Deduction in respect of contributions given by companies to political parties.

136(1)

An assessee, being an Indian company, shall be allowed a deduction for the amount contributed by it, other than by way of cash, during a tax year to a political party registered under section 29A of the Representation of the People Act, 1951 or an electoral trust.

136(2)

In this section, the word “contribute”, with its grammatical variations and cognate expressions shall have the same meaning as assigned to it in section 182 of the Companies Act, 2013.

Explanation

Section Summary:

This section allows Indian companies to claim a tax deduction for contributions made to political parties or electoral trusts, provided the contributions are not made in cash. The political party must be registered under Section 29A of the Representation of the People Act, 1951.

Key Changes:

• Cash Contributions Excluded: Unlike previous provisions, cash contributions to political parties are no longer eligible for tax deductions. Only non-cash contributions (e.g., cheques, digital transfers) qualify.
• Alignment with Companies Act: The definition of "contribution" is aligned with Section 182 of the Companies Act, 2013, ensuring consistency in interpretation across laws.

Practical Implications:

• For Companies: Indian companies can reduce their taxable income by the amount contributed to eligible political parties or electoral trusts, but only if the contributions are made through non-cash methods.
• For Political Parties: This encourages political parties to receive contributions through traceable and transparent means, reducing the use of cash.
• Compliance Burden: Companies must ensure that contributions are made to registered political parties or electoral trusts and that proper documentation is maintained to claim the deduction.

Critical Concepts:

• Non-Cash Contributions: Contributions must be made via methods like cheques, bank transfers, or digital payments. Cash donations are explicitly excluded.
• Registered Political Party: The political party must be registered under Section 29A of the Representation of the People Act, 1951, to qualify for the deduction.
• Electoral Trust: Contributions to electoral trusts, which are entities specifically set up to distribute funds to political parties, are also eligible for deductions.

Compliance Steps:

1. Verify Eligibility: Ensure the political party or electoral trust is registered under Section 29A of the Representation of the People Act, 1951.
2. Use Non-Cash Methods: Make contributions through cheques, bank transfers, or digital payments. Avoid cash contributions.
3. Maintain Documentation: Keep records of the contribution, including proof of payment and acknowledgment from the political party or electoral trust.
4. Claim Deduction: Include the contribution amount in the company’s tax return under the appropriate section to claim the deduction.

Examples:

• Scenario 1: ABC Ltd. donates ₹10 lakh to a registered political party via a bank transfer. The company can claim a deduction of ₹10 lakh from its taxable income.
• Scenario 2: XYZ Ltd. donates ₹5 lakh in cash to a political party. This contribution is not eligible for a tax deduction under this section.

This section promotes transparency in political funding while providing a tax benefit to companies that contribute through legitimate, traceable means.