Association for Democratic Reforms & Anr v. Union of India & Ors

1. Case Details

Case Name: Association for Democratic Reforms & Anr v. Union of India & Ors
Citation: 2024 INSC 113; [2024] 2 SCR 420[1]
Court: Supreme Court of India (Constitution Bench)
Bench: Dr. D.Y. Chandrachud CJI (judgment author), B.R. Gavai J., J.B. Pardiwala J., Manoj Misra J., Sanjiv Khanna J.
Date of Judgment: 15 February 2024
Area of Law: Constitutional Law, Electoral Law, Administrative Law[2]

2. Relevant Statutes and Key Provisions

The constitutional challenge concerned the Electoral Bond Scheme, 2018, and amendments introduced through the Finance Act, 2017, to four underlying statutes: the Reserve Bank of India Act, 1934,[3] the Representation of the People Act, 1951,[4] the Income Tax Act, 1961,[5] and the Companies Act, 2013.[6] The principal constitutional provisions engaged were Articles 14 and 19(1)(a) of the Constitution of India,[2] particularly the voter’s right to information and the constitutional commitment to free and fair elections.

3. Facts and Issues

The Finance Act, 2017, introduced the Electoral Bond Scheme along with statutory amendments, creating a new framework for political financing in India. The Scheme created bearer instruments issued by the State Bank of India (SBI), carrying no name of buyer or payee, redeemable only by registered political parties within fifteen days of purchase.[1]

The Finance Act amended four pre-existing acts:

Section 135: Amended the Reserve Bank of India Act, 1934, to permit SBI to issue these instruments.[3]
Section 137: Amended Section 29C of the Representation of the People Act, 1951, to exempt electoral bond contributions from mandatory disclosure.[4]
Section 11: Amended Section 13A(b) of the Income Tax Act, 1961, providing the same tax exemption without disclosure.[5]
Section 154: Removed the 7.5% net profit cap on corporate donations under Section 182(1) of the Companies Act, 2013.[6]

Both the Reserve Bank of India and the Election Commission of India (ECI) had formally raised objections to the Scheme before it was notified. The ECI specifically warned that removing the corporate donation cap would enable shell companies to be created solely for political funding.[1] Empirical data revealed that 94% of bonds purchased were in the ₹1 crore denomination, indicating corporate origin, and the ruling party at the Centre received 57% of total contributions through the Scheme.[1] The petitioners, led by the Association for Democratic Reforms, challenged the Scheme and amendments under Article 32 of the Constitution, leading to a reference to a five-judge Constitution Bench under Article 145(3).[2]

Primary Issues Framed by the Court:
Issue (a): Whether unlimited corporate funding to political parties, as enacted by the amendment to Section 182(1) of the Companies Act, 2013,[6] infringes the principle of free and fair elections and violates Article 14 of the Constitution.[2]
Issue (b): Whether the non-disclosure of contributions under the Electoral Bond Scheme and impugned amendments to Section 29C of the Representation of the People Act, 1951,[4] Section 182(3) of the Companies Act, 2013,[6] and Section 13A(b) of the Income Tax Act, 1961,[5] violate the right to information of citizens under Article 19(1)(a) of the Constitution.[2]

4. Arguments of the Parties

Arguments of the Petitioners:
The petitioners, represented by senior counsel including Mr. Prashant Bhushan and Mr. Kapil Sibal, mounted their challenge on constitutional and empirical grounds.[1] They argued that the voter’s right to information about political funding flows directly from Article 19(1)(a),[2] building on prior holdings in Union of India v. Association for Democratic Reforms[7] and PUCL v. Union of India,[8] which recognized that an informed vote is a prerequisite for free and fair elections. The anonymity embedded in the Scheme directly defeated this right by preventing voters from assessing potential quid pro quo arrangements between large donors and policy decisions.[1]

The petitioners contended that the Scheme granted only de jure, not de facto, anonymity since political parties could ascertain donor identities through the physical delivery of bonds, especially given that 94% were purchased in the ₹1 crore denomination.[1] Even accepting black money reduction as a legitimate state aim, they argued that non-disclosure was not the least restrictive means available, as alternatives such as time-delayed or post-election disclosures existed.[1] Finally, the removal of the 7.5% net profit cap on corporate donations was challenged as manifestly arbitrary under Article 14[2] for equating companies with individuals and removing the distinction between profit-making and loss-making companies.[1]

Arguments of the Respondents (Union of India):
The Union of India, represented by the Attorney General and Solicitor General, defended the Scheme on three grounds.[1] The primary justification offered was the shift from a cash-based system to regulated banking channels: Know Your Customer (KYC) compliance requirements, a 15-day validity window, and mandatory SBI processing collectively improved transparency relative to the pre-existing regime.[1]

The Union argued that donor anonymity protects political affiliation, which constitutes informational privacy under Justice KS Puttaswamy (Retd) v. Union of India,[9] and that Clause 7(4) of the Scheme, permitting disclosure to courts and law enforcement, provided an adequate balance between competing rights.[1] Lastly, the Union submitted that the Scheme constituted economic policy, warranting judicial restraint and deference to legislative judgment on complex matters of electoral financing.[1]

5. Critical Observations

The Court’s double proportionality standard represents a significant doctrinal development in how Indian courts resolve right-versus-right conflicts.[1] However, the Scheme served as an easy test: Clause 7(4) fails the suitability prong for the voter’s right at step one, since absolute non-disclosure can never serve the purpose of informing voters.[1] A measure that extinguishes one right at the threshold did not require a four-prong balancing exercise to strike down.[1]

