Political parties must maintain accounts of “voluntary donations”- Delhi HC

The Delhi High Court has passed a judgement that may go a long way towards electoral reforms. Justices S Murlidhar and Vibhu Bakhru yesterday ruled that political parties must maintain “properly audited accounts” of income received through voluntary contributions. Unless this

was done, the party would be prevented from claiming any exemption on paying income tax on these contributions.

Delivering a verdict in the income tax appeal against the Indian National Congress, the High Court held that the Income Tax Appellate Tribunal was correct in its decision to deny exemption to the Congress party under Section 13A of the Income Tax Act of 1961.

Section 13-A

Under this particular provision, income by way of voluntary contributions to a political party would not be taxed. However this exemption could only be availed if the party in question maintained a book of accounts with respect to these contributions. Furthermore, in contributions of ten thousand or more, the donor’s name and address would have to be recorded.

The case at hand is connected with the year 1995-96 when the IT Department first asked the Indian National Congress to furnish accounts, and list of donors. When the matter finally reached the ITAT, the tribunal held that,

“The Assessee did not fulfil the conditions (a), (b) and (c) under the proviso to Section 13A of the Act and, therefore, the AO was justified in not allowing exemption therein.”

In a 70-page verdict, the High Court observed that it could never have been the legislative intention that voluntary contributions received by a political party, without satisfying the requirement of Section 13A of the Act, would be exempt from tax.

It further goes on to say,

“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. 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.”

The tribunal also held that there was no violation of the principle of natural justice as sufficient opportunity was given to the assessee to produce the books of accounts and audited accounts. This particular order was challenged by the Congress party before the High Court.

General Observations

Besides adjudicating on the merits of the case and explaining the ambit of Section 13A, the Bench has also made some crucial observations on how there should be an effective check over the influence of money in electoral process.

It says,

“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.”

Stressing on the urgency of implementing the reforms suggested by the Law Commission, the Bench held that proper auditing of accounts of political parties is both imperative critical to the conduct of free and fair elections.

“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.”

The same Bench has also passed another judgment yesterday in a case involving the Janata Party.