Within three weeks, I-T department reverses circular after BJP MP Subramanian Swamy, among others, raises objections.
New Delhi: The Income Tax department is struggling to dissociate itself from a circular that allegedly strengthens the stand of Congress president Rahul Gandhi and his mother, Sonia Gandhi, in the National Herald case and has now taken a complete U-turn from its earlier stance on the matter.
The first circular, issued on 31 December 2018, stated that fresh issuance of shares by a company will not attract provisions of Section 56 (2) (viia) of the Income Tax Act that deals with taxation of firms in which the “public is not substantially interested”.
The circular stressed that Section 56 (2) (viia) was a mere anti-abuse provision in the Finance Act, 2010, that was meant to prevent the transfer of shares in a company for no or an inadequate consideration. It went on to clarify that it was “never the intention to apply these provisions to fresh issuance of shares” by the specified company by way of issue of bonus shares, rights shares and preference shares or transactions of similar nature.
The I-T department, however, withdrew the circular on 4 January after questions were raised on whether it would aid the Gandhis in their legal battles in the National Herald case.
The Gandhis are under fire in the case over Young India Pvt Ltd, in which the two are directors, acquiring Associated Journals Ltd (AJL), the publisher of National Herald newspaper, by conversion of existing debt into equity.
The Congress had, in fact, referred to the circular and its subsequent withdrawal, to back its claims, during a hearing on the National Herald case in the Supreme Court on 8 January, prompting the court to direct the tax department to file a reply.
The Gandhis have been accused by BJP MP Subramanian Swamy of cheating, conspiracy and criminal breach of trust in their acquisition of AJL as Young Indian Pvt Ltd allegedly paid only Rs 50 lakh to obtain the right to recover Rs 90.25 crore that AJL owed the Congress. Young Indian Pvt Ltd was incorporated in November 2010 with a capital of Rs 50 lakh.
I-T dept issues a fresh circular
Unable to shake off the controversy, despite having withdrawn the circular, the I-T department issued a fresh clarification on 21 January stating that its stance on fresh issuance of shares, in the December circular, would “not be a correct approach, as it could be subject to abuse and would be contrary to the express provisions and the legislative intent of Sec. 56(2) (viia) or similar provisions contained in Sec. 56(2) of the act”.
It went on to add that any view expressed by the Central Board of Direct Taxes (CBDT) in the 31 December circular shall be considered to have “never been expressed”.
By then, however, the department had come under severe fire. Swamy had alleged that officials in the Finance Ministry were colluding to help the Congress leaders escape prosecution.
The CBDT circular issued giving a clean chit to the NH share transfers from AJL to Young Indian and then a withdrawal of the same circular 24 hours later requires a high level probe. Was the issuance by CBDT cleared at the MoF level or not?
— Subramanian Swamy (@Swamy39) January 5, 2019
He also sought a probe by the Prime Minister’s Office to determine who was behind the issuance of the circular.
— Subramanian Swamy (@Swamy39) January 14, 2019
Taxation experts too say the circular could lead to increased litigation. Amit Maheshwari, a managing partner at Ashok Maheshwary and Associates LLP, said the December 2018 circular had also caused confusion in terms of its applicability on other subsections/clauses of 56(2).
“The withdrawal and the subsequent clarification shows the uncertainty which the erstwhile circular has caused. With this circular, one can be rest assured that 56(2) will continue to be litigated in years to come,” he said.
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