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2016 (3) TMI 879 - DELHI HIGH COURT

2016 (3) TMI 879 - DELHI HIGH COURT - [2016] 383 ITR 99 - Exemption u/s 13A - Political party registered as such under Section 29A of the Representation of People Act, 1951 - whether 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 Income Tax Act, 1961? - Held that:- ITAT was correct in law in holding that the audited accounts filed by the INC before the CIT (A) could not be accepted as eviden .....

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- Decided 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 mon .....

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ment 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 discrimin .....

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vely 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 .....

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as 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." 1.6 Referri .....

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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 .....

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sue 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 estima .....

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laiming such exemption under the proviso to Section 13A of the Act. 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. 6. The Assessee was initially not filing its annual returns of income in terms of Section 139 (4B) of the Act which was introduced by the Taxation Laws (Amendment) Act, 1978 with effect from 1s .....

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and (c) of the proviso to Section 13A. A political party has to: (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 ₹ 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 .....

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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. .....

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ve a separate existence. 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 .....

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g 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 defaulting political party and initiate necessary action in accordance with law including penal action under .....

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after 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 i .....

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e been placed on record. On 28th October 1996, the AO noted that there was no compliance or any communication received from the INC. The same position continued on 28th November, 1996 and 16th December, 1996. The proceedings of 29th January 1994 read as under: There has been a continued non-compliance from the Party and no details have been placed on record by the Party. In between Shri C.P. Malhotra had appeared in connection with the filing of I.T. Return was again reminded. In view of this, a .....

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ve. 1. In the R & P A/c of the AICC (I), the donations shown are ₹ 10,50,000/- but no details of them are furnished as required u/s 13A. The AR expressed his inability to do so. Furthermore, it is noticed that the Party has furnished R & P A/c's in respect of the Distt. Units also. No Balance Sheet was filed. 2. In the A/c's of the following State Units. 1. Haryana 2. Bihar 3. Himachal Pradesh 4. Kerala 5. Madhya Pradesh 6. Manipur 7. Uttar Pradesh 8. Andaman & Nicobar .....

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garding the other receipts like Membership etc. has been placed on record. 3. In the case of other Units namely-Mizoram, the Party has furnished a list of donors in excess 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 b .....

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ed 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 A/c in page 650 of Ledger, the name of donors is mentioned but the addresses is not shown. No supporting documents produced. 3. From Misc. r .....

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CC membership fee ₹ 3,220/- (iv) Delegation fee ₹ 13,375/- (v) AICC Membership fund ₹ 600/- 20. The details of other income were furnished in Schedule 6 of the accounts and read as under: Other Income i. Interest on Fixed deposits ₹ 89,72,827/- ii. Miscellaneous Receipts ₹ 13,532/- iii. Donation Rs.2,22,73,430/- iv. Literature Sale ₹ 5,710/- Rs.3,12,65,500/- 21. The AO proceeded to note that the INC had given a break-up of the collection from sale of coupons i .....

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incomplete since it did not contain the complete address of such donors as was required by Section 13A of the Act. The AO noted that despite repeated opportunities, the party failed to fulfil this statutory requirement. 22. Less 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. T .....

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ssment 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 addressed a letter on 14th November 1996 stating that addresses of the above contribu .....

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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. 25. The AO discussed at length the provisions of the Act governing political parties. The AO noted that the INC had failed to satisfy the conditions mentioned in Section 13A of the Act in .....

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d that the receipts would be subject to tax. The AO noted the note in the Auditor s report that since all the Pradesh Committees had not supplied necessary details of their primary and active members, and that no adjustment of membership fee could be made in the books of accounts. 27. The AO had to make an estimate of the receipts since despite several requests the Assessee was unable to furnish the details of the collections made by the state units. Even the accounts of the 14 state units submi .....

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,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 .....

