TMI Blog2016 (3) TMI 879X X X X Extracts X X X X X X X X Extracts X X X X ..... ided against assessee - ITA 145/2001, ITA 180/2001 - - - Dated:- 23-3-2016 - S. Muralidhar And Vibhu Bakhru, JJ. For the Petitioner : Mr. Rahul Chaudhary, Senior Standing Counsel with Mr. Raghvendra Singh, Advocate. For the Respondent : Mr. C.S. Aggarwal, Senior Advocate with Mr. Prakash Kumar, Mr. Gautam Jain, Ms. Pushpa Sharma and Mr.Madhur Aggarwal, Advocates JUDGMENT 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( ADR ), the LCI noted that: more than 75% of parties sources are unknown, while donations over ₹ 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 ₹ 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/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cuments as would enable the AO to properly deduce its income therefrom, (b) in respect of each voluntary contribution in excess of ₹ 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. 9. A further proviso to Section 13A was inserted by the Taxation Laws Amendment Act, 2003 (Act 46 of 2003) which stated that on failure by 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tember 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. 14. It is only thereafter that the INC filed income tax returns for AYs 1993-94, 1994-95 and 1995-96 together for the first time on 14th February, 1996. The returns for the earlier AYs i.e., 1991-92 and 1992-93, were filed later on, i.e. on 30th October, 1996. Each of the returns was filed showing Nil income after claiming exemption under Section 13A of the Act. 15. On 25th September 1996, the AO while issuing notice under Sections 143(2) and 142(1) of the Act to the INC for AY 1994-95, asked for specific details in terms of the annexure to the said notice. The INC was asked to furnish: (i) its consolidated accounts on an all-India basis by incorporating all the accounts of the State Units; (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 volunt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 10,000/- but the complete addresses is not mentioned. Further, as above the books of A/c's of the respective units were not produced neither any supporting vouchers. 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. 5. The AR has furnished the A/c's in respect 14 units only. The AR has submitted that the A/c's in respect of the others are not available with him. The AR has further stated that the books of A/c's in respect of Central Office will be produced. The AR, is requested to produce the same for verification. 18. The proceedings recorded on 25th March 1997 showed that Mr. Rajesh Sharma, Chief Accountant and Mr. C.P. Malhotra, Accountant, attended the proceedings and produced the cash book and ledger of the Central Office. The AO then noted as under: 1. From the Sale of coupons A/c's there are deposits exceeding ₹ 10,000/- The AR have explained that the Treasurer of the Party is in custody of the same it is he who gets collection from Sale thereof. 2. From the donations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss than a week prior to the deadline for framing of the order, the INC on 25th March 1997, furnished some of the details. The AO noted that a ledger account of the donations reflecting those in excess of ₹ 10,000/- did not mention the complete address of the donors. The Authorised Representative (AR) of the INC sought to explain that these represented coupon sales but could not produce receipts or other supporting documents or counterfoils of the said coupons for verification of the claim. 23. The AO then turned to the three donations received from abroad and noted that while the INC had placed on record its correspondence with the bank, it expressed its inability to give further details. These three donations were discussed by the AO in para 5.1 of the assessment order. They were shown to be of the same date, i.e., 24th December, 1993. The first was a sum of ₹ 40 lakh from Dominion Trading Company . The two others were of ₹ 30 lakh each from Decor Trading Company . The addresses of the above parties were not furnished. According to the INC, the details were being obtained from the banks from which the drafts had been received. The Treasurer of the INC addres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... together at ₹ 15 crores that could make the total receipts of the party after including this estimated sum of ₹ 15 crores shall be ₹ 26,33,57,696/- (Rs. 11,33,57,696 + ₹ 15,00,00,000). 28. The AO then noted that the claimed expenditure of ₹ 16,45,27,326 under various heads were mostly related to political activities and that the establishment expenditure had to be treated as the only non-political expenditure. Only those expenses which could be said to be laid out wholly and exclusively for earning income under the head income from house property and income from other sources were allowable. In respect of income by way of voluntary contributions no expenses were allowed. Interest on fixed deposits amounting to ₹ 89,72,827.78 was assessed as income from other sources . For AY 1994-95, there was no income under income from house property . 29. As regards the expenditure towards salaries and other benefits to its employees, postage and telegrams, travelling, rent and taxes, water and electricity, printing and stationery etc. in the sum of ₹ 1,45,98,768.16, the AO allowed the entire expenditure of ₹ 37,58,036 on the employ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aforesaid facts, the evidence now the assessee is seeking to place on record may kindly be admitted . 35. The comments of the AO were then sought by the CIT (A) on the application and the accompanying documents. Inter alia, the AO pointed out that the specific instances in Explanation 1 to Section 153(3) of the Act, as it stood at that time, did not apply to the INC and, therefore, the INC could not be permitted to furnish the final accounts after the limitation period had expired. The AO turned down the 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 whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 41. It was submitted by the INC that there was no time limit under Section 13A of the Act for completing the audited accounts and, therefore, the audited accounts, which were completed after the assessment order for the AY 1994-95, should be considered after the matters were remanded to the AO for a fresh consideration. Reliance was placed on the CBDT s Circular dated 19th October 2000. It was submitted that there was no basis for the CIT (A) to restrict the expenditure to 60% of the claim. 