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The fundamentals of fund-raising

T N Pandey | August 25, 2003

Both houses of Parliament have passed the Election and Other Related Laws (Amendment) Bill, 2003, and with the president's nod, the funding of political parties by the exchequer at the taxpayer's cost will become legal.

Political parties are already scrambling for political mileage. Senior Congress member Pranab Mukherjee, who heads the Standing Committee on Home Affairs, takes credit for some of the important amendments in the Bill.

The BJP too is enthusiastic.

According to reports, Law Minister Arun Jaitley has said that the Bill is not for legalising corruption in the political system but to infuse it with accountability. But how this is going to be achieved remains unclear. No political party, except the CPM, has opposed the Bill. Even the corporate sector is upbeat on the Bill as it will get 100 per cent tax deduction for such contributions, which previously stood at only 3 per cent.

Donations to political parties under the Companies Act 1956 have a chequered history. Before 1956, there was no statutory provision related to donations to political parties. Section 192(1)(e) of the Act empowered the board of directors of a company to contribute "to charitable and other funds not directly related to the business of the economy", sums not exceeding Rs 25,000 or 5 per cent of the average net profits of three financial years, whichever was greater.

The Bombay and Kolkata High Courts took the view that donations to political parties were covered by this provision and that companies could lawfully make such donations if such a power was conferred by the clause.

In the case of Jayantilal Ranchdass Koticha vs Tata Iron & Steel Co Ltd (1957), the Bombay high court considered the validity of the amendment of the memorandum of association to permit donations to political parties.

While confirming such an amendment, the court expressed misgivings about the effect of corporate donations to political parties.

Chief Justice Chagla observed (page 633): "...we think it our duty to draw the attention of Parliament to the great danger inherent in permitting companies to make contributions to the funds of political parties.

"It is a danger which may grow apace and which may ultimately overwhelm and even throttle democracy in the country. Therefore, it is desirable for Parliament to consider under what circumstances and under what limitations companies should be permitted to make these contributions."

The court suggested that "...the least the Parliament can do is to require the sanction of the court before any large amount is paid by the company to the funds of a political party."

Similar views were expressed by the Calcutta high court in Indian Iron and Steel Co Ltd (1957).

In its report published in 1957, the Companies (Amendment) Act Committee referred to both these judgements and recommended that full information related to such contributions should be incorporated in the accounts.

Section 293a was inserted by Act 65 of 1960, limiting the amount, which could be donated in any financial year to Rs 25,000 or 5 per cent of the average net profits of the three preceding financial years, whichever was greater.

Sub-section (2) required the company to give particulars in its profit-and-loss account of the amounts donated and the names of the political party or people who were the recipients of these donations.

The issue concerning donations to political parties by corporations continued to be a matter of debate even after the incorporation of Section 293a in the Companies Act, 1956. According to the Companies (Amendment) Bill, 1968, donations to political parties were proposed to be banned altogether.

The relevant portion of the statement of objects and reasons to Section 293a as enacted in 1969 reads as follows: "The propriety of companies making contributions to any political party or for any political purpose to any individual or body has for some time been the subject of discussion both inside and outside Parliament.

"A view has been expressed that such contributions have a tendency to corrupt political life and to adversely affect [the] healthy growth of democracy in the country and it has been gaining ground with the passage of time.

"It is, therefore, proposed to ban such contributions."

Accordingly, Section 293a was enacted to ban political donations to parties in 1969.

In 1976, a Bill (Bill 80) was introduced in Parliament, purporting to give companies the power to donate up to 5 per cent of their profits to political parties. This Bill, however, lapsed.

By the Companies (Amendment) Act 1985, a new Section 293a was enacted to permit political donations. Thus, the existing position is that, barring government companies and companies that have been in existence for less than three years, the corporate sector is free to make donations to political parties or for political purposes up to the extent of 5 per cent of average net profits determined in accordance with the provisions of Section 349 and 350 during the three immediately preceding financial years.

There is no specific provision in the Income Tax Act for giving tax benefits for such donations. But there is no specific bar also in the IT Act for allowing such benefits. The legal aspects related to the allowability of political donations in computing taxable income have been succinctly summed up by S S Chaturvedi and Pithisaria in their treatise Income-tax Law (on pages 2,260 and 2,261, fifth edition).

"The allowability of the non-banned political contributions is to be considered on the touchstone of the phraseology of Section 37(1). In most of the cases, the contributions have been denied deduction because the assessee concerned could not show any direct link between his trade and the contribution made by him. However, if the assessee can show a pragmatic nexus between his trade and the contribution made by him, it is allowable as a deduction under section 37(1)."

"So long as a political party remains in power, it has favours to show and patronages to distribute, which attract aspirants for favour and patronage, a short-cut to such favours and patronage is considered to be payment of money to party funds, because fund-hunger at party level is well-known.

"In this country, where social controls over trade and industry are wide and varied, commercial men feel, for reasons good or bad, that their existence and prosperity depend upon Government graces."


 (The writer is former chairman of the Central Board of Direct Taxes)

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