On Monday (1st April), Solicitor General Tushar Mehta, representing the Income Tax (IT) Department, gave an undertaking before the Supreme Court of India that the department would not take coercive action against the Congress party until the upcoming Lok Sabha Elections were over.
Notably, the IT department has sent multiple notices to the Congress party, raising demands for outstanding payments totalling over Rs 3,500 crores. Incidentally, the tax notices sent to the party on March 29th were for the assessment years (AY) 1994-95 and 2014-15 to 2020-21, amounting to Rs 1,823 crores.
Later, on March 31st, the IT department issued fresh tax notices to Congress, demanding payments for AY 2014-15 (Rs 663 crores), 2015-16 (Rs 664 crores), and 2016-17 (Rs 417 crores). This brings the total outstanding tax demands from Congress to Rs 3,567 crores. The development came after the High Court had rejected multiple pleas of the Congress party that had challenged the IT department’s reassessment proceedings against it for several assessment years, earlier in March, this year.
The Income-tax reassessment proceedings include penalties, interests, and ‘unaccounted cash/transactions’ relating to Congress party unearthed during recent raids
According to reports, the Income Tax department initiated reassessment proceedings for earlier assessment years after discovering discrepancies in the Congress party’s tax returns. The department found ‘unaccounted’ transactions during its searches, indicating that the party’s total taxable income for certain earlier assessment years was higher than reported, leading to tax liability on undisclosed income.
Furthermore, the party faced penalties for various violations, resulting in disqualification from tax exemptions available to political parties under Section 13(A). The total outstanding demands also include interest on pending tax dues.
For those unversed, Section 13(A) is the provision that outlines the conditions under which a political party can be exempted from paying taxes on certain types of income. Example – Income from certain sources like house property, other sources, or capital gains, as well as voluntary contributions received from individuals, are not considered as part of the political party’s total income.
However, a political party has to follow certain criteria to avail of the tax exemption. According to Indian Kanoon, certain conditions include –
- the political party must maintain proper books of account and documents to allow the tax authority to accurately determine its income.
- For voluntary contributions exceeding Rs. 20,000, the party must keep records of the contribution along with the donor’s name and address.
- Donations exceeding Rs. 2,000 should be received only through specific banking methods, such as account payee cheques, bank drafts, or electronic clearing systems.
- If the treasurer or authorised person fails to submit a report under the Representation of the People Act, the exemption won’t be available for that financial year.
- The political party must file a return of income for the previous year within the prescribed deadline.
As per reports, in some assessment years like in AY 2018-19, the Congress party failed to file the return by the deadline while in some years it was found in violation of other criteria like ‘unaccounted income’, taking donations in cash over and above the prescribed norms.
High Court took notice of unaccounted transactions
Evidently, these recent tax notices to the Congress party relate to the I-T department’s raids conducted before the 2019 Lok Sabha elections where it traced “unaccounted transactions” of Rs 523.87 crore.
The grand old party has been taxed for these “unaccounted transactions” relating to the Congress party. These unaccounted transactions were revealed in diaries that were seized from some of its leaders by probe agencies during raids, media reports added.
Conspicuously, the IT department revealed that during its searches on entities, including some of which were purportedly linked to Karnataka Deputy Chief Minister D K Shivakumar and a company in Surat, it had uncovered cash transactions involving the Congress party.
In March, while dismissing the pleas of the Congress party, the High Court stated that the tax authority had prima facie gathered “substantial and concrete” evidence warranting further scrutiny. The development unfolded after the tax department revealed that approximately Rs 520 crore had evaded assessment during these three years.
During the raids in MP, Gujarat, Karnataka, and Andhra Pradesh, the probing agencies found evidence of widespread use of cash receipts and payments. Additionally, they also found multiple sets of documents and electronic evidence that the I-T authorities have relied upon during the reassessment proceedings.
A source said, “In one of the cases, the department had information of cash being present in a location, which was found to be true as Rs 10 crore was recovered.”
The Congress party was disqualified from tax exemption available to political parties as these transactions were found to be in violation of the law.
Notably, without exemption, parties are regarded as “associations of persons” and are required to pay taxes on their reported income. Additionally, cash transactions are also included in their total income, leading to a higher taxable income and tax demand by the IT department.
As per reports citing sources, the authorities have ended the tax exemption available to political parties under Section 13 (A) of the IT Tax Act 1961 and have taxed the Congress party for the entire sum. The notice also included penalty and interest.
Furthermore, according to reports, in 2018-19, the Congress party had failed to file the return by the extended deadline of Dec 2018. The tax department had also stated that there were cash donations of over Rs 2,000, which were not permitted under law.
Congress claims ‘unaccounted transactions’ are ‘third-party transactions’, not liable to tax; no relief from ITAT to Supreme Court
Demanding exemptions from tax payment, Congress has argued that the “unaccounted transactions” are “third-party transactions”. They have claimed that the Supreme Court had previously rejected the admissibility of “third-party Excel sheets or entries” as invalid evidence.
Congress’ Rajya Sabha MP and lawyer Vivek Tankha, who handles the party’s tax litigation, lamented, “In the present case, all such suspicious and strange entries have been accepted as gospel truth while reopening or re-assessing Congress I-T returns,” alleging it to be a travesty of justice and misuse of authorities.
However, the grand old party had failed to get relief from the Income Tax Appellate Tribunal (ITAT), the Delhi High Court, and the Supreme Court.
Incidentally, in March this year, the Congress party lost its appeal before the Income-Tax Appellate Tribunal (ITAT) where it had sought a stay on the withdrawal of Rs 135 crore from its bank accounts. Later the Delhi High Court had rejected their pleas for tax reassessment for four years.
On 28th March, the Delhi High Court rejected four fresh petitions filed by the Congress party challenging the Income Tax reassessment proceedings initiated against the party.
Rejecting the plea, the Delhi High Court stated that the pleas were rejected following their earlier decision to abstain from intervening in the reopening of reassessment for an additional year. The subject matter of the case pertained to AY from 2017 to 2021.
A week earlier, it had dismissed the petition where the grand old party had contested tax reassessment proceedings for AY 2014-15 to 2016-17.
Meanwhile, Congress has filed a plea in the Supreme Court seeking to club the recent recovery of Rs 135 crores by the IT department for the last AY with an earlier special leave petition filed in 2016. The earlier petition relates to a 1994-95 case in which the department recently raised a Rs 53 crore demand. However, the I-T dept has been contesting the clubbing of the cases arguing that the two are separate cases.
After Congress cried foul over recent Income tax notices, the SG Tushar Mehta submitted that the IT department won’t take coercive action until July in the wake of Lok Sabha elections. However, the Supreme Court bench recorded that the demand of approx. Rs 3,500 crores is not strictly relatable to the controversy in these appeals.
In the previous special leave petition (SLP) submitted to the Supreme Court, the initial demand amounted to approximately Rs 26 crore. This figure was later reduced to Rs 11-12 crore during the appeals process. However, with the addition of interest, the amount has now surpassed Rs 50 crore. The demand for the assessment year 1994-95 was raised as the exemption available to political parties under Section 13(A) of the Income Tax Act had been cancelled by the department.
While the recent submission by the IT department may provide temporary relief for the Congress party, it merely postpones the issue until July instead of addressing Congress’ request to exclude the ‘unaccounted cash’ from taxable income. If the tribunal/courts find that Congress violated tax exemptions under Section 13(A) and included ‘unaccounted transactions’ in the party’s taxable income, Congress would be required to pay the outstanding tax demands. However, Congress could then potentially seek tax settlement and negotiation with the ITAT to reduce penalties and interest payments.
