I-T suspects use of little known political parties to evade tax
As the taxman chased revenue targets and reopened old files before the March 31 deadline, caught in the net are many who are suspected to have used several small, lesser-known political parties to move around money and escape tax.Several individuals, and in some cases firms, had transferred sums from their bank accounts to these political outfits in the financial year 2018-19, only to get back most of it as cash after the money changed multiple hands.The first leg of the transaction --- where money was donated by cheque or electronic transfers with the donor receiving a receipt from the political party --- would come across as legitimate donation. It allowed donors to reduce their taxable incomes by claiming full deduction of the amounts in their Income tax (I-T) returns.But after that the donations were used by the parties to book sham expenses under various heads to pay off fake vendors acting as intermediaries; the money then flowed through a string of handlers to the donor who received an amount in cash (less commissions of 3.5 to 5%).In March the I-T department served notices to many assessees, along with a list of 23 `registered but unrecognised political parties who collected the donations.Some of the political parties figuring in the I-T department list are registered for a decade or more. Technically, a donor can claim full deduction on the donation made to a party registered under section 29A of Representation of the People Act, 1951. However, there may be two kinds of cases. Some may be genuine donors who would have donated based on requests or calls received from these parties. While there will be cases where the donors have made large contributions during the last week of a financial closing. In the latter cases, the department would try to establish a money trail on the back of certain evidences like book entries, WhatsApp chats, and statements of intermediaries or office bearers of the political parties in question that the money found its way back as cash to the donor, said Siddharth Banwat, a chartered accountant and partner with a leading CA firm.In the past two days the subject figured in the chat groups of many tax practitioners, with few of them posting blogs on the development.According to a person who has gone through some of the appraisal post I-T search, there are cases where wholesale traders in the APMC market came handy in generating the cash which was eventually paid back to the donor. Here, the traders, who typically handle large amounts of cash, would receive cheques and pay back the cash (net of charges) to some of the intermediaries who in turn handed over the money to donors.While some of the charitable trusts offer such `cash pay back deals to donors, the tax benefit is more in donations to a political party. In the former, the deduction allowed is 50% or 10% of the taxable income, whichever is lower.Since the donations were below Rs 50 lakh, after March 31, 2023, the transactions, which happened in 2018-19, would have been time-barred under the tax law for reopening. The I-T department can go back three years if the tax evaded is suspected to be within Rs 50 lakh and 10 years if the income that escaped tax is said to be over Rs 50 lakh.According to the notices, the entire donation is considered by the I-T office as having escaped assessment within the meaning of provision of Section 147 of the I-T Act for the assessment year 2019-20. The particular section gives the assessing officer the discretion to reopen assessment proceedings if there are reasons to believe some of the income has escaped tax.A recognised political party is either a national or a state party that meets certain conditions laid down by the Election Commission. Among other things, every political party has to communicate any change in its name, head office, office-bearers, address, PAN etc. to the Commission. Last year, the EC found that many registered unrecognised political parties (RUPPs) were non-existent either after a physical verification carried out by the respective chief electoral officers of concerned states/UTs or based on report of undelivered letters/notices from the postal authority sent to the registered address of the concerned RUPP.As spelt out in the annexure of the notices, the intermediaries or shell entities, providing accommodation entries, are often formed by the same persons running the RUPPs. Then handlers of these intermediaries open bank accounts, carry out transactions for some time, and then close the accounts to open new ones.
Tuesday, April 11, 2023 at 5:46 pm