Income Tax Raises Tough Questions on Individuals Donating Political Parties

The Income Tax officials have sent a long-list of questions to thousands of individuals who had donated ₹5 lakh or more to lesser-known political parties.

The detailed queries date back to financial year 2020-21 where reports indicate that many donors gave cheques only to get back the money in cash from the party, thereby serving as a laundering machine and collecting a commission fee of 1-3% for the service.

Donors can claim full deduction of the donated amount while lowering their tax liability. As per the rules, there is no limit on the amount that can be donated to political parties.

About 9000 persons claimed deductions under section 80GGC on their donations of ₹5 lakh or more during the reviewed year. Notably, section 80GGC applies to individuals while section 80GGB of the I-T Act relates to companies making similar donations.

Ashish Karundia, founder, Ashish Karundia & Co said, “If the taxpayer is unable to justify the claim of donation, then it could invite heavy tax and penal consequences since apart from denial of deduction, tax authorities could also make simultaneous income addition on the presumption of undisclosed cash receipts from 'registered unrecognised political parties'. The eligible taxpayers may consider suo moto filing updated tax return to minimise the consequences,”

The recipients who are under question have been asked to furnish details regarding their nature of business or profession, account statements of all bank accounts for FY21, sources of income and audited financial statements for 2019-20, 2020-21 and 2021-22, name, permanent account number and registration certificates of the political parties and electoral trusts.

“The department is scrutinising a large number of donations to the political parties. All they want is to check whether these donations are genuine. People who made genuine contributions don't have to worry. But, for others, it is high time to update the return and withdraw the deduction and pay tax with interest before March 2025,” said Rajesh P. Shah, partner at Jayantilal Thakkar & Company.

Donors who have been identified by tax authorities are now required to disclose their political contributions made during other years besides 2020-21.