Among the developments of 2018, the Electoral Bond Scheme was one means by which Indian companies and individuals could contribute to political parties that were registered in India. Such contributions were made by electoral bonds, which are essentially promissory notes with denominations starting from Rs 1,000 and going as high as Rs 1,00,00,000. This scheme aimed at making political funding transparent and accountable.
In a pivotal decision, the Supreme Court of India on February 15, 2024, pronounced the Electoral Bond Scheme unconstitutional in the case “Association for Democratic Reforms v. Union of India”. The court held that this scheme infringed the Right to Information guaranteed by Article 19(1)(a) of the Indian Constitution.
Following the ruling, the authorised bank i.e. State Bank of India was ordered to cease the production of electoral bonds, which they were authorized to issue and encash by the government as per the finance act. Additionally, SBI was required to submit to the Election Commission of India well known as ECI a detailed description of buying and issuing every bond by March 6, 2024.
The ECI is tasked with publishing this information on its official website by March 13, 2024, by the Supreme Court of India.
Talking about the tax consequences of this decision, it has been explicitly stated that the election bond donations, which were claimed as deductions under sections 80GGB and 80GGC of the Income Tax Act for contributions made in the financial year 2023-24, would likely not suffer any effects. That means deductions will be guaranteed to the assessee on the same. This was because political parties would have already cashed bonds bought during this period within their period of validity
Moreover, the judgment would not likely affect retroactively the deductions claimed in past assessment years under sections 80GGB and 80GGC. The legality of these deductions, established by the Finance Act 2017, remains intact despite the scheme being struck down.
Talking about the tax implications for the political parties, this judgment invalidated the exemption granted under section 13A(b) of the Income Tax Act for maintaining records of contributions exceeding Rs. 20,000 received through electoral bonds. The Political parties are now required to maintain complete records of such contributions to claim tax exemptions in their Income tax returns.
However, after this judgment, it is analyzed that past years’ lawful exemption claims of political parties which were claimed by them cannot be revoked based on the “Doctrine of Supervising Impossibility”, which prevents the imposition of impossible requirements retroactively.
As an outcome of the Supreme Court’s decision concerning tax issues, other matters were also brought into consideration, including the changes made to Section 182 of the Companies Act which enables an Indian company to contribute any amount to any political party. Interalia the conditions are that the contribution should (i) be authorized by the Board; (ii) not made in cash, and (iii) be disclosed in the Company’s P&L account, for knowledge, Before the amendment, Section 182(1) placed a cap on the amount of money a company could donate in a single financial year, limiting it to 7.5% of the company’s average net profits during the previous three financial years.
In response to this, the court found these amendments to be unconstitutional due to their infringement upon both the right to information and fair election practices. However, this ruling does not require companies that have already filed their financial statements and made contributions above the pre-amendment limit or failed to disclose the recipient political parties to revise their audited financial statements. This is also based on the Doctrine of Supervising Impossibility, which does not allow imposing requirements retrospectively.
In conclusion, the Supreme Court of india in its ruling has important consequences in terms of election funding and corporate contributions to political parties, which are considered legal issues; however, its effects on tax deductions and financial statements would be curtailed due to the rules of impossibility.
One Response
Dear Aman,
This article brilliantly dissects the ramifications of the Supreme Court’s verdict on the Electoral Bond Scheme, shedding light on its unconstitutional nature and the subsequent fallout. It’s a crucial step towards restoring transparency in political funding, holding parties and corporations accountable. Kudos to the CA Aman for the insightful analysis!