Additionally, the Finance Act, 2017’s validity as a Money Bill under Article 110 of the Constitution[2] remains pending before a 7-judge bench in Rojer Mathew v. South Indian Bank Ltd.[10] Every impugned amendment came through that Act. If it falls there, the proportionality analysis becomes academic. While the practical consequences of this judgment have already materialized, the legislative route that enabled the Scheme in the first place is not constitutionally settled.[1]

6. Judgment and Ratio Decidendi

The Constitution Bench unanimously struck down the Electoral Bond Scheme, the proviso to Section 29C(1) of the Representation of the People Act, 1951,[4] Section 13A(b) of the Income Tax Act, 1961,[5] and Section 182(3) of the Companies Act, 2013,[6] as violative of Article 19(1)(a) of the Constitution.[2] The Court also declared the deletion of the first proviso to Section 182(1) of the Companies Act, 2013,[6] arbitrary and violative of Article 14.[1]

The Court extended the voter’s right to information previously established in Union of India v. Association for Democratic Reforms[7] and PUCL v. Union of India[8] in the context of candidate disclosures to encompass political party funding.[1] Reasoning that under the Tenth Schedule[2] and the Election Symbols (Reservation and Allotment) Order, 1968, political parties exercise decisive control over how elected members vote in the legislature, the Court held that party funding is at least as electorally relevant as a candidate’s personal background.[1]

The Scheme provided only selective anonymity vis-a-vis the public, not vis-a-vis the receiving political party, as parties could ascertain donor identities through physical delivery of bonds or cross-referencing, defeating the stated justification of protecting donors from rival party retaliation.[1] To resolve the conflict between two fundamental rights (the voter’s right to information and the donor’s right to informational privacy),[2] the Court formally adopted the double proportionality standard applying the four-prong proportionality analysis from both rights’ perspectives. Clause 7(4) satisfied the suitability prong for informational privacy but failed it for the right to information.[1] The measure did not balance the two rights; it extinguished one.[1]

Furthermore, the deletion of the first proviso to Section 182(1) of the Companies Act, 2013,[6] was held manifestly arbitrary under Article 14[2] for two reasons: it equates companies and individuals for political contribution purposes despite the categorically greater capacity of companies to distort electoral outcomes; and it makes no distinction between profit-making and loss-making companies, removing the safeguard enacted to deter shell companies from entering political finance.[1]

Ratio Decidendi:
The ratio decidendi establishes that the voter’s right to information about political funding is a facet of Article 19(1)(a);[2] this right cannot be extinguished by measures that serve only one side of a two-rights conflict; and corporate political contributions carry a degree of electoral influence that places them in a categorically different position from individual donations.[1]

7. Obiter Dicta

Beyond the ratio, the Court made several observations not strictly necessary for its decision:[1]

1. Potential for Quid Pro Quo: The Court noted that financial contributions to political parties carry the inherent potential for quid pro quo arrangements, whereby donors expect policy decisions to reflect their interests.[1]

2. Corporate vs. Individual Identity: The Court cited Justice Stevens’ dissent in the United States Supreme Court decision Citizens United v. Federal Election Commission[11] for the proposition that corporations and natural persons occupy categorically different positions in electoral finance.[1]

3. Basic Structure Doctrine: The Court suggested that free and fair elections form part of the basic structure of the Constitution, meaning no amendment could authorize a scheme that fundamentally distorts electoral competition.[1] This remains obiter, as the Scheme was struck down on Article 19(1)(a) and Article 14 grounds alone.[2]

8. Final Decision and Operative Directions

The Court issued five operative directions on 15 February 2024:[1]

1. Issuance Halt: SBI was directed to immediately stop issuing electoral bonds.[1]

2. Disclosure of Purchase Details: SBI was directed to submit complete details of all bonds purchased since the interim order of 12 April 2019 to the Election Commission of India within three weeks.[1]

3. Publication of Data: The ECI was directed to publish the submitted information on its official website within one week of receipt.[1]

4. Unencashed Bonds: Political parties were directed to deposit details of bonds received but not yet encashed.[1]

5. Remittance to Relief Fund: Bonds purchased but not yet encashed were to be returned to SBI, which would then remit the proceeds to the Prime Minister’s National Relief Fund.[1]

References

[1] Association for Democratic Reforms & Anr v. Union of India & Ors, 2024 INSC 113; [2024] 2 SCR 420 (Supreme Court of India).
[2] INDIA CONST. art. 14, 19(1)(a), 32, 110, 145(3), sch. X.
[3] Reserve Bank of India Act, No. 2 of 1934, INDIA CODE (1934), s. 135.
[4] Representation of the People Act, No. 43 of 1951, INDIA CODE (1951), ss. 29C, 137.
[5] Income Tax Act, No. 43 of 1961, INDIA CODE (1961), ss. 11, 13A(b).
[6] Companies Act, No. 18 of 2013, INDIA CODE (2013), ss. 154, 182.
[7] Union of India v. Association for Democratic Reforms, (2002) 5 SCC 294.
[8] PUCL v. Union of India, (2003) 4 SCC 399.
[9] Justice KS Puttaswamy (Retd) v. Union of India, (2017) 10 SCC 1.
[10] Rojer Mathew v. South Indian Bank Ltd., (2020) 6 SCC 1.
[11] Citizens United v. Federal Election Commission, 558 U.S. 310 (2010).