Case Law Details
Delhi HC helkd that, All India Congress Committee (AICC) and Indian National Congres (INC) Delhi are not eligible to claim exemption u/s 13A of Income Tax Act for AY 1994-95 & 1995-96. The Court further holds that voluntary contributions received by political parties cannot be equated with corpus donation or capital receipts.
The present appeals under Section 260A of the Act are directed against an order dated 9th April 2001 of the Income Tax Appellate Tribunal (‘ITAT’) in ITA Nos. 4181/Del/98 and 5100/Del/98 for AY 1994-95. While ITA No. 145 of 2001 is by the Revenue, ITA No. 180 of 2001 is by the Assessee, INC, a political party registered as such under Section 29A of the Representation of People Act, 1951 (‘RP Act’).
The central issue in these appeals involves the interpretation of the words ‘income by way of voluntary contributions received by a political party’occurring in Section 13A of the Act. The ITAT by its impugned order held that the accounts of the Assessee for the AY 1994-95 were incomplete and therefore, the exemption under Section 13A of the Act was not available to it. At the same time, the ITAT held that the Assessing Officer (‘AO’) could not invoke the provisions of Sections 144 and 145 of the Act to estimate the quantum of income earned by the Assessee by way of voluntary contributions. Accordingly, the matter was remanded to the AO with the direction to the AO that he should undertake afresh the exercise of computing the taxable income of the Assessee.
By this judgment, the Court holds that the INC was not entitled to claim exemption from paying income tax for AY 1994-95 since it failed to maintain properly audited accounts for the said AY, thereby not fulfilling the mandatory condition for claiming such exemption under the proviso to Section 13A of the Act.
Relevant facts
The facts relevant to the present appeals are that the Assessee INC is a political party registered under the RP Act and satisfies the description of a ‘political party’ for the purpose of Section 1 3A of the Act.
The Assessee was initially not filing its annual returns of income in terms of Section 139 (4B) of the Act which was introduced by the Taxation Laws (Amendment) Act, 1978 with effect from 1st April 1979. This was simultaneous with the insertion of Section 1 3A of the Act.
In terms of Section 13A of the Act, income under the following heads were exempt from tax as far as political parties were concerned:
(a) income from house property
(b) income from other sources
(c) capital gains
(d) any income by way of voluntary contribution received by a political party.
However, in order to avail of such exemption a political party has to fulfil the conditions detailed in clauses (a), (b) and (c) of the proviso to Section 1 3A. A political party has to:
(a) keep and maintain such books of accounts and other documents as would enable the AO to properly deduce its income therefrom,
(b) in respect of each voluntary contribution in excess of Rs. 10,000 keep and maintain a record of such contribution and the name and address of the person who has made such contribution;
(c) have its accounts audited by an Accountant as defined in the Explanation below Section 288 (2) of the Act.
A further proviso to Section 13A was inserted by the Taxation Laws Amendment Act, 2003 (Act 46 of 2003) which stated that on failure by a political party to submit a report under Section 29C (3) of the RP Act for a financial year to the Election Commission of India , no exemption under Section 13A would be available to it for such financial year.
HELD BY DELHI HIGH COURT (SUMMARY)
(i) For understanding and interpreting Section 13A of the Act, it would serve no purpose to compare it with Section 11 of the Act which applies to Trusts.
(ii) Section 1 3A of the Act is not a computation section. Income by way of voluntary contributions would be excluded only subject to fulfilment of the conditions stipulated under Section 1 3A of the Act.
(iii) It could never have been the legislative intention that voluntary contributions received by a political party that does not satisfy the requirement of Section 13A of the Act – viz., maintaining books of accounts, keeping a record of voluntary contributions in excess of Rs. 10,000 (now enhanced to Rs. 20,000) and getting the accounts audited – would be exempt from tax. In such event, the income of a political party by way of voluntary contributions would be included in the taxable income. Voluntary contributions are not capital receipts.
(iv) Clause F of Section 14 of the Act is a residuary provision. An income which is not to be excluded from the total income and is not chargeable to income tax under heads A to E, has to be treated as ‘income from other sources’. If the total income by way of voluntary contributions of a political party cannot be excluded from its total income because such political party has not complied with any of the conditions in the proviso to Section 13A of the Act, then by virtue of Section 56(1) of the Act, such income by way of voluntary contribution would be ‘income from other sources’ under Section 56(1) of the Act.
