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* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 1st March, 2016
Date of Decision: 23rd March, 2016
+ ITA 188/2002
COMMISSIONER OF INCOME TAX, DELHI-XI..... Appellant
Through: Mr. Dileep Shivpuri, Senior Standing
Counsel with Mr. Zoheb Hossain, Junior
Standing Counsel.
versus
JANATA PARTY ..... Respondent
Through: Mr. S. Krishnan, Advocate.
CORAM:
JUSTICE S. MURALIDHAR
JUSTICE VIBHU BAKHRU
JUDGMENT
% 23.03.2016
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 23 rd 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 3rd
ITA No.188 of 2002 Page 1 of 27
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. Atal Bihari Vajpayee left to form the Bharatiya Janata Party
(`BJP') and the third in July 1989, when Mr. Madhu Dandavate, Mr. Ajit
Singh etc. left to form the Janata Dal. It is stated that on 12th November
1990, Dr. Subramanian Swamy was elected as the President of the party and
he appointed new office bearers. It is stated that Dr Swamy opened an
account of the central office of the party with Vijaya Bank, New Delhi. The
voluntary contributions collected in the various States were brought (mostly
in cash) by the office bearers to Delhi where they were deposited in the
aforementioned bank account. The Assessee's case is that from this account
funds were disbursed to the various State units through demand drafts or
telegraphic bank transfers. It is stated that a numbered signed receipt was
given by the collecting party volunteer to the donor for each voluntary
contribution.
3. On 10th October 1990, the Assessing Officer (`AO') wrote to the Assessee
demanding production of the accounts from AY 1986-1987 onwards till AY
1990-1991. It is stated that since the party had different office bearers and
different bank accounts, some of which the President was not aware of, the
said request could not be given effect to. It is stated that when it was found
that no income-tax return had ever been filed on behalf of the party, the
President of the Party got a firm of Chartered Accountants (`CAs') to audit
the central office accounts for the AY 1990-91.
ITA No.188 of 2002 Page 2 of 27
4. On 27th March 1991, the Assessee filed the central office accounts and the
income tax return for AY 1990-91. The disclosed figure of voluntary
contributions was Rs. 87,71,280/-. However, exemption was claimed under
Section 13A of the Act and, therefore, Nil income was declared. It is stated
that the aforementioned return was accepted by the AO on 22 nd August,
1991.
5. The same firm of CAs was asked to audit the accounts of the central
office of the party for AY 1991-92. The income tax return for AY 1991-92
was stated to have been handed over for filing on 30th October, 1991. The
disclosed figure of voluntary contributions therein was Rs. 2,46,322 and Nil
income was declared after claiming exemption under Section 13A of the
Act. However the return for AY 1991-92 was not filed.
6. It is stated that the fourth major split occurred in the party in March 1992,
when Mr. Mulayam Singh Yadav left the party 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 Rs. 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.
ITA No.188 of 2002 Page 3 of 27
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 Rs. 68,84,800. Exemption was claimed under Section 13A
of the Act and, therefore, the returned income was shown as Nil. It is now
claimed that the said return included only the accounts of the central office
although there is no such indication in the return as filed, a copy of which
has been enclosed with the appeal. It is stated that on the same date, i.e., 19th
February 1996, the returns of the Assessee for the earlier AYs 1991-92 to
1993-94 were filed.
10. It is stated that as regards AY 1995-96, the information sought by the
AO was provided on 3rd June 1996. On 3rd July, 1996 notices under Sections
143(2) and 142(1) of the Act were issued calling for the following details:
i. Complete books of accounts and other documents pertaining
to AY 1995-96.
ii. Complete details of voluntary contributions in excess of
Rs.10,000/- received during AY 1995-96 along with the
names of donors and their complete addresses.
ITA No.188 of 2002 Page 4 of 27
11. The Assessee claimed that since the Chennai based Treasurer of the
Assessee had left the party, it took considerable time to locate and
reconstruct the accounts. Adjournments were sought, at least, on ten
occasions between 16th July 1996 and 23rd March 1998, all of which were
granted by the AO. On 2nd February, 1998, the AO served the Assessee with
a letter drawing its attention to the fact that an account of the Party had been
opened with the Vijaya Bank, Chennai and the credit entries in the said
account in the sum of Rs. 68,53,435 had not been included in the return filed
for AY 1995-96.