42. It was submitted that for AY 1994-95, the question of granting exemption under Section 13A of the Act would arise only if there was income fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ₹ 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 shown in central office account at ₹ 11,33,57,696 and from all the state and other units at ₹ 3,82,97,972 + ₹ 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 politica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s well as in the Assessee s appeal. Meanwhile, in terms of the 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 ₹ 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 ₹ 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 ₹ 60,23,621. 45. On 12th November 2014 the Court framed a further question of law in addition to those already framed by its order dated 3rd January 2002. On 8th December 2015 in light of the submissions made by both learned counsel for the Revenue as well as learned Senior counsel for the Assessee, one further question of law was framed for consideration by the Court in the Revenue's appeal, i.e., ITA No. 145 of 2001. 46. Also, in substitution of the questions framed in the Assessee's appeal, ITA No. 180 of 2001 on 3rd January 2002, the Court f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mption under Section 13A of the Act? 2. Whether, in the circumstances of the case and on the basis of material on record, the ITAT was justified in denying exemption to the Assessee under Section 13A of the Act and even refusing to condone the delay that had occurred in audit of some of the State units? 3. Whether, the ITAT was right in holding that the Assessee had failed to fulfil the three conditions envisaged under Clauses (a), (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. 50. Before proceeding to interpret Section 13A, certain other terms and expressions used in the provisions of the Act require to be noticed. The expression voluntary contributions has been defined under Section 2(24)(iia) of the Act as under: voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes or by an association or institution referred to in clause (21) or clause (23), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... known as Secretary or by any other designation) of every political party shall, if the total income in respect of which the political party is assessable (the total income for this purpose being computed under this Act without giving effect to the provisions of Section 13A exceeds the maximum amount which is not chargeable to income-tax, furnish a return of such income of the previous year in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed and all the provisions of this Act, shall, so far as may be, apply as if it were a return required to be furnished under sub-section (1). 54. The expression political party , as stated by the explanation to Section 13A of the Act, as it stood at the relevant time, meant a political party registered with the Election Commission of India under paragraph 3 of the Election Symbols (Reservation and Allotment) Order, 1968, and includes a political party deemed to be registered with the Commission under the proviso to sub-paragraph (2) of that paragraph.. The scheme of the these provisions appears to be that, after 1st April 1979, it was incumbent on every registered political ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his consideration does not apply in the case of political parties, it is proposed to exempt them from the levy of wealth-tax. 4. This Bill accordingly seeks to amend the Income-tax Act, 1961, and the Wealth-tax Act, 1957, mainly with a view to achieving the aforementioned objects. 57. The Income Tax Circular No. 245 dated 11th August 1978 also explained the purport of the above provisions. It was clarified in para 4 of the said circular that the exemption under Section 13A of the Act would not be available unless a political party fulfils the following conditions: (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. (ii) it keeps and maintains records of each voluntary contribution in the excess of ₹ 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. 58. It requires to be noticed at this stage that Section 13-A of the Act has undergone further changes in 2003 and as at pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om 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 2(24)(iia) of the Act. He further submitted that voluntary contributions could never be considered to be a regular source of income. 61. Mr. Aggarwal referred to the decision in Commissioner of Expenditure Tax v. P.V.G. Raju (1975) 101 ITR 465 (SC) where it was held: 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 . 62. Mr. Aggarwal also referred to the decisions in Commissioner of Income Tax v. Harprasad Company Private Limited (1975) 99 ITR 118 (SC) and Parimisetti Seetharamamma v. Commissioner of Income Tax (1965) 57 ITR 532 (SC) to urge that all receipts were not income and the burden was on the Revenue to establish that a voluntary contribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tary 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 ₹ 20,000 in substitution of ₹ 10,000. 67. Mr. Singh referred to the decision in Commissioner of Income Tax v. MP Anaj Tilhan Vyapari Mahasangh (1988) 171 ITR 677 (MP) and submitted that voluntary contributions received by a political party was income under Section 2(24) of the Act and was a revenue receipt. Reliance was placed on the decisions in Karanpura Development Co. Ltd. v. Commissioner of Income Tax (1962) 44 ITR 362 (SC) and Aroon Purie v CIT. (2015) 375 ITR 188 (Del). 68. Mr Singh submitted that whether a receipt is income or not is a mixed question of fact or law and the matter ought to be remanded to the ITAT to call for and examine the complete books and decide the question afresh. 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 carrying on an activity that is comparable to that carried on by a charitabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and that the whole expression is income writ large. 7. But whatever income may include or mean it is however, clear that it does not include fixed capital or the realising of fixed Capital by turning it into some other form of capital or money. Fixed capital in something which the owner keeps in his possession but turns to profit; circulating capital however, is turned over in the process of profit making. It may sometimes happen that in the process of production, fixed capital may be consumed or wasted, but that is a reduction of capital and not an expenditure in the business claimable as an allowance in the reduction of assessable income in the shape of profits of the business. 73. It is, therefore, clear that an income has to necessarily arise from a receipt of money but all receipts do not qualify as income . What is clear is that income does not include fixed capital or realising of fixed capital by turning it to some other form of capital or money. It has to be a periodical monetary receipt not in the nature of windfall. It has to be earned with some sort of regularity from definite sources. 