Urgently need to ensure transparently in publicly obtained funds of Political Parties: High Court

In its recent decision in Commissioner of Income Tax v. Indian National Congress [ITA No. 145/2001, decision dated 23.03.2016] a division bench of the Delhi High Court has delineated the need for urgent probity in affairs of political parties. The High Court made certain scathing remarks over the perceived sorry state-of-affairs in so far their non-transparent actions are concerned particularly in the manner in which they deal with contributions from the citizens. The High Court quoted with disdain the observations made by the Supreme Court four decades back on the conduct of political parties to rue that the practices unappreciated all the way back then continue to haunt the society. The Delhi High Court highlighted the need to urgently tackle the issue by quoting the Supreme Court - "The small man’s chance is the essence of Indian democracy and that would be stultified if large contributions from rich and affluent individuals or groups are not divorced from the electoral process."

The High Court was dealing with an income tax appeal filed by Indian National Congress against the decision of a tax tribunal which had found the political party ineligible for tax concession since it failed to maintain proper accounts of the money received as donation. The High Court not only endorsed the decision of the tax tribunal, it also cited (a) the Supreme Court's missive against failure of political parties to account for money; (b) the directions of the Election Commission of India; (c) the concern expressed by the Law Commission of India and (d) the publicly available figures on unknown sources of finance of political parties, to hold and adjudge serious introspection required on the part of the political parties generally in the country. 

The Delhi High Court noted the following to conclude against the political

• Congress had failed to file the tax returns despite clear directions by the Gujarat High Court in an earlier case and that too since the year 1995. [para 11]
• The Supreme Court had declared that Political Parties are not above the law. [Common Cause v. Union of India 1996-222-ITR-260-SC] [para 12]
• Political parties do not carry out charitable activities. Their claim for exemption akin to one extended to charitable trusts is ill-founded. [para 69]
• Receipts of Political Parties by way of voluntary donations are their "income from other sources" [para 80]
• The income tax law grants exemption to a political party on the receipts by way of voluntary donation. However this exemption is subject to filing detailed and certified accounts. The statutory provisions reveal that "it was critical from the point of view of the legislature that political parties are made to disclose what their state of financial affairs is in any given financial year". [para 93]

The High Court even chastised the chartered accountant / auditor for having certified the books of accounts of Congress even though he specifically stated that he did not have all the figures and information for this purpose. On this count the High Court made the following observations;

103. It is also disconcerting to note that the same auditor has issued identical certificates for other AYs for which simultaneously accounts have been finalised. This kind of an auditor’s report, to say the least, leaves much to be desired. It does not comport with the degree of seriousness with which a duly qualified auditor is expected to discharge his statutory obligations. An auditor is discharging both the professional and a statutory duty. He is licensed under the expectation that he will faithfully discharge the above obligations. In the present case, the Court is constrained to note that the auditor’s report submitted before the CIT (A) on 4th November 1997 is woefully short of the requirement of the law.

The High Court concluded by declaring that the "case demonstrates the need for a slew of legislative measures that need to be put in place for an effective check on the influence of money on the electoral process". The High Court further held that "considering that political parties are an essential part of our democracy and are dealing in large sums of public money, much of which is unaccounted, the proper auditing of the accounts of the political parties is both imperative critical to the conduct of free and fair elections". And the reason for this all; to "infuse transparency and accountability into the functioning of the political parties thereby strengthening and deepening democracy".

We hope that this decision of the High Court will not just form another precedent consigned to the law reports but will be implemented in both spirit and form for the betterment of the democratic outlook of the country.

Dichotomy in Government functioning - Citizens not to be penalized : Supreme Court

What happens when the citizens act on the representation of the Government (particularly its Ministers and Policy) only to find to their detriment that the Government machinery has failed to act on time? Can a citizen be penalized for following the Government Policy on the ground that even though the Government promised yet it failed to act? Can benefit of a benevolent industrial policy be denied to the citizen on such grounds? These were some of the questions which were put before the Supreme Court by a tax payer to claim that in the absense of any fault on its part, the benefit of Industrial Policy announced by the State Government should not be denied and the Supreme Court concurred.

