The income tax law prevalent in India has shown a kind and
compassionate treatment. Section 13A of the Income-tax Act, 1961 confers
tax-exemption to recognized political parties for income from house property,
income by way of voluntary contributions, income from capital gains and income
from other sources. In other words, only income under the head salaries and
income from business or profession are chargeable to tax in the hands of
political parties in India. These political outfits can enjoy the above-said
tax-exemption if they maintain proper books of accounts and other documents
along with a record of contributions in respect of donations to the party in
excess of Rs 20, 000.
Further, the accounts of such political party are to be
audited by a chartered accountant and the party must be registered with the
Election Commission of India. However, it would be enough if such political
party keeps and maintains such books of accounts and other documents as would
enable the assessing officer to properly deduce the income therefrom. In other
words, the party need not maintain all books and records as prescribed under
section 44AA of the Income-tax Act. Since the income of political parties are
governed by the special provisions of section 13A of the Income tax Act, 1961,
the provisions of Chapter IV-D of the Act which are applicable for normal
profits and gains of normal profession cannot be applied in the cases of
political parties.
Further, income of political parties from voluntary
contributions cannot be said to be income from profession so as to attract
section 44AA or 44AB or section 271B of the Income-tax Act. However, the
political parties are required to maintain the accounts and getting them
audited by a chartered accountant, as provided u/s 13A for claiming exemption.
Under section 45(i) of the Wealth tax Act, 1957 no tax would be levied in
respect of the net wealth of any political party as defined in Explanation to
section 13A of the Income –tax Act, 1961. Thus, political parties in India are
destined to enjoy tax freedom not only from the so-called income tax law but
also from its sister law, viz, the wealth-tax law.
Under section 139(4B) of the Income tax Act, 1961, political
parties are however under a statutory obligation to file return of income in
respect of each assessment year. If and when the total income of a political
party exceeds the maximum amount, which is not chargeable to tax, the liability
of the political party to file ROI voluntarily arises. For this purpose, total
income has to be computed without giving effect to provisions of section 13A.
In case of political parties, the returns are required to be signed by the
‘Executive Officer’ of the parties. Further, the amendment made in 2003 to the
Representation of the People Act, 1951 requires that the treasurer of every
political party must file a declaration in respect of donations exceeding Rs.
20,000 at a time. Accordingly, the party treasurer must file a report of
contributions received to the Election commission before the due date for
furnishing the return of income under Section 139 of the Income tax Act.
More importantly, section 13A has been amended and tax
exemption for a political party is contingent upon the submission of the report
by the party treasurer. Moreover, contributions over Rs.20,000 should be by
crossed cheque or draft. However, the parties can receive any amount below this
from any person without submitting the report from the party treasurer.
Section 80GGB is a new insertion in the Income-tax Act, 1961.
This enables Indian companies to get full deduction in their income-tax
assessments for contributions made to political parties. Interestingly, there
is no ceiling fixed on the amount of such contribution. Section 80GGC gives similar
deduction for non-company taxpayers. Advertisements in souvenirs published by
political parties would also be eligible for deduction. For this purpose, the
term “political party” means a political party registered under section 29A of
the Representation of the People Act, 1951.
Return of Income of Political Parties [Section 139(4B)]
- 1.
Under this section, a political party is required to file a return of
income if, before claiming exemption under section 13A, the party has
taxable income. The grant of exemption from income-tax to any political
party under section 13A is subject to the condition that the political
party submits a return of its total income within the time limit
prescribed under section 139(1).
- 2.
The chief executive officer of the political party is statutorily required
to furnish a return of income of the party for the relevant assessment
year, if the amount of total income of the previous year exceeds the basic
exemption limit before claiming exemption under section 13A.
- 3.
The return must be filed in the prescribed form and verified in the
prescribed manner setting forth such other particulars as may be
prescribed by the CBDT.
- 4.
The provisions of the Act would apply as if it were a return required to
be furnished under section 139(1).
CBDT has vide Notification No.
24/2014 dated 01.04.2014 amended rule 12 of
Income Tax Rules 1962. Prior to amendment of Rule 12
and upto A.Y. 2013-14 All Political Parties were allowed to Furnish ITR 7 in
any of the following mode :-
(i) furnishing the
return in a paper form;
(ii)
furnishing the return electronically under digital signature;
(iii) transmitting
the data in the return electronically and thereafter submitting the verification of
the return in Form ITR-V;
But with amendment in Rule 12 w.e.f. A.Y. 2014-15 Political
Parties can File ITR 7 only electronically under digital signature.
