Donation to Political Parties: Legal Framework & Tax Implications

Summary: Donating to political parties in India is common, particularly among salaried individuals, with provisions in the Income Tax Act allowing deductions under Sections 80GGB and 80GGC. Section 80GGB applies to Indian companies, allowing deductions for donations made to political parties registered under Section 29A of the Representation of the People Act, 1951. Section 80GGC covers individuals and other entities, excluding government-funded bodies, and offers similar deductions. However, donations must be non-cash and properly documented to qualify. The rise of fraudulent practices involving donations to Registered Unrecognised Political Parties (RUPPs) has led to increased scrutiny by tax authorities. Bogus donations are identified through investigations, with the possibility of penalties under Sections 68, 69, and 148 of the Income Tax Act for unexplained credits or investments. Recent judicial rulings emphasize the importance of transparency and proper documentation in claiming tax deductions for political donations. Taxpayers must carefully evaluate reassessment notices and consider options such as surrendering deductions, filing appeals, or opting for amnesty schemes to manage potential liabilities. Understanding the legal framework is crucial for compliance and minimizing risks.

Donations to political parties in India are common practice, especially  amongs salaried persons. There are specific provisions for deductibility of donations are available in Income tax Act.

However, misuse of these provisions, particularly through donations to Registered Unrecognised Political Parties (RUPPs) has generated significant verification by tax authorities.

In this article we explores legal framework nearby political donations, identifying  issues connected and associated with term bogus donation (AS called by Officials )

Let us summarise about Political Donations and its Deductibility under income tax act.

Under income tax act there are two provisions available i.e. Sections 80GGB and 80GGC of the I.T Act :

Section 80GGB:  This section applies specifically to Indian companies.

It allows  deduction for donations made to political parties and whole amount of the donation is deductible from  company’s taxable income associated with below mentioned conditions

The donation must be made to a political party registeredct  u/s. 29A of the Representation of the People Act, 1951.

 Section 80GGC: This section is widen in scope, applying to individuals, HUFs, firms, and other entities, except local authorities and artificial juridical persons wholly or partly funded by government.

Deduction: Similar to Section 80GGB, the full amount of the donation is deductible.

Condition: The donation must be made to  registered political party as defined u/s. 29A of the Representation of the People Act, 1951. Both recognized and unrecognized political parties are eligible.

Important Notes:

 No Cash Donations: No deduction  available for donations made in cash. The payment must be made by mode other than cash, such as a cheque, bank draft, or electronic means.

Documentation: Proper receipts from  political party are essential to claim the deduction. The receipt should include name, address, PAN of the party, and  details of the donation.

2. Identifying Bogus Donations

Registered Unrecognised Political Parties (RUPP):  These are political parties registered u/s. 29A of Representation of the People Act, 1951, but they haven’t secured adequate votes in elections to be recognized as state or national parties.

Issues: Due to their less important known status, RUPPs have been used in fraudulent schemes where bogus donations are made to claim undue tax deductions.

Action Taken by Income Tax Authorities:

Recent Investigations: The Income Tax Department has conducted searches on several RUPPs, finding fraudulent donation schemes. In one such operation involving 23 RUPPs, authorities found bogus intermediaries issuing fake donation receipts, indicating systematic abuse of the tax provisions.

Charging Evidence: forged donation receipts, WhatsApp chats, and other records were found, pointing to the creation of fake donations purely for tax evasion purposes.

3. Legal Framework and Section 68 of the Income Tax Act Unexplained Cash Credits:

Overview: This section applies when an assessee receives money, and source of the money cannot be satisfactorily explained.

Implication:    If a taxpayer claims to have received a donation but cannot explain the source or prove the genuineness of the transaction, the amount may be added to the taxpayer’s income as unexplained cash credits.

 Penalty: U/S. 271(1)(c), a penalty for concealment of income can be imposed, which ranges from 100% to 300% of the tax on the concealed income.

Section 69 of the Income Tax Act  Unexplained Investments:

Overview: This section is invoked when an investment is made, and  taxpayer cannot explain the source of the funds.

Implication: If  donation appears as an unexplained investment, the amount can be added to the taxpayer’s income.

Penalty:  Section 68, penalties u/s. 271(1)(c) can apply, ranging from 100% to 300% of the tax on the income deemed to be unexplained.

Section 148 of the Income Tax Act  Reopening of Assessments:

Overview: This section empowers the  Officer (AO) to reopen  previously completed assessment if there is reason to believe that income has escaped assessment.

