Introduction
In a crucial development that could significantly alter India’s political funding framework, the Supreme Court has issued notice on a writ petition challenging the constitutional validity of the Income Tax Act provision allowing political parties to receive cash donations up to ₹2000. The petition argues that such cash contributions lack transparency, enable anonymity, and create discrepancies between income tax filings and contribution reports submitted by political parties.
The bench of Justice Vikram Nath and Justice Sandeep Mehta sought responses from the Election Commission of India (ECI) and other respondents after hearing submissions from Senior Advocate Vijay Hansaria, who stressed the need for transparency in political funding as recognized in the landmark Electoral Bonds judgment.
This SEO post provides a detailed breakdown of the case, the legal challenge, arguments, and the potential implications for political financing in India.
Background: The Legal Challenge to Cash Donations under Section 13A(d)
The petition, filed by Dr. Khem Singh Bhati, challenges Section 13A(d) of the Income Tax Act, 1961, which excludes from “income” any voluntary contributions received by political parties:
- through electoral bonds, and
- banking channels,
- and in cash up to ₹2000.
Under this provision, political parties can receive cash donations up to ₹2000 without disclosing PAN details, bank account information, or contributor identity. Such cash donations are also entitled to tax exemption, provided that the party complies with disclosure norms for larger contributions.
The petitioner contends that in an era where India has witnessed a massive shift towards digital payments, especially through UPI, there is no valid justification for permitting cash donations of ₹2000 at all.
Supreme Court Proceedings: Transparency is a Fundamental Electoral Right
During the hearing, Senior Advocate Vijay Hansaria argued that the right to transparent political funding is now part of the constitutional framework, as recognised in:
- the Electoral Bonds Case (2024), and
- the Court’s repeated emphasis on cleansing the electoral process.
Hansaria submitted that allowing cash donations up to ₹2000 defeats this objective, especially given that:
- Tax exemption to political parties is based on transparency and disclosure
- PAN and bank details are mandatory for contributions above ₹2000
- Yet, through the cash route, significant chunks of party finances remain opaque
The bench agreed that the matter raises important issues and issued notice to all relevant authorities.
Key Concerns Raised in the Petition
The petition highlights several systemic loopholes that enable opaque funding through cash:
1. ‘Huge discrepancy’ between ITRs and contribution reports
The petitioner alleges that many political parties declare nil contributions or very low contributions in Form 24A by misclassifying income as:
- Cash membership fee
- Miscellaneous collections
- Voluntary donations below ₹2000
This practice allows political parties to:
- Avoid transparency
- Escape the obligation to disclose donor details
- Circumvent Section 29C of the Representation of People Act, 1951
2. Cash donations allow anonymity
The plea argues that cash contributions—however small individually—can cumulatively form crores of rupees, effectively becoming a loophole that protects:
- undisclosed donors,
- illicit cash transactions, and
- unregulated election funding.
3. The digital payments boom invalidates the rationale
According to the petition, the Indian digital payments ecosystem has evolved to a point where allowing cash contributions is irrational.
Some key data highlighted:
- Over ₹24.03 lakh crore worth of UPI transactions took place in June 2025 alone.
- Small traders, vendors, NGOs, and even religious institutions now accept digital payments for micro-transactions.
Thus, maintaining a cash exemption contradicts the government’s own push toward transparency and digitalisation.
Reliefs Sought in the Petition
The petitioner seeks far-reaching reforms. The primary prayers include:
1. Declaration of Unconstitutionality
Strike down Section 13A(d) of the Income Tax Act as:
- arbitrary,
- unreasonable, and
- violative of the principles of free and fair elections.
2. Directions to the Election Commission of India
The petition requests detailed scrutiny and enforcement by the ECI:
a. Scrutinise Form 24A contribution reports of all national and state parties.
b. Recover undeclared contributions where PAN/address details are missing.
c. Under Paragraph 16A of the Election Symbols Order, 1968, issue notices to defaulting parties for non-compliance—possibly leading to suspension or withdrawal of election symbols.
d. Mandate independent audits of political party accounts.
3. Ban on Cash Donations Altogether
Direct the ECI to impose, as a condition for registration and symbol allotment:
“No political party shall receive any amount in cash.”
4. Scrutiny of ITRs and Audit Reports of Last Five Years
The petitioner urges the Central Board of Direct Taxes (CBDT) to:
- examine income tax returns filed by political parties,
- review audit reports under Sections 65, 142, and 143 of the Income Tax Act, and
- initiate proceedings for possible tax, penalty, and prosecution.
Why This Case Matters: Broader Implications for Political Funding in India
1. Could Close a Major Loophole in Party Finance
The ₹2000 cash donation exemption is one of the last remaining channels for anonymous political funding. If struck down, political donations may become almost fully traceable.
2. Strengthens Electoral Transparency
Transparent funding is essential for free and fair elections. Eliminating cash donations ensures:
- accountability
- reduction of black money
- accurate audit trails
3. Aligns with Digital India Vision
The petition aligns with the government’s digital payment mission. With near-universal digital payment penetration, cash exemptions appear outdated.
4. Greater Accountability of Political Parties
Ensuring compliance with Form 24A and audit norms strengthens the institutional framework governing political entities.
5. Potential Increase in Tax Scrutiny
Political parties may face:
- penalty proceedings,
- tax reassessments, or
- disallowance of exemptions
if found to be misusing the cash exemption.
Case Title
KHEM SINGH BHATI v. ELECTION COMMISSION OF INDIA
W.P.(C) No. 1076/2025
Conclusion
The Supreme Court’s decision to issue notice in the plea challenging the income tax exemption for cash donations up to ₹2000 marks an important step in India’s ongoing battle for transparency in political funding. As digital payments dominate India’s economic landscape, the continued allowance of cash contributions has increasingly come under scrutiny.
If the Court ultimately strikes down Section 13A(d) or directs stricter enforcement, it could reshape the financial practices of political parties and bring India closer to clean, accountable, and transparent electoral finance.
This case will be closely watched in the coming months, as its outcome may redefine the rules of political funding and strengthen democratic processes in India.
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