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Explained: What are the ED and IT cases against Rahul and Sonia Gandhi?

The ED case is based on a trial court order that allowed the Income Tax Department to probe the affairs of National Herald newspaper and conduct a tax assessment of Sonia and Rahul. Here's the full story.

Written by Deeptiman Tiwary , Sandeep Singh | Mumbai, New Delhi |
June 17, 2022 2:59:26 pm
Sonia Gandhi and Rahul Gandhi

After Rahul Gandhi, Congress president Sonia Gandhi appeared before the Enforcement Directorate (ED), on Thursday (July 21), for questioning in connection with a money laundering case related to the National Herald newspaper.

What is the case in which the two Congress leaders are being questioned?

What is the case?

The ED case is based on a trial court order that allowed the Income Tax Department to probe the affairs of National Herald newspaper and conduct a tax assessment of Sonia and Rahul. The order was the result of a petition filed by BJP MP Subramanian Swamy in 2013.

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Swamy’s complaint had alleged cheating and misappropriation of funds on the part of the Gandhis in acquiring the newspaper. Swami had alleged that the Gandhis acquired properties owned by National Herald by buying the newspaper’s erstwhile publishers, The Associated Journals Limited (AJL), through an organisation called Young Indian (YI) in which they have 86 per cent stake.

Sonia and Rahul were granted bail in the case by the trial court on December 19, 2015.

In Swamy’s complaint before the trial court, Sonia, Rahul and others have been accused of misappropriating funds by paying Rs 50 lakh through YI to obtain the right to recover Rs 90.25 crore that AJL owed to the Congress.

What happened with National Herald?

Jawaharlal Nehru established The National Herald in 1938. It was published by AJL, a Section 25 company, which is generally a not-for-profit entity. AJL also published the Qaumi Awaz in Urdu, and Navjeevan in Hindi.

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The company owns prime real estate in various cities including Delhi, Mumbai, Lucknow, Patna, and Panchkula. Plagued by overstaffing and a lack of revenue, AJL ran into losses and stopped publishing in April 2008.

After the publication of the newspaper was suspended, the income of AJL came mainly from exploitation of various properties held by it. One of its key properties was situated at 5A Herald House, Bahadurshah Zafar Marg, New Delhi.

Rahul Gandhi with party workers at march to ED office in Delhi on Monday. (Express Photo by Prem Nath Pandey)

Meanwhile, the All India Congress Committee (AICC), which is the apex body of Indian National Congress, gave the company unsecured, interest-free loans for a few years up to 2010.

What happened thereafter?

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By the end of 2010, AJL’s unsecured debt had risen to Rs 90.21 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 AICC. According to investigations by the Income Tax Department, the properties owned by AJL had a fair market value (FMV) of over Rs 413 crore.

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. The object of the company was stated to be: “To inculcate in the mind of India’s youth commitment to the ideal of a democratic and secular society…”

Sonia Gandhi and Rahul Gandhi (File photo via PTI)

However, immediately after its incorporation, both the Directors transferred their shares to Congress leaders Oscar Fernandes, Sonia Gandhi, Rahul Gandhi and Moti Lal Vora (now deceased). Later, on December 13, 2010, Rahul Gandhi was appointed as Director of Young Indian and, on January 22, 2011, Sonia Gandhi joined the board as a Director.

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.

YI then registered itself under Section 12A of the Income Tax Act as a charitable organisation, making it eligible for 100% tax exemption.

What was the AJL-YI-AICC deal?

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After the formation of YI, the AICC decided to assign AJL’s nearly Rs 90 crore debt to the newly formed organisation. Young Indian paid just Rs 50 lakh for this acquisition.

The loan assigned to YI was converted into shares of AJL, and AJL allotted 9,02,16,899 equity shares to Young Indian in lieu of the aforesaid loan amount. In this manner, almost 99.99% shares of AJL were transferred to Young Indian.

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The IT Department has alleged that in order to achieve the objective of holding 100 per cent share of AJL by YI’s majority shareholders, Rahul Gandhi and Priyanka Gandhi Vadra have purchased an additional 47,513 and 2,62,411 shares through Rattan Deep Trust and Janhit Nidhi Trust respectively.

