Source: Supreme Court 

Why in News?

Recently, a bench of Chief Justice of India (CJI) D Y Chandrachud and Justices Sanjiv Khanna, B R Gavai, J B Pardiwala, and Manoj Misra declared Electoral Bond Scheme unconstitutional.

• The Supreme Court gave this judgment in the case of Association for Democratic Reforms & Anr. v. Union of India & Ors.

What is the Background of Association for Democratic Reforms & Anr. v. Union of India & Ors. Case?

• Background of the Challenge:
  • The petitioners initiated proceedings under Article 32 of the Constitution of India, 1950 (COI), contesting the validity of the Electoral Bond Scheme and provisions within the Finance Act 2017.
  • These challenged amendments impacted various laws, including the Reserve Bank of India Act, 1934 (RBI Act), the Representation of the People Act, 1951, the Income Tax Act, 1961 (IT Act), the Companies Act, 2013 and the Finance Act, 2017.
• Amendments to the Reserve Bank of India Act, 1934:
  • Previously, Section 31 of the RBI Act, 1934 restricted the issuance of financial instruments for payment solely to the RBI or entities authorized by it.
  • The Finance Act, 2017 altered this by introducing Section 31(3), enabling the Central Government to authorize scheduled banks to issue electoral bonds.
• Evolution of Corporate Contributions Regulation:
  • Initially, the Companies Act, 1956 lacked provisions regulating corporate contributions to political parties.
  • The Companies Act 2013, mirroring Section 293A, increased the cap to 7.5% of average net profits and mandated Board resolutions for contributions, alongside disclosure requirements.
  • Section 182 of the Companies Act, 2013 substantively incorporated the provisions of Section 293-A of the 1956 Act, as amended in 1985.
  • Section 182 enables a company to contribute any amount directly or indirectly to any political party.
  • The provision bars a Government company and a company which has been in existence for less than three financial years from contributing to a political party.
• The Finance Act, 2017 further altered corporate funding regulations, removing caps and modifying disclosure obligations while adding restrictions on contribution methods.
  
  • The first proviso to Section 182(1) which prescribed a cap on corporate funding was omitted by Finance Act, 2017.
• Tax Exemption for Political Parties:
  • The Taxation Laws (Amendment) Act, 1978 introduced Section 13A to the IT Act, 1961 exempting political parties' income from contributions and investments from income tax.
    • To qualify for exemption, political parties had to maintain proper accounts, record voluntary contributions exceeding twenty thousand rupees, and undergo annual auditing.
• Incentivizing Contributions:
  • The Election and Other Related Laws (Amendment) Act, 2003 added Sections 80GGB and 80GGC to the IT Act, making contributions to political parties tax-deductible.
    • This move aimed to encourage contributions through transparent channels like cheques.
• Transparency Measures:
  • The Finance Act, 2017 amended Section 13A, allowing political parties to receive contributions via electoral bonds without disclosure.
    • However, parties had to report contributions exceeding twenty thousand rupees to the Election Commission of India (ECI).
• RBI and ECI Concerns
  • The RBI expressed concerns over electoral bonds, citing potential currency misuse and money laundering risks.
  • The ECI criticized the lack of transparency and recommended reintroducing caps on corporate funding to prevent misuse. Despite objections, the Electoral Bond Scheme was implemented in 2018, subject to ongoing constitutional challenges.

What were the Court’s Observations?

• Conclusions of the Court:
  • The Electoral Bond Scheme, certain sections of the Representation of the People Act 1951, the Companies Act, and amendments therein, violate Article 19(1)(a) and are unconstitutional.
  • The removal of the proviso to Section 182(1) of the Companies Act, allowing unlimited corporate contributions to political parties, is arbitrary and breaches Article 14.
• Directive for Disclosure:
  • The Court mandated the disclosure of information regarding political party contributions under the Electoral Bond Scheme to uphold its ruling.
  • SC said that Political parties are required to provide detailed particulars of donors, bond amounts, and credits received against each bond.
• Issuance of Directives:
  • The Court issued directives including the cessation of Electoral Bond issuance, submission of purchase details by SBI, disclosure of political party recipients, publication by ECI, and return/refund of unencashed bonds.
  • The court said that the issuing bank shall herewith stop the issuance of Electoral Bonds.