In its recent decision in Lloyd Electric & Engineering Ltd. v. State of Himachal Pradesh [Civil Appeal No. 6838/2015] (now reported at (2016) 1 SCC 560) the Supreme Court was dealing with the decision taken by Cabinet of Himachal State Government which extended benefit of a tax concession from 1st April onwards. However the enabling legislative notification was issued in middle of June and it stated that benefit was available "with immediate effect". On this count the High Court declined to decide in favour of the tax-payer giving strict effect to the notification. The Supreme Court reversed the decision of the High Court taking into context the Cabinet's resolve and the decision taken by the highest body of the State Government i.e. the Council of Ministers.

Making the Government answerable and responsible for the statement / decision of its Council of Ministers, the Supreme Court sternly declared the impermeability of the Government to say one thing and effectuate another. The Court declared the legal position inter alia in the following terms;

10. We do not think it necessary to go into the various contentions raised by the parties in view of the undisputed factual position we have referred to above. The State Government cannot speak in two voice. Once the Cabinet takes a policy decision to extend its 2004 Industrial Policy in the matter of CST concession to the eligible units beyond 31.03.2009, upto 31.03.2013, and the Notification dated 29.05.2009, accordingly, having been issued by the Department concerned, viz., Department of Industries, thereafter, the Excise and Taxation Department cannot take a different stand. What is given by the right hand cannot be taken by the left hand. The Government shall speak only in one voice. It has only one policy. The departments are to implement the Government policy and not their own policy. Once the Council of Ministers has taken a decision to extend the 2004 Industrial Policy and extend tax concession beyond 31.03.2009, merely because the Excise and Taxation Department took some time to issue the notification, it cannot be held that the eligible units are not entitled to the concession till the Department issued the notification. It has to be noted that the Finance Department of the State Government had concurred with the proposal of the Department of Industries to extend the tax concession beyond 31.03.2009 till 31.03.2013 and the Council of Ministers had accordingly taken a decision also. No doubt, the statutory notification issued by the Excise and Taxation Department under Section 8(5)(b) of the Act on 18.06.2009 has stated that the eligible units will be entitled to the concession with immediate effect. Merely because such an expression has been used, it cannot be held that the State Government can levy the tax against its own policy. The State Government is bound by the policy decision taken by the Council of Ministers and duly notified by the Department concerned, viz., Department of Industries.

…

13.       The High Court, with great respect, has gone wrong in not appreciating the background of the case and the decision of the Council of Ministers to extend its own Industrial Policy announced in 2004 and the tax concession beyond 31.03.2009. Once the Council of Ministers takes a policy decision, the implementing Department cannot issue a notification contrary to the policy decision taken by the Government. The High Court also erred in analyzing and understanding the Notification dated 18.06.2009 as if it introduced the CST concession @ 1 per cent with effect from the date of issuance of notification. As we have already clarified, it is not the introduction of a new policy but an extension of the benefits under the extended policy. It is in this context, the decision of this Court in Suprabhat Steel Limited (supra) and State of Jharkhand and others v. Tata Communications Limited and another become relevant.

In terms of Article 141 of the Constitution of India, this declaration of legal position by the Supreme Court amounts to law of the land and is binding on one and all, including all Government functionaries and even the High Courts. We hope that Government departments will take due note of this decision and ensure that there is no dichotomy in their public declarations and functioning.

Equilization Levy: Indian version of 'Google Tax'?