(v) The mere fact that income by way of voluntary contribution of a political party is not deemed to be income under Section 2(24)(iia) of the Act, does not place it outside the purview of ‘income from other sources.’
(vi) Donations to a political party may be made for a variety of reasons and is an act of participation in a democracy. The known tests for determining ‘income are, therefore, inadequate for determining whether the voluntary contribution in the hands of a political party is in fact ‘income’.
(vii) The requirement of maintaining audited accounts and furnishing those accounts in terms of the proviso to Section 13A of the Act is not merely directory.
(viii) It is with a view to placing a check on the financial transactions of political parties that the proviso to Section 13A was enacted. In this context, the object of Section 13A of the Act will be defeated if the requirements of the proviso thereto are held not to be mandatory.
(ix) The conditionality attached to Section 13A must be strictly construed. If a political party seeks exemption from payment of income tax in a given AY, it is incumbent on the political party to strictly comply with each of the requirements in the proviso to Section 1 3A. At the highest, the compliance has to be by the time the assessment is completed but certainly not thereafter.
(x) The INC failed to demonstrate sufficient cause in terms of Rule 46A(1)(b) and 46A(1)(c) of the Rules. The CIT(A) was correct in holding, and the ITAT in affirming, that the INC failed to make out a case for tendering additional evidence in the form of the consolidated audited accounts at the appellate stage.
(xi) The final audited accounts tendered at the appellate stage contained various discrepancies and shortcomings. The auditor’s report submitted before the CIT (A) on 4th November 1997 is woefully short of the requirement of the law.
(xii) Since the INC failed to place before the AO, or even before the CIT (A), acceptable audited accounts, from which the AO could deduce the taxable income of the assessee, the mandatory requirement of the proviso to Section 13A of the Act was not fulfilled by the INC.
(xiii) With the Revenue having preferred an appeal before this Court against the impugned order of the ITAT, all further proceedings consequent upon the remand to the AO were subject to the outcome of the present appeal. It is, therefore, to no avail as far as the INC is concerned, that in the remand proceedings the AO relied on the audited accounts submitted by the INC at the appellate stage.
(xiv) The rule of consistency cannot be applied to condone the violation of the law by the INC.
(xv) There is no basis indicated by the AO for estimating the figure of voluntary contributions received by the state units during AY 1994-95 at Rs 15 crores and therefore the above estimation cannot be sustained. However, it would be futile to remand the matter to the AO for such estimation as the submitted accounts are not reliable and it is not possible to even reasonably guess what could be the contribution to a political party in a given year because of the variety of factors involved.
(xvi) The expenditure claimed by the INC as LII atable to ‘inI oReIfLoR otheL HouLI es’ is disallowed. On the receipts side, the Revenue will simply have to go by whatever is disclosed by the INC as income by way of voluntary contributions in the return as originally filed and treat that as income from other sources. Consequently, the decision of the CIT (A) and the ITAT restricting the expenditure of the INC to 60% of the amount claimed are set aside.
(xvii) Subsequent to the decision of the Supreme Court in Commissioner of Income Tax v. Bhagat Construction Co. Pvt. Ltd. [2015] 279 CTR 185 (SC) interest can be charged on the tax amount due under Sections 234A and 234B of the Act, even if the same was not separately dealt with in the assessment order. The decision of the ITAT on this aspect is set aside.
Answers to the questions in the Revenue’s appeal
The Court answers the questions framed by the order dated 3rd January 2002 in ITA 145/200 1 as under:
Question No.1 is answered by holding that the Assessee INC was not entitled to any exemption in respect of the disclosed income by way of voluntary contributions i.e., Rs.25,12,68,081-Rs.15,00,00,000 (the latter amount being the estimate by the AO which has been set aside by this Court).
Question No.2 is answered in the negative by holding that the ITAT was not justified in restricting the estimate of income to the figure disclosed by the INC in the books of accounts produced by it.
Question No.3 is answered by holding that the ITAT was not justified in holding that the objects of a political party fall within the scope of the expression any other object of general public utility appearing in Section 2(15) of the Act.
Question No.4 is answered by holding that ITAT was not justified in deleting the interest charged under Section 234A and 234B of the Act.
