Exemption and proposed amendment relating to political parties.

[C.A. DEV KUMAR KOTHARI]

Present provision;

Relevant links and statutory provisions:

Section 13A of the Income-tax Act, 1961 and circulars, notifications issued under that section.

Section 29A of the Representation of the People Act, 1951 (43 of 1951).

Section 29C of the Representation of the People Act, 1951 (43 of 1951).

Clause 3(b) of the Finance (No.2) Bill 2009 by which definition of 'electoral trust' vide new proposed clause (22AAA) of section 2 of the I.T. Act is proposed.

Clause 8 of the Finance (No. 2) Bill 2009 by which section 13B of the I.T. Act is proposed.

The existing provision is reproduced below with highlights as a means of analysis:

[Special provision relating to incomes of political parties.

13A. 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 :

Provided further that if the treasurer of such political party or any 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).]

An analysis:

What is exempt in case of a political party:

Income which is otherwise chargeable under the following heads:

Income from house property" or

 "Income from other sources" or

["Capital gains" or

Any income by way of voluntary contributions:

Voluntary contributions are generally not income. They are not received in consideration of any goods or services or assurance or other activities. Therefore voluntary contributions are in fact capital receipts and cannot be made taxable as income. However, in case of political parties the requirement is to satisfy conditions laid down in the section in respect of any voluntary contribution in excess of Rs. twenty thousand, otherwise such contributions will be taxable. Impliedly it can be said that there is blanket permission to receive voluntary contributions up to Rs.20000/- from any person in a year without any requirement as to disclosure on name etc. of contributor. However, if the A.O. want to tax such contributions, and dare to do so, he can make addition under section 68 if the political party does not offer satisfactory explanation about nature and source of such contributions.

Income under the head business or profession is not exempt:

Thus we find that any income falling under the head income from business or profession shall not be exempted under this section. If an assessing officer dare to impose tax on a political party he can take view that incomes shown as falling under three exempted heads, are really income from business or profession because the house property is held as a business asset , and systematic and organized activities are carried out and a risk is also taken in letting out of property, similar view can be taken against income shown as falling under heads capital gains or other sources, by considering the  volume of activity,  systematic and organized activity, involvement of risk element etc.

Conditions:

The following are preconditions for such exemption to any political party:

a) Political party:  means a political party registered under section 29A of the Representation of the People Act, 1951, therefore registration is a precondition.

b) Report u/s 29C of the Representation of the People Act

The treasurer of such political party or any other person authorised by that political party in this behalf  must  submit a report under sub-section (3) of section 29C of the Representation of the People Act, 1951  for any financial year. If such report is not submitted, then no exemption under this section shall be available for that political party for such financial year.

c) Proper books of account:

such political party should  keeps and maintains such books of account and other documents as would enable the Assessing Officer to properly deduce its income therefrom;

d) Details of voluntary contributions: 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

e) Audit: the accounts of such political party are audited by an accountant as defined in the Explanation below sub-section (2) of section 288. This condition is without any monetary limit.

Budget 2009:

Vide the Finance (No. 2) Act 2009 a new section as section 13B is proposed  specifically in relation to and concerning political parties w.e.f. 01.04.2010 that is applicable for current running previous year that begun on 01.04.2009. The section shall read as follows:

 "13B. Special provisions relating to voluntary contributions received by electoral trust.—Any voluntary contributions received by an electoral trust shall not be included in the total income of the previous year of such electoral trust, if—

(a) such electoral trust distributes to any political party, registered under section 29A of the Representation of the People Act, 1951 (43 of 1951), during the said previous year, ninety-five per cent of the aggregate donations received by it during the said previous year along with the surplus, if any, brought forward from any earlier previous year; and

(b) such electoral trust functions in accordance with the rules made by the Central Government."

What is electoral trust:

As per new clause proposed in the Bill in section 2 of the I.T. Act the term Electoral Trust will be defined as follows:

'(22AAA) "electoral trust" means a trust so approved by the Board in accordance with the scheme made in this regard by the Central Government;

Thus we find that the Central Government shall make a scheme in this regard and the CBDT should approve any trust as Electoral Trust. Then only any trust shall be considered as Electoral Trust.

Notes on relevant clause read as follows:

Clause 8 of the Bill seeks to insert new section 13B relating to voluntary contributions received by electoral trusts. The proposed new section provides that any voluntary contribution received by an electoral trusts shall not be included in the total income of the previous year of such electoral trusts if (a) such electoral trust distributes to any political party registered under section 29 of the Representation of the People Act, 1951 (43 of 1951) during the said previous year ninety-five per cent of the aggregate donations received by it during the said previous year along with the surplus, if any, brought forward from any earlier previous year; and (b) such electoral trust functions in accordance with the rules made in this regard by the Central Government.

This amendment will take effect from 1st April, 2010 and will, accordingly, apply in relation to the assessment year 2010-11 and subsequent years.

Thus the new provision is really to exempt any voluntary contributions received by an Electoral Trust. However it relates to political parties. Because income by way of voluntary contributions received by such trust will be exempt only if such trust :

a) distributes to any political party, registered under section 29A of the Representation of the People Act, 1951 (43 of 1951), during the said previous year, ninety-five per cent of the aggregate donations received by it during the said previous year along with the surplus, if any, brought forward from any earlier previous year; and

Thus distribution of 95% of donations/ contributions and surplus brought forward is precondition for exemption of such contributions in hands of the Electoral Trust. Besides the Trust has to comply with other requirements as per section 13B highlighted above. That is such electoral trust functions in accordance with the rules made by the Central Government."

Whether contribution received from Electoral Trust will be exempt in hands of political party?

As noted above any voluntary contribution received by a political party is exempt subject to conditions as discussed above. However, the first condition is that the contribution received should be a voluntary and not compulsory. Contributions to be made by an Electoral Trust will not be voluntary contributions in strict sense. This is because the Electoral Trust is forced by provisions of law to distribute 95% of contributions received and surplus brought forward to avail exemption and also to comply with other legal requirements. Therefore there is a gray area and possible view is that contribution received from Electoral Trust is not a voluntary contribution and hence it is not exempt under section 13A.

Clarification is required:

Harassment by Assessing Officers is well known and is also recognized officially by officers of the I.T. Department  itself. Every scrutiny assessment is considered a potential a source of harassment and arm twisting by the A.O. To avoid at least harassment of political parties, it is desirable that there should be full clarity in the provisions. As discussed above there is no provision of exemption of money received by a political party from an Electoral Trust. In fact the concept of Electoral Trust is being introduced in the I.T. Act newly. When Section 13A was inserted, there was no such concept. Therefore, it is desirable that specific provision should also be made in section 13A to exempt any sum received from Electoral Trust.

Readers are requested to send their comments on these provisions and the above write-up.