Web viewACAE CHARTERED ACCOUNTANT’S STUDY CIRCLE- EIRC. Lecture Meeting on. Electoral Trust...

ACAE CHARTERED ACCOUNTANT’S STUDY CIRCLE- EIRC

Lecture Meeting on

Electoral Trust vis-a-vis Political Donation u/s 80GGB and 80GGC of Income Tax Act, 1961 including FCRA provisions

On

Thursday, the 30th January, 2014

At

Emami Conference Hall

6, Lyons Range, 3rd Floor, Unit-2, Kolkata- 700 001

INDEX

Particulars Page No. From To

PART- IA Statutory Provisions under Income Tax Act, 1961 and

Income Tax Rules, 1952Section 80GGB 2 2Section 80GGC 2 2Electoral Trust Scheme, 2013 2 6Rule 17CA – Functions of Electoral Trust 6 8Form 10BC 8 10

B Statutory Provisions under Companies Act, 1976 and Companies Act, 2013 – A comparative study

10 12

C Statutory Provisions under Foreign Contribution (Regulation) Act, 1976 and Foreign Contribution (Regulation) Act, 2010 – A comparative study

13 15

D Guidance Note on Section 293A of the Companies Act and the Auditor issued by The ICAI

15 20

PART- IIImportant Relevant Court Decisions 20 20

PART- III

By CA Ramesh Kumar Patodia([email protected])

mailto:[email protected]

Controversies/ disputes and issues 20 21

PART – I

A.Statutory Provisions under Income Tax Act, 1961 and Income Tax Rules, 1962

Deduction in respect of contributions given by companies to political parties.80GGB. In computing the total income of an assessee, being an Indian company, there shall be deducted any sum contributed by it, in the previous year to any political party 35[or an electoral trust].The following proviso shall be inserted before the Explanation to section 80GGB by the Finance Act, 2013, w.e.f. 1-4-2014 :

Provided that no deduction shall be allowed under this section in respect of any sum contributed by way of cash.

Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, the word "contribute", with its grammatical variation, has the meaning assigned to it under section 293A36 of the Companies Act, 1956 (1 of 1956).

Deduction in respect of contributions given by any person to political parties.80GGC. In computing the total income of an assessee, being any person, except local authority and every artificial juridical person wholly or partly funded by the Government, there shall be deducted any amount of contribution made by him, in the previous year, to a political party 35[or an electoral trust].

The following proviso shall be inserted before the Explanation to section 80GGC by the Finance Act, 2013, w.e.f. 1-4-2014 :

Provided that no deduction shall be allowed under this section in respect of any sum contributed by way of cash.

Explanation.—For the purposes of sections 80GGB and 80GGC, "political party" means a political party registered under section 29A of the Representation of the People Act, 1951 (43 of 1951).]

Electoral Trust Scheme, 2013

In exercise of the powers conferred by clause (22AAA) of section 2 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby makes the following scheme for approval of electoral trusts, namely:-

Short title, commencement and application1. (1) This Scheme may be called the Electoral Trusts Scheme, 2013.



http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:%5CWebSites%5CDITTaxmann%5CAct2010%5CDirectTaxLaws%5CITACT%5CHTMLFiles%5C2013&DFile=ftn35_section80ggc.htm&tar=middle

http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:%5CWebSites%5CDITTaxmann%5CAct2010%5CDirectTaxLaws%5CITACT%5CHTMLFiles%5C2013&DFile=ftn36_section80ggb.htm&tar=middle

http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:%5CWebSites%5CDITTaxmann%5CAct2010%5CDirectTaxLaws%5CITACT%5CHTMLFiles%5C2013&DFile=ftn35_section80ggb.htm&tar=middle

(2) It shall come into force on the date of its publication in the Official Gazette. (3) The scheme shall apply for the approval of any electoral trust under clause (22AAA) of section 2 of the Act.

Objectives of the Scheme2. To lay down a procedure for grant of approval to an electoral trust which will receive voluntary contributions and distribute the same to the political parties.

Definitions3. In this Scheme unless the context otherwise requires,-(a) "Act" means the Income-tax Act, 1961 (43 of 1961);(b) "Rules" means the Income-tax Rules, 1962;(c) "Scheme" means the Electoral Trusts Scheme, 2012; and(d) the words and expressions used herein but not defined and defined in the Act shall have the same meanings as assigned to them in the Act.

Eligibility4. A company registered for the purposes of section 25 of the Companies Act, 1956 (1 of 1956) satisfying all of the following conditions shall be eligible to make an application for approval as an electoral trust, namely:-

(a) the company is registered on or after the 1st day of April, 2012 for the purposes of section 25 of the Companies Act, 1956 (1 of 1956);

(b) the name of the company registered for the purposes of section 25 of the Companies Act, 1956 (1 of 1956) shall include the phrase "electoral trust";

(c) the sole object of the electoral trust is to distribute the contributions received by it to the political party, registered under section 29A of the Representation of the People Act, 1951(43 of 1951); and

(d) the electoral trust shall have a permanent account number.

Procedure for approval5. (1) The procedure for approval of an electoral trust shall be as follows, namely:

(a) the application for approval under clause (22AAA) of section 2 of the Act shall be made in duplicate in FORM A, on or before the 31st day of July of the previous year relevant to the assessment year for which the approval is sought, to the Commissioner of Income-tax or the Director of Income-tax, as the case may be, having jurisdiction over the applicant;

(b) the applicant shall also send a copy of the application to the Member (Income-tax), Central Board of Direct Taxes accompanied by the acknowledgement receipt evidencing submission of application form in duplicate to the Commissioner of Income-tax or Director of Income tax, as the case may be, having jurisdiction over the case ;

(c) if any defect is noticed in FORM A or any document referred to therein is not attached with it, the Commissioner of Income-tax or the Director of Income-tax, as the case may be, shall intimate the defect to the applicant within thirty days from the date of receipt of the application form in his office;



