INDIAN NATIONAL CONG. (I) AICC vs. C.I.T.- XI

ITA Nos. 145/2001 & 180/2001

Page 1 of 71 $~ * IN THE HIGH COURT OF DELHI AT NEW DELHI

ITA 145/2001

Reserved on: February 11, 2016

Date of decision: March 23, 2016

COMMISSIONER OF INCOME TAX DELHI-XI ..... Appellant Through: Mr. Rahul Chaudhary, Senior Standing Counsel with Mr. Raghvendra Singh, Advocate.

versus

INDIAN NATIONAL CONGRESS (I)/ALL INDIA CONGRESS COMMITTEE

..... Respondent Through: Mr. C.S. Aggarwal, Senior Advocate with Mr. Prakash Kumar, Mr. Gautam Jain, Ms. Pushpa Sharma and Mr.Madhur Aggarwal, Advocates.

AND

ITA 180/2001

INDIAN NATIONAL CONGRESS (I)/ALL INDIA CONGRESS COMMITTEE

..... Appellant Through: Mr. C.S. Aggarwal, Senior Advocate with Mr. Prakash Kumar, Mr. Gautam Jain, Ms. Pushpa Sharma and Mr.Madhur Aggarwal, Advocates.

versus

COMMISSIONER OF INCOME TAX DELHI-XI ... Respondent Through: Mr. Rahul Chaudhary, Senior Standing Counsel with Mr. Raghvendra Singh, Advocate. 2016:DHC:2463-DB

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Page 2 of 71

CORAM:

JUSTICE S. MURALIDHAR

JUSTICE VIBHU BAKHRU J U D G M E N T %

23.03.2016 Dr.S.Muralidhar,J: Introduction 1.1 More than four decades ago, while noting the distortion that large contributions of money made to political parties and candidates could bring about to the electoral process, the Supreme Court observed in Kanwar Lal Gupta v. Amar Nath Chawla, (1975) 3 SCC 646 (at p. 654) as under: "The availability of disproportionately larger resources is also likely to lend itself to misuse or abuse for securing to the political party or individual possessed of such resources, undue advantage over other political parties or individuals. Douglas points out in his book called Ethics in Government at p. 72, “If one party ever attains overwhelming superiority in money, newspaper support, and (Government) patronage, it will be almost impossible, barring an economic collapse, for it ever to be defeated”. This produces anti-democratic effects in that a political party or individual backed by the affluent and wealthy would be able to secure a greater representation than a political party or individual who is without any links with affluence or wealth. This would result in serious discrimination between one political party or individual and another on the basis of money power and that in its turn would mean that “some voters are denied an ‘equal’ voice and some candidates are denied an ‘equal chance’ ”.

1.2 The Supreme Court also noted that: "The small man’s chance is the essence of Indian democracy and that would be stultified if large contributions from rich and affluent individuals or groups are not divorced from the electoral process." 2016:DHC:2463-DB

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1.3 Till the Supreme Court began actively examining the issue in a public interest litigation (PIL) instituted in 1995 by 'Common Cause', most of the registered political parties in this country, both at the national and state levels, did not file income tax returns, despite it being made mandatory under Section 139 (4B) of the Income Tax Act, 1961 ('Act'), introduced with effect from 1st April 1979. They also failed to maintain proper accounts of their income and expenditure although this was too mandatory for them to claim exemption from payment of income tax under Section 13A of the Act.

1.4 The problem persisted despite the judgment of the Supreme Court in the PIL by Common Cause. The Election Commission of India noted in its 'Guidelines on Transparency and Accountability in Party Funds and Election Expenditure' issued on 29th August 2014 that “concerns have been expressed in various quarters that money power is disturbing the level playing field and vitiating the purity of elections.”

1.5 This was echoed by the Law Commission of India (‘LCI’) in its 255th Report on 'Electoral Reforms' when it said: "Money, often from illegitimate sources, results in “undisguised bullying” when it is used (both authorised and unauthorised) to buy muscle power, weapons, or to unduly influence voters through liquor, cash, gifts. Currency notes come first in containers, then in truckloads, moving to wholesale/small retail forms, and finally to suitcases and in people’s pockets."

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Page 4 of 71 1.6 Referring to a study conducted by Association for Democratic Reforms (‘ADR’), the LCI noted that: "more than 75% of parties’ sources are unknown, while donations over Rs. 20,000 comprise only 9% of parties’ funding." Further ADR's analysis of the funding of political parties for financial years 2004-05 to 2011-12 revealed that the total income of political parties from unknown sources was Rs 3,674.50 crores which constituted 75.05% of the total income of the parties.

1.7. The above introductory narrative serves as a backdrop for proceeding to examine the case on hand which is about a claim by the Indian National Congress (I) ('INC'), a political party, for exemption from paying income tax for the Assessment Year (‘AY’) 1994-95. The significance of this case, which has had a chequered history, lies in it being symbolic of the general lack of transparency and accountability of political parties in this country. By a separate judgment today the Court is disposing of a similar case involving the Janata Party for AY 1995-96.

The present appeals 2. The present appeals under Section 260A of the Act are directed against an order dated 9th April 2001 of the Income Tax Appellate Tribunal (‘ITAT’) in ITA Nos. 4181/Del/98 and 5100/Del/98 for AY 1994-95. While ITA No. 145 of 2001 is by the Revenue, ITA No. 180 of 2001 is by the Assessee, INC, a political party registered as such under Section 29A of the Representation of People Act, 1951 (‘RP Act’).

