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2016 (3) TMI 878 - DELHI HIGH COURT

2016 (3) TMI 878 - DELHI HIGH COURT - [2016] 383 ITR 146 - Entitlement to exemption under Section 13A - Held that:- The finding of the ITAT that the Assessee satisfied the mandatory conditions for availing the exemption under Section 13A of the Act is nothing short of perverse as it is wholly contrary to and unsupported by the documents on record. A political party which seeks to avail of the exemption cannot be heard to say that it is not possible for it to maintain its accounts on a consolidat .....

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valid reasons have been given by the ITAT for overturning the reasoned and detailed orders of the AO and CIT (A). In the circumstances, the question framed is answered in the affirmative by holding that the finding of the ITAT is perverse and contrary to evidence on record in so far as applicability of Section 13A of the Act is concerned, i.e., in favour of the Revenue and against the Assessee. - ITA 188/2002 - Dated:- 23-3-2016 - S. Muralidhar And Vibhu Bakhru, JJ. For the Appellant : Mr. Dile .....

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under the Representation of the People Act, 1951 ( RP Act ). It was formed on 3rd May, 1977. According to the Assessee there were three major splits in the party. The first occurred on 18th July 1979, when Mr. Chaudhary Charan Singh left to form the Lok Dal. The second split occurred on 4th April 1980, when Mr. Atal Bihari Vajpayee left to form the Bharatiya Janata Party ( BJP ) and the third in July 1989, when Mr. Madhu Dandavate, Mr. Ajit Singh etc. left to form the Janata Dal. It is stated th .....

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State units through demand drafts or telegraphic bank transfers. It is stated that a numbered signed receipt was given by the collecting party volunteer to the donor for each voluntary contribution. 3. On 10th October 1990, the Assessing Officer ( AO ) wrote to the Assessee demanding production of the accounts from AY 1986-1987 onwards till AY 1990-1991. It is stated that since the party had different office bearers and different bank accounts, some of which the President was not aware of, the .....

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ection 13A of the Act and, therefore, Nil income was declared. It is stated that the aforementioned return was accepted by the AO on 22nd August, 1991. 5. The same firm of CAs was asked to audit the accounts of the central office of the party for AY 1991-92. The income tax return for AY 1991-92 was stated to have been handed over for filing on 30th October, 1991. The disclosed figure of voluntary contributions therein was ₹ 2,46,322 and Nil income was declared after claiming exemption unde .....

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,179. In the return, exemption was claimed under Section 13A of the Act and nil income was shown. The return was sent from Delhi to Madras where the new Treasurer of the party was based. However, no IT returns were filed for AY 1992-93. 8. It is stated that in August 1993-94, the sixth split took place in the party and the State units in Delhi, Tamil Nadu and Kerala also left the party. It is claimed that the local Party bank accounts were taken over by the persons over whom the central leadersh .....

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y the accounts of the central office although there is no such indication in the return as filed, a copy of which has been enclosed with the appeal. It is stated that on the same date, i.e., 19th February 1996, the returns of the Assessee for the earlier AYs 1991-92 to 1993-94 were filed. 10. It is stated that as regards AY 1995-96, the information sought by the AO was provided on 3rd June 1996. On 3rd July, 1996 notices under Sections 143(2) and 142(1) of the Act were issued calling for the fol .....

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and 23rd March 1998, all of which were granted by the AO. On 2nd February, 1998, the AO served the Assessee with a letter drawing its attention to the fact that an account of the Party had been opened with the Vijaya Bank, Chennai and the credit entries in the said account in the sum of ₹ 68,53,435 had not been included in the return filed for AY 1995-96. Proceedings before the AO 12. Meanwhile in the proceedings which took place before the AO on 23rd March 1998, time was again sought by t .....

