The recent allegations made by AVAM (AAP Volunteer Action Manch) that the Aam Aadmi Party (AAP) had received ₹ 2 crore from 4 bogus companies has again revived the debate about political parties receiving donations in the form of black money, which is generated mostly through corruption. The allegation against AAP is that it has received ₹ 50 lakh each from four companies which were non-existent and which did not have any worthwhile business model to earn that much money as profits, and thus AAP is suspected to have been indulging in money laundering. Allegations against AAP assume more seriousness since this party had in particular been claiming that it receives donations only through transparent methods unlike other parties which receive political donations mostly in cash.
Let us analyse the legal provisions relating to donations made to political parties and then see their compliance in practice. To start with, let me first point out the existing legal provisions relating to donations made to political parties. I have first tried to analyse the legal provisions and summarised them under separate headings for easier understanding. The detailed legal provisions have been provided at the end of the article for those who are interested to read them in detail.
(A) Who can make the contribution / donation to a political party:
- Firstly, every political party is allowed to accept any amount of contribution voluntarily offered to it by any person or company (other than a Government company). [see: Section 29-B of the Representation of the People Act, 1951.]
- Such contribution cannot be accepted from a Government company. [see: Section 29-B of the Representation of the People Act, 1951.]
- Such contribution cannot be accepted from any foreign source defined under clause (e) of Section 2 of the Foreign Contribution (Regulation) Act, 1976. [see: Section 29-B of the Representation of the People Act, 1951.]
- Such contribution cannot be accepted from any local authority or any artificial juridical person (such as society, trust, company, etc.) wholly or partially funded by the Government. [see: Section 29-B of the Representation of the People Act, 1951.]
- Such contribution cannot be made by any company which has been in existence for less than three financial years. [see: Section 293-A of Companies Act, 1956.]
- The amount or the aggregate of the amounts which may be contributed by a company in any financial year shall not exceed 5% of its average net profits determined in accordance with the provisions of Sections 349 and 350 of the Companies Act during the three immediately preceding financial years. [see: Section 293-A of Companies Act, 1956.]
- No candidate for election, no political party or any office bearer thereof, can accept any foreign contribution. [see: Section 4 of Foreign Contribution (Regulation) Act, 1976.]
- No person resident in India, and no citizen of India resident outside India, can accept any foreign contribution, etc., on behalf of (1) any political party, or (2) office bearer thereof, or (3) any candidate for election. [see: Section 4 of Foreign Contribution (Regulation) Act, 1976.]
- No person, resident in India, can deliver any currency, whether Indian or foreign, which has been accepted from any foreign source, to any person if such other person intends or is likely to deliver such currency to any political party, etc. [see: Section 4 of Foreign Contribution (Regulation) Act, 1976.]
- Similar restrictions exist for any citizen of India, resident outside India, for delivery of any currency, whether Indian or foreign which has been accepted from any foreign source. [see: Section 4 of Foreign Contribution (Regulation) Act, 1976.]
(B) Is there any restriction on accepting contribution in cash?
There is no restriction prescribed under the laws for accepting such contribution in cash. However, tax deduction may not be allowed to the person making such contribution if it is made in cash.
(C) Declaration of donation received by the political parties:
As per Section 29-C of the Representation of the People Act, 1951, the political party has to prepare a report in respect of the contribution in excess of twenty thousand rupees received by such political party from any person or company in that financial year. Thus, this report has to be prepared in respect of all contributions above ₹ 20,000 made in a financial year. This report is required to be filed with the Election Commission of India.
(D) Declaration of donations made by companies:
Section 293-A(4) of the Companies Act, 1956, requires that the contributions made to a political party by a company shall be disclosed in its profit and loss account. Failure in this regard is punishable with fine and/or imprisonment.
(E) Tax exemption available to the donors:
- Under Section 80-GGC of the Income Tax Act, 1961, the contribution made by a person to a political party is deductible from his income. However, if such contribution is made in cash, no such deduction will be allowed.
- Similarly, under Section 80-GGB of the Income Tax Act, 1961, the contribution made by a company (which is otherwise eligible to make such contribution, as mentioned above) to a political party is deductible from its income. However, if such contribution is made in cash, no such deduction will be allowed.
