Section 80GGC Bogus Political Donations: ITAT Ahmedabad Denies Tax Deduction

Section 80GGC Bogus Political Donations: ITAT Ahmedabad Denies Tax Deduction

Facts and Issue of the Case

The case titled Rajen Jayantilal Merchant vs. Assessment Unit (ITAT Ahmedabad) relates to the assessment year 2019-20 and revolves around the taxpayer’s claim of a deduction under Section 80GGC of the Income Tax Act, 1961. The assessee, an individual taxpayer, filed his income-tax return originally on 26 October 2019, declaring a total income of ₹8,25,580. Included in his declared income computation was a claimed deduction of ₹1,50,000 under Section 80GGC for donations made to political parties. In this instance, the donation claimed was made to the Rashtriya Samajwadi Party (Secular) — which was a registered unrecognized political party (RUPP) with the Election Commission of India, entitling it prima facie to receive deductible contributions under the law.

However, the Assessing Officer (AO) reopened the assessment under Section 147 read with Section 144B of the Act on the ground that the donation was not genuine but a bogus claim to evade tax. The AO’s reopening was based on post-search enquiries into a network of 23 Registered Unrecognized Political Parties (RUPPs) in Ahmedabad, showing that donations to these parties were systematically returned to donors after deducting a percentage — essentially acting as accommodation entries. In simple terms, a contribution that should have been a true gift was instead turned into a disguised loan, with the money coming back to the donor, minus a “service charge.” Such transactions mislead the tax authorities and result in wrongful deductions.

In response to the reassessment notice, the taxpayer filed an updated return on 22 May 2023, again claiming the deduction and submitting supporting documents: the donation receipt, bank statements showing the fund transfer, and the party’s registration certificate. The taxpayer contended that all legal requirements under Section 80GGC were met — payment was made through banking channels and the political party was registered. However, the AO, supported by investigative findings about the RUPP “scam,” concluded that the transaction was non-genuine and disallowed the claimed deduction, adding the amount back into taxable income.

Observation by the Court and Tribunal

The ITAT Ahmedabad thoroughly examined the record, including the findings of the lower authorities and previous Tribunal decisions on similar issues. The Tribunal noted that the AO’s conclusion was not based on wild suspicion but investigative evidence gathered during search operations and detailed inquiries into the activities of RUPPs. Specifically, post-search inquiries revealed:

• Donations credited to the bank accounts of certain political parties were split and transferred back to corporate and individual entities.

• The parties receiving the so-called donations lacked genuine operations, maintained multiple bank accounts, and often did not participate meaningfully in political activities.

• In at least one coordinated Bench precedent (Pavan Anil Bakeri vs. ITO), it was established that funds routed into a political party’s account were later channeled back to the donor through shell companies — confirming the pattern as an accommodation entry rather than a true donation.

  
  

The Tribunal placed considerable weight on this factual backdrop. Importantly, it found that the taxpayer did not provide any new evidence beyond what the AO and CIT(A) had already examined. The lack of fresh, persuasive material to disprove the pattern of bogus transactions meant the Tribunal could not overturn the findings that the donation was non-genuine.

The ITAT also highlighted the modus operandi involved: political parties with minimal or no real political activity were allegedly used as conduits to facilitate tax evasion. These parties often returned most of the donation amount back to the donor after keeping a certain percentage as a “fee,” which is emblematic of accommodation entries — transactions entered solely to provide tax benefits without any substantive economic or charitable purpose.

Furthermore, the Tribunal observed that if the donee political entity is just a shell — even if formally registered — the taxpayer’s donation does not qualify as a genuine political contribution merely because documents like a donation receipt and bank statement exist. The evidence tested in context matters, especially where the Income Tax Department’s broader investigation uncovers systematic misuse of the tax benefit.

Law Applicable

Section 80GGC of the Income Tax Act allows a 100% deduction for contributions made by individuals (and by persons other than companies; Section 80GGB covers companies) to a political party or an electoral trust — provided the donation is made through non-cash modes such as cheque, bank transfer (NEFT/RTGS), or online banking. A political party must be registered under Section 29A of the Representation of the People Act, 1951, to qualify.

However, the legal framework also presumes that the transaction is bona fide and genuine. In other words, the donor must ensure that the donation is not routed back or used to defraud legitimate tax, and that the political party receiving the donation is engaging in legitimate political activities. If the Income Tax Department demonstrates that the contribution is part of a bogus or artificial transaction, the deduction can be denied. This aligns with broader principles preventing tax avoidance and misuse of statutory deductions.

Prior Tribunal decisions have consistently held that the existence of a valid receipt, PAN, and banking evidence alone may not be sufficient if the donation is merely a vehicle for money laundering or accommodation entry. Once the Department establishes a prima facie case of a bogus arrangement, the burden shifts to the taxpayer to prove the authenticity and substance of the donation.

Conclusion by the Tribunal

• After careful analysis, the ITAT dismissed the appeal in entirety, upholding both the Assessing Officer’s reassessment order and the Appellate Commissioner’s decision. The Tribunal ruled that:

• The donation to the Rashtriya Samajwadi Party (Secular) was not genuine but part of a scheme of accommodation entries intended to reduce taxable income.

  
  

• The taxpayer failed to offer any fresh or compelling evidence to challenge the factual findings based on detailed investigations.

• As a result, the deduction under Section 80GGC for ₹1,13,51,000 (aggregate across parties involved) was appropriately disallowed.

  
  

• The Tribunal’s decision reinforces that claiming a deduction under Section 80GGC requires not only compliance with technical requirements but also substantive genuineness. Mere paperwork is insufficient where the reality behind the transaction indicates tax evasion. This case serves as a strong caution to taxpayers considering political donation claims: ensure the recipient’s legitimacy and the transaction’s substance, or face reassessment, denial of deductions, and potential penalties.