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Page 5 of 71 3. The central issue in these appeals involves the interpretation of the words ‘income by way of voluntary contributions received by a political party’ occurring in Section 13A of the Act. The ITAT by its impugned order held that the accounts of the Assessee for the AY 1994-95 were incomplete and therefore, the exemption under Section 13A of the Act was not available to it. At the same time, the ITAT held that the Assessing Officer (‘AO’) could not invoke the provisions of Sections 144 and 145 of the Act to estimate the quantum of income earned by the Assessee by way of voluntary contributions. Accordingly, the matter was remanded to the AO with the direction to the AO that he should undertake afresh the exercise of computing the taxable income of the Assessee.

Relevant facts 5. The facts relevant to the present appeals are that the Assessee INC is a political party registered under the RP Act and satisfies the description of a 'political party' for the purpose of Section 13A of the Act.

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Page 6 of 71 Taxation Laws (Amendment) Act, 1978 with effect from 1st April 1979. This was simultaneous with the insertion of Section 13A of the Act.

(a) income from house property

(b) income from other sources

(c) capital gains (d) any income by way of voluntary contribution received by a

political party.

(a) keep and maintain such books of accounts and other documents as would enable the AO to properly deduce its income therefrom,

(b) in respect of each voluntary contribution in excess of Rs. 10,000 keep and maintain a record of such contribution and the name and address of the person who has made such contribution;

(c) have its accounts audited by an Accountant as defined in the Explanation below Section 288 (2) of the Act.

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Page 7 of 71 a political party to submit a report under Section 29C (3) of the RP Act for a financial year to the Election Commission of India , no exemption under Section 13A would be available to it for such financial year.

The decision of the Gujarat High Court 10.1 At this stage it is important to notice two developments on the judicial side which have a bearing on the question of political parties filing returns. In Commissioner of Income Tax v. Gujarat Pradesh Congress Samiti [1994] 207 ITR 622 (Guj), the Gujarat High Court considered the question whether the Gujarat Pradesh Congress Samiti (‘GPCS’) was an independent taxable entity.

10.2 The facts there were that the Income Tax Officer (‘ITO’) served a notice under Section 148 of the Act on the GPCS for AYs 1960-61, 1961-62 and 1962-63 on the basis that it was a taxable entity having an income of its own. The ITO proceeded to tax GPCS as an association of persons. The Appellate Assistant Commissioner accepted the contention of GPCS that it was only a unit of the INC and annulled the assessments for the said three AYs.

10.3 After the ITAT dismissed the appeal of the Revenue, a reference was made to the Gujarat High Court, which agreed with the ITAT that a comparison of the constitution of the INC and the GPCS showed that the GPCS was one of the constituents and committees of the INC and did not have a separate existence.

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Page 8 of 71 11. The aforementioned decision of the Gujarat High Court made explicit the legal requirement of the INC having to file consolidated income tax returns for both the central office and the State units. Nevertheless, the INC did not file a return of income, much less the consolidated accounts of its central office and state units, even thereafter.

The decision in 'Common Cause' 12. In 1995 the Supreme Court was seized of a PIL filed by Common Cause, a civil society organisation. In Common Cause v. Union of India (1996) 222 ITR 260 (SC), the Supreme Court by a judgement dated 4th April 1996, dealt with the question of political parties not filing returns of income for several years thereby violating the mandatory requirement of Section 139(4B) of the Act. The summary of the main conclusions of the Supreme Court was as under: (i) Political parties were not above the law. A political party that was not maintaining audited and authentic accounts and not filing returns could not be permitted to contend that it had incurred authorised expenditure in connection with the election of a party candidate.

(ii) The Income Tax authorities had been remiss in invoking the statutory provisions against the defaulting political parties.

(iii) The Ministry of Finance, Department of Revenue was directed to have an investigation/inquiry conducted against each 2016:DHC:2463-DB

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Page 9 of 71 defaulting political party and initiate necessary action in accordance with law including penal action under Section 276CC of the Act.

Proceedings before the AO 13. Turning to the case on hand, the Income Tax Department ('Department') first issued a notice to the INC on 20th September 1995 under Section 142(1) of the Act asking it to file its income tax returns for AY 1995-96. A reminder notice was issued on 30th November 1995. The INC was also requested to furnish audited accounts in respect of AYs 1993-94 and 1994-95. Yet another reminder was issued on 17th January, 1996.

(i) its consolidated accounts on an all-India basis by incorporating all the accounts of the State Units; 2016:DHC:2463-DB

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(ii) complete books of accounts and other documents that may enable the AO to properly deduce the income of the party therefrom; and

(iii) the list of all donors, who had given voluntary contributions in excess of Rs.10,000/- with their names and addresses.

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Page 11 of 71 P A/c's in respect of the Distt. Units also. No Balance Sheet was filed.

The following points have noticed.

(i) The Party has shown donations in respect of donors. No certificate from the Auditor concerned is placed on record regarding the same.

(ii) The Party has not given the list of donors who have given contributions in excess of Rs.10,000/-.

(iii) The Party has shown other receipts like coupons sales etc. but no details are filed.

(iv) No books of A/c's of these units have been produced.

(v) No documentary evidence regarding the other receipts like Membership etc. has been placed on record.