(F) Tax exemption available to the political parties:
Any income of a political party which is chargeable under the head “Income from house property” or “Income from other sources” or “capital gains or” any income by way of voluntary contributions received by a political party from any person shall not be included in the total income of the previous year of such political party, subject to certain conditions, such as:
(a) such political party maintains such proper books of account and other documents;
(b) for contributions in excess of ₹ 20,000, the political party maintains a record of such contribution and the name and address of the person who has made such contribution;
(c) the accounts of the political party are audited; and
(d) report of the contributions above ₹ 20,000 is submitted to the Election Commission of India as required under Section 29-C of the Representation of People Act, 1951.
Above paragraphs show the summary of the legal provisions with regard to the contributions made to a political party. These legal provisions are reproduced in detail at the end of this article.
In the light of these legal provisions, let us now discuss the practical situation of donations made to political parties.
Conflicting figures are available on the Internet in this regard. For example, as per this document from ADR (Association of Democratic Rights), the total donations received by BJP (Bhartiya Janata Party) during the 3 years period from 2007-08 to 2009-10 were ₹ 520.3 crore, whereas as per this document from myneta.info website the total donations received by BJP during the 10 years period from 2003-04 to 2012-13 were only ₹ 321 crore. The total donations received during the aforesaid 3 years period by Indian National Congress, as per the above document of the ADR, were ₹ 168 crore.
Above document from ADR further shows that Congress party has shown that its share of donations received in excess of ₹ 20,000 from total income is a mere 10% and for BJP it is 23%. This means that their remaining donations were less than ₹ 20,000 which may in fact be in cash or cheque, but in either case they are not required to be reported. It is noteworthy that BSP (Bahujan Samaj Party, led by Ms Mayawati) has declared that it had not received a single donation in excess of ₹ 20,000 in all the above three financial years considered even though its total donations were around 231 crore. Thus, it appears that all its donations were perhaps in cash!
It is generally claimed by AAP that other political parties are not transparent in the matter of the donations received by them. However, other parties such as BJP claim that they are fully in compliance with the applicable laws. As we have seen above, what the existing laws require is that a political party shall declare details of all donations received by it during a financial year where the donation exceeds ₹ 20,000. There is no restriction on accepting a donation in cash or accepting a donation of a smaller amount (either in cash or cheque). Moreover, there is no requirement of submitting report about the details of the donations of amounts smaller than ₹ 20,000. Likewise, there is no legal requirement that the full list of these donations should be placed on the website of the political party (as is done voluntarily by AAP). What is required is that the details of donations above ₹ 20,000 have to be furnished to the Election Commission of India. These other parties claim that they have been providing such details to the Election Commission, due to which they are compliant with laws (except perhaps BSP, which did not receive a single donation above ₹ 20,000 during the aforesaid period of 3 years, in view of which it did not have to file any such report!).
However, what is noticed is that details of donations made to political parties other than AAP are also now available online on Internet, if not on their own websites then on some other NGO sites, such as myneta.info. For example, the details of all donations (with details of the donors) made to BJP during 2012-13 are available online here, and the details for 2011-12 are available here. I am not sure whether these lists are exhaustive (though they appear to be) but the lists are quite lengthy; for example, the 2012-13 BJP list contains details of 2941 donors who made contributions to BJP, and it contains details of some donors who donated even a smaller amounts of ₹ 5,000. For the Indian National Congress, the details of donations for the years 2013-14 and 2012-13 are available here and here, respectively. While these lists appears to be for donations made in cheque, there are some odd entries relating to cash donations also.
Thus, it can be said that political parties other than AAP are complying with the existing provisions of law with regard to disclosure of donations. It may be true that the law is not perfect and that improvements need to be made in these laws so that details of all donations (whether in cash or in cheque, and whether of and above ₹ 20,000 or below that amount) are provided by them to the Election Commission and are also put on their respective websites. Till a law is made in that regard, such other details can be put on the websites of the political parties only voluntarily as has been done by AAP.
