In a recent judgment, the Delhi High Court has held that Indian National Congress Party (INC) (I) not entitled to exemption u/s 13A of the Income tax Act, 1961 for AY 1994-95 being failed to fulfil the three conditions of keeping books of accounts, maintaining records of voluntary contributions in excess of twenty thousand and audit by chartered accountant,
Commissioner of Income tax vs. Indian National Congress (I)/All India Congress Committee
ITA 145/2001, ITA 180/2001
Coram: Justice S. Muralidhar, Justice Vibhu Bakhru
Date of Judgment: 23/03/2016
Summary of the conclusions:
(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 13A 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 13A 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 13A. 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 4 th 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 relatable to ‘income from other sources’ 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.  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
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 13A 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 “income from other sources”
Answers to the questions in the Assessee’s appeal:
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 13A 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 13A 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 13A of the Act.
The Court also commented that this case demonstrated the need for legislative measures for an effective check on the influence of money on the electoral process. In the words of the Court,
“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 political party’s entire collection (whether 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.”