(d) the applicant shall remove the defect within a period of fifteen days from the date of such intimation or within such further period which, on an application made in this behalf, may be extended. However, the total period for removal of defect shall not exceed thirty days;

(e) if the applicant fails to remove the defect within the period so allowed, the Commissioner of Income-tax or the Director of Income-tax, as the case may be, shall send his recommendation to the Member (Income-tax), Central Board of Direct Taxes for treating the application as invalid;

(f) the Central Board of Direct Taxes, if satisfied, may pass an order treating the application as invalid;

(g) if the application form is complete in all respects, the Commissioner of Income-tax or the Director of Income-tax, as the case may be, may make such inquiry as he may consider necessary regarding the genuineness of the electoral trust and send a report to the Member (Income-tax), Central Board of Direct Taxes for grant of approval or rejection of the application;

(h) the Central Board of Direct Taxes may, on receipt of the report referred to in sub-clause (g), call for such documents or information from the applicant, any authority or other person as it may consider necessary and get any further inquiry conducted in this regard;

(i) the Central Board of Direct Taxes shall, after considering all the information in its possession and the result of enquiry conducted, if any, grant approval to the electoral trust or reject the application;

(j) the Central Board of Direct Taxes may also impose any conditions, subject to which the approval shall be valid;

(k) no order treating the application as invalid or rejecting the application or withdrawing the approval shall be passed by the Central Board of Direct Taxes without giving the applicant an opportunity of being heard and without recording the reasons for the same in writing;

(l) the order of approval or rejection shall be passed by the Central Board of Direct Taxes within six months from the end of the month in which the application form was received from the applicant in the office of Member (Income-tax), Central Board of Direct Taxes;

(m) the period of limitation of six months referred to in sub-clause (1) shall exclude the period beginning from the date of the intimation of the defect under clause (c) by the Commissioner of Income-tax or the Director of Income-tax, as the case may be, to the date the applicant removes such defect;

(n) a copy of the order invalidating or rejecting the application or withdrawing the approval shall be sent to the applicant, the Assessing Officer and the Commissioner of Income-tax or the Director of Income-tax, as the case may be;



(o) the approval shall be valid for the assessment year relevant to the financial year in which such application has been made and for a further period, not exceeding three assessment years, as may be specified in such approval.

(2) The application in FORM A shall be accompanied by the following documents, namely:-

(a) an attested copy of the certificate evidencing the registration of the company for the purposes of section 25 of the Companies Act, 1956 (1 of 1956);

(b) a certified copy of the memorandum and articles of association;

(c) complete name, permanent account number and address of the electoral trust and its members (including members of its Executive Committee, Governing Committee or Board of Directors);

(d) initial share capital of the company and its source;

(e) details of beneficiaries, if available;

(f) an undertaking in the form of an affidavit stating that the receipts shall be distributed only to the political parties registered under section 29A of the Representation of the People Act, 1951 (43 of 1951); and

(g) copy of accounts of the applicant for the last one, two or three years, as may be applicable.

(3) Any change in the shareholders, subsequent to the approval granted under the Scheme, shall be intimated to the Board within thirty days of the change.Criteria for approval

6. An electoral trust shall be considered for approval if it fulfils all of the following conditions, namely: —

(a) the company registered for the purposes of section 25 of the Companies Act, 1956 (1 of 1956 ), which satisfies the conditions referred to in paragraph 4 of this Scheme;

(b) the object of the electoral trust shall not be to earn any profit or pass any direct or indirect benefit to its members or contributors, or to any person referred to in sub-section (3) of section 13 of the Act, or any person referred to in sub-rule (10) of rule 17CA of the Rules;

(c) it has made adequate arrangement for recording the receipts from the contributors in accordance with rule 17CA; and

(d) the stipulations contained in sub-rules (2) to (15) of rule 17CA of the Rules for the functioning of an electoral trust are specifically included in the articles of association of the company registered for the purposes of section 25 of the Companies Act, 1956 (1 of 1956).



Renewal of approval7. (1) The approval shall be valid for the assessment year relevant to the financial year in which such application has been made and for a further period, not exceeding three assessment years, as may be specified in the approval.

(2) The electoral trust may apply for renewal of approval at any time during the financial year immediately preceding the last assessment year, for which the approval has originally been granted, and such renewal of approval may be granted after examining the application in the same manner as laid out for approval in this Scheme.

Withdrawal of approval8. (1) The Central Board of Direct Taxes may withdraw the approval granted under this Scheme if it is satisfied that the electoral trust has ceased its activities or its activities are not genuine or are not carried out in accordance with all or any of the conditions laid down under this Scheme or the provisions of rule 17CA of the Rules, or any other condition imposed in the approval granted.

(2) In order to ascertain whether an electoral trust, after its approval, is functioning in accordance with the provisions of rule 17CA of the Rules, the Central Board of Direct Taxes may call for information or documents as it may deem fit from the electoral trust or may get an enquiry conducted in this regard by an income-tax authority or any other agency.

(3) If the Commissioner of Income-tax or the Director of Income-tax is satisfied that an approved electoral trust is not fulfilling any of the conditions specified under this Scheme or the conditions subject to which approval was granted to it or does not function in accordance with rule 17CA, he may, after making appropriate enquiries, furnish a report to the Central Board of Direct Taxes in this regard and the Board may take such action on the report as it may deem fit.

(4) An order for withdrawal of the approval shall be passed after giving the electoral trust an opportunity of being heard, and shall record the reasons in writing for the withdrawal of approval.

(5) A copy of the order withdrawing the approval shall be sent to the applicant, the Assessing Officer and the Commissioner of Income-tax or the Director of Income-tax, as the case may be.

Income Tax Rules, 1962

Functions of electoral trusts .

17CA. (1) The functions of an electoral trust referred to in section 13B shall be as provided in this rule.

(2) The electoral trust may receive voluntary contributions from —

(a) an individual who is a citizen of India;

(b) a company which is registered in India; and



(c) a firm or Hindu undivided family or an Association of persons or a body of individuals, resident in India.

