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TMI Blog2016 (3) TMI 878X X X X Extracts X X X X X X X X Extracts X X X X ..... n framed is answered in the affirmative by holding that the finding of the ITAT is perverse and contrary to evidence on record in so far as applicability of Section 13A of the Act is concerned, i.e., in favour of the Revenue and against the Assessee. - ITA 188/2002 - - - Dated:- 23-3-2016 - S. Muralidhar And Vibhu Bakhru, JJ. For the Appellant : Mr. Dileep Shivpuri, Senior Standing Counsel with Mr. Zoheb Hossain, Junior Standing Counsel For the Respondent : Mr. S. Krishnan, Advocate JUDGMENT Dr. S. Muralidhar, J. 1. This appeal by the Revenue under Section 260A of the Income Tax Act, 1961 ( the Act ) is directed against an order dated 23rd November, 2001 passed by the Income Tax Appellate Tribunal ( ITAT ) in ITA No.2140/Del/2000 for the Assessment Year ( AY ) 1995-96. Background facts 2. The Respondent Assessee is a political party registered under the Representation of the People Act, 1951 ( RP Act ). It was formed on 3 rd May, 1977. According to the Assessee there were three major splits in the party. The first occurred on 18th July 1979, when Mr. Chaudhary Charan Singh left to form the Lok Dal. The second split occurred on 4th April 1980, when Mr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the fifth split occurred in September 1992 when Mr. Chandrashekhar, Mr. Deve Gowda and Mr. Om Prakash Chautala left the party. 7. It is stated that the same CAs again audited the accounts of the central office of the party for AY 1992-93. The disclosed voluntary contributions was ₹ 3,16,77,179. In the return, exemption was claimed under Section 13A of the Act and nil income was shown. The return was sent from Delhi to Madras where the new Treasurer of the party was based. However, no IT returns were filed for AY 1992-93. 8. It is stated that in August 1993-94, the sixth split took place in the party and the State units in Delhi, Tamil Nadu and Kerala also left the party. It is claimed that the local Party bank accounts were taken over by the persons over whom the central leadership had no control. The Treasurer in Chennai is also stated to have left the party. 9. On 21st September 1995, the Assessee was served with a notice under Section 142(1) of the Act calling upon it to file its IT return for AY 1995-96. On 19th February 1996, the Assessee filed its return disclosing voluntary contributions of ₹ 68,84,800. Exemption was claimed under Section 13A of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other nature and the Assessee has not violated any of the provisions of the Income Tax Act. The Assessee disclosed that it had four other bank accounts with one each in Bombay and Bangalore and two in Chennai, which had not been included in the return. It was claimed that these accounts had been incorporated in the consolidated return prepared by its Chennai based CA firm and it would be filed shortly in Delhi. One last opportunity was granted to the Assessee to comply with the direction to file all its accounts by 11am on 28th March 1998. 14. The proceedings of 28th March 1998 drawn up by the AO reveal that again Mr. Rajan Malik and Mr. Prem Nath appeared on behalf of the Assessee and filed the consolidated receipts and payment (R P) accounts of the New Delhi unit, the Maharashtra unit and the Bangalore unit of the party. The accounts of the Chennai unit were also filed. 15. The Assessee filed the cash book ledger of the central office from which the return of income along with the audited accounts were prepared and filed before the Department. It was stated that this represents the consolidated accounts of the party as per the return of income originally. The AO noted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hem before depositing it in the bank. 19. While perusing the accounts of the Bangalore unit, the AO noted that its total collections were ₹ 12,61,000/-, which were remitted to Account No.572 maintained with Vijaya Bank. The collections in the months of May, August to November were in excess of ₹ 10,000/- and totalled to ₹ 12,61,000/-. This entire sum was kept in the bank account with Vijaya Bank. 20. As far as the Chennai unit was concerned, the AR explained it by pointing out that all the entries therein pertained to sums transferred from the Maharashtra, New Delhi and Bangalore units. The details were, therefore, called for. Order of the AO 21. The examination of the statements of the bank accounts and the books produced before the AO showed that in the case of the Mumbai and Bangalore units there was a gap in the collection of money and its eventual deposit in the bank accounts. Although the stand of the Assessee was that the Party functionaries carried money to Delhi, travelling from time to time by rail or air, and that the expenses on such travel were reimbursed from the cash in hand available with the party, no such evidence of travel was produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vade tax. Since the conditions under Section 13A of the Act were not satisfied, the Assessee s claim under it could not be allowed. The Assessee s receipts from all State units in the sum of ₹ 1,17,10,370/- shown as voluntary contributions in the consolidated account and ₹ 6,62,000/- shown as cash deposit in the Chennai account were together taken as the receipts and, therefore, the income of the Assessee. None of the expenses were allowed. Thus, the taxable income was computed as ₹ 1,23,72,370/-. Order of the CIT (A) 25. The appeal filed by the Assessee against the aforementioned assessment order was dismissed by the Commissioner of Income Tax (Appeals) [CIT(A)] by the order dated 16th February, 2000. The CIT(A) agreed with the AO that in the return filed under Section 139(4B) of the Act, the Chief Executive Officer (CEO) of the Assessee had to verify the correctness of the contents of the return filed in the prescribed form. The bank accounts of the Chennai, Mumbai and Bangalore units had not been disclosed. Thus, it was obvious that the CEO had signed a false verification in the return of income. 