Proceedings before the AO
12. Meanwhile in the proceedings which took place before the AO on 23rd
March 1998, time was again sought by the Assessee till 27th March 1998 to
furnish the details. The AO recorded "the Party is being given a final
opportunity till 27/3/1998 as the proceedings gets barred by limitation on
31/3/1998."
13. The proceedings of 27th March 1998, show that Mr. Rajan Malik and Mr.
Prem Nath attended the proceedings on behalf of the Assessee and filed
details by a letter of that date. It was admitted that there was an account CA
1327 of the Party with the Vijaya Bank at Chennai but that it was left out
while filing returns due to a bonafide error on account of various pre-
occupations "including election campaigns, splits, exodus of office bearers."
It was claimed that the credit entries in the said account were "only towards
Party funds and do not constitute receipts of any other nature and the
Assessee has not violated any of the provisions of the Income Tax Act." The
ITA No.188 of 2002 Page 5 of 27
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 28 th 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
that from the account of voluntary contributions appearing on page 65 of the
ledger produced "all the entries are exceeding Rs.10,000/-." The AO noted
the explanation offered by the AR that the collections are made by
respective State units and each collection/contribution was less than
Rs.10,000/-. Whenever sizeable amount was accumulated, the same was
remitted to Delhi through political workers and Executives of the Party to be
deposited in Vijaya Bank, Delhi. The collections in the State units were
made by way of issue of receipts and every receipt was less than Rs.
ITA No.188 of 2002 Page 6 of 27
10,000/-. Further a copy of collection books showing accumulation of
collections was also maintained.
16. The AO then examined the counterfoils of the receipts from the Tamil
Nadu, Karnataka, Mumbai, New Delhi units. The AO noted the following
facts:
i. The receipts were all manually numbered.
ii. All of them were of denomination less than Rs.10,000/-.
iii. All the receipts were signed by the party volunteers.
17. The AO then directed the ARs to furnish (i) the name and address of
the party functionaries who had received the aforementioned amounts in the
various States; and (ii) the name, date and mode of transport of persons who
purportedly brought the money to Delhi. The central office ledger showed
that no expenses for travelling had been booked. This was true for the
Mumbai and Karnataka units as well. The ARs were, therefore, asked to
substantiate the plea that monies were carried to Delhi for deposit in the
account of the central office.
18. The AO then examined the consolidated accounts which had been
prepared by incorporating all the bank accounts as mentioned in the AR's
letter dated 27th March 1998. A perusal of the accounts of the Maharashtra
unit revealed that there was one unit for entire Maharashtra excluding
Bombay and a separate unit for Bombay. The ledger account of the
Maharashtra unit showed that voluntary contributions totalling
Rs.35,81,600/- were shown up to 6th August, 1994. The cash book had not
ITA No.188 of 2002 Page 7 of 27
been produced. All the entries were found to be in excess of Rs.10,000/-.
The amounts collected in the months of April, May, June, July and August
were in excess of Rs.10,000/- and, therefore, the ARs were asked to furnish
the names and addresses of the party functionaries who collected these
amounts and kept it with them before depositing it in the bank.
19. While perusing the accounts of the Bangalore unit, the AO noted that its
total collections were Rs. 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 Rs.10,000/- and totalled to
Rs.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
ITA No.188 of 2002 Page 8 of 27
produced. As regards the Chennai account there were transfer entries of
Rs.61,91,435/- and cash entry of Rs.6,62,000/-. The contention of the
Assessee that the transfer entries were from various other units of the party
and that the cash deposits were merely deposits of earlier withdrawals was
devoid of merit since the bank account (account No.1327) showed that there
were very few withdrawals prior to the cash deposits on various dates.
Considering that according to the Assessee it had received voluntary
contributions in Chennai unit only to the extent of Rs. 2,970/-, there was no
plausible explanation for the cash entries.