 Application: If  AO suspects that a taxpayer has claimed  deduction for bogus donation, they can issue a notice u/s. 148 to reassess the taxpayer’s income.

 Time Limit: The notice can naturally be issued within four years from the end of the relevant assessment year. However, if the amount involved exceeds ₹50 lakhs, this period can extend up to six years, and in some cases, ten years.

Penalties: If the reassessment leads to additional tax liabilities, penalties for concealment of income under Section 271(1)(c) may also apply.

Section 151 of the Income Tax Act  Sanction for Reassessment:

 Overview: For issuing a notice u/s.148, prior approval from higher authority is required. This section ensures that the reassessment is not done illogically.

 Importance: If the sanction is given mechanically, without proper application of mind, the reassessment notice can be challenged as invalid.

Judicial Precedent: Courts have struck down reassessment notices where it was found that the higher authority granted approval without properly reviewing the facts.

4. Options for Taxpayers Facing Reassessment

Countering to Reassessment Notices:

 Evaluate the Notice:    Taxpayers should warily review the reasons provided in the notice u/s. 148. If reasons seem unclear or lack substantive evidence, the notice can be challenged.

 File a Reply: Within the specific time (i.e. 30 days), the taxpayer should file a detailed reply, addressing the issues raised in the notice.

There Many options Available for Taxpayer

1. Surrendering the Deduction:

Action: The taxpayer can choose to surrender  deduction claimed under Section 80GGB or 80GGC, accepting the tax liability.

Financial Impact:  Paying the additional tax along with interest under Section 234B (for underestimation of advance tax) and Section 234C (for deferment of advance tax).

Penalty: A penalty under Section 270A for underreporting of income may apply, which could be 50% of the tax on the underreported income.

2. Filing an Appeal:

Action: If the taxpayer believes the reassessment is unjustified, they can file an appeal before the Commissioner of Income Tax (Appeals).

Procedure: The appeal must be filed within 30 days of receiving the reassessment order. During  appeal process, penalties may not be immediately enforced until a final decision is made.

3. Amnesty Schemes:

Vivad se Vishwas Scheme (VSVS):

Overview: This scheme was introduced by  government to reduce proceedings. Taxpayers can resolve their disputes by paying  specified amount of tax, with waivers on penalties and interest.

Eligibility: Taxpayers with pending disputes as of a specific date can choose for this scheme. It provides  opportunity to resolve tax disputes with minimal financial impact.

Future Schemes: Taxpayers should remain informed about any new amnesty schemes that might be introduced, which could offer relief for those with pending reassessments.

Recent case Laws and Judicial Judgments on Donations to Political Party

CIT v. Shree G. Selva Kumari (2022) 139 taxmann.com 460 (Madras HC)

Summary:

The case turn around around  issue of bogus donations to  trust and  consequent denial of deductions u/s. 80G of the I.T act. The Madras High Court ruled that if  donee trust fails to validate the donations with proper records, the donor’s claim for deduction can be disallowed.

Facts of the Case:

Section 80G of the Income Tax Act, which allows deductions for donations to certain funds and charitable institutions. The authenticity of donation was questioned by  I.T authorities, leading to  investigation.

Interpretation by the I.T Officer

The Officer questioned the genuineness of  donation, highlighting disagreement in the documentation provided by  assessee. By investigation, the ITO found that  donee trust could not provide adequate proof of the donation’s receipt, direct doubt on the legality of the claim. The ITO thus disallowed the deduction u/s. 80G and proposed additional tax liability on  assessee.

Interpretation  by the Commissioner of I.T

The CIT upheld the ITO’s decision, agreeing that  burden of proof lay with  assessee to establish the authenticity of the donation. The CIT emphasize that without proper evidence, such as valid receipts and bank statements proving the donation, the claim u/s.80G could not be allowed.  also noted that  donee trust’s failure to maintain proper records further authenticate the ITO’s findings.

Tribunal’s View:

The Tribunal analysis the facts and upheld t findings of the lower authorities.  Tribunal noted that while  assessee provided certain documents, they were inadequate to establish  bona fide nature of  donation.

Tribunal repeated that in cases involving large sums, the assessee must ensure that all documentation is clear, unmistakable, and supports  claim for deduction.

Judicial Judgment :

The Madras High Court dismissed the assessee’s appeal, confirming the decisions of the lower authorities. The Court held that the deduction u/s. 80G is not regular and must be verified  by proper evidence from both  donor and donee. The judgment emphasized  importance of clearness and thorough documentation in claiming tax deductions for donations, warning against the acceptance of doubtful claims.

