New Delhi: Allowing unlimited corporate contributions to political parties “authorises unrestrained influence of companies on the electoral process”, the Supreme Court observed Thursday, as it struck down the electoral bonds scheme as unconstitutional.
The Finance Act, 2017, made several amendments to the Companies Act, 2013, Income Tax Act, 1961, Reserve Bank of India Act, 1934, the Representation of the People Act, 1951, and the Foreign Contribution Regulation Act, 2010. These changes were brought in to allow contributions/donations through electoral bonds.
Before the 2017 amendment paving the way for electoral bonds, a company could not donate more than 7.5 per cent of its average profit of the previous three years to a political party. The amendment removed the limit on the amount that could be contributed to political parties.
Petitioners against the scheme argued that the amendment was manifestly arbitrary as it allowed companies, including loss-making companies, to contribute unlimited amounts to political parties. They argued that the law now facilitated the creation of shell companies solely for the purposes of contributing funds to political parties.
The court observed that one of the reasons for which companies may contribute to political parties could be to secure income tax benefit. However, it noted that companies have been contributing to political parties much before the Indian laws in 2003 exempted contributions to political parties.
It then observed: “Contributions are made for reasons other than saving on the income tax. The chief reason for corporate funding of political parties is to influence the political process which may in turn improve the company’s business performance.”
The court then asserted that “unlimited contribution by companies to political parties is antithetical to free and fair elections because it allows certain persons/companies to wield their clout and resources to influence policymaking”.
“This is violative of the principle of free and fair elections and political equality captured in the value of “one person one vote”, it observed.
The court noted that when the proposal to amend the Companies Act, 2013, was mooted by the government in 2017, the Election Commission of India had opposed the amendment and suggested that the government reconsider its decision on the ground that it would open up the possibility of creating shell companies.
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On amendments to various laws
The court also asserted that the amendment must be read along with other provisions on financial contributions to political parties under the Representation of the People Act and the Income Tax Act — which do not place a cap on the contributions that can be made by an individual.
It said that the amendment to the Companies Act removing the cap on the contributions which can be made by a company seeks to equalise an individual and a company for the purposes of electoral funding.
However, the court emphasised on the fact that the ability of a company to influence the electoral process through political contributions is much higher when compared to that of an individual.
It observed: “A company has a much graver influence on the political process, both in terms of the quantum of money contributed to political parties and the purpose of making such contributions. Contributions made by individuals have a degree of support or affiliation to a political association.”
The court asserted that the contributions made by companies are purely business transactions, made with the intent of securing benefits in return.
It noted that before the amendment, companies could only contribute a certain percentage of the net aggregate profits. The erstwhile provision, it said, classified between loss-making companies and profit-making companies for the purpose of political contributions and for good reason.
“The underlying principle of this distinction was that it is more plausible that loss-making companies will contribute to political parties with a quid pro quo and not for the purpose of income tax benefits. The provision (as amended by the Finance Act, 2017) does not recognise that the harm of contributions by loss-making companies in the form of quid pro quo is much higher,” it explained.
The court, therefore, declared that the amendment was “manifestly arbitrary”.
It said that this was because it treated political contributions by companies and individuals alike, permitted unregulated influence of companies in the governance and political process violating the principle of free and fair elections, and treated contributions made by profit-making and loss-making companies to political parties alike.
On donor privacy
The court ruled that the right to information of the voter includes the right to information of financial contributions to a political party because of the influence of money in electoral politics and governmental decisions.
After ruling that the scheme violated the right to information of the voter, the court went on to test whether this infringement was “justified”.
One of the defences for this was the Centre’s submission that anonymity was important to ensure donor privacy, and to protect the contributor’s informational privacy to political affiliation, so that the donor is not harassed if they don’t contribute to a particular party.
The court was, therefore, considering whether the right to information of voters could be restricted on the ground of donor privacy. It then explained that privacy is not limited to “private” actions and decisions such as the choice of a life partner, procreation and sexuality.
The Income Tax Act, before the amendment, mandated that the political party must maintain a record of contributions more than Rs 20,000. The 2017 amendment created an exception for contributions made through electoral bonds, and said that political parties are not required to maintain a record of any contribution received through electoral bonds.
Further, before the amendment, the Representation of the People Act mandated the political party to prepare a report with respect to contributions more than Rs 20,000 from a person or company in a financial year. However, the 2017 amendment said the political party is now not required to include contributions received by electoral bonds in its report.
The Centre had also pointed out that Clause 7(4) of the electoral bonds scheme states that the information furnished by the buyer shall be treated as confidential by the authorised bank. The bank has to disclose the information when it is demanded by a competent court or upon the registration of a criminal case by a law enforcement agency.
The Centre had said at the time that this clause balances the right to information of the voter and the right to informational privacy of the contributor.
On right to privacy of political affiliation
In its judgement, the court emphasised on the impact of the lack of privacy of political affiliation, saying that it would be “catastrophic”, and ruled that the Constitution guarantees a “right to informational privacy of political affiliation”.
However, among other things, the court pointed out that under the current scheme, it is still open to the political party to coerce persons to contribute. It, therefore, observed that the argument of the Centre that the electoral bonds scheme protected the confidentiality of the contributor akin to the system of secret ballot was “erroneous”.
The court then ruled that the amendments to the Income Tax Act and the Representation of the People Act were unconstitutional. It observed that Clause 7(4) of the scheme is “not the least restrictive means to balance the fundamental rights” — the right to information and the right to privacy in this case. This is a test that courts employ to balance two fundamental rights.
The court felt that the alternative measure — of Rs 20,000 threshold for disclosure — was a better alternative and imposed lesser restrictions on fundamental rights.
The court also noted that the amended provision in the Companies Act mandates the disclosure of “total” contributions made by political parties. However, the 2017 amendment deleted the mandate of disclosing the particulars of contributions.
This, it ruled, violates the right to information of the voter since they would not possess information about the political party to which the contribution was made, which is necessary to identify corruption and quid pro quo transactions in governance.
It asserted that such information was also necessary for exercising an informed vote.
(Edited by Nida Fatima Siddiqui)
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