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Page 12 of 71 4. The A/c's in respect of UPCC (I) bear the same as discussed above but also have a specific note that the membership fee adjustment has not been made in respect of the Distt. Committees.

With these observation, case is discussed.”

The assessment order 19. Thereafter on 31st March 1997, the AO passed the assessment order for AY 1994-95. In para 3.1 of the assessment order, the AO noted that 2016:DHC:2463-DB

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Page 13 of 71 the returns pertained to the accounts of the Central Office alone. It disclosed the following receipts: “(i) Collection from sale of

Rs.8,20,75,000/- Coupons & Purse money, etc. (ii) Other income

Rs.3,12,65,500/- (iii) AICC membership fee

Rs. 3,220/- (iv) Delegation fee

Rs. 13,375/- (v) AICC Membership fund

Rs. 600/-”

Rs. 89,72,827/- ii. Miscellaneous Receipts

Rs. 13,532/- iii. Donation

Rs.2,22,73,430/- iv. Literature Sale

Rs. 5,710/- Rs.3,12,65,500/-”

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Page 15 of 71 24. The AO then discussed the accounts of 14 State units furnished by the INC. The AO noted that the details of the donations or the list of donors in excess of Rs. 10,000 were not furnished. No documentary evidence in respect of sale of coupons was also furnished. In sum, the conclusion drawn by the AO was that the INC had failed to furnish the true and fair picture of the receipts on all India basis; it could not produce the books of accounts and other documents in order that the income of the party may be properly deduced therefrom; in respect of the 14 State units none of the accounts could be treated as genuine.

(i) furnish consolidated accounts that would reflect its income on all India basis; (ii) produce books of accounts and other documents to enable the AO to properly deduce the figures of its income therefrom; and (3) place on record the list of all donors, who had made voluntary contributions in excess of Rs. 10,000 with their complete names and addresses.

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“[I]n the absence of authentic and verifiable accounts of the activities of the state units, I am compelled to estimate receipts therefrom on account of membership fee, sale of coupons and collection by way of purse money together at Rs. 15 crores that could make the total receipts of the party after including this estimated sum of Rs. 15 crores shall be Rs. 26,33,57,696/- (Rs. 11,33,57,696 + Rs. 15,00,00,000).”

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Page 17 of 71 electricity, printing and stationery etc. in the sum of Rs.1,45,98,768.16, the AO allowed the entire expenditure of Rs. 37,58,036 on the employees and only 10% of the expenses under the head ‘other expenses’ as per schedule 7 of the accounts.

Appeal before the CIT (A) 32. The INC then filed an appeal before the Commissioner of Income Tax (Appeals) [‘CIT (A)’]. The appeal was filed on 4th November 1997 along an application under Rule 46A of the Income Tax Rules, 1962 (‘Rules’). In this application, it was stated that the dates for compliance in the proceedings referred to in the order of the AO pertained to AY 1995-96 which assessment was still pending and, therefore, the INC had not been granted sufficient opportunity to comply with the various requisitions of the AO.

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Page 18 of 71 33. The INC stated that the task of consolidating the accounts of the party including all its state units was a herculean task “as the aforesaid attempt was being made for the first time”. The INC had 26 Pradesh Congress Committees, 6 territorial Congress Committees, 2 Regional Committees, as also the account of All India Youth Congress, All India Mahila Congress Committee, All India Congress Seva Dal, National Students Union of India & Congress Parliamentary Party. It was claimed that “the Assessee, under such a tremendous pressure could not consolidate and also file the complete details pertaining to the voluntary contributions, as was directed”.

“[F]urther additional evidence, i.e., a complete audited income and expenditure account for the year ending 31.3.1994 containing the accounts of 26 Pradesh Congress Committees, 6 Territorial Congress Committees, 2 Regional Congress Committee, All India Youth Congress, All India Mahila Congress Committee, All India Congress Sewa Dal, National Students Union of India and Congress Parliamentary Party, which has been placed in the Paper Book and appears from Pages 37 to 39 of the Paper Book. It is, therefore, prayed that having regard to the aforesaid facts, the evidence now the assessee is seeking to place on record may kindly be admitted”.

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Page 19 of 71 allegation of the INC that it had not been given a sufficient opportunity as ‘irresponsible’ since the Assessee had inspected the records for AY 1994-95 on 20th October 1997 and the notice dated 31st January 1997 asking it to furnish the accounts and other details was duly received in the office of the INC on 31st January 1997 itself. It was further pointed out by the AO that there was no case made out for entertaining any additional evidence at this stage.

Order of the CIT (A) 36. In the order dated 8th July 1998, the CIT (A) held that it had been proved beyond doubt that the INC had failed to discharge its statutory responsibility of filing the accounts in time which alone could have entitled it to the benefit of Section 13A of the Act. The CIT (A) declined to admit the fresh evidence adduced by the INC. The estimate of the income of the INC from the state units made by the AO at Rs.15 crores was upheld.

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Page 20 of 71 14,92,22,294. Consequently, an estimate was made of the expenses incurred by the INC as regards its political activities and the CIT (A) held it to be reasonable to restrict the INC's claim of expenses to 60% of the claim after excluding employees’ expenses and depreciation. This worked out to Rs. 8,95,33,374. The total relief granted to the INC by the CIT(A) was to the extent of Rs. 9,27,48,793.

Appeals before the ITAT 38. Aggrieved by the above order of the CIT(A), both the INC and the Revenue filed appeals before the ITAT.