Relevant Extract of Rule 12 of Income Tax
Rules 1962
(3) The return of
income referred to in sub-rule (1) may be furnished in any of the
following manners, namely:—
(i)
furnishing the return in a paper form;
(ii)
furnishing the return electronically under digital signature;
(iii) transmitting
the data in the return electronically and thereafter submitting the
verification of the return in Form ITR-V;
(iv) furnishing a
bar-coded return in a paper form:
(b)
a person required to furnish the return in Form ITR-7 shall furnish
the return for assessment year 2014-15 and subsequent assessment years,-
(A) in case it is furnished under
sub-section (4B) of section 139, in the manner specified in clause (ii);
(B) in other cases, in the manner specified
in clause (i) or clause (ii) or clause (iii)
Relevant Extract of Section 139(4B)
Section 139 (4B)The chief executive officer (whether such chief
executive officer is known as Secretary or by any other designation) of every
political party shall, if the total income in respect of which the
political party is assessable (the total income for this purpose being computed
under this Act without giving effect to the provisions of section 13A) exceeds
the maximum amount which is not chargeable to income-tax, furnish a
return of such income of the previous year in the prescribed form and verified
in the prescribed manner and setting forth such other particulars as may be
prescribed and all the provisions of this Act, shall, so far as may be, apply
as if it were a return required to be furnished under sub-section (1).]
FAQs
- ITR of political parties
1. Do
political parties get tax exemption? If so, how much?
Under Section 13A of the Income Tax Act, political
parties are exempt from paying Income Tax but are required to file their Income
Tax returns annually to the Income Tax Department. They enjoy 100% tax
exemption from all sources of income.
2. Under
what Act do the Political Parties enjoy tax exemption?
Political parties registered with the Election
Commission of India are exempt from paying Income Tax under Section 13A of
Income Tax Act, 1961 as long as the political parties file their Income Tax
Returns every Assessment Year along with their audited accounts, Income/
Expenditure details and balance sheet.
There is a proviso to Sec 13A as follows:
“Provided further that
if the treasurer of such political party or any other person authorised by that
political party in this behalf fails to submit a report under subsection
(3) of section 29C of the Representation of the People Act, 1951 (43 of 1951)
for a financial year, no exemption under this section shall be available for
that political party for such financial year.”
3.
Under what section do the political parties have to
file their income tax returns and how often?
Similar
to the Income Tax Returns (ITR) filed by individual tax payers in India,
registered political parties too
have to file their Income Tax Returns every year.
According to Section 139 (4B), returns of a political party is required to be
filed of a particular financial year, audited and submitted by the 30th
of September.
4.
How to get a copy of the ITR of a particular
political party?
For obtaining a copy of the ITR of a political
party, an RTI has to be drafted to the Income Tax Department of the city in
which the political party is registered. Examples of such RTIs can be found at http://adrindia.org/content/rtis-scanned-copies-filed-political-parties-income-tax-returns-donations
where both the RTIs and their replies
from the concerned authority have been made available.
5.
What is the main information to look for in an ITR
filed by the political party?
There are five components that provide information
relating to the functioning of the political party. They are:
·
Balance Sheet: Contains a broad
information of the main sources of funds (Corpus fund, general funds, loans
etc) and the application of those funds (assets, investments, advances etc)
·
Income and Expenditure Account: Income
from fee/ grants, donations, sale of coupons etc and the Expenses towards
election, finance, employee costs etc
·
Schedules: This is the breakup of
individual component in the balance sheet wherein every detail regarding loans
taken, given, details of purchase of any asset, details of investments etc
·
Contribution report: This is the report
containing details of donors who have made contribution above Rs 20,000 to the
political party during the specified financial year. A copy of this report this
sent to the Election Commission
on an annual basis (mandatory) which correlates with the Income Tax department
for tax exemption.
Assessment order: Ordering scrutiny of the
accounts provided by the party
6. What
is an assessment order and who issues it?
