Party finances are not state secrets
Some parties are making corruption charges and some are facing corruption
charges, but they all are united in keeping their own finances as secret as
possible, away from the eyes of the very citizens they claim to speak for. The
supreme court, law commission and other authorities have repeatedly called
for mandatory financial disclosure and yet little has changed
GovernanceNow, July 1-15, 2011, pp.36-41
Jagdeep S. Chhokar[i]
Arguably, the biggest bugbear for political parties, and at the same time one of the most important and necessary pre-conditions that must be satisfied before any meaningful electoral reforms can actually take place on the ground, is financial transparency of political parties. Let us begin with an example of the bugbear that happened in 2007-08.
The income of political parties is totally exempt from income tax under section 13-A of the Income Tax Act. Assuming an overall rate of income tax to be 25 per cent, and given that the income shown in their return by the Congress and BJP in the financial year 2008-09 was Rs.496.88 crores and Rs.220.02 crores, the tax that they did not have to pay works out to Rs.124.22 and Rs.55.005 crores respectively. The income tax thus “not paid” or “not required to be paid” by just these two political parties, and in just one year, works out to Rs.179.225 crores. How much will it work out to for all the political parties put together and over several years, is left to the readers’ computations.
Assuming that the hundreds of rupees of revenue forgone by the Indian State or “We, the People”, as decided by our elected representatives in the Parliament who passed the amendment to the Income Tax Act on our behalf in 1978, it must be in the general public interest, Anumeha, a colleague then working in the Association for Democratic Reforms (ADR), filed an RTI application in February 2007 seeking copies of income tax returns of 19 political parties. As could be expected, the copies were denied. The first appeals to the appellate authorities were then filed, and also rejected, necessitating a second appeal to the Central Information Commission (CIC). The CIC invited the political parties to share their objections to making their IT returns public. A summary of the reasons given by various parties is given in Box 1.
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Box 1
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These are some of the reasons political parties have given for not
disclosing their income tax returns
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Party A
· There could not be any public interest, much less larger public interest, warranting disclosure of desired information.
· The Income Tax Department cannot divulge such confidential information to strangers and thereby become party to political maneuverings of the rival political parties.
Party B
· The Parrty is not a public authority in terms of provisions of Section 2(h) of the RTI Act and thus the basis itself of the appellant’s case is incorrect and that the RTI application is liable to be dismissed on this ground alone as baseless.
· The disclosure of Balance Sheets, Profit & Loss statement and audit reports of political parties, from which income tax returns are derived entirely, contain both personal information of the assessees as well as commercial confidence nature of information, which can harm the competitive position of a political party.
· The Income Tax Returns are submitted by the assessee to the Government in a fiduciary capacity.
· The Income Tax Returns are not public documents and it is only the respondent who can generally inspect and have certified copies of the documents.
· The disclosure of information pertaining to tax assessment order, which contains personal information such as PAN, sources of income and other business related details would cause unwarranted invasion of privacy of the assessee.
· There is no larger public interest which justifies disclosure of this information.
· The information has been sought with a political motive and for causing harm and detriment to the political parties.
· It is denied that the disclosure of information relating to political parties including assessment returns and assessment orders to general public would promote transparency and reduce the role of black money and other undesirable and illegal activities.
· The copies of the Income Tax Returns filed by Party; PAN number of Party and information regarding the fact whether Party has submitted its Income Tax Returns for the assessment years 2002-03 to 2006-07 is confidential in nature and private in character and thus cannot be disclosed.
· Information has been asked for with a political motive.
Party C
· The Party objects to the disclosure of information on the ground that the Income Tax Returns were confidential information, parting with which, will amount to infringement of certain privacy rights of the members of the political parties.
Party D
· While making a request for information, an applicant may not be required to give any reasons or any other personal details except those that may be necessary for contacting him but Section 6(2) does not give a blanket exemption to the appellant to reveal the bonafide of her/his conduct once an appeal is preferred under the RTI Act.