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Page 21 of 71 40. It was urged by the INC that the non-consideration of the accounts produced by the INC s additional evidence under Rule 46A of the Rules amounted to a violation of the principles of natural justice. It was further submitted that unlike Section 145 of the Act, Section 13A of the Act did not empower the AO to estimate income from voluntary contributions and there was no material with the AO to make any such estimation. It was submitted that voluntary contributions did not fall under any head of income under Section 14 of the Act and was taxable only in terms of Section 13A of the Act.

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Page 22 of 71 Order of the ITAT 43. The ITAT in the impugned order dated 9th April 2001 came to the following conclusions:

(i) Till the completion of the assessment order on 31st March 1997, the Assessee failed to file the audited accounts of all the state units and produce the books of accounts. The auditing of the accounts of state units was completed only thereafter.

(ii) Even if there was no time limit for completion of the accounts and audit, they had to be completed within a reasonable time. Non- completion of accounts and their audit even within two years from the end of the relevant financial year (‘FY’) cannot be condoned and the Assessee cannot be given the benefit of a reasonable cause to enable the additional evidence to be tendered under Rule 46A of the Rules. In terms of Rules 46A(1)(b) and 45A(1)(c), there was no sufficient cause which prevented the Assessee from producing the requisite evidence before the AO. The CIT (A), therefore, was justified in declining to admit the additional evidence.

(iii) 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. After the decision of the Gujarat High Court in Commissioner of Income Tax v. Gujarat Pradesh Congress Samiti (supra) rendered in 1993, the Assessee could not have any doubt 2016:DHC:2463-DB

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Page 23 of 71 about having to comply with the statutory requirements under Section 13A read with Section 139(4B) of the Act.

(iv) 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.

(v) The reasons given by the AO for making an estimate of receipts from state and other units at Rs. 15 crores was not convincing or satisfactory. The AO erred in making a lump sum estimate of all the receipts of the state and other units. Section 13A of the Act applied only to voluntary contributions actually received and would not apply to any ‘accrued, deemed, notional or estimated voluntary contributions’. Even if the AO had taken a cue from the accounts of the 14 state units that were filed, the total receipts of all the state units and other units would not have worked out to Rs. 15 crores.

(vi) Likewise, the CIT(A) erred in confirming the AO’s estimate of receipts. By this time, the Assessee had filed a complete account of the states and all other units. When the CIT (A) called for a remand report from the AO, he should have raised a specific query whether the AO’s estimate on receipts could be considered as fair and reasonable in light of the audited accounts filed before the CIT(A). Even though the CIT(A) declined to accept the said additional evidence, it was relevant and imperative that these materials be appreciated to decide the estimate of receipts. A direction was issued to the AO “to accept the receipt 2016:DHC:2463-DB

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Page 24 of 71 shown in central office account at Rs. 11,33,57,696 and from all the state and other units at Rs. 3,82,97,972 + Rs. 1,81,17,534.” Further in case the AO had information about any specific receipt not disclosed in the accounts “he can take appropriate actions under the law”.

(vii) There was a close nexus between the voluntary contributions and expenditure on political activity of a political party. This was because the expenditure on political activity is incurred from the voluntary contributions and the position of a political party was akin to the carrying out of the aims and objectives of a Trust.

(viii) But for Section 13A of the Act, voluntary contributions would not be taxable income since it did not fall under any of the heads of the income under Section 14 of the Act. It would not come under the head ‘income from other sources’. The expenditure incurred by a political party on its political activities was allowable as a deduction since such expenditure was incurred to carry out its aims and objects for which the voluntary contributions were also received. The aims and objects of political party fell within the scope of the expression “any other object of general public utility” appearing in the definition of ‘charitable purposes’ under Section 2(15) of the Act.

(ix) The contention of the Assessee that exemption under Section 13A of the Act can be granted even if the prescribed conditions are fulfilled at the appellate stage was rejected. The Assessee did not deserve the grant of exempton at the appellate stage. At the same time, the Assessee 2016:DHC:2463-DB

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Page 25 of 71 did not deserve its assessment to be set aside so that the AO could grant exemption under Section 13A of the Act.

(x) In view of the overall excess of expenditure over income and the decision of the Supreme Court in Ranchi Club Ltd. v. Commissioner of Income Tax (2001) 247 ITR 209 (SC), the interest charged under Section 234A and 234B of the Act was required to be deleted.

(xi) The Revenue’s appeal was dismissed by observing that the allowance of depreciation and 60% of the expenditure by the CIT (A) could not be held to be erroneous.

(xii) The impugned order of the CIT (A) on the allowability of the expenditure was set aside and the matter was restored to the AO with the direction to decide it de novo. The expenditure could be allowed subject to the condition that “there exists a nexus between the expenditure and voluntary contributions, and the expenditure was incurred to attain the aims and objects of the party”.

(xiii) Accordingly, the Assessee’s appeal was partly allowed and the Revenue’s appeal was dismissed.

Orders on remand 44. Initially when these appeals were heard on 3rd January 2002, certain questions of law were framed by the Court both in the Revenue’s appeal as well as in the Assessee’s appeal. Meanwhile, in terms of the 2016:DHC:2463-DB

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Page 26 of 71 impugned order of the ITAT, the AO on remand, passed a fresh order on 31st March 2003 computing the taxable income of the Assessee for the AY as Rs. 1,44,42,290. The appeal against the said order by the Assessee was partly allowed by the Commissioner of Income Tax (Appeals) [‘CIT (A)’] which by an order dated 9th December 2004 led to the revision in the taxable income as Rs. 38,38,258.The further appeal by the Assessee against that order was disposed of by the ITAT by an order dated 18th July 2007 leading to the determination of the loss in the sum of Rs. 60,23,621.

