Rs 2,844 crore I-T claim on Sahara

Part of deposits treated as undisclosed income, company contests claim.

The income tax department has slapped a Rs 2,844.70 crore claim on Sahara India Financial Corporation Ltd, the largest residual non-banking finance company (RNBC) in India.

The company posted a net profit of Rs 22.92 crore in 2004-05 on a total income of Rs 938.95 crore, including Rs 718.86 crore interest income. The company had a deposit base of Rs 11,537.26 crore on March 31, 2005.

Referring to the tax claim, the annexure to the auditor's report in the company's annual report for 2004-05 points out that the amount has "not been paid to the authorities concerned as the demand has been raised on the ground similar to those which have been adjudicated by appellate authorities and the ITAT in favour of the company".

Elsewhere, in the schedule forming part of the accounts for the year ended March 31, 2005, the annual report said the income tax department had been creating tax demands by "adding/disallowing" deposits.

According to sources close to the developments, the income tax department does not consider the deposit liability of the RNBC as deposits and instead prefers to treat the amount as income. Hence, the massive tax claim on a company that has posted a small net profit.

In 2003-04, Sahara India Financial Corporation had posted Rs 50.86 crore as net profit and in 2002-03, Rs 6.11 crore.

In an e-mail response, a company spokesperson said: "The department is treating part of the deposits that are mobilised by the company to be in the nature of undisclosed income by invoking the provisions of the Income Tax Act and adding them to the income of the company."

"As per RNBC guidelines, the deposits mobilised were to be invested in directed investment. On the return, ie interest/dividend received on the directed investments, tax is deducted at source at the rates as applicable for domestic companies, which is ranging from year to year from 20 per cent to 25 per cent, thereby more or less 20 per cent of the return on investments received by the company go to the income tax department by way of TDS (tax deducted at source)."

The spokesperson said, "Obviously, the income of the company after making, provisions of interest payable on the deposits, is not commensurate to absorb the total amount of TDS as tax payable by the company and as a result, huge amounts of refunds are claimed by the company from the department. These refunds keep on piling up and are on increase from year to year with the increase in the business activities of the company."

The company's 2004-05 balance sheet has shown Rs 922.88 crore as tax refund. The company said ad hoc additions were being made under the deeming provisions of the Income tax Act.

"As a result of this addition, only the assessed income is at a very high figure and tax demands after setting of the TDS are created by the department from year to year which are also increasing because of ad hoc addition which is being made from year to year with the increase in the business activities," the company said.

"Consequent to the treatment of part of the deposit as unexplained, the interest which is payable on the deposit is also disallowed by the department which in turn also increase the taxable income. Another major addition which is being made is on account of hypothetical accrued interest income on non performing assets (NPAs). As per RBI guidelines which are applicable to RNBCs in case of NPA category of advances/assets the company is prohibited to account for accrual of interest income. The company has been following prudential norms guidelines of the RBI like other banks and financial institutions but in the case of the company, the department is putting interest income on such NPAs and adding the same to the taxable income of the company again resulting in increase of demands," the response said.

Sahara India Financial Corporation's 2003-04 annual report mentioned a disputed tax claim of Rs 1,111.82 crore. These tax demands are for assessment years 1990-91, 1991-02, 1993-04, 1994-95, 1999-2000 and 2000-01.