There is a thin line of difference between tax saving and tax evasion; and this is always tested when any person claims a deduction under section 80GGB/80GGC of the Income Tax Act, 1961. As per section 80GGB/80GGC, deduction is available from Gross Total Income if a taxpayer is donating any amount towards a political party or an electoral trust.
This deduction can be claimed by an Individual, Hindu Undivided Family (HUF), Firms and Association of Persons (AOP) and Body of Individuals (BOI). Companies are eligible for claiming this deduction under section 80GGB of the Income Tax Act, 1961.
The Quantum of deduction available to taxpayers is 100% of the amount donated i.e. without any upper limit on the amount. However, as per the Companies Act, 2013, companies can make a maximum contribution of up to 7.5% of their annual net profit (average of 3 years). For instance, if a taxpayer has Gross Tax Income of Rs. 10,00,000/- and has donated Rs. 2,00,000/- to any political party then a deduction of Rs. 2,00,000/- can be claimed, which will result in healthy tax saving. The only prerequisite is that the political party shall be registered under section 29A of the Representation of the People Act, 1951 and donations made shall not be in Cash or Kind.
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But this is only one side of the coin. Many instances have been found where it has been seen that after deducting some percentage from the donation amount, political parties are returning the donated amount to the taxpayer. This transaction is popularly known as a ‘Bogus Donation’.
Due to the increase in the quantum of such transactions, genuine taxpayers are also getting notices from Income Tax Department seeking supporting documents for a claim of donations as a deduction from Gross Total Income.
One of the important questions which worries taxpayer is what if he fails to prove the genuineness of the donation?
If a person fails to prove the genuineness of the donation, the person will be liable to pay tax at the applicable slab rate plus interest for late payment of tax plus a penalty can also be levied at the rate of 50% of tax payable due to under-reporting of Income which may increase to 200% of tax payable if said is treated as misreporting of income. Assessing officers may treat such transactions as bogus claims and tax under section 115BBE attracting 60% tax rate. If the transaction is taxed under section 115BBE then the penalty will be restricted to 10% of the tax.
If we continue our earlier example if tax was payable at the rate of 20% then the taxpayer will be liable for paying Rs. 40,000/- as tax along with applicable interest and penalty ranging from 50% to 200% (i.e. ranging from Rs. 20,000/- to 80,000/-). Thus, resulting in additional tax liability instead of tax savings. This makes donating to political parties a double-edged sword.
Rs 2000 deposit, exchange last date: Daily limit, validity, where you can return and from when
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Steps that can be followed to prove the genuineness of the transaction:
First and foremost, thing taxpayer is required to do is to seek the registration certificate stating that the political party is registered under section 29A of the Representation of the People Act, 1951, which is issued by the Secretariat of the Election Commission of India. The registration can also be verified on eci.gov.in where the taxpayer can also check that party in which he is donating the fund is not specified under the list of Registered Unrecognised Political Parties (RUPP).
The taxpayer shall seek PAN (Permanent Account Number) card of the political party along with a copy of the cancelled cheque. The bank details mentioned in the cancelled cheque can also be verified with bank details mentioned in the registered website of a political party. The taxpayer shall ensure that he receives a physical receipt which is duly stamped by the political party clearly stating the amount of donation made to the political party.
In case if the taxpayer is served with a notice to prove the genuineness of the transaction then the above documents along with the payment receipt issued by the bank can be used as supporting documents and can be produced before the assessing officer.
What if a political party to whom the donation is made fails to use such funds for the intended objective? Whether deductions claimed by a taxpayer in such a case be disallowed?
As per a decision of the Ahmedabad Tribunal, funds given by the assessee as donations to political parties for claiming deduction under section 80GGC could not be disallowed treating same as bogus on ground that donees failed to use it for the object which had been made eligible to receive a donation as the Act nowhere puts an obligation upon donor to ensure how funds are utilized by donee towards their objects.
Donations to political parties can be used as a tax-saving trump card if such a transaction is a genuine transaction, otherwise tax savings from such transaction may result in higher tax payment in the form of interest and penalty.
This column has been written by Jigar Mansatta, a Chartered Accountant.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of https://www.financialexpress.com)