Questions in the Revenue's appeal 47. Consequently, as far as the Revenue’s appeal, ITA No. 145 of 2011 is concerned the following questions of law were framed for consideration:

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Page 27 of 71 basis of the material available on record, the total income adopted at Rs.25,12,68,08 was valid and in accordance with the provisions of Section 13A of the Income Tax Act and further, whether the assessee was not entitled to an exemption on or any part of the aforesaid amount?

Questions in the Assessee's appeal 48. As far as the Assessee’s appeal, ITA No. 180 of 2001, is concerned, the following substantial questions of law were re-framed by the Court by its order dated 8th December 2015: 2016:DHC:2463-DB

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(b) and (c) of Section 13A of the Act?

Background to Section 13A 49. A central issue that arises involves the interpretation of Section 13A of the Act and in particular the expression ‘income from voluntary contributions received’ found therein.

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Page 29 of 71 Explanation.- For the purposes of this sub- clause, "trust" includes any other legal obligation;”

"13A. Special provision relating to incomes of political parties.- Any income of a political party which is chargeable under the head "Income from house property" or "Income from other sources" or any income by way of voluntary contributions received by a political party from any person shall not be included in the total income of the previous year of such political party :

Provided that— ( a) such political party keeps and maintains such books of account and other documents as would enable the Assessing Officer to properly deduce its income therefrom; ( b) in respect of each such voluntary contribution in excess of ten thousand rupees, such political party keeps and maintains a record of such contribution and the name and address of the person who has made such contribution; and 2016:DHC:2463-DB

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Page 30 of 71 ( c) the accounts of such political party are audited by an accountant as defined in the Explanation below sub-section (2) of section 288.

Explanation.—For the purposes of this section, "political party" means 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, and includes a political party deemed to be registered with that Commission under the proviso to sub- paragraph (2) of that paragraph."

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Page 31 of 71 the these provisions appears to be that, after 1st April 1979, it was incumbent on every registered political party to furnish a return of income, if the total assessable of such political party exceeded the maximum amount which is not chargeable to income tax. In determining the total income, the computation has to take place under the Act “without giving effect to the provisions of Section 13A”.

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Page 32 of 71 political party are audited by a chartered accountant or other qualified accountant.

(i) it keeps and maintains such books of accounts and other documents that would enable the income tax officer to properly deduce its income therefrom.

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Page 33 of 71 (ii) it keeps and maintains records of each voluntary contribution in the excess of Rs.10,000 and all the names and addresses of persons who have made such contributions.

(iii) the accounts of the political party are audited by a Chartered Accountant or other qualified accountant as defined below Section 288(2) of the Act.

"13A. Special provision relating to incomes of political

parties.- Any income of a political party which is chargeable

under the head “Income from house property” or “Income from

other sources” or “Capital gains” or any income by way of

voluntary contributions received by a political party from any

person shall not be included in the total income of the previous

year of such political party :

Provided that—

(a) such political party keeps and maintains such books of account

and other documents as would enable the Assessing Officer to

properly deduce its income therefrom;

(b) in respect of each such voluntary contribution in excess of

twenty thousand rupees, such political party keeps and maintains

a record of such contribution and the name and address of the

person who has made such contribution; and

(c) the accounts of such political party are audited by an

accountant as defined in the Explanation below sub-section (2) of

section 288 :

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other person authorised by that political party in this behalf fails

to submit a report under sub-section (3) of section 29C of the

Representation of the People Act, 1951 (43 of 1951) for a

financial year, no exemption under this section shall be available

for that political party for such financial year.

Explanation.—For the purposes of this section, “political party”

means a political party registered under section 29A of the

Representation of the People Act, 1951 (43 of 1951).

Submissions of Senior counsel for the INC 60. The submission of Mr. C.S.Aggarwal, learned Senior counsel for the INC was that ‘voluntary contribution’ is in the nature of a gift and can never be regarded as income under Section 2(24) of the Act. According to him even for the purposes of Section 11 of the Act in the case of a Trust, voluntary contributions received by a Trust is deemed to be income derived from property held under Trust and is not income. He pointed out that if indeed voluntary contributions received by a political party would have been income per se under Section 2(24) of the Act, then clearly there would not have been any need to enact Section 2016:DHC:2463-DB

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Page 35 of 71 2(24)(iia) of the Act. He further submitted that voluntary contributions could never be considered to be a regular source of income.

“when a person a person gives money to another without any material return, he donates that sum. An act by which the owner of a thing voluntarily transfers the title and possession of the same from himself to another, without any consideration, is a donation. A gift or gratuitous payment is, in simple English, a donation”.

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Page 36 of 71 by way of ‘voluntary contribution’. In any event since it did not fall within the definition of income under Section 2(24) of the Act it could not be held liable to be assessed as that would be beyond the scope of Section 5 of the Act.

