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2017-02-06
As quoted by Finance Minister Shri Arun Jaitley in his speech, “India is the world's largest democracy. Political parties are an essential ingredient of a multi-party Parliamentary democracy” Noting that Political parties continue to receive most of their funds through anonymous donations which are shown in cash, he stated that “an effort, therefore, requires to be made to cleanse the system of political funding in India.” He therefore proposed a four-point plan of action to bring about greater transparency and accountability in political funding while preventing future generation of black money.|
Political Party – Definition over the periods
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‘Political party’ as defined by Explanation to Sec. 13A of the Income Tax Act, 1961 means a political party registered u/s 29A of the Representation of the People Act , 1951. This definition was substituted by Election and Other Related Laws (Amendment) Act, 2003 w.e.f September 11, 2003.
Prior to that, ‘political party’, was defined as "an association or body of individual citizens of India registered with the Election Commission of India as a political party under paragraph 3 of the Election Symbols (Reservation and Allotment) Order, 1968
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Introduction of Sec 13A
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It was in the year 1978, that Sec. 13A came to be inserted (by the Taxation Laws (Amendment) Act, 1978). It granted exemption to the political parties, subject to the fulfillment of all the conditions laid down in the proviso to Sec 13A, on incomes in the form of (i) Interest on securities (upto AY 1988-89), (ii) Income from house property, (iii) Income from other sources and (iv) income by way of voluntary contributions. Subsequently, with a retro amendment by Finance Act, 2003 w.e.f. April 1, 1979 wherein income under the head ‘Capital gains’ was also made eligible for exemption in the hands of a political party. Therefore, income derived from business activities alone is subjected to tax in the hands of a political party.
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Conditions to be fulfilled to be eligible to avail the exemption
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a) The political party keeps and maintains such books of account and other documents as would enable the AO to properly deduce its income therefrom;
b) in respect of each voluntary contributions in excess of twenty thousand rupees (this amount was ten thousand rupees till 10.09.2003), such political party keeps and maintains a record of such contribution along with the names and addresses of the persons who have it;
c) the accounts of such political party are audited by a Chartered Accountant;
d) The treasurer of political party or an authorized person submits a report under the Representation of the People Act , for each financial year (W.e.f Sept 11-09-2003)
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Additional conditions proposed byFinance Bill 2017w.e.f from April 1, 2018
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(i) No donations of Rs.2000 or more is received in cash (i.e. otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account or through electoral bonds);
(ii) Political party furnishes return in accordance with Sec. 139(4B) on or before the due date specified therein.
(iii) Further, in order to address the concern of anonymity of the donors, it is proposed to provide that the political parties shall not be required to furnish the name and address of the donors who contribute by way of electoral bond.
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Some Landmark Pronouncements over the years
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· Ruling out exemption u/s.13A for period prior to AY 1979-1980, Madras HC in Dravida Munnetra Kazhagam [TS-5669-HC-2002(MADRAS)-O]
· The Apex court had ruled on the importance of fulfilment of conditions to be able to avail the exemption u/s. 13A. In case of ‘Common Cause [TS-5053-SC-1996-O], the SC held that the political parties have to file the return of income and the Government of India should appoint an enquiring body to find out why the mandatory provisions of filing of return was not followed by the political parties and why no action was taken. This ruling has in effect, been confirmed by Finance Bill, 2017.
· It would be worth noting that deduction towards contribution to political parties by companies u/s. 80GGB is allowed only onnon-cash contributions. Deduction towards contribution by a company to a political party u/s. 80GGB was allowed only to the extent provided u/s. 293A of Companies Act, 1956 which restricts quantum of such contribution to 5% of average profits of three immediately preceding financial years of company by Pune ITAT in case of Rajdeep Marketing Pvt Ltd [TS-6312-ITAT-2014(PUNE)-O].
· Delhi HC had denied tax exemption to Indian National Congress (INC) [TS-5167-HC-2016(DELHI)-O], for AY 1994-95, for flouting audit report conditionality. Janata Party was similarly denied exemption for violating Sec. 13A conditions [TS-5169-HC-2016(DELHI)-O].
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