Commissioner Of Income Tax Delhi-Xi v. Indian National Congress (I)/All India Congress Committee

$~ * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA 145/2001 Reserved on: February 11, 2016 Date of decision: March 23, 2016 COMMISSIONER OF INCOME TAX DELHI-XI ..... Appellant Through: Mr. Rahul Chaudhary, Senior Standing Counsel with Mr. Raghvendra Singh, Advocate. versus INDIAN NATIONAL CONGRESS (I)/ALL INDIA CONGRESS COMMITTEE ..... Respondent Through: Mr. C.S. Aggarwal, Senior Advocate with Mr. Prakash Kumar, Mr. Gautam Jain, Ms. Pushpa Sharma and Mr.Madhur Aggarwal, Advocates. AND + ITA 180/2001 INDIAN NATIONAL CONGRESS (I)/ALL INDIA CONGRESS COMMITTEE ..... Appellant ..... Appellant Through: Mr. C.S. Aggarwal, Senior Advocate with Mr. Prakash Kumar, Mr. Gautam Jain, Ms. Pushpa Sharma and Mr.Madhur Aggarwal, Advocates. with Mr. Prakash Kumar, Mr. Gautam Jain, Ms. Pushpa Sharma and Mr.Madhur Aggarwal, Advocates. versus COMMISSIONER OF INCOME TAX DELHI-XI ... Respondent Through: Mr. Rahul Chaudhary, Senior Standing Counsel with Mr. Raghvendra Singh, Advocate. Through: Mr. Rahul Chaudhary, Senior Standing Counsel with Mr. Raghvendra Singh, Advocate. ITA Nos. 145/2001 & 180/2001 CORAM: JUSTICE S. MURALIDHAR JUSTICE VIBHU BAKHRU J U D G M E N T 23.03.2016 % Dr.S.Muralidhar,J: Introduction 1.1 More than four decades ago, while noting the distortion that large contributions of money made to political parties and candidates could bring about to the electoral process, the Supreme Court observed in Kanwar Lal Gupta v. Amar Nath Chawla, (1975) 3 SCC 646 (at p. 654) as under: "The availability of disproportionately larger resources is also likely to lend itself to misuse or abuse for securing to the political party or individual possessed of such resources, undue advantage over other political parties or individuals. Douglas points out in his book called Ethics in Governmentat p. 72, “If one party ever attains overwhelming superiority in money, newspaper support, and (Government) patronage, it will be almost impossible, barring an economic collapse, for it ever to be defeated”. This produces anti-democratic effects in that a political party or individual backed by the affluent and wealthy would be able to secure a greater representation than a political party or individual who is without any links with affluence or wealth. This would result in serious discrimination between one political party or individual and another on the basis of money power and that in its turn would mean that “some voters are denied an ‘equal’ voice and some candidates are denied an ‘equal chance’ ”. 1.2 The Supreme Court also noted that: "The small man’s chance is the essence of Indian democracy and that would be stultified if large contributions from rich and affluent individuals or groups are not divorced from the electoral process." ITA Nos. 145/2001 & 180/2001 1.3 Till the Supreme Court began actively examining the issue in a public interest litigation (PIL) instituted in 1995 by 'Common Cause', most of the registered political parties in this country, both at the national and state levels, did not file income tax returns, despite it being made mandatory under Section 139 (4B) of the Income Tax Act, 1961 ('Act'), introduced with effect from 1[st] April 1979. They also failed to maintain proper accounts of their income and expenditure although this was too mandatory for them to claim exemption from payment of income tax under Section 13A of the Act. 1.4 The problem persisted despite the judgment of the Supreme Court in the PIL by Common Cause. The Election Commission of India noted in its 'Guidelines on Transparency and Accountability in Party Funds and Election Expenditure' issued on 29[th]August 2014 that “concerns have been expressed in various quarters that money power is disturbing the level playing field and vitiating the purity of elections.” 1.5 This was echoed by the Law Commission of India (‘LCI’) in its 255[th] Report on 'Electoral Reforms' when it said: 1.4 The problem persisted despite the judgment of the Supreme Court in the PIL by Common Cause. The Election Commission of India noted in its 'Guidelines on Transparency and Accountability in Party Funds and Election Expenditure' issued on 29[th]August 2014 that “concerns have been expressed in various quarters that money power is disturbing the level playing field and vitiating the purity of elections.” 1.5 This was echoed by the Law Commission of India (‘LCI’) in its 255[th] Report on 'Electoral Reforms' when it said: "Money, often from illegitimate sources, results in “undisguised bullying” when it is used (both authorised and unauthorised) to buy muscle power, weapons, or to unduly influence voters through liquor, cash, gifts. Currency notes come first in containers, then in truckloads, moving to wholesale/small retail forms, and finally to suitcases and in people’s pockets." 1.6 Referring to a study conducted by Association for Democratic Reforms (‘ADR’), the LCI noted that: "more than 75% of parties’ sources are unknown, while donations over Rs. 20,000 comprise only 9% of parties’ funding." Further ADR's analysis of the funding of political parties for financial years 2004-05 to 2011-12 revealed that the total income of political parties from unknown sources was Rs 3,674.50 crores which constituted 75.05% of the total income of the parties. 