By TIOL News Service

NEW DELHI, SEPT 11, 2018: THE ISSUE BEFORE THE BENCH IS - Whether exemption granted to Directors from disclosure of their interests in not-for-profit companies under the Companies Act would automatically mean that there is no legal obligation to make any disclosure under the I-T Act. NO IS THE VERDICT.

Facts of the case

The assessee is the Indian National Congress (INC). It 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 re-commence its newspaper. The books of account of AJL showed that for the period 01.04.2010 to 31.03.2011, the total outstanding debt as on 01.04.2010 was Rs 88,86, 68,976/- and as on 15.12.2010 it was Rs 90,21,68,980/-. In the meanwhile, an application was made for the incorporation of the charitable non-profit company "Young Indian" (YI) on 13.08.2010, and Form 1A with Registrar was filed for availability of the Young Indian name. On 18.11.2010, a license was issued to YI which was then incorporated on 23.11.2010; M/s. Suman Dubey and Sam Pitroda were its founder members and founder directors. On 13.12.2010, the first Managing Committee meeting 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 550 shares each. On 18.12.2010 by a Deed of Assignment, the Rs 90 crore loan standing in INC's books as payable to it, from AJL from 2002 to 2011 was transferred to YI.

On 24.12.2010, a loan to the tune of Rs 1 crore was received through a cheque, from M/s Dotex, another company, drawn on ICICI Bank by YI. The formal stamped deed of assignment of Rs 90 crore in favour of YI was executed by AICC on 28.12.2010. This event was followed, on 21.01.2011, by an EGM (of AJL) approving fresh issue of 9.021 crore shares to YI. On 22.01.2011, the second managing Committee Meeting of YI was held; Ms. Sonia Gandhi, Mr. ML Vora and Mr. Oscar Fernandes were appointed Directors. The transfer of YI Shares from its existing shareholders, was approved.

AJL allotted 9,02,16,898 equity shares to YI pursuant to its EGM dated 21.01.2011 and AJL's Board meeting (dated 26.02.2011). YI applied for Section 12AA exemption and the same was granted with effect from FY 2010-11. The income tax returns of the three assessees before this Court, were dealt with and assessment orders made, on various dates.

One of the assessees, Rahul Gandhi, filed a return of income declaring Rs 68,12,018/- which included income from house property and from other sources. After some examination and consideration of details, including the missing Fair Market Value of YI's shares, the income returned was accepted by a scrutiny order dated 30.09.2013 by the Assessing Officer (AO) under Section 143(3). The assessee requested for 'reasons to believe' details before furnishing more documents relating to his income. However, the AO rejected all representations.

In his writ, Mr Gandhi has sought quashing of reassessment. The Counsel for the assessee contended 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 Mr. Rahul Gandhi 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. In this regard, it was argued that the said provision, i.e. Section 56(2)(vii) was inapplicable in the issue of fresh shares. The specific ground articulated on behalf of the petitioner Mr. Rahul Gandhi was that the second proviso to Section 56(2)(vii) (c) (ii) enacted certain exceptions to the provision one of which was that if any property was received by an individual from any Trust or institution, including an institution registered under Section 12(AA), Section 56(2)(vii) could not apply.

Other assessees - Ms Sonia Gandhi and Mr Oscar Fernandes, who were also issued notices, argued along the similar lines.

Having heard the counsels, the HC held that,

Whether re-assessment notice sent by email late night, just before the change of date, and the same being acknowledged by the assessee, can be construed as within the period of limitation - YES: HC

++ Improper mode of communication - This court is of the considered view that the argument is insubstantial. The object of imposing time limits is to ensure that both the assessees and the tax administrators have the same standard on which the extended period available under the law are to be judged. Therefore, if it is shown, that the AO issued and the assessee received notice, which was within the period of limitation, the form of the notice or the fact that it was through a channel not deemed "regular" is not relevant. The violation of the circulars relied on at best can be speak of irregularity, but the fact remains that all the three assessees received email intimations about the reassessment and reopening of their AY 2010-11 assessments before the end of 31.03.2018;

Whether if the Revenue takes times in acting upon the investigation reports with alacrity, re-assessment notice issued can be alleged to be based on 'stale' materials - NO: HC