It may perhaps also be desirable to amend the law to provide that donations to the political parties can be made only through a bank account by account-payee cheque or bank draft or by online payment from bank account, debit card or credit card, etc., and that no such donation can be made through cash. This is important in order to ensure that corruption or other type of illicit money is not diverted to a political party through cash donations. Otherwise, the political parties take undue advantage of the existing provisions of law by showing a large number of smaller transactions in cash (of amounts less than ₹ 20,000) to accept corruption money or other types of tainted money as donations. For example, as noted above, during the above-mentioned period of 3 years, BSP has accepted total donations of about ₹ 231 crore (which would all be in cash, in all probability) and not even a single donation was in excess of ₹ 20,000.
Now, let me come to the issue of ₹ 2 crore accepted by AAP as donation from 4 companies in cheques of ₹ 50 lakh each. AAP claims that these are genuine transactions, whereas some other parties have claimed that these transactions represent hawala or corruption money.
Firstly, let me applaud AAP for putting details of all its donations on its website. It is definitely commendable and should be followed by other parties also. However, is that enough? Merely because a donation is through cheque, does it mean that everything is alright?
Well, this report in Indian Express clearly shows how these donations made to AAP are highly suspicious. It is clearly seen that these 4 companies were either not existing at all or existed at unexpected places. Moreover, these companies did not have sufficient profits to make such large donations. For example, one such company had no profits at all, while another company had a nominal profit of only ₹ 61,237 in a year. Remember, the above-mentioned legal provision in Section 293-A of the Companies Act which requires that the contribution by a company in any financial year shall not exceed 5% of its average net profits of the three immediately preceding financial years. Thus, it is clearly seen that such large donations of ₹ 50 lakh each were patently illegal. Moreover, all these companies appear to be bogus companies existing only on paper.
Where did these companies get so much money when they did not have sufficient profits? Here come the deficiencies in our system which are exploited by many for conducting illegal hawala type transactions. For example, one of the above 4 companies issued its shares at a premium of ₹ 500 even though its profit was a very nominal amount! Thus, by issuing shares at an exorbitant and irrational premium amount to people (who had some oblique motive to subscribe to such share at such high premium even though the company is a defunct company) and this premium amount then goes to its cash reserves. There are other dubious means also to put money into a company’s accounts.
Thus, it is seen that illegal or irregular methods were used to first channelize cash into such four companies even though they are non-existent or defunct companies with no revenue model, and thereafter cheques were issued to AAP. It is possible that source of funds of these companies may not directly be from AAP or those connected with AAP. But, there has to be some indirect route adopted to conceal the identity of the persons involved. It is a subject matter of detailed investigation.
The basic question that arises here is this. Why would a company which is defunct and which does not have a revenue model, which is not earning any profits or is earning a nominal profit of a few thousands rupees only per year, would pay (or need to pay) a hefty donation of ₹ 50 lakh to AAP? More so, when the Companies Act does not allow such huge donations and makes it illegal and punishable? Here, I am not even asking the question as to why did AAP accept such large donations from 4 non-existing companies at the same time, even though AAP has a declared policy of first verifying and confirming every donation of large amount (of and above ₹ 30,000, I am told) though its political affairs committee, which is headed by none other than Shri Arvind Kejriwal himself. What I am asking is simply why did these companies need to make such huge donations in such illegal manner? Was there any quid pro quo? Or, were these transactions conducted though cheques manipulated just to camouflage the cash amounts? Definitely, there is more to it then what is visible at first sight. What is needed is some basic investigation to unravel the truth.
It is not to suggest that other political parties are perfectly clean in this regard. But, since AAP always takes a high (or higher) moral ground of being honest and transparent party, such suspicious transactions dent its image and it needs to come clean on this issue. Otherwise, it should stop claiming that it is a transparent and honest party.
Thus, it is quite clear that all political parties, without an exception, indulge in irregular practices of accepting donations through suspicious transactions. The law of the land may perhaps be satisfied in letter, but not in spirit. Most of such donations, even if made in cheque, may be due to some quid pro quo or motive or reward (past or future). There is definitely an urgent need for legal reforms in the way contributions are made to and accepted by political parties, in order to introduce more transparency and honesty in the system. As of today, it is widely perceived that most donations received by political parties are not for some altruistic purposes alone. This perception can be changed only by genuine reforms in law and practice.