(3) A receipt indicating the following shall be issued by the trust immediately on receipt of any contribution indicating the following:—

(a) name and address of the contributor;

(b) Permanent account number of the contributor or passport number in the case of a citizen who is not a resident;

(c) amount and mode of contribution including name and branch of the Bank and date of receipt of such contribution;

(d) name of the electoral trust;

(e) Permanent account number of the electoral trust;

(f) date and number of approval by the prescribed authority; and

(g) Name and designation of the person issuing the receipt.

(4) The electoral trust shall not accept contributions—

(a) from an individual who is not a citizen of India or from any foreign entity whether incorporated or not; and

(b) from any other electoral trust which has been registered as a company under section 25 of the Companies Act, 1956 (1 of 1956) and approved as an electoral trust under the Electoral Trusts Scheme, 2013.

(5) The electoral trust shall accept contributions only by way of an account payee cheque drawn on a bank or account payee bank draft or by electronic transfer to its bank account and shall not accept any contribution in cash.

(6) The electoral trust shall not accept any contribution without the permanent account number of the contributor, who is a resident and the passport number in the case of a citizen of India, who is not a resident.

(7) A political party registered under section 29A of the Representation of the People Act, 1951 (43 of 1951) shall be an eligible political party and an electoral trust shall distribute funds only to the eligible political parties.

(8) (i) The electoral trust may, for the purposes of managing its affairs, spend up to five per cent of the total contributions received in a year subject to an aggregate limit of rupees five hundred thousand in the first year of incorporation and rupees three hundred thousand in subsequent years;

(ii) the total contributions received in any financial year along with the surplus from any earlier financial year, if any, as reduced by the amount spent on managing its affairs, shall be the distributable contributions for the financial year;



(iii) an electoral trust shall be required to distribute the distributable contributions received in a financial year, referred to in item (ii), to the eligible political parties before the 31st day of March of the said financial year, subject to the condition that at least ninety five per cent of the total contributions received during the financial year along with the surplus brought forward from earlier financial year, if any, are distributed.

(9) The trust shall obtain a receipt from the eligible political party indicating the name of the political party, its permanent account number, registration number, amount of fund received from the trust, date of the receipt and name and designation of person signing such receipt.

(10) The electoral trust shall not utilize any contributions for the direct or indirect benefit of the members or contributors, or for any of the following persons, namely:—

(a) the members (including members of its Executive Committee, Governing Committee or Board of Directors) of the electoral trust;

(b) any relative of such Members;

(c) where such member or contributor is a Hindu undivided family, a member of that Hindu undivided family;

(d) any person who has made a contribution to the trust;

(e) any person referred to in sub-section (3) of section 13 of the Act; and

(f) any concern in which any of the persons referred to in clauses (a), (b), (c), (d) and (e) has a substantial interest.

(11) (i) An electoral trust shall keep and maintain such books of account and other documents in respect of its receipts, distributions and expenditure as may enable the computation of its total income in accordance with the provisions of the Act;

(ii) The electoral trust shall also maintain a list of persons from whom contributions have been received and to whom the same have been distributed, containing the name, address and permanent account number of each such person along with the details of the amount and mode of its payment including the name and branch of the bank.

(12) Every electoral trust shall get its accounts audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and furnish the audit report in Form No. 10BC along with particulars forming part of its Annexure, to the Commissioner of Income-tax or the Director of Income-tax, as the case may be, having jurisdiction over the electoral trust, on or before the due date specified for furnishing the return of income by a company under section 139.

(13) An electoral trust shall maintain a regular record of proceedings of all meetings and decisions taken therein.



(14) Every electoral trust shall furnish a certified copy of list of contributors and a list of political parties, to whom sums were distributed in the manner prescribed in sub-rule (8), to the Commissioner of Income-tax or the Director of Income-tax, as the case may be, every year along with the audit report as stipulated under sub-rule (12).

(15) Any change in the shareholders, subsequent to the approval granted under the Electoral Trusts Scheme, 2013 shall be intimated to the Board within thirty days of such change.

FORM NO. 10BC

[See rule 17CA] Audit report under (sub-rule (12) of rule 17CA) of the Income-tax Rules, 1962, in the case of an electoral trust

* I/We have examined the Balance Sheet of ___________________________ [name of the electoral trust] as at ________________________ and the Income and Expenditure Account for the year ended on that date and certify that the Balance Sheet and the Income and Expenditure Account are in agreement with the books of account maintained by the said electoral Trust.

* I/We have obtained all the information and explanations which to the best of * my/our knowledge and belief were necessary for the purposes of the audit.

In * my/our opinion, proper books of account have been kept by the head office and the branches of the above named electoral trust visited by * me/us so far as appears from* my/our examination of the books, and proper documents adequate for the purposes of audit have been received from branches not visited by * me/us, subject to the comments given below:

In * my/our opinion and to the best of * my/our information, and according to information given to *me/us, the said accounts give a true and fair view-

(i) in the case of the Balance Sheet, of the state of affairs of the above named electoral trust as at...................... and

(ii) in the case of the Income and Expenditure Account, of the surplus or deficit for its accounting year ending on that date.

The prescribed particulars are annexed hereto.

Place. __________________

Date __________________

(Signed)

Accountant†

Name

Membership No.



Address

Notes :

1. *Strike out whichever is not applicable.

2. †This report has to be given by-

(i) a chartered accountant within the meaning of the Chartered Accountants Act, 1949 (38 of 1949); or

(ii) any person who, in relation to any State, is, by virtue of the provisions of sub-section (2) of section 226 of the Companies Act, 1956 (1 of 1956), entitled to be appointed to act as an auditor of the companies registered in that State.

3. Where any of the matters stated in this report is answered in the negative, or with a qualification, the report shall state the reasons for the same.

ANNEXURE: TO FORM NO. 10BC

I. Details of contributions received and distributed:-

(1) Total amount of contributions received in the previous year.

(2) Total amount of contributions distributed to eligible political parties.

