New Delhi, December 27, 2025 – In a stern rebuff to lax financial practices among political entities, the Income Tax Appellate Tribunal (ITAT) Delhi Bench has denied tax exemption under Section 13A to a registered unrecognized political party (RUPP), directing that 6% of its total donations be taxed as "income from other sources" due to a covert commission scheme and repeated non-compliance with statutory mandates. The ruling, stemming from a 2022 raid exposing fraudulent donation rackets, underscores the taxman's growing crackdown on opaque funding in the political arena.
The assessee, referred to in court records as "Public Political Party" – a RUPP registered under Section 29A of the Representation of the People Act, 1951 – faced scrutiny across assessment years (AY) 2015-16 to 2022-23. The saga began with a high-stakes search and seizure operation on September 7, 2022, launched by the Income Tax Department in tandem with an Election Commission probe into alleged tax evasion and sham donations funneled through lesser-known parties. Raiding teams seized incriminating evidence, including books of accounts, bank statements, donation ledgers, cash vouchers, and statements from the party's treasurer under Section 132(4) of the Income Tax Act, 1961.
At the heart of the controversy was a dubious "donation scheme" where funds were routed through bogus donors, only to be returned to them after the party siphoned off a commission ranging from 5-7%. For AY 2015-16 alone, the Assessing Officer (AO) slapped an addition of Rs. 19.15 lakh under Section 68 as unexplained cash credits, deeming the inflows unsubstantiated. The party appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], arguing the credits were genuine voluntary contributions shielded by Section 13A, which grants tax-free status to political parties' receipts if strict conditions are met.
However, the ITAT bench, comprising Judicial Member G.S. Pannu and Accountant Member Prashant Chandra, dismissed these claims outright. "Section 13A conditions are mandatory, making voluntary contributions taxable," the tribunal observed, drawing on a landmark 2016 Delhi High Court verdict in Commissioner of Income Tax (Delhi-XI) vs. Indian National Congress*, which ruled that exemptions are not automatic and audited accounts must be filed on time – a "mandatory, not directory" requirement. The party had flouted key provisions repeatedly: failing to file returns by the due date under Section 139(4B), neglecting to maintain audited books of accounts, and skipping mandatory contribution reports to the Election Commission of India.
In a partial victory for the assessee, the ITAT quashed the Section 68 addition, reasoning that "deeming provisions cannot apply to rejected donation claims." Yet, it upheld the denial of exemption and innovatively pegged the taxable portion at 6% of aggregate donations – an average of the admitted commission rate – to be assessed as income under Section 56(1). This move effectively claws back revenue from what the bench viewed as a profit-driven conduit rather than bona fide political funding.
The decision has broader ripples, reigniting calls for transparency in political financing amid India's polarized electoral landscape. Activists and tax experts hail it as a "wake-up call" for RUPPs, often accused of serving as "shell entities" for laundering funds during elections. "This isn't just about one party; it's a template for enforcing accountability across the board," said noted tax analyst Ravi Gupta, commenting on the verdict's alignment with the Supreme Court's 2023 push for electoral bonds disclosure.
The Public Political Party, which did not respond to requests for comment, has options for further appeal to the High Court. Meanwhile, the Income Tax Department confirmed that similar probes into over a dozen RUPPs are underway, with potential additions running into crores. As the 2026 assembly polls loom, this ruling serves as a fiscal reminder: in the game of democracy, every rupee must pass the audit.
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