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ing returns due to a bonafide error on account of various pre-occupations including election campaigns, splits, exodus of office bearers. It was claimed that the credit entries in the said account were only towards Party funds and do not constitute receipts of any other nature and the Assessee has not violated any of the provisions of the Income Tax Act. The Assessee disclosed that it had four other bank accounts with one each in Bombay and Bangalore and two in Chennai, which had not been includ .....

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ent (R & P) accounts of the New Delhi unit, the Maharashtra unit and the Bangalore unit of the party. The accounts of the Chennai unit were also filed. 15. The Assessee filed the cash book ledger of the central office from which the return of income along with the audited accounts were prepared and filed before the Department. It was stated that this represents the consolidated accounts of the party as per the return of income originally. The AO noted that from the account of voluntary contr .....

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eceipts and every receipt was less than ₹ 10,000/-. Further a copy of collection books showing accumulation of collections was also maintained. 16. The AO then examined the counterfoils of the receipts from the Tamil Nadu, Karnataka, Mumbai, New Delhi units. The AO noted the following facts: i. The receipts were all manually numbered. ii. All of them were of denomination less than ₹ 10,000/-. iii. All the receipts were signed by the party volunteers. 17. The AO then directed the ARs .....

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tral office. 18. The AO then examined the consolidated accounts which had been prepared by incorporating all the bank accounts as mentioned in the AR s letter dated 27th March 1998. A perusal of the accounts of the Maharashtra unit revealed that there was one unit for entire Maharashtra excluding Bombay and a separate unit for Bombay. The ledger account of the Maharashtra unit showed that voluntary contributions totalling ₹ 35,81,600/- were shown up to 6th August, 1994. The cash book had n .....

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re remitted to Account No.572 maintained with Vijaya Bank. The collections in the months of May, August to November were in excess of ₹ 10,000/- and totalled to ₹ 12,61,000/-. This entire sum was kept in the bank account with Vijaya Bank. 20. As far as the Chennai unit was concerned, the AR explained it by pointing out that all the entries therein pertained to sums transferred from the Maharashtra, New Delhi and Bangalore units. The details were, therefore, called for. Order of the A .....

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of travel was produced. As regards the Chennai account there were transfer entries of ₹ 61,91,435/- and cash entry of ₹ 6,62,000/-. The contention of the Assessee that the transfer entries were from various other units of the party and that the cash deposits were merely deposits of earlier withdrawals was devoid of merit since the bank account (account No.1327) showed that there were very few withdrawals prior to the cash deposits on various dates. Considering that according to the .....

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see under Section 139(1) read with Section 139 (4B) of the Act. Since omission to file the return was not discovered by the Assessee, it was not bona fide. The revised statement of income and accounts filed by the Assessee, purportedly consolidating the accounts of other units of the Assessee could not be accepted in terms of Section 139(5) of the Act. There was a failure by the Assessee to comply with the statutory requirements under the Act. 23. More serious was its inability to furnish the co .....

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ily created evidence by way of manually numbered receipt books each being below ₹ 10,000/-. 24. The AO concluded that the Assessee was trying to misuse the provisions of Section 13A of the Act by creating such evidence and then giving it to the Department at the fag end of the limitation period so as to remove any chance of cross-verification. It was concluded that this was a methodology adopted to evade tax. Since the conditions under Section 13A of the Act were not satisfied, the Assesse .....

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aforementioned assessment order was dismissed by the Commissioner of Income Tax (Appeals) [CIT(A)] by the order dated 16th February, 2000. The CIT(A) agreed with the AO that in the return filed under Section 139(4B) of the Act, the Chief Executive Officer (CEO) of the Assessee had to verify the correctness of the contents of the return filed in the prescribed form. The bank accounts of the Chennai, Mumbai and Bangalore units had not been disclosed. Thus, it was obvious that the CEO had signed a .....

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justified in coming to the conclusion that the Assessee had not fulfilled the conditions laid down for availing the exemption under Section 13A of the Act. 27. The CIT (A) held that the contention of the Assessee that it was under the bona fide belief that only the accounts of the central office were to be filed, could not, on the face of it, be accepted. Prior to notice being issued by the AO to the Assessee under Section 142(1) of the Act on 20th September 1995 and even prior to the filing of .....