If the income tax returns filed by the political
party come into scrutiny by the Income Tax Department, a notice is issued to
the party requesting their presence for an assessment proceeding. Such a notice
is called an assessment order, the proceedings of which should be conducted by
the Income Tax Department by the end of the next financial year. An example
where an assessment order might be issued is when a political party declares
NIL income during a particular financial year. Once called for assessment
proceedings, the said political party has to show adequate proof for declaring
NIL income in its returns.
7. What
are the sources from which political parties derive their income?
From the Income Tax Returns filed by political
parties, it can be safely said that they function mainly on the basis of
donations from individuals and companies/ institutions. Apart from voluntary
contributions, income received from sale of coupons, membership fee collected
and interest earned form the major sources of income of political parties.
8.
One of the sources of income has
been given as ‘Sale of Coupons’. What are coupons and how are they made
available to the political parties for sale?
Coupons are one of the ways devised by the political
parties for collecting donations and hence are printed by the party itself.
There is no cap or limit as to how many coupons can be printed or the total
quantum (that is the total amount/worth of coupons). Details of donors is not
required for coupons with small amounts (say Rs 5/10/20 etc), and might be
where all the unaccounted/black money might be pumped in. The only source of
information regarding the coupon system is the party itself and no on else. Coupon
system does not come under the scope of Election Commission of India and they
have no control over it.
9.
How is the ‘donations’ given in the ITR different
from the donations report submitted to the ECI?
Donations, mentioned as one of the sources of
income, given in the Income Tax returns is the sum of donations received
through various means during that financial year such as through sale of
coupons, through a party rally, while conducting public meeting and need not
necessarily be above Rs 20,000 and do not provide information about the
individual amount collected nor the mode of payment of these donations whereas
the donations report submitted to the ECI are those made above Rs 20,000
listing the details of the donors, their address and their mode of payments.
10.
What are the types of accounting
methods followed by the political parties and what is the suggested method of
accounting?
There are two types of accounting methods currently
being followed by political parties: The Cash accounting and the accrual method
of accounting. The former method registers the transactions when the related
cash transactions take place. Thus, the revenue of political parties such as
donations, grants etc is recognized when funds are actually received while
failing to show a proper picture of the financial position of the party. On the
other hand, the accrual method of accounting, records transactions during the
period they occur such as revenue, expenses, assets and liabilities in
real-time thus providing information about the real level of organisation’s
activities.
Accrual basis of accounting is recommended by the
Institute of Chartered Accountants of India (ICAI) for the political parties.
11. Have
there been any concerns about the way political parties have been filing their
Income Tax Returns?
As all political parties do not employ the same
method of accounting, there is a concern that the present auditing techniques
do not meet the financial information requirements of the public at large.
Hence a sound accounting and auditing framework for standardising the procedure
of filing returns would improve the accountability of political parties towards
utilising their financial resources.
12. What
is the Institute of Chartered Accountants of India (ICAI)?
The Institute of Chartered Accountants
of India is the body which defines the way the Income Tax returns have to be
audited and submitted. It is a known fact that the funding of the political
parties are diversified hence the objective of accountability and transparency
is of great importance. ICAI had laid down a few recommendations to the ECI for
improving transparency and accountability in dissemination of accounts of the
political parties which were accepted by the ECI.
13.
What are the latest recommendations
by the ICAI towards filing of Income Tax Returns by the political parties?
The recommendations aim at bringing in a standard
format through which the political parties can file their Income Tax returns.
The document containing guidelines issued to the Chartered Accountants by ICAI
for a uniform audit can be viewed at http://adrindia.org/sites/default/files/Guidance_Note_on_Accounting_Auditing_of_Political_Parties.pdf
As mentioned earlier, cash flow of accounting has a
few flaws whereas accrual method, though superior, did not capture the cash
flow of the party effectively. Hence the new recommendations suggest that a
format be used so that the advantages of both the methods be utilised. The
suggested ITR to contain:
·
Balance
Sheet
·
Income
and Expenditure Account
·
Cash flow Statement: Similar to the cash
mode of accounting giving information of cash receipts/ payments as they occur
·
Notes forming part of financial
statements: Notes giving reasons for not following the suggested changes and
any additions made to the suggested changes
Recommendations
for Auditing of Political Parties
ICAI has recommended for audit of the accounts of
political parties, by a firm of Chartered Accountants, appointed on rotation
every 3 years, by the ECI. Auditors would be required to follow the
Auditing and Assurance Standards issued by the ICAI, while auditing the
accounts of the political parties.
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