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Income Tax Notices for Bogus Political Donation: Issue & Option
Donation to the Registered Political Parties or electoral trusts by Indian companies is eligible for tax incentives under section 80GGB of the Income Tax Act-1961. Donation by other taxpayers (except local authority & artificial juridical person funded by Government) is available as deduction U/s 80GGC. Unlike section 80G, there is no ceiling of 10% of Gross Total Income for deduction U/s 80.GGB & 80GGC. However, the deduction is available only if the donation is done in electronic mode and not if in cash.
Recently, many taxpayers (mostly salaried) have been issued notices by the income tax department that they have made bogus claims of donation U/s 80GGB/80GGC. These notices were primarily issued on the basis of raids carried out by the income tax department on 23 Registered Unrecognized Political Parties & 35 bogus intermediary entities. Lot of incriminating documents, receipts, diaries, commission payment details, loose papers, WhatsApp chats, etc were found during the raids which revealed that the donations were bogus. Few of the recipients of donation were found to have no physical presence & have admitted to be in the activities of providing accommodation entries. With this, the Department has concluded that all the donations are just bogus entries. The modus operandi as observed was that donation was given by cheque/RTGS/NEFT & the cash was returned back to such donor through various layers after deducting commission in the range of 1.50% to 10%. The Department has identified the network of agents who were engaged in offering bogus tax benefits through the above mode.
What Taxpayers who have received Notice should do?
The claim of the income tax department is simple i.e., there is escapement of tax liability and it wishes to recover the amount of tax with interest and penalty thereafter. To do this, the department has issued notice U/s 148 of the Income Tax Act-1961 after giving an opportunity of being heard to the taxpayers before passing order U/s 148A(d).
Though the notices are sent through email also, there are many taxpayers whose email id may not be correct at the income tax portal or may not have received the mail. Taxpayers who have made political donations may just login at the income tax portal to see if there are any notices for such bogus political donations. The question arises as to what is the remedy in such cases with the taxpayers.
If the notice is issued U/s 148 then the taxpayers are required to file the income tax return again. The return U/s 148 has to be filed even if the taxpayers have already filed the income tax return earlier for the relevant assessment year. The purpose of filing the income tax return U/s 148 is to give an opportunity to the taxpayers to file a correct and true return in view of the information which has come in the possession of the department.
One may note that the taxpayer has the right to demand copies of documents obtained during the raid as discussed above and can also demand the opportunity of cross examination against the evidence recovered from political parties. The taxpayer may also ask for the details of the cash trail. Apart from the above, there are numerous case laws on similar types of issues wherein courts have given ruling in favor of the taxpayers on false claim of accommodation entries. Taxpayers who are charged with the allegation of bogus donation can now file the income tax return with following two options:
1) Not Admitting the donation as Bogus:
Taxpayers can file the same return as filed originally without accepting the fact of having made any bogus donation. Taxpayers can deny the allegation of having made any bogus claim and may stick to the original claim. In such a case, taxpayers would be receiving the subsequent notices and would be required to justify the genuineness of the claim. Taxpayers can object to the notices on merits if the same is on incorrect information, incorrect fact, incorrect details, etc. Similarly, the taxpayers can also object on the technical ground if the notice issued is unsigned, without DIN, issued without approval of specified authorities or without following due procedure of law, etc.
If the taxpayer is able to establish the genuineness of the transaction & if the officer accepts it, the assessment order may be passed without any addition. If not satisfied then the assessment order rejecting the claim of deduction towards donation will be passed which will result in demand of tax & interest on the taxpayers. In such a case, the notices for penalty are also issued for under-reporting or mis-reporting of income. If the taxpayer is not satisfied with the disallowance then they can prefer an Appeal before Commissioner of Income Tax wherein all the defenses earlier can be taken up before CIT.
[The chances that the officers allow the deduction is very less. In normal course, past track record in similar types of cases shows that the officers do not accept the transaction as genuine and proceeds with disallowance of taxpayer’s claim]
2) Admitting the donation as Bogus:
Taxpayers can file the corrected return by voluntarily disallowing the deduction U/s 80GGC & paying the required amount as tax & interest. By exercising this option, Taxpayers may further submit in response to the subsequent notices that the tax is paid by the taxpayers so as to avoid the unnecessary compliances and to buy the peace of mind without accepting the donation as bogus. In such a case also, the notices for levy of penalty may also be issued for under-reporting or mis-reporting of income. Here, the notices and submission will be less as compared to the first option discussed above.
What should taxpayers do if they have done Donation to political parties for AY 2021-22 & 2022-23 if the same is likely to be declared as Bogus:
At present, the notices are issued for the AY 2019-20 only as the same was getting time barred on 31.03.2023 in most of the cases. If the taxpayers have done bogus donations in subsequent years then the taxpayers may also receive similar notices. In such a case, taxpayers will have both the options as discussed above in subsequent years. However, taxpayers have one more option at present in the form of filing “Updated Income Tax Return” so as to avoid litigation and disputes. Taxpayers can file the updated Return with additional tax cost because of a bogus donation claim. However, the option to file the updated return is available only till the department initiates the proceeding as done for the AY 2019-20.
There is no smoke without fire. Taxpayers know well whether the donation is bogus or not. If it is genuine, taxpayers may not admit the same and may prove with all the evidence and records, Taxpayers may furnish the logic & reason for making the donation and also with other relevant evidence. However, if the donation is not genuine then one may think of not litigating it as the cost of compliances and tension may be more than the amount of tax in case of political donation of smaller sum.
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CA Naresh Jakhotia
Partner – M/s. SSRPN & Co.
10, Laxmi Vyankatesh Apartment
Telephone Exchange Square
Central Avenue Road
Web : www.ssrpn.com
linkedin : https://www.linkedin.com/in/ca-naresh-jakhotia-b2069b16/
Phone Nos: (0712)2735479, 6549611
Cell No. : 094228-60300