Why is the Congress facing a Rs 3,567-crore demand from the Income Tax department?

Why is the Congress facing a Rs 3,567.33-crore demand from the authorities, even though it is commonly understood that political parties are exempt from paying income tax?

Since the beginning of this year, the Congress has received several income tax demand notices for dues and penalties for eight assessment years: 1994-’95 and seven consecutive years from 2014-’15 to 2020-’21.

The party said that the Income Tax department has frozen all its bank accounts and has recovered Rs 135 crore from the party so far, for the assessment year 2018-’19.

On Monday, the Congress received some relief when the department told the Supreme Court that it would not be recovering the amount in income tax and interest from India’s principal opposition party until the conclusion of the Lok Sabha elections.

Here is a quick explainer of the details of the case.

Are political parties exempt from income tax?

Under Section 13A of the Income Tax Act, 1961, registered political parties will be exempt from paying income tax on the income they receive provided they fulfil certain conditions.

The party must maintain a book of accounts recording its income. It must maintain a record of the names and addresses of each person who contributes a sum over Rs 20,000 to it. Thirdly, the party’s accounts must be audited by a chartered accountant. The party must only accept contributions over Rs 20,000 via cheque, demand draft, electronic clearing system or other prescribed electronic modes.

To claim an exemption, the treasurer of the party must submit a report listing all donations over Rs 20,000 received by the party in a financial year to the Election Commission by the due date for filing income tax returns.

The provision also requires parties to file a tax return for the previous year.

If any of these conditions are not satisfied, the party will not be able to claim income tax relief, according to section 13A of the Income-tax Act as well as Section 29C of the Representation of the People Act, 1951.

Why is the Congress being asked to pay income tax?

The Congress’ income tax troubles stem from the assessment year 2018-’19. The party submitted its income return for the previous financial year on February 2, 2019, more than a month after the stipulated deadline of December 31, 2018.

Its income return for the year also did not provide particulars for contributions worth Rs 14.49 lakhs out of the total donations worth Rs 142.83 crores it received that year.

Due to its non-compliance with the provisions to claim exemption, the Income Tax department issued notices to the Congress in September 2019 and January and March 2020, demanding tax of Rs 94.44 crores on an assessed income of Rs 199.15 crores for 2018-19.

The Congress challenged the assessment order in August 2021 and applied for a stay on the recovery of the amount demanded by the income tax department in October 2021.

Later that month, an assessment officer disposed of the application, directing the Congress to pay 20% of its outstanding tax liability, failing which it would be treated as a defaulter.

However, the Congress did not pay the 20% tax amount, leading the Income Tax department to issue a letter in January 2023 to the Congress requiring the party to deposit and liquidate its tax liability. The Congress challenged this before the Commissioner of Income Tax (Appeals) and then the Income Tax Appellate Tribunal and the Delhi High Court, being denied relief at every forum.

The High Court had criticised the Congress for “badly handl[ing the] matter” and said that somebody from the Congress' office “went off to sleep” from 2021.

Last week, less than three weeks before polling begins in the Lok Sabha elections, the Congress received tax notices for seven other assessment years.

NDTV reported that according to sources in the Income Tax department, these notices were based on extensive use of hundreds of crores of rupees in cash by the party, the evidence of which was recovered by the department during raids conducted in April 2019 on associates of Congress leader and former Madhya Pradesh chief minister Kamal Nath.