PUBLIC POLITICAL PARTY,DELHI vs. DCIT, CENTRAL CIRCLE 31, DELHI

Heard and perused the record. The appeals were heard together and as they involve similar set of facts and question of law involved, they are decided together. The facts wherever necessary for A.Y. 2015-16 shall be taken into consideration.

1 The appellant, M/s Public Political Party, is a Registered Unrecognized Political Party (RUPP) under Section 29A of the Representation of the People

2 The Assessing Officer (AO), DCIT Central Circle-31, New Delhi, reopened the appellant's case for A.Y. 2015-16 under Section 147 and completed the reassessment under Section 143(3) vide order dated 27.03.2024. The AO added Rs. 19,15,269/- to the appellant's income under Section 68 as unexplained cash credits, citing the appellant's failure to substantiate the nature and source of these credits, alleged to be donations. The AO further noted non-compliance with Section 13A, which governs tax exemptions for political parties, and relied on evidence from seized materials and the treasurer's statement recorded under Section 132(4) of the Act.

3 Aggrieved by the AO's order, the appellant filed appeal before ld. CIT(A), contesting: (1) the addition under Section 68, claiming the credits were exempt donations under Section 13A; (2) procedural irregularities, including insufficient response time to notices and the absence of a show- cause notice; and (3) the initial application of Section 115BBE for tax calculation (subsequently rectified).

As with regard to the addition of Rs.19,15,269/- under Section 68 (Unexplained Cash Credits): The appellant contended before the ld. CIT(A) that the credits of Rs.19,15,269/- in its bank account (PNB A/C No. 7789002100000321) represent legitimate donations reported to the Election Commission in a "contribution report," qualifying for exemption under Section 13A. It was argued that Section 68 of the Act does not apply to such donations and that the AO erred in treating these credits as unexplained income despite the submission of donor details.

1 Ld. CIT(A) called for remand report from the AO and a rejoinder of same was filed by the assessee and based on both the ld. CIT(A) concluded as follows;

3 The appellant falls short on all counts. The seized books of account were incomplete and unaudited, lacking donor-specific details. The donation records submitted were vague, with many entries below Rs.20,000 suspiciously aggregated to evade detailed disclosure. Crucially, the appellant failed to file its income tax return for A.Y. 2015-16 by the due date, only submitting it on 13.01.2024 after receiving a notice under Section 148. This belated filing disqualifies the appellant from claiming exemption under Section 13A, as timely compliance is non-negotiable. 10.4 The search operation yielded damning evidence supporting the AO's findings. Analysis of PNB A/C No. 7789002100000321 showed credits of Rs.19,15,269 with no corresponding entries in the appellant's donation registers, indicating these were not legitimate donations. The coupons seized were undated, unsigned, and lacked donor identification, rendering them unreliable as evidence of genuine contributions. Seized vouchers disclosed unaccounted cash receipts not reported to the Election Commission, contradicting the appellant's claim of transparency. During the search, the appellant's treasurer admitted under Section 132(4) that some "donations" included cash from undisclosed sources, a statement recorded voluntarily and admissible under law. This admission directly corroborates the AO's conclusion that the credits were unexplained. 10.5 Judicial pronouncements reinforce the department's stance. In P a g e | 8 8 appeals Public Political Party (AY: 2015-16 to2017-18, 2021-22 & 2022-23) income. The appellant's assertion that the credits are exempt donations under Section 13A is untenable. The "contribution report" lacks evidentiary value, and the absence of donor details, coupled with discrepancies in the seized records, justifies the AO's invocation of Section 68. The appellant's non-compliance with Section 13A further precludes any exemption. The addition of Rs.19,15,269/- as unexplained cash credits is fully warranted, and these grounds are dismissed.” 4. Assessee is in appeal and for convenience the grounds for A.Y. 2015- 16 are reproduced below;

The thrust of ld. Counsel appearing for assessee was on the wrongful assumption of juri iction for addition u/s 68 of the Act. It was contended that all the compliances of section 13A of the Act were made and there was mere delay in some compliances. 5.1 Ld. DR relied the orders of ld. Tax authorities below. 6. We have given a thoughtful consideration to the submissions and material on record. The important aspect that emerges out of the facts alleged by the AO is that for denial of exemption u/s 13A of the Act the AO had made certain factual observations and which can be conveniently picked up from the remand report, copy of which is available in paper book filed by the assessee for AY: 2015-16 at page No. 29 as for convenience para 4.5.1 to 4.5.3 are reproduced below: “4.5 Non-genuine claim of exemption u/s 13A of the Act:

These facts in remand report were countered by the assessee by submitting comments/rejoinder copy of which is made available at page 38 - 48 of the paper book and relevant para is reproduced below: “6. As regards, Para 4.4 and 4.5, assessee maintained its books of account to enable the AO to assess the income and as submitted above, the Assessee is entitled to 100% tax exemption under Section 13A of the Act. 7. As far as Para 4.5.2, 4.5.3, the assessee has filed all the ITRs for the relevant period with short delay (in few ITR), on account of the fact that founder/treasurer of the Assessee, Lokesh Kumar Srivastava is not having his good health and is also looking and sitting at the registered office of the party at Pratapgarh, U.P. Thus, it is quite difficult for him to travel frequently to Delhi, but have complied with filing ITRs, contribution reports etc. with the concerned authorities. As such, it wrong to state that assessee did not fulfill the mandatory conditions for claiming exemption under Section 13A of the Act and is guilty under Section 68 of the Act. It is submitted that provisions of Section 68 of the Act do not apply at all to the assessee, since there is no undisclosed

Quite apparently the assesse has very vaguely contested the factual assertions of assessing officer as made in remand report and also before us during the hearing assessee was unable to demonstrate substantial compliance of filing of return as per Section 139(4B) of the Act before the ‘due date’, the maintenance of audited books and account and filing of contribution report for the relevant financial year involved.

1 The statements of the donors relied by the AO and are part of the remand report and the statement of Shri Lokesh Kumar Shrivastava founder of assesse Political party, recorded u/s 132(4) of the Act establish that the cash was released to the donors after deducting the commission in the range 5-8%. It can be observed that AO has examined the cash withdrawals from the bank account by the assessee political party without plausible justification or corroborated by any political activity and in fact when Shri Lokesh Kumar Srivastava was asked to furnish the details of expenditure incurred and the list of vendors along with details of expenses like printed material, electronic

2 Thus apart from above fact of non-compliance of mandate of law to avail benefit of exempt income provisions we are of the considered view that when the donors are established to be bogus and donations are accepted merely to help the donors gain deductions u/s 80GGB/80GGC of the Act to reduce the taxable income of the entity/individual that in itself is sufficient to deny the political party benefit of Section 13A of the Act.

Hon’ble Delhi High Court in the case of Commissioner Of Income Tax Delhi-Xi vs Indian National Congress (I) and others decided on 23 March, 2016 vide ITA 145/2001in para 77 has very categorically held that satisfaction of Section 13A conditions are necessary and mandatory and in case of failure income of political party by way of voluntary contributions would be included in the taxed income. As for completeness para 77 is reproduced here;

Then Hon’ble Delhi High Court has went on to examine the nature of voluntary contributions to be taxed on denial of exemption u/s 13A of the Act, as income from other sources u/s 56 of the Act and relevant para 78 to 89 are reproduced below:

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.

Section 56(1) reads as under:

It is true 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. However that does not place it outside the purview of 'income from other sources' for the purposes of Section 13 A read with Section 56 (1) of the Act. The Privy Council in Commissioner of Income Tax v. Shaw 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.

The submission that there has to be in the first place a source of income and in relation to it there has to be income from 'other sources' does not hold good in the present context since admittedly the INC has also income from house property, which is reflected in its returns. That apart, Section 56 (1) of the Act makes it clear that even if there was no P a g e | 20 8 appeals Public Political Party (AY: 2015-16 to2017-18, 2021-22 & 2022-23) income under clauses A to E of Section 14 of the Act, there could be income from other sources under clause F of Section 14 of the Act.

Mr Singh is right in the submission that collection by sale of coupons, purse money and donations do constitute 'voluntary contributions' and they are part of the essential sources of a political party's income. This is clear from the reading of statements of objects and reasons for the introduction of Section 13A of the Act. It is definitely one of the sources of income of a political party.

A political party cannot be equated with other types of Assessees, for e.g., a company, whose income is subject to tax. The theory of there 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.

