Set back to Rahul and Sonia Gandhi on reopening of income tax cases for Young Indian share allotment not disclosed . Delhi High Court dismisses Petitions for non disclosure of taxing event
ABCAUS Case Law Citation:
ABCAUS 2510 (2018) 09 HC
By the instant common judgment, the Hon’ble High Court has disposed off three writ petitions filed by Smt. Sonia Gandhi, Shri Oscar farnades and Shri Rahul Gandhi involve on common questions on similar facts.
The Indian National Congress (INC/AICC) had over a period of time advanced Rs. 90 crores to Associated Journals Ltd (AJL), publishers of the newspaper “National Herald”, with the condition that the amounts be utilized by the latter to write off its accumulated debts and recommence its newspaper.
In the meanwhile, an application was made for the incorporation of the charitable non-profit company “Young Indian” (“YI”) and eventually it was incorporated with M/s. Suman Dubey and Sam Pitroda as its founder members and founder directors.
When the first Managing Committee meeting of YI took place, Mr. Rahul Gandhi was appointed as Director (non-shareholder); Mr. Motilal Vora and Mr. Oscar Fernandes were nominated as Ordinary Members; M/s. Suman Dubey and Sam Pitroda subscribed to shares. Soon thereafter, by a Deed of Assignment, the Rs. 90 crore loan standing in INC’s books as payable to it from AJL was transferred to YI and later, AJL by by EGM approved fresh issue of 9.021 crore shares to YI. Within few days, Ms. Sonia Gandhi, Mr. ML Vora and Mr. Oscar Fernandes were also appointed Directors in YI and after transfer of Shares, Mr. Rahul Gandhi and Ms. Sinia Gandhi became shareholder of more than 83% shares in YI.
Later, the return of income of Mr. Rahil Gandhi was reopened u/s 148. As per the “Reasons to Believe” it was alleged that the difference between the “Fair Market Value” of the shares of the Young Indian (YI) and the cost of acquisition of those shares by Mr. Rahul Gandhi was his income.
In support of this position, the Revenue relied upon a letter written by its Department of Investigation and letter and a tax evasion petition (TEP) addressed to the Finance Minister by Mr. Subramanian Swamy.
The main ground on which Mr. Rahul Gandhi approached the Hon’ble High Court by the instant Petition was seeking intervention for quashing of reassessment notice is that no income in fact escaped assessment and that all queries which could have been raised given the returns and documents were in fact addressed adequately in the scrutiny assessment and moreover there was no tangible evidence to reassessment. It was urged besides that the alleged depression of the value of YI‟s shares, in the returns filed by Mr. Rahul Gandhi could never be the subject matter of reassessment. It was contested that the allegations with respect to transaction value, being contrary to Section 56(2)(vii)(c) (ii) and in terms of Rule 11UA of the Income Tax Rules was plainly erroneous and cannot be the basis of a reassessment. It was also urged that since he was a shareholder of YI – a non-profit and charitable company, he was under no obligation to disclose the value of his shares in the manner that the Revenue alleged.
It was argued that the second proviso to Section 56(2)(vii) (c) (ii) enacts certain exceptions to the provision one of which is that if any property is received by an individual from any Trust or institution, including an institution registered under Section 12(AA), Section 56(2)(vii) could not apply.
Similarly, other Petitioners i.e., Mrs. Sonia Gandhi and Mr. Oscar Fernandes too, like Mr. Rahul Gandhi impugned the reassessment notice on the similar grounds.
The Hon’ble High Court opined that by virtue of Section 56 (1) income from any source that is not exempted, “shall be chargeable to income tax.. if it is not chargeable to income tax under any of the heads specified in section 14, items A to E”. This is clearly a deeming provision, which specifically creates a fiction that “the following income” (Section 56 (2)) is chargeable to tax. The section then enumerates what is deemed to be income; the relevant part is that “any property”, other than immovable property(is acquired)“(ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration”. Therefore, the differential between the fair market value and the cost of acquisition, constitutes income, said the Court.
The Hon’ble High Court observed that the nature of the exemptions given u/s 299 are with respect to the duties of directors to disclose one or the other issue pertaining to their duties and in regard to affairs of the company. This, however, does not automatically mean that it suspend obligations under other laws. In the instant case, Section 52(2) (v)(c) (ii) clearly deems that the acquisition of certain shares or property can lead to income and the mechanism for dealing with it. Unless that income or information related to it is exempted from the provisions of the other laws -such as taxation laws which enact individual taxation events, the returns that an individual member (or directors) have to disclose regarding the relevant event of share acquisition, it cannot prima facie be held that the individual is exempted altogether from disclosing her or his interest in the acquisition of shares in the not-for-profit company. When the assessees acquired the shares through allotment, the taxing event, as it were, occurred on account of the differential between what is said to be market value and what was value paid by them.
The Hon’ble High Court held that the primary obligation to disclose about the acquisition of shares, was not relieved by virtue of the notification under Section 25(6) of the (now repealed) Companies Act, 1956. Therefore, prima facie, it cannot be said that the assessees had no obligation to disclose about the acquisition of the shares, which appeared to be the taxing event (on account of the differential between the acquisition cost and the fair market value).
The petitioner argued that the allotment of shares per se did not and could not have led to a taxing event, because, in the same financial year, AJL had allotted shares in lieu of its debt. The book adjustment, did not result in tax liability in the hands of the individual shareholders.
The Hon’ble High Court opined that the argument touches intrinsically on the merits of the issue. At least disclosure of this was warranted, whatever the explanations with respect to liability or otherwise of the assessees might have been.
The Hon’ble High Court noted that the the entire premise of the reassessment notices in the instant cases were that the nondisclosure of the taxing event, i.e. allotment of shares (and the absence of any declaration as to value) deprived the AO of the opportunity to look into the records.
The Hon’ble High Court observed that in the case of Mr. Rahul Gandhi, undoubtedly, the assessment originally completed, was under Section 143 (3). Had he disclosed in his returns or any related documents about the event (share acquisition) the primary fact would have been on the record; the AO’s subsequent action in pursuing that aspect or letting go of it, after inquiry might well have justified the charge of a second and impermissible opinion on the same subject. However, that was not the case. The TEP and investigation reports therefore, constituted tangible material which in terms of the ruling by Hon’ble Supreme Court justified reassessment.
The Hon’ble High Court further observed that in the case of the other two assessees (Ms. Sonia Gandhi and Mr. Oscar Fernandes) the returns filed by them were processed under Section 143 (1). Such instances are not treated as “assessments”.
In view of the above, the Hon’ble High Court dismissed the all three writ petitions