1.7. The above introductory narrative serves as a backdrop for proceeding to examine the case on hand which is about a claim by the Indian National Congress (I) ('INC'), a political party, for exemption from paying income tax for the Assessment Year (‘AY’) 1994-95. The significance of this case, which has had a chequered history, lies in it being symbolic of the general lack of transparency and accountability of political parties in this country. By a separate judgment today the Court is disposing of a similar case involving the Janata Party for AY 1995-96. The present appeals 2. The present appeals under Section 260A of the Act are directed against an order dated 9[th] April 2001 of the Income Tax Appellate Tribunal (‘ITAT’) in ITA Nos. 4181/Del/98 and 5100/Del/98 for AY 1994-95. While ITA No. 145 of 2001 is by the Revenue, ITA No. 180 of 2001 is by the Assessee, INC, a political party registered as such under Section 29A of the Representation of People Act, 1951 (‘RP Act’). ITA Nos. 145/2001 & 180/2001 3. The central issue in these appeals involves the interpretation of the words ‘income by way of voluntary contributions received by a political party’ occurring in Section 13A of the Act. The ITAT by its impugned order held that the accounts of the Assessee for the AY 1994-95 were incomplete and therefore, the exemption under Section 13A of the Act was not available to it. At the same time, the ITAT held that the Assessing Officer (‘AO’) could not invoke the provisions of Sections 144 and 145 of the Act to estimate the quantum of income earned by the Assessee by way of voluntary contributions. Accordingly, the matter was remanded to the AO with the direction to the AO that he should undertake afresh the exercise of computing the taxable income of the Assessee. 4. By this judgment, the Court holds that the INC was not entitled to claim exemption from paying income tax for AY 1994-95 since it failed to maintain properly audited accounts for the said AY, thereby not fulfilling the mandatory condition for claiming such exemption under the proviso to Section 13A of the Act. Relevant facts 5. The facts relevant to the present appeals are that the Assessee INC is a political party registered under the RP Act and satisfies the description of a 'political party' for the purpose of Section 13A of the Act. 6. The Assessee was initially not filing its annual returns of income in terms of Section 139 (4B) of the Act which was introduced by the ITA Nos. 145/2001 & 180/2001 Taxation Laws (Amendment) Act, 1978 with effect from 1[st] April 1979. This was simultaneous with the insertion of Section 13A of the Act. Relevant facts 5. The facts relevant to the present appeals are that the Assessee INC is a political party registered under the RP Act and satisfies the description of a 'political party' for the purpose of Section 13A of the Act. 6. The Assessee was initially not filing its annual returns of income in terms of Section 139 (4B) of the Act which was introduced by the ITA Nos. 145/2001 & 180/2001 Taxation Laws (Amendment) Act, 1978 with effect from 1[st] April 1979. This was simultaneous with the insertion of Section 13A of the Act. 7. In terms of Section 13A of the Act, income under the following heads were exempt from tax as far as political parties were concerned: (a) income from house property (b) income from other sources (c) capital gains (d) any income by way of voluntary contribution received by a political party. 8. However, in order to avail of such exemption a political party has to fulfil the conditions detailed in clauses (a), (b) and (c) of the proviso to Section 13A. A political party has to: (a) keep and maintain such books of accounts and other documents as would enable the AO to properly deduce its income therefrom, (b) in respect of each voluntary contribution in excess of Rs. 10,000 keep and maintain a record of such contribution and the name and address of the person who has made such contribution; (c) have its accounts audited by an Accountant as defined in the Explanation below Section 288 (2) of the Act. 9. A further proviso to Section 13A was inserted by the Taxation Laws Amendment Act, 2003 (Act 46 of 2003) which stated that on failure by ITA Nos. 145/2001 & 180/2001 a political party to submit a report under Section 29C (3) of the RP Act for a financial year to the Election Commission of India , no exemption under Section 13A would be available to it for such financial year. The decision of the Gujarat High Court 10.1 At this stage it is important to notice two developments on the judicial side which have a bearing on the question of political parties filing returns. In Commissioner of Income Tax v. Gujarat Pradesh Congress Samiti [1994] 207 ITR 622 (Guj), the Gujarat High Court considered the question whether the Gujarat Pradesh Congress Samiti (‘GPCS’) was an independent taxable entity. 10.2 The facts there were that the Income Tax Officer (‘ITO’) served a notice under Section 148 of the Act on the GPCS for AYs 1960-61, 1961-62 and 1962-63 on the basis that it was a taxable entity having an income of its own. The ITO proceeded to tax GPCS as an association of persons. The Appellate Assistant Commissioner accepted the contention of GPCS that it was only a unit of the INC and annulled the assessments for the said three AYs. 10.3 After the ITAT dismissed the appeal of the Revenue, a reference was made to the Gujarat High Court, which agreed with the ITAT that a comparison of the constitution of the INC and the GPCS showed that the GPCS was one of the constituents and committees of the INC and did not have a separate existence. 