2016 (3) TMI 879 - HC - Income Tax

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 evidence since they were not audited till the assessment was framed and, therefore, the INC was not entitled to exemption under Section 13A of the Act. 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 by holding that the ITAT was right in its conclusion that the INC failed to fulfil the three conditions envisaged under clauses (a), (b) and (c) of Section 13A of the Act. - Decided against assessee

Issues Involved:
1. Interpretation of the words ‘income by way of voluntary contributions received by a political party’ in Section 13A of the Income Tax Act, 1961.
2. Compliance with the conditions under the proviso to Section 13A of the Act.
3. Estimation of income and expenditure of a political party.
4. Allowance of expenditure under Section 57(iii) of the Act.
5. Applicability of interest under Sections 234A and 234B of the Act.
6. Rule of consistency in tax assessments.

Issue-Wise Analysis:

1. Interpretation of ‘Income by Way of Voluntary Contributions’ in Section 13A:
The court held that voluntary contributions received by a political party are taxable as ‘income from other sources’ under Section 56(1) of the Act if the conditions in the proviso to Section 13A are not met. The court rejected the argument that voluntary contributions are not income, emphasizing that they should be included in taxable income unless the political party maintains proper books of accounts, keeps a record of contributions exceeding ?10,000, and gets its accounts audited.

2. Compliance with Conditions Under the Proviso to Section 13A:
The court ruled that the conditions in the proviso to Section 13A are mandatory, not directory. The Indian National Congress (INC) failed to submit complete audited accounts for the assessment year (AY) 1994-95 by the time the assessment was completed. The court upheld the decisions of the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) that the INC did not demonstrate sufficient cause for tendering additional evidence at the appellate stage.

3. Estimation of Income and Expenditure of a Political Party:
The court found that the Assessing Officer (AO) had no basis for estimating the voluntary contributions received by the state units of the INC at ?15 crores. The court noted that estimating the income of a political party is complex due to various factors like election cycles and donor profiles. The court set aside the ITAT’s order remanding the matter to the AO for re-computation, deeming it futile given the unreliable accounts submitted by the INC.

4. Allowance of Expenditure Under Section 57(iii):
The court held that no deduction can be allowed for the expenditure incurred by a political party for attaining its aims and objects if it fails to comply with the requirements of Section 13A. The court disallowed the expenditure claimed by the INC as relatable to ‘income from other sources’ and directed the Revenue to treat the disclosed income by way of voluntary contributions as income from other sources.

5. Applicability of Interest Under Sections 234A and 234B:
The court ruled that interest can be charged on the tax amount due under Sections 234A and 234B of the Act, even if it was not separately dealt with in the assessment order. The court set aside the ITAT’s decision to delete the interest charged under these sections.

6. Rule of Consistency in Tax Assessments:
The court rejected the argument based on the rule of consistency, stating that the incomplete and unreliable accounts submitted by the INC for AY 1994-95 cannot be condoned. The court emphasized that the rule of consistency cannot be applied to condone the violation of the law by the INC.

Summary of Conclusions:
- Section 13A of the Act is not a computation section; income by way of voluntary contributions is excluded only if the conditions in the proviso are met.
- Voluntary contributions are not capital receipts and are taxable as ‘income from other sources’ if the conditions of Section 13A are not satisfied.
- The requirement of maintaining audited accounts and furnishing them is mandatory.
- The rule of consistency cannot be applied to condone the violation of the law.
- The estimation of voluntary contributions by the AO was baseless and futile to remand the matter for re-computation.
- No deduction for expenditure is allowed if the conditions of Section 13A are not met.
- Interest under Sections 234A and 234B can be charged even if not separately dealt with in the assessment order.

Postscript:
The court highlighted the need for legislative measures to ensure transparency and accountability in the financial transactions of political parties, emphasizing the importance of proper auditing of their accounts to maintain the integrity of the electoral process.

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