Interestingly, at the time of AJL’s acquisition, Young Indian, incorporated with a paid up capital of Rs 5 lakh, did not have even the Rs 50 lakh funds to acquire AJL. It thus decided to take a loan of Rs 1 crore from M/s Dotex Merchandise Pvt. Ltd, Kolkata. Dotex, alleged by the Income Tax Department to be a company that allowed accommodation entries for a commission, is now owned by the RPG Group.

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This loan of Rs 1 crore was also flagged as “suspicious transaction” by the Financial Intelligence Unit of the Finance Ministry.

Notably, AICC transferred its loan to YI on December 28, 2010, more than two months before YI made any payment to AICC. In fact, at that time YI did not even have a bank account. The IT probe has found that YI started its office at AJL-owned Herald House in 2010 itself, without any agreement to that effect or any payment of rent to AJL.

The IT Department has even raised doubts about the purported loan forwarded by the Congress to AJL saying there is no evidence of it except in the books of AJL. “The amount of loan entry of Rs 90.21 crore was fixed in order to ensure that the amount was just sufficient to allot 99% share of AJL to the Appellant (YI),” the IT submission to the IT Appellate Tribunal said.

What were the questions around the deal?

The AICC transferred all its loan to YI for just Rs 50 lakh, claiming that it was not sure if AJL would be in position to return the loan. The IT probe has held that AJL had properties worth hundreds of crores, and thus it was actually in a very good position to return the loan.

Also, in the Notes to Accounts for the financial year 2010-11 of AJL, it was mentioned that the management was confident of a turnaround for the company. Since the same people were office bearers of both AICC and AJL, it was strange for the former to assume that its loan could not be recovered.

Other key questions raised were of conflict of interest, with Vora holding positions in all the three entities involved — AICC treasurer (formerly), AJL CMD, and shareholder and director at Young Indian. Also, The Representation of the People Act, 1950, does not allow a political party to give a loan.

What is the status of the IT case now?

The IT Department had earlier issued a notice to Rahul for allegedly concealing information on his status as a Director of Young Indian. It has said that Rahul’s shares in Young Indian resulted in an income of Rs 154 crore, whereas earlier only Rs 68 lakh was assessed. It issued similar notices to Sonia and Fernandes, even as it sought to reopen the assessment to compute the “fair market value” of these shares.

Rahul, Sonia and Fernandes challenged this, contending that no income had escaped assessment, and that they had disclosed all facts. One key argument against the reassessment was that YI, as a Section 25 company, had applied for exemption under Section 12A of the Income Tax Act, which was granted on May 9, 2011.

However, CIT(E) cancelled the registration granted to YI u/s 12A on October 26, 2017 on the ground that no genuine activities were carried out by YI either in furtherance of its objects or otherwise, which can be held to be charitable. The cancellation was upheld by the IT Tribunal. A March 31, 2022 order of the IT Appellate Tribunal asked the IT Department to make further inquiries into the matter, even as it struck down some tax demands by the department on YI.

What is the Congress’s defence?

The Congress has accused the BJP government of cheap vendetta politics to divert attention from issues like inflation, GDP, social unrest, and social divisiveness in the country. The party said the case of money laundering was “weird”, and the charges were “hollow…more hollow than a pack of cards”.

Congress leader Abhishek Manu Singhvi has said that AJL had come under financial stress over the decades, after which the Congress stepped in, and over a period of time gave Rs 90-odd crore as financial support to it.

According to Singhvi, AJL did what any company under debt would do, i.e., to convert its debt into equity which was eventually acquired by Young Indian. He said since Young Indian is a non-profit organisation, “by law…no dividend can be given to its shareholders or directors… So you cannot take a penny.”

Singhvi said AJL continues to hold all the properties it was holding earlier, and that the only change was that Young Indian was now the shareholder of AJL.

“So there is no transfer of property. So where is the money laundering?” he said.

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First published on: 17-06-2022 at 02:59:26 pm
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