11. The aforementioned decision of the Gujarat High Court made explicit the legal requirement of the INC having to file consolidated income tax returns for both the central office and the State units. Nevertheless, the INC did not file a return of income, much less the consolidated accounts of its central office and state units, even thereafter. The decision in 'Common Cause' 12. In 1995 the Supreme Court was seized of a PIL filed by Common Cause, a civil society organisation. In Common Cause v. Union of India (1996) 222 ITR 260 (SC), the Supreme Court by a judgement dated 4[th] April 1996, dealt with the question of political parties not filing returns of income for several years thereby violating the mandatory requirement of Section 139(4B) of the Act. The summary of the main conclusions of the Supreme Court was as under: The decision in 'Common Cause' 12. In 1995 the Supreme Court was seized of a PIL filed by Common Cause, a civil society organisation. In Common Cause v. Union of India (1996) 222 ITR 260 (SC), the Supreme Court by a judgement dated 4[th] April 1996, dealt with the question of political parties not filing returns of income for several years thereby violating the mandatory requirement of Section 139(4B) of the Act. The summary of the main conclusions of the Supreme Court was as under: (i) Political parties were not above the law. A political party that was not maintaining audited and authentic accounts and not filing returns could not be permitted to contend that it had incurred authorised expenditure in connection with the election of a party candidate. (ii) The Income Tax authorities had been remiss in invoking the statutory provisions against the defaulting political parties. (iii) The Ministry of Finance, Department of Revenue was directed to have an investigation/inquiry conducted against each ITA Nos. 145/2001 & 180/2001 defaulting political party and initiate necessary action in accordance with law including penal action under Section 276CC of the Act. Proceedings before the AO 13. Turning to the case on hand, the Income Tax Department ('Department') first issued a notice to the INC on 20[th] September 1995 under Section 142(1) of the Act asking it to file its income tax returns for AY 1995-96. A reminder notice was issued on 30[th] November 1995. The INC was also requested to furnish audited accounts in respect of AYs 1993-94 and 1994-95. Yet another reminder was issued on 17[th]January, 1996. 14. It is only thereafter that the INC filed income tax returns for AYs 1993-94, 1994-95 and 1995-96 together for the first time on 14[th]February, 1996. The returns for the earlier AYs i.e., 1991-92 and 1992-93, were filed later on, i.e. on 30[th] October, 1996. Each of the returns was filed showing Nil income after claiming exemption under Section 13A of the Act. 15. On 25[th] September 1996, the AO while issuing notice under Sections 143(2) and 142(1) of the Act to the INC for AY 1994-95, asked for specific details in terms of the annexure to the said notice. The INC was asked to furnish: (i) its consolidated accounts on an all-India basis by incorporating all the accounts of the State Units; all the accounts of the State Units; ITA Nos. 145/2001 & 180/2001 (ii) complete books of accounts and other documents that may enable the AO to properly deduce the income of the party therefrom; and (iii) the list of all donors, who had given voluntary contributions in excess of Rs.10,000/- with their names and addresses. 16. The order sheets of the proceedings before the AO have been placed on record. On 28[th] October 1996, the AO noted that there was no compliance or any communication received from the INC. The same position continued on 28[th] November, 1996 and 16[th] December, 1996. The proceedings of 29[th] January 1994 read as under: “There has been a continued non-compliance from the Party and no details have been placed on record by the Party. In between Shri C.P. Malhotra had appeared in connection with the filing of I.T. Return was again reminded. In view of this, a specific show cause is being issued for a final opportunity on the 14.02.1997. In case of non-compliance, the Party has been informed that as ex-parte assessment will be made.” 17. The proceedings of 14[th] February, 1997, again showed that there was non-compliance and there was no communication received from the INC. The proceedings of 25[th] March, 1997 read as under: “Shri Rajesh Sharma, Chief Accountant of the Party attended and filed a copy of A/c's of 14 State units. It is seen from the above. 1. In the R & P A/c of the AICC (I), the donations shown are Rs.10,50,000/- but no details of them are furnished as required u/s 13A. The AR expressed his inability to do so. Furthermore, it is noticed that the Party has furnished R & ITA Nos. 145/2001 & 180/2001 17. The proceedings of 14[th] February, 1997, again showed that there was non-compliance and there was no communication received from the INC. The proceedings of 25[th] March, 1997 read as under: “Shri Rajesh Sharma, Chief Accountant of the Party attended and filed a copy of A/c's of 14 State units. It is seen from the above. 1. In the R & P A/c of the AICC (I), the donations shown are Rs.10,50,000/- but no details of them are furnished as required u/s 13A. The AR expressed his inability to do so. Furthermore, it is noticed that the Party has furnished R & ITA Nos. 145/2001 & 180/2001 P A/c's in respect of the Distt. Units also. No Balance Sheet was filed. 2. In the A/c's of the following State Units. 1. Haryana 2. Bihar 3. Himachal Pradesh 4. Kerala 5. Madhya Pradesh 6. Manipur 7. Uttar Pradesh 8. Andaman & Nicobar Islands 9. Dadra & Nagar Haveli The following points have noticed. (i) The Party has shown donations in respect of donors. No certificate from the Auditor concerned is placed on record regarding the same. (ii) The Party has not given the list of donors who have given contributions in excess of Rs.10,000/-. (iii) The Party has shown other receipts like coupons sales etc. but no details are filed. (iv) No books of A/c's of these units have been produced. (v) No documentary evidence regarding the other receipts like Membership etc. has been placed on record. 