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10% of the expenses under the head other expenses as per schedule 7 of the accounts. 30. Thus a total expenditure of ₹ 52,17,912 was allowed in relation to the Central office establishment. The expenditure of state units was computed at ₹ 68,71,700. The total expenses worked out to ₹ 1,20,89,616 which when adjusted against the receipts (Rs. 26,33,57,696), gave a taxable income of ₹ 25,12,68,081. 31. Towards the end of the order, the AO observed Charge interest. Penalty p .....

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nd, therefore, the INC had not been granted sufficient opportunity to comply with the various requisitions of the AO. 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 In .....

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, 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 . 35. The comments of the AO we .....

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ed 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 statuto .....

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viewed from the perspective of it having to implement its policies, objectives and manifesto and also to contest elections for which it needed a large number of vehicles, millions of leaflets, posters, banners, flags, loudspeakers etc. The employees expenses were allowed in full. It was also held that depreciation to the extent of ₹ 1,15,46,998.17 also ought to have been allowed. The balance claim of expenses then came to ₹ 14,92,22,294. Consequently, an estimate was made of the expe .....

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ggrieved that the CIT(A) had granted relief of only reducing the computable income by ₹ 9,27,48,793 (thereby computing the total income at ₹ 25,12,68,081 (-) ₹ 9,27,48,793). Further according to the INC the CIT (A) ought to have considered the additional evidence tendered and no prejudice would have been caused to the Revenue if it had. It was, inter alia, pointed out that the estimate of the receipts on account of membership fee, coupon sales and purse money, etc. at ₹ 1 .....

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ence 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 sub .....

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ed that for AY 1994-95, the question of granting exemption under Section 13A of the Act would arise only if there was income for the said AY. In view of the fact that there was an overall deficit in the consolidated account filed before the CIT(A) to the extent of ₹ 4.60 crores there was no justification in the CIT (A) confirming the estimate of receipts and allowing only part of the expenses. Order of the ITAT 43. The ITAT in the impugned order dated 9th April 2001 came to the following c .....

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( 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 opportuni .....

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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 ₹ 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 fr .....

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nable 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 .....

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e 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 uti .....

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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 se .....

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ons 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 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 inc .....

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, 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 framed three substantial questions of law by its order dated 8th December 2015. 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 fram .....

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ccounts produced before the AO and CIT (A) despite its finding that Assessee failed to furnish the complete accounts and produce the books of accounts of all its units before AO in spite of ample opportunities given to it? 3. Whether ITAT was justified in law and on the facts in holding that the objects of a political party fall within the scope and expression "any other object of general public utility" appearing in Section 2(15) of the Act? 4. Whether ITAT was justified in deleting t .....

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s received by the political party cannot be considered as income from other sources in the absence of availability of relief of benefit of Section 13-A of the Act? 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: 1. Whether the ITAT was correct in law in holding that the audited accounts filed by the Assessee before the CIT (A) .....

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e 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 contribu .....

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ust" includes any other legal obligation; 51. It is significant that the above definition does not include voluntary contributions received by a political party . However, does that mean that voluntary contributions received by a political party, which finds mention as an exempted category of income under Section 13A of the Act, is not otherwise income ? 52. In order to understand this, the purpose of inserting Section 13A of the Act has to be examined. Section 13A of the Act was introduced .....

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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 (c) the accounts of such .....

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sub-paragraph (2) of that paragraph." 53. This was simultaneous with the insertion of Section 139(4B) of the Act which reads as under: 139 (4B). The chief executive officer (whether such chief executive officer is 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 .....

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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 party to furnish a return of income, if the total assessable of such political party e .....

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ndments reads as under: Political parties are essential in any democratic set-up. The taxation of their income, however, reduces their disposable funds thereby adversely affecting their capacity to finance their activities from legitimate sources of income. It is, therefore, proposed to provide for exemption from income tax in respect of specified categories of income derived by political parties, namely income from investments both in movable and immovable properties and income by way of volunt .....

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olitical party are audited by a chartered accountant or other qualified accountant. 2. Payments made for advertisements in souvenirs, brochures and the like published by political parties are not made on considerations of commercial expediency, but are in the nature of disguised donations made with the twin objective of circumventing the ban on company donations and for securing their deduction in the computation of taxable profits. It is, therefore, proposed to provide that expenditure incurred .....