22. The AO also found that the Assessee had failed to disclose its receipts
truly at the time of filing of the return. It was only after the Department
conducted inquiries that the Assessee came forward, virtually at the fag end
of the limitation period, to furnish fresh audited accounts. The return was
not filed voluntarily by the Assessee under Section 139(1) read with Section
139 (4B) of the Act. Since omission to file the return was not discovered by
the Assessee, it was not bona fide. The revised statement of income and
accounts filed by the Assessee, purportedly consolidating the accounts of
other units of the Assessee could not be accepted in terms of Section 139(5)
of the Act. There was a failure by the Assessee to comply with the statutory
requirements under the Act.
23. More serious was its inability to furnish the complete books of accounts
and other documents that it was required to keep and maintain under the Act
prior to the detection of an undisclosed bank account of the party in
Chennai. Despite adequate opportunities, the Assessee did not comply with
ITA No.188 of 2002 Page 9 of 27
the statutory requirements. It has also been unable to explain the cash
deposits in its bank account in Delhi and the cash deposits in its Chennai
account. The AO was of the opinion that the Assessee, without maintaining
proper books of accounts, had "hastily created evidence by way of manually
numbered receipt books each being below Rs.10,000/-."
24. The AO concluded that the Assessee was trying to misuse the provisions
of Section 13A of the Act by creating such evidence and then giving it to the
Department at the fag end of the limitation period so as to remove any
chance of cross-verification." It was concluded that this was a methodology
adopted to evade 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 Rs.1,17,10,370/-
shown as voluntary contributions in the consolidated account and
Rs.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
Rs.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
ITA No.188 of 2002 Page 10 of 27
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 detection of the Assessee's
bank account in Chennai and after the Assessee's notice was drawn to it that
the details of the Chennai, Mumbai and Bangalore accounts were furnished.
The claimed expenses of the Assessee were not verified by the bank
transactions. The books of accounts were not maintained in the manner that
would enable the AO to deduce the Assessee's income therefrom.
Consequently, the AO was justified in coming to the conclusion that the
Assessee had not fulfilled the conditions laid down for availing the
exemption under Section 13A of the Act.
27. The CIT (A) held that the contention of the Assessee that it was under
the bona fide belief that only the accounts of the central office were to be
filed, could not, on the face of it, be accepted. Prior to notice being issued by
the AO to the Assessee under Section 142(1) of the Act on 20 th September
1995 and even prior to the filing of the return by the Assessee on 14th
February 1996, the Gujarat High Court had given its decision in CIT v.
Gujarat Pradesh Congress Samiti (1994) 207 ITR 622 which made it plain
that the conditions to be fulfilled for availing exemption were not mere
machinery provisions, but were mandatory. Thus the Assessee, as a political
party, could not claim to be unaware of its statutory obligation to file income
tax returns, particularly if it wanted to avail the benefit under Section 13A of
the Act.
ITA No.188 of 2002 Page 11 of 27
The order of the ITAT
28. The further appeal by the Assessee being ITA No.2140/Del/2000 was
allowed by the ITAT by the impugned order dated 23 rd November, 2001.
The findings of the ITAT were as under:
i. The AO had not been able to pinpoint even one case where the
voluntary contribution was in excess of Rs.10,000/-. Thus, the
conditions stipulated in Section 13A of the Act were satisfied.
Once the Appellant had maintained the accounts and such accounts
had been duly audited and none of the entries were found to be
more than Rs.10,000, "nothing further was required to be proved."
ii. The books of accounts could not be rejected on the mere ipsi dixit
of the Revenue authorities. The AO had not pointed out the defects
in the accounts and the objections of the AO were untenable.
iii. Considering that the Assessee party had undergone many splits
over the years, it was anybody's guess as to the number of state
units which still owed allegiance to the Assessee. A political 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
ITA No.188 of 2002 Page 12 of 27
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
qualified, the purpose of law is well subserved."
vi. Since the Assessee had been claiming Nil income any variation in
the income was an academic issue. As regards claim for interest, it
was held that in the light of the decision in C.I.T. v. Anjum M.H.
Ghaswala [2001] 252 ITR 1 (SC), the Assessee deserved to
succeed.
The present appeal
29. While admitting the present appeal on 15th January 2004, the following
question was framed:
"Whether the finding is perverse and contrary to evidence on record
ITA No.188 of 2002 Page 13 of 27
in so far as applicability of Section 13A of the Income-tax Act, 1961
is concerned?"