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order of the ITAT 28. The further appeal by the Assessee being ITA No.2140/Del/2000 was allowed by the ITAT by the impugned order dated 23rd November, 2001. The findings of the ITAT were as under: i. The AO had not been able to pinpoint even one case where the voluntary contribution was in excess of ₹ 10,000/-. Thus, the conditions stipulated in Section 13A of the Act were satisfied. Once the Appellant had maintained the accounts and such accounts had been duly audited and none of the ent .....

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all India status would have bank accounts in different States, Districts and Taluks. No exception could be taken for the failure to recall the political workers, who may have travelled to the capital for depositing money with the Party. In the circumstances, the denial of exemption under Section 13A of the Act for non-furnishing of the particulars of the persons, who had carried the cash to Delhi would not result in denial of exemption under Section 13A of the Act. iv. There is no requirement u .....

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o Section 44AA of the Act which applied to political parties so long as the auditor has found the accounting version amenable to verification and audit and the report is not qualified, the purpose of law is well subserved. vi. Since the Assessee had been claiming Nil income any variation in the income was an academic issue. As regards claim for interest, it was held that in the light of the decision in C.I.T. v. Anjum M.H. Ghaswala [2001] 252 ITR 1 (SC), the Assessee deserved to succeed. The pre .....

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f 2001), this Court has elaborately discussed the scope of Section 13A of the Act and has come to the following 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 ne .....

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ould be included in the taxable income. Voluntary contributions are not in the nature of 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 contributions of a political party cannot be excluded from its total income because such political party has not complied w .....

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le 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 .....

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he assessment is completed but certainly not thereafter. 31. In the aforementioned decision involving the Indian National Congress ('INC'), the Court has held, on the facts of that case, inter alia, that since the Assessee 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 13 A of the Act was not fulfilled by the Assessee. Facts not i .....

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it was only after the Chennai bank account of the Assessee was detected that the Assessee came forward to make a disclosure of the bank accounts of its Mumbai and Bangalore units. In other words, the accounts that were produced were not consolidated and were, therefore, incomplete. Submission of counsel 33. It was sought to be urged by Mr. Krishnan, the learned counsel for the Assessee, that there was a bona fide reason for the Assessee not having filed the consolidated accounts of the central o .....

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AO. He sought to support the findings of the ITAT and pointed out that unless the books of accounts were rejected by the AO, what was stated therein has to be accepted as the correct depiction of the financial state of the Assessee. Mr. Krishnan submitted that Section 13A of the Act was not a computation provision and there was no requirement that the receipts of the party had to be applied for any expenses for political purposes. According to him, therefore, the ITAT s order was perfectly in or .....

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. Mr. Shivpuri expressed surprise that the receipt books were manually numbered and that not one donation was above ₹ 10,0000. According to him this showed a desperate attempt at producing fabricated documents just to meet the deadline set by the AO for furnishing the accounts. Analysis and reasons 35. The above submissions have been considered. What is striking in the present case is the casualness of which the Assessee has gone about discharging its statutory obligations as political par .....

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r Income Tax Purpose Income from other sources: Gross receipts: Voluntary contributions : 68,64,800 Less : Exemption u/S 13A : 68,64,800 Taxable income : NIL Note: Assessee is a political party registered with the Election Commissioner of India and Election Symbols (Reservation and Allotment) Order, 1968. The entire income of political party by way of voluntary contributions are exempt under Section 13A of the IT Act. Sd/- (Dr. Subramanian Swamy) President 36. Enclosed with the income tax return .....