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LEGAL PROVISIONS IN DETAIL (ABOUT CONTRIBUTION TO POLITICAL PARTIES):
(1) Representation of the People Act, 1951:
29-B. Political parties entitled to accept contribution.—Subject to the provisions of the Companies Act, 1956 (1 of 1956), every political party may accept any amount of contribution voluntarily offered to it by any person or company other than a Government company:
Provided that no political party shall be eligible to accept any contribution from any foreign source defined under clause (e) of Section 2 of the Foreign Contribution (Regulation) Act, 1976 (49 of 1976).
Explanation.—For the purposes of this section and section 29-C,—
(a) “company” means a company as defined in Section 3;
(b) “Government company” means a company within the meaning of Section 617; and
(c) “contribution” has the meaning assigned to it under Section 293-A, of the Companies Act, 1956 (1 of 1956) and includes any donation or subscription offered by any person to a political party; and
(d) “person” has the meaning assigned to it under clause (31) of Section 2 of the Income Tax Act, 1961 (43 of 1961), but does not include Government company, local authority and every artificial juridical person wholly or partially funded by the Government.
29-C. Declaration of donation received by the political parties.—(1) The treasurer of the political party or any other person authorised by the political party in this behalf shall, in each financial year, prepare a report in respect of the following, namely:—
(a) the contribution in excess of twenty thousand rupees received by such political party from any person in that financial year;
(b) the contribution in excess of twenty thousand rupees received by such political party from companies other than Government companies in that financial year.
(2) The report under sub-section (1) shall be in such form as may be prescribed.
(3) The report for a financial year under sub-section (1) shall be submitted by the treasurer of a political party or any other person authorised by the political party in this behalf before the due date for furnishing a return of its income of that financial year under Section 139 of the Income Tax, 1961 (43 of 1961) to the Election Commission.
(4) Where the treasurer of any political party or any other person authorised by the political party in this behalf fails to submit a report under sub-section (3), then, notwithstanding anything contained in the Income Tax Act, 1961 (43 of 1961), such political party shall not be entitled to any tax relief under that Act.
(2) Companies Act, 1956:
293-A. Prohibitions and restrictions regarding political contributions.—(1) Notwithstanding anything contained in any other provision of this Act,—
(a) no Government company; and
(b) no other company which has been in existence for less than three financial years,
shall contribute any amount or amounts, directly or indirectly,—
(i) to any political party; or
(ii) for any political purpose to any person.
(2) A company, not being a company referred to in clause (a) or clause (b) of sub-section (1), may contribute any amount or amounts, directly or indirectly,—
(a) to any political party, or
(b) for any political purpose to any person:
Provided that the amount or, as the case may be, the aggregate of the amounts which may be so contributed by a company in any financial year shall not exceed five per cent of its average net profits determined in accordance with the provisions of Sections 349 and 350 during the three immediately preceding financial years.
Explanation.—Where a portion of a financial year of the company falls before the commencement of the Companies (Amendment) Act, 1985, and a portion falls after such commencement, the latter portion shall be deemed to be a financial year within the meaning, and for the purposes, of this sub-section:
Provided further that no such contribution shall be made by a company unless a resolution authorising the making of such contribution is passed at a meeting of the Board of Directors and such resolution shall, subject to the other provisions of this section, be deemed to be justification in law for the making and the acceptance of the contribution authorised by it.
(3) Without prejudice to the generality of the provisions of sub-sections (1) and (2),—
(a) a donation or subscription or payment caused to be given by a company on its behalf or on its account to a person who, to its knowledge, is carrying on any activity which, at the time at which such donation or subscription or payment was given or made, can reasonably be regarded as likely to effect public support for a political party shall also be deemed to be contribution of the amount of such donation, subscription or payment to such person for a political purpose;
(b) the amount of expenditure incurred, directly or indirectly, by a company on advertisement in any publication (being a publication in the nature of a souvenir, brochure, tract, pamphlet or the like) by or on behalf of a political party or for its advantage shall also be deemed,—
(i) where such publication is by or on behalf of a political party, to be a contribution of such amount to such political party, and
(ii) where such publication is not by or on behalf of but for the advantage of a political party, to be a contribution for a political purpose to the person publishing it.
(4) Every company shall disclose in its profit and loss account any amount or amounts contributed by it to any political party or for any political purpose to any person during the financial year to which that account relates, giving particulars of the total amount contributed and the name of the party or person to which or to whom such amount has been contributed.
