By TIOL News Service

NEW DELHI, MAR 26, 2016: THE issue before the Bench is - Whether the requirement of maintaining audited accounts and furnishing those accounts in terms of the proviso to Section 13A of the Act is mandatory. YES is the verdict.

Facts of the case

The Assessee is a political party registered under the Representation of People’s Act and satisfies the description of a 'political party' for the purpose of Section 13A of the Act. The Assessee was initially not filing its annual returns of income in terms of Section 139 (4B) which was introduced by the Taxation Laws (Amendment) Act, 1978 with effect from 1st April 1979. This was simultaneous with the insertion of Section 13A of the Act. Income Tax Department first issued a notice to the assessee under Section 142(1) asking it to file its income tax returns for AY 1995-96. Later, a reminder notice was issued. Assessee was also requested to furnish audited accounts in respect of AYs 1993-94 and 1994-95. Yet another reminder was issued. Assessee filed income tax returns for AYs 1993-94, 1994-95 and 1995-96 together for the first time. The returns for the earlier AYs i.e., 1991-92 and 1992-93, were filed later. Each of the returns was filed showing Nil income after claiming exemption under Section 13A of the Act. AO while issuing notice under Sections 143(2) and 142(1) asked for specific details. AO noted that there was no compliance or any communication received from the assessee. AO passed assessment order for AY 1994-95 noting that the returns pertained to the accounts of the Central Office alone. AO noted that INC had given a break-up of the collection from sale of coupons. There was purse money presented to the Congress President in the shape of garlands and purse money presented to the Deputy Home Minister. This list (A) contained the break-up of the donors who had given voluntary contributions in excess of Rs. 10,000. The AO noted that the list was incomplete since it did not contain the complete address of such donors as was required by Section 13A. The AO noted that “despite repeated opportunities, the party failed to fulfil this statutory requirement.” AO noted that a ledger account of the donations reflecting those in excess of Rs. 10,000/- did not mention the complete address of the donors. AO note that in respect of the three donations received from abroad, addresses of the contributors were not furnished till the time of framing of assessment. AO noted that the INC had failed to satisfy the conditions mentioned in Section 13A of the Act in all three respects, i.e., (i) furnish consolidated accounts that would reflect its income on all India basis; (ii) produce books of accounts and other documents to enable the AO to properly deduce the figures of its income therefrom; and (3) place on record the list of all donors, who had made voluntary contributions in excess of Rs. 10,000 with their complete names and addresses. AO concluded that the INC's claim under Section 13A of the Act could not be allowed and that the receipts would be subject to tax. 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. 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. AO noted that the claimed expenditure under various heads were mostly related to political activities and that the establishment expenditure had to be treated as the only non-political expenditure. In respect of ‘income by way of voluntary contributions’ no expenses were allowed. Interest on fixed deposits was assessed as ‘income from other sources’. 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., AO allowed the entire expenditure on the employees and only 10% of the expenses under the head ‘other expenses’ as per schedule 7 of the accounts. Towards the end of the order, the AO observed “Charge interest. Penalty proceedings under Section 271(1)(b) and 271(1)(c) have been separately initiated”. CIT (A) upheld order of AO but granted relief in reducing the computable income. ITAT partly allowed assessee’s appeal and dismissed revenue’s appeal.

Having heard the parties, the Court held that,

+ 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 ‘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.

++ 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.

++ 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 identified as a separate head of income in Section 14 of the Act, the legislative intent was not to exclude it altogether from the taxable income. It would be excluded only subject to fulfilment of the conditions stipulated under Section 13A of the Act. 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 Rs. 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.

++ 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 13A of the Act is not exclusive of Section 14 F or Section 56(1) of the Act. If the total income by way of voluntary contributions of a political party cannot be excluded from its total income because such political party has not complied 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.

++ the mere fact that income by way of voluntary contributions in the hands of Trusts and other entities (other than the political party) is deemed to be income under Section 2 (24) (iia) of the Act, will not mean that it is not income as far as the political party is concerned.

++ the 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 definitely forms the corpus from which expenses are incurred by the political party. It is a regular source of income. It may or may not be a windfall depending on the size of the donation.

++ although it is true that all receipts are not income, clause F of Section 14 read with Section 56(1) of the Act, provides an affirmative answer to the question whether income by way of voluntary contributions is ‘income from other sources’ in a situation where the proviso to Section 13A(1) of the Act is not fulfilled by a political party.

++ the voluntary contributions received by the INC during the AY in question has to be treated as ‘income from other sources’.

++ the requirement of maintaining the audited accounts and furnishing those accounts in terms of the proviso to Section 13A of the Act is not merely directory.

++ political parties are purportedly incurring expenses for their political activities. It is with a view to placing a check on the financial transactions of political parties that the proviso to Section 13A was enacted. In this context, the object of Section 13 A of the Act will be defeated if the compliance with the requirements of the proviso thereto are held not to be mandatory.

++ Section 13A has to be read as a whole. It is a provision beneficial to a political party. It exempts various items of income of a political party from tax. If it has to be strictly construed, so too should the conditionality attached to Section 13A. If a political party seeks exemption from paying income tax in a particular AY, it is incumbent on such political party to strictly comply with each of the requirements in the proviso to Section 13A and to do so by the time the assessment is completed. At the highest, there can be a leeway between the time of filing of the return and the completion of the assessment but certainly not thereafter. This is a reasonable interpretation to be placed on the said provision as far as the time period for compliance with the requirement of the proviso to Section 13A of the Act is concerned.

++ 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.

++ 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.

++ the mere fact that the INC may have 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.

++ INC failed to demonstrate sufficient cause in terms of Rule 46A(1)(b) and 46A(1)(c) of the Rules.

++ the accounts for AY 1994-95 were audited only on 1st July 1997. This was more than two years after the end of the relevant FY. The consolidated accounts were tendered before the CIT (A) only on 4th November 1997. This was certainly an unacceptable and inordinate delay. Given the context of Section 13A of the Act, such delay could not possibly have been condoned. (para 99);

++ the audited 'consolidated' accounts filed before the CIT (A) also do not satisfy the mandatory legal requirement. 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. (para 100);

++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.

++ with the Revenue having preferred an appeal before this Court against the impugned order of the ITAT, all further proceedings consequent upon the remand to the AO would obviously be subject to the outcome of the present appeal. It is, therefore, to 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.

++ 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 subsequent to the AY in question. There appears to be a laxity on the part of the income tax authorities in not insisting on strict compliance with the mandatory requirement of Section 139(4B) read with Section 13A of the Act, thereby defeating the very purpose of the said provisions as was foreseen by the Supreme Court in Common Cause v. Union of India. In the circumstances, the rule of consistency cannot be applied to condone the violation of the law by the INC.

++ estimation of income of a political party is different from estimation of income of other taxable entities.

++ there are too many imponderables that make the task of estimating, with a degree of certainty, the income of a political party extremely difficult.

++ 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 Rs 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.

++ 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 requirements of Section 13A of the Act.

++ the only way to proceed in the present matter is to wholly disallow the expenditure claimed by the INC as relatable to ‘income from other sources’. On the receipts side, the Revenue will simply have to go by whatever is disclosed by the INC as income by way of voluntary contributions in the return as originally filed and treat that as income from other sources. (para 125);

++ Court disagrees with the decision of the CIT (A) restricting 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.

++ 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. 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.’

++ the AO may not have separately dealt with the issue of interest in the assessment order, interest can nevertheless be charged on the tax amount due under Section 234A and 234B of the Act. Consequently, the decision of the ITAT on this aspect is set aside.

(See 2016-TIOL-587-HC-DEL-IT)