Ques. No.1) What is deductibility of payments made to political parties?

Ans) To encourage more contributions towards political parties, there is a provision

of exemption from taxation under Sec 80 GGB. This section of the Income Tax
Act 1961 mainly deals with donations and contributions made by Indian
Companies towards political parties or electoral trusts.

1.)Tax Deductions under Section 80 GGB

As per Section 80GGB of the Income Tax Act, 1961, any Indian company or
enterprise that donates to a political party or an electoral trust registered in India
can claim a deduction for the amount contributed.

The political party receiving the donation must be registered under the Section 29A
of the Representation of the People Act, 1951. An electoral trust is a non-profit
company created under Section 8 of the Companies Act, 2013. An electoral trust
can receive voluntary contributions from other companies and then reallocate it to
the duly registered political parties.

2.)Rules and Conditions to Claim Section 80GGB Deductions

Section 80GGB specifies the rules and conditions related to donations being made
to political parties in India. Following are the essential points that you must
remember:

(i) Cash contributions are not allowed under Section 80 GGB. Therefore, the
respective contributions to political parties must be made through other modes of
payments such as Cheque, Demand Draft or Electronic Transfer.

(ii) There is no maximum applicable limit on the contributions made to political

parties, under Section 80 GGB of the Income Tax Act. But as per the Companies
Act 2013, companies can contribute up to 7.5% of their annual net profit (three
years average). It is necessary that the respective company discloses the amount
contributed and the name of the political party in its Profit and Loss account for the
said financial year.

(iii) If the amount has been contributed via electoral bonds, then there is no
requirement for mentioning the name of the party in the Profit and Loss Account of
the company. Only the amount paid has to be mentioned.

(iv) As per the latest guidelines, any advertisement from a company on a platform
owned by a Political Party would be considered as a contribution under Section 80
GGB. It is therefore eligible for income tax deduction. This includes social media,
magazines, newspapers, etc.

(v) There is no limit on the amount being contributed to a political party, but it is
necessary for a company to pay the amount via an acceptable route and keep a
documentary record of the same.

(vi) There are certain exceptions to the contributions made under Section 80 GGB:
 1. A Public Sector Enterprise
2. A company that has an age of three years or less.

3.) Key Points Related to Contributions Made to Political Parties in

India

If your company is contemplating contributing to a political party in India, it is

essential for you to understand a few points. Here are the key aspects that you
must remember as specified in the Income Tax Act 1961: –

(i) Any company or enterprise that is registered in India is allowed to make

contributions to any political party they wish to.

(ii) A company is allowed to make contributions to any number of political

parties that it wishes to support. All contributions made under Sec 80GGB will
be combined for the income tax deduction.

(iii) The political party that is receiving the donation must be duly registered
under Section 29A of the Representation of People Act, 1951.

(iv) The electoral trust receiving the donation amount must be duly registered
and recognized by the competent authorities.

(v) Under no circumstances are cash payments allowed under Section 80GGB.
The only acceptable modes of payment include cheques, demand draft, electronic
transfer, or a pay order towards the bank account of the political party. This is
to ensure transparency in political funding and to keep track of the money
received and spent.

(vi) The Company can claim 100% deduction against the amount donated to a
political party under section 80GGB.

Therefore, you are free to make donations to political parties as per your
preference and claim deductions in your income tax for the same. It is essential
that you keep a proper record of the amount being paid and comply with all the
regulations specified in the Income Tax Act 1961. If you do not follow the set
procedure, your claim for deduction might be rejected by the competent
authorities.
Ques. No.2) Is illegal payments are allowed as deduction?

Ans.) The Amended Section 37,

Section 37 of the Income Tax Act, 1961 provides for deduction of business
expenditure incurred wholly and exclusively for the purpose of business. An
amendment made by Finance (No. 2) Act, 1998 enabled Revenue to disallow
payments of an illegal nature.

There are some types of expenses that are directly related to operating a business,
yet are are not deductible under any circumstance.These nondeductible expenses
include:

 lobbying and political expenses

 fines and penalties, and
 illegal payments.

Lobbying and Political Expenses

No business deduction is allowed for political or lobbying expenses. These

include payments to:

 influence legislation
 help a political candiate or campaign
 attempt to influence the general public regarding elections, legislative matters,
or referendums, or
 directly communicate with a covered executive branch official to influence the
person’s official actions or positions.