26. The CIT(A) found that it was only after the detectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical party which has all India status would have bank accounts in different States, Districts and Taluks. No exception could be taken for the failure to recall the political workers, who may have travelled to the capital for depositing money with the Party. In the circumstances, the denial of exemption under Section 13A of the Act for non-furnishing of the particulars of the persons, who had carried the cash to Delhi would not result in denial of exemption under Section 13A of the Act. iv. There is no requirement under the Act for a political party to have automatic numbering of the receipt books. Books of accounts had only a limited role and as far as the income from other sources was concerned what was permitted as deduction against the income is only a direct outflow of income relatable. Therefore, no major book-keeping hassles would be involved. v. What was left thereafter were the voluntary contributions. Since the accounts were to be maintained in fairly simple form, there was no provision similar to Section 44AA of the Act which applied to political parties so long as the auditor has found the accounting version amenable to verification and audit and the report is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iso 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 outside the purview of 'income from other sources.' (vi) Donations to a political party are for multiple reasons and is an act of participation in a democracy. The known tests for determining income are, therefore, inadequate for determining whether the voluntary contribution in the hands of a political party is in fact income . (vii) The requirement of maintaining audited accounts and furnishing those accounts in terms of the proviso to Section 13A of the Act is not merely directory. (viii) It is with a view to placing a check on the financial transactions of political parties that the proviso 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 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re rejected by the AO, what was stated therein has to be accepted as the correct depiction of the financial state of the Assessee. Mr. Krishnan submitted that Section 13A of the Act was not a computation provision and there was no requirement that the receipts of the party had to be applied for any expenses for political purposes. According to him, therefore, the ITAT s order was perfectly in order. 34. Mr. Dileep Shivpuri, learned Senior standing counsel for the Revenue, on the other hand, referred to the numerous opportunities afforded to the Assessee for giving a satisfactory explanation regarding entries in the bank accounts and also to present the consolidated accounts of the central as well as the State units. Mr. Shivpuri also referred to the audit report submitted in the matter which clearly showed that there was no systematic maintenance of the accounts or its audited accounts. Mr. Shivpuri expressed surprise that the receipt books were manually numbered and that not one donation was above ₹ 10,0000. According to him this showed a desperate attempt at producing fabricated documents just to meet the deadline set by the AO for furnishing the accounts. Analysis an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipts: Rs. P. Cash at Bank: Vijaya Bank: New Delhi a/c 27,46,633.65 Voluntary contributions received and remitted Into the bank account 68,64,800.00 96,11,433.65 Payments: Payments made to Party units at : Kerala Unit 1,00,000.00 : Simla 26,075.00 : Delhi 5,55,000.00 : Tamilnadu 22,08,000.00 : Karnataka 20,000.00 Building Bangalore 11,65,000.00 Vishwa Dharmayatan 24,93,000.00 General expenses 7,79,765.00 Cash from bank 4,88,413.00 Telephone charges 1,19,214.00 Bank charges 6,247.00 The Express (Malayalam) (P) Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d it represents the 'true and fair view' of the financial affairs of the Assessee. The second is to give a qualified audit report highlighting which matters have not been fully explained by the Assessee. The third is to give an adverse report to the effect that the complete accounts have not been placed before the auditor and therefore it cannot be said that they depict the true and fair view of the financial affairs of the Assessee. The fourth is to candidly state that it is not possible to give an audit report since the accounts have not been maintained in the manner required. 41. The statutory obligation of an auditor flows from the provisions of the Chartered Accountants Act 1949 under which the Institute of Chartered Accountants of India (ICAI), the disciplinary body of chartered accountants, is constituted. The ICAI has issued a Code of Conduct for the guidance of its members to adopt high standards of professional conduct. Referring to the said document this Court in Council of Institute of Chartered Accountants of India v. Kul Rattan Bhasin (2011)183 DLT 648 observed: A large section of public relies on the objectivity and integrity of professional accountan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 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'' 43. An auditor discharges both a statutory and a professional responsibility. With particular reference to Section 13A of the Act, the audit report becomes a most crucial document from which the AO should be able to determine if the claim for the exemption under Section 13A of the Act is justified. 44. To recapitulate, the three mandatory requirements for availing of the benefit of exemption under Section 13A of the Act are that a political party: (a) has to keep and maintain such books of accounts and other documents as would enable the AO to properly deduce its income therefrom; (b) has to, in respect of each voluntary contribution in excess of ₹ 10,000, (now enhanced to ₹ 20,000) keep and maintain a record of such contribution and the name and address of the person who has made such contribution; (c) has to have its accounts audited by an Accountant as defined in the Explanation below Section 288 (2) of the Act. 45. Therefore, the role of the auditor in the matter of poli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort such an assertion. It was not enough that documents in support of voluntary contributions ought to have been preserved but they ought to have the names and addresses of the donors whose donations were in excess of ₹ 10,000. As rightly pointed out, the provisions of Sections 142 to 145 of the Act are applicable to political parties as much as they are to other Assessees. 48. The finding of the ITAT that the Assessee satisfied the mandatory conditions for availing the exemption under Section 13A of the Act is nothing short of perverse as it is wholly contrary to and unsupported by the documents on record. A political party which seeks to avail of the exemption cannot be heard to say that it is not possible for it to maintain its accounts on a consolidated basis. As long as a political party continues to avail the exemption from payment of income tax, there can be no excuse for not maintaining its account whether it has one or more state units. Where in any particular FY, a political party is unable to maintain its accounts for any reason whatsoever, or satisfy the pre-conditions set out in the proviso to Section 13A of the Act, an exemption cannot be possibly be granted ..... 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