Forex

In the article ‘Bringing political donations to book’ (Business Line, June 28), the author has expressed the view that “the bottom line therefore is while a company would fall foul of the company law if it breaches the 5 per cent norm, it can get away under the income-tax law and the claim of entire contribution would be allowed in computing its taxable income.” There could be another view on this.

Section 293A

Section 293 of the Companies Act, operative from May 24, 1985, permits donations to political parties with certain riders. The important ones are:

Government companies and other companies which have been in existence for less than three financial years cannot make political donations.

The maximum amount up to which a company can contribute to such donations in any one financial year cannot exceed 5 per cent of the company’s average net profit.

The contributions can be made only if a resolution, authorising such contributions, is passed at a meeting of the board of directors of the company.

Such contributions are required to be disclosed in the profit and loss (P&L) account of the company.

Contravention of Section 293A provisions, permitting donations to political parties, namely, exceeding the limit prescribed, is punishable under sub-section (5) of this section, which reads as follows:

“If a company makes any contribution in contravention of the provisions of this section:

the company shall be punishable with fine, which may extend to three times the amount so contributed; and

every officer of the company, who is in default, shall be punishable with imprisonment for a term, which may extend to three years and shall also be liable to fine.”

Deduction under I-T Act

Section 80GGB of the I-T Act permits deduction in respect of contributions to political parties given by companies in a previous year in computation of their total income. This section does not mention any monetary limit up to which deduction can be claimed. Therefore, can deduction of more than that permissible under the Companies Act be claimed under Section 80GGB?

Explanation to Section 80GGB provides that for the purpose of this section, the word ‘contribute’, with its grammatical variation, has the meaning assigned to it under Section 293A of the Companies Act.

From this it can be inferred that contributions, more than that permissible under the Companies Act, cannot be deducted under Section 80GGB.

The issue needs to be seen from another angle as well. The board of directors of a company are unlikely to approve contributions exceeding the prescribed limit, making the company and themselves liable for fine and prosecution. Hence, in actual practice, the position envisaged in the article is not expected to arise.

From the income-tax angle too, the excess contribution may not be deductible because it would be an expenditure prohibited by law. The general policy in regard to allowance of illegal expenses can be said to have been declared in the Explanation to Section 37(1), operative from April 1, 1962.

Incorrect view

Judicial precedents are to the effect that from an interpretation angle, the Act has to be read as a whole. Courts have also decided that in a legal business, expenses claimed, which are in infraction of law, cannot be deducted because infraction of law is not a normal incident of business.

The position that there being no limit prescribed under Section 80GGB for claiming deduction for political donations, deduction for the same can be claimed under this section even if such donations are in excess of the limit under Section 293A of the Companies Act is incorrect both legally and on practical grounds.