· A request for copies of assessment orders is motivated inasmuch as an appellant has no public knowledge of an assessment made. Incomes of political parties are exempt under Section 13A of the Income Tax Act and in the absence of any violation of Section 13A, the information sought for is frivolous and academic.
· The Returns of Income filed by the assessees under the provisions of Income Tax Act are confidential information which include details of commercial activities. These are submitted in fiduciary capacity. There is no public interest involved in the matter.
Party E
· The Applicant/Appellant is a busy body having malafide intent and that they are seeking the information for ulterior motives.
· The Applicant/Appellant has failed to come up with any substantive/cogent reasons for its requests for the information and as to what use and purpose the said information would be put to.
· The documents relating to Income Tax Returns and Assessment Orders are both personal information of the political parties and also contain commercial confidential nature of data, the disclosure of which is barred under the Right to Information Act.
· It is now a well settled proposition that Income Tax Returns filed by the assessees before Income Tax Authority are personal as well as fiduciary entrustment and thereby attract the exemptions from the Right to Information Act, 2005.
· The Income Tax Returns contain commercial information for enabling the Income Tax Department to determine the tax liability flowing from it.
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End of Box 1
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The number of times “competitive, commercial interest” appears among the reasons is worth noting. One would think, naively, that political parties are involved in competitive political activities, but their deep involvement in competitive commercial activities which they are so keen to protect is revealing. Despite the objections of the political parties, the CIC permitted the disclosure of the IT returns. While pronouncing a “speaking” order on April 29, 2008, the CIC made very significant observations about the financing and financial affairs of political parties. The oft-repeated argument that there was no public interest involved was roundly rejected. A flavor of the essence of these observations is given in Box 2.
Box 2
“There is now widespread concern about a hyphenated relationship
developing between party finance and political corruption.”
Excerpts from the central information commission order
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Para 28. Political parties are an unique institution of the modern Constitutional State. These are essentially civil society institutions and are, therefore, nongovernmental. Their uniqueness lies in the fact that in spite of being nongovernmental, political parties come to wield or directly or indirectly influence, exercise of governmental power. It is this link between State power and political parties that has assumed critical significance in the context of the Right of Information ― an Act which has brought into focus the imperatives of transparency in the functioning of State institutions. It would be facetious to argue that transparency is good for all State organs, but not so good for the political parties, which control the most important of those organs. For example, it will be a fallacy to hold that transparency is good for the bureaucracy, but not good enough for the political parties which control those bureaucracies through political executives.
Para 29. In modern day context, transparency and accountability are spoken of together ― as twins. Higher the levels of transparency greater the accountability. This link between transparency and accountability is sharply highlighted in the Preamble to the RTI Act. In T.N. Seshan, CEC of India Vs. Union of India & ors. the Apex Court referred to the Preamble to the Constitution of India and observed that the preamble of our Constitution proclaimed that we were a Democratic Republic and “democracy” being the basic feature of our constitutional set-up, there could be no two opinions that free and fair elections to our legislative bodies alone would guarantee the growth of a healthy democracy in the country. In People’s Union for Civil Liberties (PUCL) and Ors Vs. Union of India and Anr. (AIR2003SC2363), the apex court stated that it is true that the elections are fought by the political parties, yet election would be a farce if the voters are unaware of antecedents of candidates contesting elections. Their decisions to vote either in favour of ‘A’ or ‘B’ candidate would be without any basis. Such election would be neither free nor fair. In Union of India v. Association for Democratic Reforms & another (AIR 2002 SC 2112) also, the Apex Court has observed as follows:-
“To maintain the purity of elections and in particular to bring transparency in the process of election, the Commission can ask the candidates about the expenditure incurred by the political parties and this transparency in the process of election would include transparency of a candidate who seeks election or re-election. In a democracy, the electoral process has a strategic role. The little man of this country would have basic elementary right to know full particulars of a candidate who is to represent him in Parliament where laws to bind his liberty and property may be enacted.”
Para 30. The RTI Act aims at expanding accountability through transparency at all levels of governance. It is difficult to be persuaded by the argument that though political parties control the political executive ― who are their appointees ― these parties should be allowed to be insulated from the demands of transparency.