Submissions of counsel for the Revenue 66. Countering the above submissions, it was pointed out by Mr. Raghvendra Singh, learned counsel for the Revenue that collection from 2016:DHC:2463-DB

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Page 37 of 71 sale of coupons and purse money and donations and other such receipts constitute voluntary contributions under Section 13A of the Act. Referring to Section 29B of the RP Act and Section 293A of the Companies Act 1956, he submitted that a wider meaning has to be given to the expression ‘voluntary contributions’. After 11th September 2003, the date on which Election and Other Related Laws (Amendment) Act, 2003 came to force, a political party had to maintain records of each voluntary contribution in excess of Rs. 20,000 in substitution of Rs. 10,000.

Interpreting Section 13A 69. Section 2(15) of the Act defines what is ‘charitable purpose’. This is relevant for Section 11 of the Act. A political party cannot be said to be 2016:DHC:2463-DB

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Page 38 of 71 carrying on an activity that is comparable to that carried on by a ‘charitable trust.’ Treating the income of a political party to be that of a Trust and using the same principle to test the treatment of its expenses is inconsistent with the very scheme of the Act.

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Page 39 of 71 in Commissioner of Income-tax v. Shaw Wallace & Co. (1932) L.R. 59 I.A. 206, where it was held that by income is meant a periodical monetary receipt, not in the nature of a windfall but coming in with some sort of regularity or expected regularity. In business, it was also pointed out, income was the produce of something "loosely spoken of as capital". This income in business is profit which is earned by a process of production, or, in other words, by the continuous exercise of an activity. These observations of the Privy Council were quoted with approval by this Court in many cases and recently in Senairam Doongarmall v. Commissioner of Income-tax [1961] 42 ITR 392 (SC). In the last case, it was also pointed out that the addition of the words "profits and gains" in the phrase "income, profits and gains" used in the Income-tax Act does not restrict the meaning of the word "income" by implication, and that the whole expression is "income" writ large.

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Page 40 of 71 74. That takes us to Section 14 of the Act which specifies the heads of income. Five distinct heads of income that are identified are: (i) Salaries (Section 14 clause A) (ii) Income from house property (Section 14 clause C) (iii) Profits and gains of business or profession (Section 14 clause D) (iv) Capital gains (Section 14 clause E), and (v) Income from other sources (Section 14 clause F)

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Page 41 of 71 a careful perusal of the entire scheme of the Act, it is not possible to accept it. As rightly pointed out, Section 13A of the Act is not a computation section. It is only a provision that tells us what types of receipts of a political party would not be included in determining its taxable income. While it is true that income by way of voluntary contributions is not identified as a separate head of income in Section 14 of the Act, the legislative intent was not to exclude it altogether from the taxable income. It would be excluded only subject to fulfilment of the conditions stipulated under Section 13A of the Act. 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 and getting the accounts audited - would be exempt from tax. If the above conditions are not fulfilled, the income of a political party by way of voluntary contributions would be included in the taxable income.

Nature of voluntary contributions 78. If that was the legislative intent, the question that arises is whether there is an anomaly in not specifying income by way of voluntary contributions as a head of income under Section 14 or not even deeming it to be income for the purposes of Section 2(24)(iia) of the Act? This requires the discussion to turn to what is meant by ‘income from other sources’. An elaboration of this expression occurs in Section 56 of the Act.

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Page 42 of 71 79. Section 56(1) reads as under: “56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the heads specified in Section 14, items A to E”.

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Page 43 of 71 Wallace & Co. AIR 1932 PC 138, in the context of the Income Tax Act, 1922, held that Section 4(3)(v) of that Act was only clarificatory and “must be due to the over anxiety of the draftsman to make this clear beyond possibility of doubt”. Applying that analogy it has to be held that the mere fact that income by way of voluntary contributions in the hands of Trusts and other entities (other than the political party) is deemed to be income under Section 2 (24) (iia) of the Act, will not mean that it is not income as far as the political party is concerned.

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Page 44 of 71 having to be some ‘material return’ for the donor may not be apposite in the context of donations made to a political party. Such donation could be a result of the donor endorsing the ideology or the manifesto of a political party. It may be simply be an act of participation in a democracy. An elector may believe that a plurality of political parties is good for democracy. She may want to make donations to one or more political parties while reserving to herself the right of deciding which political party to support at the time of election. There could be multiple reasons for donations.

Voluntary contributions are not capital receipt 86. In this context, the Court is unable to accept the contention that these kinds of voluntary contributions are ‘capital receipts’ as contended by Mr. Aggarwal. Although it is true that all receipts are not income, clause F of Section 14 read with Section 56(1) of the Act, provides an affirmative answer to the question whether income by way of voluntary contributions is ‘income from other sources’ in a situation where the proviso to Section 13A(1) of the Act is not fulfilled by a political party.

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Page 45 of 71 87. The decision in Commissioner of Expenditure Tax v. P.V.G. Raju (supra) is distinguishable on facts. In that case, the context was that the Expenditure Tax Act, 1958 (‘ET Act’) which taxed certain forms of expenditure. Section 5(j) of the ET Act specifically excluded expenditure incurred by an Assessee by way of a gift, donation or settlement on Trust or otherwise for the benefit of any other person. It is in this context that it was held that the donation made to a political party qualifies for exemption under Section 5(j) of the ET Act.

Non-furnishing of audited accounts within time 90. This next takes us to the question of whether the CIT(A) and the ITAT ought to have permitted the Assessee to place on record its audited accounts although they were not completed and audited prior to the passing of assessment order by the AO for the AY in question.

