A few days back, Finance Minister P Chidambaram gave a clean chit to Robert Vadra and his dealings with DLF. "All I can say is at this moment these allegations pertain to transactions between two private persons or entities.... The individual (Vadra, son-in-law of Sonia Gandhi) has disclosed all these transactions in his income tax and other returns, and perhaps in the returns of the company," Chidambaram is quoted by DNA as saying.
Firstpost has already explained how Vadra gained in various ways from his dealings with DLF. (You can read it here). A close reading of the Income Tax Act, balance-sheets of Sky Light Hospitality Pvt Ltd, a company owned by Vadra, and the statement issued by DLF suggest that Chidambaram could have jumped the gun in trying to give Vadra a clean chit. These documents suggest that Vadra's Sky Light Hospitality may not have paid tax amounting to Rs 14.1 crore.
Here's how we arrived at this conclusion.
Sky Light Hospitality has an issued capital of Rs 5 lakh. Of this Robert Vadra owns 49,900 shares and his mother Maureen owns 100 shares. Sometime in 2008-09, the company bought a plot of land in Manesar, Haryana, of 3.5 acres. This can be said because the balance-sheet of the company as on 31 March 2009 shows this entry. But the balance-sheet in the previous year does not show it.
The cost of this plot of land is stated to be Rs 15.38 crore in the balance-sheet. Against this plot of land DLF gave Sky Light an advance of Rs 50 crore by valuing the land at Rs 58 crore. As the company said in a statement on 6 October, "Skylight Hospitality Pvt Ltd approached us in FY 2008-09 (i.e. between 1 April 2008 and 31 March 2009) to sell a piece of land measuring approximately 3.5 acres...DLF agreed to buy the said plot, given its licensing status and its attractiveness as a business proposition for a total consideration of Rs 58 crore. As per normal commercial practice, the possession of the said plot was taken over by DLF in FY 2008-09 itself and a total sum of Rs 50 crore given as advance in instalments against the purchase consideration."
So what does this mean in simple English? It means that Vadra's Sky Light Hospitality approached DLF to sell the 3.5 acres of land it had bought at Rs 15.38 crore. DLF valued this land at Rs 58 crore and gave Vadra's company an advance of Rs 50 crore against this land. (To read Why DLF's claim of an 'advance' to Vadra doesn't hold up, click here).
Now, this is where the tax question come in - since Sky Light Hospitality would have made a capital gain on the transaction.
DLF clearly points out in its statement that it took possession of the 3.5 acres of land from Sky Light Hospitality in the financial 2008-09. The statement further points out that "After receipt of all requisite approvals, the said property was conveyanced in favour of DLF." From this statement it is not clear when the land was conveyanced in favour of DLF. In legal terms, conveyance essentially means the transfer of ownership or interest in real property from the seller to the buyer by a document, such as a deed, lease, or mortgage. In this case, the 3.5 acre land, which was owned by Sky Light, was transferred to DLF after it was conveyanced.
This essentially means that Vadra's Sky Light Hospitality would have made a capital gain on the transfer of the land to DLF. Sky Light Hospitality bought the land at Rs 15.38 crore and sold it at Rs 58 crore and thus made a profit of Rs 42.62 crore in the process.
On this capital gain, Sky Light Hospitality would have to pay either a long-term capital gains tax or a short-term capital gains tax depending on its period of holding. A capital gain made on selling land is categorised as long-term only if the land is sold after three years of owning it. In this case the capital gain is taxed at the rate of 20 percent indexed for inflation. Otherwise, the gain is categorised as short-term and added to the income for that particular year and taxed at the rate of a little over 33 percent (30 percent tax + 10 percent surcharge on tax, plus cess).
Since DLF's statement does not tell us when exactly the 3.5 acres was conveyanced in its favour from Sky Light, we cannot determine whether the gain is a short-term capital gain or a long-term one. Also, the balance-sheets of Sky Light Hospitality do not show an entry for advance tax paid of Rs 14.1 crore, or provision for tax of Rs 14.1 crore in the financial years ending March 2009, March 2010 and March 2011. If a company has already paid a tax, it shows it as an advance tax on the asset side of the balance-sheet. If it hasn't, it needs to show it as provision for tax on the liabilities side.
One interpretation that can be made is that the conveyance of the 3.5 acres of land must have happened in the financial year 2011-12. This means the tax entry should be available in the balance-sheet of Sky Light for the year ending 31 March 2012. This is not currently available in the public domain. Also, this land is shown as a fixed asset worth Rs 15.38 crore on the balance-sheet of Sky Light Hospitality as on 31 March 2011. If the land had been conveyanced in favour of DLF it couldn't have been asset on the balance-sheet of Sky Light Hospitality.