(3) Amount of contributions utilised for administrative or management functions.

(4) Surplus brought forward.

(5) Distributable Contributions for the Financial Year.

(6) Whether the contributions received in the previous year have been distributed to eligible political parties? Name of the Political Party with permanent account number

Amount distributed Date Mode

(7) Surplus to be carried forward.

(8) Whether all contributions have been received by account payee cheque or demand draft? If no; the details thereof. Name of the person

Permanent account number

Amount of contribution Date Mode

(9) Whether receipts in respect of all distributions made to political parties have been obtained?



(10) Whether the list of all contributors has been maintained?

(11) Whether the list of all political parties, to whom the amount distributed, has been maintained?

II. Application or use of income or property for the benefit of persons referred to in sub-rule (10) of rule 17CA:-

1. Details of any transaction in excess of Rs. 20,000 with a person referred to in sub-rule (10) of rule 17CA (hereinafter referred to in this Annexure as "interested person").

2. Whether any payment was made to any interested person during the previous year by way of salary, allowance or otherwise? If so, details thereof. 3. Whether any part of the contributions received by the trust was lent, or continues to be lent, in the previous year to any interested person? If so, details of the amount, rate of interest charged and the nature of security, if any.

4. Whether any income or property of the electoral trust was diverted during the previous year in favour of any interested person? If so, details thereof together with the amount of income or value of property so diverted.

III. Information pertaining to expenditure incurred by the electoral trust towards administration or management of its affairs:-

1. Whether the administrative or management expenses pertaining to the electoral trust are in accordance with sub-rule (8) of rule 17CA?

2. If yes, whether the required details are adequately maintained?

3. If no, what is the percentage of expenditure incurred by the electoral trust vis-a-vis the total contributions received?

Place: Signature of the Accountant:______________________

Date: Accountant Membership No. ______________________

B.Statutory Provisions under Companies Act, 1976 and Companies Act, 2013 – A comparative study

COMPANIES ACT, 1956 COMPANIES ACT, 2013

Prohibitions and restrictions regarding political contributions.

293A. (1) Notwithstanding anything contained in any other provision of this Act,—

(a) no Government company; and

Prohibitions and restrictions regardingpolitical contributions

182. (1) Notwithstanding anything contained in any other provision of this Act, a company, other than a Government company and a company



(b) no other company which has been in existence for less than three financial years,

shall contribute any amount or amounts, directly or indirectly,—(i) to any political party; or(ii) for any political purpose to any person.

(2) A company, not being a company referred to in clause (a) or clause (b) of sub-section (1), may contribute any amount or amounts, directly or indirectly,—(a) to any political party; or(b) for any political purpose to any person:

Provided that the amount or, as the case may be, the aggregate of the amounts which may be so contributed by a company in any financial year shall not exceed five per cent of its average net profits determined in accordance with the provisions of sections 349 and 350 during the three immediately preceding financial years.

Explanation : Where a portion of a financial year of the company falls before the commencement of the Companies (Amendment) Act, 1985, and a portion fallsafter such commencement, the latter portion shall be deemed to be a financial year within the meaning and for the purposes, of this sub-section:

Provided further that no such contribution shall be made by a company unless a resolution authorising the making of such contribution is passed at a meeting of the Board of directors and such resolution shall, subject to the other provisions of this section, be deemed to be justification in law for the making and the acceptance of the contribution authorised by it.

(3) Without prejudice to the generality of the provisions of sub-sections (1) and (2),—

which has been in existence for less than three financial years,may contribute any amount directly or indirectly to any political party.

Provided that the amount referred to in sub-section (1) or, as the case may be, the aggregate of the amount which may be so 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:

Provided further that no such contribution shall be made by a company unless a resolution authorising the making of such contribution is passed at a meeting of the Board of Directors and such resolution shall, subject to the other provisions of this section, be deemed to be justification in law for the making and the acceptance of the contribution authorised by it.

(2) Without prejudice to the generality of the provisions of sub-section (1),—



(a) a donation or subscription or payment caused to be given by a company on its behalf or on its account to a person who, to its knowledge, is carrying on any activity which, at the time at which such donation or subscription or payment was given or made, can reasonably be regarded as likely to effect public support for a political party shall also be deemed to be contribution of the amount of such donation, subscription or payment to such person for a political purpose;

(b) the amount of expenditure incurred, directly or indirectly, by a company on advertisement in any publication (being a publication in the nature of a souvenir, brochure, tract, pamphlet or the like) by or on behalf of a political party or for its advantage shall also be deemed,—

(i) where such publication is by or on behalf of a political party, to be a contribution of such amount to such political party, and

(ii) where such publication is not by or on behalf of but for the advantage of a political party, to be a contribution for a political purpose to the person publishing it.

(4) Every company shall disclose in its profit and loss account any amount or amounts contributed by it to any political party or for any political purpose to any person during the financial year to which that account relates, giving particulars of the total amount contributed and the name of the party or person to which or to whom such amount has been contributed.

(a) a donation or subscription or payment caused to be given by a company on its behalf or on its account to a person who, to its knowledge, is carrying on any activity which, at the time at which such donation or subscription or payment was given or made, can reasonably be regarded as likely to affect public support for a political party shall also be deemed to be contribution of the amount of such donation, subscription or payment to such person for a political purpose;

(b) the amount of expenditure incurred, directly or indirectly, by a company on an advertisement in any publication, being a publication in the nature of a souvenir, brochure, tract, pamphlet or the like, shall also be deemed,—

(i) where such publication is by or on behalf of a political party, to be a contribution of such amount to such political party, and

(ii) where such publication is not by or on behalf of, but for the advantage of a political party, to be a contribution for a political purpose.

(3) Every company shall disclose in its profit and loss account any amount or amounts contributed by it to any political party during the financial year to which that account relates, giving particulars of the total amount contributed and the name of the party to which such amount has been contributed.

(4) If a company makes any



(5) If a company makes any contribution in contravention of the provisions of this section,—

(a) the company shall be punishable with fine which may extend to three times the amount so contributed; and

(b) every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to fine.

