Mukesh Ambani gets tax notice

The income-tax department has issued a notice to Reliance Industries Chairman and Managing Director Mukesh Ambani asking him to explain why he should not pay tax on deemed income of Rs 2,635 crore for the 2004-05 assessment year.

The Mumbai circle of the department asked Ambani to reply by August 31. Reliance was in the process of responding to the notice, sources close to the development said.

When contacted, a Reliance Industries spokesperson said: "The facts based on which the query has been raised by the income-tax department are incorrect, and hence any conclusion drawn from the said facts will only be faulty. Since the entire transaction was annulled, no income accrued. No tax can be levied on notional income. This issue has been widely publicised many times in the past."

The issue dates to March 2004 when Reliance Communications Infrastructure Ltd (RCIL) transferred 500 million shares of Reliance Infocomm (RIC) to Ambani at par value (Re 1). RCIL was the promoter of Reliance Infocomm.

The income-tax department notice said that going by Reliance Infocomm's valuation at Rs 53.71 per share in November 2002, the 500 million shares were worth Rs 2,685 crore. They were transferred to Ambani's demat account in HDFC Bank on March 31, 2004.

The notice pointed out that on March 13, 2004, two days after Ambani became the managing director of RCIL, "the company desired to obtain from you a temporary secured interest-free loan of Rs 50 crore on terms you might decide. On March 31, 2004, RCIL transferred 500 million shares of RIC into your demat account".

The tax authorities felt that Ambani had accrued an income gain of Rs 2,635 crore (subtracting Rs 50 cr from Rs 2,685 crore) according to the provisions of Section 2(24)(iv) of the Income-tax Act, 1961.

It may be recalled that Ambani had given up his "sweat equity shares" in Reliance Infocomm in December 2004, following a controversy over the manner in which the transaction was done. He got these shares, representing 12 per cent of RIC, from RCIL in March 2004. He later annulled the shares during the dispute with his brother Anil Ambani.

Post-annulment in December 2004, RCIL held 77.3 per cent of RIC, while Reliance Industries had 7.6 per cent. ESOP shares constituted 7.5 per cent of the company, while Mukesh Ambani and his associates held 7.6 per cent.