JUDGMENT

S. Muralidhar, J.

Introduction

1.1. More than four decades ago, while noting the distortion that large contributions of money made to political parties and candidates could bring about to the electoral process, the Supreme Court observed in Kanwar Lal Gupta v. Amar Nath Chawla, (1975) 3 SCC 646 (at p. 654) as under:

"The availability of disproportionately larger resources is also likely to lend itself to misuse or abuse for securing to the political party or individual possessed of such resources, undue advantage over other political parties or individuals. Douglas points out in his book called Ethics in Government at p. 72, "If one party ever attains overwhelming superiority in money, newspaper support, and (Government) patronage, it will be almost impossible, barring an economic collapse, for it ever to be defeated". This produces anti-democratic effects in that a political party or individual backed by the affluent and wealthy would be able to secure a greater representation than a political party or individual who is without any links with affluence or wealth. This would result in serious discrimination between one political party or individual and another on the basis of money power and that in its turn would mean that "some voters are denied an `equal' voice and some candidates are denied an `equal chance'".

1.2. The Supreme Court also noted that: "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."

1.3. Till the Supreme Court began actively examining the issue in a public interest litigation (PIL) instituted in 1995 by 'Common Cause', most of the registered political parties in this country, both at the national and state levels, did not file income tax returns, despite it being made mandatory under Section 139 (4B) of the Income Tax Act, 1961 ('Act'), introduced with effect from 1st April 1979. They also failed to maintain proper accounts of their income and expenditure although this was too mandatory for them to claim exemption from payment of income tax under Section 13A of the Act.

1.4. The problem persisted despite the judgment of the Supreme Court in the PIL by Common Cause. The Election Commission of India noted in its 'Guidelines on Transparency and Accountability in Party Funds and Election Expenditure' issued on 29th August 2014 that "concerns have been expressed in various quarters that money power is disturbing the level playing field and vitiating the purity of elections."

1.5. This was echoed by the Law Commission of India (`LCI') in its 255th Report on 'Electoral Reforms' when it said:

"Money, often from illegitimate sources, results in "undisguised bullying" when it is used (both authorised and unauthorised) to buy muscle power, weapons, or to unduly influence voters through liquor, cash, gifts. Currency notes come first in containers, then in truckloads, moving to wholesale/small retail forms, and finally to suitcases and in people's pockets."

1.6. Referring to a study conducted by Association for Democratic Reforms (`ADR'), the LCI noted that: "more than 75% of parties' sources are unknown, while donations over Rs.20,000 comprise only 9% of parties' funding." Further ADR's analysis of the funding of political parties for financial years 2004-05 to 2011-12 revealed that the total income of political parties from unknown sources was Rs.3,674.50 crores which constituted 75.05% of the total income of the parties.

1.7. The above introductory narrative serves as a backdrop for proceeding to examine the case on hand which is about a claim by the Indian National Congress (I) ('INC'), a political party, for exemption from paying income tax for the Assessment Year (`AY') 1994-95. The significance of this case, which has had a chequered history, lies in it being symbolic of the general lack of transparency and accountability of political parties in th