The known tests for determining what could be said to be 'income' for the purposes of the Act are, therefore, inadequate for determining whether the voluntary contribution to a political party is 'income' in its P a g e | 21 8 appeals Public Political Party (AY: 2015-16 to2017-18, 2021-22 & 2022-23) hands. It definitely forms the corpus from which expenses are incurred by the political party. It is a regular source of income. It may or may not be a windfall depending on the size of the donation. Voluntary contributions are not capital receipt

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.

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.

The situation here is hardly comparable. What is sought to be exempted for the purposes of Section 13A of the Act is not expenditure by way of a donation but income by way a voluntary contribution.

Consequently, on this aspect, it is held that the voluntary contributions received by the INC during the AY in question has to be treated as 'income from other sources'.

In the decision Hon’ble Delhi High Court has dealt with the contention of political party that filing of audit report is only directory and the same has been rebutted Hon’ble Delhi High Court by holding that it is mandatory and not directory and relevant para 92 to 94 is reproduced here; “92. At the outset it should be noted that there is a distinction between accounts needing to be maintained and audited, and, the requirement that an auditor's report should be filed. In other words, the filing of an auditor's report is distinct from the filing of audited accounts. There is no option for a political party not to file audited accounts as far as Section 13A of the Act is concerned. It is only when the accounts, duly certified by a chartered accountant who satisfies the description in terms 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 P a g e | 23 8 appeals Public Political Party (AY: 2015-16 to2017-18, 2021-22 & 2022-23) maintaining the audited accounts and furnishing those accounts in terms of the proviso to Section 13A of the Act is not merely directory.

The decisions cited by Mr. Aggarwal are distinguishable as each of them talks of the non-filing of an auditor's report and not the non-filing of audited accounts themselves. Given the context in which Section 13A of the Act was introduced, it was critical from the point of view of the legislature that political parties are made to disclose what their state of financial affairs is in any given financial year. It was felt necessary to make them account for the receipts and expenses in any financial year. After all, political parties do deal with monies contributed by the public. Political parties are purportedly incurring expenses for their political activities. 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 13 A of the Act will be defeated if the compliance with the requirements of the proviso thereto are held not to be mandatory. 94. Section 13A has to be read as a whole. It is a provision beneficial to a political party. It exempts various items of income of a political party from tax. If it has to be strictly construed, so too should the conditionality attached to Section 13A. If a political party seeks exemption from paying income tax in a particular AY, it is incumbent 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 P a g e | 24 8 appeals Public Political Party (AY: 2015-16 to2017-18, 2021-22 & 2022-23) 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.”

Further, while determining the question as to if deduction has to be allowed with respect to expenditure incurred by political party for any purpose whatsoever, if it fails to comply with the basic requirement of Section 13A of the Act Hon’ble Delhi High Court in para 123 to 125 held as follows: “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.

The legal position is that no deduction can be allowed with respect to the expenditure incurred by the political party for any P a g e | 25 8 appeals Public Political Party (AY: 2015-16 to2017-18, 2021-22 & 2022-23) purpose whatsoever if it fails to comply with the basic requirements of Section 13A of the Act.

Therefore, the only way to proceed in the present matter is to wholly disallow the expenditure claimed by the INC as relatable to 'income from other sources'. 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.”

Thus based on aforesaid legal principles when we deal with the contention of ld. Counsel for the assessee that addition could not have been made u/s 68 of the Act,we find substance as donations or the alleged commission cannot be considered to be unexplained credit. The deeming income provisions cannot be invoked in regard to donation claims which are rejected on the basis of non-compliance of Section 13A provisions and alleging that the donations were not voluntary contributions beingmodus operandi to benefit the donors by returning a major part of the donations after keeping a part of it a commission income.

In the light of the aforesaid discussion we are of the considered view that additions made u/s 68 of the Act cannot be sustained, however, there is P a g e | 26 8 appeals Public Political Party (AY: 2015-16 to2017-18, 2021-22 & 2022-23) no error in the conclusion by AO that assessee is not entitled to benefit u/s 134A of the Act and consequently on the basis of admitted case of the AO that assessee was operating by earning 5-7% of the commission the AO is directed to take income of the assessee at 6% of total donations/contributions received in respective years and consider the same as ‘income from other sources’ under section 56(1) of the Act and pass orders afresh.

As a sequel to aforesaid discussion the appeals of assessee are partly allowed with consequence to follow as per the directions given above.

Consequent to appeals of assessee partly allowed with aforesaid directions to AO, the stay applications filed by assessee stands dismissed.