Proper auditing of political parties imperative: HC

Most of the public funds spent by political parties to fight elections are "unaccounted", the Delhi High Court said today as it called for a slew of legislative measures to effectively check the influence of such money on the electoral process.
The court said proper auditing of accounts of political parties was "imperative and critical" for free and fair elections as they dealt in large sums of public money. This would also "infuse transparency and accountability" in functioning of these parties.
"Considering that political parties are an essential part of our democracy and are dealing in large sums of public money, much of which is unaccounted, the proper auditing of the accounts of the political parties is both imperative and critical to the conduct of free and fair elections," a bench of justices S Muralidhar and Vibhu Bakhru said.

The order came on a plea by Indian National Congress (I) (INC) for exemption from paying income tax for the assessment year (AY) 1994-95.
The court said in the instant case "demonstrates need for a slew of legislative measures that need to be put in place for an effective check on the influence of money on the electoral process".
The INC had challenged an Income Tax Appellate Tribunal (ITAT) order which had held that the accounts of the assessee for 1994-95 were incomplete and therefore, the exemption under the Act was not available to it.

The court held that "INC was not entitled to claim exemption from paying income tax for AY 1994-95 since it failed to maintain properly audited accounts for the said AY, thereby not fulfilling the mandatory condition for claiming such exemption".

"Consequently, on this aspect, it is held that the voluntary contributions received by the INC during the AY in question has to be treated as 'income from other sources'," it added.
The bench referred to recommendations of Law Commission of India (LCI) in a March 2015 report which had suggested that "only up to Rs 20 crore or 20 per cent of total contribution of a political party's entire collection, whichever is lesser, can be anonymous".
"The other significant recommendations are that each
recognised political party should maintain accounts clearly and fully disclosing all the amounts received and the expenditure incurred by them," the high court noted.

It said these recommendations "should receive serious and urgent attention at the hands of the executive and legislature if money power should not be allowed to distort the conduct of free and fair elections."
"This will in turn infuse transparency and accountability into the functioning of the political parties thereby strengthening and deepening democracy."
In its 71-page judgement, the court held that "ITAT was correct in law in holding that the audited accounts filed by the INC before the CIT(A) could not be accepted as evidence since they were not audited till the assessment was framed and, therefore, the INC was not entitled to exemption".

It also said that ITAT was right in refusing to condone the delay in audit of some of the state units of INC.
"If a political party seeks exemption from paying income tax in a particular AY, it is incumbent on such political party to strictly comply with each of the requirements in the proviso to Section 13A of the IT Act and to do so by the time the assessment is completed.
"At the highest, there can be a leeway between the time of filing of the return and the completion of the assessment but certainly not thereafter," it said.

The court clarified that by its order it has set aside the impugned order of the ITAT "to the extent it has remanded the proceedings to the Assessing Officer (AO), the orders passed on remand by the AO, the Commissioner of Income Tax (CIT) (Appeal) and the ITAT do not survive".
The bench said remanding the matter back to AO for re-computing INC's taxable income for the AY 1994-95 was a "futile exercise" as "what was unable to produced in these 22 years cannot suddenly be produced by the INC even if the matter is sent back to the AO at this stage".

"The AO would be unable, in the circumstances, to determine the possible extent of voluntary contributions received by the state units," the bench added.
"As far as the present case is concerned, since it is impossible to meaningfully estimate the income by way of voluntary contributions made to state units, the court sees no purpose in remanding the matter to the AO for that purpose.
"The impugned order of the ITAT to the extent it remands the matter to the AO is hereby set aside. Consequently all proceedings consequent upon such remand are rendered non-est."
The court said "the only way" to proceed in the matter was "to wholly disallow the expenditure claimed by the INC as relatable to 'income from other sources'".