Ronald Reagan once summed up the Government's view of the economy as, “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it.”

The Indian Government seems to have a different interpretation of this. It has always handed over entities that have been subject to accounting accidents to more responsible hands to prevent them from stopping moving - Global Trust Bank and Satyam being examples . But once these entities startmoving again, the tax department ensures that past memories are not forgotten.

Mahindra Satyam is fighting hard to stave off a Rs 617-crore tax demand from the Income-Tax Department which has arisen due to the shenanigans of the previous promoter.

At first blush, this appeared quizzical since the charges against the erstwhile promoter were that revenues had been boosted artificially and a restatement of the financial results would result in lower revenues and taxes. It appears that tax credits too were camouflaged.

It is unsurprising for acquisitions to throw up surprises after a few years in respect of statutory obligations. JetLite got into a legal tangle with both the erstwhile owners, Sahara and the Service tax department a few years after the acquisition, though it managed to scrape through and win the service tax case. The pre-acquisition due diligence may not expose all the skeletons in the tax cupboard.

Foreign taX CREDIT

In the case of Mahindra Satyam, the tax demands are for erroneous claims of foreign tax credit claimed by the former management.

The fictitious tax credit of Rs 345 crore ballooned over 79 per cent to Rs 617 crore, giving an inkling of the robustness of the interest and penalty provisions of the Income-Tax Act.

The jurisdictional High Court asked for a cash deposit of Rs 350 crore and an unconditional bank guarantee for the balance. The tax department issued garnishee orders on the bank accounts of the company.

The apex court came to the rescue of the company by directing that the tax liability be computed by removing the fictitious entries, forcing the Government to withdraw its demand and hear the case afresh.

The entire episode became a human relationship management issue as worried associates had to be assured by the management that all is well and if push comes to the shove, the company had the resources to cough up the amount.

Asking for a waiver of the interest and penalty slapped should not involve too much sweat.

The deviations were at the instance of the previous management for which the new management and entity should not be held responsible — natural justice provisions would come into play.

Course of dispute

Ever since the acquisition, the management has acted pro-actively to settle pending disputes. The company had filed a petition before CBDT requesting for stay of demands for Financial Years (FY) 2002-03 to FY 2007-08 aggregating Rs 503. 2 crore till the correct quantification of income and taxes payable is done for the respective years.

In the financial results, the company states that the CBDT directed the Director General of Income Tax (Investigation) (DGIT) to dispose of the said stay petition .

The DGIT rejected the stay petition and consequently, the Additional Commissioner of Income Tax issued an Order directing the company to pay the outstanding demand of Rs 503.2 crore. Considering the effects of financial irregularities, status of disputed tax demands, appeals/claims pending before the various authorities, consequent uncertainties regarding the outcome of this matter and the significant uncertainties in determining the tax liability, the company deemed it appropriate not to make any further adjustments to its existing tax provision.

The Income-Tax Act is filled with an amalgam of beneficial and harsh provisions. There should be provisions in the Income-Tax Act to provide immunity to entities not to pay taxes for past sins perpetrated by others as long as the entity pays tax on its legal taxable income.

(The author is a Bangalore-based chartered accountant.)

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