Explanation.—For the purposes of this section, “political party” means a political party registered under section 29A of the Representation of the People Act, 1951.

contribution incontravention of the provisions of this section, the company shall be punishable with fine which may extend to five times the amount so contributed and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months and with fine which may extend to five times the amount so contributed.

Explanation.—For the purposes of this section, "political party" means a political party registered under section 29A31 of the Representation of the People Act, 1951.

C. Statutory Provisions under Foreign Contribution (Regulation) Act, 1976 and Foreign Contribution (Regulation) Act, 2010 – A comparative study

Foreign Contribution (Regulation) Act, 1976

Foreign Contribution (Regulation) Act, 2010

Section 2. (e) "foreign source" includes-

(i) the government of any foreign country or territory and any agency of such government,

(ii) any international agency, not being the United Nations or any of its specialised agencies, the World Bank, International Monetary Fund or such other agency as the Central Government may, by notification in the Official Gazette, specify in this behalf,

(iii) a foreign company within the meaning of section 591 of the Companies Act, 1956 (1 of 1956), and also includes

(a) a company which is a subsidiary of a foreign company, and

(b) a multi-national corporation within the meaning of this Act.

(iv) a corporation, not being a foreign company, incorporated in a foreign country or territory,

(j) "foreign source" includes,-

(i) the Government of any foreign country or territory and any agency of such Government;

(ii) any international agency, not being the United Nations or any of its specialised agencies, the World Bank, International Monetary Fund or such other agency as the Central Government may, by notification, specify in this behalf;

(iii) a foreign company;

(iv) a corporation, not being a foreign company, incorporated in a foreign country or territory;(v) a multi-national corporation



(v) a multi-national corporation within the meaning of this Act,

(vi) a company within the meaning of the Companies Act, 1956 (1 of 1956), if more than one-half of the nominal value of its share capital is held, either singly or in the aggregate, by one or more of the following, namely,-

(a) government of a foreign country or territory,

(b) citizens of a foreign country or territory,

(c) corporations incorporated in a foreign country or territory,

(d) trusts, societies or other associations of individuals (whether incorporated or not), formed or registered in a foreign country or territory,

(vii) a trade union in any foreign country or territory, whether or not registered in such foreign country or territory,

(viii) a foreign trust by whatever name called, or a foreign foundation which is either in the nature of trust or is mainly financed by a foreign country or territory,

(ix) a society, club or other association of individuals formed or registers outside India,

(x) a citizen of a foreign country, but does not include any foreign institution which has been permitted by the Central Government, by notification in the Official Gazette, to carry on its activities in India;

referred to in sub-clause (iv) of clause (g);

(vi) a company within the meaning of the Companies Act, 1956, and more than one-half of the nominal value of its share capital is held, either singly or in the aggregate, by one or more of the following, namely:-(A) the Government of a foreign country or territory;(B) the citizens of a foreign country or territory;(C) corporations incorporated in a foreign country or territory;(D) trusts, societies or other associations of individuals (whether incorporated or not), formed or registered in a foreign country or territory;(E) foreign company;

(vii) a trade union in any foreign country or territory, whether or not registered in such foreign country or territory;

viii) a foreign trust or a foreign foundation, by whatever name called, or such trust or foundation mainly financed by a foreign country or territory;

(ix) a society, club or other association of individuals formed or registered outside India;

(x) a citizen of a foreign country;

CHAPTER II: REGULATION OF FOREIGN CONTRIBUTION AND FOREIGN HOSPITALITY

Section 4. Candidate for election, etc., not to accept foreign contribution

(1) No foreign contribution shall be accepted by any-

(a) candidate for election,

REGULATION OF FOREIGN CONTRIBUTION AND FOREIGN HOSPITALITY

Section 3.

(1) No foreign contribution shall be accepted by any-

(a) candidate for election;



(b) correspondent, columnist, cartoonist, editor, owner, printer or publisher of a registered newspaper,

(c) [Judge, government servant] or employee of any corporation,

(d) member of any Legislature,

(e) political party or office-bearer thereof.

Explanation: In clause (c) and in section 9, "corporation" means a corporation owned or controlled by government and includes a government company as defined in section 617 of the Companies Act, 1956 (1 of 1956).

(2). (a) No person, resident in India, and no citizen of India resident outside India, shall accept any foreign contribution, or acquire or agree to acquire any currency from a foreign source, on behalf of any political party, or any person referred to in sub-section (1), or both.

(b) No person, resident in India, shall deliver any currency, whether Indian or

(b) correspondent, columnist, cartoonist, editor, owner, printer or publisher of a registered newspaper;

(c) Judge, Government servant or employee of any corporation or any other body controlled or owned by the Government;

(d) member of any Legislature;

(e) political party or office-bearer thereof;

(f) organisation of a political nature as may be specified under sub-section (I) of section 5 by the Central Government;

(g) association or company engaged in the production or broadcast of audio news or audio visual news or current affairs programmes through any electronic mode, or any other electronic form as defined in clause (r) of sub-section (I) of section 2 of the Information Technology Act, 2000 or any other mode of mass communication;

(h) correspondent or columnist, cartoonist, editor, owner of the association or company referred to in clause (g).

Explanation.-In clause (c) and section 6, the expression "corporation" means a corporation owned or controlled by the Government and includes a Government company as defined in section 617 of the Companies Act, 1956.

(2) (a) No person, resident in India, and no citizen of lndia resident outside India, shall accept any foreign contribution, or acquire or agree to acquire any currency from a foreign source, on behalf of any political party, or any person referred to in sub-section (I), or both.



foreign, which has been accepted from any foreign source, to any person if he knows or has reasonable cause to believe that such other person intends, or is likely, to deliver such currency to any political party or any person referred to in sub-section (1), or both.

