Political funding: Janata Party asked to pay tax but what about the mainstream BJP and Congress parties

On 23rd March 2016, while disposing of the appeal CIT vs Janata Party-- a virtual one man party till it lasted of the irrepressible and doughty Subramanian Swami, now in the BJP---the Delhi High Court sustained the assessment order for the AY 1995-96 calling it upon to pay tax on about Rs 1 crore of voluntary contributions under the head “income from other sources”.


The assessing officer and other appellate forums found that the three conditions set out in section 13A of the Income-tax Act, 1961 were not complied with by Janata Party. The three conditions are:

 Maintenance of proper books of accounts and records from which proper income can be deducted;

 Keeping a record of identities of donors in excess of Rs 10,000 (hiked to Rs 20,000 from September 2003);

 Audit report on the accounts by a chartered accountant

In a stinging and ringing indictment of the regime of exemption for political parties, the Delhi High Court castigated both the party and its auditor for being remiss in compliance of the above conditions. The Janata Party pleaded that it had undergone six splits and was spread over the country so much so that it could not maintain a consolidated account of the voluntary contributions much less maintain serially numbered receipt books.

The party had explained away the entire donation of Rs 1 crore or thereabout as below Rs 10,000 each so as to duck the disclosure of the identity of the donors. The Court found the role of the auditor bordering on casualness. In the event, it said when the three conditions are not satisfied no exemption is on and the entire income is taxable as ‘income from other sources”.

Before examining the larger implications of the verdict, a few lines about the technical aspects of section 13A is in order. Are the three conditions applicable only to voluntary contributions or to all the four types of incomes that are exempt from tax for political parties---(a) income from house property (b) capital gains (c) income from other sources and (d) voluntary contributions or donations?

It seems the political class would rise as a phalanx and challenge this verdict just as they did with the ruling that political parties were amenable to RTI query by the public and are bound to come clean. Be that as it may. The political parties are likely to clutch to the straws and argue that the Delhi High Court was wrong in asking Janata Party to pay tax under income from other sources when it was specifically exempted.

Well, let us not second guess the political parties any further. The income tax department found in the Janata Party a convenient whipping boy but what about the mainstream political parties with the BJP getting Rs 437 crore as donations in 2014-15, 70% of which were explained away as small i.e. less than Rs 20,000 (statistics source financial express) for which disclosure of identity is not necessary.

Congress it is believed trails the BJP by a small margin. Only the new kid on the block and the enfant terrible of the Indian political system the Aam Aadmi Party (AAP) takes pride in accounting for every rupee of donation with the details of the donors though it is now turning out from the allegations doing rounds that the veneer of authenticity is dubious what with PAN numbers etc being cooked up.

It is common knowledge that political parties convert bulk of the donations in heavy cash into units of less than Rs 10,000 each and issue fictitious receipts, with the auditors winking at their shenanigans. Corporate donations which are in any case few and far between of course are acknowledged as indeed are donations by those who want to use political parties as their cat’s paw----the entire amount donated to recognized political parties are deductible from Gross Total Income under section 80GGC. What a self-serving farce? The promoter of a one man political party thus can donate all his/her income to the party s/he has promoted and blithely claim tax-free status secure in the knowledge that the party is exempt from tax as well.

It is time bold reforms were carried out on political funding and the tax status of political parties. The Delhi High Court verdict brings to light the minor misdemeanors of an extinct party. It is time to shine the torch on the mainstream parties.

Updated Date: Apr 01, 2016 17:03 PM

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