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After Congress claims vindication in National Herald tax case, CBDT withdraws circular that may have helped AJL

Team 101Reporters
The Central Board of Direct Taxes (CBDT) on Friday withdrew a circular it issued on Monday, which could have led to exoneration of top Congress leaders in the National Herald case.

The Central Board of Direct Taxes (CBDT) on Friday withdrew a circular it issued on Monday, which could have led to exoneration of top Congress leaders in the National Herald case. The next hearing of case by Supreme Court is scheduled for 8 January.

The withdrawn circular stated that the provisions of Section 56(2)(vii)(a) of the Income Tax Act, 1961 were not applicable on shares received by a company as a result of fresh issuance of shares by the said company. In essence, this would have meant that fresh issuance of shares would not have been taxable.


Former Union Law Minister Kapil Sibal and the Congress party had welcomed the 31 December circular saying it "vindicates" their stand in the Associated Journals Limited case pending before the Supreme Court. Kapil Sibal tweeted, "Circular No 10 of 2018 issued by the CBDT on 31 December, 2018 completely exonerated Young Indian of Tax liabilities for the shares allotted to it by National Herald. The circular clarifies the legislative intent behind section 56(2) (Vii) (a) of the income tax act. Govt. exposed."

However, the CBDT promptly withdrew the circular on Friday saying that it has been brought to the notice of the board that the matter relating to interpretation of the term "receives" under section 56(2) (vii) (a) of the IT Act 1961 is subjudice in certain higher judicial forums.

The circular further said that representations have been received from stakeholders seeking clarification on other similar provisions in section 56(2) (vii) (a) of the Act. Accordingly, the matter has been reconsidered by the board. Given the fact that the matter relating to interpretation of the term 'receives' used in section 56 of the Act is pending before judicial forums and stakeholders have sought clarification on similar provisions in section 56(2) (vii) (a) of the Act, the board is of the view that the matter is required to be examined afresh so that a comprehensive circular on the matter can be issued, reads the amended circular issued Friday.

In view of the above, "the said circular shall be considered to have been never issued. A fresh comprehensive circulation on the subject shall be issued in due course," it added.

According to Income Tax department sources, the circular was issued following multiple representations made by industry body, especially a telecom major, to the government. "The government issued the circular without realising that it would help Congress in its National Herald case," said a senior Income Tax official based in Delhi. Only when media reported it, the government realised this and decided to roll back the circular, he said.

CBDT rains on Congress' parade

Congress held a press conference on Friday where Congress leader Ahmed Patel welcomed the Monday circular saying that this "vindicates" their position. "There never was an issue about issuance of such shares as a taxable event as it was being projected by way of harassment," he said.

"It vindicates our position and the years of harassment meted out on National Herald case that the shares issued by it were a taxable event, that has been clarified by the CBDT," he said.

The 31 December, 2018 circular clarified that provision of 56(2)(vii)(a) of the Income Tax Act, 1961 shall not be applicable in cases of receipt of shares by a specified company or firm as a result of shares shared by the specified company.

"Keeping in view the legislative intent to apply anti-abuse provision contained in section 56(2)(viia) to transfer of shares for no or inadequate consideration, it is hereby clarified that section 56(2)(viia) of the Act shall apply in cases where a specified company or firm receives the shares of the specified company through transfer for no or inadequate consideration," said the 31 December circular.

However, the circular was soon rolled back, prompting Sibal to accuse the government of functioning with malafide intent.

Patel too came down heavily on the Narendra Modi government. He said that the government withdrew the circular when it realised that it is going to help AJL. The government is being "totally subjective" in reading the law, he said. "This is nothing but political vendetta. They are not considering how many people would be benefited by this circular but because this would help AJL, they withdrew it," he said. The party will put up the circular in the Supreme Court where the next hearing in the National Herald case is due on 8 January, he said.

The National Herald Case

Associated Journals Ltd (AJL) which publishes of Congress' mouthpiece National Herald was acquired by Young Indian, a 'Section 25' company formed by Congress leaders Sonia Gandhi, Rahul Gandhi and Oscar Fernandes in 2010 with a capital of Rs 50 lakh. The acquisition also meant transfer of Rs 90 crore debt of AJL which was later converted into equities and the Congress party claimed it was not a taxable income.

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