Multinational Corporations have taken up the tax battle to the countries. For long concerns have been raised over dwindling tax base owing to artificial shifting of profits by the MNCs. Now these concerns have now been officially documented at the aegis of the OECD under its 'Base Erosion and Profit Shifting' (BEPS) Project. The BEPS Action plan of OECD describes this narrative in the following terms;

Over time, the current rules have also revealed weaknesses that create opportunities for BEPS. BEPS relates chiefly to instances where the interaction of different tax rules leads to double non-taxation or less than single taxation. It also relates to arrangements that achieve no or low taxation by shifting profits away from the jurisdictions where the activities creating those profits take place. No or low taxation is not per se a cause of concern, but it becomes so when it is associated with practices that artificially segregate taxable income from the activities that generate it. In other words, what creates tax policy concerns is that, due to gaps in the interaction of different tax systems, and in some cases because of the application of bilateral tax treaties, income from cross-border activities may go untaxed anywhere, or be only unduly lowly taxed.

Of particular disquietude is the affect on the tax base on account of digital transactions as, according to the OECD BEPS Action Plan, "digital economy is characterised by an unparalleled reliance on intangible assets, the massive use of data (notably personal data), the widespread adoption of multi-sided business models capturing value from externalities generated by free products, and the difficulty of determining the jurisdiction in which value creation occurs."

To thwart these tax-avoidance attempts and particularly those arising out of artificial shifting of residence in digital transactions, the international tax community has recently seen new levies particularly characterised as the 'Google Tax'. A number of countries have initiated attempts on bring in specific rules taxing corporations engaged in digital transactions amidst their jurisdictions such that they pay a fair share of tax on the income derives from the operations in such jurisdictions. United Kingdom (HMRC) has been the frontrunner being in the headlines for long and has explained its position publicly in a recently announted Policy briefing to this effect. Wikipedia entry on Google Tax informs that Australia and Spain have similarly announced promulgation of such taxation rules.

The Union Budget for 2016-17 presented by the Finance Minister on 29-Feb-2016 proposes to impose a similar tax branded as 'Equilisation Fee'. Chapter - 8 of the Finance Bill, 2016 (when enacted) would stand out as a sui generis levy on consideration earned by foreign companies for providing "online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government" to Indian businesses. The levy would be enforced indirectly i.e. by way of obliging the Indian businesses paying the foreign companies to deduct from the consideration the tax amount which currently stands at six percent of the total consideration payable for the service. The Memorandum accompanying the Finance Bill, 2016 explains the rationale for the new levy and its salient features in the following terms;

With the expansion of information and communication technology, the supply and procurement of digital goods and services have undergone exponential expansion everywhere, including India. The digital economy is growing at ten per cent per year, significantly faster than the global economy as a whole.
Currently in the digital domain, business may be conducted without regard to national boundaries and may dissolve the link between an income-producing activity and a specific location. From a certain perspective, business in digital domain doesn't seem to occur in any physical location but instead takes place in the nebulous world of "cyberspace." Persons carrying business in digital domain could be located anywhere in the world. Entrepreneurs across the world have been quick to evolve their business to take advantage of these changes. It has also made it possible for the businesses to conduct themselves in ways that did not exist earlier, and given rise to new business models that rely more on digital and telecommunication network, do not require physical presence, and derives substantial value from data collected and transmitted from such networks.
These new business models have created new tax challenges. The typical direct tax issues relating to e-commerce are the difficulties of characterizing the nature of payment and establishing a nexus or link between a taxable transaction, activity and a taxing jurisdiction, the difficulty of locating the transaction, activity and identifying the taxpayer for income tax purposes. The digital business fundamentally challenges physical presence-based permanent establishment rules. If permanent establishment (PE) principles are to remain effective in the new economy, the fundamental PE components developed for the old economy i.e. place of business, location, and permanency must be reconciled with the new digital reality.
The Organization for Economic Cooperation and Development (OECD) has recommended, in Base Erosion and Profit Shifting (BEPS) project under Action Plan 1, several options to tackle the direct tax challenges which include modifying the existing Permanent Establishment (PE) rule to include that where an enterprise engaged in fully de-materialized digital activities would constitute a PE if it maintained a significant digital presence in another country's economy. It further recommended a virtual fixed place of business PE in the concept of PE i,e creation of a PE when the enterprise maintains a website on a server of another enterprise located in a jurisdiction and carries on business through that website. It also recommended to impose of a final withholding tax on certain payments for digital goods or services provided by a foreign e-commerce provider or imposition of a equalisation levy on consideration for certain digital transactions received by a non-resident from a resident or from a non-resident having permanent establishment in other contracting state.
Considering the potential of new digital economy and the rapidly evolving nature of business operations it is found essential to address the challenges in terms of taxation of such digital transactions as mentioned above. In order to address these challenges, it is proposed to insert a new Chapter titled "Equalisation Levy" in the Finance Bill, to provide for an equalisation levy of 6 % of the amount of consideration for specified services received or receivable by a non-resident not having permanent establishment ('PE') in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India.
Further, in order to reduce burden of small players in the digital domain, it is also provided that no such levy shall be made if the aggregate amount of consideration for specified services received or receivable by a non-resident from a person resident in India or from a non-resident having a permanent establishment in India does not exceed one lakh rupees in any previous year.
To provide certainty and to avoid interpretational issues, it is also proposed to define certain terms and expressions used therein. Further it also proposes to provide for the procedure to be adopted for collection and recovery of equalisation levy.
In order to provide for the administrative mechanism of the equalisation levy, it also proposes to provide for statutory authorities and also prescribes the duties and powers of the authorities to administer the equalisation levy. In order to ensure effective compliance, it also proposes to provide for interest; penalty and prosecution in case of defaults with sufficient safeguards. 

