National Herald: The tax aspect

In a move arising out of case involving the newspaper, Income Tax department reopens Sonia and Rahul tax assessments for 2011-12. What is the National Herald case, how did it lead to the I-T move?

Written by Sandeep Singh , Pritam Pal Singh | Updated: September 13, 2018 11:14:17 am
Sonia Gandhi and Rahul Gandhi in Patiala House Courts in December 2015, for a National Herald case hearing. (Praveen Khanna)

ON MONDAY, Delhi High Court dismissed pleas by Congress leaders Sonia Gandhi and Rahul Gandhi against the Income Tax department’s decision to reopen their tax assessments for 2011-12. The I-T department’s move was in connection with the National Herald newspaper case. A look back at the case, and how it led to the I-T move:

Newspaper & party

Jawaharlal Nehru established The National Herald in 1938. It was published by The Associated Journals Limited, a “Section 25” company, which is generally a not-for-profit entity. AJL also published the Qaumi Awaz in Urdu and Navjeevan in Hindi. The company owns prime real estate in various cities, including Delhi and Mumbai. Veteran Congress leader Motilal Vora has been the chairman and managing director of AJL since March 22, 2002.

Plagued by overstaffing and a lack of revenue, AJL ran into losses and stopped publishing in April 2008. To keep it afloat, the Congress party gave the company unsecured, interest-free loans for a few years up to 2010. By the end of March 2010, AJL’s unsecured debt had risen to Rs 89.67 crore. Despite owning real estate that is said to be valued much higher than the quantum of its debt, the management of AJL appears to have made no effort to repay the All India Congress Committe (AICC).

New company

On November 23, 2010, a company called Young Indian Pvt Ltd was incorporated as a Section 25 company, with Gandhi family loyalists Suman Dubey and Satyan Gangaram (Sam) Pitroda as directors. On December 13, 2010, Rahul Gandhi was appointed a director of Young Indian. On January 22, 2011, Sonia Gandhi joined the board as a director. Vora and Congress Rajya Sabha member Oscar Fernandes too were appointed to the Young Indian board the same day. As of March 2017, Sonia Gandhi and Rahul Gandhi had shareholdings of 38% each in the company. Vora and Fernandes held the remaining 24% in equal parts.

AJL-YIL-AICC deal

In 2010, the AICC decided to assign AJL’s nearly Rs 90 crore debt to Young Indian. Thus, Young Indian became the new owner of the debt on the AJL books. In December 2010, AJL decided to transfer its entire equity to Young Indian in lieu of YIL owning its Rs 90 crore debt. Young Indian paid Rs 50 lakh for this acquisition.

This is how AJL, which originally owed Rs 90 crore to the Congress party, became a fully-owned subsidiary of Young Indian, which was owned by four individuals —Rahul, Sonia, Vora and Fernandes. This acquisition is now at the centre of a court case. Some of the key questions being raised are:

* Why was YIL, owned by top Congress leaders, assigned AJL’s debt to the party? This also made YIL the owner of AJL’s real estate assets across the country.

* Why didn’t AJL utilise part of its assets to repay the debt?

* Was there a conflict of interest in Vora holding important positions in all the three entities involved — AICC treasurer (formerly), AJL CMD, and shareholder and director at Young Indian?

* The Representation of the People Act, 1950, does not allow a political party to give a loan, so how did the Congress do so?

In focus now

On March 31, the I-T department issued a notice to Rahul for allegedly concealing information on his status as a director of Young Indian. Investigating the acquisition case, the department has said that Rahul’s shares in Young Indian resulted in an income of Rs 154 crore, whereas Rs 68 lakh was earlier assessed. It issued similar notices to Sonia and Fernandes for allegedly not disclosing income arising as YIL shareholders for 2011-12. The tax department sought to reopen the assessment to compute the “fair market value” of these shares.

Rahul, Sonia and Fernandes challenged this with separate submissions. Broadly, all three contended that no income had escaped assessment and they had disclosed all facts. One key argument against the reassessment was that YIL, as a Section 26 company, had applied for exemption under Section 12AA of the Income Tax Act, and was granted this on May 9, 2011.

The ruling

In dismissing the petitions, the High Court observed: “… it cannot be said that the effect of the exemption notification was to relieve the assessees from their obligation to disclose about the acquisition of the shares, which appears to be the taxing event (on account of the differential between the acquisition cost and the fair market value)”. It added: “The entire premise of the reassessment notices in this case is that the nondisclosure of the taxing event, ie allotment of shares (and the absence of any declaration as to value) deprived the Assessing Officer (AO) of the opportunity to look into the records.”

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