Rs20K crore tax based on wrong principles: Cairn India to HC

Cairn India on Wednesday told the Delhi High Court that the Rs 20,495 crore demand slapped on it by the Income Tax department has been calculated on “wrong” principles and it would come to around Rs 5000 crore.

The IT department had issued the demand for Cairn’s alleged failure to pay tax on gains made by its former parent company, Cairn Energy Plc, in a share transfer transaction eight years ago. Cairn submitted before a bench of justices Badar Durrez Ahmed and Sanjeev Sachdeva that it had recalculated the tax demand to be around Rs 5000 crore, of which Rs 4200 crore was already secured and only the remaining was unsecured.

The submission was made in response to the court’s query as to what was the company’s offer to secure the tax demand made by the IT department. Cairn also sought an interim order against the tax demand but Attorney General Mukul Rohatgi opposed the relief sought by the company and said there was “no question of interim order if they are not able to give any security”.

However, the bench heard arguments briefly and listed the petition for further hearing on May 7 as it had some full bench matter to attend to. On April 16, the court had asked Cairn India how it would secure the Rs 20,495 crore demand raised by the IT department. Cairn India had told the court that of the principal tax demand of Rs 10,248 crore, Rs 4,200 crore was already secured and it would inform about the rest and what kind of security or guarantee it can give on the next date of hearing.

The court was hearing Cairn India Ltd’s (CIL) plea challenging the IT department’s demand on the ground there has been “unreasonable and atrocious” delay on the part of the authorities who exercised their power “unreasonably” while making the demand. Cairn has sought quashing of the IT department’s demand order saying the proceedings were initiated after a lapse of more than six years from the end of the relevant financial year of 2006-07. 

Cairn had also said in its plea that it had in 2006 carried out an internal group reorganisation through 100 per cent share swaps to facilitate initial public offer of CIL and in such a process there would be no capital gains. The bench, on the other hand, was of the view there would be capital gains which had to be computed based on the change in market value of the shares during each swap till the final transaction. It also said that the entire sale price cannot be capital gains.

Cairn had agreed with the court’s view but said in the instant case, the exercise was not carried out. The government had opposed Cairn’s submissions saying issue of computation of tax as well as delay cannot be debated before the High Court. Apart from Rs 10,248 crore principal tax demand, the department has also imposed an interest of Rs 10,247 crore on the company.

The government had said the total sale price of transferring Cairn Energy’s assets here -- around 26 companies which have production-sharing agreements with the government to extract hydrocarbons -- to CIL was Rs 26,681 crore which was paid for half in cash and another half through shares of that much value.