74. That takes us to Section 14 of the Act which specifies the he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 . 80. The above provision makes it clear that clause F of Section 14 is a residuary provision. If an income which is not to be excluded from the total income and is not chargeable to income tax under heads A to E, then it has to be treated as income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 84. 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. 85. 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 hands. It defini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). 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 audi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the time period for compliance with the requirement of the proviso to Section 13A of the Act is concerned. 95. It is not in dispute that as far as AY 1994-95 is concerned, the INC did not submit the complete audited accounts by the time the assessment was completed. What was submitted was only the accounts of the central office and not the state units. It was only before the CIT (A) that an application was filed under Rule 46A seeking to place on record the consolidated accounts of the central office, 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 the Congress Parliamentary Party. That attempt was rebuffed by the CIT(A) and the decision in this regard was upheld by the ITAT. 96. Given the above legal position regarding the mandatory requirement of Section 13A of the Act, the CIT (A) was justified, and so was the ITAT, in declining the application of the INC under Rule 46A seeking permission to place on record the consolidated accounts at the appellate stage. 97. The mere fact that the INC may h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that a standard format report has been adopted. The auditor s report dated 1st July 1997 for the AY 1994-95 reads as under: The President Indian National Congress New Delhi. 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. 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. 101. The Schedule A to the balance sheet reads as under: Notes on Accounts Forming part of the Balance Sheet as on 31.03.94 1. Generally cash system of accounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a CA, is to examine if the accounts maintained by an Assessee give a true and fair view of its financial affairs. Significantly, the above report does not use the expression true and fair view at all. There is also a difference between an Auditor saying that the accounts are in accordance with the Assessee's books of accounts and the Auditor saying that they are in accordance with the books of accounts produced before us . If an Assessee has failed to maintain or produce all the books of accounts, receipts, vouchers etc., in accordance with the mandatory legal requirement, it was incumbent on an auditor to qualify his report to that extent. 103. It is also disconcerting to note that the same auditor has issued identical certificates for other AYs for which simultaneously accounts have been finalised. This kind of an auditor s report, to say the least, leaves much to be desired. It does not comport with the degree of seriousness with which a duly qualified auditor is expected to discharge his statutory obligations. An auditor is discharging both the professional and a statutory duty. He is licensed under the expectation that he will faithfully discharge the above obligatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or thereto there was no such requirement of a auditor's report to satisfy the statutory mandate of Section 13A of the Act. 108. Since no attempt has been made by the INC 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 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. 110. The above sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 ₹ 15 crores in the absence of any reliable document or voucher. 115. In this context it was submitted by learned counsel for the Revenue that although the AO did not mention Section 144 of the Act, it was permissible for him to have made such an estimation of income. It is further stated that estimation is possible even under Section 143(3) of the Act. Reliance was placed on the decisions in Seth Gunmukh Singh v CIT [1944] 12 ITR 393 (Lahore) and Dhakeshwari Cotton Mills v CIT [1954] 26 ITR 775 (SC). It was submitted that this kind of a defect is curable under Section 292B of the Act. It was submitted that in the facts of the case since the INC failed to comply with the terms of notice under Section 142(1) of the Act, it was open to the AO to make a best judgment assessment. Reliance was placed on the decision in CIT v R. Narayanrao (2011 338 ITR 625 (AP). 116. As has alre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dates to the Election Commission of India, that per se cannot form a reliable source of estimation of the voluntary contributions that may be made to a political party. 119. As far as the Act is concerned, there is at present a lacuna inasmuch as upon failure of a political party to comply with Section 139 (4B) of the Act in letter and spirit, and with auditors not discharging their statutory obligation, the income tax authority is hamstrung by the lack of reliable data on which to base a reasonably accurate estimation of income of a political party. 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 ₹ 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. 121. The question that then arises is whether the ITAT ought to have remanded the matter to the AO for re-computing the INC's taxable income for the Ay 1994-95? Here the Court would like to recapitulate that we are dealing with AY 1994-95 and the current year is 2016. What wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical 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. (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 fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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., ₹ 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. 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) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the proceedings to the AO, the orders passed on remand by the AO, the CIT (A) and the ITAT do not survive. 133. The appeals of the INC and the Revenue are disposed of in the above terms. There shall be no order as to costs. 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... 135. In its 255th Report ..... X X X X Extracts X X X X X X X X Extracts X X X X
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