No Interim Relief for Congress Party in Income Tax Recovery Case

Income Tax Appellate Tribunal (ITAT) to Hear the Appeal on Merits; Congress Party likely to move Delhi High Court.

Breaking News: ITAT Denies Stay on Recovery Proceedings

In a significant development, the Income Tax Appellate Tribunal (ITAT) on Friday (March 8, 2024) dismissed the plea for the Indian National Congress for a stay on the recovery of over ₹105 Crore in outstanding taxes. The decision came in a detailed 26-page order pronounced by the Delhi Bench, comprising Vice President GS Pannu and Judicial Member Anubhav Sharma. This decision, though ad interim, addresses the demand notice issued by the Income Tax (IT) Department for the assessment year 2018-19, marking a crucial moment in the ongoing legal battle between the Congress Party and the IT Department.

Background of the Controversy

The controversy exploded last month when the Congress alleged that its bank accounts had been frozen by the IT Department, a claim that was subsequently contested by the tax authorities. The IT department's rejection of the Congress's declaration of Nil income for the assessment year in question led to a demand of more than ₹105 Crore as tax, citing late filing and receipt of donations in excess of ₹2,000 from various individuals—actions deemed in violation of Section 13A of the Income Tax Act, 1961.

Congress's Allegations and ITAT's Response

The Congress Party argued that the recovery proceedings, initiated on February 13, were strategically aimed at creating financial hardships ahead of the upcoming Lok Sabha elections. However, the IT authorities countered, emphasizing the pendency of the proceedings since July 2021. The ITAT, focusing solely on the prima facie legal merits of the case, found no undue haste in the recovery proceedings timeline, leading up to the notice under section 226(3) of the Act on February 13, 2024.

Examination of Claims and Legal Stance

Upon reviewing the legal prerequisites for tax exemption under Section 13A, the ITAT scrutinized the Congress Party's compliance with these conditions. The tribunal highlighted the importance of timely filing of returns and adherence to the legal cap on cash donations. Despite Congress's argument that minor infractions should not negate their exemption entirely, the ITAT declined interim “stay” on the recovery notice, effectively affirming the Assessing Officer's bona fides. It, however, needs to be clarified that current order is a merely an interim one and the ITAT shall continue to hear the appeal on merits and pass a final, detailed order in due course.

The Continuing Legal Saga

A month prior, the controversy was stirred by allegations of the Congress Party's bank accounts being frozen, which were later clarified and rebutted by the Income Tax Department. The Department of Revenue stated there was no directive for a blanket freeze on the accounts, and only a lien on amounts equal to the outstanding tax demand, had been ordered, by the statutory, quasi-judicial authorities of the IT Department, in due process of law.

As the ITAT rejects the Congress Party's plea for an interim relief, the case remains open for comprehensive adjudication. The possibility of the matter escalating to the Delhi High Court and potentially, the Supreme Court, looms, depending on the Congress Party's next legal move. Representing the Congress were Senior Advocate Vivek Krishna Tankha and his team, while the IT authorities were represented by Senior Standing Counsel Zoheb Hossain and his legal team.

Editorial Insight: The Tax Exemption Conundrum for Political Parties

The Principle of Tax Exemption for Political Entities

Our analysis begins with the foundational principle embedded in the Income Tax Act, 1961, specifically Section 13A, which grants political parties registered with the Election Commission of India a broad exemption from income tax. This exemption, while comprehensive, is not without its prerequisites. Political parties must adhere to stringent conditions, including timely income tax return filings and the restriction on accepting cash donations exceeding Rs 2,000 from a single source¹.

The Crux of the Legal Debate

Despite the clear breach of these conditions by the Congress Party—a fact that the Party itself has not contested—the ensuing legal debate pivots on a critical question: Does a minor infringement, such as a slight delay in filing tax returns or the acceptance of a negligible portion of donations in cash, justify the complete revocation of tax exemption? With no existing legal precedents for such scenarios, this question is poised to challenge the judiciary, likely necessitating a final verdict from the Supreme Court of India.

Immediate Implications and Long-term Perspectives

In the meantime, given the ITAT's decision not to keep its order in abeyance for a brief period of around ten days, as requested by the Congress Party, enabling it to file an appeal or writ petition in the Delhi High Court, the financial stability of the Party is potentially at risk. This situation leaves the Congress's bank accounts exposed to recovery actions for the outstanding tax amount, alongside accruing interest and penalties for delayed payment.

As the legal proceedings unfold, the Congress Party is anticipated to fully leverage its position, framing itself as a victim in the political narrative leading up to the 2024 Lok Sabha elections. The judicial journey ahead is not only a test of legal interpretation but also a significant political moment, underscoring the delicate balance between regulatory compliance and political strategy. It is also a lesson for the other political parties to strictly comply with the provisions of law, failing which their income from all sources is likely to be subjected to income tax as well as stringent penalties.

1. In India, political parties are generally exempt from paying income tax, provided they comply with certain conditions stipulated under the Income Tax Act, 1961. This exemption is granted to encourage political activities that are essential for the functioning of a democratic society. According to Section 13A of the Income Tax Act, political parties are exempt from paying income tax on their income from house property, other sources, capital gains, and income by way of voluntary contributions received from their supporters, as long as they adhere to the following conditions:

1. Maintenance of Books of Accounts and Records: Political parties must maintain detailed books of account and records of all financial transactions to claim the exemption.

2. Audit of Accounts: If the income of the political party exceeds the amount set by the government for any financial year, its accounts must be audited by a chartered accountant.

3. Reporting to the Election Commission: Political parties are required to report the names and addresses of individuals and entities donating more than a specified amount (currently Rs. 20,000) to the Election Commission of India. This is to ensure transparency in the finances of political parties.

4. Prohibition on Receiving Contributions from Foreign Sources: Political parties are not allowed to receive contributions from foreign sources as defined under the Foreign Contribution (Regulation) Act, 2010 (FCRA).

It's important to note that while political parties enjoy income tax exemptions, this privilege comes with the responsibility of maintaining transparency and accountability in their financial operations. The provisions are designed to encourage lawful financial practices and to ensure that political parties' financial operations are aligned with the interests of public transparency and accountability.

Failure to comply with these conditions can lead to the revocation of the tax exemption status and make the political party liable to pay taxes on their income. The framework aims to balance the need for financial support for political activities with the necessity of ensuring transparency and preventing misuse of the financial system.