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Page 46 of 71 like Sections 10 (23C)(via), 32AB, 80 HHC, and numerous other such provisions which require that the audited report should be furnished along with the returns or before the due date of the filing of return, there is no such requirement in Section 13A of the Act. Accordingly, it is submitted that the filing of the audit report is only directory and it can be filed during the course of assessment and even if the auditor’s report is filed during the course of the appellate proceedings, the requirement of law should be taken to have been complied with. Reliance is placed on the decision in Commissioner of Income Tax v. American Data Solutions India (P.) Ltd. [2014] 45 taxmann.com 379 (Kar), Commissioner of Income Tax v. Jayant Patel 248 ITR 199 (Mad), Commissioner of Income Tax v. Trehan Enterprises (2001) 248 ITR 333 (J&K), Commissioner of Income Tax v. Magnum Export (P.) Ltd. (2003) 262 ITR 10 (Cal) and Commissioner of Income Tax v. Medicaps Ltd. (2010) 323 ITR 554 (MP). Reference was also made to the decision in Commissioner of Income Tax v. Bijli Cotton Mills Pvt. Ltd. (1979) 116 ITR 60 (SC) to contend that the income tax authorities ought to have accepted the audit reports produced before the CIT(A).

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Page 47 of 71 of the Explanation to sub-section (2) of Section 288 of the Act, are filed that the AO may reasonably deduce the taxable income of the political party therefrom. In other words, the requirement of maintaining the audited accounts and furnishing those accounts in terms of the proviso to Section 13A of the Act is not merely directory.

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Page 48 of 71 on such political party to strictly comply with each of the requirements in the proviso to Section 13A and to do so by the time the assessment is completed. At the highest, there can be a leeway between the time of filing of the return and the completion of the assessment but certainly not thereafter. This is a reasonable interpretation to be placed on the said provision as far as the time period for compliance with the requirement of the proviso to Section 13A of the Act is concerned.

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Page 49 of 71 97. The mere fact that the INC may have units in each of the states in the country, which makes the task of consolidating the accounts a tedious one, does not absolve it from the mandatory statutory requirement of filing consolidated accounts of the central office and the state units. A company can have branches all over the country and may be required to file consolidated accounts of all those branches. There can be no excuse for such company not doing so for any given AY. Without there being audited accounts, none of the figures mentioned by an Assessee in the returns can be verified. Where the accounts of an Assessee fail to inspire confidence and merit rejection, or where there is no full and true disclosure by the Assessee, a combination of Sections 143 and 144 of the Act would come into play and the AO would have to deploy the best judgment assessment. Therefore, in the present case, merely because the INC had several state units and other associated bodies, whose individual accounts had to be tallied and finalised, was not a sufficient cause for it not to comply with the requirements of the proviso to Section 13A of the Act by the time of completion of the assessment.

The accounts do not give a true and fair picture 99. Admittedly, in the present case, the accounts for AY 1994-95 were audited only on 1st July 1997. This was more than two years after the 2016:DHC:2463-DB

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Page 50 of 71 end of the relevant FY. The consolidated accounts were tendered before the CIT (A) only on 4th November 1997. This was certainly an unacceptable and inordinate delay. Given the context of Section 13A of the Act, such delay could not possibly have been condoned.

We have audited the first attached consolidated Balance Sheet of Indian National Congress, as on 31st March 1994 and the Income & Expenditure account of the Party for the year ended on that date in which are incorporated the Audited accounts of All India Congress Committee, 26 Pradesh Congress Committees, 6 Territorial Congress Committees, 2 Regional Congress Committees, All India Youth Congress, All India Mahila Congress Committee, All India Congress Sewa Dal, National Students Union of India and Congress Parliamentary Party and report that:

Subject to the notes on accounts as per schedule ‘A’ of the Balance Sheet. 2016:DHC:2463-DB

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Page 51 of 71

The Balance Sheet as on 31.3.94 and Income and Expenditure account for the year ended on that date are in agreement with the books of accounts, vouchers, receipts books etc. produced before us.”

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Page 52 of 71 by demand drafts. A public interest petition has been moved in Delhi High Court challenging the acceptability of these donations under the provisions of the Foreign Contribution (Regulation) Act, 1976. The party is of the opinion that the acceptance of these donations are not in contravention of the Foreign Contribution (Regulation) Act, 1976.

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Page 53 of 71 requirement, it was incumbent on an auditor to qualify his report to that extent.

(A) on 4th November 1997 is woefully short of the requirement of the law.

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Page 54 of 71 diversified, the objectives of accountability and transparency seem to be of great importance. Transparent accounting and financial reporting are also central to the fulfilment of new age governance, The introduction of acceptable accounting practices and disclosure norms are not just technical practices but the foundations for the integrity and maturity of the Political Parties. Political Parties would, therefore, need to reflect their 'financial position' and 'financial performance' which should indicate their ability to achieve their developmental goals, meet their programme targets, their efficiency in the use of resources.

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Page 55 of 71 which the AO could deduce the taxable income of the assessee, the Court has no hesitation to hold that the mandatory requirement of the proviso to Section 13A of the Act was not fulfilled by the Assessee. Such a failure could not have been condoned either by the CIT (A) or the AO.

