Foreign Contribution Rules: Foreign-incorporated ownership can make political donations prohibited, and disputed accounting entries require inquiry.

Under the Foreign Contribution (Regulation) Act, 1976, the definition of "foreign source" was treated as deliberately wide to curb foreign influence in political life. A company incorporated outside India remained a foreign source by reason of incorporation, and Indian shareholding did not change that character; donations to political parties by Indian companies substantially owned by such a foreign company were therefore treated as foreign contributions. The text also records that donations shown as received from two government companies were not accepted as conclusively explained by inadvertent mistake, and an inquiry was directed to verify the accounting entries before further action in accordance with law.

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Issues: (i) Whether donations made to political parties by Indian-incorporated companies substantially owned by a foreign-incorporated company constituted foreign contribution from a foreign source under the Foreign Contribution (Regulation) Act, 1976. (ii) Whether the donations shown in the accounts of a political party as having been received from two government companies required inquiry on the plea of inadvertent mistake.

Issue (i): Whether donations made to political parties by Indian-incorporated companies substantially owned by a foreign-incorporated company constituted foreign contribution from a foreign source under the Foreign Contribution (Regulation) Act, 1976.

Analysis: The definition of "foreign source" in the Act was held to be inclusive and deliberately wide so as to suppress the mischief of foreign influence in political life. A company incorporated outside India was treated as a foreign company under Section 591(1) of the Companies Act, 1956, and the fact that its shareholding was substantially held by an Indian national did not alter its nationality, which depended on incorporation. The Court further held that the term "corporation" in Section 2(e)(vi) of the Act was broad enough to include a company incorporated outside India. Since the Indian companies were substantially held by such a foreign company, their donations fell within the statutory concept of foreign source.

Conclusion: The donations made by Sterlite and Sesa to political parties were foreign contributions from foreign sources, and acceptance of such donations by the political parties was contrary to the Act.

Issue (ii): Whether the donations shown in the accounts of a political party as having been received from two government companies required inquiry on the plea of inadvertent mistake.

Analysis: The entries relating to the two government companies were not treated as conclusively established misconduct at this stage, but the explanation of inadvertent mistake was not accepted without verification. An inquiry was directed to determine whether the entries were accidental or otherwise, and appropriate action was left to the authorities in accordance with law.

Conclusion: An inquiry was directed into the entries concerning the two government companies, with further action to follow according to law.

Final Conclusion: The writ petition succeeded in substance because the Court declared the impugned donations to be hit by the foreign contribution prohibition and directed the authorities to identify and proceed against similar receipts, while also ordering inquiry into the disputed accounting entries.

Ratio Decidendi: For the purpose of the Foreign Contribution (Regulation) Act, 1976, a foreign-incorporated company remains a foreign source notwithstanding Indian shareholding, and an inclusive statutory definition of foreign source extends to such corporate entities and their subsidiaries.

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