3. In the case of other Units namely-Mizoram, the Party has furnished a list of donors in excess of Rs. 10,000/- but the complete addresses is not mentioned. Further, as above the books of A/c's of the respective units were not produced neither any supporting vouchers. 4. The A/c's in respect of UPCC (I) bear the same as discussed above but also have a specific note that the membership fee adjustment has not been made in respect of the Distt. Committees. 5. The AR has furnished the A/c's in respect 14 units only. The AR has submitted that the A/c's in respect of the others are not available with him. The AR has further stated that the books of A/c's in respect of Central Office will be produced. The AR, is requested to produce the same for verification.” 18. The proceedings recorded on 25[th] March 1997 showed that Mr. Rajesh Sharma, Chief Accountant and Mr. C.P. Malhotra, Accountant, attended the proceedings and produced the cash book and ledger of the Central Office. The AO then noted as under: “1. From the "Sale of coupons" A/c's there are deposits exceeding Rs.10,000/- The AR have explained that the Treasurer of the Party is in custody of the same & it is he who gets collection from Sale thereof. 2. From the donations A/c in page 650 of Ledger, the name of donors is mentioned but the addresses is not shown. No supporting documents produced. 3. From Misc. receipts it is noticed that no. entry is in excess of Rs.10,000/-. With these observation, case is discussed.” The assessment order 19. Thereafter on 31[st] March 1997, the AO passed the assessment order for AY 1994-95. In para 3.1 of the assessment order, the AO noted that ITA Nos. 145/2001 & 180/2001 the returns pertained to the accounts of the Central Office alone. It disclosed the following receipts: “(i) Collection from sale of Rs.8,20,75,000/- Coupons & Purse money, etc. (ii) Other income Rs.3,12,65,500/- (iii) AICC membership fee Rs. 3,220/- (iv) Delegation fee Rs. 13,375/- (v) AICC Membership fund Rs. 600/-” 20. The details of ‘other income’ were furnished in Schedule 6 of the accounts and read as under: “Other Income i. Interest on Fixed deposits Rs. 89,72,827/- ii. Miscellaneous Receipts Rs. 13,532/- iii. Donation Rs.2,22,73,430/- iv. Literature Sale Rs. 5,710/-”-Rs.3,12,65,500/ 19. Thereafter on 31[st] March 1997, the AO passed the assessment order for AY 1994-95. In para 3.1 of the assessment order, the AO noted that ITA Nos. 145/2001 & 180/2001 the returns pertained to the accounts of the Central Office alone. It disclosed the following receipts: “(i) Collection from sale of Rs.8,20,75,000/- Coupons & Purse money, etc. (ii) Other income Rs.3,12,65,500/- (iii) AICC membership fee Rs. 3,220/- (iv) Delegation fee Rs. 13,375/- (v) AICC Membership fund Rs. 600/-” 20. The details of ‘other income’ were furnished in Schedule 6 of the accounts and read as under: “Other Income i. Interest on Fixed deposits Rs. 89,72,827/- ii. Miscellaneous Receipts Rs. 13,532/- iii. Donation Rs.2,22,73,430/- iv. Literature Sale Rs. 5,710/-”-Rs.3,12,65,500/ 21. The AO proceeded to note that the INC had given a break-up of the collection from sale of coupons in the denomination of Rs. 50, Rs. 100, Rs. 500 and Rs. 1,000 amounting to Rs. 8,20,75,000. There was purse money of Rs. 46,150 presented to the Congress President in the shape of garlands and purse money of Rs. 26,280 presented to the Deputy Home ’Minister. Rs. 2,22,01,000 was under the head ‘as per list attached (A). This list (A) contained the break-up of the donors who had given voluntary contributions in excess of Rs. 10,000. The AO noted that the list was incomplete since it did not contain the complete address of such donors as was required by Section 13A of the Act. The AO noted that “despite repeated opportunities, the party failed to fulfil this statutory requirement.” ITA Nos. 145/2001 & 180/2001 22. Less than a week prior to the deadline for framing of the order, the INC on 25[th] March 1997, furnished some of the details. The AO noted that a ledger account of the donations reflecting those in excess of Rs. 10,000/- did not mention the complete address of the donors. The Authorised Representative (AR) of the INC sought to explain that these represented coupon sales but could not produce receipts or other supporting documents or counterfoils of the said coupons for verification of the claim. 23. The AO then turned to the three donations received from abroad and noted that while the INC had placed on record its correspondence with the bank, it expressed its inability to give further details. These three donations were discussed by the AO in para 5.1 of the assessment order. They were shown to be of the same date, i.e., 24[th] December, 1993. The first was a sum of Rs. 40 lakh from ‘Dominion Trading Company’. The two others were of Rs.30 lakh each from ‘Decor Trading Company’. The addresses of the above parties were not furnished. According to the INC, the details were being obtained from the banks from which the drafts had been received. The Treasurer of the INC addressed a letter on 14[th] November 1996 stating that addresses of the above contributors were not available with the party and were being ascertained from their bankers. However, till the time of framing of the assessment by the AO, these details were not furnished. 