The relationship between Prime Minister Narendra Modi and Mukesh Ambani, the richest Indian and Chairman of Reliance Industries Limited (RIL), appears to be souring. Some observers are reading a lot into certain recent actions of the income tax (IT) Department, while some others argue that what has taken place is a mere tax dispute that may soon get resolved.
According to a report in Business Standard (linked here), the IT department plans to approach the Supreme Court after its objections to the de-merger of Reliance Jio’s tower and optic fibre network assets into two separate infrastructure companies were turned down by the National Company Law Appellate Tribunal (NCLAT) on December 20, 2019. The petition of the tax department before NCLAT was heard and adjudicated upon by Justices S J Mukhopadhaya and A I S Cheema.
Reliance Jio (RJio), which is part of RIL, de-merged two companies -- Reliance Jio Infocomm Private Limited (RJIPL) and Jio Digital Fibers Private Limited -- in April 2019 by cancelling infusions of equity capital into the two entities and converting these into loans from RIL.
The parent company argued that the two entities had distinct assets and liabilities. Further, they were engaged in separate areas of business. In July, RJio sold its tower unit to Brookfield Infrastructure Partners LP, a Canadian investment fund, for the equivalent of Rs 25,215 crore. At that time, RIL’s Chief Financial Officer, V Srikanth, was quoted as saying that Brookfield “will own 100% of the tower company.”
RJIPL currently owns about 1,30,000 communication towers that form the backbone of RJio’s digital network to provide voice and data services to over 350 million subscribers, making it India’s largest mobile network operator.
RJio, which launched its services in September 2016, had signed up to be the anchor tenant of RJIPL’s towers for 30 years. Its competitors -- Bharti Airtel and Vodafone Idea -- too have hived off their tower assets to separate corporate entities to ease their debt burden amid intensification of competition in the country’s telecommunications sector and an overall slowdown in the economy.
The clearance by NCLAT for Brookfield to buy RJIPL has been opposed by the IT department – in the Central Board of Direct Taxes (CBDT), which is part of the Department of Revenue in the Ministry of Finance in the government of India – on the ground that RJio’s proposal to cancel preference shares worth Rs 65,000 crore into loans would substantially reduce profits of the de-merged company. This, in turn, would result in a significant loss of revenue to the exchequer and would be tantamount to tax avoidance, if not evasion, the IT department alleged.
RJio has denied these charges. An e-mail sent by Business Standard to the Reliance group did not elicit a response.
The NCLAT dismissed the IT department’s petition for “lack of evidence.” In their order, Justice Mukhopadhaya and Justice Cheema noted: “Without going (into) … the record and without placing any evidence or (substantiating) … the allegation by appearing before the Tribunal, it was not open to the Income Tax Department to hold that the Composite Scheme of Arrangement amongst the Petitioner Companies and their respective shareholders and creditors is giving undue favour to the shareholders of the company and also the overall scheme of arrangement results (in) … tax avoidance.”
It remains to be seen how strong the IT department’s appeal before the country’s apex court will be and what evidence it will adduce to substantiate its claim that the proposed transaction between RIL’s wholly-owned subsidiary, RJio, and Brookfield would cause a loss to the exchequer, given that the department’s petition in the tribunal was dismissed for lack of evidence.
While NCLAT has approved the de-merger, it has also allowed the IT department to scrutinise the transactions and raise any tax- related issues in the two demerged entities. Does this imply that RJio’s tax troubles are far from over?
The IT department claims the entire scheme of de-merger indirectly seeks to do what RIL could not do directly under the law. “There is an indirect release of assets by the demerged company to its shareholders which is used to avoid (payment of) dividend distribution tax which would have otherwise been attracted in light of Section 2(22)(a) of the Income Tax Act. It was further submitted that the scheme does not fulfil the requirements of Section 2(19AA) which defines the meaning of ‘demerger’ under the Companies Act, 2013, and it could only be referred to as a purported demerger which does not fulfil the requirements of law,” the IT department claimed in its petition.
In its representation before NCLAT, the department further argued: “Converting preference shares along with securities premium into loans is detrimental to the interest of shareholders and (the) Income Tax department because payment to preference shareholders is made only when there is profit in the hands of the company...Whereas, payment of interest on loan is charged on profit therefore the conversion will result in lesser (sic) taxable profit in the hands of company which pays interest and would be against the interests of (the) Income Tax Department.”
