The Gandhis have challenged the reopening of their tax assessment for the year 2011-12.
The debt of Rs 90 crore of the Young Indian company, when converted into equity, would not result in any income for levying tax, top Congress leader Sonia Gandhi told the Delhi High Court today.
Young Indian (YI), which was incorporated in November 2010 with a capital of Rs 50 lakh, had acquired almost all shareholdings of the AJL, which owns the National Herald newspaper. In this process, YI had also acquired AJL's debt of Rs 90 crore.
The submission on behalf of Sonia Gandhi by senior advocate P Chidambaram was made before a bench of Justices S Ravindra Bhat and A K Chawla appearing for Sonia Gandhi.
Mr Chidambaram said that even if this was taxable income, it would not go into the hands of YI's shareholders like the former Congress President.
After hearing part arguments, when the court said it will issue a formal notice, Additional Solicitor General (ASG) Tushar Mehta said there was no need for it as he was present in the court.
The court, thereafter, listed the matter for further hearing on August 16, when the ASG will argue in defence of the action taken by the tax department.
The court said that once it reserved its judgement on conclusion of the arguments, it will ask the tax department not to take any coercive steps till the verdict was pronounced.
The bench also did not issue any order restraining the reporting of contents of the petitions filed on behalf of Sonia Gandhi, Congress president Rahul Gandhi and party leader Oscar Fernandes.
The Gandhis and Mr Fernandes have challenged the reopening of their tax assessment for the year 2011-12 in March this year.
Senior advocate Arvind Datar, appearing for Rahul Gandhi, said that arguments during the hearing may be reported and urged the court to order that confidentiality be maintained regarding the contents of the petitions.
However, the bench declined to issue any such direction saying "we cannot go into all this" as it would be akin to going on a "wild-goose chase" as it was known who reports contents of the matter and who is the source of the information.
During the over an hour-long hearing, P Chidambaram contended, "when debt is converted to equity, it does not result in any income and, even if it does, it would not result in income for the shareholder".
He said that even if it was accepted that income was generated, "it cannot be the income of YI and its shareholders in the same assessment year of 2011-12."
He also argued that the tax department has "incorrectly invoked and applied" the formula for calculating the tax liability of Sonia Gandhi when her assessment for 2011-12 was reopened.
He also questioned how a debt of Rs 90 crore which was converted into equity acquired a value of Rs 407 crore as claimed by the tax department.
P Chidambaram said that when his client became a shareholder of YI, she received nothing else, not even property, except 1,900 shares in the company.
He said that YI being a section 25 company, a non-profit entity, it cannot give anything to its shareholders. "To say that I got something from YI is an oxymoron," he said.
He also termed as "incorrect" the tax department's claim that Rs 90 crore loaned to AJL, leading to the debt, was bogus or paper loan, saying this is not correct as the amount was loaned through 137 cheques issued over a 9-10 year period.
Among other objections raised by him against the reopening of the assessment was that the communication sent to his client informing about the development was not digitally signed. The assessment was reopened in March 2018 on the orders of a senior officer who was monitoring the case from 2014, he said.
Rahul Gandhi's plea was taken up by the court on August 8 when it had rejected the oral plea of his lawyers to prohibit the media from reporting or publishing the court proceedings.
According to the tax department, Rahul's assessment for the years 2011-12 was decided to be reopened as he had not disclose that he was a director in the YI company since 2010.
As per the department, the shares Rahul has in YI would lead him to have an income of Rs 154 crore and not about Rs 68 lakh, as was assessed by it earlier.
The department has in the instant case applied section 147 of the Income Tax Act, which provides for bringing under the tax net any income that has escaped assessment in the original assessment.
Rahul Gandhi's lawyers had said the query put to their client during the scrutiny of his assessment was whether he had any interest in any company or a sister concern and not if he was a director in any entity.
He had replied in the negative as YI was a Section 25 company, a non-profit entity, and hence no director would have any interest in it, the lawyers had said.
The tax department has already issued a demand notice for Rs 249.15 crore to YI for the assessment year 2011-12.
The IT department's move followed its probe on a complaint alleging that the Gandhis had misappropriated AJL's assets while transferring their shares to the newly formed Young Indian.
BJP MP Subramanian Swamy, in a private criminal complaint filed before a trial court, had accused the Gandhis and others of conspiring to cheat and misappropriate funds by paying just Rs 50 lakh, through which the YI had obtained the right to recover Rs 90.25 crore which the AJL owed to the Congress party.
All the accused, also including Motilal Vora, Oscar Fernandes, Suman Dubey and Sam Pitroda, have denied the allegations levelled against them.