24. The AO then discussed the accounts of 14 State units furnished by the INC. The AO noted that the details of the donations or the list of donors in excess of Rs. 10,000 were not furnished. No documentary evidence in respect of sale of coupons was also furnished. In sum, the conclusion drawn by the AO was that the INC had failed to furnish the true and fair picture of the receipts on all India basis; it could not produce the books of accounts and other documents in order that the income of the party may be properly deduced therefrom; in respect of the 14 State units none of the accounts could be treated as genuine. 24. The AO then discussed the accounts of 14 State units furnished by the INC. The AO noted that the details of the donations or the list of donors in excess of Rs. 10,000 were not furnished. No documentary evidence in respect of sale of coupons was also furnished. In sum, the conclusion drawn by the AO was that the INC had failed to furnish the true and fair picture of the receipts on all India basis; it could not produce the books of accounts and other documents in order that the income of the party may be properly deduced therefrom; in respect of the 14 State units none of the accounts could be treated as genuine. 25. The AO discussed at length the provisions of the Act governing political parties. The AO noted that the INC had failed to satisfy the conditions mentioned in Section 13A of the Act in all three respects, i.e., (i) furnish consolidated accounts that would reflect its income on all India basis; (ii) produce books of accounts and other documents to enable the AO to properly deduce the figures of its income therefrom; and (3) place on record the list of all donors, who had made voluntary contributions in excess of Rs. 10,000 with their complete names and addresses. 26. Consequently, the AO concluded that the INC's claim under Section 13A of the Act could not be allowed and that the receipts would be subject to tax. The AO noted the note in the Auditor’s report that since all the Pradesh Committees had not supplied necessary details of their primary and active members, and that no adjustment of membership fee could be made in the books of accounts. ITA Nos. 145/2001 & 180/2001 27. The AO had to make an estimate of the receipts since despite several requests the Assessee was unable to furnish the details of the collections made by the state units. Even the accounts of the 14 state units submitted on 25[th] March 1997 had a number of deficiencies. The AO accordingly observed: “[I]n the absence of authentic and verifiable accounts of the activities of the state units, I am compelled to estimate receipts therefrom on account of membership fee, sale of coupons and collection by way of purse money together at Rs. 15 crores that could make the total receipts of the party after including this estimated sum of Rs. 15 crores shall be Rs. 26,33,57,696/- (Rs. 11,33,57,696 + Rs. 15,00,00,000).” 28. The AO then noted that the claimed expenditure of Rs.16,45,27,326 under various heads were mostly related to political activities and that the establishment expenditure had to be treated as the only non-political expenditure. Only those expenses which could be said to be laid out wholly and exclusively for earning income under the head ‘income from house property’ and ‘income from other sources’ were allowable. In respect of ‘income by way of voluntary contributions’ no expenses were allowed. Interest on fixed deposits amounting to Rs. 89,72,827.78 was assessed as ‘income from other sources’. For AY 1994-95, there was no income under ‘income from house property’. 29. As regards the expenditure towards salaries and other benefits to its employees, postage and telegrams, travelling, rent and taxes, water and ITA Nos. 145/2001 & 180/2001 electricity, printing and stationery etc. in the sum of Rs.1,45,98,768.16, the AO allowed the entire expenditure of Rs. 37,58,036 on the employees and only 10% of the expenses under the head ‘other expenses’ as per schedule 7 of the accounts. 30. Thus a total expenditure of Rs. 52,17,912 was allowed in relation to the Central office establishment. The expenditure of state units was computed at Rs. 68,71,700. The total expenses worked out to Rs. 1,20,89,616 which when adjusted against the receipts (Rs. 26,33,57,696), gave a taxable income of Rs. 25,12,68,081. 31. Towards the end of the order, the AO observed “Charge interest. Penalty proceedings under Section 271(1)(b) and 271(1)(c) have been separately initiated”. ITA Nos. 145/2001 & 180/2001 electricity, printing and stationery etc. in the sum of Rs.1,45,98,768.16, the AO allowed the entire expenditure of Rs. 37,58,036 on the employees and only 10% of the expenses under the head ‘other expenses’ as per schedule 7 of the accounts. 30. Thus a total expenditure of Rs. 52,17,912 was allowed in relation to the Central office establishment. The expenditure of state units was computed at Rs. 68,71,700. The total expenses worked out to Rs. 1,20,89,616 which when adjusted against the receipts (Rs. 26,33,57,696), gave a taxable income of Rs. 25,12,68,081. 31. Towards the end of the order, the AO observed “Charge interest. Penalty proceedings under Section 271(1)(b) and 271(1)(c) have been separately initiated”. Appeal before the CIT (A) 32. The INC then filed an appeal before the Commissioner of Income Tax (Appeals) [‘CIT (A)’]. The appeal was filed on 4[th] November 1997 along an application under Rule 46A of the Income Tax Rules, 1962 (‘Rules’). In this application, it was stated that the dates for compliance in the proceedings referred to in the order of the AO pertained to AY 1995-96 which assessment was still pending and, therefore, the INC had not been granted sufficient opportunity to comply with the various requisitions of the AO. 33. The INC stated that the task of consolidating the accounts of the party including all its state units was a herculean task “as the aforesaid attempt was being made for the first time”. The INC had 26 Pradesh Congress Committees, 6 territorial Congress Committees, 2 Regional Committees, as also the account of All India Youth Congress, All India Mahila Congress Committee, All India Congress Seva Dal, National Students Union of India & Congress Parliamentary Party. It was claimed that “the Assessee, under such a tremendous pressure could not consolidate and also file the complete details pertaining to the voluntary contributions, as was directed”. 