This is a BIG news because a party which has run the country , made law and tried to sermonize the countrymen, are now punished for non compliance of the law that they brought it . That they did not respect the tax law as is clear from the decision of Delhi High Court in CIT vs Indian National Congress (I)Â  67 taxmann.com 323 (Delhi) . The hon,ble high court has also commented that the only time audit report was produced , was before CIT(A) and that too was rejected by the High Court for the reason of the completeness and being proper audit report. This is a very important decision by high court that brings the issue that section 13A of the Income Tax Act that provides exemption to political parties have to be taken seriously .Â If you want to know quickly about taxation of political parties , watch video on section 13A I will be posting more on the provision of taxation of political parties and certain loopholes it in next week post , but let us concentrate on the big story , untouched by media house and public.
Facts of The Case
Indian National Congress (INC after this ) Â filed tax returnÂ for the assessment years 1993-94 to 1995-96 declaringÂ nil income by virtue of section 13A of the Income Tax Act.
The Assessing Officer estimated the income of the INC observing Â that
- The complete addresses of donors of 2.22 Crore were not furnished by INCÂ Â as required under section 13A, and
- The books of account and documents not furnished for verification and examination in respect of 14 units and Central Office .
- The A.O rejected the accounts of the sales in respect of 14 state units and estimated income of Rs 15 crore in respect of sale of coupons ,voluntary contribution, donations etc.
- The Assessing Officer disallowed theÂ Â expenditure claimed by the INC on teh ground that Â the expenditure was forÂ political activity of the party Â and thus not allowable under other sources.
- Thus, the total income of the party was computed by the Assessing Officer at Rs. 25.126 crores as against the return filed declaring excess of expenditure over income of Rs. 5.116 crores in respect of Central Office of the party.
When the INC appealed before CIT(A) , he also confirmed the order of A.O on estimation of income , but allowed expenditure to the extent of 60%.
When the matter went toÂ Â ITAT , it partly allowed the appeal of assessee and dismissed the revenue appeal . It set aside the order on allowance of 60% and restored the matter to the assessing officer for passing order de novo.Â
Assessing Officer thenÂ passed a fresh assessment order computing the taxable income of the assessee. INC goes to appeal before CIT (A) and gets some relief . INC approaches ITAT against the CIT(A) order before ITAT. The hon’ble ITAT Â holds in favour of INC.
Income Tax department challenged the said order of ITAT before Delhi High Court Â wherein the Hon’ble High Court held in favour of income tax department and against the Indian National Congress.
Here are the relevant extract of the order of the Delhi High Court
Audited Accounts not submitted
It is not in dispute that as far as AY 1994-95 is concerned, the INC did not submit the complete audited accounts by the time the assessment was completed. What was submitted was only the accounts of the central office and not the state units. It was only before the CIT (A) that an application was filed under Rule 46A seeking to place on record the consolidated accounts of the central office, 26 Pradesh Congress Committees, 6 Territorial Congress Committees, 2 Regional Congress Committee, All India youth Congress, All India Mahila Congress Committee, All India Congress Sewa Dal, National Students Union of India and the Congress Parliamentary Party. That attempt was rebuffed by the CIT(A) and the decision in this regard was upheld by the ITAT.[ Para 95 ]
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. [Para 98 ]
108. Since no attempt has been made by the INC to place before the AO, or even before the CIT (A), acceptable audited accounts, from which the AO could deduce the taxable income of the assessee, the Court has no hesitation to hold that the mandatory requirement of the proviso to Section 13A of the Act was not fulfilled by the Assessee. Such a failure could not have been condoned either by the CIT (A) or the AO. [Para 108]
2. 60% expenditure allowed by CIT(A) & ITAT Wrong
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 requirements of Section 13A of the Act.
125. Therefore, 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.
126. Consequently, the 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.
3. Interest u/s 234b & 234C Payable
While deleting the interest under Section 234A and 234B of the Act, the ITAT relied on the judgment of the Patna High Court in Ranchi Club Ltd. v. CIT  217 ITR 72/85 Taxman 201 against which an SLP was dismissed by a one line order in Ranchi Club Ltd. (supra). However, recently in CIT v. Bhagat Construction Co. (P.) Ltd.  235 Taxman 135/60 taxmann.com 334 (SC) , the decision in Ranchi Club Ltd. (supra) has been overruled. The consequent legal position is that notwithstanding that 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 Sections 234A and 234B of the Act. Consequently, the decision of the ITAT on this aspect is set aside. [Para 128 ]
4. No Exemption Allowed to INC
High Court in para 30 answered all the question of law raised before it by the Income Tax Department
“the Assessee INC was not entitled to any exemption in respect of the disclosed income by way of voluntary contributions i.e., Rs.25,12,68,081-Rs.15,00,00,000 (the latter amount being the estimate by the AO which has been set aside by this Court).