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x 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 inco .....

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A. 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 en .....

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rty 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). 59. Th .....

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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 .....

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s 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 volunt .....

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rwal pointed out that under Section 14 of the Act, there were various heads of income provided but there was no head of income 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. 64. Mr Aggarwal submitted that had income by way of voluntary contributions been income from other sources, there would have been no occas .....

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. 1988 dated 19th October 2000 issued by the CBDT which clarified that income of political parties from voluntary contributions cannot be said to be income from other sources . A distinction was also drawn between the expression income by way of voluntary contributions received occurring in Section 13A of the Act and any voluntary contribution received by an electoral Trust occurring in Section 13B of the Act. Submissions of counsel for the Revenue 66. Countering the above submissions, it was po .....

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ame 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. Commi .....

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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. 70. It is clear, therefore, that 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. 71. The charging provision as far as the Act is concerned is Se .....

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e as Salami for the mining sub-lease constituted a trading receipt in its hands and the profits therefrom were assessable to tax under the Indian Income Tax Act, 1922. The Supreme Court made the following observations: 6. The words "income" has not been defined in the Income-tax Act. In the definition which is enacted certain receipts are said to be included in the concept of income; but it does not say that "income" itself means. Certain working definitions have been given b .....

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on, 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 im .....

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on, 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 mon .....

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me from other sources (Section 14 clause F) 75. When the above heads of income are compared with the heads of exempt income under Section 13A of the Act, as far as a political party is concerned, three of the above heads are exempt from tax. These are income from house property, income from other sources and capital gains (the latter having been inserted by Finance Act, 2003 with retrospective effect from 1st April 1979). Apart from the above three, there is also mentioned any income by way of v .....

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by a political party would not be income at all. 77. Although the above argument appears attractive at the first blush, on 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 identif .....

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ons in excess of ₹ 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 in .....

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tems 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 other sources . Section 14 of the Act no doubt opens with the words save as otherwise provided by this Act and that would include both Section 13A as well as Section 56 of the Act. However Section 13A of the Act does not open with a .....

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rom other sources under Section 56(1) of the Act. 81. 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 .....

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here 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 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. 83. Mr Singh is right in the .....

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ory 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 .....

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the size of the donation. 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 p .....

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ext that it was held that the donation made to a political party qualifies for exemption under Section 5(j) of the ET Act. 88. 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. 89. 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 . No .....

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that unlike certain other provisions 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 th .....

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(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 auditor s report should be filed. In other words, the filing of an auditor s report is di .....

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and furnishing those accounts in terms of the proviso to Section 13A of the Act is not merely directory. 93. 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 .....

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e 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 .....

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ubmit 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 Se .....

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ave 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 .....

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, 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. 98. The Court, therefore, holds that the INC failed to demonstrate sufficient cause in terms of Rule 46A(1)(b) and 46A(1)(c) of the Rules. The decision of the CIT(A) as affirmed by the ITAT, is upheld. 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 J .....

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course of hearing various discrepancies and shortcomings therein. The auditor s report is not in the format that one expects a duly qualified CA to adopt. When it was plain to the CA that the receipts of the state units and the items of expenditure incurred by them units were not supported by documents, a qualified report ought to have been furnished. On the other hand, the Court finds that a standard format report has been adopted. The auditor s report dated 1st July 1997 for the AY 1994-95 rea .....

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ee, 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 .....

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ceipt and payment account. Hence while drawing the Balance Sheet as on 31.3.94 of those offices, fixed Assets and moveable assets have been estimated by the said committees/office bearers and taken into account with corresponding credit to the Reserve Fund account. Assets and liabilities have been incorporated in the financial statement on the basis of details provided to us by the Pradesh Committees. 4. As no financial accounts were drawn for the year in the case of Tamil Nadu and Arunachal Pra .....