ACIT v. Armee Infotech (2022) 136 taxmann.com 128 (Ahmedabad – Trib.)

Summary:

The Tribunal addressed the issue of whether the donation claimed by the assessee was genuine. The Tribunal emphasized the necessity for proper evidence and documentation to substantiate such claims. It was ruled that tax authorities must provide concrete evidence proving that the donation is bogus before making any additions to the assessee’s income.

Explanation by the Income Tax Officer (ITO):

The ITO questioned the legality of  donation based on inconsistency in the documentation provided. It was observed that there was  lack of substantial evidence to support  claim, leading the ITO to propose addition to income on account of a bogus donation.

Analysis by the Commissioner of Income:

The CIT supported the ITO’s view, affirming  that the burden of proof lies with the assessee to prove the authenticity of  donation. CIT emphasized that without convincing evidence, such as valid receipts and authority documents, the claim for donation cannot be accepted.

Tribunal’s View:

The Tribunal critically reviewed the evidence provided by assessee and the arguments made by the tax authorities. The Tribunal ruled that  authorities failed to provide concrete evidence that the donation was bogus. The Tribunal emphasized the need for the tax department to present solid proof before making any addition on account of suspected bogus donations.

 Judgment by Ahmedabad Tribunal:

The Tribunal ruled in favor of  assessee, stating that the addition made by  tax authorities was unnecessary due to the lack of considerable evidence. The judgment reinforced the principle that the burden of proving a donation as bogus lies with the tax authorities and cannot be assumed without sufficient evidence.

Indian National Congress  and the Institute of Social Welfare & Ors

Summary:

The Supreme Court ruled that the Election Commission does not have the authority to deregister  political party for non-compliance with registration conditions. This decision impacts how political parties are treated under tax laws, particularly in  context of donations and exemptions.

Facts of the Case:

• Parties Involved: Indian National Congress and the Institute of Social Welfare & Ors.
• Issue: Whether the Election Commission has the power to deregister  political party for weakening to fulfill with the conditions set forth during registration.
• Legal Section Involved: Provisions related to the registration and regulation of political parties under the illustration of the People Act.

Explanation by the Election Commission:

• The Election Commission firstly believed it had  power to deregister political parties if they failed to comply with the registration conditions.
• This included situations where parties did not stick to the financial and organizational clearness required under the law.

Analysis by the Court:

• The Supreme Court analyzed the scope of  Election Commission’s powers and  intent of  legislation governing political parties.
• The Court determined that  Election Commission’s role was to oversee elections and ensure compliance with the electoral process but did not extend to deregistering political parties.

 Judgment by Supreme Court:

• The Supreme Court ruled that the Election Commission cannot deregister  political party for non-compliance with registration conditions.
• The judgment make cleared  that political parties are independent entities, and their compliance with conditions is  matter to be dealt with by their internal governance, not the Election Commission.
• This ruling impacts the way political parties are treated under tax laws, as it reaffirms their status and continuity despite non-compliance issues.

Impact on Tax Laws:

• The decision affects how donations to political parties are treated under tax laws, particularly in terms of exemptions and deductions.
• It reinforces that donors and political parties continue to enjoy tax benefits unless specifically addressed by tax authorities.

2. LIC of India v. CIT (1997) 219 ITR 410 (SC)

Summary:

The Supreme Court established the ‘Doctrine of Impossibility,’ stating that donors cannot be held responsible for how political parties utilize donated funds after the donation is made. This ruling emphasizes that once  donation is fulfilled, the donor’s obligations end, and the liability shifts to the recipient.

Facts of the Case:

• Issue: Whether donors can be held accountable for utilization of funds by political parties post-donation.

• Section Involved: Provisions related to the accountability and responsibility of donors under tax laws.

Explanation by the Income Tax Department:

• The Income Tax Department argued that donors should ensure that their donations are used for the intended purposes.
• They proposed holding donors responsible if political parties misused the funds, thereby denying tax exemptions or deductions.

Analysis by the Court:

• The Supreme Court analyzed the concept of donor accountability in  context of tax laws and the practical implications of such  responsibility.
• The Court introduced the ‘Doctrine of Impossibility,’ recognizing that it is irrational to expect donors to track  utilization of funds once the donation is made.

