Donation to Political Parties-Department View

Donations to political parties are encouraged by the Indian government to promote democratic participation, and the Income Tax Act, 1961 provides specific provisions that allow deductions for such donations, subject to conditions.

From the Income Tax Department's standpoint, such donations are subject to strict scrutiny and compliance requirements, particularly when deductions are claimed under the Income Tax Act, 1961.

While the government encourages political donations through tax incentives, the department ensures that such deductions are not used to:

• Launder black money

• Route unaccounted income

• Inflate business expenses

• Claim fraudulent deductions

Hence, all political party donations are subject to strict scrutiny during assessments.

The Income Tax Act, through Sections 80GGB and 80GGC, provides full deduction for donations made to registered political parties or approved electoral trusts, subject to strict conditions. The Income Tax Department ensures transparency by scrutinizing large or suspicious donations and verifying donor and recipient compliance.

Legal Provisions for claiming Deductions

Section 80GGB – Applicable to Companies

Eligibility: Indian companies

Deduction: 100% of the amount donated

Recipient: A political party registered under Section 29A of the Representation of the People Act, 1951 or an electoral trust

Section 80GGC– Applicable to Other Persons

Eligibility: Individuals, HUFs, firms, AOPs, BOIs (excluding local authorities and artificial juridical persons funded by government)

Deduction: 100% of the amount donated

Recipient: political party means a political party registered under section 29A of the Representation of the People Act, 1951

Restriction & Disqualification

• Cash donations: No deduction allowed if payment is made in cash (Section 80GGB/80GGC).

• Anonymous donations above ?20,000 must be reported by political parties (per ECI guidelines).

• Donation to unregistered political parties

• No deduction if there is no documentary evidence of actual payment

Income Tax Department’s View and Scrutiny Mechanism-

The Income Tax Department treats donations to political parties as high-risk areas for tax abuse. Although the law permits full deduction, it is granted only when strict conditions are met.

Proof Required to Validate Claims- Taxpayers have reportedly received notices via SMS and email requesting them to furnish:

• Documentary proof of donations

• Bank statements

• Donation receipts

• Confirmation of the political party's registration status

Authorities have observed cases where deductions were claimed for contributions to unrecognized entities or made in non-permissible forms like cash, which violate tax norms.

The department cross-verifies donation claims with:

• Party-wise contribution reports submitted to the Election Commission

• Electoral bond purchases (bank data)

• Donor’s financials and books of accounts

In case of discrepancies, the department may:

• Issue notices under Section 143(2) or 148

• Treat the amount as unexplained expenditure (Section 69C)

• Levy tax along with penalty and interest

Relevant Judicial Pronouncement-

The Tribunal allowed the deduction under Section 80GGC, holding that the assessee cannot be penalized for the political party’s failure to account for the donation. [2024] 204 TAXLOK.COM (IT) 596 (ITAT-DELHI)

The ITAT Ahmedabad dismissed the assessee’s appeal challenging disallowance of deduction under Section 80GGC for donations made to two political parties. The AO established, based on detailed inquiries and prior rulings, that the donations were bogus accommodation entries and not genuine contributions. The assessee failed to produce any corroborative evidence or rebut the findings. Hence, the disallowance of Rs.1,13,51,000 under Section 80GGC is upheld by the Tribunal. [2025] 209 TAXLOK.COM (IT) 666 (ITAT-AHMEDABAD)