Question No.5 (framed as Question No. 3A on 12th November 2014) is answered by holding that voluntary contributions received by a political party is in terms of Section 2(24) of the Act read with Section 14(F) and Section 56(1) of the Act taxable as ‘income from other sources’. The corresponding expenditure incurred by a political party for attaining aims and objects of the party cannot be allowed as a deduction since it is not provided under Section 57 of the Act except to the extent that a political party is able to demonstrate that it is able to claim a deduction under Section 57(iii) of the Act. However any such expenditure can be allowed as a deduction, only if the conditions of the first proviso to Section 1 3A of the Act are cumulatively satisfied by the political party.
Question No. 6 (framed on 8th December 2015) is answered by holding that when the voluntary contributions received by a political party does not satisfy the requirement of Section 13A of the Act – viz., maintaining books of accounts, keeping a record of voluntary contributions in excess of Rs. 10,000 and getting the accounts audited, such voluntary contributions would be included in the taxable income under the head 3LnpF IP f LI IUotP LI sourpesU
Answers to the questions in the Assessee ‘s appeal
Now the Court proceeds to answer the questions that have been framed in ITA 180/2001 by the order dated 8th December 2015:
Question No.1 is answered in the affirmative by holding that the ITAT was correct in law in holding that the audited accounts filed by the INC
before the CIT (A) could not be accepted as evidence since they were not audited till the assessment was framed and, therefore, the INC was not entitled to exemption under Section 1 3A of the Act.
Question No.2 is answered in the affirmative by holding that the ITAT was justified in denying exemption to the INC under Section 1 3A of the Act and refusing to condone the delay that had occurred in the audit of some of the state units.
Question No.3 is answered in the affirmative by holding that the ITAT was right in its conclusion that the INC failed to fulfil the three conditions envisaged under clauses (a), (b) and (c) of Section 1 3A of the Act.
The impugned order dated 9th April 2001 of the ITAT in ITA Nos. 4181/Del/98 and 5100/Del/98 for AY 1994-95 and the corresponding order dated 31st March 1997 of the AO and the order dated 8th July 1998 of the CIT (A) shall stand modified in terms of this judgment. It is clarified that the inasmuch as this Court has set aside the impugned order of the ITAT to the extent it has remanded the proceedings to the AO, the orders passed on remand by the AO, the CIT (A) and the ITAT do not survive.
The appeals of the INC and the Revenue are disposed of in the above terms. There shall be no order as to costs.
Postscript
This case demonstrates the need for a slew of legislative measures that need to be put in place for an effective check on the influence of money on the electoral process. Recently in Ashok Shankarrao Chavan v. Madhavrao Kinhalkar (2014)7 SCC 99 the Supreme Court observed:
“48. It is common knowledge as is widely published in the Press and Media that nowadays in public elections payment of cash to the electorate is rampant and the Election Commission finds it extremely difficult to control such a menace. There is no truthfulness in the attitude and actions of the contesting candidates in sticking to the requirement of law, in particular to Section 77 and there is every attempt being made to violate the restrictions imposed in the matter of incurring election expenses with a view to woo the electorate concerned and thereby, gaining their votes in their favour by corrupt means viz by purchasing the votes…”
In its 255th Report on ‘Electoral Reforms’ submitted in March 2015 the LCI has suggested several changes to the RP Act, the Companies Act 1956 as well as the Act. Among the significant changes suggested is that “only up to Rs. twenty crore or twenty per cent of the total contribution of a olitic p ty’s entire col ction (whet er cash/cheque), whichever is lesser, can be anonymous. Apart from this, the details and amounts of all donations and donors (including PAN cards, wherever applicable) need to be disclosed by political parties, regardless of their source or amount.” The other significant recommendations are that (i) each recognised political party should maintain accounts clearly and fully disclosing all the amounts received and the expenditure incurred by them (ii) have the accounts audited by a qualified and practicing chartered accountant from a panel of such accountants maintained by the Comptroller and Auditor General of India (iii) within six months of the close of each financial year submit accounts to the ECI which shall in turn make them publicly available on its website and for inspection on the payment of a prescribed fee.
Considering that political parties are an essential part of our democracy and are dealing in large sums of public money, much of which is unaccounted, the proper auditing of the accounts of the political parties is both imperative critical to the conduct of free and fair elections. The above recommendations of the LCI should receive serious and urgent attention at the hands of the executive and the legislature if money power should not be allowed to distort the conduct of free and fair elections. This will in turn infuse transparency and accountability into the functioning of the political parties thereby strengthening and deepening democracy.