This new tax has already been dubbed as the Indian version of Google Tax by the print media. See [1] [2] There are certain important aspects of the new tax;

• The tax is on the gross amount earned by the foreign companies. Therefore it is not one akin to a standard income tax which is on profits i.e. permits deduction on account of expenses from the revenue earned.
• The tax would be administered by way of provisions termed as 'tax collection at source'. Thus the manner of collection of this tax is akin to those cases which are considered peculiar to be administered owing to the tax-base being scattered / unorganised. Currently there are very few cases to which tax collection at source provisions apply.
• The proposed provisions do not indiciate a fixed time-line to commence the tax application and leave it to a subsequent notification which will announce the date of the levy. Ordinarily income tax applies from first date of assessment year i.e. 1st April of a year. However since this is a tax collection on consideration earned by foreign company (which will not be assessed but the payer will be required to comply with the law), there is a possibility that this new tax can be enforced even during the year.

While the finer nuances of the levy will be known only at a later date when it becomes operational, it is indeed of particular significance to note that Indian tax laws are matching up the Indian trends.

Sedetion or Freedom of Speech: Delhi High Court ponders

"Spring season is a time when nature becomes green and flower blooms in all colours. This spring why the colour of peace is eluding the prestigious Jawaharlal Nehru University (JNU) situated in the heart of Delhi needs to be answered by its students, faculty members and those managing the affairs of this national university." This is how the Delhi High Court in its order has addressed the recent controversy surrounding the arrest of student leader of JNU while examining his request for bail.

In its order in Kanhaiya Kumar v. State of NCT of Delhi Writ Petition (Criminal) No. 558/2016 [decision dated 02.03.2016] the Delhi High Court noted that the student leader asserted "his fundamental rights guaranteed under Article 19(1)(a) of the Constitution of India on the ground that the utterances (speech or slogans) attributable to him cannot be termed to be in violation of any law and as such he has not committed any offence". The High Court thereafter reproduced the allegedly seditious comments / statements made at the event and also reproduced colour photographs of the event which led to his arrest.

