Political Trusts, Donations And Parties

With mid-term elections looming large consequent upon the Congress withdrawing support to the United Front government, financing political campaigns is a critical issue. For income tax purposes, some of the questions pertaining to such financing are:

Whether a trust or institution created for political purposes is entitled to exemption of its income;

Whether donations to political parties can be claimed as allowable business expenses;

How donations are to be dealt with in the hands of political parties.

The legal view is that a trust or an institution with political objectives is not charitable and hence its income is not exempt. In Bowman vs Secular Society Ltd(1917) 406 (HL), Lord Parker said: ...a trust for the attainment of political objects has always been held invalid not because it is illegal... but because the Court has no means of judging whether a proposed change in law will or will not be for the public benefit...In Laxman Balwant Bhopatkar vs The Cha-rity Commissioner, Mumbai (AIR 1962 SC 1589), it was decided (by a majority of judges), that a political purpose is not charitable under Section 9 of the Bombay Public Trusts Act (which was in pari materia with the definition of charitable purpose under Section 4(3) of the IT Act 1922 and Section 2(15) of the IT Act 1961). Subba Rao J (as he then was) wrote a very detailed judgment in this case disagreeing with the majority view.

 

The legal position concerning political trusts could be summed up by reference to the SCs decision in All India Spinners Association vs CIT (1944) 12ITR 482, where it was said that there is, in law, nothing to prevent a purely political organisation from carrying on activities of general public utility, which, if it satisfies Income Tax Law conditions, could entitle the organisation to exemption in respect of the income held in trust for charity. On the other hand, if the objects of an organisation are primarily political in character, then the mere fact that there may be a subsidiary motive of carrying on activities of public utility will not be sufficient to make it a charitable trust.

Expenditure on advertisement in any souvenir, brochure etc, published by a political party is not allowed deduction in computing taxable income. Subsection (2B) of Section 37 of the IT Act specifically prohibits allowing such expenditure. The Finance Bill 1997, which has liberalised allowance of expenditure inter alia on advertising on actual basis by omitting Subsection (3) of Section 37, has retained Subsection (2B) in the said section relating to advertisements in political party souvenirs etc.

Donations to political parties have not generally been considered business expenditure (see JK Cotton Spg & Wvg Mills Co Ltd vs CIT (1966) 62 ITR.813 (All) and Delhi Cloth & General Mills Co Ltd vs Addl CIT (1986) 160 ITR (Delhi). In CIT vs Scindia Steam Navigation Co Ltd (1980) 125 ITR 118 (Mumbai) it has been held that donation to a political party on the grounds that the assessees business is contingent on the continuance of the party in office cannot be allowed.

However, if a tax payer is able to establish a nexus between the donations and his business, the donation would be held to be for the purpose of business and allowable under Section 37(1) of the Income Tax Act. It is not as though in every case a donation to an official fund or political organisation is not allowable expenditure under Section 37(1) (See Addl CIT vs Kuber Singh Bhagvan Dass (1979) 73ITR 14 (Delhi) etc).

Whether a donation to a political party is admissible as a deduction or not would ultimately depend on the facts of the case. Under Subsection (4B) of Section 139 (w.e.f. 1-4-1979) of the Income Tax Act, 1961 (as inserted by the Taxation Laws (Amendment) Act, 1978), the chief executive officer of every political party, whose total assessable income exceeds the maximum amount not chargeable to income tax, is required to furnish a return on such income for the previous year in the prescribed form, furnishing required particulars and suitably verified. The total income for this purpose is to be computed under the Act without giving effect to the provisions of Section 13A of the Income Tax Act, 1961. On furnishing such a return, all the provisions of the Income Tax Act 1961 shall, so far as may be, apply as under Subsection (1) of Section 139 of the Income Tax Act 1961. However, Section 45 of the Wealth Tax Act 1957, provides that no wealth tax shall be levied on the wealth of political parties.

Section 13A (effective from 1-4-1979) exempts incomes of po-litical parties chargeable under the heads interest on securities, income from house property and income from other sources or any income by way of voluntary contributions. Inc-ome from business of a political party is not exempt from tax.

It is to be noted that the substituted Section 293A of the Companies Act, 1956, (effective from May 24, 1985), deals with the restrictions on political contributions by a company to any political party or for any political purpose to any person. Section 293B (w.e.f 3-12-1971) of the Companies Act empowers the Board and other persons to make contributions to the National Defence Fund or any other Fund approved by the central government for the purpose of national defence.

Great care and caution has to be exercised in the matter of giving and taking donations to avoid or minimise tax impacts. Political parties too have to be extremely vigilant in the discharge of their income tax obligations.

The legal view is that a trust or an institution with political objectives is not charitable and hence, its income is not exempt.