Judgment by Supreme Court:

• The SC  ruled that donors cannot be held accountable for  post-donation utilization of funds by political parties.
• The judgment emphasizes that once  donation is completed, the donor’s role ends, and  responsibility for fund utilization lies exclusively with the recipient.
• This ruling safeguards donors from potential tax liabilities arising from the actions of  donees.

Impact on Tax Laws:

• The ruling has a significant impact on how donations to political parties are treated under tax laws.
• It provides donors with clarity and protection, ensuring that they are not penalized for actions beyond their control.

3. Andaman Timber Industries v. CCE (2015) 281 CTR 241 (SC)

Summary:

The Supreme Court held that reject  taxpayer the right to cross-examine witnesses used to establish a tax demand is a serious violation of natural justice. This ruling emphasize importance of fair procedure in tax assessments and the taxpayer’s right to defend against assertion.

Facts of the Case:

• Issue: Whether the denial of right to cross-examine witnesses by  tax authorities constituted  violation of natural justice.

• Section Involved: Provisions related to the conduct of tax assessments and  rights of taxpayers under  principles of natural justice.

Explanation by the Tax Authorities:

• The tax authorities relied on witness statements to establish a tax demand against Andaman Timber Industries.
• Though, the assessee was not allowed to cross-examine these witnesses, raising concerns about the fairness of  proceedings.

Analysis by the Court:

• The SC examined the principles of natural justice and  right to  fair hearing in tax proceedings.
• The Court found that denying the assessee  opportunity to cross-examine witnesses compromised the fairness of  assessment process.

 Judgment by Supreme Court:

• The Supreme Court ruled in favor of Andaman Timber Industries, stating that rejection of the right to cross-examine witnesses is a serious violation of natural justice.
• The judgment emphasized that fair procedure is basic in tax assessments, and taxpayers must be allowed to challenge  evidence presented against them.
• The Court set aside the tax demand, highlighting the necessity for clearness and justice in tax proceedings.

Impact on Tax Laws:

• This ruling strengthen importance of adhering to principles of natural justice in tax assessments.
• It provides taxpayers with  stronger position to challenge assessments where practical fairness has been compromised.

Benchmark Case Laws

1. McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC)

• • Summary: The Supreme Court in this landmark judgment laid down the principle that while tax planning is legal, tax avoidance through colorable devices is not permissible. The Court ruled that transactions intended solely for the purpose of tax evasion, without any commercial substance, can be disregarded by tax authorities.
  • Relevance: This case is often cited as a benchmark in cases where donations or other transactions are suspected to be a means of tax evasion rather than genuine contributions.

2. CIT v. Durga Prasad More (1971) 82 ITR 540 (SC)

• • Summary: The Supreme Court in this case established that the tax authorities are not bound to accept the apparent and can probe deeper into the substance of a transaction. The Court emphasized that it is the duty of the tax authorities to consider the reality of the transaction.
  • Relevance: This benchmark case is crucial in situations where the genuineness of a transaction, including donations, is under scrutiny. It supports the argument that tax authorities can look beyond the surface to determine the true nature of a transaction.

3. Sumati Dayal v. CIT (1995) 214 ITR 801 (SC)

• • Summary: In this case, the Supreme Court ruled that the apparent transaction can be disregarded if it does not match the surrounding circumstances and human probabilities. The Court held that the reality of the transaction must prevail over its apparent form.
  • Relevance: This case is a benchmark in cases involving bogus transactions, including donations. It provides legal backing for tax authorities to reject claims that appear too good to be true based on circumstantial evidence.

4. CIT v. P. Mohankala (2007) 291 ITR 278 (SC)

• • Summary: The Supreme Court held that when an assessee fails to satisfactorily explain the nature and source of cash credits, the revenue authorities are justified in treating it as undisclosed income under Section 68.
  • Relevance: This is a benchmark case in matters of unexplained cash credits, including situations where donations are involved. It emphasizes the need for assessees to provide a satisfactory explanation for any credits or donations claimed.

Conclusion:

Political donations are  important  for both taxpayers and tax authorities. Understanding the legal framework, including Sections 80GGB, 80GGC, 68, 69, 148, and 151 of the Income Tax Act, is vital for navigating this complex landscape. Taxpayers must maintain correct documentation and be prepared to justify realness of their donations. In cases where reassessment notices are issued, evaluating  options carefully—whether to surrender  deduction, file an appeal, or choose for  amnesty scheme—is essential for minimizing potential liabilities.

By staying informed and seeking professional advice, taxpayers can effectively manage their tax obligations related to political donations, ensuring compliance with the law while protecting their financial interests.