In other words, political parties be allowed to escape the obligations / norms transparency imposes, and inferentially, escape accountability, even though these parties almost always influence and, frequently control, State power through the organs of the State. That shall be an unacceptable proposition ― especially in a democracy ― as accountability is the underpinning of the actions of all stake-holders who have anything to do with State power.
Para 31. The question that additionally needs to be asked is whether the avowed purpose of the RTI Act, as set out in its Preamble ― to combat corruption ― is being achieved by allowing the finances of the political parties to remain beyond public scrutiny or even public view. There is now widespread concern about a hyphenated relationship developing between party finance and political corruption. The lack of openness and transparency in party finance is matched by the lack of adequate State regulation of such finance.
Para 32. The National Commission to Review the Working of the Constitution in its report submitted in March 2002 has recommended that the political parties as well as individual candidates be made subject to a proper statutory audit of the amounts they spend. These accounts should be monitored through a system of checking and cross-checking through the income-tax returns filed by the candidates, parties and their well- wishers. At the end of the election each candidate should submit an audited statement of expenses under specific heads.
The National Commission has further suggested that the Election Commission should devise specific formats for filing such statements so that fudging of accounts becomes difficult. Also, the audit should not only be mandatory but it should be enforced by the Election Commission.
Para 33. The Supreme Court in People’s Union for Civil Liberties Vs. Union of (AIR2003SC2363) considered the report of the Law Commission, National Commission to Review the Working of the Constitution, conclusion drawn in the report of Shri Indrajit Gupta and Ethics Manual applicable in an advance democratic country and observed that it is apparent that for saving democracy from the evil influence of criminalization of politics, for saving the election from muscle and money power, for having true democracy and for controlling corruption in politics, the candidate contesting the election should be asked to disclose his antecedents including assets and liabilities. Thereafter, it is for the voters to decide in whose favour he should cast his vote.
Para 34. In Common Cause (A Registered Society) Vs. Union of India (AIR 1996 SC 3081), Supreme Court dealt with election expenses incurred by political parties and submission of return and the scope of Article 324 of the Constitution, where it was contended that cumulative effect of the three statutory provisions, namely, Section 293A of the Companies Act, 1956, Section 13A of the Income Tax Act, 1961 and Section 77 of the Representation of the People Act, 1951, was to bring transparency in the election funding. The people of India must know the source of expenditure incurred by the political parties and by the candidates in the process of election. It was contended before the Supreme Court that elections in the country were fought with the help of money power which was gathered from black sources and once elected to power, it becomes easy to collect tons of black money, which is used for retaining power and for re-election and that this vicious circle had polluted the wellspring of democracy in the country. The Court held that purity of election was fundamental to democracy and the Election Commission could ask the candidates about the expenditure incurred by the candidates and by a political party. The Apex Court summed up the position thus:-
"...The political parties in their quest for power spend more than one thousand crore of rupees on the General Election (Parliament alone), yet nobody accounts for the bulk of the money so spent and there is no accountability anywhere. Nobody discloses the source of the money. There are no proper accounts and no audit. From where does the money come nobody knows. In a democracy where rule of law prevails this type of naked display of black money, by violating the mandatory provisions of law, cannot be permitted."
Para 35. In Common Cause (A Registered Society) Vs. Union of India (AIR 1996 SC 3081), the Apex Court has further observed that to combat this naked display of unaccounted/black money by the candidates, declaration of assets was likely to check violation of the provisions of the P.R. Act and other relevant Acts including Income Tax Act. The Apex Court did not agree that the declaration of assets would result in infringement of the right of privacy. The following observations of the Court in this context are quite relevant:-
“Similarly, with regard to the declaration of assets also, a person having assets or income is normally required to disclose the same under the Income Tax Act or such similar fiscal legislation. Not only this, but once a person becomes a candidate to acquire public office, such declaration would not affect his right or privacy. This is the necessity of the day because of statutory provisions of controlling wide spread corrupt practices as repeatedly pointed out by all concerned including various reports of Law Commission and other Committees as stated above.
