DLF

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 said.
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 Private Ltd, a company owned by Vadra and a statement issued by DLF suggest that Chidambaram might 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.
The Rs 50 crore advance
Sky Light Hospitality Private Ltd is a company owned by Robert Vadra.  It has issued 50,000 shares with a face value of Rs 10 each and so has an issued capital of Rs 5 lakh. Of this Robert Vadra owns 49,900 shares and his mother Maureen owns 100 shares.
Sometime between April 1, 2008 and March 31, 2009, the company bought a plot of land of 3.5acres. This can be said because the balance sheet of the company as on March 31, 2009, shows this entry. But the balance sheet as on March 31, 2008, does not show this entry.
The cost of this plot of land is stated to be at Rs 15.38 crore in the balance sheet of Sky Light Hospitality. Against this plot of land DLF gave Sky Light Hospitality an advance of Rs 50 crore by valuing the land at Rs 58 crore. As the company said in a statement on October 6 “Skylight Hospitality Pvt Ltd approached us in FY 2008-09(i.e. the period between April 1, 2008 and March 31, 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 crores. 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 crores 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 acre of land it had bought at Rs 15.38 crore. DLF valued this land at Rs 58 crore and gave Vadra’s Sky Light Hospitality 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).
The capital gain made by Sky Light Hospitality
DLF clearly points out in its statement that it took possession of the 3.5acre land from Sky Light Hospitality in 2008-2009. 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 conveyance 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 3.5acre land which was owned by Sky Light Hospitality 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 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 categorized 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% indexed for inflation. Otherwise the gain is categorized short term and added to the income for that particular year and taxed at the rate of 33% (30% tax + 10% surcharge on tax).
Since DLF’s statement does not tell us when exactly the 3.5 acre land was conveyanced in its favour from Sky Light, we cannot determine whether the gain is a short term capital gain or a long term capital gain. Also 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 31, 2009, March 31, 2010 and March 31, 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 liability 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 2011-2012(i.e. the period between April 1, 2011 and March 31, 2012). This means the tax entry should be available in the balance sheet of Sky Light Hospitality for the year ending March 31, 2012. This is not currently available in the public domain.  What buttresses the point further is the fact that this land is shown as a fixed asset worth Rs 15.38 crore on the balance sheet of Sky Light Hospitality as on March 31, 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 “deemed” to be transferred 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 co-operative 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 deemed to have 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(i.e. anytime between April 1, 2008 and March 31, 2009) itself, which means it was enjoying the benefits of the 3.5 acre 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 Bombay High Court in Chatrabhuj Kapadia v CIT (2003)case  and 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 gain tax.
DLF paid Vadra’s Sky Light Hospitality an advance of Rs 50 crore in installments and took possession of the land even thought the title deed may not have been executed. 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. Hence, the 3.5acre piece of land was deemed to be transferred to DLF from Vadra’s Sky Light Hospitality.
But for this, if two parties do not execute sale deed/conveyance, they may be able to postpone tax liability indefinitely. To plug such a loophole, this provision was inserted. It provides that even when 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 categorized 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% (30% tax + 10% surcharge). This works out to a tax of Rs 14.1 crore (33% 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 March 31, 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 wasn’t paid in the financial year 2009-2010(period between April 1, 2009 and March 31, 2010).
What about the balance sheet as on March 31, 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 32.1lakh, 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(the period between April 1, 2010 and Mach 31, 2011) either.
The same stands true for the balance sheet as on March 31, 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(period between April 1, 2008 and March 31, 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 Income Tax, statement issued by DLF and balance sheets of Sky Light Hospitality available in the public domain. That’s why I said at the beginning that Chidambaram had jumped the gun while giving Vadra a clean chit.
The interview originally appeared on www.firstpost.com on October 12, 2012. http://www.firstpost.com/business/did-vadra-pay-rs-14-cr-tax-on-his-gains-or-did-fm-jump-the-gun-488309.html
(Vivek Kaul is a writer. He can be reached at [email protected])