It further contended that the proposed transactions “would adversely affect the Income Tax Department … because interest on these converted loans would be claimed as expenditure by the concerned companies and the same would result in lesser (sic) taxable profit.”
While dismissing the IT department’s claims, NCLAT ruled: “(The) … mere fact that a Scheme may result in reduction of tax liability does not furnish a basis for challenging the validity of the same.” It also permitted the department to take appropriate steps, if “any part of the Composite Scheme of Arrangement amounts to tax avoidance or is against the provisions of the Income Tax” Act.
The IT department’s objections and its decision to appeal the tribunal’s decision before the Supreme Court comes against the backdrop of increased scrutiny by the government into the affairs of RIL, it chairman and his family members.
In March 2019, the department served notices under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 to Mukesh Ambani’s wife, Nita Ambani, and their three children, for their alleged undisclosed foreign income and assets, the Indian Express reported (linked here).
Interestingly, in October, K V Chowdary was appointed “Additional Director – Non-Executive,” an independent director on the board of RIL. He was former Central Vigilance Commissioner (CVC) and also used to head the CBDT. Chowdary, and the officers who worked under him at that time, had been investigating allegations against RIL and companies linked to it for, among other things, illegal round tripping of funds.
As chairman of CBDT and the investigation wing of the IT department, Chowdary’s department also investigated a number of sensitive cases against influential individuals and corporate groups, such as the Sahara India Pariwar and the Aditya Birla group – both had been accused of corruption, bribery and possession of black money, allegations that were eventually rejected by the Supreme Court. (Details are contained in the book titled Loose Pages: Court Cases That Could Have Shaken India; Recalling Birla-Sahara Papers and Kalikho Pul’s Suicide Note by Sourya Majumder and one of the authors of this article, Paranjoy, who also published the book in November 2018; see www.loosepages.in.)
Chowdary and his officers had also probed the activities of firms associated with current Union Cabinet minister Nitin Gadkari belonging to the ruling Bharatiya Janata Party and Virbhadra Singh, former Chief Minister of Himachal Pradesh, from the Congress. Both of them had been accused of acquiring assets disproportionate to known sources of income.
Under Chowdary’s leadership, the IT department had also investigated the financial dealings of liquor and real estate baron Gurdeep Singh ‘Ponty’ Chadha (who was killed in November 2012 during a shootout where his brother was present); the activities of meat exporter and alleged hawala operator Moin Qureshi, and; the alleged involvement of Mukesh Ambani’s brother, Anil Ambani, in the second-generation (2G) telecommunications spectrum scam, among other high-profile cases.
In 2015, Chowdary became the first officer from the Indian Revenue Service to be appointed CVC by the Appointments Committee of the Cabinet headed by Prime Minister Narendra Modi. In an interlocutory application filed by the non-government organisation, Common Cause, before the Supreme Court in January 2017, it was pointed out that Chowdary had “supervisory charge on the subjects being handled by Member (Investigation), CBDT, including investigations and subsequent actions” when the Sahara group’s offices were raided in 2014. (Disclaimer: One of the authors of this article, Paranjoy, is on the governing council of Common Cause.)
As an investigating officer, Chowdary had access to evidence alleging acts of corruption, bribery and the possession of black money. Such evidence included claims that Modi, as Chief Minister of Gujarat, may have accepted funds from a person associated with the Sahara group. Other persons who allegedly received money from the same group were former BJP Chief Ministers of Madhya Pradesh and Chhattisgarh Shivraj Singh Chouhan and Raman Singh, respectively, BJP functionary in Maharashtra, Shaina NC, and former Congress Chief Minister of Delhi, late Sheila Dikshit.
The Common Cause petition had claimed that evidence relating to these allegations had not been shared with the Central Bureau of Investigation or the Special Investigative Team on black money set up by the Supreme Court and constituted a “serious lapse” on the part of the IT department under Chowdary.
The petition further claimed that when Chowdary was in charge, the IT department had not shared the evidence it had retrieved from the Aditya Birla group’s premises in October 2013 with any other agency nor had any “meaningful action” been taken on the department’s findings.
The Supreme Court refused to order an investigation into the Birla-Sahara Papers in January 2017.
It is, however, not known if Chowdary, in his latest avatar as director of India’s largest private corporate entity, will be advising Reliance Industries Limited on its tax dispute with the Income Tax Department.
The writers are independent journalists.