The difference between tax saving and tax evasion can become apparent when individuals seek deductions under sections 80GGB/80GGC of the Income Tax Act 1961. These sections govern the eligibility for deductions from the Gross Total Income when individuals contribute funds to a political party or an electoral trust.
The deduction under sections 80GGB/80GGC of the Income Tax Act, 1961, can be claimed by various entities, including Individuals, Hindu Undivided Families (HUFs), Firms, Associations of Persons (AOPs), and Bodies of Individuals (BOIs). Companies can claim this deduction under section 80GGB of the Income Tax Act 1961.
Taxpayers are eligible for a deduction of 100% of the amount donated under sections 80GGB/80GGC without any upper limit on the donation amount. However, companies governed by the Companies Act 2013 are limited to making contributions up to 7.5% of their annual net profit (averaged over 3 years).
For example, if a taxpayer has a Gross Tax Income of Rs. 10,00,000/- and has donated Rs. 2,00,000/- to a political party, they can claim a deduction of Rs. 2,00,000/-. This results in substantial tax savings. It is important to note that the political party must be registered under section 29A of the Representation of the People Act, 1951, and the donations made should not be in the form of cash or kind.
However, it is important to acknowledge that there is another side to this issue. Instances have been discovered where political parties deduct a certain percentage from the donated amount and then return the remaining funds to the taxpayer. This type of transaction is commonly referred to as a “Bogus Donation.”
As the number of such transactions has increased, even genuine taxpayers are facing situations where they receive notices from the Income Tax Department. These notices request supporting documents to substantiate their claim for donations as deductions from their Gross Total Income.
What if the taxpayer fails to prove the genuineness of the donation?
If a person is unable to substantiate the genuineness of the donation, they may face several consequences. Firstly, the person will be liable to pay tax at the applicable slab rate on the amount in question. Additionally, interest for late payment of tax may be imposed. Furthermore, a penalty can be levied, typically at a rate of 50% of the tax payable, due to the under-reporting of income. In more severe cases where the transaction is deemed as misreporting of income, the penalty can increase up to 200% of the tax payable.
Assessing officers have the authority to treat such transactions as bogus claims, which would then be subject to tax under section 115BBE. This section imposes a tax rate of 60%. However, if the transaction is taxed under section 115BBE, the penalty will be limited to 10% of the tax amount. It is crucial for taxpayers to be diligent in maintaining proper documentation and ensuring the genuineness of their claimed deductions to avoid such penalties and consequences.
Continuing with the previous example, if the tax payable rate is 20%, the taxpayer would be responsible for paying Rs. 40,000/- as tax along with applicable interest and penalties ranging from 50% to 200% (i.e., ranging from Rs. 20,000/- to Rs. 80,000/-). Consequently, rather than achieving tax savings, this situation would result in additional tax liability. It is evident that donating to political parties can be a double-edged sword, carrying both potential benefits and risks for taxpayers. It highlights the importance of careful consideration, proper documentation, and compliance with tax regulations when claiming deductions for political party donations.
Steps to follow to prove the genuineness of the transaction:
The first crucial step for a taxpayer is to obtain the registration certificate, confirming that the political party is registered under section 29A of the Representation of the People Act, 1951. This certificate is issued by the Secretariat of the Election Commission of India. It is recommended to verify the registration on the official website eci.gov.in. Additionally, it is essential to ensure that the party to which the funds are being donated is not listed under the Registered Unrecognised Political Parties (RUPP) on the website. These measures help validate the legitimacy of the political party and reduce the risk of engaging in transactions with unregistered or unrecognised entities.
To ensure proper documentation and evidence of the donation made to a political party, the taxpayer should follow these steps:
- Request the PAN (Permanent Account Number) card of the political party.
- Obtain a copy of the cancelled cheque, which can be used to cross-verify the bank details mentioned on the political party’s registered website.
- Ensure that the taxpayer receives a physical receipt from the political party. This receipt should be duly stamped by the party and clearly state the amount of the donation made.
By seeking the PAN card, verifying bank details, and obtaining a stamped receipt, the taxpayer can establish a solid paper trail and have tangible proof of the donation made to the political party.
If the taxpayer receives a notice from the Income Tax Department to substantiate the genuineness of the transaction, the above-mentioned documents, along with the payment receipt issued by the bank, can serve as supporting evidence. These documents can be presented before the assessing officer to demonstrate the authenticity of the donation made to the political party.
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