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Backdrop: The Electoral Bond Scheme, 2018 was notified on January 2, 2018 by the Department of Economic Affairs, Ministry of Finance, and it enabled the Indian companies and any other persons including individuals to make contributions to any registered political party in India by way of an electoral bond, without any monetary threshold. Electoral bond was a bond issued in the nature of promissory note which is a bearer banking instrument and did not carry the name of the buyer. The bonds were issued in denominations of Rs 1000, 10,000, 1,00,000, 10,00,000 and 1,00,00,000. A political party, to be eligible to receive an electoral bond, has to be registered under Section 29A of the Representation of The People Act, 1951 and ought to have secured not less than one per cent of the votes polled in the last general election to the House of the People or the Legislative Assembly of the State. An eligible political party could encash a bond only through a bank account with an authorised bank. The scheme has notified the State Bank of India as the bank authorised to issue and encash electoral bonds. Payments for the issuance of the bond could be accepted in Indian rupees, through demand draft, cheque, Electronic Clearing System or direct debit to the buyer’s account, only and not by way of cash. Where payment is made by cheque or demand draft, it must be drawn in favour of the issuing bank at the place of issue
The SC Judgement: On 15th February, 2024, the Constitutional bench of the honourable Supreme Court comprised of five judges and chaired by the honourable Chief Justice of India, in its landmark judgement, in the case of “Association for Democratic Reforms and Anr. v. Union of India & Ors. in Writ Petition (C) No. 880 of 2017 [2024] 159 taxmann.com 383 (SC), (hereinafter referred to as the ADR judgement), has unanimously struck down the Electoral Bond Scheme, holding it as Unconstitutional, and in violation of the Right to Information, provided in Article 19(1)(a) of the Constitution of India.
The hon’ble SC has directed that the issuing bank State Bank of India (SBI), shall herewith stop the issuance of Electoral Bonds and it shall submit complete details of the purchase of each Electoral Bond, the name of the purchaser of the bond and the denomination of the Electoral Bond purchased. The SBI has also been directed to submit the details of political parties which have received contributions through Electoral Bonds since April 2019 till date to the Election Commission of India (ECI). SBI has also been directed to disclose details of each Electoral Bond encashed by political parties.
The hon’ble SC has further directed the SBI to submit the above information to the ECI by March 6, 2024. The ECI has been directed to publish the information shared by the SBI on its official website within one week by 13 March 2024.
Income Tax Implications of the SC Judgement:
In the hands of Donors/Purchasers of Electoral Bonds:
In the Income Tax Act, any Indian company or any other person including an individual, contributing (other than by way of cash) to any registered political party or an electoral trust in India, including by way of electoral bond is eligible to claim the deduction of equivalent amount from its taxable income, under sections 80GGB and 80GGC respectively.
Can Deduction u/s 80GGB/80GGC be claimed for Electoral Bonds purchased prior to the SC Judgement:
The Electoral Bond Scheme provided that the electoral bonds shall be available for purchase for a period of ten days on a quarterly basis, in the months of January, April, July, and October and an additional period of 30 days in the year of general elections. The scheme also provided that such electoral bonds are valid for encashment by the concerned political party only for fifteen days from the date of issue and No payment will be made to a political party if the bond is deposited after the expiry of fifteen days.
So, for the current FY 2023-24, the electoral bonds purchased by the Indian companies and individuals in the specified months of April, July, October 2023 and in January 2024, would have already been encashed by the respective political parties, as the validity period of 15 days has already expired for all these four specified months.
In the SC judgment authored by the hon’ble CJI, in para, 221(f), it has been directed that the Electoral Bonds which are within the validity period of fifteen days but that which have not been encashed by the political party yet shall be returned by the political party or the purchaser depending on who is in possession of the bond to the issuing bank. The issuing bank, upon the return of the valid bond, shall refund the amount to the purchaser’s account.
This implies that the SC judgement, prima-facie, will not have any adverse impact on the deduction claimed by the Indian companies, and individuals, u/s 80GGB and 80GGC respectively, for the FY 2023-24 relevant to the AY 2024-25, in respect of the electoral bonds already purchased by them in the current FY 2023-24. This is because the said donations via electoral bonds, have not been directed to be refunded by the hon’ble SC as the same would have already been encashed by the respective Political parties, on the expiry of the 15 days validity period. Also, no direction has been given in the SC judgement suggesting scrapping of deduction u/s 80GGB or 80GGC.
Another interesting aspect would be that whether now since the Electoral Bond Scheme, 2018, itself has been struck down as unconstitutional, by the hon’ble SC, so whether the deductions claimed by the respective donors, viz. corporates u/s 80GGB of the Income Tax Act and persons other than companies u/s 80GGC, in respect of their electoral bonds contributions to recognised political parties, in all past assessment years viz. AY 2018-19, 2019-20, 2020-21, 2022-23 and 2023-24, u/s 13A of the Income Tax Act, can be revoked?
