adverse material included taxpayer-specific documentary information, rather than third-party statements alone.
The grounds concerning the deduction and cross-examination were ultimately treated as academic because of the jurisdictional ruling.
Interest To Be Recomputed; Penalty Challenge Premature
The CIT(A) directed the Assessing Officer to recompute interest, if any, under Sections 234B and 234C while giving effect to the appellate order. The additional tax liability arising from the impugned disallowance did not survive.
The challenge to initiation of penalty proceedings was dismissed as premature because no penalty had been imposed through the assessment order under appeal. The authority stated that the effect of quashing the reassessment would necessarily have to be considered in consequential proceedings.
The appeal against the reassessment order was allowed.
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