ITAT Mumbai Clears Real Estate Developer of Fraud Allegations, Allows ₹1.79 Crore Tax Deduction

In a significant ruling with implications for corporate taxpayers and the real estate sector, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has granted major relief to Aakash Value Realty Pvt. Ltd., holding that a real estate developer cannot be denied a legitimate tax deduction merely on the basis of alleged fraud at the level of a recipient institution, in the absence of any evidence of the developer’s involvement.

The Tribunal allowed the developer’s appeal and deleted a disallowance of ₹1.79 crore made under Section 35(1)(ii) of the Income-tax Act, rejecting the tax department’s attempt to link the assessee to alleged financial irregularities involving a charitable research trust.

Background of the Case

The case pertains to Assessment Year 2016–17, where Aakash Value Realty Pvt. Ltd., a Mumbai-based real estate company engaged in construction and property development, had claimed a weighted deduction of ₹1,79,37,500 for donations made to Vivekananda Yoga Anusandhana Samsthana (VYASA), a well-known scientific research institution approved under Section 35(1)(ii).

The company had donated ₹1 crore on March 31, 2016, and ₹2.5 lakh on November 18, 2015, and claimed the statutory deduction available for donations made towards approved scientific research institutions.

Reassessment Triggered by Alleged Fraud

The Income Tax Department reopened the assessment under Section 147, citing information received from the office of the ACIT (Exemptions), Coimbatore, alleging that:

An employee of VYASA had opened an unauthorised Axis Bank account in Hyderabad
Donations were allegedly received through this account
Funds were purportedly diverted for personal benefit, without the knowledge of the trust
Receipts issued through the said account were therefore not genuine

On this basis, the Assessing Officer disallowed the entire deduction and initiated penalty proceedings, holding that the assessee failed to prove actual utilisation of funds for scientific research.

The disallowance was subsequently upheld by the Commissioner of Income Tax (Appeals)-47, Mumbai, who relied on the principle that “fraud vitiates all.”

ITAT’s Findings

A bench comprising Shri Amit Shukla (Judicial Member) and Shri Makarand Vasant Mahadeokar (Accountant Member) rejected the department’s stand, observing that the entire case against the developer was based on suspicion and third-party allegations, with no evidence linking the assessee to any fraudulent activity.

The Tribunal noted that:

The donations were made through regular banking channels
The amounts were debited from the assessee’s bank account
Valid donation receipts and approval notifications under Section 35(1)(ii) were furnished
The trust’s approval under the Act was valid at the time of donation

Crucially, the Tribunal pointed out that no material was produced to show that the assessee’s donation was credited to the disputed bank account, or that any amount was returned to the assessee in cash or otherwise.

Donor Not Responsible for Donee’s Internal Misconduct

The ITAT clarified that Section 35(1)(ii) does not impose an obligation on the donor to prove end-use of funds, and that once payment to an approved institution is established, the statutory conditions stand fulfilled.

It held that:

“A donor cannot be penalised for internal irregularities or misconduct at the level of the donee institution unless there is cogent evidence of complicity, knowledge, or benefit.”

The Tribunal also distinguished earlier rulings relied upon by the tax department, noting that those cases involved clear findings of organised fraud and round-tripping, which were entirely absent in the present matter.

Final Verdict

Holding that the disallowance was based on conjecture rather than evidence, the ITAT set aside the orders of the lower authorities and allowed the appeal in full.

The order was pronounced on January 22, 2026, in ITA No. 2560/Mum/2025.