Summary of the Court's decision in the INC case
30. In a detailed judgement delivered today in Commissioner of Income
Tax, Delhi-XI v. Indian National Congress (I)/All India Congress
Committee and the cross-appeal (ITA Nos. 145 and 180 of 2001), this Court
has elaborately discussed the scope of Section 13A of the Act and has come
to the following conclusions:
(i) For understanding and interpreting Section 13A of the Act, it would serve
no purpose to compare it with Section 11 of the Act which applies to Trusts.
(ii) Section 13A of the Act is not a computation section. Income by way of
voluntary contributions would be excluded only subject to fulfilment of the
conditions stipulated under Section 13A of the Act.
(iii) It could never have been the legislative intention that voluntary
contributions received by a political party that does not satisfy the
requirement of Section 13A of the Act - viz., maintaining books of accounts,
keeping a record of voluntary contributions in excess of Rs.10,000 (which
was later increased to Rs. 20,000 with effect from 11th September 2003) and
getting the accounts audited - would be exempt from tax. In such event, the
income of a political party by way of voluntary contributions would be
included in the taxable income. Voluntary contributions are not in the nature
of capital receipts.
ITA No.188 of 2002 Page 14 of 27
(iv) Clause F of Section 14 of the Act is a residuary provision. An income
which is not to be excluded from the total income and is not chargeable to
income tax under heads A to E, has to be treated as `income from other
sources'. If the total income by way of voluntary contributions of a political
party cannot be excluded from its total income because such political party
has not complied with any of the conditions in the proviso 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,
ITA No.188 of 2002 Page 15 of 27
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 13A must be strictly construed. If
a political party seeks exemption from payment of income tax in a given
AY, it is incumbent on the political party to strictly comply with each of the
requirements in the proviso to Section 13A. At the highest, the compliance
has to be by the time the assessment is completed but certainly not
thereafter.
31. In the aforementioned decision involving the Indian National Congress
('INC'), the Court has held, on the facts of that case, inter alia, that since the
Assessee failed 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 mandatory requirement of the proviso to Section
13 A of the Act was not fulfilled by the Assessee.
Facts not in dispute
32. Turning to the case on hand, certain facts are not in dispute at all.
Crucially there is no denial by the Assessee that it filed its returns for AY
1995-96 and the earlier two AYs, i.e., 1993-94 and 1994-95, only pursuant
to the notice issued to it under Section 142 (1) of the Act. Further there is no
denial that what was filed by it was the incomplete accounts. It pertained to
the central office and not to the State units of the Assessee. A third factor
that is not denied is that it was only after the Chennai bank account of the
Assessee was detected that the Assessee came forward to make a disclosure
ITA No.188 of 2002 Page 16 of 27
of the bank accounts of its Mumbai and Bangalore units. In other words, the
accounts that were produced were not consolidated and were, therefore,
incomplete.
Submission of counsel
33. It was sought to be urged by Mr. Krishnan, the learned counsel for the
Assessee, that there was a bona fide reason for the Assessee not having filed
the consolidated accounts of the central office and the state units. He
referred to the fact that there were periodic splits in the party and that Dr.
Swamy did not have control over the affairs and accounts of the state units.
According to Mr. Krishnan, it was also not unusual for the political parties
to number the receipt books manually. He, however, is candid that the
accounts could have been better maintained. According to him, there was no
intention to keep back any document available with the Assessee from being
disclosed to the AO. He sought to support the findings of the ITAT and
pointed out that unless the books of accounts were 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
ITA No.188 of 2002 Page 17 of 27
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 Rs. 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 and reasons
35. The above submissions have been considered. What is striking in the
present case is the casualness of which the Assessee has gone about
discharging its statutory obligations as political party in terms of Section 139
(4B) of the Act even while claiming exemption under Section 13A of the
Act. One has to simply look at the statement of total income for income tax
purposes, appended to the income tax return signed by Dr. Swamy as
President of the Assessee, to understand the above conclusion. The said
statement reads as under:
Name of the Assessee: Janata Party
Address: No. 5, Pandity Pant Marg, New Delhi.
