Friday, 5 August 2016

National Herald, a party property that became family property

According to a news item in the media, reversing an earlier decision, the Enforcement Directorate has decided to reinvestigate the National Herald case. This is in addition to investigations by the Income Tax authorities into transfer of shares of Associated Journal Ltd (AJL), publishers of the erstwhile newspaper the National Herald to Sonja Gandhi and Rahul Gandhi, allegedly resulting in gain of Rs. 1300 crore to them.

The credit for these investigations goes to one-man political army called Subramanian Swamy who had earlier filed a case in a Delhi court alleging that Sonia, Rahul and two others “have cheated, committed criminal breach of trust and criminally misappropriated the funds of the Congress” through which they acquired assets of AJL worth hundreds of crores of rupees.

For the benefit of those not familiar with the case, here is a brief account.

AJL  was formed by eminent Congress leaders led by Jawaharlal Nehru on November 19, 1937, Indira Priyadarshini Nehru’s  18th birth day. The publications of newspapers started in 1938. After independence, the company was allotted prime lands at concessional rates in New Delhi, Lucknow and other towns. Today, its real estate is worth several thousand crores.

Despite patronage of the Nehru-Gandhi family, AJl incurred losses for decades. The publication of newspapers stopped more than seven years ago. By 2010-11 the accumulate losses were Rs. 90.21 crore, including Rs. 39.78 cr. on account of voluntary retirement of 700 employees in 2009-10. From time to time, Congress Party had been giving unsecured interest-free loan to the AJL to meet its expenses. By December 2010, Congress had given loan of Rs. 89.71 crore.

In November 2010 a new company, Young Indian Ltd (YIL), was formed jointly by Sonia, Rahul (owning 38% share each), Motilal Vora and Oscar Fernandes (owning 12% share each). On December 21, the Board of Directors of AJL transferred loans of Rs. 89.71 to YIL. The shareholders ratified the decision a month later. Thereafter, Congress wrote the entire loan off in its books. YIL not only  accepted the ‘liability’, it gave loan of Rs. 50 Lacs (difference between Rs. 90.21 crore and Rs. 89.71 crore) to AJL to meet the remaining obligations. AJL now owed Rs. 90.21 crore to YIL but YIL had to return nothing to the Congress. To liquidate the loan owed to YIL, AJL allotted 9, 02, 16, 898 equity shares of Rs. 10 each to the YIL. Thus, AJL became a subsidiary of YIL  76% of which is owned by Sonia and Rahul. By paying just Rs. 50 lakh they have become effective owners of all the real estate held in the name of AJL. The annual rental income in New Delhi alone is more than Rs. 7 cr. On October 11, 2012 Rahul had clarified  that YIL being a not-for-profit company, it had no intention of starting any newspaper. 

Motilal Vora played a significant role. As Congress treasurer, he gave loans to AJL and then wrote all the loans off. As Chairman of AJL, he presided over the meeting of Board of Directors that requested YIL to take over the company’s debt to the Congress and as a shareholder of YIL, he was party to the decision to accept that request. Sonia Gandhi and Rahul Gandhi, the main beneficiaries, were minority shareholders in AJL before the latter allotted lakhs of shares to them.

The Income Tax Department has served notices on Congress, AJL and YIL to explain, inter alia, unsecured loan by a political party. The Department’s case is that the funds raised by a political party are exempted from tax because these are meant for political activities and use of funds for commercial purposes might result in loss of tax exemption.

Section 13A of the Income Tax Act exempts from tax income of a political party (registered under the Representation of the People’s Act, 1951) received from “house property”, “capital gains” and “other sources” (residuary head of income that includes income from interest) and voluntary contributions. The exemption is subject to certain conditions: maintenance and audit of books of account, maintenance of complete records of voluntary contributions in excess of Rs. 20,000 and submission of annual report of contributions to the Election Commission.

According to Section 139 (4B) of the IT Act, when the total income, including from exempt items mentioned in Section 13A, “exceeds the maximum amount which is not chargeable to income tax”, a political party has to file income tax return in prescribed form.

It is worth noting that the IT Act does not say that a political party cannot legally earn income from sources other than those mentioned in Section 13A. Nor does it say anything about admissibility or otherwise of a party’s expenses. It may also be noted that, in November 2012, while rejecting petitions filed by Swamy to de-recognise Congress party on the ground that giving loans to the AJL amounted to violation of the grounds for registration, the Election Commission had held that that ‘there is no provision whatsoever (in the Representation of People’s Act) prescribing the manner in which the political party may use its funds.’

No one knows when and what will be the final outcome of all the investigations and legal cases. Prima facie, there are two possibilities: (a) Congress, its top office bearers (President, Vice President and Treasurer), AJL and YIL are held guilty of violations of laws and are punished or (b) no one is found guilty or all are let off on the condition that the “written off” loan is returned to the Congress. Whatever the verdict, it would have a far-reaching effect on the political scenario. The victory of Sonia and Rahul will open new opportunities to political parties, especially those run by families, to make investments for augmenting income and wealth. On the other hand, their defeat would be disastrous  for them as well as for the Congress.

Devendra Narain
September 19, 2015