(c) No citizen of India resident outside India shall deliver any currency, whether Indian or foreign, which has been accepted from any foreign source, to-(i) any political party or any person referred to in sub-section (1), or both, or(ii) any other person, if he knows or has reasonable cause to believe that such other person intends, or is likely, to deliver such currency to a political party or to any person referred to in sub-section (1), or both.

(3) No person receiving any currency, whether Indian or foreign, from a foreign, source on behalf of any association, referred to in sub-section (1) of section 6, shall deliver such currency-(i) to any association or organisation other than the association for which it was received, or(ii) to any other person, if he knows or has reasonable cause to believe that such other person intends, or is likely, to deliver such currency to an association other than the association for which such currency was received.

(b) No person, resident in India, shall deliver any currency, whether Indian or foreign, which has been accepted from any foreign source, to any person if he knows or has reasonable cause to believe that such other person intends, or is likely, to deliver such currency to any political party or any person referred to in sub-section (1), or both.

(c) No citizen of lndia resident outside India shall deliver any currency, whether Indian or foreign, which has been accepted from any foreign source, to-(i) any political party or any person referred to in sub-section (I), or both; or(ii) any other person, if he knows or has reasonable cause to believe that such other person intends, or is likely, to deliver such currency to a political party or to any person referred to in sub-section (1), or both.

(3) No person receiving any currency, whether Indian or foreign, from a foreign source on behalf of any person or class of persons, referred to in section 9, shall deliver such currency-(a) to any person other than a person for which it was received, or(b) to any other person, if he knows or has reasonable cause to believe that such other person intends, or is likely, to deliver such currency to a person other than the person for which such currency was received.

D. Guidance Note on Section 293A of the Companies Act and the Auditor

1. The hitherto complete ban on any contribution by companies to any political party or for any political purpose was relaxed to a great extent by the Companies (Amendment) Act, 1985, by which the provisions of the then existing Section 293A of the Companies Act, 1956 were totally substituted with effect from 24.5.1985, the day on which the said Amendment Act of 1985 received the assent of the President of India.

2. For ready reference, the old Section 293A as well as the new one are reproduced in an Annexure to this Guidance Note.



3. The new Section 293A provides that –(a) A company (other than a government company) which has been in existence for less than three financial years or any Government company shall not contribute any amount directly or indirectly to any political party or for any political purpose to any person;(b) A company other than the above is permitted to contribute to any political party or for any political purpose to any person provided that the aggregate of the amounts so contributed by it, directly or indirectly, in any financial year does not exceed 5% of its average net profits determined in accordance with the provisions of Sections 349 and 350 of the Act during the three immediately preceding financial years;(c) No such contribution shall be made by a company unless a resolution authorising the making of such contribution is passed at a meeting of its Board of Directors.

4. It will thus be seen that the blanket ban on making of contributions referred to above is continued so far as government companies and those companies which have been in existence for less than three financial years are concerned. It may be noted that Government companies will not include companies governed by Section 619B. Any other company is, however, permitted to make such contributions in the aggregate in any financial year, not exceeding 5% of average net profits of the company computed in accordance with Sections 349 and 350 of the Companies Act, 1956, during the immediately preceding three financial years provided the Board of Directors of the company at a meeting authorises the making of the same by a resolution.

4.1 It may be pointed out that the second proviso to Section 293A(2) provides that no such contribution shall be made by a company unless a resolution authorising the making of such contribution is passed at a meeting of the Board of Directors.

4.2. The point for consideration is whether an ex-post facto resolution of the Board of Directors would regularise a contribution already made. In this connection, attention may be drawn to the interpretation given; to the word "unless'', as appearing in Section 372 (4) by the Calcutta High Court in the case of Mathura Prasad Saraf vs. Company Law Board (1979) 49 Comp. Cas. 371 wherein the Court has interpreted the said expression to mean in the context of the Central Government's approval referred to therein that it could be obtained even after the investment is made. If this analogy is applied, it is possible to take the view that an ex-post facto resolution of the Board of Directors would have the effect of regularising the contribution. A practical difficulty, however, will arise in such a case if the Board refuses to pass such a resolution after a contribution is already made, in retrieving the amount donated.

5. The said limit of 5% of average net profits has to be considered with reference to the aggregate amount or amounts of such contributions made directly or indirectly in a given financial year of the company. However, it is provided that where a portion of the financial year of any company falls before the commencement of the Companies (Amendment) Act of 1985, i. e. before 24.5.85 and a portion falls after such commencement, then the latter portion shall be deemed to be a financial year for this purpose. This would mean that even if a small period of the current financial year of the company falls after the date on which the new Section 293A came into force, namely 24th May, 1985 (e.g. in the case of a company, whose accounting year ends 31st May, 1985), during this



short period the company could make contribution to the extent of full 5% of the said average net profits.

6. Section 293A makes certain specific provisions so as to remove several ambiguities relating to the extent and sweep of the situations/dealings which were intended to be covered in the ambit of this Section and to control certain practices which had been employed in the past to circumvent the previous restrictions. The use of the words "directly or indirectly" (which were absent in the old Section) after the words 'contributes any amount or amounts, appearing in sub-sections (1) and (2) of the new Section appear to cover these several practices, which came to be employed earlier. And though the word 'amount' is not defined even in the new Section, yet taking the provisions made as a whole, it should not be difficult to judge the dealings which will be hit by this new Section. In this context, the Committee is of the view that the expression "amount" used in this Section is not necessarily linked with money. Anything capable of quantification can be expressed as "amount". Consequently, any assistance, donation and contribution to a political party or for a political purpose, made through means other than money, but which is quantifiable and capable of being expressed in monetary terms is also covered by Section 293A.