But there is a twist in the tale here. The Income Tax Act suggests that a piece of land can be said to have been transferred even without the execution of the transfer deed, subject to certain conditions.
The income tax angle
It is important to look at what Section 2(47), which includes the following points (this might sound pretty complicated but hold on for the explanation that follows):
"(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or
"(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a cooperative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property (the italics are mine)."
Thus the definition of "transfer" in Section 2(47) of the Act is inclusive and, therefore, extends to events and transactions which may not otherwise be "transfer" according to its ordinary, popular and natural sense.
What this means in simple English is that a property might have said to been transferred from the buyer to the seller even though the actual transfer of the "title deed" may not have been executed. The statement issued by DLF clearly says that the possession of 3.5 acres of land was taken over by DLF in FY 2008-09 itself, which means it was enjoying the benefits of the land, even though the title deed of the land may not have been executed.
Also DLF gave Sky Light Hospitality a total sum of Rs 50 crore given as advance in installments against the purchase consideration. The judicial interpretations made by the Division Bench of the Bombay High Court in the Chatrabhuj Kapadia vsCIT(2003)case and the Authority of Advance Ruling, New Delhi, in 2007 (AAR No 724 of 2006), have held that the receipt of a substantial consideration and handing over possession amounts to transfer liable to capital gains tax.
DLF paid Vadra's Sky Light Hospitality an advance of Rs 50 crore in instalments and took possession of the land even though the title deed may (or may not) have been executed. This Rs 50 crore was advanced against a total value of the land of Rs 58 crore and can be construed to be a substantial consideration and accordingly needed to be taxed.
But for this, if two parties do not execute the sales deed/conveyance, they may be able to postpone tax indefinitely. To plug such a loophole, this provision was inserted. It provides that even when the transfer of title deed is not executed, if the possession is handed over and if consideration is paid in part/substantial/total, it is a transaction liable to taxation.
So what does this imply?
This implies that Vadra's Sky Light Hospitality would have to pay a tax on the capital gain it had made in the process. The capital gain for Sky Light Hospitality is Rs 42.68 crore (Rs 58 crore, the price at which DLF bought the land - Rs 15.38 crore, the price at which the company bought the land). This capital gain will be categorised as a short-term capital gain as the land was sold within three years of having been bought. As mentioned earlier, Sky Light Hospitality bought the land in 2008-2009 and, as per the Income Tax Act, it is deemed to have transferred the land to DLF within the same financial year. This means the short-term capital gain of Rs 42.68 crore will be taxed at 33 percent. This works out to a tax of Rs 14.1 crore (33 percent of Rs 42.68 crore).
Did Sky Light Hospitality pay this tax?
This is where things get very interesting. The advance of Rs 50 crore from DLF is visible as a current liability in the balance-sheet of Sky Light as on 31 March 2010 and so is the 3.5 acre land valued at Rs 15.38 crore. If the tax of Rs 14.08 crore was paid it would be visible as advance tax on the asset side of the balance-sheet. The advance tax in the balance-sheet is at Rs 6.93 lakh. If the tax had not been paid it should have been visible on the liability side under the head 'provision for tax'. The provision for income tax is Rs 11.41 lakh. So the tax probably wasn't paid in the financial year 2009-2010.
What about the balance-sheet as on 31 March 2011? The provision for income tax is Rs 24.57 lakh. I couldn't find the exact number for the advance tax paid. But the total amount of loans and advances under the head current assets stood at around Rs 32.1 lakh, which is a lot lesser than Rs 14.08 crore. So there is no question of the tax having been paid in the financial year 2010-2011 either.
The same stands true for the balance-sheet as on 31 March 2009. The advance tax is at Rs 69,257. And the provision for income tax is at Rs 75,000. So the income tax wasn't paid in the financial year 2008-2009.
Hence Vadra's Sky Light Hospitality may not have paid the income tax it was required to pay as per the provisions of the IT Act, the statement issued by DLF and the balance-sheets of Sky Light Hospitality available in the public domain.
The question: did Chidambaram jump the gun on Vadra's taxes? Of has Vadra paid up and the figure is hidden somewhere else in some less accessible part of his balance-sheet?
Mr Chidambaram should ask his taxmen to take another look-see.
Vivek Kaul is a writer. He can be reached at firstname.lastname@example.org
Updated Date: Dec 20, 2014 12:44 PM