Kapil Gupta – [2024] 159 taxmann.com 526 (Article)
Before the advent of Lok Sabha elections this year, the Supreme Court of India has recently delivered a ground-breaking judgement in the case of Association for Democratic Reforms Versus Union of India dated February 15, 2024, whereby the hon’ble court has held that political contribution by way of electoral bond is violative of Article 19(1)(a) of the Constitution of India (‘COI’) andunconstitutional.
While the aforesaid judgement has discussed electoral bond scheme, Section 29C(1) of the Representation of People Act 1951, Section 182 of the Companies Act 2013 (‘CA 2013’) and Section 13A(b) of the Income Tax Act, 1961 in detail.
However, this article assesses the impact of said judgement on Section 182 of the CA 2013 and difficulties to be faced by Corporates who are contemplating political contribution in this fiscal year 2023-24 and going forward.
I. What is an electoral bond?
The Electoral Bond is a bond issued in the nature of promissory note which is a bearer banking instrument and does not carry the name of the buyer. Such bonds are issued under Electoral Bond Scheme 2018, and it has following features:
- The bonds are issued in denominations of Rs. 1000, 10,000, 1,00,000, 10,00,000 and 1,00,00,000.
- The bond is valid for fifteen days from the date of issue.
- The bond issued is non-refundable.
- The information furnished by the buyer is to be treated as confidential by the authorized bank. It shall be disclosed only when demanded by a competent court or upon the registration of criminal case by any law enforcement agency.
In a case, the contribution in form of electoral bond is made by a Company then it is considered as political contribution under Section 182, and thus Companies making such political contribution are also required to abide by provisions of Section 182.
II. Background of Section 182
Section 182 of the CA 2013, as originally enacted, allowed a Company other than a government Company or Company in existence for less than 3 financial years, to contribute any amount directly or indirectly to any political party.
However, such contribution could be made subject to following conditions, inter alia:
- Amount to be contributed in any financial year shall not exceed 7.5% of average net profits during the three immediately preceding financial years (‘First Proviso’).
- The said contribution shall be authorised by a resolution passed by the Board of Directors in their meeting (‘Second Proviso’).
- As per Section 182(3) of CA 2013, the company is required to disclose in its profit and loss account any amount 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 (‘Disclosure Requirements’).
III. Amendment made by Finance Act 2017 under Section 182 of CA 2013
With the passage of time, the legislature realised that the Companies are already directly or indirectly contributing fund in excess of maximum permissible limit of 7.5% by way of shell companies, and therefore said limit was removed by omitting the First Proviso through Finance Act 2017.
Further, the said Finance Act 2017 made an amendment in Section 182(3) i.e., Disclosure Requirements and consequently, the obligation on the Companies to disclose name of political parties to whom contribution has been made in their profit and loss account was also done away with.
With respect to payment, it was mandated that the contribution shall not be made except by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account.
Lastly, a company may make contribution through any instrument, issued pursuant to any scheme notified under any law for the time being in force, for contribution to the political parties.
The impact of above amendment is as follows:
- Companies can make political contribution even beyond the limit of 7.5% by taking Board’s approval.
- A loss-making Companies also became eligible for making a political contribution under Section 182.
- Companies which have made political contribution during the financial year are only required to report total amount of contribution in their profit and loss account.
- Political contribution by Companies in form of cash was obliterated.
- The political contribution can also be made in an instrument pursuant to a scheme notified.
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