This article is written by Ms. Shivani Agarwal, currently pursuing B.Com LLB (Hons.) from Institute of Law, Nirma University. This is a comprehensive article that discusses in detail the legal rules that a company should keep in mind while making donations to a political party.
Table of Contents
Introduction
One can easily observe the changes that take place in a country whether they are social changes, political changes, economic changes, etc. With the fast-moving technology and many other economic benefits, huge corporate giants have started growing and developing at a very impressive pace. These corporate companies not only create employment for the people of a nation but also add to the economy of a nation. There are various other benefits that these corporations provide to a nation and one of them is electoral/political funding of a party during elections.
Electoral funding in its literal sense can be understood as reimbursing eligible and qualified candidates and political parties for some particular expenditure that a candidate or a party incurs during election campaigning. So, to generally describe the term ‘electoral funding’, it is basically providing or arranging funds to a political candidate or party during elections. There are various kinds of expenses that a candidate or political party has to incur and there is a limit set for it and not every candidate or party is able to arrange these kinds of funding and hence candidates or parties take help from many organizations and one such source is corporate companies located in that particular region. One must think about the role of corporations in the elections, but these corporates play a very crucial role and they can support that particular candidate or party a lot by providing them with the required funds.
Related provisions under Indian laws
The supreme authority that governs the electoral/political funding is the Election Commission of India (EC). The Election Commission of India is an independent constitutional body that oversees and provides rules and regulations during national or state elections in India.
There are various other laws also under various statutes that prescribe the manner and structure of political funding in India such as:
- Representations of People Act, 1951– This Act prescribes for the actual conduct of elections in India. This Act deals with other aspects of elections also such as various criteria for qualifications of members, smoother and efficient functioning of Indian democracy. There are many sections in this Act that provides for electoral funding of the political parties like Section 29B, 29C, etc.
- Companies Act, 1956– Since corporates are involved with the electoral funding of candidates or parties, the Companies Act also has a crucial role in governing the aspects of companies also. Various sections like Section 293A, etc. prescribe for donations by the corporates.
- Income Tax Act, 1961– The Income Tax Act, 1961 prescribes charging statute of Income-tax in India. Tax is the compulsory financial charge that citizens have to pay to the government on product, administrations, etc. This Act prescribes for governing, collecting, and recovery of income tax from citizens of India. Sections such as Sec. 80GGC & 80GGB, 13A talks about various aspects related to this concept.
Representation of People’s Act, 1951
The Act was enacted before the first general elections by the Indian parliament to govern and monitor the elections in India. Free and fair elections in a nation is an important element of a democracy. This Act along with EC is a kind of check and balance system that monitors and regulates the state or national elections in India.
This Act provides various laws and frameworks for conducting elections. Various key features of this Act are:
- It prescribes the procedure for the preparation of electoral rolls and the mannerism of filling seats of the candidates.
- It lays down the qualifications of voters.
- It mentions the procedure for the delimitation of constituencies.
This Act represents the effective functioning of Indian democracy.
Section 29B – Political parties entitled to accept contribution
As per this Section, every political party has the liberty to accept any amount of contribution that has been voluntarily offered to it by any person or company other than a government company provided that any political party is not allowed to accept any contribution from any foreign source defined under Sec. 2 clause (e) of the Foreign Contribution (Regulation) Act, 1976. This section basically bars all the registered political parties from accepting any kind of funds that has been contributed by a foreign source.
Section 29C – Declaration of donation received by the political parties
This section states that any person authorized by the political party or the party’s treasurer shall, in every financial year, prepare a report of the contribution where the amount received as the contribution is more than ₹20,000. Such a report shall be submitted before the due date for furnishing a return of its income of that particular financial year under Section 139 of the Income Tax Act, 1961.
Section 293 of Companies Act, 1956 – Prohibitions and restrictions regarding political contributions
This Section in particular talks about bars and restrictions regarding political contributions by companies. This section mentions that any government company or any other company that has existed for less than three financial years shall not contribute or provide any kind of funds directly or indirectly to any political candidate or party. This section also mentions that a company that is registered under the Companies Act can donate up to five percent of its annual profit by showing the profit in the books of accounts.
Section 293(a)(1)(a) of Companies Act
This provision simply states that any political party cannot receive any kind of contribution from government companies.
Section 80GGC of Income Tax Act, 1961
As per this section, any person who has made a contribution to a candidate or a political party that has been registered under Representations of People’s Act, 1951 is allowed to deduct from his income as a taxpayer. To put it in simpler words, if a person makes any contribution to a political party then that amount is deductible from the total income as an individual taxpayer.