34. Accordingly, the INC sought to place on record “[F]urther additional evidence, i.e., a complete audited income and expenditure account for the year ending 31.3.1994 containing the accounts of 26 Pradesh Congress Committees, 6 Territorial Congress Committees, 2 Regional Congress Committee, All India Youth Congress, All India Mahila Congress Committee, All India Congress Sewa Dal, National Students Union of India and Congress Parliamentary Party, which has been placed in the Paper Book and appears from Pages 37 to 39 of the Paper Book. It is, therefore, prayed that having regard to the aforesaid facts, the evidence now the assessee is seeking to place on record may kindly be admitted”. 35. The comments of the AO were then sought by the CIT (A) on the application and the accompanying documents. Inter alia, the AO pointed out that the specific instances in Explanation 1 to Section 153(3) of the Act, as it stood at that time, did not apply to the INC and, therefore, the INC could not be permitted to furnish the final accounts after the limitation period had expired. The AO turned down the ITA Nos. 145/2001 & 180/2001 Page 18 of 71 allegation of the INC that it had not been given a sufficient opportunity as ‘irresponsible’ since the Assessee had inspected the records for AY 1994-95 on 20[th] October 1997 and the notice dated 31[st] January 1997 asking it to furnish the accounts and other details was duly received in the office of the INC on 31[st] January 1997 itself. It was further pointed out by the AO that there was no case made out for entertaining any additional evidence at this stage. Order of the CIT (A) 36. In the order dated 8[th] July 1998, the CIT (A) held that it had been proved beyond doubt that the INC had failed to discharge its statutory responsibility of filing the accounts in time which alone could have entitled it to the benefit of Section 13A of the Act. The CIT (A) declined to admit the fresh evidence adduced by the INC. The estimate of the income of the INC from the state units made by the AO at Rs.15 crores was upheld. Order of the CIT (A) 36. In the order dated 8[th] July 1998, the CIT (A) held that it had been proved beyond doubt that the INC had failed to discharge its statutory responsibility of filing the accounts in time which alone could have entitled it to the benefit of Section 13A of the Act. The CIT (A) declined to admit the fresh evidence adduced by the INC. The estimate of the income of the INC from the state units made by the AO at Rs.15 crores was upheld. 37. However, the CIT (A) found that the AO's decision as regards the expenditure incurred by the INC for the AY in question was erroneous. The expenses of the INC as a political party had to be viewed from the perspective of it having to implement its policies, objectives and manifesto and also to contest elections for which it needed a large number of vehicles, millions of leaflets, posters, banners, flags, loudspeakers etc. The employees’ expenses were allowed in full. It was also held that depreciation to the extent of Rs. 1,15,46,998.17 also ought to have been allowed. The balance claim of expenses then came to Rs. ITA Nos. 145/2001 & 180/2001 14,92,22,294. Consequently, an estimate was made of the expenses incurred by the INC as regards its political activities and the CIT (A) held it to be reasonable to restrict the INC's claim of expenses to 60% of the claim after excluding employees’ expenses and depreciation. This worked out to Rs. 8,95,33,374. The total relief granted to the INC by the CIT(A) was to the extent of Rs. 9,27,48,793. Appeals before the ITAT 38. Aggrieved by the above order of the CIT(A), both the INC and the Revenue filed appeals before the ITAT. 39. The INC was aggrieved that the CIT(A) had granted relief of only reducing the computable income by Rs. 9,27,48,793 (thereby computing the total income at Rs. 25,12,68,081 (-) Rs.9,27,48,793). Further according to the INC the CIT (A) ought to have considered the additional evidence tendered and no prejudice would have been caused to the Revenue if it had. It was, inter alia, pointed out that the estimate of the receipts on account of membership fee, coupon sales and purse money, etc. at Rs. 15 crores and the estimate of the total receipts at Rs. 26,33,57,966 were “without any basis or material on record and were merely based on the subjective opinion of the AO”. It was further pointed out that the CIT(A) had also ignored the assessment order framed by the AO for AY 1995-96 where the assessment had been completed on 31[st] March 1998 determining the income of the INC as ‘nil’. 