Transparency in political funding is once again under the Supreme Court’s scrutiny. On 24 November 2025, the Supreme Court issued notice on a public interest writ petition challenging the income tax exemption for political parties on cash donations up to ₹2000, as permitted under the Income Tax Act. The petition also alleges major discrepancies between the contribution reports and income tax returns (ITRs) of several political parties and demands a deeper audit to ensure accountability.
The bench comprising Justice Vikram Nath and Justice Sandeep Mehta sought responses from the Election Commission of India (ECI) and the Union Government, signalling judicial interest in revisiting the transparency framework previously debated in the Electoral Bonds case.
This article breaks down the petition, legal issues, statutory background, and overall implications for political finance reform.
Background: Why Are Cash Donations Significant?
Under the existing provisions of the Income Tax Act, 1961, political parties enjoy tax exemptions under Sections 11 and 13A for voluntary contributions. While the 2017 amendments introduced electoral bonds to reduce cash-based anonymous donations, the law still allows political parties to accept cash donations up to ₹2000 per person.
Political finance reform advocates argue that this limit is widely misused because:
- Multiple small cash donations can be shown under different names.
- Parties often report significant cash income without explaining the source.
- Cash transactions remain largely unverifiable, enabling opaque funding.
The petition filed before the Supreme Court seeks to address these long-standing loopholes.
What the Petition Seeks
The petitioner has made three key prayers:
1. Strike down or amend the provision permitting cash donations up to ₹2000
The plea challenges the legality of continuing income tax exemption for political parties on such cash contributions. It argues that cash transactions:
- Enable manipulation of accounting records,
- Encourage untraceable donations, and
- Violate the constitutional mandate of free and fair elections.
2. Restrain political parties from receiving any amount in cash
This would mean a complete shift toward digital and traceable donation mechanisms. Several countries already mandate this approach to prevent black-money-backed political influence.
3. Direct scrutiny of political parties’ ITRs for the last 5 years
The petitioner claims a “huge discrepancy” between what political parties report to the Income Tax Department and what they disclose to the Election Commission of India under Section 29C of the Representation of the People Act.
A multi-agency audit, therefore, becomes crucial for transparency.
Bench Issues Notice: Significance of Supreme Court Intervention
The issuance of notice by the bench of Justice Vikram Nath and Justice Sandeep Mehta indicates that the Court finds merit in examining:
- Whether the current tax exemptions enable misuse,
- Whether cash donation limits should be lowered or abolished, and
- Whether political party funding must undergo stricter regulatory supervision.
In the aftermath of the landmark Supreme Court ruling that struck down Electoral Bonds, political finance reform is a top national concern. Courts have repeatedly emphasized:
- The voter’s right to information,
- Transparency in campaign financing, and
- The need to curb the use of black money in elections.
This case can become the next major milestone in India’s journey toward electoral transparency.
Legal Issues Involved
1. Whether income tax exemption on cash donations up to ₹2000 violates Article 14
The petition argues that the provision discriminates between:
- Ordinary taxpayers who must provide detailed financial information, and
- Political parties who enjoy broad exemptions despite receiving massive contributions.
2. Whether cash donations defeat the purpose of transparency laws
The Supreme Court has repeatedly held that transparency in funding is necessary for voters to make informed choices. Cash contributions prevent such transparency.
3. Whether the Election Commission has adequate regulatory tools
The plea indirectly questions the ECI’s effectiveness in detecting discrepancies in party accounts. The Court may examine:
- Whether the ECI has statutory power to conduct audits,
- Whether the Central Government should revise reporting norms, and
- Whether there should be a unified system linking ITRs and contribution reports.
4. Whether political parties, as public institutions, must follow stricter accountability frameworks
In various judgments, the Supreme Court has acknowledged that political parties play an essential role in governance. Transparency in their finances is therefore a matter of public interest.
Statutory Context
Section 13A, Income Tax Act
Allows tax exemption for registered political parties, subject to:
- Maintaining proper books of accounts,
- Filing returns on time,
- Ensuring that no donation exceeding ₹2000 is received in cash.
Section 29C, Representation of the People Act, 1951
Mandates political parties to submit contribution reports to the ECI for donations above ₹20,000.
The alleged discrepancy arises because parties often split large cash donations into multiple entries under ₹2000 to avoid disclosure.
Arguments Likely To Be Raised
Petitioner’s Position
- Cash donation allowance is being misused.
- Anonymous transactions undermine electoral fairness.
- Reports filed before ECI and ITD reveal glaring inconsistencies.
- Complete ban on cash donations is essential for transparency.
Respondents’ Expected Counter-Arguments
The Union Government and political parties may argue that:
- Smaller donors, especially rural contributors, still rely on cash.
- The ₹2000 limit already restricts large anonymous contributions.
- Abolishing cash donations might disproportionately affect small regional parties.
- Additional reforms (such as digital receipts) may suffice.
ECI’s response will be crucial, given its central role in overseeing political financing.
Implications of the Case
If the Supreme Court eventually rules in favor of the petitioner, India could see:
1. End of cash donations to political parties
This would be transformational—bringing all contributions into digital and traceable systems.
2. Mandatory cross-verification of ITRs and ECI reports
A structural audit could expose discrepancies, inflows of unaccounted money, and improper financial reporting.
3. Better oversight of political party finances
Parties may need to adopt:
- Real-time disclosure systems,
- Transparent accounting tools,
- Internal audit mechanisms aligned with global standards.
4. Acceleration of political finance reforms after Electoral Bonds verdict
This case could become the next major judicial intervention strengthening electoral democracy.
Conclusion
The Supreme Court’s decision to issue notice on the plea challenging the income tax exemption for political parties on cash donations up to ₹2000 is a significant development in India’s legal and political landscape. The petition raises foundational questions about transparency, accountability, and the constitutional principles governing elections.
At a time when political funding is under nationwide scrutiny, this case could help redefine norms around electoral finance, curb potential misuse of cash transactions, and reinforce the voter’s right to information. The responses from the Election Commission and the Union Government will shape the future trajectory of reforms in this crucial area.
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