A civil war within the SNP has sunk to a new low after a councillor was threatened with legal action from his own branch.

Councillor David Baird was placed under investigation by the party following claims he profited from selling SNP merchandise at a rally for the pro-independence group Hope over Fear.

He has deposited cash with headquarters until what the party described as a “dispute” is resolved.

However, a report contained within an Uddingston and Bellshill branch audit document, circulated to members on Monday, said £1,524 was due to the group by a member and that the local organisation should “litigate if necessary”.

Another version explicitly names Mr Baird recommending that if cash is not surrendered “further action must be taken immediately”. It also reveals SNP headquarters told members not to call in police.

The campaign organiser strongly denies any wrongdoing and claims he planned to use the cash to set up a breakaway branch.

It is the latest episode in a long-running internal feud within the SNP that has exploded since Julie McAnulty, another councillor, was suspended by the SNP over claims she told an activist she wanted to “get the pakis out of the party”.

The racism complaint was made by Sheena McCulloch, a staff member of MSP Richard Lyle, who is convenor of the Uddingston and Bellshill branch and Holyrood candidate.

A group loyal to Mr Lyle claims the party is fighting off attempts of infiltration from Tommy Sheridan’s Solidarity Party, while his opponents, largely new members who have grouped around Coatbridge MP Phil Boswell, are convinced Ms McAnulty is victim of a smear campaign.

Mr Lyle’s opponents also claim Mr Baird is victim of a “stitch-up”, with the councillor seen as the main challenger to the Central Scotland MSP for the constituency nomination when concerns around financial irregularities were submitted to HQ last May.

Mr Baird said: “I brought all of the paperwork and money to party HQ in May yet nine months on this has still not been resolved.

“I asked them to take this to the police. This is a smear job that has been leaked to the papers because of negative stories appearing about certain other members of the party.”

The internal report says allegations of financial misconduct came to the attention of Mr Lyle shortly after the General Election. It states that branch auditor Michael Clarkson, who helped prepare the report, queried why the police were not called in if fraud was being alleged and that “the response made was that this was the instruction received from party HQ”.

The document added that over an eight-month period no further response from HQ was received other than chief executive Peter Murrell, Nicola Sturgeon’s husband, confirming in July the investigation was “close to conclusion and he would be in touch”, but the branch heard nothing for the rest of the year.

One Lyle faction source said: “This is an independent audit and Baird should resign from the party. Dick Lyle has a lot of support which is why when Baird tries to get his own way he’s always voted against. People talk about the Monklands McMafia, but we’re up against Tommy Sheridan’s mafia.”

However, one of the members hoping to oust Mr Lyle dismissed infiltration claims as “nonsense”. He added: “The only people infiltrating the branch are politically motivated, engaged people who ask questions. It’s upset the apple cart of the old guard.”

It follows Ms Sturgeon stonewalling questions about the Lanarkshire controversy in a Facebook Q&A while it also emerged Patrick Grady, the SNP national secretary, tried to hush up activists on Twitter. He privately told one former branch secretary discussing internal party business in public was “inappropriate”, but saw the intervention backfire when she revealed she had already quit the party due to his lack of action and posted the exchange on Twitter.

A SNP spokesman said: “David Baird has deposited funds with the party until a dispute within his local branch is resolved. The national secretary and party staff continue to offer guidance to local members about best practice in relation to branch affairs.”