Para 36. In Dr. P. Nalla Thampy Terah v. Union of India and Ors. [1985 Suppl. SCC 189], the Apex Court considered the validity of Section 77(1) of the Representations of People’s Act and referred to the report of the Santhanam Committee on Prevention of Corruption, which says:
The public belief in the prevalence of corruption at high political levels has been strengthened by the manner in which funds are collected by political parties, especially at the time of elections. Such suspicions attach not only to the ruling party but to all parties, as often the opposition can also support private vested interests as well as members of the Government party. It is, therefore, essential that the conduct of political parties should be regulated in this matter by strict principles in relation to collection of funds and electioneering. It has to be frankly recognized that political parties cannot be run and elections cannot be fought without large funds. But these funds should come openly from the supporters or sympathizers of the parties concerned.”
Para 37. These judicial pronouncements unmistakably commend progressively higher levels of transparency in the functioning of political parties in general, and their funding in particular. Quite importantly, these pronouncements by the nation’s Supreme Court were made much before the RTI Act came into being and, in a sense, even before transparency was enshrined, through the RTI Act, as an avowed objective of governance, Supreme Court delineated the evolutionary process that would culminate in the year 2005 in adoption of the historic enactment of RTI Act by India’s Parliament. The convergence of approach of the nation’s Supreme Court and its Supreme Legislature ― the Parliament ― in preparing the country to embrace the values of transparency in all aspects of governance is striking. It was their response to an idea, whose time had come. And, it is in this context that the case for transparency in political funding ― and its concomitant, the case for disclosure of Income Tax Returns of political parties ― is to be evaluated.
Para 48. Political financing and its potentiality for distorting the functioning of the government, has been the subject of wide public debate in contemporary democracies. It is recognized that political parties do need large financial resources to discharge their myriad functions. But this recognition is tinged with the apprehension that non-transparent political funding could, by exposing political parties, and through it the organs of State which come under the control or its influence, to the corrupting influence of undisclosed money, can inflict irreversible harm on the institutions of government. There is public purpose in preventing such harm to the body-politic.
Para 49. Democratic States, the world over, are engaged in finding solutions to the problem of transparency in political funding. Several methodologies are being tried such as State subsidy for parties, regulation of funding, voluntary disclosure by donors ― at least large donors ― and so on. The German Basic Law contains very elaborate provisions regarding political funding. Section 21 of the Basic Law enjoins that political parties shall publicly account for the sources and the use of their funds and for their assets. The German Federal Constitutional Court has in its decisions strengthened the trend towards transparency in the functioning of political parties. It follows that transparency in funding of political parties in a democracy is the norm and, must be promoted in public interest. In the present case that promotion is being effected through the disclosure of the Income Tax Returns of the political parties.
End of Box 2
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The CIC’s observations in April 2008 were possibly the last significant ones but certainly not the first. The first time serious attention was paid to this issue was in the Law Commission’s 170th report in 1999. In an attempt to put the issue in its proper perspective, the Law Commission made an incisive observation, “In the very scheme of things and as pointed out by the Supreme Court in its various decisions, the bulk of the funds contributed to political parties would come only from business houses, corporate groups and companies. Such a situation sends a clear message from the political parties to big business houses and to powerful corporations that their future financial well-being will depend upon the extent to which they extend financial support to the political party. Indeed most business houses already know where their interest lies and they make their contributions accordingly to that political party which is likely to advance their interest more. Indeed not sure of knowing which party will come to power, they very often contribute to all the major political parties. Very often these payments are made in black money” (Emphasis added) (Para 4.1.6.1).
The Law Commission proposed the insertion of “Section 78A (Maintenance, audit and publication of accounts by political parties)” in the Representation of the People Act, 1951. The report says, in para 4.2.1, that, “This proposal drew unanimous approval from all at the seminars as well as from several persons, parties and organisations which responded to the Law Commission's working paper. There was no dissenting voice” (Emphasis added).
