Donation of Political Parties May Now Subject to Scrutiny: Genuine or Bogus?

Donations made to political parties qualify for deductions under the Income Tax Act, 1961, under Section 80GGC. This provision is sometimes misused by salaried individuals who have limited avenues for tax savings, using it as a means to reduce their taxable income. However, there are also genuine contributions made to political parties that rightfully qualify for deductions. Recently, the Income Tax Department has sent notices via messages to taxpayers who have exclusively claimed deductions under Section 80GGC. Notably, the department appears to be focusing only on this particular deduction, without questioning claims under other sections like 80C, 80D, or 80DD. This selective observation has raised concerns regarding the treatment of deductions for political donations under Section 80GGC.

Here is the message content sent by the Income Tax Department to all taxpayers regarding donations under Section 80GGC.

Dear Taxpayer, Name (PANNUMBER)

It is observed that you have claimed deduction under section 80GGC of Rs  XXXXXXX in your ITR for A.Y. 2024-25. It is requested that the claim may be verified and mistake, if any, may be rectified by updating the ITR for A.Y. 2024-25 by 31.03.2025.

Warm regards

Income Tax Department

A key question arises regarding the Income Tax Department’s intent behind sending messages to all taxpayers—whether it aims to verify if deductions claimed under Section 80GGC are genuine or fraudulent. If the department is uncertain about the legitimacy of claims, it should use its internal mechanisms to identify cases of false deductions rather than sending blanket messages to all taxpayers.

Sending such messages to individuals who have made genuine donations and rightfully claimed deductions serves little purpose and only creates unnecessary fear. It raises concerns that even legitimate deductions could be questioned, requiring proof such as donation receipts, bank statements, and other supporting documents. This may discourage taxpayers from claiming rightful deductions, fearing scrutiny despite complying with tax laws.

If the message is a generic alert sent to all taxpayers, those who have valid proof to substantiate their claims need not take any action in their Income Tax Return (ITR) and can ignore the message. However, taxpayers who have falsely claimed deductions merely to save tax, without proper documentation, may consider filing an updated return. Doing so could help them avoid potential scrutiny, penalties, and interest charges that may arise if the department later challenges their claim.

After receiving these messages, many salaried taxpayers are concerned and are consulting their chartered accountants for guidance on the next steps. It appears that the mass messaging strategy may be intended to prompt taxpayers with questionable claims to revise their returns voluntarily. If this is the department’s objective, the message may serve its purpose by encouraging self-correction before formal scrutiny begins.

Looking ahead, one thing is evident—the Income Tax Department is closely monitoring donations to political parties. This suggests that in the future, deductions claimed under Section 80GGC may be subjected to stricter scrutiny, possibly leading to detailed assessments or notices. The department’s intent seems clear: political donations claimed as deductions will likely be questioned more rigorously in upcoming tax assessments.

Taxpayers who have genuinely donated and have the necessary documentation should remain prepared for potential scrutiny but need not worry. However, those who have misused this deduction as a tax-evading strategy should take proactive steps to rectify their filings before facing further action from the department. Moving forward, it is advisable to claim deductions only when backed by valid proof to avoid complications in future tax assessments.

Here is the relevant extract of Section 80GGC for taxpayers’ reference:

Deduction in respect of contributions given by any person to political parties.

80GGC. In computing the total income of an assessee, being any person, except local authority and every artificial juridical person wholly or partly funded by the Government, there shall be deducted any amount of contribution made by him, in the previous year, to a political party or an electoral trust :

Provided that no deduction shall be allowed under this section in respect of any sum contributed by way of cash.

Explanation.—For the purposes of sections 80GGB and 80GGC, “political party” means a political party registered under section 29A of the Representation of the People Act, 1951 (43 of 1951).

What Steps Should Taxpayers Take in This Situation?

In cases where political party donations are subject to scrutiny, taxpayers should take the following steps to ensure their claims are legitimate and avoid potential penalties:

1. Maintain Proper Documentation: Ensure you have valid proof for the donations made, such as receipts from the political party, bank statements, and transaction details. These documents will help substantiate your claim under Section 80GGC.
2. Review Your Tax Returns: Carefully review your previous tax returns to ensure that donations have been accurately reported and the necessary supporting documents are in place.
3. Consult a Tax Professional: If you’re uncertain about your claims or face scrutiny, it’s advisable to consult a chartered accountant or tax professional. They can help clarify the situation, assist in providing the required documentation, or help you file an updated return if necessary.
4. File an Updated Return: If you have made a mistake or misreported the donation, consider filing an updated return (under Section 139(5)) to rectify the error and avoid future penalties or interest.
5. Respond Promptly to Notices: If the Income Tax Department sends any notices regarding your donation claims, respond promptly. Address the queries by providing the necessary proof and clarifications.
6. Ensure Authenticity: If the donation was genuine, make sure all details are correct and supported by evidence. If the donation was not made or is fraudulent, it’s crucial to take corrective action by filing an updated return.

By following these steps, taxpayers can ensure that their claims are legitimate, reduce the risk of penalties, and respond effectively to any scrutiny from the Income Tax Department.