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of accounts and documents necessary for above have been maintained. The receipts and payments duly certified by me is in accordance with the records maintained by the party. Date: 16th Feb. 96 Sd/- Place: Madras (S. SANTHANAGOPALAN) 37. In order to justify the above report, the third document was appended titled Receipts and Payments Account 1994-1995 and reads as under: JANATA PARTY RECEIPTS AND PAYMENTS ACCOUNT 1994-1995 Receipts: Rs. P. Cash at Bank: Vijaya Bank: New Delhi a/c 27,46,633.65 Vo .....

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11,433.65 In terms of separate report attached Sd/- Sd/- (Dr. SUBRAMANIAN SWAMY) President (S. SANTHANAGOPALAN) 38. Apart from the above documents, nothing has been filed along with the returns. On the date when the above returns were filed, it was known to the auditor that there were bank accounts of the state units and yet the Auditor made no reference to them. Two inferences are possible: either Dr. Swamy did not disclose the full facts to the auditor or the auditor gave an incorrect report w .....

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for above reveal that the auditor himself had not been satisfied that the entire accounts had been disclosed. Even as regards the Receipts and Payments (R & P), the auditor only states that it is in accordance with the records maintained by the Party. It is plain that the auditor had no access to the entire accounts of the party and therefore, the above statement was false to his knowledge. 39. It is also not in dispute that it is only during the course of the assessment proceedings and, in .....

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as the voluntary contribution. 40. At this stage it requires to be noticed that a CA can possibly give four kinds of audit reports. First is to state that the complete accounts have been produced and it represents the 'true and fair view' of the financial affairs of the Assessee. The second is to give a qualified audit report highlighting which matters have not been fully explained by the Assessee. The third is to give an adverse report to the effect that the complete accounts have not .....

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ed accountants, is constituted. The ICAI has issued a Code of Conduct for the guidance of its members to adopt high standards of professional conduct. Referring to the said document this Court in Council of Institute of Chartered Accountants of India v. Kul Rattan Bhasin (2011)183 DLT 648 observed: "A large section of public relies on the objectivity and integrity of professional accountants to maintain the orderly functioning of commerce. Such reliance imposes a public interest responsibil .....

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an impact on the economic well-being of their community and the country. 42. In a separate judgment delivered today in Commissioner of Income Tax, Delhi-XI v. Indian National Congress (I)/All India Congress Committee (supra), while dealing with the role and responsibility of auditors in relation to accounts of political parties, the Court has noted as under: "105. The ICAI issued a 'Guidance Note on Accounting and Auditing of Political Parties' in February 2012. The covering note o .....

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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. 106. The covering note of the President ICAI acknowledges that "the present system of accounting and financial reporting followe .....

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oth a statutory and a professional responsibility. With particular reference to Section 13A of the Act, the audit report becomes a most crucial document from which the AO should be able to determine if the claim for the exemption under Section 13A of the Act is justified. 44. To recapitulate, the three mandatory requirements for availing of the benefit of exemption under Section 13A of the Act are that a political party: (a) has to keep and maintain such books of accounts and other documents as .....

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mption under Section 13 A of the Act is critical. For the reasons already noticed, it is plain that the audit report in the present case does not satisfy the requirement of the law. The accounts produced by the Assessee were not such as would enable the AO to properly deduce its income. The consolidated accounts produced after the filing of the returns disclosed a figure of voluntary contributions that differed from that disclosed in the original return. The consolidated returns revealed the fig .....

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ly disbelieved. The Assessee's case that all donations were received in cash, were accumulated at the various units and were remitted to the central office personally by the party functionaries when they happened to come to New Delhi for attending meetings was unable to be satisfactorily substantiated. The AO found large gaps in the monthly accumulations of the donations at the various places and its actual deposit in the bank account of the central office. No regular books of accounts had b .....

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nd the deposits of cash. 47. The Assessee also did not offer any explanation as to why donations collected by the various state units were not remitted to the central office either by the bank draft or telegraphic transfer. The assertion that each donation was less than ₹ 10,000 was a desperate one and not at all convincing. The documents produced did not support such an assertion. It was not enough that documents in support of voluntary contributions ought to have been preserved but they .....

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