Assessment Year : 1995-1996
Status: Political Party
"Statement of Total Income for Income Tax Purpose
Income from other sources:
Gross receipts: Voluntary contributions : 68,64,800
Less : Exemption u/S 13A : 68,64,800
ITA No.188 of 2002 Page 18 of 27
-------------
Taxable income : NIL
-------------
Note: Assessee is a political party registered with the Election
Commissioner of India and Election Symbols (Reservation and
Allotment) Order, 1968. The entire income of political party by way
of voluntary contributions are exempt under Section 13A of the IT
Act.
Sd/-
(Dr. Subramanian Swamy)
President"
36. Enclosed with the income tax returns, the auditor's report reads as under:
"I have carried out the audit of the accounts of JANATA PARTY for
the year ended 31st March 1995 and state that as per the records
produced to me and to the best of my knowledge and belief, the party
had receipts only from Voluntary contributions during the year under
reference and each such voluntary contribution was not in excess of
Rs. 10,000 (Rupees ten thousand only). The party did not derive any
income from property or other sources. Proper books of accounts and
documents necessary for above have been maintained.
The receipts and payments duly certified by me is in accordance with
the records maintained by the party.
Date: 16th Feb. 96 Sd/-
Place: Madras (S. SANTHANAGOPALAN)"
37. In order to justify the above report, the third document was appended
titled `Receipts and Payments Account 1994-1995" and reads as under:
"JANATA PARTY
RECEIPTS AND PAYMENTS ACCOUNT 1994-1995
ITA No.188 of 2002 Page 19 of 27
Receipts: 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. 13,80,000.00
Cash at Bank : C.B. 2,70,719.00
-----------------
96,11,433.65
-----------------
In terms of separate report attached
Sd/- Sd/-
(Dr. SUBRAMANIAN SWAMY) (S. SANTHANAGOPALAN)
President"
38. Apart from the above documents, nothing has been filed along with the
returns. On the date when the above returns were filed, it was known to the
ITA No.188 of 2002 Page 20 of 27
auditor that there were bank accounts of the state units and yet the Auditor
made no reference to them. Two inferences are possible: either Dr. Swamy
did not disclose the full facts to the auditor or the auditor gave an incorrect
report without qualifying the report. Nowhere does the report state that the
accounts depict a true and correct picture of the state of the financial affairs
of the Assessee. Significantly the report only refers to "the records
produced" as forming the basis of the auditor's belief that the party's receipts
were "only from voluntary contributions during the year" and that each such
contribution "was not in excess of Rs.10,000/-." Even the sentence "proper
books of accounts and documents necessary for above" reveal that the
auditor himself had not been satisfied that the entire accounts had been
disclosed. Even as regards the Receipts and Payments (R & P), the auditor
only states that it "is in accordance with the records maintained by the
Party." It is plain that the auditor had no access to the entire accounts of the
party and therefore, the above statement was false to his knowledge.
39. It is also not in dispute that it is only during the course of the assessment
proceedings and, in fact, towards the end thereof, that the Assessee on 31st
March 1998, filed a consolidated return incorporating the accounts of the
four state units, which showed voluntary contributions in the aggregate of
Rs.1,17,10,370/- (i.e. Rs. 68,84,800/- declared by the central office and the
amounts in the accounts of the Mumbai and Bangalore units). This was at
variance with the figure disclosed in the statement appended to the original
return where only a sum of Rs.68,84,800 was disclosed as the voluntary
contribution.
ITA No.188 of 2002 Page 21 of 27
40. At this stage it requires to be noticed that a CA can possibly give four
kinds of audit reports. First is to state that the complete accounts have been
produced and 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 accountants to maintain the orderly functioning of
commerce. Such reliance imposes a public interest responsibility on
the accounting profession. Professional accountants have an important
role to play in the society. Investors, creditors, employees and other
sectors of the business community as well as the government and the
public at large rely on professional accountants for sound financial
accounting and reporting, effective financial management and
competent advice on a variety of business and taxation matters. The
attitude and behaviour of the professional accountants in providing
such services have an impact on the economic well-being of their
ITA No.188 of 2002 Page 22 of 27
community and the country."