7. The Section clarifies what will be considered to be a political purpose. Any donation or subscription or payment made or caused to be given by or on behalf of a company to a person who is carrying on any activity which can reasonably be regarded as likely to effect public support for a political party shall be deemed to be a contribution to such person for a 'political purpose' [Sub-section (3) (a)]_

8. The Section also expressly provides that expenditure incurred directly or indirectly on advertisements for the advantage of a political party will be deemed to be a contribution of the kind covered by this Section. And if the advertisement is in any publication by or on behalf of a political party, the expenditure thereon will be deemed to be a contribution to such political party. Where such publication is not by or on behalf of a ‘political party’ as such, but, for the advantage of a political patty then the expenditure on advertisement will be deemed to be a contribution for a political purpose' to the person publishing it. Therefore, such expenditure should also be included in reckoning whether the limit of 5% of average net profit is exceeded or not. It may be noted that Section 293A(3)(b) applies to advertisement in any publication, being the publication in the nature of a souvenir, brochure, tract, pamphlet or the like, but will not include a newspaper. Therefore, if an advertisement is given in a newspaper run by a political party and a genuine quid pro quo is evident in the transaction, the payment for the advertisement should be treated as being outside the ambit of the prohibition. The auditor will have to exercise his judgment regarding the element of ''quid pro quo'' based on the facts and circumstances of the case.

9. Any amount/amounts contributed by a company which fall under this Section, i.e., amounts contributed to any political party or for political purposes, are required to be disclosed separately in its profit and loss account, giving particulars of the total amount contributed and the name of the party or the person to which or to whom such amount has been contributed.

10. The penal consequences for a company for making any contributions in contravention of these provisions are severe as it will be liable to be punished with a fine which may extend to three times the amount contributed in contravention of the Section (as against the limit of Rs. 5,000/- in the old



Section). However, the punishment for every officer in default is the same as in the old Section, namely, that he or they shall be liable to imprisonment for a term which may extend to three years in addition to fine.

11. Though the language of the revised Section 293A is clear to convey the broad intention of the Legislature, the following terms, phrases and expressions (some of which did not exist in the earlier Section) used therein require a careful study and examination to comprehend the implications of its provisions as a whole.

(a) ‘Political Party’The Election Commission in exercise of the powers conferred on it by Article 324 of the Constitution of India read with rule 5 and rule 10 of the Conduct of Election Rules, 1961 (framed under the Representation of People Act, 1951) has made an order defining ‘Political party’ under paragraph 2(h) of the Election Symbols (Reservation and Allotment) Order, 1968. “Political party” means an association or body of individual citizens of India registered with the Commission as a political party under paragraph 3 and includes a political party deemed to be registered with the Commission under the proviso to sub-paragraph (2) of that paragraph.”

(b) ‘Political Purpose’The term 'Political Purpose' is explained in sub-section (3) as under:Any activity which can reasonably be regarded as likely to effect public support for a political party will be deemed to be political purpose. Any payment therefore made to a person who carries on such activity will be a contribution for political purpose.

(c) ‘Directly or Indirectly’These words are added as suffix to the words “contribute any amount or amounts” in sub-sections (1) and (2). These words were not there in the old Section 293A. It is, therefore, necessary to analyse the significance thereof. Several practices of helping political parties or political purposes, monetarily or non-monetarily which were being followed till now, will fall within the ambit of this Section due to the word “indirect” used herein. The following items will be covered now by the Section due to the addition of the words “directly or indirectly” and the same should be aggregated to determine whether the contributions covered by this Section are within the permissible limits:

(i) Contribution made directly to a political party whether in cash or in other form.(ii) Expenditure incurred on printing and distribution of posters and leaflets, either directly concerned or connected with elections or otherwise for a political purpose.(iii) Contribution made directly to a political party whether in cash or in other form for running an educational institution or for undertaking philanthropic activities.(iv) A donation, contribution, or other form of support to a Trust, Society or Association in any of the under noted circumstances:(a) If the Trust, Society or Association has any political objectives either wholly or even partially.(b) If the Trust, Society or Association is formed for any political purpose either wholly or even partially.



(c) If the Trustees or Governing Council or Committee of the Trust, Society or Association have the discretion of using the funds wholly or partially for a political purpose or in furtherance of a political objective. On the other hand, the mere fact that some of the objects of a particular Trust, Society or Association are similar to the objects of a particular political party but are not of a political nature should not act as a disqualification.(v) Expenditure incurred on remuneration (including other benefits) to employees or on other establishment where the services of the employees are made available in connection with the activities of some political party, such as elections to legislative assembly, Parliament, etc. (vi) Making available vehicles owned by the company to any political party or to any candidate seeking election to any local authority, assembly, Parliament, etc., either free of cost, or at less than market rate.

(d) ‘Person’The word ‘Person’ has now been used in sub-section (1) (b) (ii) and (2) (b) instead of the words 'individual or body' used in the corresponding provisions of the old Section 293 A. It appears that the word ‘Person’ is intended to cover a wider area of recipients than what could be covered in the words ‘individual or body’.

(e) ‘Average Net Profits’These words used in the first proviso to sub-section (2) do not need much explanation. Profits determined in accordance with Sections 349 and 350 of the Act for the immediately preceding three financial years, would have to be averaged. The companies which write off ‘Depreciation’ on a basis other than that as per Section 350 would have to recompute depreciation and consequently the net profits for this purpose. In this connection, a doubt which is likely to arise is whether in view of the 'Explanation' below the first proviso to sub-section (2) and as noted in para (5) herein above, the latter portion of the financial year which falls after the date 24-5-1985, and which is to be deemed to be a financial year, will be taken as one full financial year for averaging net profits. The problem may arise at the time of considering such contributions made during the financial year ending in 1988. The proper view, however, in this context, would be that for the purpose of calculating average net profits, three complete financial years should be taken into account.

12. If any kind of service or facility is made available to a political party or for a political purpose, no element of political contribution should be deemed to arise if a charge is made for the service or facility on a reasonable basis. If, on the other hand, no charge is made or the charge is patently or grossly unreasonable, the shortfall should be regarded as a political contribution and treated accordingly. In determining a reasonable charge for the service or facility made available to a political party or for a political purpose, regard shall be had only to the direct cost of providing such service or facility. No attempt need ordinarily be made to determine the comprehensive cost of facility or service by including a part of the company's normal overheads.