The Delhi High Court judge concedes that in the factual background of the case she finds herself "standing on a crossroad" [para 38]. It is further held that while as a student leader one is "expected to be responsible and accountable for any anti-national event organised in the campus", the facts reveal that it "is a case of raising anti-national slogans which do have the effect of threatening national integrity" [para 40]. Nonetheless it student leader is reminded that "persons enjoy the freedom to raise such slogans in the comfort of University Campus but without realising that they are in this safe environment because our forces are there at the battle field situated at the highest altitude of the world where even the oxygen is so scarce that those who are shouting anti-national slogans holding posters of Afzal Guru and Maqbool Bhatt close to their chest honoring their martyrdom, may not be even able to withstand those conditions for an hour even" and the "kind of slogans raised may have demoralizing effect on the family of those martyrs who returned home in coffin draped in tricolor".

The High Court expressed its opinion on the above, in the following terms;

"39. As President of Jawaharlal Nehru University Students Union, the petitioner was expected to be responsible and accountable for any anti-national event organised in the campus. Freedom of speech guaranteed to the citizens of this country under the Constitution of India has enough room for every citizen to follow his own ideology or political affiliation within the framework of our Constitution. While dealing with the bail application of the petitioner, it has to be kept in mind by all concerned that they are enjoying this freedom only because our borders are guarded by our armed and paramilitary forces. Our forces are protecting our frontiers in the most difficult terrain in the world i.e. Siachen Glacier or Rann of Kutch.

... 

41. Suffice it to note that such persons enjoy the freedom to raise such slogans in the comfort of University Campus but without realising that they are in this safe environment because our forces are there at the battle field situated at the highest altitude of the world where even the oxygen is so scarce that those who are shouting anti-national slogans holding posters of Afzal Guru and Maqbool Bhatt close to their chest honoring their martyrdom, may not be even able to withstand those conditions for an hour even.

42. The kind of slogans raised may have demoralizing effect on the family of those martyrs who returned home in coffin draped in tricolor.

43. The petitioner claims his right regarding freedom of speech and expression guaranteed in Part-III under Article 19(1)(a) of Constitution of India. He has also to be reminded that under Part-IV under Article 51A of Constitution of India fundamental duties of every citizen have been specified alongwith the fact that rights and duties are two sides of the same coin.

44. The petitioner belongs to an intellectual class pursuing Ph.d. from International School of Studies, Jawaharlal Nehru University, which is considered as hub of intellectuals. He may have any political affiliation or ideology. He has every right to pursue that but it can be only within the framework of our Constitution. India is a living example of unity in diversity. Freedom of expression enjoyed by every citizen can be subjected to reasonable restrictions under Article 19(2) of our Constitution. The feelings or the protest reflected in the slogans needs introspection by the student community whose photographs are available on record holding posters carrying photographs of Afzal Guru and Maqbool Bhatt."

The High Court has sternly advised the JNU administration to ensure that the infection is not spread further. On such lines the High Court has observed as under;

"45. The faculty of JNU also has to play its role in guiding them to the right path so that they can contribute to the growth of the nation and to achieve the object and vision for which Jawaharlal Nehru University was established.

46. The reason behind anti-national views in the mind of students who raised slogans on the death anniversary of Afzal Guru, who was convicted for attack on our Parliament, which led to this situation have not only to be found by them but remedial steps are also required to be taken in this regard by those managing the affairs of the JNU so that there is no recurrence of such incident.

47. The investigation in this case is at nascent stage. The thoughts reflected in the slogans raised by some of the students of JNU who organized and participated in that programme cannot be claimed to be protected as fundamental right to freedom of speech and expression. I consider this as a kind of infection from which such students are suffering which needs to be controlled/cured before it becomes an epidemic.

48. Whenever some infection is spread in a limb, effort is made to cure the same by giving antibiotics orally and if that does not work, by following second line of treatment. Sometimes it may require surgical intervention also. However, if the infection results in infecting the limb to the extent that it becomes gangrene, amputation is the only treatment."

In all, the High Court has brought out its views on the state-of-affairs and it is not just the students, JNU administration but the nation at large which has to revisit its standing on the right to criticize (as a part of freedom of speech) versus its outlook on national integrity. More importantly our political leaders must introspect, before they decide to endorse one view over other, that may be affirming growth of a Frankenstein as the High Court indirectly observes.