42. In a separate judgment delivered today in Commissioner of Income Tax,
Delhi-XI v. Indian National Congress (I)/All India Congress Committee
(supra), while dealing with the role and responsibility of auditors in relation
to accounts of political parties, the Court has noted as under:
" 105. The ICAI issued a 'Guidance Note on Accounting and Auditing
of Political Parties' in February 2012. The covering note of the
President, ICAI states inter alia:
"Political Parties are one of the core organisations for
functioning of a democracy. In this dynamic scenario,
where the sources of funding of the Political Parties are
diversified, the objectives of accountability and
transparency seem to be of great importance.
Transparent accounting and financial reporting are also
central to the fulfilment of new age governance, The
introduction of acceptable accounting practices and
disclosure norms are not just technical practices but the
foundations for the integrity and maturity of the
Political Parties. Political Parties would, therefore,
need to reflect their 'financial position' and 'financial
performance' which should indicate their ability to
achieve their developmental goals, meet their
programme targets, their efficiency in the use of
resources.
106. The covering note of the President ICAI acknowledges that "the
present system of accounting and financial reporting followed by
political parties in India does not adequately meet the accountability
concerns of the stakeholders." The 'Illustrative format of Auditor's
report' appended to the note requires the auditors to state inter alia
that:
''In our opinion and to the best of our information and
according to the explanations given to us, the said
ITA No.188 of 2002 Page 23 of 27
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 Rs. 10,000,
(now enhanced to Rs. 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 political parties
claiming exemption under Section 13 A of the Act is critical. For the reasons
already noticed, it is plain that the audit report in the present case does not
ITA No.188 of 2002 Page 24 of 27
satisfy the requirement of the law. The accounts produced by the Assessee
were not such as would enable the AO to properly deduce its income. The
consolidated accounts produced after the filing of the returns disclosed a
figure of voluntary contributions that differed from that disclosed in the
original return. The consolidated returns revealed the figure of voluntary
contribution in the sum of Rs. 1,17,10,370. This included the figures shown
in the accounts of the units at Maharashtra, Bangalore and Mumbai.
46. The entries in the bank accounts, as also in the ledger produced in
respect of the central office, showed that there were donations of more than
Rs.10,000. Yet, in order to substantiate its stand that the individual
contributions were less than Rs.10,000, the Assessee submitted manually
numbered receipts which were rightly disbelieved. The Assessee's case that
all donations were received in cash, were accumulated at the various units
and were remitted to the central office personally by the party functionaries
when they happened to come to New Delhi for attending meetings was
unable to be satisfactorily substantiated. The AO found large gaps in the
monthly accumulations of the donations at the various places and its actual
deposit in the bank account of the central office. No regular books of
accounts had been maintained except at the central office. The bank account
at Chennai showed that a sum of Rs. 6,62,000 was deposited in cash on
five/six occasions for which there was no explanation as regards sources. It
was sought to be explained that these were out of prior withdrawals but the
bank accounts did not reveal any such withdrawal prior to the deposits.
There were small amounts of cheque withdrawals in the name of the
different persons but there was no correlation between such withdrawals and
ITA No.188 of 2002 Page 25 of 27
the deposits of cash.
47. The Assessee also did not offer any explanation as to why donations
collected by the various state units were not remitted to the central office
either by the bank draft or telegraphic transfer. The assertion that each
donation was less than Rs. 10,000 was a desperate one and not at all
convincing. The documents produced did not support 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 Rs. 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 from
payment of income tax for that FY.
ITA No.188 of 2002 Page 26 of 27
Conclusion
49. The Court finds that no valid reasons have been given by the ITAT for
overturning the reasoned and detailed orders of the AO and CIT (A). In the
circumstances, the question 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.
50. The impugned order dated 23rd November 2001 of the ITAT in ITA No.
2140/Del/2000 is set aside and the corresponding order dated 31st March
1998 of the AO, as upheld by the order dated 16th February 2000 of the CIT
(A), is restored. The appeal is allowed in the above terms with no order as to
costs.
S.MURALIDHAR, J.
VIBHU BAKHRU, J.
MARCH 23, 2016
b'nesh
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