Taxing business behind the stage

Top bureaucrats angled for tax relief to Mahindra Satyam.

Top bureaucrats in the country lobbied hard for tax relief to Mahindra Satyam Computer Services Ltd (MSCSL) before the case eventually reached the courts.

A senior finance ministry official told Business Standard, on the condition of anonymity, that the top echelons of the government tried to convince the Central Board of Direct Taxes (CBDT) for a sympathetic consideration of the company’s plea in the case pertaining to the income of the erstwhile Satyam Computer Services Ltd (SCSL) from abroad.

The official added that the issue was re-considered at the full board meeting in February and the company’s plea for tax relief was subsequently rejected. A tax demand of Rs 616 crore was raised on the company.

MSCSL ignored a question on whether the company had approached senior government officials for help in this case and said: “We have approached the Supreme Court and they have granted a stay on the issue.”

The finance ministry official said CBDT was not averse to taking a sympathetic view of the issue, but it had maintained to the company that it was not possible under the Income Tax Act to re-open this case, as the matter was already settled and relief, if any, could come only from the Supreme Court.
 

BONE OF CONTENTION
Some facts from SFIO report and CBI chargesheet

• The company had been subjected to a massive financial fraud, whereby its income had been overstated to the extent of about '5,000 crore (Rs 5,059 crore estimated by SFIO and '4,746 crore by CBI) for assessment years from 2003-04 to 2008-09.
  
• As a result of overstatement of income, taxes had been overpaid to the extent of about '500 crore for these assessment years (according to CBI chargesheet)
  
• The additional tax demand of about '500 crore had been raised without taking into consideration the overstatement of income. This was unfair and also causing undue hardship to the company, its shareholders and its 50,000 employees.
  
• The stand taken by the I-T department is not consistent with the findings of other central government agencies, which established the fraud perpetrated on the company, its shareholders and its employees.

MSCSL had first filed a petition before CBDT on August 5, 2010, saying the income declared by earlier management in the returns of income of SCSL had been overstated and tax credits thereon also claimed excessively, as was evident from the subsequent restatement of accounts at the instance of the Company Law Board (CLB) consequent to investigations by the Serious Fraud Investigation Office (SFIO).

It has been contended by the company that, whereas the I-T department had acted on the false claim of payment of taxes by rectifying the assessments and raising tax demands, natural justice demanded that the overstated income in the earlier years should also be reduced. This was not done, which had resulted in creation of infructuous income tax demands by the department.

MSCSL, therefore, sought certain reliefs. First, reopening of past assessments for 2003-04 to 2008-09 by the I-T department, with a correct and holistic quantification of income, based on the findings of the government investigating agencies and the audited financial statements of the company, instead of confining itself to one aspect of the fraud — the alleged fake tax credit.

The second relief which the company asked for was determination of the actual income based on the SFIO report, the forensic accountant’s report by KPMG and the audited accounts, instead of demanding further information which even the state agencies had not been able to unearth.

MSCSL also wanted a stay on the demand, pending a correct quantification of income and disposal of the petitions by CBDT.

The total tax demand of MSCSL for various years during the period 2003-04 to 2008-09 amounts to Rs 503.61 crore and with the current demands, it stands at Rs 616 crore (see chart).

In response to a reference on the issue, received on March 17, 2010, from Salman Khursheed, the corporate affairs minister, the finance minister had sent a reply on July 12 indicating the position that there was no provision under the I-T law to revise or reduce an income voluntarily declared and filed by an assessee, after assessments and appeals had been concluded.

The Director General of Income Tax (Investigation), Hyderabad, rejected the petition of MSCSL for the stay of tax demand by an order on October 21, 2010.

The grounds for rejection included: The conclusions of various agencies were based on incomplete facts and had not reached finality and, therefore, the truth could not be ascertained at that stage; under the I-T law, income tax authorities had to conduct necessary enquiries and come to an appropriate conclusion, which was still to be completed; and no case of genuine hardship had been made by the assessee as the company’s latest financial position was not made available, and media reports suggested it had cash reserves of Rs 2,100 crore as on September 30, 2010.

The issue was then discussed at a CBDT meeting on November 16, 2010. It was concluded that re-computation of income for the earlier assessment years, in respect of which assessment had already reached finality as appeals had been decided and given effect to, would not be possible since that was not permissible under the Income Tax Act.

CBDT’s final decision in February this year came after considering the point that the board had plenary powers under Section 119(2)(b) to travel beyond the law for mitigating genuine hardship in a case or a class of cases.

The Supreme Court on Friday asked the company to file a “comprehensive” petition before CBDT within two weeks, giving all particulars to enable a relook.

The court has also directed Mahindra Satyam to furnish a bank guarantee of Rs 617 crore by April 25 before the court registrar.

(With inputs from K Rajani Kanth)