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nce of these donations are not in contravention of the Foreign Contribution (Regulation) Act, 1976. 6. Income Tax Department has raised a demand amounting to ₹ 22.96 crore for the assessment year 1994-95. The Party has gone in appeal against this demand and the recovery of the same has been stayed by the department till the disposal of the first appeal. 102. It is not understood how despite the above note, the auditor can simply certify that the balance sheet and the statement of income an .....

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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 l .....

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he professional and a statutory duty. He is licensed under the expectation that he will faithfully discharge the above obligations. In the present case, the Court is constrained to note that the auditor s report submitted before the CIT (A) on 4th November 1997 is woefully short of the requirement of the law. 104. Mr. Aggarwal tried to suggest that a format was prescribed by the Institute of Chartered Accountants of India ( ICAI ) for accounts to be tendered by political parties only recently, i .....

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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 s .....

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alia that: ''In our opinion and to the best of our information and according to the explanations given to us, the said accounts give a true and fair view in conformity with the accounting principles generally accepted in India'' 107. The above guidance note of the ICAI can be said to clarify the legal requirement regarding the standard of reporting that is expected of an auditor discharging both a professional and a statutory responsibility. It does not mean, as was suggested by .....

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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 .....

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no avail as far as the INC is concerned, that in the remand proceedings the AO may have relied on the audited accounts submitted by the INC at the appellate stage. There is no estoppel in such situations particularly since the Assessee has been put on notice that all orders passed on remand are subject to the outcome of the appeal filed by the Revenue in this Court. 111. It is, therefore, to no avail that the AO on remand assessment relied on these audited accounts to determine whether there wa .....

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ion 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) 113. As already noticed, the so-called audited accounts that were presented to the AO by the INC for AY 1994-95, and later in a 'consolidated' form on 4th November 1997 before the CIT(A), does not inspire confidence. The same type of incomplete accounts have been prepared and submitted by the same auditor, for several AYs earlier to and subseque .....

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utions 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 ₹ 15 crores in the absence of any reliable document or voucher. 115. In this context it was submitte .....

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ubmitted 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 already been noted, the INC failed to comply with the requirements of the proviso to Section 13A of the Act and was therefore not eligible to claim exemption from payment of income tax. The INC failed to produce the aut .....

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party is different from estimation of income of other taxable entities. It is not possible to even reasonably guess what could be the contribution to a political party in a given year because a variety of factors are involved. In an election year, closer to the actual dates of election, and because of the extraordinary efforts made by members of a political party, the extent of voluntary contributions might show a marked increase. In a year which is not an election year, the contributions might .....

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the size and frequency of the contribution. For instance, just a few corporate entities could make a very sizeable donation to a political party compared to a political party which has a large number of individual donors. Therefore, there are too many imponderables that make the task of estimating, with a degree of certainty, the income of a political party extremely difficult. This kind of an exercise would require collating a vast amount of data which as of now does not exist in the public dom .....

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ct 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 C .....

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age. It would be a futile exercise particularly since even the so-called audited accounts of the INC, submitted on 4th November 1997 at the stage of the appeal before the CIT (A), are not reliable. The AO would be unable, in the circumstances, to determine the possible extent of voluntary contributions received by the state units. 122. However, as far as the present case is concerned since it is impossible to meaningfully of estimate the income by way of voluntary contributions made to state uni .....

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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. 124. The legal position is that no deduction can be allowed with respect to the expenditure incurred by the political party for any purpose whatsoever if it fails to comply with the basic re .....

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the expenditure of the Assessee to 60% of the amount claimed and order of the CIT (A) and the ITAT to that extent are set aside. 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 st .....

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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 inte .....

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on 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 ₹ 10,000 (now enhanced to ₹ 20,000) and getting the acc .....

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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 out .....

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ctory. (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 com .....

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inal 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. (xii .....

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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 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 .....

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Commissioner of Income Tax v. Bhagat Construction Co. Pvt. Ltd. [2015] 279 CTR 185 (SC) interest can be charged on the tax amount due 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 tha .....

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TAT 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 .....

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y 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 ₹ 10,000 and getting the accounts audited, such voluntary contributions would be incl .....

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amed 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 .....

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, 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 i .....

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