Section 80GGB of Income Tax Act, 1961
The above-mentioned Section talked about a person making a contribution, while this section talks about a contribution made by a company. If an Indian company makes any kind of contribution or provides funds to a political party that has been registered under Representations of People’s Act, 1951 then such company can claim a deduction of that amount contributed to a political party.
Section 13A of Income Tax Act, 1961 – Special provision relating to incomes of political parties
Any income of a political party that comes under the head of ‘Income from house property’ or ‘Income from other sources’ or any such income that shows a voluntary contribution received by a political party from any person shall not be allowed in the total income of the previous year of such political party. This provision basically provides tax-exemption to political parties for income from house property, income from capital gains, etc.
Section 3 and 4 of Foreign Contributions (Regulation) Act (FCRA), 1976
Section 3 of the Act states that this Act shall not bar any other law that is for the time being in force.
Section 4 states that any candidate or political parties are barred from receiving any kind of contributions from foreign companies or such companies that are controlled in India by foreign companies.
Related Case Laws
Sri Deepak Mittal Vijaywada v. ACIT, Circle-1(1), Vijayawada
This case was decided by the Income Tax Appellate Tribunal in 2016. Brief facts of the case are that cross-appeals were filed by the assessee. The assessee ran a business trading in industrial spare parts and he filed his income for the annual/the financial year 2009-10 declaring ₹4,62,930 as his total income. The case was selected for a scrutinized assessment and the A.O. determined a total income of ₹1,17,07,175 and stated that a deduction without providing any explanation has been made u/s 80GGC of ₹54,00,000 and there were unexplained cash deposits into ICICI bank and there were also unexplained creditors.
The assessee filed evidence regarding the same and it was found that the assessee had paid a donation to a political party that was not recognized by EC of India. The primary issue, in this case, was that contributions made to a political party that is recognized by the EC of India is deductible u/s 80GGC of Income Tax Act, 1961 but here the party to whom contribution was made was registered or not. Both sides argued on this point. The tribunal after considering both sides of the case decided in the favour of the assessee.
Association for Democratic Reforms v. Union of India
The case is still pending in the Supreme Court of India. It was last heard in January 2020. The main issue, in this case, was to decide upon whether the current electoral bonds scheme facilitates anonymous funding by corporates/companies to political parties and whether it was wrongly introduced through the Finance Act.
In 2018, the Central government notified electoral bonds. The petitioners contended that this scheme of electoral bonds should not have been introduced through the Finance Acts because it bypasses the scrutiny of the Rajya Sabha. Four legislations namely the Foreign Contribution Regulation Act, 2010 (FCRA), Representation of the People Act, 1951 (RoPA), Income Tax Act, 1961 and the Companies Act, 2013 were amended by the Finance Act while the introduction of electoral bonds scheme. The petitioner contended that these bonds are used in the denominations of 1 million and 1 crore and it can be inferred that this scheme is used by corporations (by hiding their names) rather than individuals.
The Court in January 2020 gave EC of India time to respond and in October 2020 again the petitioners asked the Court for an urgent hearing of this case because the decision was pending in the past nine months and the SBI reopened the sale of electoral bonds for the upcoming Bihar legislative assembly elections.
Conclusion
Free and fair elections are a vital part of any democratic nation. Various large and small candidates and political parties stand in elections. These political parties are always in need of access to money to reach out to the electorate, express their philosophical ideas and receive inputs from people, and in order to do the same political parties go with the option of political funding. Political funding by the companies has always been a very controversial topic for discussion.
Throughout the article, we discussed political funding that can simply be put in words as a method that political parties use to obtain funds for financing their campaign and other regular activities. The huge corporations have a lot of potential in terms of money and thus they provide funding to various candidates and political parties and in return, they secure a very good relation with that particular political party that can help them in many different ways in the future. This whole system of providing and obtaining funds needs to be regulated so that unfair elections can be avoided. The Representation of People’s Act, 1951 is the major influential law that governs and regulates the activities, work and other related aspects associated with the elections. This law sets down certain rules and criteria for the qualifications and disqualifications of candidates and also prescribes as to what all activities are allowed and what are not allowed under this Act.
All the various laws discussed in the article provide various legal frameworks related to the concept and different statutory bodies and authorities keep an eye on this aspect. We also learned that political parties are not allowed to receive contributions from foreign companies or foreign companies that control certain companies in India. There are still many other key aspects related to this concept that need to be regulated and laws need to be developed on those certain concepts.
References
- https://www.thehindu.com/opinion/editorial/Donations-and-disclosures/article17093825.ece
- https://www.thehindu.com/news/national/cap-on-corporate-aid-to-parties-to-go/article17619391.ece
- https://www.drishtiias.com/loksabha-rajyasabha-discussions/in-depth-political-funding
- https://vakilsearch.com/advice/corporate-funding-elections/
- https://cleartax.in/s/income-tax-exemptions-political-parties
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