40. It was urged by the INC that the non-consideration of the accounts produced by the INC s additional evidence under Rule 46A of the Rules amounted to a violation of the principles of natural justice. It was further submitted that unlike Section 145 of the Act, Section 13A of the Act did not empower the AO to estimate income from voluntary contributions and there was no material with the AO to make any such estimation. It was submitted that voluntary contributions did not fall under any head of income under Section 14 of the Act and was taxable only in terms of Section 13A of the Act. 41. It was submitted by the INC that there was no time limit under Section 13A of the Act for completing the audited accounts and, therefore, the audited accounts, which were completed after the assessment order for the AY 1994-95, should be considered after the matters were remanded to the AO for a fresh consideration. Reliance was placed on the CBDT’s Circular dated 19[th] October 2000. It was submitted that there was no basis for the CIT (A) to restrict the expenditure to 60% of the claim. 42. It was submitted that for AY 1994-95, the question of granting exemption under Section 13A of the Act would arise only if there was income for the said AY. In view of the fact that there was an overall deficit in the consolidated account filed before the CIT(A) to the extent of Rs. 4.60 crores there was no justification in the CIT (A) confirming the estimate of receipts and allowing only part of the expenses. Order of the ITAT 42. It was submitted that for AY 1994-95, the question of granting exemption under Section 13A of the Act would arise only if there was income for the said AY. In view of the fact that there was an overall deficit in the consolidated account filed before the CIT(A) to the extent of Rs. 4.60 crores there was no justification in the CIT (A) confirming the estimate of receipts and allowing only part of the expenses. Order of the ITAT 43. The ITAT in the impugned order dated 9[th] April 2001 came to the following conclusions: (i) Till the completion of the assessment order on 31[st] March 1997, the Assessee failed to file the audited accounts of all the state units and produce the books of accounts. The auditing of the accounts of state units was completed only thereafter. (ii) Even if there was no time limit for completion of the accounts and audit, they had to be completed within a reasonable time. Non-completion of accounts and their audit even within two years from the end of the relevant financial year (‘FY’) cannot be condoned and the Assessee cannot be given the benefit of a reasonable cause to enable the additional evidence to be tendered under Rule 46A of the Rules. In terms of Rules 46A(1)(b) and 45A(1)(c), there was no sufficient cause which prevented the Assessee from producing the requisite evidence before the AO. The CIT (A), therefore, was justified in declining to admit the additional evidence. (iii) There was no violation of the principle of natural justice as sufficient opportunity was given to the Assessee to produce the books of accounts and audited accounts. After the decision of the Gujarat High Court in Commissioner of Income Tax v. Gujarat Pradesh Congress Samiti (supra) rendered in 1993, the Assessee could not have any doubt about having to comply with the statutory requirements under Section 13A read with Section 139(4B) of the Act. (iv) The Assessee did not fulfil the conditions (a), (b) and (c) under the proviso to Section 13A of the Act and, therefore, the AO was justified in not allowing exemption therein. (v) The reasons given by the AO for making an estimate of receipts from state and other units at Rs. 15 crores was not convincing or satisfactory. The AO erred in making a lump sum estimate of all the receipts of the state and other units. Section 13A of the Act applied only to voluntary contributions actually received and would not apply to any ‘accrued, deemed, notional or estimated voluntary contributions’. Even if the AO had taken a cue from the accounts of the 14 state units that were filed, the total receipts of all the state units and other units would not have worked out to Rs. 15 crores. (vi) Likewise, the CIT(A) erred in confirming the AO’s estimate of receipts. By this time, the Assessee had filed a complete account of the states and all other units. When the CIT (A) called for a remand report from the AO, he should have raised a specific query whether the AO’s estimate on receipts could be considered as fair and reasonable in light of the audited accounts filed before the CIT(A). Even though the CIT(A) declined to accept the said additional evidence, it was relevant and imperative that these materials be appreciated to decide the estimate of receipts. A direction was issued to the AO “to accept the receipt ITA Nos. 145/2001 & 180/2001 shown in central office account at Rs. 11,33,57,696 and from all the state and other units at Rs. 3,82,97,972 + Rs. 1,81,17,534.” Further in case the AO had information about any specific receipt not disclosed in the accounts “he can take appropriate actions under the law”. (vii) There was a close nexus between the voluntary contributions and expenditure on political activity of a political party. This was because the expenditure on political activity is incurred from the voluntary contributions and the position of a political party was akin to the carrying out of the aims and objectives of a Trust. ITA Nos. 145/2001 & 180/2001 shown in central office account at Rs. 11,33,57,696 and from all the state and other units at Rs. 3,82,97,972 + Rs. 1,81,17,534.” Further in case the AO had information about any specific receipt not disclosed in the accounts “he can take appropriate actions under the law”. (vii) There was a close nexus between the voluntary contributions and expenditure on political activity of a political party. This was because the expenditure on political activity is incurred from the voluntary contributions and the position of a political party was akin to the carrying out of the aims and objectives of a Trust. (viii) But for Section 13A of the Act, voluntary contributions would not be taxable