Taxablility of Political Parties

It is worthwhile to note that the provision relating to the exemption of Capital Gains has been inserted by the Finance Act, 2003 but with retrospective effect from 1.4.1979. This amendment presumably is the outcome of litigation for charging tax on capital gains in cases of political parties. In the case of Bharatiya Janata Party v. Deputy CIT [2002] 258 ITR 1 (ITAT-Delhi), BJP invested in Canstar Scheme, a mutual fund scheme of the Canara Bank. The interest on the said investment accrued each year but there was no disbursal as the income was ploughed back to it every year. The amount received on maturity was in excess of original investment. It was decided in first appeal by the CIT (Appeals) that it was capital gain subject to tax as section 13A did not exempt capital gains. But the ITAT held by majority that there was no extinguishment of right and there was no transfer of capital asset in the instant case and the amount was not assessable as capital gains. The ITAT further held that the gain was exempt being income from other sources.
The amendment to exempt capital gains in the hands of political parties was not proposed in original Finance Bill, 2003 but has been placed at the last moment. There has been no debate, yet the exemption has been granted.
The amended Section 13A now provides that 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 if the following conditions are satisfied:
(a)	such political party keeps and maintains such books of account and other documents as would enable the Assessing Officer to properly deduce the income therefrom;
(b)	in respect of each such voluntary contribution in excess of Rs. 10,000 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 political party are audited by a chartered accountant.
For this purpose, "political party" means an association or body of individual citizens of India registered with the Election Commission of India as a political party under paragraph 3 of the Election Symbols (Reservation and Allotment) Order, 1968, and includes a political party deemed to be registered with that Commission under the proviso to sub-paragraph (2) of that paragraph.
In the light of the above provisions it follows that, only income under the head Salaries and the Income from Business or Profession of the Political Parties are chargeable to tax.
The Departmental Circular F. No. 225/128/99/ITA.II (Pt.) dated 19th October, 2000states that the income of the political parties are governed by the special provisions of section 13A of the Income-tax Act, 1961 and accordingly the provisions of Chapter IV-D which are applicable for profits and gains of business or profession cannot be applied in the cases of political parties. Income of political parties from voluntary contributions cannot be said to be income from profession so as to attract section 44AB or section 271B of the Income-tax Act. However, the political parties will have to fulfil the requirement of maintaining the accounts and getting them audited by an accountant, as provided in section 13A of the Act to claim the benefit of exemption.
In respect of the voluntary contribution in excess of Rs. 10,000 [as stated in (b) above], it is mandatory to maintain a record of such contribution and the name and address of the person who has made such contribution. However for the sake of transparency, the person making the contribution should be required to give a letter mentioning his PAN.
The issue of maintenance of the books of account by political parties came forth in the case of Janata Party v. Asst. CIT [2002] 76 TTJ (Delhi) 116 wherein it was observed that it would be wrong to suggest that exhaustive books of account as normally understood in commercial parlance ought compulsorily to be maintained to avail the exemption u/s 13A.
In the decision of Common Cause, A Registered Society v. Union of India [1996] 85 Taxman 600:222 ITR 260 (SC) it was held that political parties are under a statutory obligation to file return of income in respect of each assessment year in accordance with the provisions of the Income-tax Act. It was further held that a political party which is not maintaining audited and authenticated accounts and has not filed the return of income for the relevant period, cannot, ordinarily, be permitted to say that it has incurred or authorised expenditure in connection with the election of its candidates in terms of Explanation 1 to section 77 of the Representation of the People Act, 1951.
In this regard section 13 9(4B) and Circular No. 412 [F.No. 200/84/79-IT(A-I)], dated 2-3-1985 is also relevant which states that If the total income of a political party computed without giving effect to the provisions of section 13A exceeds the maximum amount which is not chargeable to tax, the liability of the political party to file the return of income voluntarily arises. As regards filing of returns by the units of a political party at State or District levels is concerned, it will depend upon whether these units are only branches of the national party and their receipts and expenditure form part of the account of the national party. If so, the units need not file separate returns of income. In the case where units are separately registered as political parties with the Election Commission of India, the requirement of filing of return by these units will apply.