13. The Committee is of the view that when an auditor is satisfied that political contribution has been made in excess of the limit prescribed in Section 293A, he should bring this to the attention of the shareholders by qualifying his audit report and making a mention of the excess amount involved, if ascertainable. This is because making a donation in excess of the prescribed limit amounts to an illegal application of the company's funds.



14. Where the limit laid down under Section 293A is adhered to and the facts are properly disclosed then the auditor has no further duty. Where, however, the facts regarding such contributions are not properly disclosed, then the auditor should qualify his report and state the facts therein. Where he has a genuine doubt regarding the applicability of the Section, he should ensure that the fact is properly disclosed in his audit report.

15. If, on the facts of a particular contribution, the company has obtained legal opinion indicating that it does not contravene the provisions of this Section and the auditor in the exercise of his judgment accepts that opinion, no need of disclosure should arise, provided that the matter is one which is not covered by this Guidance Note. If, on the other hand, the matter is covered by the Institute’s Guidance Note, the auditor should insist upon disclosure, even though the client has obtained a contrary legal opinion, and should qualify his report. The same position would also arise in the case where even though the matter is not covered by the Institute's Guidance Note, the auditor, in the exercise of his judgment, is unable to accept the legal opinion. In such a case, he should ensure that the facts are disclosed in an adequate manner and should also qualify his audit report.

16. It will be advisable to obtain a certificate from the company's Board of Directors to the effect that all amounts of contributions to political parties or for any political purpose to any person falling under the provisions of Section 293A have been brought into the books of account of the company and that no amounts of such nature other than those so included in the books have been paid/given directly or indirectly.

17. An auditor's duty, as such is to examine and report on the accounts of the company in accordance with the requirements of Section 227 of the Companies Act. The auditor, therefore, has no specific duty to make any special enquiry to unearth cases of unauthorised political contributions if they are not readily apparent from the examination of the accounts made in the normal course of the audit. If any unauthorised political contribution (or such contribution in excess of the permissible limit, as the case may be) has been skillfully concealed by a company or it has not come to the notice of the auditor in the normal course of his audit, an auditor would be responsible only to the extent it can be established that in the conduct of that audit he acted without reasonable care and skill.

AnnexureSection 293A before amendment (1) Notwithstanding anything contained in any other provision of this Act, neither a company in general meeting nor its Board of Directors shall after the commencement of the Companies (Amendment) Act, 1969, contribute any amount or amounts –(a) to any political party, or(b) for any political purpose to any individual or body.

(2) If a company contravenes the provisions of sub-section (1), then-(i) the company shall be punishable with fine which may extend to five thousand rupees; and(ii) every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to fine.



PART – II

Important Court Decisions

1. Common Cause , A Registered society Vs Union of India (1997) 88 Comp Cases 1(SC).

2. Graphite India Ltd Vs Dalpat Rai Mehta(1978) 48 Comp Cases 683(cal)3. Adani Exports Ltd, In re (2004) 56 SCL 235(CLB-Mum)4. Soni Ishwarlal Harjivandas Vs Assessee decided by Ahemedabad bench of

ITAT.5. Jayantilal Ranchchodass Koticha Vs TISCO(1957) 27 Comp Cases

604(Bom)6. Dehri Rohtas Light Railway Company Ltd , In re (1960) 30 Comp Cases

387(Pat)7. Indian Iron & Steel Company Ltd In re (1957) 27 Comp Cases 361(Cal)

PART – III

Controversies/ disputes and issues

Income-tax Act,1961

The provisions of the Income-tax Act,1961 in Section 80GGB continues to refer to provisions of Section 293A of the Companies Act,1956, even though the corresponding new Section 182 of the Companies Act,2013 has already been notified as effective by Notification No _________________dated___________________.

The provisions of Section 80GGB used the words “any political party’ whereas the same provisions in Section 80GGC uses the phrase ‘a political party’ .

The explanation below Section 80GGB says that the word “Contribute” with its grammatical variation shall have the meaning assigned to in Section 293A of the Companies Act,1956 . There is no definition of the term contribution. Even though courts have defined it and the FCRA Act contains indirect reference of the same.

The reference of section 25 of the companies Act, 1956 in the Electoral Trust Scheme, 2013 has not been amended to corresponding change of Section 8 of Companies Act, 2013, though Section 8 of the New Companies Act,2013 is yet to be notified.

No modalities prescribed as to what is the consequence of the rejection of an application for approval of the Electoral Trust.

Total income of an assessee contribution to political party – is eligible to whole of deduction u/s 80GGB or 80GGC

No definition of “foreign entity” under Income Tax Act, 1961 – reference is given in Rule 17CA

Companies Act,1956/Foreign Contribution(Regulation)Act,2010

Meaning of the word “ direct or indirect contribution” in section 293A of the Companies Act, 1956 as well as Section 182 of the New Companies Act,2013 subject matter of dispute.



Whether the outer limit of 5% (now 7.5% under section 182 of the new Companies Act) for such donations as prescribed under section 293A of the Companies Act [section 182 of the New Companies Act] would apply to donations deductible under the IT Act also

Importance of citizenship for electoral trust No definition of ‘contribution’ under section 293A of the Companies Act,

1956 Punishment for non violation of section 293A is on contribution not on

failure to disclosure of such contribution. Reference to the provisions of Companies Act, 1956 in Representation of

People Act, 1951 and Foreign Contribution (Regulation)Act, 2010 has not modified

The word ‘share capital’ is there in the definition of Foreign Source, not ‘equity share capital’

The interpretation of the word ‘person’ is different under different statutory Acts

LLP- exclusion from foreign source

Thanking YouCA Ramesh Kumar PatodiaRKRR & AssociatesKolkata



Web viewACAE CHARTERED ACCOUNTANT’S STUDY CIRCLE- EIRC. Lecture Meeting on. Electoral Trust...

Documents

Transcript of Web viewACAE CHARTERED ACCOUNTANT’S STUDY CIRCLE- EIRC. Lecture Meeting on. Electoral Trust...