(5) If a company makes any contribution in contravention of the provisions of this section,—
(a) the company shall be punishable with fine which may extend to three times the amount so contributed; and
(b) every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to fine.
Explanation.—For the purposes of this section, “political party” means a political party registered under Section 29-A of the Representation of the People Act, 1951 (43 of 1951).
(3) Income Tax Act, 1961:
13-A. Special provision relating to incomes of political parties.—Any income of a political party which is chargeable under the head “Income from house property” or “Income from other sources” or “capital gains or” any income by way of voluntary contributions received by a political party from any person shall not be included in the total income of the previous year of such political party:
Provided that—
(a) such political party keeps and maintains such books of account and other documents as would enable the Assessing Officer to properly deduce its income therefrom;
(b) in respect of each such voluntary contribution in excess of twenty thousand rupees, such political party keeps and maintains a record of such contribution and the name and address of the person who has made such contribution; and
(c) the accounts of such political party are audited by an accountant as defined in the Explanation below sub-section (2) of Section 288:
Provided futher that if the Treasurer of such political party or any other person authorised by that political party in this behalf fails to submit a report under sub-section (3) of Section 29-C of the Representation of People Act, 1951 (43 of 1951) for a financial year, no exemption under this section shall be available for that political party for such financial year.
Explanation.—For the purposes of this section, “political party” means a political party registered under Section 29-A of the Representation of the People Act, 1951 (43 of 1951).
80-GGB. Deduction in respect of contributions given by companies to political parties.—In computing the total income of an assessee, being an Indian company, there shall be deducted any sum contributed by it, in the previous year to any political party or an electoral trust.
Provided that no deduction shall be allowed under this section in respect of any sum contributed by way of cash.
Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, the words “contribute”, with its grammatical variation, has the meaning assigned to it under Section 293-A of the Companies Act, 1956 (1 of 1956).
80-GGC. Deduction in respect of contributions given by any person to political parties.—In computing the total income of an assessee, being any person, except local authority and every artificial juridical person wholly or partly funded by the Government, there shall be deducted any amount of contribution made by him, in the previous year, to a political party or an electoral trust.
Provided that no deduction shall be allowed under this section in respect of any sum contributed by way of cash.
Explanation.—For the purposes of Section 80-GGB and 80-GGC, “political party” means a political party registered under Section 29-A of the Representation of the People Act, 1951 (43 of 1951).
(4) Foreign Contribution (Regulation) Act, 1976:
4. Candidate for election, etc., not to accept foreign contribution.—(1) No foreign contribution shall be accepted by any—
(a) candidate for election,
(b) correspondent, columnist, cartoonist, editor, owner, printer or publisher of a registered newspaper,
(c) Judge, Government servant or employee of any corporation,
(d) member of any Legislature,
(e) political party or office bearer thereof.
Explanation.—In clause (c) and in Section 9, “corporation” means a corporation owned or controlled by Government and includes a Government company as defined in Section 617 of the Companies Act, 1956 (1 of 1956).
(2) (a) No person, resident in India, and no citizen of India resident outside India shall accept any foreign contribution, or acquire or agree to acquire any currency from a foreign source, on behalf of any political party, or any person referred to in sub-section (1), or both.
(b) No person, resident in India, shall deliver any currency, whether Indian or foreign, which has been accepted from any foreign source, to any person if he knows or has reasonable cause to believe that such other person intends, or is likely, to deliver such currency to any political party or any person referred to in sub-section (1), or both.
(c) No citizen of India, resident outside India shall deliver any currency, whether Indian or foreign which has been accepted from any foreign source, to—
(i) any political party or any person referred to in sub-section (1), or both, or
(ii) any other person, if he knows or has reasonable cause to believe that such other person intends, or is likely, to deliver such currency to a political party or to any person referred to in sub-section (1), or both.
(3) No person receiving any currency, whether Indian or foreign, from a foreign source on behalf of any association, referred to in sub-section (1) of Section 6, shall deliver such currency—
(i) to any association or organisation other than the association for which it was received, or
(ii) to any other person, if he knows or has reasonable cause to believe that such other person intends, or is likely, to deliver such currency to an association other than the association for which such currency was received.
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