The answer is clearly in the negative. This is because of the well-established legal position that that the Legislature itself has brought the electoral bonds in the category of an eligible contribution to a recognised political party, to be claimed as deduction, under sections 80GGB and 80GGC of the Income Tax Act, in the Finance Act 2017, and which deduction has accordingly been rightfully claimed by the respective donors in these assessment years. Now any subsequent ruling, even if by the hon’ble Supreme Court, can’t revoke or alter the rightful entitlement of the donor’s deduction claims u/s 80GGB and 80GGC in the past assessment years.
Further, the Doctrine of Supervening Impossibility, based on the maxim ‘Lex non cogit ad impossibilia’ [“law does not compel the impossible”], applicable in Indian Contract Act, 1956, is equally applicable in case of any subsequent amendment in the law, as well as the implementation of the findings and directions of any subsequent judicial pronouncement.
Tax Implications in the hands of Donees/Political Parties
The amendment in the Income Tax Act in section 13A(b) of the Income Tax Act, by the Finance Act 2017, granting relaxation to the political parties from maintaining and keeping complete records of contributions exceeding Rs. 20,000, received through electoral bonds, has now been struck down as unconstitutional, by the hon’ble Supreme Court and thus the political parties will be required to maintain complete records of electoral bond contributions received by them in the year 2023-24, in order to claim the income tax exemption in respect of such contributions.
However, a more interesting question would be whether the exemptions claimed by the respective political parties u/s 13A of the Income Tax Act, for the past assessment years viz. AY 2018-19, 2019-20, 2020-21, 2022-23 and 2023-24, u/s 13A of the Income Tax Act, can be revoked and cancelled, as they had not maintained the records of such electoral bonds contributions.
Here again the answer is in the negative, and again the Doctrine of Supervening Impossibility comes into picture and relying upon the same, the past years’ lawful exemption claims of the respective political parties can’t be denied or revoked now, subsequent to the SC judgement.
Impact on the Audited Financials & Balance Sheets of Indian Companies as per the Companies Act, 2013
The Section 182 of the Companies Act 2013 substantively incorporated the provisions of Section 293-A of the 1956 Act, as amended in 1985. Prior to its amendment by the Finance Act 2017, a company which has been in existence for less than three financial years was prohibited from contributing to a political party and the aggregate of the amount contributed by the company in any financial year shall not exceed seven and a half per cent of its average net profits during the three immediately preceding financial years.
The Finance Act 2017 made three changes to Section 182 of the Companies Act:
a. The first proviso to Section 182(1) which prescribed a cap of 7.5% of average net profits during last three years, on corporate funding was omitted;
b. Section 182(3) was amended to only require a disclosure of the total amount contributed to political parties by a company in a financial year and excluded the requirement to disclose the particulars of the amount contributed to each political party; and
c. Sub-section 3A was introduced, by which a company could contribute to a political party only by a cheque, bank draft, or electronic clearing system. The proviso to the sub-section states that a company may also contribute through any instrument issued pursuant to any scheme notified under any law for the time being in force for contribution to political parties.
Thus, after the above amendments, companies similar to individuals, could make unlimited contributions and contributions can be made by both profit-making and loss- making companies to political parties.
The hon’ble SC in the ADR judgement has held that the amendment to Section 182(3) of the Companies Act of omitting the requirement of making item-wise disclosures of each political contribution, including the name of the political party is unconstitutional being violative of Right to Information under Article 19(1)(a) of the Constitution of India.
The hon’ble SC has also held that the deletion of proviso to Section 182(1) of the Companies Act which stipulated the maximum cap of 7.5% of the average net profits for corporate donations to political parties, and thereby allowing unlimited corporate contributions to political parties, is manifestly arbitrary and violative of Article 14 of the Constitution of India for (a) treating political contributions by companies and individuals alike; (b) permitting the unregulated influence of companies in the governance and political process violating the principle of free and fair elections; and (c) treating contributions made by profit-making and loss-making companies to political parties alike.
Now, since these amendments to section 182 of the Companies Act, by the Finance Act 2017, have been held as manifestly arbitrary and unconstitutional by the hon’ble Supreme Court, can the companies which had made contributions to political parties in the financial years 2017-18, 2018-19, 2019-20, 2020-21, 2021-22, 2022-23 and even in the current FY 2023-24, till date, in excess of the pre-amended threshold prescribed limit of 7.5% of their aggregate net profits in their preceding three years, and which had not made the item-wise disclosures of their political contributions and the names of the recipient political parties, can be asked or required to revise their already audited and laid down books of accounts and financial statements.
The answer here again is in the negative, because of the Doctrine of Supervening Impossibility, the companies couldn’t be asked to do the impossible of ploughing back their respective political contributions in excess of the said threshold limit of 7.5% of their profits and similarly to revise their already laid down sacrosanct audited financial statements.
Parting Thought: The Election Commission of India should consider upgrading its website on account of the inevitable traffic on the eagerly awaited date of 13.3.2024...
[This Article has also been published in Taxmann with the Citation [2024] 159 taxmann.com 412]