income since it did not fall under any of the heads of the income under Section 14 of the Act. It would not come under the head ‘income from other sources’. The expenditure incurred by a political party on its political activities was allowable as a deduction since such expenditure was incurred to carry out its aims and objects for which the voluntary contributions were also received. The aims and objects of political party fell within the scope of the expression “any other object of general public utility” appearing in the definition of ‘charitable purposes’ under Section 2(15) of the Act. (ix) The contention of the Assessee that exemption under Section 13A of the Act can be granted even if the prescribed conditions are fulfilled at the appellate stage was rejected. The Assessee did not deserve the grant of exempton at the appellate stage. At the same time, the Assessee ITA Nos. 145/2001 & 180/2001 did not deserve its assessment to be set aside so that the AO could grant exemption under Section 13A of the Act. (x) In view of the overall excess of expenditure over income and the decision of the Supreme Court in Ranchi Club Ltd. v. Commissioner of Income Tax (2001) 247 ITR 209 (SC), the interest charged under Section 234A and 234B of the Act was required to be deleted. (xi) The Revenue’s appeal was dismissed by observing that the allowance of depreciation and 60% of the expenditure by the CIT (A) could not be held to be erroneous. (xii) The impugned order of the CIT (A) on the allowability of the expenditure was set aside and the matter was restored to the AO with the direction to decide it de novo. The expenditure could be allowed subject to the condition that “there exists a nexus between the expenditure and voluntary contributions, and the expenditure was incurred to attain the aims and objects of the party”. (xiii) Accordingly, the Assessee’s appeal was partly allowed and the Revenue’s appeal was dismissed. Orders on remand 44. Initially when these appeals were heard on 3[rd] January 2002, certain questions of law were framed by the Court both in the Revenue’s appeal as well as in the Assessee’s appeal. Meanwhile, in terms of the ITA Nos. 145/2001 & 180/2001 impugned order of the ITAT, the AO on remand, passed a fresh order on 31[st] March 2003 computing the taxable income of the Assessee for the AY as Rs. 1,44,42,290. The appeal against the said order by the Assessee was partly allowed by the Commissioner of Income Tax (Appeals) [‘CIT (A)’] which by an order dated 9[th] December 2004 led to the revision in the taxable income as Rs. 38,38,258.The further appeal by the Assessee against that order was disposed of by the ITAT by an order dated 18[th] July 2007 leading to the determination of the loss in the sum of Rs. 60,23,621. 45. On 12[th] November 2014 the Court framed a further question of law in addition to those already framed by its order dated 3[rd] January 2002. On 8[th] December 2015 in light of the submissions made by both learned counsel for the Revenue as well as learned Senior counsel for the Assessee, one further question of law was framed for consideration by the Court in the Revenue's appeal, i.e., ITA No. 145 of 2001. 45. On 12[th] November 2014 the Court framed a further question of law in addition to those already framed by its order dated 3[rd] January 2002. On 8[th] December 2015 in light of the submissions made by both learned counsel for the Revenue as well as learned Senior counsel for the Assessee, one further question of law was framed for consideration by the Court in the Revenue's appeal, i.e., ITA No. 145 of 2001. 46. Also, in substitution of the questions framed in the Assessee's appeal, ITA No. 180 of 2001 on 3[rd] January 2002, the Court framed three substantial questions of law by its order dated 8[th] December 2015. Questions in the Revenue's appeal 47. Consequently, as far as the Revenue’s appeal, ITA No. 145 of 2011 is concerned the following questions of law were framed for consideration: 1. Whether in the circumstances of the instant case and on the ITA Nos. 145/2001 & 180/2001 Page 26 of 71 basis of the material available on record, the total income adopted at Rs.25,12,68,08 was valid and in accordance with the provisions of Section 13A of the Income Tax Act and further, whether the assessee was not entitled to an exemption on or any part of the aforesaid amount? 2. Whether ITAT was justified in law in restricting the estimate of income to the figure disclosed by the Assessee in the books of accounts produced before the AO and CIT (A) despite its finding that Assessee failed to furnish the complete accounts and produce the books of accounts of all its units before AO in spite of ample opportunities given to it? 3. Whether ITAT was justified in law and on the facts in holding that the objects of a political party fall within the scope and expression "any other object of general public utility" appearing in Section 2(15) of the Act? 4. Whether ITAT was justified in deleting the interest charged under Sections 234A & 234B of the Act altogether?" 5. Whether the voluntary contributions received by a political party in view of Section 13-A is income per se and whether expenditure incurred by a political party for political purposes or for aims and objects of the political party can be allowed as a deduction for calculating income, when conditions of the first proviso are not satisfied? 6. Whether the ITAT was justified in holding that the voluntary contributions received by the political party cannot be considered as income from other sources in the absence of availability of relief of benefit of Section 13-A of the Act? Questions in the Assessee's appeal