Thus, for example, a business cannot deduct the cost of attending a dinner or other
event whose proceeds are used to benefit a political candidate or party.

Fines and Penalties

Fines and penalties a business pays to the government for violation of any law are
never deductible. For example, a business owner may not deduct tax penalties,
parking tickets, or fines for violating city housing codes. (IRC § 162(f).) In addition,
a business may not deduct two-thirds of any damages paid for violation of the
federal antitrust laws. (IRC § 162(g).)

Illegal Payments

For obvious reasons, illegal payments are never deductible. (IRC § 162(c).) These
include:

Bribes

Bribes paid to government officials located in the United States are not deductible.
However, bribes paid to foreign government employees are disallowed only if they
violate the Foreign Corrupt Practices Act.
Kickbacks

A kickback is a payment for referring a client, patient, or customer. The common

kickback situation occurs when money or property is given to someone to influence
a third party to purchase from, use the services of, or otherwise deal with the person
who pays the kickback. In many cases, the person whose business is being sought
or enjoyed by the person who pays the kickback is not aware of the payment.

Example: The Yard Corporation is in the business of repairing ships. It returns

10% of the repair bills as kickbacks to the captains and chief officers of the vessels
it repairs. Although this practice is considered an ordinary and necessary expense
of getting business, it is clearly a violation of a state law that is generally enforced.
These expenditures are not deductible for tax purposes, whether or not the owners
of the shipyard are subsequently prosecuted.

Drug trafficking

No deductions are allowed for payments made to traffic drugs that are illegal under
federal and/or state law. However, drug traffickers may take a deduction for the
cost of goods sold.

Ques No.3) Write notes on corporate social responsibility and deductibility in Income
Tax?

Ans.) CORPORATE SOCIAL RESPONSIBILITY (CSR) is a self-regulating process,

through which corporate link their activities with common public. The
Corporate generally using resources, whether it is natural or human to
amass big profits and through Corporate Social responsibility, they will
take social responsibility to develop local area and people living in that
area. The Corporate through Social Responsibility shall be accountable to
the itself, country and the public. The Corporate Social Responsibility also
called as Corporate Responsibility, Corporate Citizenship. Through CSR,
Corporate consider the interest of society by taking responsibility of
impact of their activities on the various stakeholders.

ADMISSIBILITY OF CSR EXPENDITURE

Whether a particular expenditure spent on CSR will be allowed under the

Income-tax Act for the company will depend upon the nature of expenditure
itself.In most of the cases which are not falling under the revenue expenditure, the
Income Tax Officer will disallow these expenses.The company which is covered
under the CSR Rules, will have to chalk out and analyse whether the expenditure to
be incurred will be done in a tax efficient manner?

To quote an example, if a company donates towards Prime Minister’s National

Relief Fund, the entire donation is allowed to be deducted from the taxable profits
but one is not sure the same company if it constructs an educational institution in a
 village near its factory, whether tax benefit would be extended, although promotion
of education is covered under the CSR activity under Schedule VII.

If we see the case laws of past years it shows ambiguity, for example in the case
of CIT Vs Infosys Technologies Ltd (2014) (360 ITR 714) the Karnatka high
court allowed the expenditure incurred for installing traffic signal by company
under social initiative. Court said the traffic signal used by its employee so it relates
to business activity hence allowed u/s 37(1)

But in the case of CIT Vs.Wipro Ltd (360 ITR 658)(kar) expenditure for
community development near its factory ,court does not find any nexus for its
business activity hence disallowed such expenditure u/s 37(1).

Section 37 of income Tax Act, 1961 is a residuary section which allows deduction
of business expenditures not covered specifically under sections 30 to 36. Since the
admissibility of CSR expenditure as business expenditure under section 37 was not
clear due to differing Court rulings, the Budget proposals were expected to clarify
the same, which it did, however not in the interest of the corporate sector.

NOTE: ANY EXPENDITURE QUALIFYING AS CSR EXPENDITURE UNDER

PROVISIONS OF SECTION 135 OF THE COMPANIES ACT, 2013, WHICH OF THE
NATURE DESCRIBED IN SECTIONS 30 TO 36 OF THE INCOME TAX ACT, 1961 SHALL
BE ALLOWED AS DEDUCTION.

Following are the examples of CSR expenditure which are deductible expenses under
provisions of Section 35 of the Income Tax Act, 1961.