Effect of remand proceedings 109. It was contended by Mr. Aggarwal that in the remand proceedings, pursuant to the impugned order of the ITAT, the AO had relied on the very figures in the consolidated audited accounts submitted by the INC before the CIT (A). He pointed out that in fact the AO had accepted the expenditure of the Assessee as shown therein. The remand proceedings ultimately resulted in the assessment being finalised at a deficit, i.e., at a net loss. On this basis, it is contended that once there is no assessable income as such, the question of exemption under Section 13A of the Act could not arise at all.

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Page 56 of 71 on notice that all orders passed on remand are subject to the outcome of the appeal filed by the Revenue in this Court.

The rule of consistency 112. Another contention that was urged was based on the rule of consistency. It was contended that when the accounts of the INC for all the AYs, earlier to and later than AY 1994-95, have been accepted by the Department without demur, then why must only AY 1994-95 be picked up for a different treatment? Reliance was placed on the decision in Excel International Ltd. v. CIT (2013) 358 ITR 295 (SC) which reiterated the decision in Radha Saomi Satsang v. CIT (1992)193 ITR 321(SC)

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Page 57 of 71 with Section 13A of the Act, thereby defeating the very purpose of the said provisions as was foreseen by the Supreme Court in Common Cause v. Union of India (supra). In the circumstances, the rule of consistency cannot be applied to condone the violation of the law by the INC.

Estimation of voluntary contributions to state units 114. The next question that arises is whether there can be an estimation of either the income by way of voluntary contributions received by state units or the expenditure incurred by such state units in the absence of any vouchers. To recapitulate, what the AO has done is to estimate the income by way of voluntary contributions received by the state units of the INC as Rs. 15 crores in the absence of any reliable document or voucher.

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Page 58 of 71 judgment assessment. Reliance was placed on the decision in CIT v R. Narayanrao (2011 338 ITR 625 (AP).

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Page 59 of 71

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Page 60 of 71 120. Turning to the facts of present case, 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. It appears to have been 'pulled out of the hat'. The Court is, therefore, unable to sustain that estimation. To that extent, the ITAT is right.

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Page 61 of 71 Expenditure of a political party 123. Here it is important to address another submission made on behalf of the Revenue which finds favour with the Court. Under the head ‘income from other sources’, no expenditure can be allowed as a deduction on the ground that the expenditure has been incurred by a political party for attaining the aims and objects of political party. As rightly pointed out, the only deduction is under Section 57(iii) of the Act and this cannot be granted since the INC did not place on record the factual basis for such a claim.

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Comparison with a Trust misplaced 127. The ITAT was in error in proceeding to draw a comparison between the Assessee and a charitable trust under Section 11 of the Act The question of a political party carrying out any charitable activity within the meaning of Section 2(15) of the Act does not arise. Further, there was no factual basis to support such a plea at any stage of the proceedings. Further the ITAT was required to examine the memorandum and rules and regulations of the Assessee to determine whether any of its objects fall within the scope of "any other object of general public utility". Since the dominant purpose of a political party is political activity, it cannot be brought under the expression ‘any other object of general public utility.’

Interest 128. While deleting the interest under Section 234A and 234B of the Act, the ITAT relied on the judgment of the Patna High Court in Ranchi Club v. CIT (1996) 217 ITR 72 (Pat) against which an SLP was dismissed by a one line order in CIT v Ranchi Club, [2001] 247 ITR 209. However, recently in Commissioner of Income Tax v. Bhagat Construction Co. Pvt. Ltd. [2015] 279 CTR 185 (SC), the decision in Ranchi Club Ltd. v. Commissioner of Income Tax (supra) has been overruled. The consequent legal position is that notwithstanding that the AO may not have separately dealt with the issue of interest in the assessment order, interest can nevertheless be charged on the tax amount due under Section 234A and 234B of the Act. Consequently, the decision of the ITAT on this aspect is set aside. 2016:DHC:2463-DB

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Summary of conclusions 129. It is necessary at this stage for the Court to summarise its 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 2016:DHC:2463-DB

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Page 64 of 71 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.

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Page 65 of 71 (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 4th 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 2016:DHC:2463-DB

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Page 66 of 71 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. [2015] 279 CTR 185 (SC) interest can be charged on the tax amount due 2016:DHC:2463-DB

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Page 67 of 71 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 130. The Court answers the questions framed by the order dated 3rd January 2002 in ITA 145/2001 as under:

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.

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Page 68 of 71 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 131. Now the Court proceeds to answer the questions that have been framed in ITA 180/2001 by the order dated 8th December 2015:

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 2016:DHC:2463-DB

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Page 69 of 71 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.

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Page 70 of 71 Postscript 134. This case demonstrates the need for a slew of legislative measures that need to be put in place for an effective check on the influence of money on the electoral process. Recently in Ashok Shankarrao Chavan v. Madhavrao Kinhalkar (2014)7 SCC 99 the Supreme Court observed:

“48. It is common knowledge as is widely published in the Press and Media that nowadays in public elections payment of cash to the electorate is rampant and the Election Commission finds it extremely difficult to control such a menace. There is no truthfulness in the attitude and actions of the contesting candidates in sticking to the requirement of law, in particular to Section 77 and there is every attempt being made to violate the restrictions imposed in the matter of incurring election expenses with a view to woo the electorate concerned and thereby, gaining their votes in their favour by corrupt means viz by purchasing the votes..."

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Page 71 of 71 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.

S. MURALIDHAR, J

VIBHU BAKHRU, J MARCH 23, 2016 Rk/b’nesh/dn 2016:DHC:2463-DB