The Law Commission continues, “The necessity of such a requirement was indeed emphasised by the Supreme Court in its recent decision in Gajanan Bapat v. Dattaji Meghe (1995 (5) SCC 347) where it observed pertinently as under:
"We wish, however, to point out that though the practice followed by political parties in not maintaining accounts of receipts of the sale of coupons and donations as well as the expenditure incurred in connection with the election of its candidate appears to be a reality but it certainly is not a good practice. It leaves a lot of scope for spoiling the purity of election by money influence. Even if the traders and businessmen do not desire their names to be published in view of the explanation of the witnesses, nothing prevents the political party and particularly a national party from maintaining its own accounts to show total receipts and expenditure incurred, so that there could be some accountability. The practice being followed as per the evidence introduces the possibility of receipts of money from the candidate himself or his election agent for being spent for furtherance of his election, without getting directly exposed, thereby defeating the real intention behind Explanation 1 to section 77 of the Act. It is, therefore, appropriate for the legislature or the Election Commission to intervene and prescribe by Rules the requirements of maintaining true and correct account of the receipt and expenditure by the political parties by disclosing the sources of receipts as well. Unless this is done, the possibility of purity of election being soiled by money influence cannot really be ruled out. The political parties must disclose as to how much amount was collected by it and from whom and the manner in which it was spent so that the court is in a position to determine "whose money was actually spent" through the hands of the party" (Emphasis added) (Para 4.2.3).
Para 4.2.5 of the report again reiterates, “Even in the responses received by various persons and organisations pursuant to the circulation of the 'working paper', there has been no dissenting voice.”
In view of the unanimous support the proposal received, the Law Commission went on to actually give the draft of the new section to be inserted in the Representation of the People Act, 1951. The last subsection of this proposed section, 78(A)(4) directly refers to financial transparency in political parties, when it says, “(4) Any orders passed under sub-sections (2) or (3) shall be directed to be published in the press and other media, for public information."
The National Commission to Review the Working of the Constitution (NCRWC), 2001, also deliberated on the issue of financial transparency in political parties. While “identifying the Problem Areas”, in Para 4.29, it says, “Having regard to the prevailing political scenario in the country and the hard fact that no electoral reforms can be effective without reforms in the political party system,” two of the several problem area identified to be “of immediate concern” were:
- “Problems of party funding - need for a legislation to regulate party funds - distribution and spending of party funds during non-election and election times”, and
- “Maintenance of regular accounts by the political parties - auditing and publishing - making audited accounts available for open inspection” (Emphasis added).
While commenting on the need for a law to regulate the functioning of political parties, the NCRWC has said, “The law should make it compulsory for the parties to maintain accounts of the receipt of funds and expenditure in a systematic and regular way. The form of accounts of receipt and expenditure and declaration about the sources of funds may be prescribed by an independent body of Accounts & Audit experts, created under the proposed Act. The accounts should also be compulsorily audited by the same independent body, created under the legislation which should also prepare a report on the financial status of the political party which along with the audited accounts should be open and available to public for study and inspection” (Emphasis added) (Para 4.30.4).
The NCRWC has made extensive observations in a special section on the Funding Political Parties (Para 4.35). Relevant portions of these observations are reproduced below so that the full extent of the complexities and also the import of the recommendations can be adequately appreciated.
“The problem of political funding is a complex one and there are no panaceas. Political parties need hefty contributions from companies and from other less desirable sources. The greater the contribution, the greater the risk of dependence, corruption and lack of probity in public life. The demand for transparency must be conceived as a democratic value in itself, a tool designed to avoid any wrongful influences of money in politics…Consequently, any proposals for reforms concerning political funding should revolve, among other things, around the following four main objectives:
(i) reducing the influence of money by diminishing its impact (by shortening campaigns, establishing ceilings on expenditure and limiting individual contributions);
(ii) improving the use of money by investing it on more productive activities for the sake of democracy, and not just squandering it on propaganda and negative campaigns;
(iii) stopping, or at least curtailing, as much as possible, current levels of influence peddling and political corruption; and
(iv) strengthening public disclosure and transparency mechanisms with respect to both the origin and the use of funds” (Emphasis added) (Para 4.35.1).