Section under Income Areas of Expenditure

Tax Act, 1961
Section 35  35(1)(i) and 35(1)(iv)-Any expenditure laid out or expended
on Scientific Research related to its own business;

Deduction allowed -100% of the sum paid.

 35(1)(ii)-Any sums to an approved research association

which has as its object the undertaking of scientific research
or to an approved university, college or other institution to be
used for Scientific research;

Deduction allowed -175% of the sum paid.

 35(1) (iia)- Any sum paid to an approved company having its

main object of carrying out scientific research and
expenditure;

Deduction allowed -125% of the sum paid.

 35(1)(iii)-Any sums paid to an approved research association

which has as its object the undertaking research in social
science or statical research or to an approved university,
college or other institution to be used for research in social
science or statistical research.
 Deduction allowed -125% of the sum paid.

Section 35(2A)  Any sum paid (not being used for the acquisition of land or
building or construction of building) to an approved scientific
research association or university or college or a public
sector company or any other institution;
 To be used for scientific research undertaken under a
programme approved by prescribed authority;
 Deduction allowed -130% of the sum paid.

Section 35(2AA)  Any sum to a National Laboratory, University or an IIT or a

specified person;
 Sum to be used for scientific research undertaken an
approved programme approved by the prescribed authority;
 Deduction allowed -200% of the sum paid.

Section 35(2B)  Any expenditure incurred (not being used for the acquisition
of land or building or construction of building) on a scientific
research undertaken under a programme approved by a
prescribed authority;
 Deduction allowed -125% of the sum paid.

35AC  Any sum paid to a public sector company or a local authority

or to an association or institution approved by the National
Committee for carrying out any eligible project or scheme
mainly concerning the upliftment of rural areas;
 Deduction allowed -100% of the sum paid.

35CCA  Any sum paid to an association or institution, which has as its

object of undertaking any programme of rural development
or training of persons for implementing programmes of rural
development as approved by the prescribed authority;
 Any sum paid to the prescribed funds as notified by the
Central Government;
 Deduction allowed -100% of the sum paid.

35CCB  Any sum paid to an association or institution, which has as its

object of undertaking programme of conservation of natural
resources or of afforestation as approved by the prescribed
authority;
 Sum paid to such fund for afforestation as may be notified by
the Central Government;
 Deduction allowed -100% of the sum paid.

35CCC  Any expenditure incurred on agricultural extension project

notified by the Board
 Deduction allowed -150% of the sum paid.
35CCD  Any expenditure incurred (not being used for the acquisition
of land or building or construction of building) on any skill
development project notified by the Board;
 Deduction allowed -150% of the sum paid.

Ques No.4) Freebies to medical practitioner , is it allowable as business expenditure?

Ans.) It has been brought to the notice of the Board that some pharmaceutical and
allied health sector Industries are providing freebees (freebies) to medical
practitioners and their professional associations in violation of the regulations
issued by Medical Council of India (the ‘Council’) which is a regulatory body
constituted under the Medical Council Act, 1956.

2. The council in exercise of its statutory powers amended the Indian Medical
Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the
regulations) on 10-12-2009 imposing a prohibition on the medical practitioner
and their professional associations from taking any Gift, Travel facility,
Hospitality, Cash or monetary grant from the pharmaceutical and allied health
sector Industries.

3. Section 37(1) of Income Tax Act provides for deduction of any revenue
expenditure (other than those failing under sections 30 to 36) from the
business Income if such expense is laid out/expended wholly or exclusively
for the purpose of business or profession. However, the explanation appended
to this sub-section denies claim of any such expense, if the same has been
incurred for a purpose which is either an offence or prohibited by law.

Thus, the claim of any expense incurred in providing above mentioned or

similar freebees in violation of the provisions of Indian Medical Council
(Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be
inadmissible under section 37(1) of the Income Tax Act being an expense
prohibited by the law. This disallowance shall be made in the hands of such
pharmaceutical or allied health sector Industries or other assessee which has
provided aforesaid freebees and claimed it as a deductible expense in its accounts
against income.

4. It is also clarified that the sum equivalent to value of freebees enjoyed by the
aforesaid medical practitioner or professional associations is also taxable as
business income or income from other sources as the case may be depending on
the facts of each case. The Assessing Officers of such medical practitioner or
professional associations should examine the same and take an appropriate
action.