++ Stale Materials - as regards mala fides (regarding hasty issuance of notices) this court has previously noticed - in the context of allegations that the PCIT had not applied the mind, that such was not the case. There was some material - in the form of investigation reports (though of 2015 vintage) and a TEP (of 2014). The revenue did not show alacrity or swiftness in proceeding to process these documents and materials; however, they cannot be termed as "stale" or irrelevant materials. Apart from a general allegation of mala fides (which is more of the kind that is frequently made under the submission of abuse of power or use of statutory discretion for purposes not authorized by law) there is no allegation of personal mala fides against any official, or that anyone of them was hostile to the assessees. Consequently, the mere circumstance that reassessment notice was issued on 31.03.2018 does not vitiate the notice or the proceedings;

Whether the ratio of Bacha F Guzdar case can be applied to a situation which attracts the provisions of Sec 56(1) relating to determination of FMV of unquoted shares - NO: HC

++ the next submission of all the assessees is that the value of a share is something which entitles the shareholder to participate in the profits of the company but that she or he does not acquire any interest in the assets of the company. No doubt, Bacha F. Guzdar is an authority for that principle of law; subsequent judgments have reiterated the same position. But the court notices that the enunciation of law was in the context of an assertion by a shareholder in a tea company (whose income was treated as agricultural to the extent of 60% and, therefore, exempt) that a proportionate portion of the dividend received by her was exempt. The Supreme Court clarified that a shareholder, upon acquiring shares in a company "becomes entitled to participate in the profits of the company in which he holds the shares if and when the company declares, subject to Articles of Association, that the profits or the portion thereof should be distributed by way of dividends among the shareholders". The court was there, not concerned with income from other sources;

++ 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;

++ the provision was introduced through an amendment to the Income Tax Act with effect from 01.10.2009. No provision of the like kind existed when Bacha F. Guzdar, (dealing with "fair market value" being the basis of determination of a deemed income, in the event of acquisition of unquoted shares,) was decided. As a result, it is held that the assessee's arguments on this aspect are unpersuasive, prima facie it cannot be said that in the light of these provisions, there was no merit in its allusion or reference in the reassessment notice;

Whether exemption granted to Directors from disclosure of their interests in not-for-profit companies under the Companies Act would automatically mean that there is no legal obligation to make any disclosure under the I-T Act - NO: HC

++ the next main argument is that when asked, Mr. Rahul Gandhi was not under any legal obligation to disclose details regarding his acquiring shares in YI; the submission is that such shareholding is not "interest" in a company; going further it is stated that shareholding YI, being a not-for-profit and charitable company, cannot result in any interest that needs disclosure. It is urged that neither a director nor shareholder has any right to receive dividends in, or interest in the property of such a company. The assessees had argued that the obligations of directors, shareholders or members (of companies) to disclose the interests in a not-for-profit company or in a trust stand on a different footing as in relation to other companies. A two-pronged submission was made in this regard. The one was that by virtue of a general exemption given under Section 25(6) of the Companies Act the Central Government waived the requirements of such disclosure to directors of not-for-profit company is incorporated under section 25; and the other was with respect to exemption [from Section 56(2)(vii)(c) in respect of payments made by trusts, etc. covered by Section 12AA];

++ the exemption in regard to provisions of the Companies Act and the disclosure which individual directors have to make to the Board, would in any manner suspend obligations under other laws. In this 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. Here a company acquired an asset on 13.12.2010 (i.e. assignment of a debt from AJL, to the tune of Rs.90.21 crores, for consideration).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. As a result, it is 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. It is, therefore, held that prima facie, there is no merit in this argument; 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);

++ the entire premise of the reassessment notices in this case is that the non-disclosure 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. In the case of Mr. Rahul Gandhi, no doubt, 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 is not the case. The TEP and investigation reports - of subsequent vintage (after completion of Mr. Gandhi's assessment), therefore, constituted tangible material which in terms of the ruling in Commissioner of Income Tax vs. Kelvinator of India Ltd 2010-TIOL-06-SC-IT-LB justified reassessment. 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". Zuari Estate Development & Investment Co Ltd is an authority on the subject.

(See 2018-TIOL-1882-HC-DEL-IT)