“At present, different Acts regulate the flow of funds to political parties both from internal as well as external sources. The Commission recommends that a comprehensive legislation providing for regulation of contributions to the political parties and towards election expenses should be enacted by consolidating such laws. The new law should aim at bringing transparency into political funding”(Emphasis added) (Para 4.35.2).
“Audited political party accounts like the accounts of a public limited company should be published yearly with full disclosures under predetermined account heads” (Emphasis added) (Para 4.35.4).
The Election Commission first recommended the maintenance of accounts by political parties and audit of these accounts in 1998. It reiterated these in the 2004 Proposed Electoral Reforms. Item 9 of Part I of the Election Commission’s recommendations says,
“The Commission considers that the political parties have a responsibility to maintain proper accounts of their income and expenditure and get them audited by agencies specified by the Commission annually. While making this proposal in 1998, the Commission had mentioned that there was strong need for transparency in the matter of collection of funds by the political parties and also about the manner in which those funds are expended by them. Although in an amendment made last year, vide the Election and Other Related Laws (Amendment) Act, 2003, a provision has been made regarding preparation of a report of contributions received by political parties in excess of Rs.20,000/-, this is not sufficient for ensuring transparency and accountability in the financial management of political parties. Therefore, the political parties must be required to publish their accounts (at least abridged version) annually for information and scrutiny of the general public and all concerned, for which purpose the maintenance of such accounts and their auditing to ensure their accuracy is a pre-requisite. The Commission reiterates these proposals with the modification that the auditing may be done by any firm of auditors approved by the Comptroller and Auditor General.
The audited accounts should be available for information of the public”(Emphasis added).
Not to be left behind, the Second Administrative Reforms Commission (ARC) also paid attention to this issue in 2007. Para 2.1.3.5.1 of the fourth report of ARC titled “Ethics in governance” says, “Political parties have a responsibility to maintain proper accounts of their income and expenditure and get them audited annually. The steps taken in the Election and Other Related Laws (Amendment) Act, 2003, following various reports mentioned in para 2.1.3.1.4 will be strengthened if this is made mandatory under law. The Election Commission has reiterated this proposal. This needs to be acted upon early. The audited accounts should be available for information of the public” (Emphasis added).
As can be seen from the above, there is complete agreement amongst all commissions that (a) political parties should be required to maintain proper accounts in predetermined account heads, (b) such accounts should be (i) audited by auditors recommended and approved by the Comptroller and Auditor General of India, and (ii) available for the information of the public.
It is with this background that the
Election Commission requested the Institute of Chartered Accountants of India (ICAI) to suggest appropriate accounting practices for political parties. It has been reported by the Press Trust of India (PTI) that the ICAI has submitted its 38-page report to the Election Commission on May 27, 2011. Some of the recommendations are reported to be that political parties should follow the accrual basis of accounting wherein they will have to report transactions on a real time basis, they should follow March 31 as uniform financial year and prepare consolidated financial statements incorporating taluka, district, and state-level party branch accounts, and that all of them should follow a common format for reporting their accounts and other financial statements. The report is also reported to have recommended that all parties must get their accounts audited by a firm of chartered accountants out of a panel of approved chartered accountants maintained by the Election Commission, and that the auditors be changed every three years. The recommendations also include publishing of the audited accounts annually and be made available on the website of the party for information and review by the concerned stakeholders and the public at large within six months of the close of the financial year. There are also recommendations for publishing of financial statements in English in leading national newspapers and in the local language in the leading newspaper in the state, and for submission of the audited financial statements to the Election Commission. While the Election Commission is reported to be yet to take a final view on the recommendations, it is hoped that the recommendations will be made mandatory, and the failure to comply with any of the recommendations should lead to automatic de-registration of the party. Sadly, the Election Commission does not yet have the power to de-register political parties and this power also needs to be given to the EC. ----------------------------------
[i] Chhokar is former professor, dean and director in-charge of IIM, Ahmedabad,and a founding member of Association for Democratic Reforms (www.adrindia.org) and National Election Watch (NEW). jchhokar@gmail.com
